-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SUbUuQC5/HcZ9nWDX9rLwYynJY0pce8dbcdKfBFqeJGltLh+5zRtKfo5gtd2r4x5 hynZT4MC3rtjuFK2bg9euQ== 0000911708-02-000002.txt : 20020415 0000911708-02-000002.hdr.sgml : 20020415 ACCESSION NUMBER: 0000911708-02-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIME RETAIL INC/BD/ CENTRAL INDEX KEY: 0000911708 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 382559212 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13301 FILM NUMBER: 02592494 BUSINESS ADDRESS: STREET 1: 100 E PRATT ST STREET 2: 1900 FLOOR CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4102340782 MAIL ADDRESS: STREET 1: 100 EAST PRATT STREET STREET 2: 1900 FLOOR CITY: BALTIMORE STATE: MD ZIP: 21202 10-K 1 a10k2001.txt ANNUAL REPORT ON FORM 10-K YEAR ENDED 12/31/2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) Commission file number: 001-13301 PRIME RETAIL, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its Charter) Maryland 38-2559212 - ------------------------------------------ ---------------------------------- (State or other jurisdiction of (IRS employer identification no.) incorporation or organization) 100 East Pratt Street Baltimore, MD 21202 (410) 234-0782 - ------------------------------------------ ---------------------------------- (Address of principal executive offices, (Registrant's telephone number, including zip code) including area code) Securities registered pursuant to Section 12(b) of the Act: - -------------------------------------------------------------------------------- None ------ (Title of class) - -------------------------------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value 10.5% Series A Cumulative Preferred Stock, $0.01 par value 8.5% Series B Cumulative Participating Convertible Preferred Stock, $0.01 par value - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $7,844,024 on March 25, 2002 (based on the closing price per share as reported on the OTC Bulletin Board). The number of outstanding shares of the registrant's Common Stock as of March 27, 2002 was 43,577,916. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents of the registrant are incorporated herein by reference: Part of Form 10-K Into Which Document Document Is Incorporated - -------- --------------------- Proxy Statement for the 2002 annual meeting of Part III of Form 10-K shareholders PRIME RETAIL, INC. Form 10-K December 31, 2001 TABLE OF CONTENTS Part I Page Item 1. Business...................................................... 2 Item 2. Properties.................................................... 6 Item 3. Legal Proceedings............................................. 9 Item 4. Submission of Matters to a Vote of Security Holders........... 11 Part II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters......................................... 12 Item 6. Selected Financial Data....................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 15 Item 7A. Quantitative and Qualitative Disclosures About Material Risk............................................... 36 Item 8. Financial Statements and Supplementary Data................... 36 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................... 36 Part III Item 10. Directors and Executive Officers of the Registrant............ 37 Item 11. Executive Compensation........................................ 37 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 37 Item 13. Certain Relationships and Related Transactions................ 37 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................. 37 Signatures.................................................... 42 PART I ITEM 1 -- BUSINESS The Company Prime Retail, Inc. (the "Company") was organized as a Maryland corporation on July 16, 1993. We are a self-administered and self-managed real estate investment trust ("REIT") that primarily owns and operates outlet centers. As of December 31, 2001, our outlet center portfolio, including three properties owned through joint venture partnerships, consists of 45 properties (the "Properties") in 26 states (including Puerto Rico), which total 12,670,000 square feet of gross leasable area ("GLA"). As a fully-integrated real estate firm, we provide accounting, finance, leasing, marketing, and management services for the Properties. Prime Retail, L.P. (the "Operating Partnership"), a Delaware limited partnership, is the entity through which we conduct substantially all of our business and operations and own (either directly or through subsidiaries) substantially all of our assets including the Properties. We control the Operating Partnership as its sole general partner and are dependent upon the distributions or other payments from the Operating Partnership to meet our financial obligations. Unless the context otherwise requires, all references to "we," "us," "our" or the "Company" herein mean Prime Retail, Inc. and those entities owned or controlled by Prime Retail, Inc., including the Operating Partnership. Our principal executive offices are located at 100 East Pratt Street, 19th Floor, Baltimore, Maryland 21202 and our telephone number is 410-234-0782. Tax Status We have 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, we generally are not subject to federal income tax at the corporate level on income we distribute to our stockholders so long as we distribute at least 90% of our taxable income (excluding any net capital gain) each year. Since our initial public offering ("IPO") on March 22, 1994, we believe that we have complied with the tax regulations to maintain our status as a REIT. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Even if we qualify as a REIT, we may be subject to certain state and local taxes on our income and property. Business of the Company We are engaged primarily in the ownership, leasing, marketing and management of outlet centers. Outlet centers are an established segment of the retail industry, enabling value-oriented shoppers to purchase designer and brand-name products directly from manufacturers at discounts. Since entering the outlet center business in 1988 (as the retail division of The Prime Group, Inc. ("PGI"), from which we later acquired certain Properties and simultaneously assumed management and development operations with the completion of our IPO), we have become a significant owner, operator and developer in the outlet center sector. Our outlet centers feature a diversified mix of nationally recognized manufacturers of designer and brand name merchandise with which we have long-standing relationships. As of December 31, 2001, our outlet center portfolio consisted of 45 properties in 26 states (including Puerto Rico) totaling 12,670,000 square feet of GLA. The average outlet center in our portfolio contained approximately 281,556 square feet of GLA at December 31, 2001. Business Strategy Our current strategy is to use the cash flow from the Properties to fund property level improvements and reduce debt levels over time. We will also pursue, on a selective basis, the sale of properties, including (i) outlet centers, (ii) community centers and (iii) land holdings, in order to reduce our overall leverage. See Item 7 - "Management's Discussion of Financial Condition and Results of Operations" contained herein for recent developments. We actively manage the Properties in an effort to maintain and increase the sales and profitability of our merchants and ultimately improve occupancy levels and rental income. In this regard we have employed and will employ various strategies, including the following: o Tenant Mix. We will continue to evaluate the tenant mix at the Properties and seek to enhance, if possible, the representation of those tenants considered the biggest and best draws in the outlet industry. We believe that an increase in the representation of such tenants positively affects consumer traffic and leads to overall higher sales for all tenants. Additionally, we will continue to explore the addition of new tenants to the outlet sector to strengthen our competitive position. o Marketing Strategies. We operate the majority of our current outlet center portfolio under the "Prime Outlets" brand name. In addition to the "Prime Outlets" brand name, we use on-site management teams to develop individualized property specific marketing programs. In addition, we have also augmented marketing dollars received from tenants with our own contributions aggregating approximately $3.8 million during 2001. We have and will continue to evaluate our marketing programs and make enhancements as appropriate. Furthermore, we will continue to seek strategic marketing alliances with companies who desire to utilize the customer base of our outlet center portfolio. o Operating Expenses. Generally, we manage and lease our properties with in-house personnel, thereby reducing our reliance on third-party service providers and enabling us to continually monitor and control the expenses associated with these functions. We strive to minimize the occupancy cost of our tenants through active management of operating expenses at the property, regional and corporate levels. Whenever possible, we leverage the size of our portfolio to obtain favorable rates from vendors and suppliers. Competition Our outlet centers compete for customers primarily with traditional shopping malls, "off-price" retailers and other outlet centers. The tenants of outlet centers usually attempt to avoid direct competition with major retailers and their own full-price stores. They accomplish this by locating outlet stores only in outlet centers at least 20 miles from the nearest regional mall. For this reason, our outlet centers are often located in relatively undeveloped areas and therefore compete only to a limited extent with traditional retail malls in or near metropolitan areas. In addition to the traditional sources of competition faced by our outlet centers, our outlet centers also compete with web-based and catalogue retailers for customers. Because a number of our outlet centers are located in relatively undeveloped areas, there are often other potential sites for retail opportunities near our outlet centers that may be developed by competitors. The existence or development of other retail venues with a more convenient location or the offer of lower rent may attract our tenants or cause them to seek more favorable lease terms at or prior to renewal of their leases with us and, accordingly, may affect adversely the business, revenues and sales volume of our outlet centers. In addition, the success of tenants in our outlet centers which are located in relatively undeveloped areas, and thus the success of such outlet centers themselves, depends on shoppers traveling significant distances to shop. If shoppers should become less willing to travel the distances necessary to shop at our remote outlet centers, the business of our tenants would likely decline. Such a decline would likely cause the value, business, revenue and sales volume of such outlet centers to decline. Our community shopping centers compete with similar properties located in the same geographic trade areas. Environmental Matters Under various federal, state and local laws and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous substances on their property. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of the hazardous substances. The costs of remediation or removal may be substantial, and the presence of the hazardous substances, or the failure to promptly remediate them, may adversely affect the owner's ability to sell the real estate or to borrow using the real estate as collateral. In connection with our ownership and operation of the Properties, we may be potentially liable for the costs of removal or remediation of hazardous substances. We have no knowledge, nor have we been notified by any governmental authority, of any material noncompliance, liability or claim relating to hazardous substances in connection with any properties, in which we now have 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 us. Insurance Recent events and the state of the insurance industry in general have resulted in substantial increases to insurance costs, and in some cases, changes in the economic viability of certain coverages. Nevertheless, we believe that each of the Properties is covered by adequate fire, flood, earthquake and property insurance provided by reputable companies and with commercially reasonable deductibles and limits. Employees As of December 31, 2001, we had 772 employees. We believe that our relations with employees are satisfactory. Liquidity Our liquidity depends on cash provided by operations and potential capital raising activities such as funds obtained through borrowings, particularly refinancings of existing debt, and cash generated through asset sales. Although we believe that estimated cash flows from operations and potential capital raising activities will be sufficient to satisfy our scheduled debt service obligations and sustain our operations for the next year, there can be no assurance that we will be successful in obtaining the required amount of funds for these items or that the terms of the potential capital raising activities, if they should occur, will be as favorable as we have experienced in prior periods. During 2002, we are required to make certain additional mandatory principal pay-downs to a mezzanine loan (the "Mezzanine Loan") aggregating $25,367 from net proceeds from asset dispositions or other capital transactions within specified periods. Although we are in the process of seeking to generate additional liquidity though new financings and the sale of assets, there can be no assurance that we will be able to complete asset dispositions or other capital transactions within the specified periods or that such asset dispositions or other capital transactions, if they should occur, will generate sufficient proceeds to make the additional mandatory pay-downs of the Mezzanine Loan. Any failure to satisfy these mandatory principal prepayments within the specified time periods indicated will constitute a default under the Mezzanine Loan. As of December 31, 2001, we were in compliance with all financial debt covenants under our recourse loan agreements. However, there can be no assurance that we will be in compliance with our financial debt covenants in future periods since our 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 our revenue, and risks associated with refinancing our current debt obligations or obtaining new financing under terms less favorable than we have experienced in prior periods. See Item 7 - "Management's Discussion of Financial Condition and Results of Operations" contained herein for additional information. Executive Officers The following table sets forth the name and position of the current executive officers of the Company as of the date of this filing along with their age as of December 31, 2001:
- ------------------------------------------------------------------------------------------------------------------------------------ Name Position Age - ------------------------------------------------------------------------------------------------------------------------------------ Glenn D. Reschke President and Chief Executive Officer, 50 Chairman of the Board R. Kelvin Antill Executive Vice President - General Counsel 42 and Secretary Robert A. Brvenik Executive Vice President - Chief Financial 46 Officer and Treasurer David G. Phillips Executive Vice President - Leasing, International 40 and New Business Development Frederick J. Meno IV Senior Vice President - Operations & Marketing 44 ====================================================================================================================================
Glenn D. Reschke. Glenn D. Reschke is President, Chief Executive Officer and Chairman of the Board of Directors. Reporting to the Board of Directors, Mr. Reschke is responsible for all aspects of the Company, its outlet centers and all its employees, including the leasing, operations, marketing, development, finance and administrative functions. In addition, Mr. Reschke is responsible for developing and implementing the long-term strategic goals and objectives of the Company as approved by the Board of Directors. Mr. Reschke has been a member of the Board of Directors since 1997. Mr. Reschke became President and Chief Operating Officer of the Company on October 6, 1999; acting Chief Executive Officer on February 25, 2000; and Chief Executive Officer and Chairman of the Board of Directors of the Company on July 19, 2000. From the Company's IPO in 1994 through October 6, 1999, Mr. Reschke served as Executive Vice President - Development and Acquisitions. Prior to his employment by the Company, Mr. Reschke worked for The Prime Group, Inc. ("PGI") which he joined 1983 and, from that time until the Company's IPO, served as Vice President, Senior Vice President and Executive Vice President. Mr. Reschke 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. R. Kelvin Antill. R. Kelvin Antill is Executive Vice President - General Counsel and Secretary of the Company. Mr. Antill assumed his current position on January 31, 2002. Mr. Antill joined the Company in 1995. Since joining the Company, Mr. Antill served as Vice President - Assistant General Counsel and Senior Vice President - Assistant General Counsel. Prior to joining the Company, Mr. Antill was associated for three years with Ballard, Spahr, Andrews and Ingersoll, and for four years prior to that with Frank, Bernstein, Conway & Goldman, both based in Baltimore, Maryland. Mr. Antill received a Juris Doctorate from the University of Virginia and a Bachelor of Arts in Economics with an additional emphasis in Government and Politics from the University of Maryland at College Park. Mr. Antill is licensed to practice law in the state of Maryland. Robert A. Brvenik. Robert A. Brvenik is Executive Vice President - Chief Financial Officer and Treasurer of the Company. Mr. Brvenik joined the Company and assumed his current position in 2000. Mr. Brvenik's responsibilities with the Company include capital market activities, increasing revenue and occupancy, corporate budgeting, financial reporting, investor relations, accounting, taxation, treasury, and management information systems. Prior to joining the Company, Mr. Brvenik was associated for 13 years with Pyramid Management Group, Inc. where he served in several key capacities including Chief Financial Officer, Chief Operating Officer, Director of Development and Senior Leasing Representative, in addition to liaison with several large commercial and investment banks. Mr. Brvenik has also held positions at Arthur Andersen & Co. and Citicorp. He received his B.S. in Accounting from Utica College of Syracuse University and is a Certified Public Accountant. David G. Phillips. David G. Phillips is Executive Vice President - Leasing, International and New Business Development of Prime Retail. Mr. Phillips assumed his current position on January 10, 2002. In this capacity, he focuses on increasing occupancy and revenue throughout the Company's outlet center portfolio and oversees the Company's international interests. From the Company's IPO in 1994 until January 9, 2002, Mr. Phillips held various management positions, including Executive Vice President - Operations, Marketing and Leasing, and Executive Vice President - International. Prior to his employment with the Company, Mr. Phillips worked for PGI from 1989 to 1994 as a Vice President and Senior Vice President of 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. Frederick J. Meno IV. Frederick J. Meno IV is Senior Vice President - Operations of the Company, a position he has held since he joined the Company in January of 1999. Mr meno is responsible for supervising the management, operations, marketing and specialty leasing programs for the Company's nationwide portfolio of outlet centers. Prior to joining the Company, Mr. Meno was Executive Director of Insignia/ESG, Inc., where he was responsible for all management, leasing, construction management, and business development activities for Insignia/ESG's 10 million square foot national enclosed mall portfolio, as well as Insignia/ESG's Dallas/Fort Worth office, industrial and non-enclosed retail portfolio. For 10 years prior to joining Insignia/ESG, Inc., Mr. Meno was President of the Woodmont Property Management Company in Fort Worth, Texas. A 1979 graduate of Ohio State University, having majored in Urban Land Development and Economics with a degree in Business Administration, Mr. Meno is a member of the Institute of Real Estate Management and the ICSC. Mr. Meno has achieved the designations of Certified Property Manager, Real Property Administrator and Certified Shopping Manager and is a licensed Real Estate Salesman in the State of Texas. Mr. Meno is also on the Advisory Board of the Shopping Center Management Insider Publication and he is the 2001 Dean for ICSC's University of Shopping Centers School of Outlet Retailing, ValueOrientor and Community Centers. ITEM 2 -- PROPERTIES General As a fully-integrated real estate company, we provide finance, leasing, accounting, marketing and management services for all of our Properties, including those which we have an ownership interest through joint venture partnerships. At December 31, 2001, our portfolio of Properties consisted of (i) 45 outlet centers aggregating 12,670,000 square feet of GLA (including 1,195,000 square feet of GLA at outlet centers owned through joint venture partnerships), (ii) two community shopping centers aggregating 219,000 square feet of GLA and (iii) 154,000 square feet of GLA of office space. The table set forth below summarizes certain information with respect to our outlet centers as of December 31, 2001 (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 our Properties).
Grand GLA Occupancy Outlet Centers Opening Date (Sq. Ft.) Percentage (1) - ------------------------------------------------------------------------------------------------------------------------------------ Prime Outlets at Fremont-- Fremont, Indiana October 1985 229,000 91% Prime Outlets at Birch Run (2)-- Birch Run, Michigan September 1986 724,000 93 Prime Outlets at Latham-- Latham, New York August 1987 43,000 83 Prime Outlets at Williamsburg (2)-- Williamsburg, Virginia April 1988 274,000 98 Prime Outlets at Pleasant Prairie-- Kenosha, Wisconsin September 1988 269,000 94 Prime Outlets at Edinburgh-- Edinburgh, Indiana September 1989 298,000 99 Prime Outlets at Burlington-- Burlington, Washington May 1989 174,000 91 Prime Outlets at Queenstown-- Queenstown, Maryland June 1989 221,000 94 Prime Outlets at Hillsboro-- Hillsboro, Texas October 1989 359,000 94 Prime Outlets at Oshkosh-- Oshkosh, Wisconsin November 1989 260,000 93 Prime Outlets at Warehouse Row (3)-- Chattanooga, Tennessee November 1989 95,000 89 Prime Outlets at Perryville-- Perryville, Maryland June 1990 148,000 100 Prime Outlets at Sedona-- Sedona, Arizona August 1990 82,000 100 Prime Outlets at San Marcos-- San Marcos, Texas August 1990 549,000 98 Prime Outlets at Anderson-- Anderson, California August 1990 165,000 98 Prime Outlets at Post Falls-- Post Falls, Idaho July 1991 179,000 80 Prime Outlets at Ellenton-- Ellenton, Florida October 1991 481,000 97 Prime Outlets at Morrisville-- Raleigh - Durham, North Carolina October 1991 187,000 96 Prime Outlets at Naples-- Naples/Marco Island, Florida December 1991 146,000 85 Prime Outlets at Conroe (4)-- Conroe, Texas January 1992 282,000 92 Prime Outlets at Niagara Falls USA-- Niagara Falls, New York July 1992 534,000 96 Prime Outlets at Woodbury-- Woodbury, Minnesota July 1992 250,000 79 Prime Outlets at Calhoun-- Calhoun, Georgia October 1992 254,000 90
- ------------------------------------------------------------------------------------------------------------------------------------ Grand GLA Occupancy Outlet Centers Opening Date (Sq. Ft.) Percentage (1) - ------------------------------------------------------------------------------------------------------------------------------------ Prime Outlets at Castle Rock-- Castle Rock, Colorado November 1992 480,000 99% Prime Outlets at Bend-- Bend, Oregon December 1992 132,000 98 Prime Outlets at Jeffersonville II (4)-- Jeffersonville, Ohio March 1993 314,000 43 Prime Outlets at Jeffersonville I-- Jeffersonville, Ohio July 1993 407,000 99 Prime Outlets at Gainesville-- Gainesville, Texas August 1993 316,000 81 Prime Outlets at Loveland-- Loveland, Colorado May 1994 328,000 100 Prime Outlets at Grove City-- Grove City, Pennsylvania August 1994 533,000 98 Prime Outlets at Huntley-- Huntley, Illinois August 1994 282,000 81 Prime Outlets at Florida City-- Florida City, Florida September 1994 208,000 78 Prime Outlets at Pismo Beach-- Pismo Beach, California November 1994 148,000 96 Prime Outlets at Tracy-- Tracy, California November 1994 153,000 94 Prime Outlets at Vero Beach-- Vero Beach, Florida November 1994 326,000 87 Prime Outlets at Odessa-- Odessa, Missouri July 1995 296,000 79 Prime Outlets at Darien (5)-- Darien, Georgia July 1995 307,000 75 Prime Outlets at Gulfport (6)-- Gulfport, Mississippi November 1995 306,000 85 Bellport Outlet Center (7)-- Bellport, New York-- Phases II/III November 1996 197,000 72 Prime Outlets at Lodi-- Burbank, Ohio November 1996 313,000 93 Prime Outlets at Gaffney (5)-- Gaffney, South Carolina November 1996 305,000 98 Prime Outlets at Lee-- Lee, Massachusetts June 1997 224,000 100 Prime Outlets at Lebanon-- Lebanon, Tennessee April 1998 229,000 98 Prime Outlets at Hagerstown (8)-- Hagerstown, Maryland August 1998 487,000 99 Prime Outlets of Puerto Rico-- Barceloneta, Puerto Rico July 2000 176,000 98 ---------- --- Total Outlet Centers (9) 12,670,000 91% ========== ==== ====================================================================================================================================
Notes: (1) Percentage reflects occupied space as of December 31, 2001 as a percent of available square feet of GLA. (2) We, through affiliates, have a 30% ownership interest in the joint venture partnership that owns this outlet center. (3) We own a 2% partnership interest as the sole general partner in Phase I of this property but are entitled to 99% of the property's operating cash flow and net proceeds from a sale or refinancing. This mixed-use development includes 154,000 square feet of office space, not included in this table, which was 95% occupied as of December 31, 2001. (4) Non-recourse mortgage loans on Prime Outlets at Conroe and Prime Outlets at Jeffersonville II are cross-collateralized. Effective January 1, 2002, the lender foreclosed on Prime Outlets at Conroe. The lender and we remain in discussions regarding the transfer of our ownership interest in Prime Outlets at Jeffersonville II. (5) We operate this outlet center pursuant to a long-term ground lease under which we receive the economic benefit of a 100% ownership interest. (6) The real property on which this outlet center is located is subject to a long-term ground lease. (7) We, through affiliates, have a 51% ownership interest in the joint venture partnership that owns Phases II and III of the Bellport Outlet Center. (8) On January 11, 2002, we sold this outlet center to a joint venture partnership in which we, through affiliates, have a 30% ownership interest. See Note 3 - "Property Dispositions" for additional information. (9) We own two community centers, not included in this table, containing approximately 219,000 square feet in the aggregate that were 81% occupied as of December 31, 2001. Lease Terms In general, the leases relating to our outlet centers have terms of three to five years. The majority of leases provide for the payment of percentage rents for annual sales in excess of certain thresholds. In addition, the typical lease agreement generally provides for (i) the recovery of a merchant's proportionate share of actual costs of common area maintenance ("CAM"), refuse removal, insurance, and real estate taxes, (ii) a contribution for advertising and promotion, and (iii) an administrative fee. CAM includes items such as utilities, security, parking lot cleaning, maintenance and repair of common areas, capital replacement reserves, landscaping, seasonal decorations, public restroom maintenance and certain administrative expenses. We continually evaluate our lease provisions in light of current and expected economic conditions and other factors. In this regard, we are exploring alternative lease provisions including fixed CAM where appropriate. The following table sets forth, as of December 31, 2001, tenant lease expirations, assuming that none of the tenants exercise any renewal option, over the next 10 years for our outlet center portfolio, including outlet centers we own through joint venture partnerships but excluding Prime Outlets at Conroe and Prime Outlets at Jeffersonville II (see "Defaults on Certain Non-recourse Mortgage Indebtedness" of Note 6 - "Bonds and Notes Payable" of the Notes to Consolidated Financial Statements contained herein for additional information):
- ------------------------------------------------------------------------------------------------------------------------------------ Lease Expirations - Outlet Center % of Total Number of Approximate Annualized Annualized Leases GLA Minimum Rent Minimum Rent Year Expiring (Sq. Ft.) of Expiring Leases of Expiring Leases - -------- --------------- ---------------- -------------------- ------------------- 2002 739 2,597,274 $ 28,829,741 18.79% 2003 597 2,540,282 33,557,125 21.87% 2004 443 1,720,286 25,443,030 16.58% 2005 374 1,558,512 23,736,138 15.47% 2006 254 1,062,460 16,914,363 11.02% 2007 155 616,334 7,802,788 5.09% 2008 48 260,396 4,262,683 2.78% 2009 22 138,448 2,082,258 1.36% 2010 48 251,935 4,277,856 2.79% 2011 42 220,293 3,859,533 2.52% ====================================================================================================================================
Tenants In management's view, tenant mix is an important factor in determining an outlet center's success. Our outlet centers are managed to attract and retain, if possible, a diverse mix of nationally and internationally recognized manufacturers of moderate to upscale designer and brand name products. Crucial to the success of an outlet center is the presence of lead tenants. Lead tenants are manufacturers that may potentially attract a large number of qualified consumers to the outlet center due to the strength of their brand name and the value offered to the consumer. Lead tenants generally are placed in strategic locations designed to draw customers into the outlet center and to encourage them to shop at more than one store. We continually examine the placement of tenants within each center and, in collaboration with our tenants, adjust the size and location of their space within each center in an effort to improve sales per square foot. During the year ended December 31, 2001, no group of tenants under common control accounted for more than 4.4% of our gross revenues or leased more than 5.3% of our total GLA. During the years ended December 31, 2001 and 2000, total bad debt expense was approximately $13.4 million, or 5.9%, and $7.4 million, or 2.6%, of total revenues, respectively. The majority of bad debt expense is attributable to tenant bankruptcies, disputes, abandonments and store closings. ITEM 3 -- LEGAL PROCEEDINGS Except as described below, neither we nor any of our properties are currently subject to any material litigation nor, to our knowledge, is any material or other litigation threatened against us, other than routine litigation arising in the ordinary course of business, some of which is expected to be covered by liability insurance and all of which collectively is not expected to have a material adverse effect on our consolidated financial statements. Dinnerware Plus Holdings, Inc., which operates under the trade name Mikasa, and affiliates (collectively, the "Mikasa Plaintiffs") filed a lawsuit against the Company and various affiliates in Superior Court of New Jersey on March 29, 2001. The Mikasa Plaintiffs assert a number of causes of action in which they allege that the Company and its affiliates breached various provisions in the Mikasa Plaintiffs' leases and, as a result, overcharged the Mikasa Plaintiffs for common area maintenance and similar charges ("CAM") and promotion fund charges at various centers where the Mikasa Plaintiffs are tenants. The Company filed a motion to dismiss the complaint on behalf of the Company's affiliates who entered into leases with the Mikasa Plaintiffs, based on lack of jurisdiction. The motion was granted, but the Mikasa Plaintiffs filed a motion for reconsideration, upon which the court has not ruled. The remaining defendants, Prime Retail, Inc. and Prime Retail, L.P., have answered the complaint. The outcome of this lawsuit, and the ultimate liability of the defendants, if any, cannot be predicted at this time. On July 6, 2001, affiliates of the Company brought an action in the Circuit Court for Washington County, Maryland against Melru Corporation, which operates under the trade name Jones New York, alleging that Melru Corporation owed past due rent in connection with 43 leases. Melru Corporation, in response to the collection action filed by certain affiliates of the Company, filed on October 15, 2001 several counterclaims against the Company and its affiliates in which it alleges that the Company and its affiliates overcharged Melru Corporation for CAM and promotion fund charges. In addition, Melru Corporation alleges that an affiliate of the Company fraudulently induced Melru Corporation to enter into a lease and that another affiliate violated its lease with Melru Corporation by failing to maintain required occupancy levels at the shopping center it owns. The Company and its affiliates have not filed their response to the Melru Corporation counterclaims. The outcome of the Melru Corporation counterclaims, and the ultimate liability of the Company and its affiliates, if any, cannot be predicted at this time. In addition to the Mikasa Plaintiffs and Melru Corporation, other tenants, including Design's Inc. and Brown Group Retail, Inc., in the Company's affiliates' outlet centers have made or may make allegations concerning overcharging for CAM and promotion fund charges similar to those made by the Mikasa Plaintiffs and Melru Corporation. No other such tenant, however, has filed a suit. It is too early to make any predictions as to whether the Company or its affiliates may be found liable with respect to such other tenants, or to predict damages should liability be found. The Company and its affiliates were defendants in a lawsuit filed by Accrued Financial Services ("AFS") on August 10, 1999 in the Circuit Court for Baltimore City. The lawsuit was removed to United States District Court for the District of Maryland (the "U.S. District Court") on August 20, 1999. AFS claimed that certain tenants had assigned to AFS their rights to make claims under leases such tenants had with affiliates of the Company and alleged that the Company and its affiliates overcharged such tenants for common area maintenance charges and promotion fund charges. The U.S. District Court dismissed the lawsuit on June 19, 2000. AFS appealed the U.S. District Court's decision to the United States Court of Appeals for the Fourth Circuit. Briefs were submitted and oral argument before a panel of judges of the United States Court of Appeals for the Fourth Circuit was held on October 30, 2001, during which the panel of judges requested further briefing of certain issues. The Fourth Circuit received the briefs, but has not yet ruled. The Company believes that it has acted properly and will continue to defend this lawsuit vigorously. The outcome of this lawsuit, and the ultimate liability of the defendants, if any, cannot be predicted at this time. Affiliates of the Company routinely file lawsuits to collect past due rent from, and to evict, tenants which have defaulted under their leases. There are currently dozens of such actions pending. In addition to defending against the Company's affiliates' claims and eviction actions, some tenants file counterclaims against the Company's affiliates. A tenant who files such a counterclaim typically claims that the Company's affiliate which owns the outlet center in question has defaulted under the tenant's lease, has overcharged the tenant for CAM and promotion fund charges, or has failed to maintain or market the outlet center in question as required by the lease. Usually such counterclaims are without merit. In response to such counterclaims the Company's affiliates usually continue to pursue their collection or eviction actions and defend against the counterclaims. Despite the fact that the Company and its affiliates believe such counterclaims are without merit and defend against them vigorously, the outcome of all such counterclaims, and thus the liability, if any, of the Company and its affiliates, cannot be predicted at this time. Since October 13, 2000 there have been eight complaints filed in the United States District Court for the District of Maryland against the Company and five individual defendants. The five individual defendants are Glenn D. Reschke, the President, Chief Executive Officer and Chairman of the Board of Directors of the Company; William H. Carpenter, Jr., the former President and Chief Operating Officer and a former director of the Company; Abraham Rosenthal, the former Chief Executive Officer and a former director of the Company; Michael W. Reschke, the former Chairman of the Board and a current director of the Company; and Robert P. Mulreaney, the former Executive Vice President - Chief Financial Officer and Treasurer of the Company. The complaints have been brought by alleged stockholders of the Company, individually and purportedly as class actions on behalf of all other stockholders of the Company. The complaints allege that the individual defendants made statements about the Company that were in violation of the federal securities laws. The complaints seek unspecified damages and other relief. Lead plaintiffs and lead counsel were subsequently appointed. A consolidated amended complaint captioned The Marsh Group, et al. v. Prime Retail, Inc., et al. dated May 21, 2001 was filed. The Company and the individual defendants filed a motion to dismiss the complaint, which was granted on November 8, 2001. The plaintiffs appealed the matter to the Fourth Circuit. The appeal is now pending. The Company believes that the claims are without merit and will defend vigorously against the appeal. The outcome of this lawsuit, and the ultimate liability of the defendants, if any, cannot be predicted at this time. Several entities (the "eOutlets Plaintiffs") have filed or stated an intention to file lawsuits (collectively, the "eOutlets Lawsuits") against the Company and its affiliates. The eOutlets Plaintiffs seek to hold the Company and its affiliates responsible under various legal theories for liabilities incurred by primeoutlets.com, inc., also known as eOutlets, including the theories that the Company guaranteed the obligations of eOutlets and that the Company was the "alter-ego" of eOutlets. primeoutlets.com inc. is also a defendant in some, but not all, of the eOutlets Lawsuits. The Company believes that it is not liable to the eOutlets Plaintiffs as there was no privity of contract between it and the various eOutlets Plaintiffs. The Company will continue to defend all eOutlets Lawsuits vigorously. primeoutlets.com inc. filed for protection under Chapter 7 of the United States Bankruptcy Code during November 2000 under the name E-Outlets Resolution Corp. The trustee for E-Outlets Resolution Corp. has notified the Company that he is contemplating an action against the Company and the Operating Partnership in which he may assert that E-Outlets Resolution Corp. was the "alter-ego" of the Company and the Operating Partnership and that, as a result, the Company and the Operating Partnership are liable for the debts of E-Outlets Resolution Corp. If the trustee pursues such an action, the Company and the Operating Partnership will defend themselves vigorously. In the case captioned Convergys Customer Management Group, Inc. v. Prime Retail, Inc. and primeoutlets.com inc. in the Court of Common Pleas for Hamilton County (Ohio), the Company prevailed in a motion to dismiss the plaintiff's claim that the Company was liable for primeoutlets.com inc.'s breach of contract based on the doctrine of piercing the corporate veil. The outcome of the eOutlets Lawsuits, and the ultimate liability of the Company in connection with the eOutlets Lawsuits and related claims, if any, cannot be predicted at this time. In May, 2001, the Company, through affiliates, filed suit against Fru-Con Construction, Inc. ("FCC"), the lender on Prime Outlets at New River ("New River") as a result of FCC's foreclosure of New River due to the maturation of the loan. The Company and its affiliates allege that they have been damaged due to FCC's failure to dispose of the collateral in a commercially reasonable manner. The Company, through affiliates, has also filed suit against The Fru-Con Projects, Inc. ("Fru-Con"), a partner in Arizona Factory Shops Partnership and an affiliate of FCC. The Company and its affiliates allege that Fru-Con failed to use reasonable efforts to assist in obtaining refinancing. Fru-Con has claims pending against the Company and its affiliates, as part of the same suit, alleging that the Company and its affiliates breached their contract with Fru-Con by not allowing Fru-Con to participate in an outlet project in Sedona, Arizona (the "Sedona Project") and breached a management and leasing agreement by managing and leasing the Sedona Project. The Company believes its affiliates and it acted properly and FCC did not act properly. The Company and its affiliates will vigorously defend the claims filed against them and prosecute the claims they filed. However, the ultimate outcome of the suit, including the liability, if any, of the Company and its affiliates, cannot be predicted at this time. The New York Stock Exchange ("NYSE") and the Securities and Exchange Commission have notified the Company that they are reviewing transactions in the stock of the Company prior to the Company's January 18, 2000 press release concerning financial matters. The initial notice of such review was received by the Company on March 13, 2000. ITEM 4 -- SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS Our Amended and Restated Articles of Incorporation state, "whenever dividends payable on the Preferred Stock shall be in arrears for six or more consecutive quarterly periods, then the holders of Preferred Stock, voting together as a single class, shall be entitled at the next meeting of stockholders or at any special meeting called for such purpose, to elect two additional directors to the Company's Board of Directors until the full dividends accumulated on all outstanding shares of the Preferred Stock have been paid in full or declared and a sum of money sufficient for the prepayment thereof set aside for payment." On December 6, 2001, a meeting (the "Special Meeting") of the holders of shares our 10.5% Series A Senior Cumulative Preferred Stock (the "Series A Senior Preferred Stock") and 8.5% Series B Cumulative Participating Convertible Preferred Stock (the "Series B Convertible Preferred Stock", and, together the "Preferred Stock") was held for the purpose of electing two additional directors to our Board of Directors. The Special Meeting was adjourned to allow sufficient time to tabulate the votes. On December 11, 2001, the Special Meeting was reconvened. Howard Amster and Robert H. Kanner were elected to serve as members of the Board of Directors. PART II ITEM 5-- MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS Our common stock trades on the OTC Bulletin Board under the trading symbol "PRME". Our common stock previously traded through September 26, 2001 on the New York Stock Exchange under the trading symbol "PRT". The following table sets forth the quarterly high, low and end of period closing sales prices per share of our common stock as reported on the OTC Bulletin Board and NYSE: Market Price of Common Stock and Cash Dividends Paid per Share
- ------------------------------------------------------------------------------------------------------------------------------------ 2001 2000 - --------------------------------------------------------------------------------- ---------------------------------------------- Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ Market price per common share: High $ 0.20 $ 0.30 $ 0.42 $ 0.70 $ 0.69 $ 1.63 $ 2.13 $ 6.63 Low 0.09 0.16 0.26 0.36 0.25 0.22 0.94 1.94 End of period close 0.10 0.17 0.27 0.39 0.47 0.34 1.27 2.19 Cash dividends paid per common share $ - $ - $ - $ - $ - $ - $ - $ - ====================================================================================================================================
To qualify as a REIT for federal income tax purposes, we are required to pay distributions to our common and preferred shareholders of at least 90% of our REIT taxable income in addition to satisfying other requirements. Although we intend to make the necessary distributions to remain qualified as a REIT under the Code, we also intend to retain such amounts as we consider necessary from time to time for our capital and liquidity needs. Our current policy is to pay distributions only to the extent necessary to maintain our status as a REIT for federal income tax purposes. Based on our current federal income tax projections for 2002, we do not expect to pay any distributions on our Series A Senior Preferred Stock, Series B Convertible Preferred Stock, common stock or common units of limited partnership interest in the Operating Partnership during 2002. We are currently in arrears on nine quarters of preferred stock distributions due February 15, 2000 through February 15, 2002, respectively. We are prohibited from paying dividends or distributions except to the extent necessary to maintain our REIT status under the terms of a mezzanine loan (see "Dividends and Distributions" of Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 6 - "Bonds and Notes Payable" of the Notes to Consolidated Financial Statements contained herein for additional information). In addition, we may not make distributions to our common shareholders or our holders of common units of limited partnership interests in the Operating Partnership unless we are current with respect to distributions to our preferred shareholders. As of December 31, 2001, unpaid dividends for the period beginning on November 16, 1999 through December 31, 2001 on the Series A Senior Preferred Stock and Series B Convertible Preferred Stock aggregated $12.8 million and $35.3 million, respectively. The annualized dividends on our 2,300,000 shares of Series A Senior Preferred Stock and 7,828,125 shares of Series B Convertible Preferred Stock outstanding as of December 31, 2001 are $6.0 million ($2.625 per share) and $16.6 million ($2.125 per share), respectively. The approximate number of holders of record of our common stock was 536 including participants in security position listings as of March 19, 2002. ITEM 6 -- SELECTED FINANCIAL DATA (Amounts in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues Base rents $ 141,116 $ 178,830 $ 193,979 $ 148,376 $ 78,046 Percentage rents 4,220 6,369 8,085 6,384 3,277 Tenant reimbursements 67,323 83,350 90,063 67,152 37,519 Interest and other 13,421 14,801 13,829 9,897 10,288 ----------- ----------- ----------- ----------- --------- Total revenues 226,080 283,350 305,956 231,809 129,130 Expenses Property operating 54,451 68,537 70,862 52,684 29,492 Real estate taxes 19,283 21,776 22,405 16,705 9,417 Depreciation and amortization 56,918 67,556 73,640 52,727 26,715 Corporate general and administrative 14,290 20,847 12,687 7,980 5,603 Interest 92,859 98,234 93,934 60,704 36,122 Other charges 22,646 17,555 6,918 4,495 3,234 Provision for asset impairment 63,026 68,663 15,842 - - Provision for abandoned projects - - 16,039 - - Loss on eOutlets.com - 14,703 - - - Loss on Designer Connection - 1,815 6,561 1,067 - ----------- ----------- ----------- ----------- --------- Total expenses 323,473 379,686 318,888 196,362 110,583 ----------- ----------- ----------- ----------- --------- Income (Loss) before loss on sale of real estate, extraordinary loss and minority interests (97,393) (96,336) (12,932) 35,447 18,547 Loss on sale of real estate (1,063) (42,648) (15,153) (15,461) - ----------- ----------- ----------- ----------- --------- Income (Loss) before minority interests and extraordinary loss (98,456) (138,984) (28,085) 19,986 18,547 Loss (Income) allocated to minority interests 408 738 (3,226) (2,456) (10,581) ----------- ----------- ----------- ----------- --------- Income (Loss) before minority interests (98,048) (138,246) (31,311) 17,530 7,966 Extraordinary loss on early extinguishment of debt - (4,206) (3,518) - (2,061) ----------- ----------- ----------- ----------- ---------- Net income (loss) (98,048) (142,452) (34,829) 17,530 5,905 Income allocated to preferred shareholders (22,672) (22,672) (9,962) (24,604) (12,726) ----------- ----------- ----------- ----------- ---------- Net loss applicable to common shares $ (120,720) $ (165,124) $ (44,791) $ (7,074) $ (6,821) =========== =========== =========== =========== ========== Basic loss per common share: $ (2.77) $ (3.79) $ (1.04) $ (0.20) $ (0.36) =========== =========== =========== =========== ========== Diluted loss per common share: $ (2.77) $ (3.79) $ (1.30) $ (0.20) $ (0.36) =========== =========== =========== =========== ========== Other Data: Funds from operations (1) $ 25,256 $ 57,967 $ 84,163 $ 90,020 $ 46,718 Net cash provided by operating activities 32,911 32,450 97,815 59,182 49,856 Net cash provided by (used in) investing activities 5,595 1,095 (56,666) (145,596) (229,956) Net cash provided by (used in) financing activities (39,875) (31,982) (39,571) 85,806 182,549 Distributions declared per common share (2) $ - $ - $ 0.885 $ 1.680 $ 1.180 Reported merchant sales 2,473,830 2,745,923 3,286,917 3,169,268 1,434,163 - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Balance Sheet Data: Rental property before accumulated depreciation $ 1,375,608 $ 1,493,107 $ 1,826,551 $ 2,015,722 $ 904,782 Net investment in rental property 1,117,484 1,275,538 1,642,597 1,887,975 822,749 Total assets 1,262,508 1,462,021 1,856,058 1,976,464 904,183 Bonds and notes payable 957,467 1,030,153 1,260,670 1,217,507 515,265 Total liabilities and minority interests 1,006,068 1,107,533 1,359,371 1,332,730 559,655 Stockholders' equity 256,440 354,488 496,687 643,734 344,528 Other Data: Total outlet center GLA at end of period (3) 12,670 13,497 14,699 14,348 7,217 Number of outlet centers at end of period (3) 45 48 51 50 28 ====================================================================================================================================
Notes: (1) We believe that to facilitate a clear understanding of our operating results, funds from operations ("FFO") should be considered in conjunction with net income (loss) as presented in accordance with generally accepted accounting principles ("GAAP"). FFO, pursuant to guidelines established by the National Association of Real Estate Investment Trusts ("NAREIT"), represents net income (loss) (determined in accordance with GAAP) excluding provisions for asset impairment, gains (or losses) from debt restructuring, sales of property and discontinued operations, plus real estate depreciation and amortization after adjustments for unconsolidated joint venture partnerships. We believe that FFO is an important and widely used measure of the operating performance of equity real estate investment trusts ("REITs") which provides a relevant basis for comparison to other REITs. Therefore, FFO is presented to assist investors in analyzing our performance. Our FFO is not comparable to FFO reported by other REITs that do not define the term using the NAREIT definition or that interpret the NAREIT definition differently than we do. Therefore, we caution that the calculation of FFO may vary from entity to entity and as such the presentation of our FFO may not be comparable to other similarly titled measures of other reporting companies. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of our performance or to cash flows as a measure of liquidity or ability to make distributions. A reconciliation of income (loss) before allocations to minority interests and preferred shareholders to FFO is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Income (Loss) before minority interests and extraordinary loss $ (98,456) $ (138,984) $ (28,085) $ 19,986 $ 18,547 FFO adjustments: Loss on sale of real estate 1,063 42,648 15,153 15,461 - Depreciation and amortization 56,918 67,556 73,640 52,727 26,715 Non-real estate depreciation and amortization (2,251) (1,703) (587) (432) (302) Joint venture adjustments 3,074 3,269 1,639 1,211 1,758 Non-cash joint venture interest subsidy 1,882 - - - - Discontinued operations - eOutlets.com - 14,703 - - - Discontinued operations - Designer Connection - 1,815 6,561 1,067 - --------- ---------- --------- -------- -------- FFO before adjustment for asset impairment (37,770) (10,696) 68,321 90,020 46,718 DProvisioneforpassetoimpairmentets.com 63,026 68,663 15,842 - - --------- ---------- --------- -------- -------- FFO before allocations to minority interests and preferred shareholders $ 25,256 $ 57,967 $ 84,163 $ 90,020 $ 46,718 ========= ========== ========= ======== ======== - ------------------------------------------------------------------------------------------------------------------------------------
(2) Includes special cash distribution during 1998 of $0.50 per common share relating to our merger with Horizon Group, Inc. completed in June, 1998. (3) Includes outlet centers we operate under joint venture partnerships with unrelated third parties as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Aggregate GLA 1,195 1,764 1,494 595 595 Number of outlet centers 3 5 4 3 3 ====================================================================================================================================
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 our consolidated financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report on Form 10-K. Our operations are conducted through the Operating Partnership. We control the Operating Partnership as its sole general partner and are dependent upon the distributions or other payments from the Operating Partnership to meet our 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" and other sections of this Form 10-K contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect management's current views with respect to future events and financial performance. 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 associated with our high level of leverage and our ability to refinance such indebtedness as it becomes due; the risk that we or one or more of our subsidiaries are not able to satisfy scheduled debt service obligations or will not remain in compliance with existing loan covenants; the risk of material adverse effects of future events, including tenant bankruptcies or abandonments, on our financial performance; the risk related to the retail industry in which our outlet centers compete, including the potential adverse impact of external factors, such as inflation, consumer confidence, unemployment rates and consumer tastes and preferences; the risk associated with tenant bankruptcies, store closings and the non-payment by tenants of contractual rents and additional rents; the risk associated with our potential asset sales; the risk of potential increases in market interest rates from current levels; the risk associated with real estate ownership, such as the potential adverse impact of changes in local economic climate on the revenues and the value of our properties; the risk associated with litigation; and the risk associated with competition from web-based and catalogue retailers. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report on Form 10-K. These Consolidated Financial Statements and Notes thereto have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of such statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent liabilities. We evaluate our estimates on an on-going basis; including those related to (i) revenue recognition, (ii) provisions for bad debt on accounts receivable, (iii) potential impairment of the carrying value of rental properties held for use, (iv) capitalization and depreciation of significant renovations and improvements and (v) contingencies for debt guarantees and litigation. We base our estimates on historical trends and certain other assumptions that we believe are reasonable under the particular circumstances. These estimates ultimately form the basis for making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. To assist you in understanding our financial condition and results from operations, we have identified our critical accounting policies and discussed them below. These accounting policies are most important to the portrayal of our financial condition and results from operations, either because of the significance of the financial statement items to which they relate or because they require our management's most difficult, subjective or complex judgments. Bad Debt We regularly reviews our accounts receivable in order to determine an appropriate range for the allowance for doubtful accounts based upon the impact of economic conditions on ours tenants' ability to pay, past collection experience and such other factors which, in our judgment deserve current recognition. In turn, a provision for bad debt is charged against the allowance to maintain the allowance level within this range. If the financial condition of our tenants were to deteriorate, resulting in impairment in their ability to make payments due under their leases, additional allowances may be required. Impairment of Rental Property We monitor our Properties for indicators of impairment on an on-going basis. We record a provision for impairment when we believe certain events and circumstances have occurred which indicate that the carrying value of our Property might have experienced a decline in value that is other than temporary. Impairment losses are measured as the difference between the carrying value and the estimated fair value for assets held in the portfolio. For assets held for sale, impairment is measured as the difference between the carrying value and fair value, less costs to dispose. Fair value is based on estimated cash flows discounted at a risk-adjusted rate of return. Adverse changes in market conditions or deterioration in the operating results of our outlet centers and other rental properties could result in losses or an inability to recover the current carrying value of such assets. Such potential losses or the inability to recover the current carrying value may not be reflected in our Properties' current carrying value, thereby possibly requiring an impairment charge in the future. Contingencies We are subject to proceedings, lawsuits, and other claims related to various matters (see Note 13 - "Legal Proceedings" of the Notes to the Consolidated Financial Statements for additional information). Additionally, we have guaranteed certain indebtedness of others (see Note 6 - "Bonds and Notes Payable" for additional information). With respect to these contingencies, we assess the likelihood of any adverse judgments or outcomes to these matters and, if appropriate potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies are made after careful analysis of each individual issue. Future reserves may be required due to (i) new developments or changes to the approach in which we deal with each matter or (ii) if unasserted claims arise. Outlet Center Portfolio Portfolio GLA and Occupancy Our outlet center portfolio grew to its present size through the development and acquisition of outlet centers and through expansions to existing outlet centers. Our outlet portfolio consisted of 45 properties totaling 12,670,000 square feet of GLA at December 31, 2001, compared to 48 properties totaling 13,497,000 square feet of GLA at December 31, 2000 and 51 properties totaling 14,699,000 square feet of GLA at December 31, 1999. The changes in our outlet center GLA are due to certain (i) sales transactions during 2001 and 2000, (ii) development activities during 2000 and (iii) the foreclosure sale of an outlet center during 2001. Such changes are discussed below and are collectively referred to as the "Portfolio GLA Activity". Our outlet center portfolio was 91.2% and 92.7% occupied as of December 31, 2001 and 2000, respectively. The weighted average occupancy of our outlet center portfolio during the years ended December 31, 2001 and 2000 was 90.3% and 91.6%, respectively. 2001 Sales Transactions On February 2, 2001, we sold Northgate Plaza, a community center located in Lombard, Illinois to Arbor Northgate, Inc. for aggregate consideration of $7,050. After the repayment of mortgage indebtedness of $5,966 and closing costs, the net cash proceeds from the Northgate Plaza sale were $510. On March 16, 2001, we sold Prime Outlets at Silverthorne, an outlet center located in Silverthorne, Colorado consisting of 257,000 square feet of GLA, to Silverthorne Factory Stores, LLC for aggregate consideration of $29,000. The net cash proceeds from the sale of Prime Outlets at Silverthorne were $8,993, after the repayment of certain mortgage indebtedness of $18,078 on Prime Outlets at Lebanon (see below) and closing costs and fees. The net proceeds from these sales of were used to prepay an aggregate $9,137 of principal outstanding under our mezzanine loan (the "Mezzanine Loan") in accordance with the terms of such loan agreement. In connection with these sales, we recorded an aggregate gain on the sale of real estate of $732 during the first quarter of 2001. The operating results of these properties are included in our results of operations through the respective dates of disposition. At December 31, 2000, these properties were classified as assets held for sale in the Consolidated Balance Sheet with an aggregate carrying value of $34,770. On November 27, 2001, we sold certain land located in Camarillo, California for aggregate consideration of $7,150. The net cash proceeds from the sale, including the release of certain funds held in escrow, were $1,859, after the repayment of certain mortgage indebtedness of $6,227 and closing costs and fees. The net proceeds from this sale were used to prepay $1,787 of the Mezzanine Loan. In connection with this sale, we recorded a loss on the sale of real estate of $1,615 during the fourth quarter of 2001. At December 31, 2000, the land was classified as assets held for sale in the Consolidated Balance Sheet with a carrying value of $8,460. Prior to the sale of Prime Outlets at Silverthorne, it was one of fifteen properties securing our first mortgage and expansion loan (the "First Mortgage and Expansion Loan"), which had an outstanding principal balance of $342,629 at December 31, 2001. In conjunction with the sale of Prime Outlets at Silverthorne, we substituted Prime Outlets at Lebanon for Prime Outlets at Silverthorne in the cross-collateralized asset pool securing the First Mortgage and Expansion Loan pursuant to the collateral substitution provisions contained in the loan agreement. In conjunction with adding Prime Outlets at Lebanon as security for the First Mortgage and Expansion Loan, we repaid, as discussed above, certain mortgage indebtedness on Prime Outlets at Lebanon of $18,078. 2001 Foreclosure Sale On May 8, 2001, Prime Outlets at New River, an outlet center located in New River, Arizona, was sold through foreclosure. Affiliates of the Company and Fru-Con Development Corporation ("Fru-Con") each own 50% of the partnership, which owned the project. We have accounted for our ownership interest in the partnership that owned the project in accordance with the equity method of accounting through the date of foreclosure sale. In connection with the foreclosure sale, we recorded a loss on the sale of real estate of $180 during the second quarter of 2001. 2000 Sales Transactions On February 23, 2000, we sold Prime Outlets at Williamsburg, an outlet center located in Williamsburg, Virginia which contains 274,000 square feet of GLA, to a joint venture partnership (the "Prime/Estein Venture"). We, indirectly through affiliates, have a 30% ownership interest in the Prime/Estein Venture. Commencing on the date of disposition, we have accounted for the operating results of this outlet center in accordance with the equity method of accounting. On December 22, 2000, we completed the sale of four outlet centers aggregating 1,592,000 square feet of GLA to a joint venture partnership comprised of Chelsea Property Group, Inc. and Fortress Investment Group, L.L.C. The four outlet centers that were sold are located in Gilroy, California; Michigan City, Indiana; Waterloo, New York; and Kittery, Maine. In connection with this sale, we recorded a loss on the sale of real estate of $42,648 during the fourth quarter of 2000. The operating results of these properties are included in our results of operations through the date of disposition. Development Activities During 2000 we engaged in development activities related to 390,000 square feet of GLA consisting of the opening of (i) Prime Outlets of Puerto Rico, the first outlet center in Puerto Rico, which contains 176,000 square feet of GLA, and (ii) four expansions to outlet centers totaling 214,000 square feet of GLA. During 2001, we did not engage in any further development activities other than post-opening work related to the 2000 development activities and certain consulting activities in Europe. Results of Operations Table 1--Consolidated Statements of Operations
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues Base rents $ 141,116 $ 178,830 $ 193,979 Percentage rents 4,220 6,369 8,085 Tenant reimbursements 67,323 83,350 90,063 Interest and other 13,421 14,801 13,829 ---------- ---------- --------- Total revenues 226,080 283,350 305,956 Expenses Property operating 54,451 68,537 70,862 Real estate taxes 19,283 21,776 22,405 Depreciation and amortization 56,918 67,556 73,640 Corporate general and administrative 14,290 20,847 12,687 Interest 92,859 98,234 93,934 Other charges 22,646 17,555 6,918 Provision for asset impairment 63,026 68,663 15,842 Provision for abandoned projects - - 16,039 Loss on eOutlets.com - 14,703 - Loss on Designer Connection - 1,815 6,561 ---------- ---------- --------- Total expenses 323,473 379,686 318,888 ---------- ---------- --------- Loss before loss on sale of real estate, minority interests and extraordinary loss (97,393) (96,336) (12,932) Loss on sale of real estate (1,063) (42,648) (15,153) ---------- ---------- --------- Loss before minority interests and extraordinary loss (98,456) (138,984) (28,085) Loss (Income) allocated to minority interests 408 738 (3,226) ---------- ---------- --------- Loss before extraordinary loss (98,048) (138,246) (31,311) Extraordinary loss on early extinguishment of debt - (4,206) (3,518) ---------- ---------- --------- Net loss (98,048) (142,452) (34,829) Income allocated to preferred shareholders (22,672) (22,672) (9,962) ---------- ---------- --------- Net loss applicable to common shares $ (120,720) $ (165,124) $ (44,791) ========== ========== ========= Basic loss per common share: Loss before extraordinary loss $ (2.77) $ (3.69) $ (0.96) Extraordinary loss - (0.10) (0.08) ---------- ---------- --------- Net loss $ (2.77) $ (3.79) $ (1.04) ========== ========== ========= Diluted loss per common share: Loss before extraordinary loss $ (2.77) $ (3.69) $ (1.22) Extraordinary loss - (0.10) (0.08) ---------- ---------- --------- Net loss $ (2.77) $ (3.79) $ (1.30) ========== ========== ========= Weighted-average common shares outstanding - basic 43,578 43,517 43,196 ========== ========== ========= Weighted-average common shares outstanding - diluted 43,578 43,517 44,260 ========== ========== ========= ====================================================================================================================================
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, 2001, 2000 and 1999 is presented in the following table, expressed in amounts calculated on a weighted average occupied GLA basis.
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ GLA at end of period (1) 11,864 12,322 13,787 Portfolio weighted average occupied GLA (1) 10,741 12,483 13,599 Factory outlet weighted average occupied GLA (1) 10,401 11,992 13,099 Outlet centers in operation at end of period (2) 45 48 51 New outlet centers opened (2) - 1 1 Outlet centers expanded (2) - 2 2 Community centers in operation at end of period 2 3 3 States (including Puerto Rico) operated in at end of period 26 26 26 Portfolio weighted average per square foot (3): Revenues Base rents $ 13.14 $ 14.33 $ 14.26 Percentage rents 0.39 0.51 0.59 Tenant reimbursements 6.27 6.68 6.62 Interest and other 1.25 1.19 1.02 ------- ------- ------- Total revenues 21.05 22.71 22.49 Expenses (4) Property operating 5.07 5.49 5.21 Real estate taxes 1.80 1.74 1.65 Depreciation and amortization 5.30 5.41 5.42 Corporate general and administrative (5) 1.33 1.36 0.93 Interest 8.65 7.87 6.91 Other charges (6) 2.11 1.32 0.51 ------- ------- ------- Total expenses 24.26 23.19 20.63 ------- ------- ------- Income (Loss) from continuing operations $ (3.21) $ (0.48) $ 1.86 ======= ======= ======= Outlet center weighted average per square foot (3): Revenues Base rents $ 13.27 $ 14.61 $ 14.51 Percentage rents 0.40 0.53 0.62 Tenant reimbursements 6.41 6.85 6.76 Interest and other 1.14 1.07 0.85 ------- ------- ------- Total revenues 21.22 23.06 22.74 Expenses (4) Property operating 5.16 5.60 5.31 Real estate taxes 1.90 1.75 1.65 Depreciation and amortization 5.22 5.45 5.53 Interest 7.19 6.92 6.42 Other charges 1.72 1.13 0.26 ------- ------- ------- Total expenses 21.19 20.85 19.17 ------- ------- ------- Income from continuing operations $ 0.03 $ 2.21 $ 3.57 ======= ======= ======= ====================================================================================================================================
Notes: (1) Includes total GLA in which we receive substantially all of the economic benefit. (2) Includes outlet centers operated under unconsolidated joint venture partnerships. (3) Based on occupied GLA weighted by months of operation. The occupied GLA on a weighted average basis for the Portfolio Activity have been included in the weighted average GLA through the date of disposition. (4) Excludes the following non-recurring items: --------------------------------------------------------------------------- Years ended December 31, 2001 2000 1999 --------------------------------------------------------------------------- Provision for asset impairment $63,026 $68,663 $15,842 Provision for abandoned projects - - 16,039 Loss on eOutlets.com - 14,703 - Loss on Designer Connection - 1,815 6,561 --------------------------------------------------------------------------- (5) 2000 excludes non-recurring corporate general and administrative costs aggregating $3,876, including (i) severance and other compensation costs totaling $2,421 and (ii) professional fees of $1,455 relating to refinancing activities. (6) Excludes non-recurring other charges aggregating $2,918 and $1,100 in 2001 and 2000, respectively. The 2001 non-recurring costs include (i) a charge of $1,882 related to an interest rate subsidy agreement and (ii) a loss of $1,036 incurred in connection with the refinancing of first mortgage loans on Prime Outlets at Birch Run. The 2000 non-recurring resulted from the termination of the sale of a joint venture interest in Prime Outlets at Hagerstown and an expansion to Prime Outlets at Williamsburg, which was not constructed. Comparison of the Year Ended December 31, 2001 to the Year Ended December 31, 2000 Summary We reported net losses of $98,048 and $142,452 for the years ended December 31, 2001 and 2000, respectively. For the year ended December 31, 2001, the net loss applicable to our common shareholders was $120,720, or $2.77 per common share on a basic and diluted basis. For the year ended December 31, 2000, the net loss applicable to our common shareholders was $165,124, or $3.79 per common share on a basic and diluted basis. The 2001 results include (i) a provision for asset impairment of $63,026, (ii) a non-recurring charge of $1,882 related to an interest rate subsidy agreement, (iii) a non-recurring loss of $1,036 related to the refinancing of first mortgage loans on Prime Outlets at Birch Run and (iv) a net loss on the sale of real estate of $1,063. The 2000 results reflect certain non-recurring items, including (i) a loss on the sale of real estate of $42,648, (ii) a provision for asset impairment of $68,663, (iii) a loss on eOutlets.com of $14,703, (iv) general and administrative expenses consisting of severance and other compensation costs aggregating $2,421 and professional fees of $1,455 related to refinancing activities, (v) a gain on the sale of outparcel land of $2,472 included in interest and other income, (vi) a loss on Designer Connection of $1,815, (vii) other charges of $1,100 incurred in connection with the termination of the sale of joint venture interests in certain properties and (viii) an extraordinary loss of $4,206 related to the prepayment and modification to the terms of certain long-term debt. Revenues Total revenues were $226,080 for the year ended December 31, 2001, compared to $283,350 for the year ended December 31, 2000, a decrease of $57,270, or 20.2%. Base rents decreased $37,714, or 21.1%, in 2001 compared to 2000. These decreases are primarily due to the Portfolio GLA Activity and the reduction in outlet center occupancy during the 2001 period. Straight-line rent expense, included in base rent was $434 and $94 for the years ended December 31, 2001 and 2000, respectively. Percentage rents, which represent rents based on a percentage of sales volume above a specified threshold, decreased $2,149, or 33.7%, to $4,220 during the year ended December 31, 2001 compared to $6,369 for the same period in 2000. This decline was primarily attributable to the Portfolio GLA Activity. As summarized in TABLE 3, merchant sales reported for centers remaining in our outlet center portfolio at period-end were $2,474 million and $2,746 million for the years ended December 31, 2001 and 2000, respectively. The weighted average reported merchant sales per square foot decreased to $241 per square foot in 2001 from $245 per square foot in 2000. Total merchant occupancy cost per square foot decreased from $22.03 in 2000 to $20.68 in 2001 and as a percentage of reported sales from 8.99% to 8.65% respectively. Table 3 - Summary of Reported Merchant Sales A summary of reported outlet merchant sales and related data for 2001, 2000 and 1999 follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Total reported merchant sales (in millions) (1) $ 2,474 $ 2,746 $ 3,287 ======= ======= ======== Weighted average reported merchant sale per square foot (2): All store sales $ 241 $ 245 $ 257 ======= ======= ======== Same-space sales $ 247 $ 251 $ 249 ======= ======= ======== Change in same-store sales versus prior year 2.2% ======= Change in same-space sales versus prior year -2.0% ======= Total merchant occupancy costs per square foot (3) $ 20.68 $ 22.03 $ 21.90 ======= ======= ======== Cost of merchant occupancy to reported sales (4) 8.65% 8.99% 8.54% ======= ======= ======== Cost of merchant occupancy, excluding marketing contributions, to reported sales (5) 7.99% 8.26% 7.84% ======= ======= ======== ====================================================================================================================================
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 our outlet centers were constructed or expanded during the time periods presented and therefore, reported sales are included only for the partial period and were not annualized. (2) Weighted average reported sales per square foot is based on reported sales divided by the weighted average square footage occupied by the merchants reporting those sales. Same-space sales is defined as the weighted average reported merchant sales per square foot for space open since the beginning of the prior year. (3) Total merchant occupancy cost per square foot includes base rents, percentage rents and tenant reimbursements which includes tenant marketing contributions. (4) Computed as follows: total merchant occupancy cost per square foot divided by total weighted average reported merchant sales per square foot. (5) Computed as follows: total merchant occupancy cost per square foot (excluding marketing contributions paid by merchants) divided by total weighted average reported merchant sales per square foot. Tenant reimbursements, which represent the contractual recovery from tenants of certain operating expenses, decreased by $16,027, or 19.2%, to $67,323 in 2001 compared to $83,350 in 2000. This decline is primarily due to the Portfolio GLA Activity and the reduction in outlet center occupancy during the 2001 period. As shown in TABLE 4, tenant reimbursements as a percentage of recoverable property operating expenses and real estate taxes was 91.3% in 2001 compared to 92.3% in 2000. Table 4--Tenant Recoveries as a Percentage of Total Recoverable Expenses - -------------------------------------------------------------------------------- Expenses Recovered Year from Tenants (1) - -------------------------------------------------------------------------------- 2001 91.3% 2000 92.3% 1999 96.6% ================================================================================ Note: (1) Total recoverable expenses include property operating expenses and real estate taxes. Interest and other income decreased by $1,380, or 9.3%, to $13,421 during the year ended December 31, 2001 as compared to $14,801 for the year ended December 31, 2000. The decrease was primarily attributable to (i) a non-recurring gain on the sale of outparcel land of $2,472 during the 2000 period, (ii) a reduction in amortization of deferred income of $782 and (iii) lower miscellaneous income of $24. Partially offsetting these items was (i) a reduction in equity losses from investment in partnerships of $957 and (ii) increased leasing commission income of $941. Expenses Property operating expenses decreased by $14,086, or 20.6%, to $54,451 in 2001 compared to $68,537 in 2000. Real estate taxes expense decreased by $2,493, or 11.4%, to $19,283 in 2001 from $21,776 in 2000. These decreases are primarily due to the Portfolio GLA Activity. As shown in TABLE 5, depreciation and amortization expense decreased by $10,638, or 15.7%, to $56,918 in 2001, compared to $67,556 in 2000. This decrease was primarily attributable to the depreciation and amortization of assets associated with the Portfolio GLA Activity. Table 5--Components of Depreciation and Amortization Expense The components of depreciation and amortization expense for 2001, 2000 and 1999 are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Building and improvements $ 28,201 $ 35,536 $ 40,184 Land improvements 6,119 6,197 5,779 Tenant improvements 18,789 22,134 25,374 Furniture and fixtures 3,275 2,988 1,540 Leasing commissions 534 701 763 -------- -------- -------- Total $ 56,918 $ 67,556 $ 73,640 ======== ======== ======== ====================================================================================================================================
As shown in TABLE 6, interest expense decreased by $5,375, or 5.5%, to $92,859 in 2001 compared to $98,234 in 2000. This decrease reflects lower interest incurred of $12,622 partially offset by (i) an increase in amortization of deferred financing costs of $3,769, (ii) a decrease in the amount of interest capitalized in connection with development activities of $3,412 and (iii) a reduction in amortization of debt premiums of $66. The decrease in interest incurred is primarily attributable to a reduction of $221,976 in our weighted average debt outstanding, excluding debt premiums, during the year ended December 31, 2001 compared to the same period in 2000. The effect of the reduction in weighted average debt outstanding was partially offset by an increase in the weighted average contractual interest rate on long-term debt for the year ended December 31, 2001 compared to the same period in 2000. The weighted average contractual interest rates for 2001 and 2000 were 9.09% and 8.46%, respectively. Table 6--Components of Interest Expense The components of interest expense for 2001, 2000 and 1999 are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- Interest incurred $ 88,927 $ 101,549 $ 98,607 Amortization of deferred financing costs 7,025 3,256 4,379 Amortization of debt premiums (3,093) (3,159) (4,406) Interest capitalized to development projects - (3,412) (4,646) -------- --------- -------- Total $ 92,859 $ 98,234 $ 93,934 ======== ========= ======== ==============================================================================================================================
Other charges increased by $5,091, or 29.0%, to $22,646 for the year ended December 31, 2001 compared to $17,555 for the same period in 2000. The increase was primarily attributable to (i) a higher provision for uncollectible accounts receivable of $5,925 in part from certain tenant bankruptcies, disputes, abandonments and store closings during the 2001 period, (ii) a non-recurring charge of $1,882 related to an interest rate subsidy agreement and (iii) a non-recurring loss of $1,036 related to the refinancing of first mortgage loans on Prime Outlets at Birch Run. Partially offsetting these items were (i) costs of $1,100 incurred in the third quarter of 2000 in connection with the discontinuance of the proposed sale of a 70% joint venture interest in Prime Outlets at Hagerstown and a proposed expansion to Prime Outlets at Williamsburg which was not constructed, (ii) a decrease in ground lease expense of $1,172, (iii) lower marketing expenses of $1,256 and (v) a decrease in all other expenses of $224. Special Charges During the third quarter of 2001, we determined that certain events and circumstances had occurred, including reduced occupancy and limited leasing success, that indicated that four of our wholly owned properties were permanently impaired. As a result, we recorded a third quarter provision for asset impairment aggregating $63,026, representing the write-down of the carrying value of these properties to their estimated fair value in accordance with the requirements of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of". During 2000, we established a formal plan to sell three of our wholly owned properties and, accordingly, reclassified their respective carrying values to assets held for sale. In accordance with the requirements of SFAS No. 121, we incurred a provision for asset impairment of $28,047 to reduce the carrying value of these properties classified as held for sale to their estimated sales value, less cost to dispose. The aggregate carrying value of these properties as of December 31, 2000 was $43,230. Total revenues and expenses for the operating properties classified as held for sale were $6,354 and $6,697, respectively, for the year ended December 31, 2000. See "Liquidity and Capital Resources - 2001 Sales Transactions" within Management's Discussion of Financial Condition and Results of Operations for additional information. Additionally, we also determined that certain events and circumstances had occurred during 2000, including reduced occupancy and limited leasing success, which indicated that four wholly owned properties and two joint venture properties were permanently impaired. Furthermore, our results of operations for 2000 include a provision for asset impairment aggregating $40,616 representing the write-down of the carrying values of these permanently impaired properties to their estimated fair value in accordance with SFAS No. 121. On April 12, 2000, we announced that we had been unable to conclude an agreement to transfer ownership of our wholly-owned e-commerce subsidiary, primeoutlets.com inc., also known as eOutlets.com, to a management-led investor group comprised of eOutlets.com management and outside investors. Effective April 12, 2000, eOutlets.com ceased all operations and on November 6, 2000 filed for bankruptcy under Chapter 7. In connection with the discontinuance of eOutlets.com, we incurred a non-recurring loss of $14,703 which includes (i) the write-off of $3,497 of costs capitalized during 1999 and (ii) $11,206 of costs incurred during the year ended December 31, 2000. In addition, during 1999 we incurred expenses of $3,500 related to organizational and start-up expenditures of eOutlets.com which are reflected in corporate general and administrative expenses in the Consolidated Statements of Operations. The operating results for our Designer Connection outlet stores are reflected in loss on Desinger Connection in the Consolidated Statements of Operations. We ceased operations of our Designer Connection outlet stores in 2000. Table 7--Capital Expenditures The components of capital expenditures for 2001, 2000 and 1999 are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ New development $ 3,336 $ 17,715 $ 37,553 Expansions and renovations 4,404 26,068 49,934 Re-leasing tenant allowances 8,273 8,050 2,482 ------- -------- --------- Total $16,013 $ 51,833 $ 89,969 ======= ======== ========= ====================================================================================================================================
Table 8--Consolidated Quarterly Summary of Operations
- ------------------------------------------------------------------------------------------------------------------------------------ 2001 2000 ------------------------------------------------ ------------------------------------------------ Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues (1) $ 56,099 $ 54,760 $ 57,104 $ 58,117 $ 70,517 $ 71,408 $ 68,584 $ 72,841 Total expenses (2)(3)(4)(5)(6) 66,814 128,012 64,167 64,480 135,056 75,759 84,343 84,528 --------- -------- -------- -------- --------- -------- --------- --------- Loss before gain (loss) on sale of real estate, minority interests and extraordinary loss (10,715) (73,252) (7,063) (6,363) (64,539) (4,351) (15,759) (11,687) Gain (Loss) on sale of real estate (1,615) - (180) 732 (42,648) - - - --------- -------- -------- -------- --------- -------- --------- --------- Loss before minority interests and extraordinary loss (12,330) (73,252) (7,243) (5,631) (107,187) (4,351) (15,759) (11,687) (Income) Loss allocated to minority interests 7 - 400 1 3 767 - (32) --------- -------- -------- -------- --------- -------- --------- --------- Loss before extraordinary loss (12,323) (73,252) (6,843) (5,630) (107,184) (3,584) (15,759) (11,719) Extraordinary loss - - - - (4,206) - - - --------- -------- -------- -------- --------- -------- --------- --------- Net loss (12,323) (73,252) (6,843) (5,630) (111,390) (3,584) (15,759) (11,719) Income allocated to preferred shareholders (5,668) (5,668) (5,668) (5,668) (5,668) (5,668) (5,668) (5,668) --------- -------- -------- -------- --------- -------- --------- --------- Net loss applicable to common shares $ (17,991) $(78,920) $(12,511) $(11,298) $(117,058) $ (9,252) $ (21,427) $ (17,387) ========= ======== ======== ======== ========= ======== ========= ========= Basic and diluted loss per common share: Loss before extraordinary loss $ (0.41) $ (1.81) $ (0.29) $ (0.26) $ (2.59) $ (0.21) $ (0.49) $ (0.40) Extraordinary loss - - - - (0.10) - - - --------- -------- -------- -------- --------- -------- --------- -------- Net loss $ (0.41) $ (1.81) $ (0.29) $ (0.26) $ (2.69) $ (0.21) $ (0.49) $ (0.40) ========= ======== ======== ======== ========= ======== ========= ========= Weighted-average common shares outstanding - basic and diluted 43,578 43,578 43,578 43,578 43,578 43,578 43,532 43,357 ========= ======== ======== ======== ========= ======== ========= ========= ====================================================================================================================================
Notes: (1) The first quarter of 2000 revenues reflect a non-recurring gain on the sale of outparcel land of $2,472. (2) The third quarter of 2001 expenses reflect non-recurring charges and expenses aggregating $65,944 including (i) a provision for asset impairment of $63,026, (ii) a charge of $1,882 related to an interest rate subsidy and (iii) a loss of $1,036 incurred in connection with the refinancing of first mortgage loans on Prime Outlets at Birch Run. (3) The first quarter of 2000 expenses reflect non-recurring charges and expenses aggregating $14,714 including (i) a loss of $12,964 associated with the discontinuance of our eOutlets.com subsidiary and (ii) severance and other compensation costs totaling $1,750. (4) The second quarter of 2000 expenses reflect non-recurring charges and expenses aggregating $11,979 including (i) a provision for asset impairment of $8,538, (ii) a loss of $1,315 associated with the discontinuance of our eOutlets.com subsidiary, (iii) professional fees related to refinancing activities of $1,455 and (iv) severance and other compensation costs totaling $671. (5) The third quarter of 2000 expenses reflect non-recurring charges and expenses aggregating $1,524 including (i) costs of $1,100 related to the termination of the sale of a joint venture interest in Prime Outlets at Hagerstown and an expansion to Prime Outlets at Williamsburg, which was not constructed, and (ii) a loss of $424 related to the discontinuance of our eOutlets.com subsidiary. (6) The fourth quarter of 2000 expenses reflect a non-recurring provision for asset impairment of $60,125. Included is $20,547 related to the Company's decision to reclassify three properties to assets held for sale and $39,578 related to five properties where significant tenants filed for bankruptcy in late 2000 and early 2001 and we have limited releasing opportunities. Comparison of the Year Ended December 31, 2000 to the Year Ended December 31, 1999 Summary We reported net losses of $142,452 and $34,829 for the years ended December 31, 2000 and 1999, respectively. For the year ended December 31, 2000, the net loss applicable to our common shareholders was $165,124, or $3.79 per common share on a basic and diluted basis. For the year ended December 31, 1999, the net loss applicable to our common shareholders was $44,791, or $1.04 and $1.30 per common share on a basic and diluted basis, respectively. The 2000 results reflect certain non-recurring items, including (i) a loss on the sale of real estate of $42,648, (ii) a provision for asset impairment of $68,663, (iii) a loss on eOutlets.com of $14,703, (iv) general and administrative expenses consisting of severance and other compensation costs aggregating $2,421 and professional fees of $1,455 related to refinancing activities, (v) a gain on the sale of outparcel land of $2,472 included in interest and other income, (vi) a loss on Designer Connection of $1,815, (vii) other charges of $1,100 incurred in connection with the termination of the sale of joint venture interests in certain properties and (viii) an extraordinary loss of $4,206 related to the prepayment and modification to the terms of certain long-term debt. The 1999 results reflect certain non-recurring items, including (i) a provision for abandoned projects of $16,039, (ii) a provision for asset impairment of $15,842, (iii) a loss on the sale of real estate of $15,153, (iv) a loss on Designer Connection of $6,561 and (v) an extraordinary loss of $3,518 (net of minority interests of $887) relating to the early extinguishment of certain long-term debt. Revenues Total revenues were $283,350 for the year ended December 31, 2000, compared to $305,956 for the year ended December 31, 1999, a decrease of $22,606, or 7.4%. Base rents decreased $15,149, or 7.8%, in 2000 compared to 1999. These decreases are primarily due to the Prime/Estein Transaction and reduced portfolio occupancy, partially offset by the Portfolio Expansion. Straight-line rent income (expense), included in base rent were $(94) and $1,181 for the years ended December 31, 2000 and 1999, respectively. Percentage rents, which represent rents based on a percentage of sales volume above a specified threshold, decreased $1,716, or 21.2%, to $6,369 during the year ended December 31, 2000 compared to $8,085 for the same period in 1999. This decline was primarily attributable to the Prime/Estein Transaction. As summarized in TABLE 3, merchant sales reported for centers remaining in our outlet center portfolio at period-end were $2,746 million and $3,287 million for the years ended December 31, 2000 and 1999, respectively. The decrease in total reported merchant sales is primarily due to the sale of the Permanent Loan Properties on December 22, 2000. The reported merchant sales data for the Permanent Loan Properties are excluded from the 2000 sales data presented in TABLE 3. The weighted average reported merchant sales per square foot decreased to $245 per square foot in 2000 from $257 per square foot in 1999. Total merchant occupancy cost per square foot increased slightly from $21.90 in 1999 to $22.03 in 2000 and as a percentage of reported sales from 8.54% to 8.99%, respectively. Tenant reimbursements, which represent the contractual recovery from tenants of certain operating expenses, decreased by $6,713, or 7.5%, to $83,350 in 2000 compared to $90,063 in 1999. This decrease is primarily due to the Prime/Estein Transaction and reduced occupancy in 2000, partially offset by the Portfolio Expansion. Interest and other income increased by $972, or 7.0%, to $14,801 during the year ended December 31, 2000 as compared to $13,829 for the year ended December 31, 1999. This increase reflects (i) a nonrecurring first quarter 2000 gain on sale of outparcel land of $2,472, (ii) an increase in amortization of deferred income of $809, (iii) higher lease termination income of $721, (iv) higher property management fee income of $694 and (v) higher interest income of $434. These were partially offset by (i) a reduction in equity earnings from investment in partnerships of $2,036, (ii) lower temporary tenant income of $1,269, (iii) reduced municipal assistance income of $313 and (iv) decreases in all other miscellaneous income of $540. Expenses Property operating expenses decreased by $2,325, or 3.3%, to $68,537 in 2000 compared to $70,862 in 1999. Real estate taxes expense decreased by $629, or 2.8%, to $21,776 in 2000 from $22,405 in 1999. The decrease in property operating expenses is primarily due to the Prime/Estein Transaction, partially offset by the Portfolio Expansion. As shown in TABLE 5, depreciation and amortization expense decreased by $6,084, or 8.3%, to $67,556 in 2000, compared to $73,640 in 1999. This decrease results from the Prime/Estein Transaction, partially offset by the depreciation and amortization of assets associated with the Portfolio Expansion. As shown in TABLE 6, interest expense increased by $4,300, or 4.6%, to $98,234 in 2000 compared to $93,934 in 1999. This increase reflects (i) higher interest incurred of $2,942, (ii) a reduction in amortization of debt premiums of $1,247 and (iii) a decrease in the amount of interest capitalized in connection with development projects of $1,234. Partially offsetting these items was a decrease in amortization of deferred financing costs of $1,123. The increase in interest incurred is primarily attributable to an increase in our weighted average contractual interest rate on long-term debt for the year ended December 31, 2000 compared to the same period in 1999. The weighted average contractual interest rates for 2000 and 1999 were 8.46% and 7.90%, respectively. Partially offsetting the impact of the interest rate increase was a reduction of $48,209 in our weighted average debt outstanding, excluding debt premiums, during 2000 compared to 1999. Other charges increased by $10,637, or 153.8%, to $17,555 for the year ended December 31, 2000 compared to $6,918 for the same period in 1999. The 2000 results reflect costs of $1,100 incurred in the third quarter in connection with the discontinuance of the proposed sale of a 70% joint venture interest in Prime Outlets at Hagerstown and a future expansion to Prime Outlets at Williamsburg. The 1999 results reflect the write-off of $3,100 of capitalized costs associated with our expired option to purchase our joint venture partner's 50.0% ownership interest in Prime Outlets at New River. Excluding these items, other charges increased $12,637 due to (i) a higher provision for uncollectible accounts receivable of $6,664 resulting in part from certain tenant bankruptcies and abandonments, (ii) higher marketing expenses of $4,263, (iii) increased non-capitalized pre-development costs of $791, (iv) an increase in all other miscellaneous charges of $596 and (v) an increase in ground lease expense of $323. Special Charges During 2000, we established a formal plan to sell three of our wholly owned properties and, accordingly, reclassified their respective carrying values to assets held for sale. Total revenues and expenses for the operating properties classified as held for sale were $6,354 and $6,697, respectively, for the year ended December 31, 2000. In accordance with the requirements of SFAS No. 121, we incurred a provision for asset impairment of $28,047 to reduce the carrying value of these properties classified as held for sale to their estimated sales value, less cost to dispose. The aggregate carrying value of these properties as of December 31, 2000 was $43,230. Additionally, we also determined that certain events and circumstances had occurred during 2000, including reduced occupancy and limited leasing success, which indicated that four wholly owned properties and two joint venture properties were permanently impaired. Furthermore, our results of operations for 2000 include a provision for asset impairment aggregating $40,616 representing the write-down of the carrying values of these permanently impaired properties to their estimated fair value in accordance with SFAS No. 121. On April 12, 2000, we announced that we had been unable to conclude an agreement to transfer ownership of our wholly-owned e-commerce subsidiary, primeoutlets.com inc., also known as eOutlets.com, to a management-led investor group comprised of eOutlets.com management and outside investors. Effective April 12, 2000, eOutlets.com ceased all operations and on November 6, 2000 filed for bankruptcy under Chapter 7. In connection with the discontinuance of eOutlets.com, we incurred a non-recurring loss of $14,703 which includes (i) the write-off of $3,497 of costs capitalized during 1999 and (ii) $11,206 of costs incurred during the year ended December 31, 2000. In addition, during 1999 we incurred expenses of $3,500 related to organizational and start-up expenditures of eOutlets.com which are reflected in corporate general and administrative expenses in the Consolidated Statements of Operations. When accounting for 1999, we determined that certain events and circumstances had occurred during 1999, including, limited leasing success and revised occupancy estimates, which indicated one wholly-owned property and one joint venture property were permanently impaired. Accordingly, the results of operations for 1999 include a provision for asset impairment of $15,842 representing the write-down of the carrying values of these assets to their estimated fair value in accordance with SFAS No. 121. Additionally, when accounting for 1999, we recorded a provision for abandoned projects of $16,039 based on our determination that as of December 31, 1999, our pre-development efforts associated with certain projects were no longer viable. The operating results for our Designer Connection outlet stores are reflected in loss on Designer Connection in the Consolidated Statements of Operations. When accounting for 1999, because we decided to discontinue the operations of its Designer Connection outlet stores, we recorded non-recurring charges aggregating $3,659, including (i) $1,659 related to the write-off of costs associated with a web-site for Designer Connection and (ii) $2,000 of costs to cover the expected cash and non-cash costs of the closure. The cash and non-cash costs of the closure primarily consisted of (i) employee termination costs, (ii) lease obligations, and (iii) the write-down of assets to their net realizable value. We ceased operations of our Designer Connection outlet stores in 2000. Liquidity and Capital Resources Sources and Uses of Cash For the year ended December 31, 2001, net cash provided by operating activities was $32,911, net cash provided by investing activities was $5,595 and net cash used in financing activities was $39,875. The gross cash provided by investing activities during the year ended December 31, 2001 was $25,885 which consisted of (i) $8,993 of net proceeds from the sale of Prime Outlets at Silverthorne on March 16, 2001, (ii) $510 of net proceeds from the February 2, 2001 sale of Northgate Plaza, (iii) $8,286 of net proceeds from the August 21, 2001 Birch Run Outlet Center refinancing transaction and (iv) $6,237 of net proceeds from the October 19, 2001 Williamsburg Outlet Center refinancing transaction. Partially offsetting theses sources were gross uses of cash totaling $20,290 comprised of (i) $15,170 of additions to rental property, (ii) $2,950 of equity contributions to unconsolidated partnerships and (iii) $2,170 of payments related to eOutlets.com. The additions to rental property are primarily attributable to (i) the payment of remaining construction costs for Prime Outlets of Puerto Rico which opened on July 27, 2000, (ii) costs incurred in connection with re-leasing space to new merchants and (iii) capital expenditures associated with the renovation and rehabilitation of existing outlet centers. The gross uses of cash for financing activities of $57,174 during the year ended December 31, 2001 consisted of (i) scheduled principal amortization on notes payable of $22,971, (ii) repayment in full of certain mortgage indebtedness on Prime Outlets at Edinburgh of $16,330, (iii) principal prepayments totaling $16,921 on our Mezzanine Loan and (iv) deferred costs of $952. Partially offsetting these items were proceeds from (i) the Edinburgh First Mortgage Loan of $16,700, (ii) other new borrowings of $199 and (iii) contributions from minority interests of $400. The following tables summarize our contractual obligations and other commitments as of December 31, 2001:
- ------------------------------------------------------------------------------------------------------------------------------------ Payments Due by Period ------------------------------------------------------------------------------- Less than After Contractual Obligations (1) Total 1 year 1 to 3 years 4 to 5 years 5 years - ------------------------------------------------------------------------------------------------------------------------------------ Bonds and notes payable, excluding debt premiums $ 855,102 $ 48,479 $ 523,667 $ 173,078 $ 109,878 Operating lease payments 9,188 1,668 1,642 502 5,376 --------- -------- --------- --------- --------- Total $ 864,290 $ 50,147 $ 525,309 $ 173,580 $ 115,254 ========= ======== ========= ========= ========= ====================================================================================================================================
- -------------------------------------------------------------------------------- Annualized In Arrears as Dividend Preferred Stock Dividend (2) of 12/31/01 Requirement - -------------------------------------------------------------------------------- Series A Senior Preferred Stock $ 12,830 $ 6,037 Series B Convertible Preferred Stock 35,349 16,635 -------- -------- Total $ 48,179 $ 22,672 ======== ======== ================================================================================ - -------------------------------------------------------------------------------- Amount of Debt Guarantee as Maturity Guarantees of Indebtedness of Others (3) of 12/31/01 Date - -------------------------------------------------------------------------------- HGP Secured Credit Facility $ 10,000 July, 2002 HGP office and equipment debt 2,435 December, 2002 -------- Total $ 12,435 ======== ================================================================================ Notes: (1) Amounts excludes contractual obligations related to (i) Prime Outlets at Hagerstown (see "2002 Sales Transaction") and (ii) Prime Outlets at Conroe and Prime Outlets at Jeffersonville II (see "Defaults on Certain Non-recourse Mortgage Indebtedness. We sold Prime Outlets at Hagerstown to the Prime/Estein Venture") on January 11, 2002 and commencing on that date we account for our remaining 30% ownership interest in accordance with the equity method of accounting. Additionally, non-recourse mortgage loans on Prime Outlets at Conroe and Prime Outlets at Jeffersonville II are cross-collateralized. Effective January 1, 2002, the lender foreclosed on Prime Outlets at Conroe. The lender and we remain in discussions regarding the transfer of our ownership interest in Prime Outlets at Jeffersonville II. (2) See "Dividends and Distributions" for additional information. (3) See "Guarantees of Indebtedness of Others" for additional information. Going Concern Our liquidity depends on cash provided by operations and potential capital raising activities such as funds obtained through borrowings, particularly refinancings of existing debt, and cash generated through asset sales. Although we believe that estimated cash flows from operations and potential capital raising activities will be sufficient to satisfy our scheduled debt service obligations and sustain our operations for the next year, there can be no assurance that we will be successful in obtaining the required amount of funds for these items or that the terms of the potential capital raising activities, if they should occur, will be as favorable as we have experienced in prior periods. During 2002, we are required to make certain additional mandatory principal pay-downs to our Mezzanine Loan aggregating $25,367 from net proceeds from asset dispositions or other capital transactions within specified periods pursuant to the terms of a modification to the original terms of the Mezzanine Loan (see "Mezzanine Loan Modification" for additional information). Although we are in the process of seeking to generate additional liquidity though new financings and the sale of assets, there can be no assurance that we will be able to complete asset dispositions or other capital transactions within the specified periods or that such asset dispositions or other capital transactions, if they should occur, will generate sufficient proceeds to make the additional mandatory pay-downs of the Mezzanine Loan. Any failure to satisfy these mandatory principal prepayments within the specified time periods indicated will constitute a default under the Mezzanine Loan. As of December 31, 2001, we were in compliance with all financial debt covenants under our recourse loan agreements. However, there can be no assurance that we will be in compliance with our financial debt covenants in future periods since our 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 our revenue, and risks associated with refinancing our current debt obligations or obtaining new financing under terms less favorable than we have experienced in prior periods. See "Defaults on Certain Non-recourse Mortgage Indebtedness" and "Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated Partnerships" for additional information. Based on our current financial projections, we believe we will not be in compliance with respect to debt service coverage ratios under certain debt facilities during 2002. The debt facilities are fixed rate tax-exempt revenue bonds (the "Affected Fixed Rate Bonds") in the amount of $18,390 and a recourse bridge loan (the "Bridge Loan") in the amount of $111,375. In the event of non-compliance, the holders of the Affected Fixed Rate Bonds may elect to put such obligations to us at a price equal to par plus accrued interest and the Bridge Loan lender may elect to accelerate its maturity. Additionally, noncompliance or defaults with respect to debt service coverage ratios under these debt facilities may trigger certain cross-default provisions with respect to other debt facilities, including our Mezzanine Loan. We intend to meet with the affected lenders to discuss potential resolutions including waiver or amendment with respect to such non-compliance provisions. If we are unable to reach satisfactory resolution with the affected lenders, we will look to (i) obtain alternative financing from other financial institutions, (ii) sell the project or projects where non-compliance is likely to occur or (iii) explore other possible capital transactions in order to generate cash to repay the amounts outstanding under such debt facilities. There can be no assurance that we will obtain a satisfactory resolution with our affected lenders or that we will be able to complete asset sales or other capital raising activities sufficient to repay the amounts outstanding under such debt facilities. These conditions raise substantial doubt about our ability to continue as a going concern. The financial statements contained herein 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 these uncertainties. 2001 Debt Transactions In connection with the sales of Northgate Plaza, Prime Outlets at Silverthorne and certain land located in Camarillo, CA during 2001, we repaid mortgage indebtedness of $5,966, $18,078 and $6,227, respectively. In addition, net cash proceeds from these property sales were used to prepay an aggregate of $10,124 of principal outstanding under our Mezzanine Loan. See "2001 Sales Transactions" for additional information. On June 8, 2001, we, through affiliates, obtained a two-month extension through August 10, 2001 to the terms and maturity date of a $16,330 first mortgage loan secured by Prime Outlets at Edinburgh (the "Edinburgh Outlet Center") located in Edinburgh, Indiana. On June 29, 2001, we, through affiliates, completed a refinancing of this first mortgage loan. The new first mortgage loan (the "Edinburgh First Mortgage Loan") provides for an aggregate commitment up to $18,000 and is non-recourse to us. The Edinburgh First Mortgage Loan, which is secured by the Edinburgh Outlet Center, has a term of three years, requires monthly principal payments based upon a 15-year amortization schedule and is pre-payable at any time subject to certain prepayment and exit fees. The Edinburgh First Mortgage Loan bears interest at a floating rate based on six-month LIBOR plus 350 basis points, subject to an 8.00% minimum, and may be adjusted semi-annually with a maximum 1.0% increase or decrease per adjustment. As of December 31, 2001, the Edinburgh First Mortgage Loan bore interest at the minimum rate. At closing, $16,700 of the Edinburgh First Mortgage Loan was funded, resulting in net proceeds of $88 after repayment of the old first mortgage loan and closing costs. As of December 31, 2001, the remaining commitment provides for the funding of up to an additional $1,300 for leasing related capital expenditures at the Edinburgh Outlet Center. Prime/Estein Venture Refinancing Transactions On August 7, 2001, we, through affiliates, obtained an additional one-month extension to September 10, 2001 to the terms and maturity date of a $10,003 first mortgage loan secured by Prime Outlets at Birch Run (the "Birch Run Outlet Center") located in Birch Run, Michigan. The terms and maturity date of the $10,003 first mortgage loan had previously been extended to August 10, 2001. We and Estein, through affiliates, have 30% and 70% ownership interests, respectively, in the Prime/Estein Venture that indirectly owns the Birch Run Outlet Center. We completed a refinancing of first mortgage loans aggregating $63,000 on the Birch Run Outlet Center on August 21, 2001. These loans which were refinanced were included in a "wrap-around" loan provided by us to the Prime/Estein Venture in connection with the November 19, 1999 sale of the Birch Run Project. The new first mortgage loan (the "Birch Run First Mortgage Loan") is in the amount of $63,000, is secured by the Birch Run Outlet Center, has a term of ten years, and requires monthly principal amortization based upon a 25-year schedule. The Birch Run First Mortgage Loan bears interest at an effective fixed-rate of 8.12%. Greenwich Capital Financial Products, Inc. provided the financing. The Prime/Estein Venture used the net proceeds from the Birch Run First Mortgage Loan to repay in full first mortgage loans and the "wrap-around" loan of $10,731 due to us, aggregating $63,000. Net proceeds to us, after payment of closing and other transaction costs, were $8,286. In connection with the refinancing transaction, we recorded a non-recurring loss of $1,036 during the third quarter of 2001. Pursuant to Prime/Estein Venture-related documents to which affiliates of ours are parties, we are obligated to provide to, or obtain for, the Prime/Estein Venture fixed rate financing at an annual rate of 7.75%. As a result, each month during the term of the Birch Run First Mortgage Loan, we will be obligated to pay to the Prime/Estein Venture the difference between the cost of the financing at an annual effective rate of 8.12% and the cost of the financing at an annual rate of 7.75% (the "Interest Rate Subsidy"). The total of the payments to be made by us to the Prime/Estein Venture over the term of the Birch Run First Mortgage Loan will be $2,723. During the third quarter of 2001, we recorded a non-recurring loss of $1,882 in other charges representing the net present value of the Interest Rate Subsidy. On October 19, 2001, we, through affiliates, completed the refinancing of a $32,500 first mortgage loan secured by Prime Outlets at Williamsburg (the "Williamsburg Outlet Center"), an outlet center located in Williamsburg, Virginia. The new first mortgage loan (the "Williamsburg Mortgage Loan") has a principal amount of $32,500, is secured by the Williamsburg Outlet Center, and has a term of ten years. The Williamsburg Mortgage Loan requires monthly principal amortization based upon a 25-year schedule and bears interest at a fixed rate of 7.69%. Prudential Mortgage Capital Company, LLC provided the financing. We and Estein, through affiliates, own 30% and 70% interests, respectively, in the Prime/Estein Venture that indirectly owns the Williamsburg Outlet Center. In connection with the refinancing transaction, the Prime/Estein Venture paid in full a $10,000 promissory note (of which Estein's obligation was $7,000 and ours was $3,000) to us. Our proceeds after payment of closing and other transaction costs were $6,237. The net proceeds from this refinancing transaction were used to prepay $5,997 of the Mezzanine Loan. Pursuant to Prime/Estein Venture-related agreements to which affiliates of ours are parties, we are obligated to provide to, or obtain for, the Prime/Estein Venture fixed rate financing at an annual rate of 7.75%. As a result, each month during the term of the Williamsburg Mortgage Loan, the Prime/Estein Venture will be obligated to pay to us the difference between the cost of such financing at an assumed annual rate of 7.75% and the actual cost of such financing at an annual rate of 7.69%. Mezzanine Loan Modification Effective January 31, 2002, we entered into a modification to the original terms of our Mezzanine Loan (see Note 6 - "Bonds and Notes Payable" of the Notes to Consolidated Financial Statements for additional information) previously obtained from Fortress Investment Fund LLC and Greenwich Capital Financial Products, Inc. (collectively, the "Lender") in December 2000. The Mezzanine Loan amendment (the "Amendment"), among other things, (i) reduces required monthly principal amortization for the period February 1, 2002 through January 1, 2003 ("Year 2") from $1,667 to $800, which may be further reduced to a minimum of $500 per month under certain limited circumstances, provided no defaults exist under the Mezzanine Loan and certain other conditions have been satisfied at the Lender's sole discretion, (ii) requires certain mandatory principal prepayments from net proceeds from asset dispositions or other capital transactions pursuant to the schedule set forth below and (iii) reduces the threshold level at which excess cash flow from operations must be applied to principal pay-downs, primarily resulting from a reduction in the available working capital reserves. Additionally, the Amendment (i) increased the interest rate from LIBOR plus 9.50% to LIBOR plus 9.75% (rounded up to nearest 0.125% with a minimum rate of 14.75%), (ii) changed the Mezzanine Loan maturity date from December 31, 2003 to September 30, 2003 and (iii) required a 0.25% fee, which was paid at the time of the modification, on the outstanding principal balance. The Amendment also requires additional Year 2 monthly payments of $250 (the "Escrowed Funds") into an escrow account controlled by the Lender. Provided certain conditions are satisfied in the Lender's sole discretion, the Escrowed Funds may be available to us for certain limited purposes. The Escrowed Funds not used at the end of each quarter, subject to certain exceptions, will be applied by the Lender to amortize the Mezzanine Loan. The required monthly principal amortization of $2,333 commencing on February 1, 2003, through the new maturity date of September 30, 2003, remains unchanged. The Amendment also requires, in lieu of the original requirements, additional mandatory principal prepayments with net proceeds from asset dispositions, excluding the January 2002 sale of a 70% interest in Prime Outlets at Hagerstown (see "2002 Sales Transactions" for additional information), or other capital transactions of not less than (i) $8,906 by May 1, 2002, (ii) $24,406, inclusive of the $8,906, by July 1, 2002 (subject to extension to October 31, 2002 provided certain conditions are met to the Lender's satisfaction) and (iii) $25,367, inclusive of the $24,406, by November 1, 2002. In addition to each principal prepayment, we must also pay any interest, including deferred interest, accrued thereon and the additional fees provided for in the Mezzanine Loan. Any failure to satisfy these mandatory principal prepayments or other payments within the specified time periods indicated will constitute a default under the Mezzanine Loan. The Mezzanine Loan was also amended on January 11, 2002 to, among other things, (i) release the partnership interests in Outlet Village of Hagerstown Limited Partnership ("Hagerstown LP") as collateral under the Mezzanine Loan, (ii) release Hagerstown LP of all obligations under the Mezzanine Loan and (iii) add Hagerstown Land, L.L.C., a Delaware limited liability company, as a guarantor under the Mezzanine Loan. Debt Service Obligations Our aggregate indebtedness, as adjusted for the Amendment to the Mezzanine Loan and excluding (i) unamortized debt premiums of $11,051, (ii) mortgage indebtedness aggregating $58,079 on Prime Outlets at Hagerstown and (iii) non-recourse mortgage indebtedness aggregating $33,235 on Prime Outlets at Conroe and Prime Outlets at Jeffersonville II was $855,102 (the "Adjusted Indebtedness") at December 31, 2001. See "2002 Sales Transactions" and "Defaults on Certain Non-recourse Mortgage Indebtedness" for additional information. At December 31, 2001, the Adjusted Indebtedness had a weighted-average maturity of 3.3 years and bore contractual interest at a weighted-average rate of 9.05% per annum. At December 31, 2001, $756,751, or 88.5%, of the Adjusted Indebtedness bore interest at fixed rates and $98,351 or 11.5%, of the Adjusted Indebtedness bore interest at variable rates. We utilize derivative financial instruments to manage our interest rate risk associated with variable rate debt. As of December 31, 2001, our scheduled principal payments during 2002 for the Adjusted Indebtedness aggregated $48,479. The 2002 scheduled principal payments include (i) a recourse first mortgage loan of $2,972 on Western Plaza (the "Western Plaza First Mortgage Loan"), a community center located in Knoxville, Tennessee, which currently matures on April 30, 2002 but may be extended, subject to an additional principal pay-down of $350, an additional six months to October 31, 2002 and (ii) additional mandatory principal pay-downs on the Mezzanine Loan aggregating $25,367 (see "Mezzanine Loan Modification" for additional information). Certain of our debt obligations, including the Mezzanine Loan and fixed-rate bonds aggregating $7,000 secured by a second mortgage on Western Plaza, contain cross-default provisions that would be triggered in the event of a default under the Western Plaza First Mortgage Loan. In the event such cross-default provisions were triggered, the holders of the Mezzanine Loan could elect to accelerate such debt and the holders of the bonds could elect to put such obligations to us at a price equal to par plus accrued interest. Guarantees of Indebtedness of Others We are a guarantor or otherwise obligated with respect to an aggregate of $12,435 of the indebtedness of Horizon Group Properties, Inc. and its affiliates ("HGP"), including $10,000 of obligations under a secured credit facility (the "HGP Secured Credit Facility"). HGP is a publicly traded company that was formed in connection with our merger with Horizon Group, Inc. in June, 1998. The HGP Secured Credit Facility bore interest at a rate of 30-day LIBOR plus 1.90%, was collateralized by five properties located throughout the United States and matured on July 11, 2001. On August 2, 2001, HGP announced it had refinanced one of the properties in the HGP Secured Credit Facility and used the proceeds from the new first mortgage loan to reduce the principal balance of the HGP Secured Credit Facility. Simultaneously, HGP obtained an extension to the remaining principal balance of approximately $33,500, including a 2% extension fee, on the HGP Secured Credit Facility through July 11, 2002. Commencing on the extension date, the HGP Secured Credit Facility bears interest at a rate of 30-day LIBOR (but not less than 4.10%) plus 3.95%, requires monthly principal amortization of $225, and is collateralized by four properties located throughout the United States. We confirmed our obligations as guarantor with respect to the HGP Secured Credit Facility in connection with the extension and partial pay-down. No claims have been made against the Company's guaranty by the HGP Secured Credit Facility lender. On October 11, 2001, HGP announced that it was in default under two loans with an aggregate principal balance of $45,500 secured by six of its other outlet centers. Such defaults are not defaults under the HGP Secured Credit Facility or any other facility guaranteed by us. We, through affiliates, hold a 51% interest in the owner of Phases II and III of an outlet center located in Bellport, New York (the "Bellport Outlet Center"). We account for our interest in Phases II and III of the Bellport Outlet Center in accordance with the equity method of accounting. On May 1, 2001, the recourse first mortgage loan on Phases II and III of the Bellport Outlet Center of $7,795 matured. On May 21, 2001, we, on behalf of the owner, made a principal payment of $2,295 to the lender in exchange for a modification to the terms and a one-year extension of the maturity of this mortgage indebtedness. The outstanding balance of the first mortgage loan was $5,500 as of December 31, 2001. We plan to sell this property to repay the outstanding balance in full. If we are unable to consummate a sale of the property, we will attempt to either refinance or extend the maturity of such indebtedness on terms acceptable to us. There can be no assurance that we will be successful in obtaining the required amount of funds for the maturing indebtedness or that the terms of any potential sale, refinancing or extension of the maturity will be as favorable as we have experienced in prior periods or otherwise acceptable to us. As of December 31, 2001, the carrying value of our investment in Phases II and III of the Bellport Outlet Center was $1,689, which is included in investments in unconsolidated partnerships in the Consolidated Balance Sheet. Defaults on Certain Non-recourse Mortgage Indebtedness During 2001, certain of our subsidiaries suspended regularly scheduled monthly debt service payments on two non-recourse mortgage loans aggregating $33,235 as of December 31, 2001. These non-recourse mortgage loans which are held by New York Life Investment LLC ("New York Life") are cross-collateralized by Prime Outlets at Jeffersonville II, located in Jeffersonville, Ohio, and Prime Outlets at Conroe, located in Conroe, Texas. Effective January 1, 2002, New York Life foreclosed on Prime Outlets at Conroe. We remain in discussions with New York Life regarding the transfer of our ownership interest in Prime Outlets at Jeffersonville II. During 2001, all excess cash flow from the operations of these centers was utilized for debt service on the two non-recourse mortgage loans. Accordingly, we believe the foreclosure sale of Prime Outlets at Conroe and the potential transfer of our ownership interest in Prime Outlets at Jeffersonville II will not have a material impact on our results of operations or financial condition. Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated Partnerships Two mortgage loans related to projects in which we, through subsidiaries, indirectly own joint venture interests have matured and are in default. The loans, at the time of default, were (i) a $10,389 first mortgage loan on Phase I of the Bellport Outlet Center, held by Union Labor Life Insurance Company ("Union Labor"); and (ii) a $13,338 first mortgage loan on Oxnard Factory Outlet, an outlet center located in Oxnard, California, held by Fru-Con. An affiliate of ours has a 50% ownership interest in the partnership which owns Phase I of the Bellport Outlet Center. Fru-Con and us are each a 50% partner in the partnership that owns Oxnard Factory Outlet. Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center and a receiver was appointed March 27, 2001 by the court involved in the foreclosure action. Effective May 1, 2001, a manager hired by the receiver began managing and leasing Phase I of the Bellport Outlet Center. We continue to negotiate the terms of a transfer of our ownership interest in Oxnard Factory Outlet to Fru-Con. We do not manage or lease Oxnard Factory Outlet. We believe neither of these mortgage loans is recourse to us. It is possible, however, that either or both of the respective lenders will, after completing its foreclosure action, file a lawsuit seeking to collect from us the difference between the value of the mortgaged property and the amount due under the loan. If such an action is brought, the outcome and ultimate liability, if any, cannot be predicted at this time. In addition, we are currently not receiving any cash flow from Oxnard Factory Outlet and were not receiving, directly or indirectly any cash flow from Phase I of the Bellport Outlet Center prior to the loss of control of such project. We account for our interests in (i) Phases I of the Bellport Outlet Center and (ii) the Oxnard Factory Outlet in accordance with the equity method of accounting. As of December 31, 2001, the carrying value of our investment in these properties was $0. Therefore, we do not believe the existing defaults under these loans or any related foreclosures on the mortgaged properties will have a material impact on our results of operations or financial condition. 2002 Sales Transaction On January 11, 2002, we completed the sale of Prime Outlets at Hagerstown (the "Hagerstown Center") to an existing joint venture partnership (the "Prime/Estein Venture") between one of our affiliates and an affiliate of Estein & Associates USA, Ltd. ("Estein"), a real estate investment company, for $80,500. Our affiliate and the Estein affiliate have 30% and 70% ownership interests, respectively, in the Prime/Estein Venture. In connection with the sale transaction, the Prime/Estein Venture assumed first mortgage indebtedness of $46,862 on the Hagerstown Center (the "Assumed Mortgage Indebtedness"). In connection with the lender's consent to the Prime/Estein Venture assuming the Assumed Mortgage Indebtedness, our guarantee of the Assumed Mortgage Indebtedness remained in place. The net cash proceeds from the sale, including the release of certain funds held in escrow, were $12,113 after a pay-down of $11,066 of existing mortgage indebtedness on the Hagerstown Center and closing costs. The net proceeds from this sale were used to prepay $11,647 of principal outstanding under our Mezzanine Loan. At December 31, 2001, the carrying value of the Hagerstown Outlet Center of $54,628 was classified as assets held for sale in the Consolidated Balance Sheet. We are obligated to refinance the Assumed Mortgage Indebtedness on behalf of the Prime/Estein Venture on or before June 1, 2004, its maturity date. Additionally, pursuant to certain Prime/Estein Venture-related documents to which affiliates of ours are parties, the Prime/Estein Venture's cost of the Assumed Mortgage Indebtedness and any refinancing of it are fixed at an annual rate of 7.75% for a period of 10 years. If the actual cost of such indebtedness should exceed 7.75% at any time during the ten-year period, we will be obligated to pay the difference to the Prime/Estein Venture. However, if the actual cost of such indebtedness is less than 7.75% at any time during the ten-year period, the Prime/Estein Venture will be obligated to pay the difference to us. The actual cost of the Assumed Mortgage Indebtedness is currently 30-day LIBOR plus 1.50%. 2001 Sales Transactions On February 2, 2001, we sold Northgate Plaza, a community center located in Lombard, Illinois to Arbor Northgate, Inc. for aggregate consideration of $7,050. After the repayment of mortgage indebtedness of $5,966 and closing costs, the net cash proceeds from the Northgate Plaza sale were $510. On March 16, 2001, we sold Prime Outlets at Silverthorne, an outlet center located in Silverthorne, Colorado consisting of 257,000 square feet of GLA, to Silverthorne Factory Stores, LLC for aggregate consideration of $29,000. The net cash proceeds from the sale of Prime Outlets at Silverthorne were $8,993, after the repayment of certain mortgage indebtedness of $18,078 on Prime Outlets at Lebanon (see below) and closing costs and fees. The net proceeds from these sales were used to prepay an aggregate $9,137 of principal outstanding under our Mezzanine Loan in accordance with the terms of such loan agreement. In connection with these sales, we recorded an aggregate gain on the sale of real estate of $732 during the first quarter of 2001. The operating results of these properties are included in our results of operations through the respective dates of disposition. At December 31, 2000, these properties were classified as assets held for sale in the Consolidated Balance Sheet with an aggregate carrying value of $34,770. On November 27, 2001, we sold certain land located in Camarillo, California for aggregate consideration of $7,150. The net cash proceeds from the sale, including the release of certain funds held in escrow, were $1,859, after the repayment of certain mortgage indebtedness of $6,227 and closing costs and fees. The net proceeds from this sale were used to prepay $1,787 of the Mezzanine Loan. In connection with this sale, we recorded a loss on the sale of real estate of $1,615 during the fourth quarter of 2001. At December 31, 2000, the land was classified as assets held for sale in the Consolidated Balance Sheet with a carrying value of $8,460. Prior to the sale of Prime Outlets at Silverthorne, it was one of fifteen properties securing our First Mortgage and Expansion Loan, which had an outstanding principal balance of $342,629 at December 31, 2001. In conjunction with the sale of Prime Outlets at Silverthorne, we substituted Prime Outlets at Lebanon for Prime Outlets at Silverthorne in the cross-collateralized asset pool securing the First Mortgage and Expansion Loan pursuant to the collateral substitution provisions contained in the loan agreement. In conjunction with adding Prime Outlets at Lebanon as security for the First Mortgage and Expansion Loan, we repaid, as discussed above, certain mortgage indebtedness on Prime Outlets at Lebanon of $18,078. 2001 Foreclosure Sale On May 8, 2001, Prime Outlets at New River, an outlet center located in New River, Arizona, was sold through foreclosure. Affiliates of the Company and Fru-Con Development Corporation ("Fru-Con") each own 50% of the partnership, which owned the project. We accounted for our ownership interest in the partnership that owned the project in accordance with the equity method of accounting through the date of foreclosure sale. In connection with the foreclosure sale, we recorded a loss on the sale of real estate of $180 during the second quarter of 2001. Development Activities During 2000 we engaged in development activities related to 390,000 square feet of GLA consisting of the opening of (i) Prime Outlets of Puerto Rico, the first outlet center in Puerto Rico, which contains 176,000 square feet of GLA, and (ii) four expansions to outlet centers totaling 214,000 square feet of GLA. During 2001, we did not engage in any further development activities other than post-opening work related to the 2000 development activities and certain consulting activities in Europe. As of December 31, 2001, we had $825 held in a lender escrow to fund the remaining expected development costs for Prime Outlets of Puerto Rico, which opened on July 27, 2000. Interest Rate Risk In the ordinary course of business, we are exposed to the impact of interest rate changes and, therefore, employ established policies and procedures to manage our exposure to interest rate changes. We use a mix of fixed and variable rate debt to (i) limit the impact of interest rate changes on our results from operations and cash flows and (ii) lower our overall borrowing costs. In certain circumstances, we use derivative financial instruments to manage interest rate risk associated with our variable rate debt. In such cases, we purchase interest rate protection agreements, such as caps, which are designated as hedges for underlying variable rate debt obligations. We do not hold derivative financial instruments for trading purposes. The interest rate caps specifically limit our interest costs with an upper limit on the underlying interest rate index. The cost of such contracts are included in deferred charges and are being amortized as a component of interest expense over the life of the contracts. Amounts earned from interest rate protection contracts, if any, are recorded as a reduction of interest expense. We are exposed to credit losses in the event of counterparty nonperformance, but do not anticipate any such losses based on the creditworthiness of the counterparties. On December 22, 2000, we purchased an interest rate cap with a notional amount of $90,000 to hedge our Mezzanine Loan that was funded on the same date. The interest rate cap has a three-year term with a strike price of 8.00% based on 30-day LIBOR. The notional amount of this interest rate cap amortizes monthly based on estimated principal repayments on the Mezzanine Loan. Additionally, on December 22, 200 0we also purchased an interest rate cap with a notional amount of $20,000 to hedge our $20,000 Puerto Rico First Mortgage Loan that was funded on the same date. The interest rate cap has a three-year term with a strike price of 8.00% based on 30-day LIBOR. See Note 2 -- "Summary of Significant Accounting Policies" and Note 6 -- "Bonds and Notes Payable" of the Notes to Consolidated Financial Statements for additional information. Although derivative financial instruments are an important component of our interest rate management program, their incremental effect on interest expense for the years ended December 31, 2001, 2000 and 1999 was not material. Dividends and Distributions To qualify as a REIT for federal income tax purposes, we are required to pay distributions to our common and preferred shareholders of at least 90% of our REIT taxable income in addition to satisfying other requirements. Although we intend to make necessary distributions to remain qualified as a REIT under the Code, we also intend to retain such amounts as we consider necessary from time to time for our capital and liquidity needs. Our current policy is to pay distributions only to the extent necessary to maintain our status as a REIT for federal income tax purposes. Based on our current federal income tax projections for 2002, we do not expect to pay any distributions on our Series A Senior Preferred Stock, Series B Convertible Preferred Stock, common stock or common units of limited partnership interest in the Operating Partnership during 2002. We are currently in arrears on nine quarters of preferred stock distributions due February 15, 2000 through February 15, 2002, respectively. We are prohibited from paying dividends or distributions except to the extent necessary to maintain our REIT status under the terms of the Mezzanine Loan. In addition, we may not make distributions to our common shareholders or our holders of common units of limited partnership interest in the Operating Partnership unless we are current with respect to distributions to our preferred shareholders. As of December 31, 2001, unpaid dividends for the period commencing November 16, 1999 through December 31, 2001 on the Series A Senior Preferred Stock and Series B Convertible Preferred Stock aggregated $12,829 and $35,349, respectively. The annualized dividends on our 2,300,000 shares of Series A Senior Preferred Stock and 7,828,125 shares of Series B Convertible Preferred Stock outstanding as of December 31, 2001 are $6,037 ($2.625 per share) and $16,635 ($2.125 per share), respectively. Economic Conditions Most of our tenants' leases contain provisions that somewhat mitigate the impact of inflation. Such provisions include clauses providing for increases in base rent and clauses enabling us to receive percentage rentals based on merchants' gross sales. Most of the leases require tenants to pay their proportionate share of all operating expenses, including common area maintenance, real estate taxes and promotion, thereby reducing our exposure to increased costs and operating expenses resulting from inflation. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138, which established new accounting and reporting standards for derivative instruments. These rules require that all derivative instruments be reported in the consolidated financial statements at fair value. The fair value for all derivative contracts is included in other assets or other liabilities and changes in fair value will be recorded each period in earnings or other comprehensive income, depending on whether the derivative is designated and effective as part of a hedged transaction, and on the type of hedge transaction. Gains or losses on derivative instruments reported in other comprehensive income must be reclassified into earnings in the period in which earnings are affected by the underlying hedged item, and the ineffective portion of all hedges is recognized in other income (expense) in the statements of operations in the current period. These new standards may result in additional volatility in reported earnings, other comprehensive income (loss) and accumulated other comprehensive income (loss). These rules became effective for us on January 1, 2001 and did not have a significant effect on our consolidated results of operations or financial position upon adoption. We are exposed to market risk from changes in interest rates. We manage our exposure to these market risks through our operating, financing and investing activities and, when deemed appropriate, through the use of interest rate protection agreements. We report changes in fair value of our interest rate protection agreements in other income or expense. Our interest rate protection agreements are marked-to-market and unrealized gains and losses are included in current period net income (loss) as a component of other income (expense). When the terms of the related financing are modified, or in the event of early extinguishment of the related financing, all changes in the fair value of the instrument are marked-to-market with changes in fair value included in net income each period until the instrument matures. We believe we have limited exposure to the extent of non-performance by the counterparties of each agreement since each counterparty is a major financial institution and we do not anticipate their non-performance. In October, 2001, the FASB issued SFAS No. 144, "Accounting for Impairment of Disposal of Long-lived Assets." SFAS No. 144 supercedes SFAS No. 121, however it retains the fundamental provisions of that statement related to the recognition and measurement of the impairment of long-lived assets to be "held and used." In addition, SFAS No. 144 provides more guidance on estimating cash flows when performing a recoverability test, requires that a long-lived asset to be disposed of other than by sale (e.g., abandoned) be classified as "held and used" until it is disposed of, and established more restrictive criteria to classify an asset as "held for sale." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We will adopt SFAS No. 144 effective January 1, 2002 and do not expect the adoption to have a material impact on our results of operations or financial position. Taxability of Distributions We did not make any distributions during the years ended December 31, 2001 and 2000. TABLE 9 summarizes the taxability of distributions paid during the year ended December 31, 1999. Table 9--Taxability of Distributions - -------------------------------------------------------------------------------- Amount Year Ended December 31, 1999 per Share Percentage - -------------------------------------------------------------------------------- Series A Senior Preferred Stock Ordinary income $ 2.625 100.0% ======= ====== Series B Convertible Preferred Stock Ordinary income $ 2.125 100.0% ======= ====== Series C Preferred Stock Ordinary income $ 0.885 100.0% ======= ====== Common Stock Ordinary income $ 0.271 23.0% Return of capital 0.909 77.0% ------- ------ $ 1.180 100.0% ======= ====== ================================================================================ Funds from Operations Industry analysts generally consider funds from operations ("FFO"), as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), an alternative measure of performance of an equity REIT. In October 1999, NAREIT issued a new white paper statement and redefined how FFO is calculated, effective January 1, 2000. FFO is now defined by NAREIT as net income (loss) determined in accordance with GAAP, excluding gains or losses from provisions for impairment and sales of depreciable operating property, plus depreciation and amortization (other than amortization of deferred financing costs and depreciation of non-real estate assets) and after adjustment for unconsolidated partnership and joint ventures. We believe 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 our performance. Our 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 we do. Therefore, we caution that the calculation of FFO may vary from entity to entity and as such the presentation of FFO by us may not be comparable to other similarly titled measures of other reporting companies. We believe that in order to facilitate a clear understanding of our 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 our 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, 2001, 2000 and 1999. FFO decreased $32,711, or 56.4%, to $25,256 for the year ended December 31, 2001 from $57,967 for the year ended December 31, 2000. The FFO results for the year ended December 31, 2001 include a non-recurring loss of $1,036 related to the refinancing of first mortgage loans on Prime Outlets at Birch Run. The FFO results for the year ended December 31, 2000 included net non-recurring items totaling ($2,504). Such non-recurring items included (i) severance and other compensation costs aggregating $2,421, (ii) professional fees of $1,455 related to refinancing activities, and (iii) $1,100 of transaction and construction termination costs; partially offset by a gain on the sale of outparcel land of $2,472. Excluding the net impact of these non-recurring items, FFO was $26,292 and $60,471 for the years ended December 31, 2001 and 2000, respectively. The decrease in FFO and FFO per diluted share for the year ended December 31, 2001 compared to the same period in 2000 is primarily due to (i) a loss in net operating income, partially offset by interest expense savings, resulting from sales of certain properties during the comparable periods; (ii) higher interest expense resulting from an increase in borrowing costs and reduced capitalization of interest on development projects; (iii) an increase in the provision for uncollectible accounts receivable of $5,925 resulting in part from certain tenant bankruptcies, disputes, abandonments and store-closings and (iv) a reduction in average occupancy in the our outlet center portfolio during the comparable periods (90.3% and 91.6% during 2001 and 2000 respectively). We sold four outlet centers on December 22, 2000 and two additional properties were sold during the first quarter of 2001. In addition to these property sales, we also sold a 70% joint venture interest in Prime Outlets at Williamsburg during February, 2000. Table 10--Funds from Operations
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Loss before minority interests and extraordinary loss $ (98,456) $ (138,984) $ (28,085) FFO adjustments: Loss on sale of real estate 1,063 42,648 15,153 Depreciation and amortization 56,918 67,556 73,640 Non-real estate depreciation and amortization (2,251) (1,703) (587) Joint venture adjustments 3,074 3,269 1,639 Non-cash joint venture interest subsidy 1,882 - - Discontinued operations - eOutlets.com - 14,703 - Discontinued operations - Designer Connection - 1,815 6,561 --------- ---------- --------- FFO before adjustment for asset impairment (37,770) (10,696) 68,321 Provision for asset impairment 63,026 68,663 15,842 --------- ---------- --------- FFO before allocations to minority interests and preferred shareholders $ 25,256 $ 57,967 $ 84,163 ========= ========== ========= Other Data: Net cash provided by operating activities $ 32,911 $ 32,450 $ 97,815 Net cash provided by (used in) investing activities 5,595 1,095 (56,666) Net cash used in financing activities (39,875) (31,982) (39,571) ====================================================================================================================================
The pay-out ratio based on distributions made by us divided by FFO for 1999 was 97.4%. Table 11--Consolidated Quarterly Summary of Funds from Operations
- ------------------------------------------------------------------------------------------------------------------------------------ 2001 2000 -------------------------------------------------- -------------------------------------------- Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ Loss before minority interests and extraordinary loss $(12,330) $ (73,252) $ (7,243) $ (5,631) $(107,187) $ (4,351) $ (15,759) $(11,687) FFO adjustments: (Gain) Loss on sale of real estate 1,615 - 180 (732) 42,648 - - - Depreciation and amortization 15,754 13,766 13,723 13,675 17,857 17,679 15,783 16,237 Non-real estate depreciation and amortization (558) (563) (562) (568) (635) (500) (383) (185) Joint venture adjustments 866 620 1,033 555 640 915 1,128 586 Non-cash joint venture interest subsidy - 1,882 - - - - - - Discontinued operations - eOutlets.com - - - - - 424 1,315 12,964 Discontinued operations - Designer Connection - - - - 4 (274) 1,006 1,079 -------- --------- -------- -------- --------- -------- --------- --------- FFO before adjustment for asset impairment 5,347 (57,547) 7,131 7,299 (46,673) 13,893 3,090 18,994 Provision for asset impairment - 63,026 - - 60,125 - 8,538 - -------- --------- -------- -------- --------- -------- --------- --------- FFO before allocations to minority interests and preferred shareholders $ 5,347 $ 5,479 $ 7,131 $ 7,299 $ 13,452 $ 13,893 $ 11,628 $ 18,994 ======== ========= ======== ======== ========= ======== ========= ========= Other Data: Net cash provided by (used in) operating activities $ 12,588 $ 2,163 $ 10,200 $ 7,960 $ (15,708) $ 16,184 $ 22,990 $ 8,984 Net cash provided by (used in) investing activities 5,529 4,586 (7,022) 2,502 38,465 (11,070) (13,265) (13,035) Net cash used in financing activities (15,402) (6,000) (4,795) (13,678) (19,838) (5,732) (3,896) (2,516) ====================================================================================================================================
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MATERIAL RISK Market Risk Sensitivity Interest Rate Risk In the ordinary course of business, we are exposed to the impact of interest rate changes. We employ established policies and procedures to manage our exposure to interest rate changes. See "Interest Rate Risk" and "New Accounting Pronouncements" of Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information. We use a mix of fixed and variable rate debt to (i) limit the impact of interest rate changes on our results from operations and cash flows and (ii) to lower our overall borrowing costs. The following table provides a summary of principal cash flows, adjusted for the Amendment to the Mezzanine Loan and excluding (i) unamortized debt premiums of $11,051, (ii) mortgage indebtedness aggregating $58,079 on Prime Outlets at Hagerstown and (iii) non-recourse mortgage indebtedness aggregating $33,235 on Prime Outlets at Conroe and Prime Outlets at Jeffersonville II (see "Mezzanine Loan Modification", "2002 Sales Transaction" and "Defaults on Certain Non-recourse Mortgage Indebtedness" within "Liquidity and Capital Resources" of Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information), and related contractual interest rates by fiscal year of maturity. Variable interest rates are based on the weighted average rates of the portfolio at December 31, 2001. See Note 6 - "Bonds and Notes Payable" of the Notes to Consolidated Financial Statements contained herein for additional information with respect to the terms of our fixed and variable rate debt instruments.
- ------------------------------------------------------------------------------------------------------------------------------------ Year of Maturity - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2003 2004 2005 2006 Thereafter Total - ------------------------------------------------------------------------------------------------------------------------------------ Fixed Rate: Principal $ 12,296 $454,478 $ 7,022 $ 51,147 $ 121,931 $ 109,877 $ 756,751 Average interest rate 7.79% 9.05% 7.20% 7.92% 8.76% 7.50% 8.69% Variable Rate: Principal $ 36,183 $ 46,966 $ 15,202 $ 98,351 Average interest rate 14.48% 10.93% 8.00% 11.79% ====================================================================================================================================
ITEM 8-- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this Item is set forth at the pages indicated in Item 14(a) below. ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The information required by Items 10, 11, 12 and 13 (except that information regarding executive officers called for by Item 10 that is contained in Part I) is incorporated herein by reference from the definitive proxy statement that the Company intends to file pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, on or before April 30, 2001. PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements Report of Independent Auditors F-1 Consolidated Balance Sheets as of December 31, 2001 and 2000 F-2 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 F-3 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999 F-6 Notes to Consolidated Financial Statements F-7 2. Financial Statement Schedules The following financial statement schedule is included in Item 14 (d): Report of Independent Auditors on Schedule (included with consent filed as Exhibit 23) Schedule III--Real Estate and Accumulated Depreciation F-29 Notes to Schedule III F-31 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 3. Exhibits Exhibit Number Description 3.1 Amended and Restated Articles of Incorporation of Prime Retail, Inc. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as amended (File No. 0-23616).] 3.2 Articles Supplementary of Prime Retail, Inc. relating to Series B Preferred Stock. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as amended (File No. 0-23616).] 3.3 Second Amended and Restated By-Laws of Prime Retail, Inc. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-23616).] 4.1 Form of Series A Preferred Stock Certificate [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).] 4.2 Form of Series B Preferred Stock Certificate [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).] 4.3 Form of Common Stock Certificate [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).] 4.4 Warrant to Purchase Common Stock of the Company dated December 22, 2000 issued to FRIT PRT Lending LLC [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, 2000 (File No. 0-23616).] 4.5 Warrant to Purchase Common Stock of the Company dated December 22, 2000 issued to Greenwich Capital Financial Products, 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, 2000 (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. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-23616).] 10.2 1994 Stock Incentive Plan [Incorporated by reference to the same titled exhibit in the Company's registration statement on Form S-11 (Registration No. 33-68536).] # 10.3 1995 Stock Incentive Plan [Incorporated by reference to the same titled exhibit in the Company's registration statement on Form S-11 (Registration No. 333-1666).] # 10.5 Separation Agreement dated February 23, 2000 by and between Prime Retail, Inc. and Abraham Rosenthal. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-23616).] # 10.6 Employment Agreement dated October 6, 1999 by and among primeoutlets.com inc, Prime Retail, L.P., Prime Retail, Inc. and William H. Carpenter, Jr. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-23616).] # 10.7 Form of Executive Employment Agreement (David G. Phillips) [Incorporated by reference to the same titled exhibit in the Company's registration statement on Form S-11 (Registration No. 33-68536).] # 10.8 Employment Agreement dated June 11, 2000 between Prime Retail, Inc. and Robert A. Brvenik. [Incorporated by reference to the same titled exhibit in the Company's Quarterly Report on Form 10-Q/A for the quarterly period ended September 30, 2000 (File No. 001-13301).] # 10.9 Employment Agreement dated May 3, 2000 between Prime Retail, Inc. and C. Alan Schroeder. [Incorporated by reference to the same titled exhibit in the Company's Quarterly Report on Form 10-Q/A for the quarterly period ended September 30, 2000 (File No. 001-13301).] # 10.10 Employment Agreement dated May 3, 2000 between Prime Retail, Inc. and Steven S. Gothelf [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, 2000 (File No. 0-23616).] # 10.11 Employment Agreement dated May 3, 2000 between Prime Retail, Inc. and John S. Mastin. [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, 2000 (File No. 0-23616).] # 10.12 Separation Agreement dated August 24, 2000 by and between Prime Retail, Inc., Prime Retail, L.P. and William H. Carpenter, Jr. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 0-23616).] 10.15 Registration Rights Agreement dated June 15, 1998 by and between Prime Retail, Inc. and Prime Retail, L.P. for the benefit of holders of common units of Prime Retail, L.P. and certain stockholders of Prime Retail, Inc. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as amended (File No. 0-23616).] 10.16 Form of Property Level General Partnership Agreement [Incorporated by reference to the same titled exhibit in the Company's registration statement on Form S-11 (Registration No. 33-68536).] 10.17 Form of Property Level Limited Partnership Agreement [Incorporated by reference to the same titled exhibit in the Company's registration statement on Form S-11 (Registration No. 33-68536).] 10.18 Noncompetition and Restriction Agreement with Michael W. Reschke of PGI [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, as amended (File No. 0-23616).] # 10.21 Consulting Agreement between the Company and Marvin Traub Associates, Inc. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).] 10.28 Waiver, Recontribution and Indemnity Agreement by the Limited Partners [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, as amended (File No. 0-23616).] 10.29 Indemnity Agreement made by the Company in favor of The Prime Group, Inc. and Prime Group Limited Partnership [Incorporated by reference to the same titled exhibit in the Company's registration statement on Form S-11 (Registration No. 333-1666).] 10.30 Promissory Note dated October 31, 1996 by and between Prime Retail, L.P. and Nomura Asset Capital Corporation [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-233616).] 10.30A Form of Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filings with Nomura Asset Capital Corporation [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).] 10.32 Consulting Agreement between the Company and Financo, Inc. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).] 10.33 Amended and Restated Agreement and Plan of Merger among Prime Retail, Inc., Prime Retail, L.P., Horizon Group, Inc., Sky Merger Corp., Horizon Group Properties, Inc., Horizon Group Properties, L.P., and Horizon/Glen Outlet Centers Limited Partnership dated as of February 1, 1998 [Incorporated by reference to the same titled exhibit in the Company's Current Report on Form 8-K dated February 1, 1998 (File No. 0-23616).] 10.34 Agreement among Prime Retail, Inc., Horizon Group, Inc., Mr. David H. Murdock, Castle & Cooke Properties, Inc., and Pacific Holding Company dated as of February 1, 1998 [Incorporated by reference to the same titled exhibit in the Company's Current Report on Form 8-K dated February 1, 1998 (File No. 0-23616).] # 10.35 Letter Agreement with David G. Phillips regarding the purchase of units in Prime Retail, L.P. dated August 6, 1996. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-23616).] # 10.36 Non-employee Director Stock Plan [Incorporated by reference to Appendix I in the Company's registration statement on Form S-4 (File No. 333-51285).] # 10.37 1998 Long-Term Stock Incentive Plan [Incorporated by reference to Appendix J in the Company's registration statement on Form S-4 (File No. 333-51285).] # 10.38 Description of the 1999 Long-Term Incentive Program. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as amended (File No. 0-23616).] # 10.39 Master Modification Agreement dated as of December 22, 2000 between Buckeye Factory Shops Limited Partnership, Latham Factory Stores Limited Partnership, Carolina Factory Shops Limited Partnership, Shasta Outlet Center Limited Partnership, The Prime Outlets at Calhoun Limited Partnership and The Prime Outlets at Lee Limited Partnership, Nomura Asset Capital Corporation, Prime Retail, Inc. and Prime Retail, L.P. [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, 2000 (File No. 0-23616).] # 10.40 The Agreement for Purchase and Sale, dated December 22, 2000, by and between Finger Lakes Outlet Center, L.L.C., The Prime Outlets at Michigan City Limited Partnership, The Prime Outlets at Gilroy Limited Partnership and Outlet Village of Kittery Limited Partnership as seller and F/C Waterloo Development LLC, F/C Michigan City Development LLC, F/C Gilroy Development LLC, F/C Kittery Development LLC and F/C Michigan Parking LLC as buyer. [Incorporated by reference to the same titled exhibit in the Company's Amended Current Report on Form 8-K/A dated December 22, 2000 (File No. 001-13301).] # 10.41 Amended and Restated Guaranty and Indemnity Agreement dated as of July 31, 2001 by and among Horizon Group Properties, Inc., Horizon Group Properties, L.P., Prime Retail, Inc. and Prime Retail, L.P. [Incorporated by reference to Exhibit 10.44 in the Company's Quarterly Report on Form 10-Q dated September 30, 2001 (File No. 0-23616).] # 10.42 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).] 10.43 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).] # 10.44 Purchase and Sale Agreement, dated as of August 6, 1999, among The Prime Outlets at Birch Run, L.L.C., The Prime Outlets at Williamsburg, L.L.C., and Outlet Village of Hagerstown Limited Partnership and Welp Triple Outlet, L.C. [Incorporated by reference to Exhibit 10.1 in the Company's Current Report on Form 8-K dated August 11, 1999 (File No. 001-13301)]. # 10.45 Loan Agreement dated as of December 22, 2000 between FRIT PRT Lending LLC and Prime Retail, L.P. [Incorporated by reference to Exhibit 10.48 in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 0-23616).] # 10.46 First Amendment dated as of January 11, 2002 to Loan Agreement between FRIT PRT Lending LLC and Prime Retail, L.P. # 10.47 Second Amendment dated as of January 31, 2002 to Loan Agreement between FRIT PRT Lending LLC and Prime Retail, L.P. # 10.48 Employment Agreement dated March 21, 2002 between Prime Retail, Inc. and R. Kelvin Antill. # 10.49 Employment Agreement dated July 24, 2000 between Prime Retail, Inc. and Glenn D. Reschke. # 10.50 Amendment to Employment Agreement dated April 2, 2001 between Prime Retail, Inc. and Robert A. Brvenik. # 10.51 Employment Agreement dated January 10, 2002 between Prime Retail, Inc. and David G. Phillips. # 10.52 Employment Letter dated December 7, 1998 between Prime Retail, Inc. and Frederick J. Meno IV. # 10.53 Seventh Amendment dated December 4, 2001 to 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. # 10.54 Letter Agreement dated April 24, 2001 between Prime Retail, Inc., Prime Retail, L.P. and Abraham Rosenthal amending Separation Agreement dated February 23, 2000. # 10.55 Letter Agreement dated April 24, 2001 between Prime Retail, Inc., Prime Retail, L.P. and William H. Carpenter, Jr. amending Separation Agreement dated August 24, 2000. 12 Ratio of Earnings to Fixed Charges 21 Subsidiaries of Prime Retail, Inc. 23 Consent of Ernst & Young LLP Note: # Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c). (b) Reports on Form 8-K 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 on March 28, 2002. PRIME RETAIL, INC. /s/ Robert A. Brvenik --------------------------- Robert A. Brvenik Executive Vice President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ Glenn D. Reschke March 28, 2002 - -------------------------------------- Glenn D. Reschke Chairman of the Board President and Chief Executive Officer /s/ Howard Amster March 28, 2002 - -------------------------------------- Howard Amster Director /s/ Robert H. Kanner March 28, 2002 - -------------------------------------- Robert H. Kanner Director /s/ Kenneth A. Randall March 28, 2002 - -------------------------------------- Kenneth A. Randall Director /s/ Michael W. Reschke March 28, 2002 - -------------------------------------- Michael W. Reschke Director /s/ Sharon Sharp March 28, 2002 - -------------------------------------- Sharon Sharp Director /s/ James R. Thompson March 28, 2002 - -------------------------------------- James R. Thompson Director /s/ Marvin S. Traub March 28, 2002 - -------------------------------------- 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, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 6, the Company's ability to meet debt service requirements is dependent upon completing future asset sales by specific dates and maintaining its results of operations at current levels. If the Company is unable to complete future asset sales by the specified dates and or maintain its results of operations at current levels, it may not be able to maintain compliance with the performance provisions and or financial covenants contained in certain of its debt facilities. 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 13, 2002 PRIME RETAIL, INC. Consolidated Balance Sheets (Amounts in thousands, except share information)
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Assets Investment in rental property: Land $ 148,463 $ 151,941 Buildings and improvements 1,208,568 1,322,368 Property under development 3,352 3,573 Furniture and equipment 15,225 15,225 ----------- ----------- 1,375,608 1,493,107 Accumulated depreciation (258,124) (217,569) ----------- ----------- 1,117,484 1,275,538 Cash and cash equivalents 7,537 8,906 Restricted cash 37,885 54,920 Accounts receivable, net 5,017 13,480 Deferred charges, net 11,789 19,533 Assets held for sale 54,628 43,230 Investment in partnerships 24,539 21,610 Other assets 3,629 24,804 ----------- ----------- Total assets $ 1,262,508 $ 1,462,021 =========== =========== Liabilities and Shareholders' Equity Bonds payable $ 31,975 $ 32,455 Notes payable 925,492 997,698 Accrued interest 7,643 5,267 Real estate taxes payable 8,091 8,555 Accounts payable and other liabilities 31,380 62,063 ----------- ----------- Total liabilities 1,004,581 1,106,038 Minority interests 1,487 1,495 Shareholders' equity: Shares of preferred stock, 24,315,000 shares authorized: 10.5% Series A Senior Cumulative Preferred Stock, $0.01 par value (liquidation preference of $70,330), 2,300,000 shares issued and outstanding 23 23 8.5% Series B Cumulative Participating Convertible Preferred Preferred Stock, $0.01 par value (liquidation preference of $231,052), 7,828,125 shares issued and outstanding 78 78 Shares of common stock, 150,000,000 shares authorized: Common stock, $0.01 par value, 43,577,916 shares issued and outstanding 436 436 Additional paid-in capital 709,373 709,373 Distributions in excess of earnings (453,470) (355,422) ----------- ----------- Total shareholders' equity 256,440 354,488 ----------- ----------- Total liabilities and shareholders' equity $ 1,262,508 $ 1,462,021 =========== =========== ====================================================================================================================================
See accompanying notes to financial statements. PRIME RETAIL, INC. Consolidated Statements of Operations (Amounts in thousands, except per share information)
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues Base rents $ 141,116 $ 178,830 $ 193,979 Percentage rents 4,220 6,369 8,085 Tenant reimbursements 67,323 83,350 90,063 Interest and other 13,421 14,801 13,829 ---------- --------- --------- Total revenues 226,080 283,350 305,956 Expenses Property operating 54,451 68,537 70,862 Real estate taxes 19,283 21,776 22,405 Depreciation and amortization 56,918 67,556 73,640 Corporate general and administrative 14,290 20,847 12,687 Interest 92,859 98,234 93,934 Other charges 22,646 17,555 6,918 Provision for asset impairment 63,026 68,663 15,842 Provision for abandoned projects - - 16,039 Loss on eOutlets.com - 14,703 - Loss on Designer Connection - 1,815 6,561 ---------- --------- -------- Total expenses 323,473 379,686 318,888 ---------- --------- --------- Loss before loss on sale of real estate, minority interests and extraordinary loss (97,393) (96,336) (12,932) Loss on sale of real estate (1,063) (42,648) (15,153) ---------- --------- -------- Loss before minority interests and extraordinary loss (98,456) (138,984) (28,085) Loss (Income) allocated to minority interests 408 738 (3,226) ---------- --------- --------- Loss before extraordinary loss (98,048) (138,246) (31,311) Extraordinary loss on early extinguishment of debt - (4,206) (3,518) ---------- --------- --------- Net loss (98,048) (142,452) (34,829) Income allocated to preferred shareholders (22,672) (22,672) (9,962) ---------- --------- --------- Net loss applicable to common shares $ (120,720) $(165,124) $ (44,791) ========== ========= ========= Basic loss per common share: Loss before extraordinary loss $ (2.77) $ (3.69) $ (0.96) Extraordinary loss - (0.10) (0.08) ---------- --------- --------- Net loss $ (2.77) $ (3.79) $ (1.04) ========== ========= ========= Diluted loss per common share: Loss before extraordinary loss $ (2.77) $ (3.69) $ (1.22) Extraordinary loss - (0.10) (0.08) ---------- --------- -------- Net loss $ (2.77) $ (3.79) $ (1.30) ========== ========= ========= Weighted-average common shares outstanding - basic 43,578 43,517 43,196 ========== ========= ========= Weighted-average common shares outstanding - diluted 43,578 43,517 44,260 ========== ========= ========= ====================================================================================================================================
See accompanying notes to financial statements. PRIME RETAIL, INC. Consolidated Statements of Cash Flows (Amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Activities Net loss $ (98,048) $ (142,452) $ (34,829) Adjustments to reconcile net loss to net cash provided by operating activities: Loss (Income) allocated to minority interests (408) (738) 3,226 Loss on sale of real estate 1,063 42,648 15,153 Extraordinary loss on early extinguishment of debt - 4,206 3,518 Depreciation and amortization 56,918 67,556 73,640 Amortization of deferred financing costs 7,025 3,256 4,379 Amortization of debt premiums (3,092) (3,159) (4,406) Provision for uncollectible accounts receivable 13,368 7,443 779 Provision for asset impairment 63,026 68,663 15,842 Provision for abandoned projects - - 16,039 Loss on eOutlets.com - 14,703 - Loss on Designer Connection - 1,815 3,659 Gain on sale of land - (2,472) (72) Changes in operating assets and liabilities: (Increase) Decrease in accounts receivable (5,092) (4,903) 2,155 (Increase) Decrease in restricted cash 15,477 (28,151) 7,044 (Increase) Decrease in other assets 3,307 3,285 (669) Increase (Decrease) in accounts payable and other liabilities (23,151) 4,272 (7,285) Increase (Decrease) in real estate taxes payable 142 (2,145) (513) Increase (Decrease) in accrued interest 2,376 (1,377) 155 --------- ---------- --------- Net cash provided by operating activities 32,911 32,450 97,815 --------- ---------- --------- Investing Activities Additions to investment in rental property (15,170) (51,833) (85,977) Payments made for eOutlets.com (2,170) (11,161) (3,992) Proceeds from repayment of notes receivable, net 14,523 - - Contributions to joint venture partnerships (2,950) (3,000) - Proceeds from sales of operating properties and land 11,362 67,089 33,303 --------- ---------- --------- Net cash provided by (used in) investing activities 5,595 1,095 (56,666) --------- ---------- --------- Financing Activities Proceeds from notes payable 16,899 134,497 304,342 Principal repayments on notes payable (56,222) (155,120) (200,026) Redemption of Series C preferred stock - - (45,054) Dividends and distributions paid - - (75,536) Minority interests contributions (distributions) 400 - (12,976) Deferred costs (952) (11,359) (10,321) --------- ---------- --------- Net cash used in financing activities (39,875) (31,982) (39,571) --------- ---------- --------- Increase (Decrease) in cash and cash equivalents (1,369) 1,563 1,578 Cash and cash equivalents at beginning of period 8,906 7,343 5,765 --------- ---------- ---------- Cash and cash equivalents at end of period $ 7,537 $ 8,906 $ 7,343 ========= ========== ========== ====================================================================================================================================
See accompanying notes to financial statements. PRIME RETAIL, INC. Consolidated Statements of Cash Flows (continued) (Amounts in thousands) Supplemental Disclosure of Non-cash Investing and Financing Activities The following assets and liabilities were disposed in connection with the sale of properties during the periods indicated:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Book value of net assets disposed $ 42,696 $ 321,849 $ 96,384 Notes payable assumed by buyer - (206,735) (53,755) Notes payable paid (30,271) - - Promissory note received from buyer - (10,000) - Loss on sale of real estate (1,063) (42,648) (9,326) -------- --------- ---------- Cash received $ 11,362 $ 62,466 $ 33,303 ======== ========= ========== ====================================================================================================================================
See accompanying notes to financial statements PRIME RETAIL, INC. Consolidated Statements of Shareholders' Equity (Amounts in thousands, except share information)
- ------------------------------------------------------------------------------------------------------------------------------------ Series A Series B Senior Convertible Series C Additional Distributions Total Preferred Preferred Preferred Common Paid-in in Excess of Shareholders' Stock Stock Stock Stock Capital Earnings Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 1, 1999 $ 23 $ 78 $ 44 $ 427 $ 759,105 $ (115,943) $ 643,734 Issuance of 160,585 restricted shares of common stock - - - 2 1,380 - 1,382 Exchange of 471,293 common units for common stock - - - 5 6,985 - 6,990 Redemption of 4,363,636 shares of Series C preferred stock - - (44) - (58,348) 13,338 (45,054) Net loss - - - - - (34,829) (34,829) Common dividends/distributions ($1.180 per share) - - - - - (50,948) (50,948) Preferred dividends/distributions: Series A preferred stock ($2.625 per share) - - - - - (6,038) (6,038) Series B preferred stock ($2.125 per share) - - - - - (16,635) (16,635) Series C preferred stock ($0.885 per share) - - (1,915) (1,915) ---- ---- ---- ----- --------- ---------- --------- Balance, December 31, 1999 23 78 - 434 709,122 (212,970) 496,687 Issuance of 180,000 restricted shares of common stock - - - 2 251 - 253 Exchange of 29,296 common units for common stock - - - - - - - Net loss - - - - - (142,452) (142,452) ---- ---- ---- ----- --------- ---------- --------- Balance, December 31, 2000 23 78 - 436 709,373 (355,422) 354,488 Net loss - - - - - (98,048) (98,048) ---- ---- ---- ----- --------- ---------- --------- Balance, December 31, 2001 $ 23 $ 78 $ - $ 436 $ 709,373 $ (453,470) $ 256,440 ==== ==== ==== ===== ========= ========== ========= ====================================================================================================================================
See accompanying notes to financial statements. PRIME RETAIL, INC. Notes to Consolidated Financial Statements (Amounts in thousands, except share and unit information) Note 1 -- Organization and Basis of Presentation Organization Prime Retail, Inc. (the "Company") was organized as a Maryland corporation on July 16, 1993. We are a self-administered and self-managed real estate investment trust ("REIT") that primarily develops, acquires, owns and operates outlet centers. As of December 31, 2001, the Company's outlet center portfolio, including three properties owned through joint venture partnerships, consists of 45 properties (the "Properties") in 26 states (including Puerto Rico), which total 12,670,000 square feet of gross leasable area ("GLA"). As a fully integrated real estate firm, we provide development, construction, accounting, finance, leasing, marketing, and management services for the Properties. Prime Retail, L.P. (the "Operating Partnership"), a Delaware limited partnership, is the entity through which we conduct substantially all of our business and operations and own (either directly or through subsidiaries) substantially all of assets including the Properties. We control the Operating Partnership as its sole general partner and are dependent upon the distributions or other payments from the Operating Partnership to meet our financial obligations. Unless the context otherwise requires, all references to "we," "us," "our" or the "Company" herein mean Prime Retail, Inc. and those entities owned or controlled by Prime Retail, Inc., including the Operating Partnership. At December 31, 2001, the Company owned 2,300,000 Series A Senior Preferred Units of the Operating Partnership (the "Senior Preferred Units"), 7,828,125 Series B Convertible Preferred Units of the Operating Partnership (the "Series B Convertible Preferred Units"), and 43,577,916 Common Units of partnership interest in the Operating Partnership (the "Common Units"). Each Senior Preferred Unit, and Series B Convertible Preferred Unit, (collectively, the "Preferred Units") entitles us to receive distributions from the Operating Partnership in an amount equal to the dividend declared or paid with respect to a share of our Series A Senior Cumulative Preferred Stock ("Series A 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, 2001 is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Number of Units ------------------------------------------------------ Holder Series A Series B Common - ------------------------------------------------------------------------------------------------------------------------------------ Prime Retail, Inc. 2,300,000 7,828,125 43,577,916 Affiliates of the Prime Group, management and others (1) - - 10,810,912 --------- --------- ---------- 2,300,000 7,828,125 54,388,828 ========= ========= ========== ====================================================================================================================================
Note: (1) Includes 251,300 units beneficially owned directly by an executive officer. As of December 31, 2001, we had an 80% general partnership interest in the Operating Partnership with full and complete control over the management of the Operating Partnership as the sole general partner not subject to removal by the limited partners. Basis of Presentation The consolidated financial statements include the accounts of us, the Operating Partnership and the partnerships in which we have operational control. Profits and losses are allocated in accordance with the terms of the Operating Partnership agreement. The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires us 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 we do not have operational control are accounted for on the equity method of accounting. Income (loss) applicable to minority interests of the Operating Partnership and common shares as presented in the consolidated statements of operations is allocated based on income (loss) before minority interests after income allocated to preferred shareholders. Significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in prior years have been reclassified to the current year presentation. Note 2 -- Summary of Significant Accounting Policies Rental Property Depreciation is calculated on the straight-line basis over the estimated useful lives of the assets, which are as follows: Land improvements 20 years Buildings and improvements Principally 40 years Tenant improvements Term of related lease Furniture and equipment 5 years Rental property is generally carried at historical cost net of accumulated depreciation. Development costs, which include fees and costs incurred in developing new properties, are capitalized as incurred. Upon completion of construction, development costs are amortized over the useful lives of the respective properties on a straight-line basis. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Significant renovations and improvements, which improve and/or extend the useful life of assets are capitalized and depreciated over their estimated useful lives. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," we record 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 and Cash Equivalents and Restricted Cash We consider highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying value of cash and cash equivalents and restricted cash as reported in the Consolidated Balance Sheets approximates their fair value. We maintain our cash and cash equivalents and restricted cash in accounts at various financial institutions. The majority of such accounts are interest bearing. Although, the combined account balances at each institution periodically may exceed FDIC insurance coverage, and as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage, we believe that the risk is not significant. During the years ended December 31, 2001, 2000 and 1999, we earned interest income of $1,980, $2,027 and $1,592, respectively (included in interest and other income in the Consolidated Statements of Operations). Accounts Receivable We regularly review accounts receivable and determine an appropriate range for the allowance for doubtful accounts based upon the impact of economic conditions on the tenants' ability to pay, past collection experience and such other factors which, in our judgment, deserve current recognition. In turn, a provision is charged against earnings in order to maintain the allowance level within this range. The allowances for doubtful accounts at December 31, 2001 and 2000 were $12,515 and $7,383, respectively. During the years ended December 31, 2001, 2000 and 1999, we recorded provisions for uncollectible accounts receivable, of $13,368, $7,443 and $772, respectively (included in other charges in the Consolidated Statements of Operations). Accounts receivable, net due after one year representing straight-line rents were $4,524 and $6,837 at December 31, 2001 and 2000, 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 effective interest method. Revenue Recognition Leases with tenants are accounted for as operating leases. Minimum rental income is recognized on a straight-line basis over the term of the lease and unpaid rents are included in accounts receivable, net in the accompanying Consolidated Balance Sheets. Certain lease agreements contain provisions, which provide for rents based on a percentage of sales or based on a percentage of sales volume above a specified threshold. These contingent rents are not recognized until the required thresholds are exceeded. In addition, the lease agreements generally provide for the reimbursement of real estate taxes, insurance, advertising and certain common area maintenance costs. These additional rents and tenant reimbursements are accounted for on the accrual basis. Interest Rate Protection Contracts We use interest rate protection contracts, such as interest rate caps to manage interest rate risk associated with floating rate debt. These contracts generally involve limiting our interest costs with an upper limit or specified range on the underlying interest rate index. The cost of such contracts are included in deferred charges and are being amortized on a straight-line basis as a component of interest expense over the life of the contracts. Amounts earned from interest rate protection contracts are recorded as a reduction of interest expense. We are exposed to credit losses in the event of counterparty nonperformance, but do not anticipate any such losses based on the creditworthiness of the counterparties. Earnings per Share Basic earnings per share ("EPS") is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the period. Diluted EPS includes the potentially dilutive effect, if any, which would occur if outstanding (i) options to purchase Common Stock were exercised, (ii) Common Units were converted into shares of Common Stock, (iii) shares of Series C Preferred Stock were converted into shares of Common Stock, and (iv) shares of Series B Convertible Preferred Stock were converted into shares of Common Stock. For the years ended December 31, 2001 and 2000, respectively, the effect of all exercises and conversions was anti-dilutive and, therefore, dilutive EPS is equivalent to basic EPS. For the year ended December 31, 1999, (i) a redemption discount and dividends aggregating $12,710 related to our repurchase of our Series C Preferred Stock were excluded from the numerator and (ii) incremental shares of 1,064, related to the assumed conversion of Series C Preferred Stock, were included in the denominator of the computation of diluted EPS. For the year ended December 31, 1999, the effect of all other exercises and conversions was anti-dilutive and, therefore, was excluded from the computation of diluted EPS.
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Numerator: Loss before minority interests and extraordinary loss $ (98,456) $ (138,984) $ (28,085) Loss (Income) allocated to minority interests 408 738 (3,226) --------- ---------- --------- Net loss before extraordinary loss (98,048) (138,246) (31,311) Income allocated to preferred shareholders (22,672) (22,672) (9,962) --------- ---------- --------- Numerator for basic earnings per share before extraordinary loss (120,720) (160,918) (41,273) Effect of Dilutive Securities: Series C preferred stock dividends - - 628 Series C preferred stock redemption discount - - (13,338) --------- ---------- --------- Numerator for diluted earnings per share before extraordinary loss $(120,720) $ (160,918) $ (53,983) ========= ========== ========= Denominator: Denominator for basic earnings per share - weighted-average common shares outstanding 43,578 43,517 43,196 Effect of Dilutive Securities: Series C preferred shares - - 1,064 --------- ---------- --------- Denominator for diluted earnings per share - weighted-average common shares outstanding 43,578 43,517 44,260 ========= ========== ========= Basic earnings before extraordinay loss per common share $ (2.77) $ (3.69) $ (0.96) ========= ========== ========= Diluted earnings before extraordinay loss per common share $ (2.77) $ (3.69) $ (1.22) ========= ========== ========= ====================================================================================================================================
Stock Based Compensation We account 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. We have elected to adopt only the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Income Taxes We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As a REIT, we generally are not subject to federal income tax at the corporate level on income we distribute to our shareholders so long as we distribute at least 90% of our taxable income (excluding any net capital gain) each year. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Even if we qualify as a REIT, we may be subject to certain state and local taxes on our income and property. We incurred $201, $197, and $234 of state and local taxes for the years ended December 31, 2001, 2000 and 1999, respectively. We paid $417, $235, and $68 of state and local taxes during the years ended December 31, 2001, 2000, and 1999, respectively. We did not make any distributions during the years ended December 31, 2001 and 2000, respectively. The following table summarizes the taxability of dividends and distributions paid during the year ended December 31, 1999: - -------------------------------------------------------------------------------- Amount Year Ended December 31, 1999 per Share Percentage - -------------------------------------------------------------------------------- Series A Senior Preferred Stock Ordinary income $ 2.625 100.0% ======= ===== Series B Convertible Preferred Stock Ordinary income $ 2.125 100.0% ======= ===== Series C Preferred Stock Ordinary income $ 0.885 100.0% ======= ===== Common Stock Ordinary income $ 0.271 23.0% Return of capital 0.909 77.0% ------- ----- $ 1.180 100.0% ======= ===== ================================================================================ Risks and Uncertainties Our results of operations are dependent on the overall health of the retail industry. Our 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 our operating results. Our outlet centers compete for customers primarily with traditional shopping malls, "off-price" retailers and other outlet centers. The tenants of outlet centers usually attempt to avoid direct competition with major retailers and their own full-price stores. They accomplish this by locating outlet stores only in outlet centers at least 20 miles from the nearest regional mall. For this reason, our outlet centers are often located in relatively undeveloped areas and therefore compete only to a limited extent with traditional retail malls in or near metropolitan areas. In addition to the traditional sources of competition faced by our outlet centers, our outlet centers also compete with web-based and catalogue retailers for customers. Because a number of our outlet centers are located in relatively undeveloped areas, there are often other potential sites for retail opportunities near our outlet centers that may be developed by competitors. The existence of development of other retail venues with a more convenient location or the offer of lower rent may attract our tenants or cause them to seek more favorable lease terms at or prior to renewal of their leases with us and, accordingly, may affect adversely the business, revenues and sales volume of our outlet centers. In addition, the success of tenants in our outlet centers which are located in relatively undeveloped areas, and thus the success of such outlet centers themselves, depends on shoppers traveling significant distances to shop. If shoppers should become less willing to travel the distances necessary to shop at our remote outlet centers, the business of our tenants would likely decline. Such a decline would likely cause the value, business, revenue and sales volume of such outlet centers to decline. Our community shopping centers compete with similar properties located in the same geographic trade areas. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138, which established new accounting and reporting standards for derivative instruments. These rules require that all derivative instruments be reported in the consolidated financial statements at fair value. The fair value for all derivative contracts is included in other assets or other liabilities and changes in fair value will be recorded each period in earnings or other comprehensive income, depending on whether the derivative is designated and effective as part of a hedged transaction, and on the type of hedge transaction. Gains or losses on derivative instruments reported in other comprehensive income must be reclassified into earnings in the period in which earnings are affected by the underlying hedged item, and the ineffective portion of all hedges is recognized in other income (expense) in the statements of operations in the current period. These new standards may result in additional volatility in reported earnings, other comprehensive income (loss) and accumulated other comprehensive income (loss). These rules became effective for us on January 1, 2001 and did not have a significant effect on our consolidated results of operations or financial position upon adoption. We are exposed to market risk from changes in interest rates. We manage our exposure to these market risks through our operating, financing and investing activities and, when deemed appropriate, through the use of interest rate protection agreements. We report changes in fair value of our interest rate protection agreements in other income or expense. Our interest rate protection agreements are marked-to-market and unrealized gains and losses are included in current period net income (loss) as a component of other income (expense). When the terms of the related financing are modified, or in the event of early extinguishment of the related financing, all changes in the fair value of the instrument are marked-to-market with changes in fair value included in net income each period until the instrument matures. We believe we have limited exposure to the extent of non-performance by the counterparties of each agreement since each counterparty is a major financial institution and we do not anticipate their non-performance. In October, 2001, the FASB issued SFAS No. 144, "Accounting for Impairment of Disposal of Long-lived Assets." SFAS No. 144 supercedes SFAS No. 121, however it retains the fundamental provisions of that statement related to the recognition and measurement of the impairment of long-lived assets to be "held and used." In addition, SFAS No. 144 provides more guidance on estimating cash flows when performing a recoverability test, requires that a long-lived asset to be disposed of other than by sale (e.g., abandoned) be classified as "held and used" until it is disposed of, and established more restrictive criteria to classify an asset as "held for sale." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We will adopt SFAS No. 144 effective January 1, 2002 and do not expect the adoption to have a material impact on our results of operations or financial position. Note 3 --Property Dispositions 2002 Sales Transaction On January 11, 2002, we completed the sale of Prime Outlets at Hagerstown (the "Hagerstown Center") to an existing joint venture partnership (the "Prime/Estein Venture") between one of our affiliates and an affiliate of Estein & Associates USA, Ltd. ("Estein"), a real estate investment company, for $80,500. Our affiliate and the Estein affiliate have 30% and 70% ownership interests, respectively, in the Prime/Estein Venture. In connection with the sale transaction, the Prime/Estein Venture assumed first mortgage indebtedness of $46,862 on the Hagerstown Center (the "Assumed Mortgage Indebtedness"). In connection with the lender's consent to the Prime/Estein Venture assuming the Assumed Mortgage Indebtedness, our guarantee of the Assumed Mortgage Indebtedness remained in place. The net cash proceeds from the sale, including the release of certain funds held in escrow, were $12,113 after a pay-down of $11,066 of existing mortgage indebtedness on the Hagerstown Center and closing costs. The net proceeds from this sale were used to prepay $11,647 of principal outstanding under a mezzanine loan (the "Mezzanine Loan"). At December 31, 2001, the carrying value of the Hagerstown Outlet Center of $54,628 was classified as assets held for sale in the Consolidated Balance Sheet. See Note 6 - "Bonds and Notes Payable" for additional information. We are obligated to refinance the Assumed Mortgage Indebtedness on behalf of the Prime/Estein Venture on or before June 1, 2004, its maturity date. Additionally, pursuant to certain Prime/Estein Venture-related documents to which affiliates of ours are parties, the Prime/Estein Venture's cost of the Assumed Mortgage Indebtedness and any refinancing of it are fixed at an annual rate of 7.75% for a period of 10 years. If the actual cost of such indebtedness should exceed 7.75% at any time during the ten-year period, we will be obligated to pay the difference to the Prime/Estein Venture. However, if the actual cost of such indebtedness is less than 7.75% at any time during the ten-year period, the Prime/Estein Venture will be obligated to pay the differnce to us. The actual cost of the Assumed Mortgage Indebtedness is currently 30-day LIBOR plus 1.50%. 2001 Sales Transactions On February 2, 2001, we sold Northgate Plaza, a community center located in Lombard, Illinois to Arbor Northgate, Inc. for aggregate consideration of $7,050. After the repayment of mortgage indebtedness of $5,966 and closing costs, the net cash proceeds from the Northgate Plaza sale were $510. On March 16, 2001, we sold Prime Outlets at Silverthorne, an outlet center located in Silverthorne, Colorado consisting of 257,000 square feet of GLA, to Silverthorne Factory Stores, LLC for aggregate consideration of $29,000. The net cash proceeds from the sale of Prime Outlets at Silverthorne were $8,993, after the repayment of certain mortgage indebtedness of $18,078 on Prime Outlets at Lebanon (see below) and closing costs and fees. The net proceeds from these sales were used to prepay an aggregate of $9,137 of principal outstanding under our Mezzanine Loan in accordance with the terms of such loan agreement. In connection with these sales, we recorded an aggregate gain on the sale of real estate of $732 during the first quarter of 2001. The operating results of these properties are included in our results of operations through the respective dates of disposition. At December 31, 2000, these properties were classified as assets held for sale in the Consolidated Balance Sheet with an aggregate carrying value of $34,770. On November 27, 2001, we sold certain land located in Camarillo, California for aggregate consideration of $7,150. The net cash proceeds from the sale, including the release of certain funds held in escrow, were $1,859, after the repayment of certain mortgage indebtedness of $6,227 and closing costs and fees. The net proceeds from this sale were used to prepay $1,787 of principal outstanding under our Mezzanine Loan. In connection with this sale, we recorded a loss on the sale of real estate of $1,615 during the fourth quarter of 2001. At December 31, 2000, the land was classified as assets held for sale in the Consolidated Balance Sheet with a carrying value of $8,460. Prior to the sale of Prime Outlets at Silverthorne, it was one of fifteen properties securing our first mortgage and expansion loan (the "First Mortgage and Expansion Loan"), which had an outstanding principal balance of $342,629 at December 31, 2001. In conjunction with the sale of Prime Outlets at Silverthorne, we substituted Prime Outlets at Lebanon for Prime Outlets at Silverthorne in the cross-collateralized asset pool securing the First Mortgage and Expansion Loan pursuant to the collateral substitution provisions contained in the loan agreement. In conjunction with adding Prime Outlets at Lebanon as security for the First Mortgage and Expansion Loan, we repaid, as discussed above, certain mortgage indebtedness on Prime Outlets at Lebanon of $18,078. Sale of Permanent Loan Properties On December 22, 2000, we completed the sale of four outlet centers aggregating 1,592,000 square feet of GLA to a joint venture partnership comprised of Fortress Investment Fund LLC ("Fortress") and Chelsea GCA Realty, Inc. ("Chelsea") for aggregate consideration of $239,500, including the assumption of first mortgage debt of $174,235. The four outlet centers (collectively, the "Permanent Loan Properties") that were sold are located in Gilroy, California; Michigan City, Indiana; Waterloo, New York; and Kittery, Maine. In connection with the sale of the Permanent Loan Properties, we incurred a loss on sale of real estate of $42,648 in the fourth quarter of 2000. The net proceeds from the sale, after closing costs and fees and the required purchase of land in the amount of $7,325 related to the outlet center in Gilroy, California, was $51,403. Net proceeds from the sale were used for the prepayment of certain long-term debt. The operating results of the Permanent Loan Properties are included in our results of operations through the date of disposition. Prime/Estein Joint Venture Transaction On August 6, 1999, we entered into an agreement (the "Prime/Estein Joint Venture Agreement") to sell three factory outlet centers, including two future expansions, to a joint venture (the "Prime/Estein Venture") between an affiliate of Estein & Associates USA, Ltd. ("Estein"), a real estate investment company, and us. 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 us for a ten-year covenant-not-to-compete (the "Covenant-not-to-Compete") and (iii) a $6,000 payment to us for a ten-year licensing agreement (the "Licensing Agreement") with the Venture to continue the use of the "Prime Outlets" brand name. The Covenant-not-to-Compete and the Licensing Agreement are collectively referred to as the "Deferred Income". On November 19, 1999, we completed the initial installment of the Prime/Estein Joint Venture Agreement consisting of the sale of Prime Outlets at Birch Run to the Prime/Estein Venture for aggregate consideration of $117,000, including a $64,500 "wrap-around" first mortgage provided by us. In connection with the sale of Prime Outlets at Birch Run, we 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, we commenced accounting for our 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 us to the Prime/Estein Venture had 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. Our net investment in the "wrap-around" first mortgage as of December 31, 2000 was $10,731, which is included in other assets in the Consolidated Balance Sheet. Additionally, the Venture assumed $53,755 of outstanding mortgage indebtedness. Included in the aggregate consideration was $8,500 of Deferred Income. The Deferred Income was initially included in accounts payable and other liabilities in the Consolidated Balance Sheet and was being amortized into other income over its ten-year life. Effective on the date of disposition, we account for our ownership interest in Prime Outlets at Birch Run in accordance with the equity method of accounting. See Note 6 - "Bonds and Notes Payable" for additional information. During the fourth quarter of 1999, we 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, we completed the second installment of the Prime/Estein Joint Venture Agreement consisting of the sale of Prime Outlets at Williamsburg to the Venture for aggregate consideration of $59,000, including (i) the assumption of mortgage indebtedness of $32,500 and (ii) $2,750 of Deferred Income. In connection with the sale of Prime Outlets at Williamsburg, we received (i) cash proceeds of $11,063, net of transaction costs, and (ii) a promissory note in the amount of $10,000 from the Prime/Estein Venture (of which Estein's obligation was $7,000). The promissory note required the monthly payment of interest in arrears at an annual rate of 7.75% and the outstanding principal amount was payable on or before December 15, 2000, subject to satisfaction of certain conditions. As a result of our inability to refinance or convert the Prime/Estein Venture's mortgage indebtedness of $32,500 to a permanent loan at a fixed rate of interest by December 15, 2000, the maturity date of the promissory note was extended until the refinancing was completed. In addition, since the refinancing or conversion did not occur on or before December 15, 2000, we were obligated to pay Estein $250 and we were not entitled to receive operating distributions arising out of Prime Outlets at Williamsburg until the refinancing occurred. Effective on the date of disposition, we have accounted for our ownership interest in Prime Outlets at Williamsburg in accordance with the equity method of accounting. See Note 6 - "Bonds and Notes Payable" for additional information. Under the Prime/Estein Joint Venture Agreement, as amended, the outside closing date for a contemplated sale of the Hagerstown Center, including an expansion which opened during 2000, was August 31, 2000. Estein terminated the Prime/Estein Joint Venture Agreement as it applied to the contemplated sale of the Hagerstown Center when the closing did not occur by the specified closing date. In connection with this discontinuance of the sales of a 70% joint venture interest in (i) the Hagerstown Center and (ii) a proposed expansion to Prime Outlets at Williamsburg (the "Williamsburg Expansion"), we reduced the carrying value of the Deferred Income by $9,550 and incurred other charges aggregating $1,100 during the third quarter of 2000. The reduction in the Deferred Income was attributable to the remaining proceeds that were not received as a result of the termination of the Prime/Estein Joint Venture Agreement. The $1,100 of other charges included (i) a $600 fee payable to Estein resulting from inability to close the sale of the Hagerstown Center on or before August 31, 2000 in accordance with the terms of the Prime/Estein Joint Venture Agreement and (ii) a $500 fee payable to Estein for non-completion of the Williamsburg Expansion by December 15, 2000. During 2000, we reclassified $61,908 representing the aggregate carrying value of the Hagerstown Center from assets held for sale to investment in rental property in the Consolidated Balance Sheet. In connection with the reclassification, we recorded $1,967 of depreciation and amortization expense related to the Hagerstown Center comprising the period from January 1 through September 30, 2000, the date of the reclassification. The following unaudited pro forma information presents a summary of the our consolidated results of operations as if the sale of the Permanent Loan Properties and the Prime/Estein Joint Venture Transaction had occurred on January 1, 1999: - -------------------------------------------------------------------------------- Years Ended December 31, 2000 1999 - -------------------------------------------------------------------------------- Total revenues $ 240,991 $ 244,693 ========= ========= Net loss from continuing operations $ (96,091) $ (20,205) ========= ========= Net loss applicable to common shareholders $(118,763) $ (30,167) ========= ========= Basic and diluted loss per common share $ (2.73) $ (0.70) ========= ========= Weighted-average common shares outstanding 43,517 43,196 ========= ========= ================================================================================ These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the indicated transactions been in effect on January 1, 1999 or of our future results of operations. Note 4 -- Restricted Cash As of December 31, 2001 and 2000, $37,885 and $54,920, respectively, of cash was placed in various escrows and, therefore, classified as restricted cash in the Consolidated Balance Sheet. Restricted cash generally consists of (i) lender escrows for the payment of debt service, real estate taxes, insurance, capital expenditures and certain operating expenses and (ii) escrows for tenant marketing contributions. Restricted cash also includes amounts relating to future development costs and a cash collateral account for fixed rate tax-exempt bonds. The cash collateral account was $2,825 (10% of the original issuance amount) as of December 31, 2001 and 2000, respectively. At December 31, 2001 and 2000, $825 and $5,142, respectively, were held in escrow for the completion of Prime Outlets of Puerto Rico. Note 5 -- Deferred Charges Deferred charges were as follows: - -------------------------------------------------------------------------------- December 31, 2001 2000 - -------------------------------------------------------------------------------- Leasing commissions $ 9,590 $ 10,046 Financing costs 27,489 28,062 --------- -------- 37,079 38,108 Accumulated amortization (25,290) (18,575) --------- -------- $ 11,789 $ 19,533 ========= ======== ================================================================================ Note 6 -- Bonds and Notes Payable Bonds payable consisted of the following:
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Fixed rate tax-exempt revenue bonds (the "Fixed Rate Bonds"), interest rates ranging form 6.88% to 7.00%, monthly interest and sinking fund payments, due 2012 to 2014, collateralized by properties in Chattanooga, TN and Knoxville, TN $ 27,325 $ 27,805 Urban development action grant loans, 6%, monthly principal and interest payments, due 2016 to 2019, collateralized by properties in Chattanooga, TN 4,650 4,650 -------- --------- $ 31,975 $ 32,455 ======== ========= ====================================================================================================================================
During October, 1999, we refinanced $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 us commencing in December, 2006 at 102% of the outstanding principal balance. The redemption price decreases incrementally each year thereafter through December, 2008, at which date the redemption price is fixed at 100% of the outstanding principal balance. The Fixed Rate Bonds contain certain financial covenants, including minimum debt service coverage ratios and cross-default provisions with respect to certain of our other credit agreements. In the event of non-compliance or default, the holders of the Fixed Rate Bonds may elect to put such obligations to us at a price equal to par plus accrued interest. See "Going Concern" for additional information. Certain of the Fixed Rate Bonds require mandatory sinking fund payments follows: - -------------------------------------------------------------------------------- Years ended December 31, - -------------------------------------------------------------------------------- 2002 $ 505 2003 540 2004 575 2005 615 2006 650 Thereafter 17,440 -------- $ 20,325 ======== ================================================================================ During the years ended December 31, 2001 and 2000, $480 and $445, respectively, of the Fixed Rate Bonds were redeemed from the sinking fund. Notes payable consisted of the following:
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ First Mortgage and Expansion Loan, 7.782%, monthly principal and interest of $2,580, due November 11, 2003, collateralized by 15 properties located throughout the United States $ 342,629 $ 346,392 Bridge Loan, 13%, monthly interest plus principal of the greater of $50 or 50% of excess cash flow, due December 31, 2003, collateralized by six properties located throughout the United States 111,375 112,000 Mortgage, 6.927% effective rate, monthly principal and interest of $565, due October 11, 2006, collateralized by four properties located throughout the United States 72,954 74,481 Mortgage, 6.927% effective rate, monthly principal and interest of $527, due March 11, 2006, collateralized by four properties located throughout the United States 63,521 65,293 Mezzanine Loan, LIBOR plus 9.50% (minimum of 14.50%) through December 31, 2001 (14.50% at December 31, 2001), LIBOR plus 9.75% (minimum of 14.75%) thereafter, monthly principal and interest payments, due September 30, 2003, collateralized by pledges of equity interests in certain properties 62,079 90,000 Mortgage, 7.60%, monthly principal and interest of $450, due May 10, 2009, collateralized by property located in Niagara Falls, NY 61,488 62,120 Construction Mortgage Loan, LIBOR plus 1.50% (3.62% at December 31, 2001), monthly interest-only payments through May 31, 2002, monthly principal and interest thereafter, due June 1, 2004, collateralized by property located in Hagerstown, MD 49,062 48,863 Mortgage, 6.95% effective rate, monthly principal and interest of $351, due November 1, 2005, collateralized by properties located in Vero Beach, FL and Woodbury, MN 42,652 43,859 Mortgage, 6.915% effective rate, monthly principal and interest of $357, due June 10, 2002, collateralized by properties located in Conroe, TX and Jeffersonville, OH 33,559 34,890 Mortgage, 8.35%, monthly principal and interest of $215, due June 11, 2007, collateralized by three properties located throughout the United States 25,327 25,740 Puerto Rico First Mortgage Loan, LIBOR plus 3.50% (5.64% at December 31, 2001), monthly interest plus (i) principal based on a 25-year amortization schedule at 9% through January 1, 2002 and (ii) principal based on a 15-year amortization schedule at 9% thereafter, due December 31, 2003, collateralized by property located in Barceloneta, Puerto Rico 19,817 20,000 Edinburgh First Mortgage Loan, LIBOR plus 3.50% (minimum of 8.00%) (8.00% at December 31, 2001), monthly principal and interest of $159, due July 1, 2004, collateralized by property located in Edinburgh, IN 16,456 - Mortgage, 6.95% effective rate, monthly principal and interest of $81, due November 1, 2005, collateralized by property located in Perryville, MD 9,593 9,893 Hagerstown Second Mortgage Loan, LIBOR plus 2.50% (4.62% at December 31, 2001), monthly interest-only payments through June 30, 2001, monthly principal of $164 plus interest thereafter, due June 1, 2004, collateralized by property located in Hagerstown, MD 9,016 10,000 Mortgage, 7.50%, monthly principal and interest of $29, due April 30, 2002, collateralized by property located in Knoxville, TN 2,972 3,521 Other Notes Payable 2,992 3,070 Lebanon First Mortgage Loan, LIBOR plus 3.00% (8.56% at December 31, 2000), monthly principal of $100 plus interest, due June 30, 2001, collateralized by property located in Lebanon, TN - 18,378 Mortgage, 6.91% effective rate, monthly principal and interest of $154, due June 1, 2001, collateralized by property located in Edinburgh, IN - 16,681 Note Payable, 13.50%, monthly interest-only payments, due November 1, 2001, collateralized by land located in Camarillo, CA - 6,527 Mortgage, 9.375%, monthly principal and interest of $71, due March 1, 2004, collateralized by property located in Lombard, IL - 5,990 ---------- --------- $ 925,492 $ 997,698 ========== ========= ====================================================================================================================================
Notes payable includes unamortized debt premiums of $11,051 and $14,144 in the aggregate at December 31, 2001 and 2000, respectively. Debt premiums are being amortized over the terms of the related debt instruments in accordance with the effective interest method. Additionally, interest incurred reflects amortization of debt premiums of $3,093, $3,159 and $4,406 for the years ended December 31, 2001, 2000 and 1999, respectively. The aggregate carrying amount of bonds and notes payable at December 31, 2001 approximated its fair value. At December 31, 2001, substantially all of our assets were pledged as collateral for bonds and notes payable. Interest costs are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Interest incurred $ 88,927 $ 101,549 $ 98,607 Amortization of deferred financing costs 7,025 3,256 4,379 Amortization of debt premiums (3,093) (3,159) (4,406) Interest capitalized to development projects - (3,412) (4,646) -------- --------- -------- Total $ 92,859 $ 98,234 $ 93,934 ======== ========= ======== Interest paid $ 86,551 $ 99,611 $ 94,046 ======== ========= ======== ====================================================================================================================================
2000 Debt Transactions On December 22, 2000, we closed a major refinancing on our assets and the sale of four of our outlet centers through a series of transactions (collectively, the "December 22, 2000 Transactions"). The principal lenders involved in the December 22, 2000 Transactions were an affiliate of Fortress; Greenwich Capital Financial Products, Inc. ("Greenwich"); and Mercantile-Safe Deposit and Trust Company ("Mercantile"). The sale of the outlet centers was to a joint venture partnership comprised of Fortress and Chelsea (see "Note 3 - "Property Dispositions" for additional information). Fortress and Greenwich (collectively, the "Lending Group") provided a mezzanine loan in the initial amount of $90,000 (the "Mezzanine Loan"). Greenwich funded a $20,000 first mortgage loan (the "Puerto Rico First Mortgage Loan") on our outlet center that opened in Puerto Rico during July of 2000 and Mercantile provided a $10,000 second mortgage loan (the "Hagerstown Second Mortgage Loan") on an outlet center in Hagerstown, Maryland. We executed agreements to extend the maturity date of two of our existing loans, a $112,000 first mortgage loan (the "Bridge Loan") from Nomura Asset Capital Corporation ("Nomura") and a $19,378 first mortgage loan (the "Lebanon First Mortgage Loan") from KeyBank National Association. The Mezzanine Loan is secured by pledges of equity interests in certain outlet centers. The Mezzanine Loan was originally for a term of three-years and required fixed monthly principal amortization commencing on February 1, 2001 of $1,000 during the first year, $1,667 during the second year and $2,333 during the third year. Additionally, the Mezzanine Loan (i) requires the payment of certain exit fees, (ii) is pre-payable at any time after one year and (iii) requires that our excess cash flow from operations and assets sales above certain thresholds be applied to principal reductions. The interest rate was originally a floating rate based on 30-day LIBOR plus 9.50%, but not less than 14.50%. The Mezzanine Loan contains financial and other covenants that restrict, among other things, the ability of us to incur additional indebtedness or pay dividends (other than dividends to maintain our status as a REIT). In addition, in connection with the financing we issued warrants (recorded at fair value at the date of the transaction) to the Lending Group to purchase one million shares of our common stock at an exercise price of $1.00 per share. The terms of the Mezzanine Loan were modified in January, 2002 (see "Mezzanine Loan Modification" for additional information). The Puerto Rico First Mortgage Loan is secured by our outlet center in Puerto Rico. The Puerto Rico First Mortgage Loan is for a term of three-years, requires monthly amortization of $15 based upon a 25-year schedule for the first year and $51 based upon a 15-year schedule thereafter. The Puerto Rico First Mortgage Loan is non-recourse and is pre-payable at any time subject to certain prepayment and exit fees. The interest rate is a floating rate based on 30-day LIBOR plus 3.50%. The Hagerstown Second Mortgage Loan was secured by our outlet center in Hagerstown, Maryland and had a term of 30-months that was co-terminus with Mercantile's existing first mortgage loan on the same center. The Second Mortgage Loan required monthly amortization starting in the seventh month of $164 per month and was pre-payable at any time without penalty or fee. The interest rate was a floating rate based on 30-day LIBOR plus 2.50%. The Hagerstown Second Mortgage was repaid in full in January 2002 (see Note 3 - "Property Dispositions" for additional information). On December 22, 2000, the term of the Bridge Loan, which was due to mature on June 11, 2001, was extended until December 31, 2003. In consideration for the extension, the interest rate was converted from 30-day LIBOR plus 1.35% to a fixed-rate of 13.00%; the monthly interest-only payments were converted to monthly interest and principal payments, (principal amortization of the greater of (i) 50% of excess cash flow from the properties collateralizing the Bridge Loan or (ii) $50) and a loan extension fee of $1,120 was paid. In connection with the modification of the terms of the Bridge Loan, we incurred an extraordinary loss of $1,345 during 2000. The extraordinary loss consisted of (i) the $1,120 extension fee and (ii) the write-off of unamortized deferred financing costs and expenses aggregating $225. On December 22, 2000, the term of the Lebanon First Mortgage Loan, secured by our outlet center in Lebanon, Tennessee, which was due to mature on December 31, 2000, was extended for a period of six months until June 30, 2001, with an additional three-month extension available if certain conditions were met. In consideration for the extension, the interest rate was increased by 1.25% to 30-day LIBOR plus 3.00% and the loan balance was reduced to $18,378 through a $1,000 principal payment. The Lebanon First Mortgage Loan was pre-payable at any time. The Lebanon First Mortgage Loan was repaid in full in March 2001 (see "2001 Sales Transactions" for additional information). The net proceeds from the December 22, 2000 Transactions were used to (i) pay off $125,000 of short-term indebtedness as described below; (ii) pay-down $3,500 of other indebtedness (the $1,000 principal reduction on the Lebanon First Mortgage Loan and a $2,500 principal reduction on a first mortgage loan on Phases II and III of the outlet center located in Bellport, New York), and (iii) pay the $1,120 extension fee on the Bridge Loan. The remainder of the proceeds was used (i) for general corporate purposes, including marketing and capital improvements programs and (ii) to fund development costs for Prime Outlets of Puerto Rico. We used $125,000 of the net proceeds from the December 22, 2000 Transactions for the repayment of (i) a $20,000 subordinated loan (the "Subordinated Loan") made by FBR Asset Investment Corporation that matured August 14, 2000, (ii) a $25,000 unsecured corporate line of credit from Mercantile which was due to mature on December 31, 2000, (iii) a $37,000 unsecured revolving loan (the "Unsecured Revolving Loan") from Nomura which was scheduled to mature on September 11, 2001 and (iv) the prepayment of a $43,000 term loan (the "Term Loan") from Greenwich which was scheduled to mature on December 10, 2001. In connection with the prepayment of the Unsecured Revolving Loan and the Term Loan, we incurred an extraordinary loss on the early extinguishment of debt aggregating $2,861 during 2000. The extraordinary loss consisted of (i) a $1,700 prepayment penalty and (ii) the write-off of unamortized deferred financing costs and expenses aggregating $1,161. We had been in default of the Subordinated Loan and such default had triggered certain cross-default provisions with respect to other of our debt facilities. In addition, we previously were not in compliance with financial covenants contained in certain of our debt facilities. As a result of the debt repayments and the various restructuring and extension agreements completed on December 22, 2000, we had cured or eliminated all financial covenant defaults under our recourse loan agreements as of December 31, 2000. See "Going Concern" for additional information. During 1999, we incurred an extraordinary loss on the early extinguishment of debt of $3,518, net of minority interests of $887. 2001 Debt Transactions In connection with the sales of Northgate Plaza, Prime Outlets at Silverthorne and certain land located in Camarillo, CA during 2001, we repaid mortgage indebtedness of $5,966, $18,078 and $6,227, respectively. In addition, net cash proceeds from these property sales were used to prepay an aggregate $10,924 of principal outstanding under our Mezzanine Loan. See Note 3 - "Property Dispositions" for additional information. On June 8, 2001, we, through affiliates, obtained a two-month extension through August 10, 2001 to the terms and maturity date of a $16,330 first mortgage loan secured by Prime Outlets at Edinburgh (the "Edinburgh Outlet Center") located in Edinburgh, Indiana. On June 29, 2001, we, through affiliates, completed a refinancing of this first mortgage loan. The new first mortgage loan (the "Edinburgh First Mortgage Loan") provides for an aggregate commitment up to $18,000 and is non-recourse to us. The Edinburgh First Mortgage Loan, which is secured by the Edinburgh Outlet Center, has a term of three years, requires monthly principal payments based upon a 15-year amortization schedule and is pre-payable at any time subject to certain prepayment and exit fees. The Edinburgh First Mortgage Loan bears interest at a floating rate based on six-month LIBOR plus 350 basis points, subject to an 8.00% minimum, and may be adjusted semi-annually with a maximum 1.0% increase or decrease per adjustment. As of December 31, 2001, the Edinburgh First Mortgage Loan bore interest at the minimum rate. At closing, $16,700 of the Edinburgh First Mortgage Loan was funded, resulting in net proceeds of $88 after repayment of the old first mortgage loan and closing costs. As of December 31, 2001, the remaining commitment provides for the funding of up to an additional $1,300 for leasing related capital expenditures at the Edinburgh Outlet Center. Prime/Estein Venture Refinancing Transactions On August 7, 2001, we, through affiliates, obtained an additional one-month extension to September 10, 2001 to the terms and maturity date of a $10,003 first mortgage loan secured by Prime Outlets at Birch Run (the "Birch Run Outlet Center") located in Birch Run, Michigan. The terms and maturity date of the $10,003 first mortgage loan had previously been extended to August 10, 2001. We and Estein, through affiliates, have 30% and 70% ownership interests, respectively, in the Prime/Estein Venture that indirectly owns the Birch Run Outlet Center. We completed a refinancing of loans aggregating $63,000 on the Birch Run Outlet Center on August 21, 2001. These loans which were refinanced were included in a "wrap-around" loan provided by us to the Prime/Estein Venture in connection with the November 19, 1999 sale of the Birch Run Project. The new first mortgage loan (the "Birch Run First Mortgage Loan") is in the amount of $63,000, is secured by the Birch Run Outlet Center, has a term of ten years, and requires monthly principal amortization based upon a 25-year schedule. The Birch Run First Mortgage Loan bears interest at an effective fixed-rate of 8.12%. Greenwich Capital Financial Products, Inc. provided the financing. The Prime/Estein Venture used the net proceeds from the Birch Run First Mortgage Loan to repay in full first mortgage loans and the "wrap-around" loan of $10,731 due to us, aggregating $63,000. Net proceeds to us, after payment of closing and other transaction costs, were $8,286. In connection with the refinancing transaction, we recorded a nonrecurring loss of $1,036 during the third quarter of 2001. Pursuant to Prime/Estein Venture-related documents to which affiliates of ours are parties, we are obligated to provide to, or obtain for, the Prime/Estein Venture fixed rate financing at an annual rate of 7.75%. As a result, each month during the term of the Birch Run First Mortgage Loan, we will be obligated to pay to the Prime/Estein Venture the difference between the cost of the financing at an annual effective rate of 8.12% and the cost of the financing at an annual rate of 7.75% (the "Interest Rate Subsidy"). The total of the payments to be made by us to the Prime/Estein Venture over the term of the Birch Run First Mortgage Loan will be $2,723. During the third quarter of 2001, we recorded a non-recurring loss of $1,882 in other charges representing the net present value of the Interest Rate Subsidy. On October 19, 2001, we, through affiliates, completed the refinancing of a $32,500 first mortgage loan secured by Prime Outlets at Williamsburg (the "Williamsburg Outlet Center"), an outlet center located in Williamsburg, Virginia. The new first mortgage loan (the "Williamsburg Mortgage Loan") has a principal amount of $32,500, is secured by the Williamsburg Outlet Center, and has a term of ten years. The Williamsburg Mortgage Loan requires monthly principal amortization based upon a 25-year schedule and bears interest at a fixed rate of 7.69%. Prudential Mortgage Capital Company, LLC provided the financing. We and Estein, through affiliates, own 30% and 70% interests, respectively, in the Prime/Estein Venture that indirectly owns the Williamsburg Outlet Center. In connection with the refinancing transaction, the Prime/Estein Venture paid in full a $10,000 promissory note (of which Estein's obligation was $7,000 and ours was $3,000) to us. Net proceeds to us after payment of closing and other transaction costs were $6,237. The net proceeds from this refinancing transaction were used to prepay $5,997 of the Mezzanine Loan. Pursuant to Prime/Estein Venture-related agreements to which affiliates of ours are parties, we are obligated to provide to, or obtain for, the Prime/Estein Venture fixed rate financing at an annual rate of 7.75%. As a result, each month during the term of the Williamsburg Mortgage Loan, the Prime/Estein Venture will be obligated to pay to us the difference between the cost of such financing at an assumed annual rate of 7.75% and the actual cost of such financing at an annual rate of 7.69%. Going Concern Our liquidity depends on cash provided by operations and potential capital raising activities such as funds obtained through borrowings, particularly refinancings of existing debt, and cash generated through asset sales. Although we believe that estimated cash flows from operations and potential capital raising activities will be sufficient to satisfy our scheduled debt service obligations and sustain our operations for the next year, there can be no assurance that we will be successful in obtaining the required amount of funds for these items or that the terms of the potential capital raising activities, if they should occur, will be as favorable as we have experienced in prior periods. During 2002, we are required to make certain additional mandatory principal pay-downs to our Mezzanine Loan aggregating $25,367 from net proceeds from asset dispositions or other capital transactions within specified periods pursuant to the terms of a modification to the original terms of the Mezzanine Loan (see "Mezzanine Loan Modification" for additional information). Although we are in the process of seeking to generate additional liquidity though new financings and the sale of assets, there can be no assurance that we will be able to complete asset dispositions or other capital transactions within the specified periods or that such asset dispositions or other capital transactions, if they should occur, will generate sufficient proceeds to make the additional mandatory pay-downs of the Mezzanine Loan. Any failure to satisfy these mandatory principal prepayments within the specified time periods indicated will constitute a default under the Mezzanine Loan. As of December 31, 2001, we were in compliance with all financial debt covenants under our recourse loan agreements. However, there can be no assurance that we will be in compliance with our financial debt covenants in future periods since our 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 our revenue, and risks associated with refinancing our current debt obligations or obtaining new financing under terms less favorable than we have experienced in prior periods. See "Defaults on Certain Non-recourse Mortgage Indebtedness" and "Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated Partnerships" for additional information. Based on our current financial projections, we believe we will not be in compliance with respect to debt service coverage ratios under certain debt facilities during 2002. The debt facilities are fixed rate tax-exempt revenue bonds (the "Affected Fixed Rate Bonds") in the amount of $18,390 and a recourse bridge loan (the "Bridge Loan") in the amount of $111,375. In the event of non-compliance, the holders of the Affected Fixed Rate Bonds may elect to put such obligations to us at a price equal to par plus accrued interest and the Bridge Loan lender may elect to accelerate its maturity. Additionally, noncompliance or defaults with respect to debt service coverage ratios under these debt facilities may trigger certain cross-default provisions with respect to other debt facilities, including our Mezzanine Loan. We intend to meet with the affected lenders to discuss potential resolutions including waiver or amendment with respect to such non-compliance provisions. If we are unable to reach satisfactory resolution with the affected lenders, we will look to (i) obtain alternative financing from other financial institutions, (ii) sell the project or projects where non-compliance is likely to occur or (iii) explore other possible capital transactions in order to generate cash to repay the amounts outstanding under such debt facilities. There can be no assurance that we will obtain a satisfactory resolution with our affected lenders or that we will be able to complete asset sales or other capital raising activities sufficient to repay the amounts outstanding under such debt facilities. These conditions raise substantial doubt about our ability to continue as a going concern. The financial statements contained herein 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 these uncertainties. Mezzanine Loan Modification Effective January 31, 2002, we entered into a modification to the original terms of our Mezzanine Loan previously obtained in December 2000. The Mezzanine Loan amendment (the "Amendment"), among other things, (i) reduces required monthly principal amortization for the period February 1, 2002 through January 1, 2003 ("Year 2") from $1,667 to $800, which may be further reduced to a minimum of $500 per month under certain limited circumstances, provided no defaults exist under the Mezzanine Loan and certain other conditions have been satisfied at the Lender's sole discretion, (ii) requires certain mandatory principal prepayments from net proceeds from asset dispositions or other capital transactions pursuant to the schedule set forth below and (iii) reduces the threshold level at which excess cash flow from operations must be applied to principal pay-downs, primarily resulting from a reduction in the available working capital reserves. Additionally, the Amendment (i) increased the interest rate from LIBOR plus 9.50% to LIBOR plus 9.75% (rounded up to nearest 0.125% with a minimum rate of 14.75%), (ii) changed the Mezzanine Loan maturity date from December 31, 2003 to September 30, 2003 and (iii) required a 0.25% fee, which was paid at the time of the modification, on the outstanding principal balance. The Amendment also requires additional Year 2 monthly payments of $250 (the "Escrowed Funds") into an escrow account controlled by the Lender. Provided certain conditions are satisfied in the Lender's sole discretion, the Escrowed Funds may be available to us for certain limited purposes. The Escrowed Funds not used at the end of each quarter, subject to certain exceptions, will be applied by the Lender to amortize the Mezzanine Loan. The required monthly principal amortization of $2,333 commencing on February 1, 2003, through the new maturity date of September 30, 2003, remains unchanged. The Amendment also requires, in lieu of the original requirements, additional mandatory principal prepayments with net proceeds from asset dispositions, excluding the January 2002 sale of a 70% interest in Prime Outlets at Hagerstown (see "2002 Sales Transactions" for additional information), or other capital transactions of not less than (i) $8,906 by May 1, 2002, (ii) $24,406, inclusive of the $8,906, by July 1, 2002 (subject to extension to October 31, 2002 provided certain conditions are met to the Lender's satisfaction) and (iii) $25,367, inclusive of the $24,406, by November 1, 2002. In addition to each principal prepayment, we must also pay any interest, including deferred interest, accrued thereon and the additional fees provided for in the Mezzanine Loan. Any failure to satisfy these mandatory principal prepayments or other payments within the specified time periods indicated will constitute a default under the Mezzanine Loan. The Mezzanine Loan was also amended on January 11, 2002 to, among other things, (i) release the partnership interests in Outlet Village of Hagerstown Limited Partnership ("Hagerstown LP") as collateral under the Mezzanine Loan, (ii) release Hagerstown LP of all obligations under the Mezzanine Loan and (iii) add Hagerstown Land, L.L.C., a Delaware limited liability company, as a guarantor under the Mezzanine Loan. Debt Service Obligations Our aggregate indebtedness, as adjusted for the Amendment to the Mezzanine Loan and excluding (i) unamortized debt premiums of $11,051, (ii) mortgage indebtedness aggregating $58,079 on Prime Outlets at Hagerstown and (iii) non-recourse mortgage indebtedness aggregating $33,235 on Prime Outlets at Conroe and Prime Outlets at Jeffersonville II was $855,102 (the "Adjusted Indebtedness") at December 31, 2001. See Note 3 - "Property Dispositions" and "Defaults on Certain Non-recourse Mortgage Indebtedness" for additional information. At December 31, 2001, the Adjusted Indebtedness had a weighted-average maturity of 3.3 years and bore contractual interest at a weighted-average rate of 9.05% per annum. At December 31, 2001, $756,751, or 88.5%, of the Adjusted Indebtedness bore interest at fixed rates and $98,351 or 11.5%, of the Adjusted Indebtedness bore interest at variable rates. We utilize derivative financial instruments to manage our interest rate risk associated with variable rate debt. As of December 31, 2001, our scheduled principal payments during 2002 for the Adjusted Indebtedness aggregated $48,479. The 2002 scheduled principal payments include (i) a recourse first mortgage loan of $2,972 on Western Plaza (the "Western Plaza First Mortgage Loan"), a community center located in Knoxville, Tennessee, which currently matures on April 30, 2002 but may be extended, subject to an additional principal pay-down of $350, an additional six months to October 31, 2002 and (ii) additional mandatory principal pay-downs on the Mezzanine Loan aggregating $25,367 (see "Mezzanine Loan Modification" for additional information). Certain of our debt obligations, including the Mezzanine Loan and fixed-rate bonds aggregating $7,000 secured by a second mortgage on Western Plaza, contain cross-default provisions that would be triggered in the event of a default under the Western Plaza First Mortgage Loan. In the event such cross-default provisions were triggered, the holders of the Mezzanine Loan could elect to accelerate such debt and the holders of the bonds could elect to put such obligations to us at a price equal to par plus accrued interest. See "Going Concern" for additional information. The scheduled principal maturities of the Adjusted Indebtedness and related average interest rates by year of maturity as of December 31, 2001 were as follows: - -------------------------------------------------------------------------------- Average Interest Principal Years Ended December 31, Rate Maturities - -------------------------------------------------------------------------------- 2002 12.78% $ 48,479 2003 9.22% 501,444 2004 7.75% 22,223 2005 7.92% 51,147 2006 8.76% 121,931 Thereafter 7.74% 109,878 ----- --------- 9.05% $ 855,102 ===== ========= ================================================================================ Guarantees of Indebtedness of Others We are a guarantor or otherwise obligated with respect to an aggregate of $12,435 of the indebtedness of Horizon Group Properties, Inc. and its affiliates ("HGP"), including $10,000 of obligations under a secured credit facility (the "HGP Secured Credit Facility"). HGP is a publicly traded company that was formed in connection with our merger with Horizon Group, Inc. in June, 1998. The HGP Secured Credit Facility bore interest at a rate of 30-day LIBOR plus 1.90%, was collateralized by five properties located throughout the United States and matured on July 11, 2001. On August 2, 2001, HGP announced it had refinanced one of the properties in the HGP Secured Credit Facility and used the proceeds from the new first mortgage loan to reduce the principal balance of the HGP Secured Credit Facility. Simultaneously, HGP obtained an extension to the remaining principal balance of approximately $33,500, including a 2% extension fee, on the HGP Secured Credit Facility through July 11, 2002. Commencing on the extension date, the HGP Secured Credit Facility bears interest at a rate of 30-day LIBOR (but not less than 4.10%) plus 3.95%, requires monthly principal amortization of $225, and is collateralized by four properties located throughout the United States. We confirmed our obligations as guarantor with respect to the HGP Secured Credit Facility in connection with the extension and partial pay-down. No claims have been made against our guaranty by the HGP Secured Credit Facility lender. On October 11, 2001, HGP announced that it was in default under two loans with an aggregate principal balance of $45,500 secured by six of its other outlet centers. Such defaults are not defaults under the HGP Secured Credit Facility or any other facility guaranteed by us. We, through affiliates, hold a 51% interest in the owner of Phases II and III of an outlet center located in Bellport, New York (the "Bellport Outlet Center"). We account for our interest in Phases II and III of the Bellport Outlet Center in accordance with the equity method of accounting. On May 1, 2001, the recourse first mortgage loan on Phases II and III of the Bellport Outlet Center of $7,795 matured. On May 21, 2001, we, on behalf of the owner, made a principal payment of $2,295 to the lender in exchange for a modification to the terms and a one-year extension of the maturity of this mortgage indebtedness. The outstanding balance of the first mortgage loan was $5,500 as of December 31, 2001. We plan to sell this property to repay the outstanding balance in full. If we are unable to consummate a sale of the property, we will attempt to either refinance or extend the maturity of such indebtedness on terms acceptable to us. There can be no assurance that we will be successful in obtaining the required amount of funds for the maturing indebtedness or that the terms of any potential sale, refinancing or extension of the maturity will be as favorable as we have experienced in prior periods or otherwise acceptable to us. As of December 31, 2001, the carrying value of our investment in Phases II and III of the Bellport Outlet Center was $1,689, which is included in investments in unconsolidated partnerships in the Consolidated Balance Sheet. 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. We held a small minority interest in the joint venture but had no obligation or commitment with respect to the post-closing operations of the Dole Cannery project. On August 15, 2000, we exercised our option under the operating agreement of the joint venture and transferred our entire interest in the joint venture to a Castle & Cooke subsidiary. Defaults on Certain Non-recourse Mortgage Indebtedness During 2001, certain of our subsidiaries suspended regularly scheduled monthly debt service payments on two non-recourse mortgage loans aggregating $33,235 as of December 31, 2001. These non-recourse mortgage loans which are held by New York Life Investment LLC ("New York Life") are cross-collateralized by Prime Outlets at Jeffersonville II, located in Jeffersonville, Ohio, and Prime Outlets at Conroe, located in Conroe, Texas. Effective January 1, 2002, New York Life foreclosed on Prime Outlets at Conroe. We remain in discussions with New York Life regarding the transfer of our ownership interest in Prime Outlets at Jeffersonville II. During 2001, excess cash flow from the operations of these centers was utilized for debt service on the two non-recourse loans. Accordingly, we believe the foreclosure sale of Prime Outlets at Conroe and the potential transfer of our ownership interest in Prime Outlets at Jeffersonville II will not have a material impact on our results of operations or financial condition. Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated Partnerships Two mortgage loans related to projects in which we, through subsidiaries, indirectly own joint venture interests have matured and are in default. The mortgage loans, at the time of default, were (i) a $10,389 first mortgage loan on Phase I of the Bellport Outlet Center, held by Union Labor Life Insurance Company ("Union Labor"); and (ii) a $13,338 first mortgage loan on Oxnard Factory Outlet, an outlet center located in Oxnard, California, held by Fru-Con. An affiliate of ours has a 50% ownership interest in the partnership which owns Phase I of the Bellport Outlet Center. Fru-Con and us are each a 50% partner in the partnership that owns the Oxnard Factory Outlet. Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center and a receiver was appointed March 27, 2001 by the court involved in the foreclosure action. Effective May 1, 2001, a manager hired by the receiver began managing and leasing Phase I of the Bellport Outlet Center. We continue to negotiate the terms of a transfer of our ownership interest in Oxnard Factory Outlet to Fru-Con. We do not manage or lease Oxnard Factory Outlet. We believe neither of these mortgage loans is recourse to us. It is possible, however, that either or both of the respective lenders will, after completing its foreclosure action, file a lawsuit seeking to collect from us the difference between the value of the mortgaged property and the amount due under the loan. If such an action is brought, the outcome, and our ultimate liability, if any, cannot be predicted at this time. In addition, we are currently not receiving, directly or indirectly, any cash flow from Oxnard Factory Outlet and were not receiving any cash flow from Phase I of the Bellport Outlet Center prior to the loss of control of such project. We account for our interests in (i) Phases I of the Bellport Outlet Center and (ii) the Oxnard Factory Outlet in accordance with the equity method of accounting. As of December 31, 2001, the carrying value of our investment in these properties was $0. Therefore, we do not believe the existing defaults under these loans or any related foreclosures on the mortgaged prperties will have a material impact on our results of operations or financial condition. Note 7 -- Minority Interests In conjunction with the formation of the Operating Partnership and us, 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 our merger with Horizon Group, Inc.. Subject to certain conditions, each Common Unit held by a Limited Partner may be exchanged for one share of Common Stock or, at our option, cash equal to the fair market value of a share of Common Stock at the time of exchange. During 2001, no Common Units were exchanged for shares of Common Stock. During 2000 and 1999, 29,296 and 471,923 Common Units, respectively, were exchanged for shares of Common Stock. As of December 31, 2001, 10,810,912 Common Units were issued and outstanding. Minority interests also includes interests in two property partnerships that are not wholly owned by the Company. During the years ended December 31, 2001, 2000, and 1999, expenses totaling $1,981, $2,928, and $11,752, respectively, related solely to our operation were allocated only to the common shareholders. Such allocation is consistent with the federal and state tax treatment of these expenses. During the years ended December 31, 2001 and 2000, the loss allocated to minority interests totaled $408 and $738, respectively. During the year ended December 31, 1999, income allocated to minority interests totaled $2,339, net of an $887 allocation of extraordinary losses. In addition, during 1999 cash distributions and losses allocated to minority interests reduced the minority interests' balance related to Common Units to zero. After reducing the minority interests' balance to zero, cash distributions, if any, related to Common Units are treated as income allocated to minority interests. Note 8 -- Shareholders' Equity We are 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, 2001, 43,577,916 shares of common stock, 2,300,000 shares of Series A Senior Preferred Stock and 7,828,125 shares of Series B Convertible Preferred Stock were issued and outstanding. The Series A 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, if declared, on the Series A Senior Preferred Stock are payable quarterly in the amount of $2.625 per share per annum. Dividends, if declared, 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, 2001, there were 9,363,786 shares of Common Stock reserved for future issuance upon conversion of the Series B Convertible Preferred Stock. We have the right to redeem the Series A 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, we entered into an agreement providing for the repurchase of all of our 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, we 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, we repurchased the remaining 1,063,636 outstanding shares of our Series C Preferred Stock for an aggregate purchase price of $10,636 on September 29, 1999. During the year ended December 31, 1999, a redemption discount of $13,388 representing the excess of the carrying amount of the Series C Preferred Stock over its redemption amount is reflected in the Consolidated Statements of Operations as a loss allocated to preferred shareholders. To qualify as a REIT for federal income tax purposes, we are required to pay distributions to our common and preferred shareholders of at least 90% of our REIT taxable income in addition to satisfying other requirements. Although we intend to make necessary distributions to remain qualified as a REIT under the Code, we also intend to retain such amounts as we consider necessary from time to time for our capital and liquidity needs. Our current policy is to pay distributions only to the extent necessary to maintain our status as a REIT for federal income tax purposes. Based on our current federal income tax projections for 2002, we do not expect to pay any distributions on our Senior Preferred Stock, Series B Convertible Preferred Stock, common stock or common units of limited partnership interest in the Operating Partnership during 2002. We are currently in arrears on nine quarters of preferred stock distributions due February 15, 2000 through February 15, 2002, respectively. We are prohibited from paying dividends or distributions except to the extent necessary to maintain our REIT status under the terms of our Mezzanine Loan (see Note 6 - "Bonds and Notes Payable" for additional information). In addition, we may not make distributions to our common shareholders or our holders of common units of limited partnership interests in the Operating Partnership unless we are current with respect to distributions to our preferred shareholders. As of December 31, 2001, unpaid dividends for the period beginning on November 16, 1999 through December 31, 2001 on the Series A Senior Preferred Stock and Series B Convertible Preferred Stock aggregated $12,830 and $35,349, respectively. The annualized dividends on our 2,300,000 shares of Series A Senior Preferred Stock and 7,828,125 shares of Series B Convertible Preferred Stock outstanding as of December 31, 2001 are $6,037 ($2.625 per share) and $16,635 ($2.125 per share), respectively. Our Amended and Restated Articles of Incorporation state, "whenever dividends payable on the Preferred Stock shall be in arrears for six or more consecutive quarterly periods, then the holders of Preferred Stock, voting together as a single class, shall be entitled at the next meeting of stockholders or at any special meeting called for such purpose, to elect two additional directors to the Company's Board of Directors until the full dividends accumulated on all outstanding shares of the Preferred Stock have been paid in full or declared and a sum of money sufficient for the prepayment thereof set aside for payment." On December 6, 2001, a meeting (the "Special Meeting") of the holders of shares of our Series A Senior Preferred Stock and Series B Convertible Preferred Stock, (together, the "Preferred Stock") was held for the purpose of electing two additional directors to our Board of Directors. The Special Meeting was adjourned to allow sufficient time to tabulate the votes. On December 11, 2001, the Special Meeting was reconvened and Howard Amster and Robert H. Kanner were elected to serve as members of the Board of Directors. Note 9 -- Stock Incentive Plans Under various plans, we may grant stock options and other awards to executive officers, other key employees, outside directors and consultants. The exercise price for stock options granted is no less than the fair market value of our common stock on the date of grant. In general, stock options are fully vested on the date of grant and have a term of 10 years. In certain cases stock options granted become exercisable over periods up to six years. During 2001, we granted options to an executive officer to purchase 300,000 shares of common stock at $2.00 per share. These options, which have a term of 10 years, were fully vested on the date of grant. During 2000, we granted options to executive officers and other key employees to purchase 1,087,600 shares of common stock at $2.00 per share. These options, which have a term of 10 years, were 50% vested as of December 31, 2000 and fully vested on June 30, 2001. Additionally, during 2000, we awarded 180,000 shares of restricted common stock and granted options to outside directors to purchase 420,0000 shares of common stock at $1.69 per share. The restricted common stock was fully vested as of September 1, 2000. The options, which have a term of 10 years, vested pro-ratably on a monthly basis from May 1, 2000 through February 1, 2001. During 1999, we 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, we 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. We have 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 we had elected to recognize compensation based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, unaudited pro forma net income (loss) and earnings per share would have been as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Loss before extraordinary loss $ (98,209) $ (139,910) $ (31,376) Extraordinary loss - (4,206) (3,518) ---------- ---------- --------- Net loss $ (98,209) $ (144,116) $ (34,894) ========== ========== ========= Net loss applicable to common shares $ (120,881) $ (166,788) $ (44,856) ========== ========== ========= Basic loss per common share: Loss before extraordinary loss $ (2.77) $ (3.73) $ (0.96) Extraordinary loss - (0.10) (0.08) ---------- ---------- --------- Net loss $ (2.77) $ (3.83) $ (1.04) ========== ========== ========= Diluted loss per common share: Loss before extraordinary loss $ (2.77) $ (3.73) $ (1.22) Extraordinary loss - (0.10) (0.08) ---------- ---------- --------- Net loss $ (2.77) $ (3.83) $ (1.30) ========== ========== ========= ====================================================================================================================================
The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Risk-free interest rate 5.0% 5.0% 6.4% Dividend yield 0.0% 0.0% 21.0% Volatility factor 0.37 0.87 0.37 Weighted average life (in years) 10.0 10.0 10.0 ====================================================================================================================================
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our 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 our stock option plans for the years ended December 31 are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ 2001 2000 1999 ------------------------------ ------------------------------ ------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ------------------------------------------------------------------------------------------------------------------------------------ Beginning of year 4,131,056 $ 11.84 3,280,317 $ 14.12 3,811,067 $ 14.90 Granted 300,000 2.00 1,507,600 1.91 85,000 9.85 Cancelled (42,300) 4.09 (656,861) 12.13 (615,750) 18.37 --------- ------- --------- ------- --------- -------- End of year 4,388,756 $ 9.49 4,131,056 $ 9.98 3,280,317 $ 14.12 ========= ======= ========= ======= ========= ======== Exercisable - end of year 3,998,756 $ 10.10 3,276,987 $ 11.84 2,900,314 $ 14.22 ========= ======= ========= ======= ========= ======== ====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------ Options Outstanding Options Exercisable ------------------------------------------ --------------------------------- Weighted Weighted Weighted Average Average Average Remaining Exercise Exercise Range of Exercise Price Shares Life in Years Price Shares Price - ------------------------------------------------------------------------------------------------------------------------------------ $1.69 to $2.00 1,725,250 6.1 $ 1.92 1,375,250 $ 1.90 $8.50 60,000 7.6 8.50 60,000 8.50 $11.15 to $13.09 1,962,606 3.8 12.50 1,962,606 12.50 $13.60 to $14.19 262,490 5.8 13.91 222,490 13.85 $19.00 30,000 2.2 19.00 30,000 19.00 $23.53 13,788 4.3 23.53 13,788 23.53 $24.55 to $26.57 334,622 0.3 26.11 334,622 26.11 --------- --- ------ --------- ------- Total 4,388,756 4.6 $ 9.49 3,998,756 $ 10.10 ========= === ====== ========= ======= ====================================================================================================================================
The weighted fair value of options granted during the years ended December 31, 2001, 2000 and 1999 was $0 per share, $0 per share and $0.96 per share, respectively. Under our various plans there were 1,170,986 and 1,428,686 shares reserved for future grants at December 31, 2001 and 2000, respectively. Note 10 -- Lease Agreements We sold Prime Outlets at Hagerstown to the Prime/Estein Venture on January 11, 2002 and commencing on that date account for our remaining 30% ownership interest in accordance with the equity method of accounting (see "Note 3 - "Property Dispositions" for additional information). Non-recourse mortgage loans on Prime Outlets at Conroe and Prime Outlets at Jeffersonville II are cross-collateralized. Effective January 1, 2002, the lender foreclosed on Prime Outlets at Conroe. The lender and we remain in discussions regarding the transfer of our ownership interest in Prime Outlets at Jeffersonville II. See Note 6 - "Bonds and Notes Payable" for additional information. Accordingly, the following disclosures exclude the lease agreements related to these properties. We are the lessors of retail and office space under operating leases with lease terms that expire from 2002 to 2026. 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, 2001 were as follows: - -------------------------------------------------------------------------------- Years Ended December 31, - -------------------------------------------------------------------------------- 2002 $ 117,910 2003 90,904 2004 66,624 2005 45,196 2006 28,445 Thereafter 65,434 --------- $ 414,513 ========= ================================================================================ We lease certain land, buildings, and equipment under various noncancelable operating lease agreements. Rental expense for operating leases was $1,782, $2,988, and $3,699 for the years ended December 31, 2001, 2000, and 1999, 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, 2001 consisted of the following: - -------------------------------------------------------------------------------- Years Ended December 31, - -------------------------------------------------------------------------------- 2002 $ 1,668 2003 1,250 2004 392 2005 286 2006 216 Thereafter 5,376 -------- $ 9,188 ======== ================================================================================ Note 11-- Special Charges During the third quarter of 2001, we determined that certain events and circumstances had occurred, including reduced occupancy and limited leasing success, that indicated that four of our wholly owned properties were permanently impaired. As a result, we recorded a third quarter provision for asset impairment aggregating $63,026, representing the write-down of the carrying value of these properties to their estimated fair value in accordance with the requirements of SFAS No. 121. During 2000, we established a formal plan to sell three of our wholly-owned properties and, accordingly, reclassified their respective carrying values to assets held for sale. In accordance with the requirements of SFAS No. 121, we incurred a provision for asset impairment of $28,047 to reduce the carrying value of these properties classified as held for sale to their estimated sales value, less cost to dispose. The aggregate carrying value of these properties as of December 31, 2000 was $43,230. Total revenues and expenses for the operating properties classified as held for sale were $6,354 and $6,697, respectively, for the year ended December 31, 2000. Additionally, we also determined that certain events and circumstances had occurred during 2000, including reduced occupancy and limited leasing success, which indicated that four wholly owned properties and two joint venture properties were permanently impaired. Furthermore, our results of operations for 2000 include a provision for asset impairment aggregating $40,616 representing the write-down of the carrying values of these permanently impaired properties to their estimated fair value in accordance with SFAS No. 121. The operating results for our Designer Connection outlet stores are reflected in loss on Designer Connection in the Consolidated Statements of Operations. We ceased operations of our Designer Connection outlet stores in 2000. On April 12, 2000, we announced that we had been unable to conclude an agreement to transfer ownership of ours wholly-owned e-commerce subsidiary, primeoutlets.com inc., also known as eOutlets.com, to a management-led investor group comprised of eOutlets.com management and outside investors. Effective April 12, 2000, eOutlets.com ceased all operations and on November 6, 2000 filed for bankruptcy under Chapter 7. In connection with the discontinuance of eOutlets.com, we incurred a non-recurring loss of $14,703 which includes (i) the write-off of $3,497 of costs capitalized during 1999 and (ii) $11,206 of costs incurred during the year ended December 31, 2000. In addition, during 1999 we incurred expenses of $3,500 related to organizational and start-up expenditures of eOutlets.com which are reflected in corporate general and administrative expenses in the Consolidated Statements of Operations. When accounting for 1999, we determined that certain events and circumstances had occurred during 1999, including limited leasing success and revised occupancy estimates, which indicated two of our outlet centers (Prime Outlets at Jeffersonville II and Prime Outlets at Oxnard) were permanently impaired. Accordingly, the results of operations for 1999 include a provision for asset impairment of $15,842 representing the write-down of the carrying values of these assets to their estimated fair value in accordance with SFAS No. 121. Additionally, when accounting for 1999, we recorded a provision for abandoned projects of $16,039 based on management's determination that as of December 31, 1999, our pre-development efforts associated with certain projects were no longer viable. The operating results for our Designer Connection outlet stores are reflected in loss on Designer Connection in the Consolidated Statements of Operations for all periods presented. When accounting for 1999, because we decided to discontinue the operations of our Designer Connection outlet stores, we recorded non-recurring charges aggregating $3,659 including (i) $1,659 related to the write-off of costs associated with a web-site for Designer Connection and (ii) $2,000 of costs to cover the expected cash and non-cash costs of the closure. The cash and non-cash costs of the closure primarily consisted of (i) employee termination costs, (ii) lease obligations, and (iii) the write-down of assets to their net realizable value. The operations of Designer Connection outlet stores ceased in 2000. Note 12 -- Risk Management Activities Interest Rate Risk In the ordinary course of business, we are exposed to the impact of interest rate changes and, therefore, employ established policies and procedures to manage our exposure to interest rate changes. We use a mix of fixed and variable rate debt to (i) limit the impact of interest rate changes on our results from operations and cash flows and (ii) lower our overall borrowing costs. In certain circumstances, we use derivative financial instruments to manage interest rate risk associated with our variable rate debt. In such cases, we purchase interest rate protection agreements, such as caps, which are designated as hedges for underlying variable rate debt obligations. We do not hold derivative financial instruments for trading purposes. The interest rate caps specifically limit our interest costs with an upper limit on the underlying interest rate index. The cost of such contracts are included in deferred charges and are being amortized as a component of interest expense over the life of the contracts. Amounts earned from interest rate protection contracts, if any, are recorded as a reduction of interest expense. We are exposed to credit losses in the event of counterparty nonperformance, but do not anticipate any such losses based on the creditworthiness of the counterparties. On December 22, 2000, we purchased an interest rate cap with a notional amount of $90,000 to hedge our Mezzanine Loan that was funded on the same date. The interest rate cap has a three-year term with a strike price of 8.00% based on 30-day LIBOR. The notional amount of this interest rate cap amortizes monthly based on estimated principal repayments on the Mezzanine Loan. Additionally, on December 22, 2000, we also purchased an interest rate cap with a notional amount of $20,000 to hedge our $20,000 Puerto Rico First Mortgage Loan that was funded on the same date. The interest rate cap has a three-year term with a strike price of 8.00% based on 30-day LIBOR. See Note 6 - "Bonds and Notes Payable" for additional information. Although derivative financial instruments are an important component of our interest rate management program, their incremental effect on interest expense for the years ended December 31, 2001, 2000 and 1999 was not material. Economic Conditions Most of our tenants' leases contain provisions that somewhat mitigate the impact of inflation. Such provisions include clauses providing for increases in base rent and clauses enabling us to receive percentage rentals based on merchants' gross sales. Most of the leases require tenants to pay their proportionate share of all operating expenses, including common area maintenance, real estate taxes and promotion, thereby reducing our exposure to increased costs and operating expenses resulting from inflation. Note 13 -- Legal Proceedings Except as described below, neither we nor any of our properties are currently subject to any material litigation nor, to our knowledge, is any material or other litigation threatened against us, other than routine litigation arising in the ordinary course of business, some of which is expected to be covered by liability insurance and all of which collectively is not expected to have a material adverse effect on our consolidated financial statements. Dinnerware Plus Holdings, Inc., which operates under the trade name Mikasa, and affiliates (collectively, the "Mikasa Plaintiffs") filed a lawsuit against the Company and various affiliates in Superior Court of New Jersey on March 29, 2001. The Mikasa Plaintiffs assert a number of causes of action in which they allege that the Company and its affiliates breached various provisions in the Mikasa Plaintiffs' leases and, as a result, overcharged the Mikasa Plaintiffs for common area maintenance and similar charges ("CAM") and promotion fund charges at various centers where the Mikasa Plaintiffs are tenants. The Company filed a motion to dismiss the complaint on behalf of the Company's affiliates who entered into leases with the Mikasa Plaintiffs, based on lack of jurisdiction. The motion was granted, but the Mikasa Plaintiffs filed a motion for reconsideration, upon which the court has not ruled. The remaining defendants, Prime Retail, Inc. and Prime Retail, L.P., have answered the complaint. The outcome of this lawsuit, and the ultimate liability of the defendants, if any, cannot be predicted at this time. On July 6, 2001, affiliates of the Company brought an action in the Circuit Court for Washington County, Maryland against Melru Corporation, which operates under the trade name Jones New York, alleging that Melru Corporation owed past due rent in connection with 43 leases. Melru Corporation, in response to the collection action filed by certain affiliates of the Company, filed on October 15, 2001 several counterclaims against the Company and its affiliates in which it alleges that the Company and its affiliates overcharged Melru Corporation for CAM and promotion fund charges. In addition, Melru Corporation alleges that an affiliate of the Company fraudulently induced Melru Corporation to enter into a lease and that another affiliate violated its lease with Melru Corporation by failing to maintain required occupancy levels at the shopping center it owns. The Company and its affiliates have not filed their response to the Melru Corporation counterclaims. The outcome of the Melru Corporation counterclaims, and the ultimate liability of the Company and its affiliates, if any, cannot be predicted at this time. In addition to the Mikasa Plaintiffs and Melru Corporation, other tenants, including Design's Inc. and Brown Group Retail, Inc., in the Company's affiliates' outlet centers have made or may make allegations concerning overcharging for CAM and promotion fund charges similar to those made by the Mikasa Plaintiffs and Melru Corporation. No other such tenant, however, has filed a suit. It is too early to make any predictions as to whether the Company or its affiliates may be found liable with respect to such other tenants, or to predict damages should liability be found. The Company and its affiliates were defendants in a lawsuit filed by Accrued Financial Services ("AFS") on August 10, 1999 in the Circuit Court for Baltimore City. The lawsuit was removed to United States District Court for the District of Maryland (the "U.S. District Court") on August 20, 1999. AFS claimed that certain tenants had assigned to AFS their rights to make claims under leases such tenants had with affiliates of the Company and alleged that the Company and its affiliates overcharged such tenants for common area maintenance charges and promotion fund charges. The U.S. District Court dismissed the lawsuit on June 19, 2000. AFS appealed the U.S. District Court's decision to the United States Court of Appeals for the Fourth Circuit. Briefs were submitted and oral argument before a panel of judges of the United States Court of Appeals for the Fourth Circuit was held on October 30, 2001, during which the panel of judges requested further briefing of certain issues. The Fourth Circuit received the briefs, but has not yet ruled. The Company believes that it has acted properly and will continue to defend this lawsuit vigorously. The outcome of this lawsuit, and the ultimate liability of the defendants, if any, cannot be predicted at this time. Affiliates of the Company routinely file lawsuits to collect past due rent from, and to evict, tenants which have defaulted under their leases. There are currently dozens of such actions pending. In addition to defending against the Company's affiliates' claims and eviction actions, some tenants file counterclaims against the Company's affiliates. A tenant who files such a counterclaim typically claims that the Company's affiliate which owns the outlet center in question has defaulted under the tenant's lease, has overcharged the tenant for CAM and promotion fund charges, or has failed to maintain or market the outlet center in question as required by the lease. Usually such counterclaims are without merit. In response to such counterclaims the Company's affiliates usually continue to pursue their collection or eviction actions and defend against the counterclaims. Despite the fact that the Company and its affiliates believe such counterclaims are without merit and defend against them vigorously, the outcome of all such counterclaims, and thus the liability, if any, of the Company and its affiliates, cannot be predicted at this time. Since October 13, 2000 there have been eight complaints filed in the United States District Court for the District of Maryland against the Company and five individual defendants. The five individual defendants are Glenn D. Reschke, the President, Chief Executive Officer and Chairman of the Board of Directors of the Company; William H. Carpenter, Jr., the former President and Chief Operating Officer and a former director of the Company; Abraham Rosenthal, the former Chief Executive Officer and a former director of the Company; Michael W. Reschke, the former Chairman of the Board and a current director of the Company; and Robert P. Mulreaney, the former Executive Vice President - Chief Financial Officer and Treasurer of the Company. The complaints have been brought by alleged stockholders of the Company, individually and purportedly as class actions on behalf of all other stockholders of the Company. The complaints allege that the individual defendants made statements about the Company that were in violation of the federal securities laws. The complaints seek unspecified damages and other relief. Lead plaintiffs and lead counsel were subsequently appointed. A consolidated amended complaint captioned The Marsh Group, et al. v. Prime Retail, Inc., et al. dated May 21, 2001 was filed. The Company and the individual defendants filed a motion to dismiss the complaint, which was granted on November 8, 2001. The plaintiffs appealed the matter to the Fourth Circuit. The appeal is now pending. The Company believes that the claims are without merit and will defend vigorously against the appeal. The outcome of this lawsuit, and the ultimate liability of the defendants, if any, cannot be predicted at this time. Several entities (the "eOutlets Plaintiffs") have filed or stated an intention to file lawsuits (collectively, the "eOutlets Lawsuits") against the Company and its affiliates. The eOutlets Plaintiffs seek to hold the Company and its affiliates responsible under various legal theories for liabilities incurred by primeoutlets.com, inc., also known as eOutlets, including the theories that the Company guaranteed the obligations of eOutlets and that the Company was the "alter-ego" of eOutlets. primeoutlets.com inc. is also a defendant in some, but not all, of the eOutlets Lawsuits. The Company believes that it is not liable to the eOutlets Plaintiffs as there was no privity of contract between it and the various eOutlets Plaintiffs. The Company will continue to defend all eOutlets Lawsuits vigorously. primeoutlets.com inc. filed for protection under Chapter 7 of the United States Bankruptcy Code during November 2000 under the name E-Outlets Resolution Corp. The trustee for E-Outlets Resolution Corp. has notified the Company that he is contemplating an action against the Company and the Operating Partnership in which he may assert that E-Outlets Resolution Corp. was the "alter-ego" of the Company and the Operating Partnership and that, as a result, the Company and the Operating Partnership are liable for the debts of E-Outlets Resolution Corp. If the trustee pursues such an action, the Company and the Operating Partnership will defend themselves vigorously. In the case captioned Convergys Customer Management Group, Inc. v. Prime Retail, Inc. and primeoutlets.com inc. in the Court of Common Pleas for Hamilton County (Ohio), the Company prevailed in a motion to dismiss the plaintiff's claim that the Company was liable for primeoutlets.com inc.'s breach of contract based on the doctrine of piercing the corporate veil. The outcome of the eOutlets Lawsuits, and the ultimate liability of the Company in connection with the eOutlets Lawsuits and related claims, if any, cannot be predicted at this time. In May, 2001, the Company, through affiliates, filed suit against Fru-Con Construction, Inc. ("FCC"), the lender on Prime Outlets at New River ("New River") as a result of FCC's foreclosure of New River due to the maturation of the loan. The Company and its affiliates allege that they have been damaged due to FCC's failure to dispose of the collateral in a commercially reasonable manner. The Company, through affiliates, has also filed suit against The Fru-Con Projects, Inc. ("Fru-Con"), a partner in Arizona Factory Shops Partnership and an affiliate of FCC. The Company and its affiliates allege that Fru-Con failed to use reasonable efforts to assist in obtaining refinancing. Fru-Con has claims pending against the Company and its affiliates, as part of the same suit, alleging that the Company and its affiliates breached their contract with Fru-Con by not allowing Fru-Con to participate in an outlet project in Sedona, Arizona (the "Sedona Project") and breached a management and leasing agreement by managing and leasing the Sedona Project. The Company believes its affiliates and it acted properly and FCC did not act properly. The Company and its affiliates will vigorously defend the claims filed against them and prosecute the claims they filed. However, the ultimate outcome of the suit, including the liability, if any, of the Company and its affiliates, cannot be predicted at this time. The New York Stock Exchange ("NYSE") and the Securities and Exchange Commission have notified the Company that they are reviewing transactions in the stock of the Company prior to the Company's January 18, 2000 press release concerning financial matters. The initial notice of such review was received by the Company on March 13, 2000. PRIME RETAIL, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 (in thousands)
Costs Capitalized Initial Cost Subsequent to Gross Amount at Which to Company Acquisition Carried at Close of Period ---------------- ---------------- ---------------------------- Bldgs & Bldgs & Bldgs & Accumulated Constructed (C) Description Encumbrances Land Improve Land Improve Land Improve Total Depreciation Acquired (A) - ------------------------------------------------------------------------------------------------------------------------------------ Prime Outlets at Anderson $ 8,755 $ 1,125 $ 11,036 $ - $ 468 $ 1,125 $ 11,504 $ 12,629 $ 1,272 Dec. 1997 (A) Prime Outlets at Bend 7,504 2,560 8,476 1,101 4,722 3,661 13,198 16,859 1,830 Feb. 1997 (A) Prime Outlets at Burlington 13,828 3,694 21,370 - 61 3,694 21,431 25,125 2,888 Jun. 1998 (A) Prime Outlets at Calhoun 17,816 3,839 24,551 - 245 3,839 24,796 28,635 3,832 Jun. 1998 (A) Prime Outlets at Castle Rock 34,593 4,424 47,200 2,717 15,309 7,141 62,509 69,650 15,324 Mar. 1994 (A) Prime Outlets at Conroe 15,621 405 18,714 - 197 405 18,911 19,316 2,999 Jun. 1998 (A) Prime Outlets at Darien 24,380 - - 3,015 13,319 3,015 13,319 16,334 7,917 Jul. 1995 (C) Prime Outlets at Edinburgh 16,456 2,726 37,952 - 1,275 2,726 39,227 41,953 5,585 Jun. 1998 (A) Prime Outlets at Ellenton 28,333 - - 5,457 49,469 5,457 49,469 54,926 13,196 Oct. 1991 (C) Prime Outlets at Florida City 15,045 - - 4,275 8,460 4,275 8,460 12,735 6,058 Sept. 1994 (C) Prime Outlets at Fremont 13,291 3,250 24,096 - 146 3,250 24,242 27,492 3,185 Jun. 1998 (A) Prime Outlets at Gaffney 31,209 - - 1,886 33,075 1,886 33,075 34,961 7,841 Nov. 1996 (C) Prime Outlets at Gainesville 20,042 - - 1,100 15,302 1,100 15,302 16,402 9,188 Aug. 1993 (C) Prime Outlets at Grove City 39,754 1,123 58,630 791 2,539 1,914 61,169 63,083 10,488 Nov. 1996 (A) Prime Outlets at Gulfport 19,218 - - - 35,460 - 35,460 35,460 8,746 Oct. 1995 (C) Prime Outlets at Hillsboro 29,563 7,121 50,894 - 588 7,121 51,482 58,603 6,462 Jun. 1998 (A) Prime Outlets at Huntley 17,132 - - 1,970 17,826 1,970 17,826 19,796 8,845 Sept. 1994 (C) Prime Outlets at Jeffersonville I 25,533 843 31,084 196 14,990 1,039 46,074 47,113 11,679 Mar. 1994 (A) Prime Outlets at Jeffersonville II 17,938 174 21,058 - (14,137) 174 6,921 7,095 3,007 Jun. 1998 (A) Prime Outlets at Kenosha 22,721 6,995 39,558 106 4,646 7,101 44,204 51,305 5,772 Jun. 1998 (A) Prime Outlets at Latham 1,453 507 1,476 - (975) 507 501 1,008 117 Oct. 1997 (A) Prime Outlets at Lebanon 25,039 - - 2,689 31,820 2,689 31,820 34,509 5,979 Apr. 1998 (C) Prime Outlets at Lee 26,855 8,035 31,656 - 1,364 8,035 33,020 41,055 6,721 Jun. 1998 (A) Prime Outlets at Lodi 25,287 1,013 21,455 706 14,022 1,719 35,477 37,196 7,242 Sept. 1997 (A) Prime Outlets at Loveland 21,951 6,400 33,244 - 323 6,400 33,567 39,967 8,189 Nov. 1996 (A) Melrose Place 1,935 - - 499 1,828 499 1,828 2,327 846 Aug. 1987 (C)
Costs Capitalized Initial Cost Subsequent to Gross Amount at Which to Company Acquisition Carried at Close of Period ---------------- ---------------- ---------------------------- Bldgs & Bldgs & Bldgs & Accumulated Constructed (C) Description Encumbrances Land Improve Land Improve Land Improve Total Depreciation Acquired (A) - ------------------------------------------------------------------------------------------------------------------------------------ Prime Outlets at Morrisville 9,067 - - 2,502 21,181 2,502 21,181 23,683 6,400 Oct. 1991 (C) Prime Outlets at Naples 10,433 2,753 15,602 5 2,919 2,758 18,521 21,279 3,683 Mar. 1994 (A) Prime Outlets at Niagara Falls USA 61,488 7,247 82,842 - 1,736 7,247 84,578 91,825 9,100 Dec. 1997 (A) Prime Outlets at Odessa 14,057 815 31,311 - (12,488) 815 18,823 19,638 6,421 Nov. 1996 (A) Prime Outlets at Oshkosh 13,681 2,160 26,895 - 364 2,160 27,259 29,419 4,081 Jun. 1998 (A) Prime Outlets at Perryville 9,593 3,089 16,287 - 1,640 3,089 17,927 21,016 1,914 Jun. 1998 (A) Prime Outlets at Pismo Beach 12,481 9,048 17,617 - 72 9,048 17,689 26,737 2,539 Jun. 1998 (A) Prime Outlets at Post Falls 11,163 3,100 12,163 - (7,637) 3,100 4,526 7,626 1,732 Feb. 1997 (A) Prime Outlets at Puerto Rico 19,816 - - 4,748 45,651 4,748 45,651 50,399 1,917 Jul. 2000 (C) Prime Outlets at Queenstown 18,190 4,422 35,592 - 693 4,422 36,285 40,707 4,001 Jun. 1998 (A) Prime Outlets at San Marcos 38,052 - - 1,995 46,341 1,995 46,341 48,336 15,729 Aug. 1990 (C) Prime Outlets at San Marcos 2,992 - - 4,468 17,691 4,468 17,691 22,159 1,475 Nov. 1999 (C) Prime Outlets at Sedona 6,660 1,924 9,099 750 481 2,674 9,580 12,254 1,250 Feb. 1997 (A) Prime Outlets at Tracy 12,721 6,170 16,715 - 336 6,170 17,051 23,221 2,698 Jun. 1998 (A) Prime Outlets at Vero Beach 25,591 4,530 41,878 - 1,678 4,530 43,556 48,086 5,952 Jun. 1998 (A) Prime Outlets at Warehouse Row 23,040 - - 1,174 33,317 1,174 33,317 34,491 14,274 Nov. 1989 (C) Western Plaza 9,972 - - 2,000 7,138 2,000 7,138 9,138 1,759 Jun. 1993 (A) Prime Outlets at Woodbury 17,061 2,528 27,645 - (14,477) 2,528 13,168 15,696 3,032 Jun. 1998 (A) - Under Property Under Development - - - 2,293 2,468 2,293 2,468 4,761 - Construction Mar. 1994- Other Property 62,079 - 1,588 - 8,015 - 9,603 9,603 4,959 Dec. 1999 (A) -------- -------- -------- -------- -------- -------- ---------- ---------- -------- $899,389 $102,020 $817,684 $ 46,443 $409,461 $148,463 $1,227,145 $1,375,608 $258,124 ======== ======== ======== ======== ======== ======== ========== ========== ========
At December 31, 2001, the Company had transferred Prime Outlets at Hagerstown (encumbrance of $58,078) to assets held for sale (carrying value of $54,628). PRIME RETAIL, INC. Notes to Schedule III - Real Estate and Accumulated Depreciation December 31, 2001 (in thousands) 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 The aggregate cost for federal income tax purposes was $1,306,123 at December 31, 2001.
- ------------------------------------------------------------------------------------------------------------------------------------ Investment in Rental Property - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of year $ 1,493,107 $ 1,826,551 $ 2,015,722 Retirements (7,406) (6,281) (4,727) Improvements 16,013 51,833 89,969 Dispositions (416) (309,942) (138,321) Transfer (to) from assets held for sale, net (62,664) (4,513) (108,968) Provision for asset impairment (63,026) (64,541) (13,572) Provision for abandoned projects - - (13,552) ----------- ----------- ----------- Balance, end of year $ 1,375,608 $ 1,493,107 $ 1,826,551 =========== =========== =========== ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Depreciation - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of year $ 217,569 $ 183,954 $ 127,747 Retirements (7,406) (6,281) (4,727) Other - (818) 346 Dispositions - (23,469) (6,787) Transfer (to) from assets held for sale, net (8,036) (2,672) (5,502) Depreciation expense 55,997 66,855 72,877 --------- --------- --------- Balance, end of year $ 258,124 $ 217,569 $ 183,954 ========= ========= ========= ====================================================================================================================================
EX-10 3 ex1046.txt EX-10.46 FIRST AMENDMENT TO LOAN AGREEMENT Ex-10.46 FIRST AMENDMENT TO LOAN AGREEMENT THIS FIRST AMENDMENT TO LOAN AGREEMENT ("Amendment") is made as of January 11, 2002 ("First Amendment Date") by and between FRIT PRT LENDING LLC, a Delaware limited liability company ("Lender"), PRIME RETAIL, L.P., a Delaware limited partnership, having an office at 100 East Pratt Street, 19th Floor, Baltimore, Maryland 21202 ("Borrower"), OUTLET VILLAGE OF HAGERSTOWN LIMITED PARTNERSHIP, a Delaware limited partnership, having an office at 100 East Pratt Street, 19th Floor, Baltimore, Maryland 21202 ("Hagerstown LP") and PRIME HAGERSTOWN LAND, L.L.C., a Delaware limited liability company, having an office at 100 East Pratt Street, 19th Floor, Baltimore, Maryland 21202 ("Hagerstown Land"). W I T N E S S E T H: WHEREAS, Lender and Borrower have entered into that certain Loan Agreement, dated as of December 22, 2000 (the "Original Loan Agreement", and as amended by this Amendment, the "Loan Agreement"), providing for a loan to Borrower in the original amount of $90,000,000.00 (the "Loan"); WHEREAS, Borrower has requested that Lender release certain collateral, as more particularly described herein, and to terminate all of the Hagerstown LP Obligations (as hereinafter defined) under the Loan Documents; WHEREAS, Lender has agreed to release such collateral and terminate the obligations of Hagerstown LP under the Loan Documents, in accordance with and subject to satisfaction of the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the parties hereto amend the Loan Agreement, and covenant and agree, as follows: 1. Defined Terms. Terms used herein and not defined herein shall have the meanings provided therefor in the Original Loan Agreement. In addition, references in this Amendment to the "Hagerstown Escrow Funds" shall mean and refer to the funds in the "Escrow Account" and the "Project Account" as defined and referred to in that certain Modification Agreement dated as of January 11, 2002, by and among Mercantile-Safe Deposit and Trust Company ("Merc"), Prime Retail Finance VI, L.L.C. ("Finance VI"), Hagerstown LP, Prime Retail, L.P., Hagerstown Outlets, L.L.C., Hagerstown Land and Hagerstown Outlets Subsidiary, L.L.C. 2. Hagerstown Collateral Release. Effective as of the date hereof, Lender agrees: (i) to release and hereby releases the pledge of partnership interests in Hagerstown LP made by Borrower and Prime Retail, Inc. pursuant to those certain Partnership and Membership Pledge and Security Agreements executed by Borrower and Prime Retail, Inc., respectively, and each dated December 22, 2000; (ii) to release and hereby releases the pledge of all of the membership interests in Finance VI made by Hagerstown LP pursuant to that certain Membership Interest Pledge and Security Agreement dated December 22, 2000; (iii) to release from the Hagerstown Third Mortgage all real property except for the three outparcels which are being conveyed from Hagerstown LP to Hagerstown Land as of the date hereof; and (iv) to file of record such financing statements and other documents as may be required to reflect the foregoing releases, amendments and terminations. Lender, Hagerstown LP and Borrower agree that the Hagerstown Escrow Funds shall be disbursed to Lender and treated as additional Asset Disposition Net Proceeds under the Loan Agreement, applied to pay down the Loan and the Additional Fee associated therewith, and Lender, Hagerstown LP and Borrower shall and hereby do direct Merc to transfer such funds accordingly: 3. Termination of Hagerstown LP Obligations. Effective as of the date hereof, Hagerstown LP shall have no further obligations under any of the Loan Documents, including, without limitation, those specified on Exhibit A attached hereto. Notwithstanding the foregoing release of Hagerstown LP, it is expressly understood and agreed that the obligations of all parties to the Loan Documents other than Hagerstown LP shall remain in full force and respect. 4. BRWH Pledge. Borrower hereby agrees to use all reasonable efforts to obtain, no later than sixty days from the date hereof, the consent of the following parties in order to permit the pledge to Lender of all of the rights to operating, non-operating and other distributions as and when made arising out of the joint venture interests held by BRWH, L.L.C. in Triple Outlet World Joint Venture, a Florida Joint Venture ("BRWH Pledge"), but not any other voting, consent or (unless otherwise approved by the other joint venterer in Triple Outlet World Joint Venture) other rights, and upon obtaining such consent to grant to Lender the BRWH Pledge in Lender's form as further security for the Loan: (i) the holder(s) of the mortgage loan(s) made to Birch Run Outlets II, L.L.C. on or about August 16, 2001; and (ii) the holder(s) of the mortgage loan(s) made to Williamsburg Outlets, L.L.C. (as evidenced by the deed of trust most recently amended on or about October 19, 2001). Borrower hereby agrees to use all reasonable efforts to obtain, no later than sixty days from the date hereof, the consent of the holder(s) of the mortgage loan(s) made to Birch Run Outlets II, L.L.C. on or about August 16, 2001 to the pledge of the 99% non-managing membership interest held by the Borrower in BRWH, L.L.C (the "BRWH Membership Pledge"), and upon obtaining such consent to grant to Lender the BRWH Membership Pledge in Lender's form as further security for the Loan. Borrower hereby represents and warrants to Lender that no other consents, excepting those previously obtained or obtained simultaneously herewith, are required for the BRWH Pledge, the BRWH Membership Pledge or the enforcement thereof. 5. Joinder and Assumption. Hagerstown Land shall be an additional Subsidiary Guarantor, Expanded Property Owner and Loan Party for all purposes under the Loan Agreement and the other Loan Documents. Hagerstown Land hereby absolutely and unconditionally (i) joins as and becomes a party to the Guaranty and the Loan Agreement, becoming a party to the Guaranty and the Loan Agreement as an additional Guarantor thereunder, (ii) assumes, as the joint and several obligation of Hagerstown Land and each other Guarantor signatory thereto, all of the obligations, liabilities and indemnities of each Guarantor under the Guaranty and the Loan Agreement, and (iii) covenants and agrees to be bound by and adhere to all of the terms, representations, warranties, covenants, agreements and conditions contained in the Guaranty and, with respect to each Guarantor, under the Loan Agreement. Hagerstown Land further hereby absolutely and unconditionally (a) joins as and becomes a party to the Environmental Indemnity, becoming a party to the Environmental Indemnity as an additional Indemnitor (as defined in the Environmental Indemnity) thereunder, (b) assumes, as the joint and several obligation of Hagerstown Land and each other Indemnitor signatory thereto, all of the obligations, liabilities and indemnities of each Indemnitor under the Environmental Indemnity, and (c) covenants and agrees to be bound by and adhere to all of the terms, representations, warranties, covenants, agreements and conditions contained in the Environmental Indemnity. Hagerstown Land further hereby absolutely and unconditionally (1) joins as and becomes a party to the Omnibus Cash Flow Pledge Agreement, becoming a party to the Omnibus Cash Flow Pledge Agreement as an additional Assignor (as defined in the Omnibus Cash Flow Pledge Agreement) thereunder, (2) assumes, as the joint and several obligation of Hagerstown Land and each other Assignor signatory thereto, all of the obligations, liabilities and indemnities of each Assignor under the Omnibus Cash Flow Pledge Agreement, and (3) covenants and agrees to be bound by and adhere to all of the terms, representations, warranties, covenants, agreements and conditions contained in the Omnibus Cash Flow Pledge Agreement. Hagerstown Land further hereby absolutely and unconditionally (X) joins as and becomes a party to the Omnibus Negative Pledge Agreement, becoming a party to the Omnibus Negative Pledge Agreement as an additional Negative Pledgor (as defined in the Omnibus Negative Pledge Agreement) thereunder, (Y) assumes, as the joint and several obligation of Hagerstown Land and each other Negative Pledgor signatory thereto, all of the obligations, liabilities and indemnities of each Negative Pledgor under the Omnibus Negative Pledge Agreement, and (Z) covenants and agrees to be bound by and adhere to all of the terms, representations, warranties, covenants, agreements and conditions contained in the Omnibus Negative Pledge Agreement. Hagerstown Land hereby represents and warrants that each of the representations and warranties contained in the Loan Agreement, Guaranty, Environmental Indemnity, Omnibus Cash Flow Pledge Agreement and Omnibus Negative Pledge Agreement (collectively, the "Joinder Loan Documents") are true and correct as to Hagerstown Land. Nothing contained herein is intended to or shall limit, impair, terminate or revoke the obligations of any other party to the Joinder Loan Documents (other than with respect to Hagerstown LP as set forth above), and such obligations shall continue in full force and effect in accordance with the terms and provisions of the Joinder Loan Documents. 6. Loan Documents. This Amendment and all of the documents executed in connection herewith shall constitute Loan Documents. 7. Ratification. All of the representations and warranties set forth in the Loan Documents are true and correct as of the date hereof as if made on the date hereof. The Loan Agreement (as amended hereby) and the other Loan Documents are hereby ratified and remain in full force and effect. 8. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 9. Governing Law. This Amendment shall be governed by the laws of the State of New York. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers, thereunto duly authorized, as of the date first above written. LENDER: FRIT PRT LENDING LLC, a Delaware limited liability company By: ____________________________________________ Name: __________________________________________ Title: Authorized Signatory The undersigned Assignee and Co-Lender hereby consents to and authorizes the execution and delivery of the foregoing Amendment and the transactions referenced therein. GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware corporation By: ____________________________________________ Name: __________________________________________ Title: Authorized Signatory BORROWER: PRIME RETAIL, L.P., a Delaware limited partnership By: PRIME RETAIL, INC., its general partner By: ____________________________________________ Name: Title: HAGERSTOWN LP: OUTLET VILLAGE OF HAGERSTOWN LIMITED PARTNERSHIP, a Delaware limited partnership By: Triple Outlet World Joint Venture, its sole member, By: BRWH, L.L.C., venturer By: PRIME RETAIL, L.P., managing member By: Prime Retail, Inc., general partner By: ____________________________________________ Name: Title: HAGERSTOWN LAND: PRIME HAGERSTOWN LAND, L.L.C., a Delaware limited liability company By: PRIME RETAIL, L.P., a Delaware limited partnership, its sole member By: PRIME RETAIL, INC., a Maryland corporation, its general partner By: ____________________________________________ Name: Title: CONSENT OF GUARANTOR The undersigned, each being a Guarantor (as defined in the Loan Agreement referred to in the foregoing Amendment) and party to certain other Loan Documents (as defined in the Loan Agreement referred to in the foregoing Amendment) do hereby consent to the foregoing Amendment, and ratify and affirm that the Guaranty and such other Loan Documents as have been heretofore executed by each of the undersigned remains in full force and effect for the benefit of Lender under the Loan Agreement, as amended by the foregoing Amendment. IN WITNESS WHEREOF, the undersigned have each executed and delivered this Consent of Guarantor effective as of the date of the foregoing Amendment. GUARANTORS: PRIME RETAIL, INC., a Maryland corporation By: ____________________________________________ Name: Title: PRIME RETAIL CAPITAL I, L.L.C., a Delaware limited liability company PRIME RETAIL, L.P., a Delaware limited partnership, its managing member By: PRIME RETAIL INC., a Maryland corporation, its general partner By: ____________________________________________ Name: Title: PRIME BELLPORT LAND, L.L.C., a Delaware limited liability company By: PRIME RETAIL, L.P., a Delaware limited partnership, its managing member By: PRIME RETAIL INC., a Maryland corporation, its general partner By: ____________________________________________ Name: Title: PRIME WAREHOUSE ROW LIMITED PARTNERSHIP, an Illinois limited partnership By: PRIME RETAIL, L.P., a Delaware limited partnership, its general partner By: PRIME RETAIL, INC., a Maryland corporation, its general partner By: ____________________________________________ Name: Title: SUN COAST FACTORY SHOPS LIMITED PARTNERSHIP, a Delaware limited partnership By: PRIME RETAIL, L.P., a Delaware limited partnership, its general partner By: PRIME RETAIL, INC., a Maryland corporation, its general partner By: ____________________________________________ Name: Title: PRIME OUTLETS AT SAN MARCOS II LIMITED PARTNERSHIP, a Delaware limited partnership By: PRIME RETAIL, L.P., a Delaware limited partnership, its general partner By: PRIME RETAIL, INC., a Maryland corporation, its general partner By: ____________________________________________ Name: Title: CHESAPEAKE DEVELOPMENT LIMITED PARTNERSHIP, a Delaware limited partnership By: PRIME RETAIL, L.P., a Delaware limited partnership, its general partner By: PRIME RETAIL, INC., a Maryland corporation, its general partner By: ____________________________________________ Name: Title: EXHIBIT A 1. Loan Agreement; 2. Omnibus Cash Flow Pledge Agreement; 3. Omnibus Negative Pledge Agreement; 4. Environmental Indemnity Agreement; and 5. Guaranty. All of the above-referenced documents are each dated as of December 22, 2000. EX-10 4 ex1047.txt EX-10.47 SECOND AMENDMENT TO LOAN AGREEMENT Ex-10.47 SECOND AMENDMENT TO LOAN AGREEMENT THIS SECOND AMENDMENT TO LOAN AGREEMENT (this "Amendment") is made as of January 31, 2002 ("Second Amendment Date") by and between FRIT PRT LENDING LLC, a Delaware limited liability company ("Lender") and PRIME RETAIL, L.P., a Delaware limited partnership ("Borrower"). W I T N E S S E T H: WHEREAS, Lender and Borrower have entered into that certain Loan Agreement, dated as of December 22, 2000 (as amended by First Amendment to Loan Agreement dated as of January 11, 2002, the "Original Loan Agreement", and as further amended by this Amendment, the "Loan Agreement"), providing for a loan to Borrower in the original amount of $90,000,000.00 (the "Loan"); and WHEREAS, Borrower and Lender desire to enter into this Amendment in order to amend, modify and supplement certain terms and conditions of the Original Loan Agreement. NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the parties hereto amend the Original Loan Agreement, and covenant and agree, as follows: 1. Defined Terms. Terms used herein and not defined herein shall have the meanings provided therefor in the Original Loan Agreement, provided, however, that effective from (and including) January 1, 2002 and thereafter, the term "Applicable Interest Rate" as used in the Loan Agreement shall be and hereby is amended and restated to have the following meaning: "Applicable Interest Rate" shall mean the rate which is the LIBOR Rate plus 975 basis points (9.75%) per annum, which sum shall be rounded up to the nearest one-eighth of one percent (0.125%), and which shall be adjusted on each LIBOR Adjustment Date, provided that the Applicable Interest Rate shall not in any event be less than 1475 basis points (14.75%) per annum. Further, the term "Minimum Monthly Amortization Amount" as used in the Loan Agreement shall be and hereby is amended and restated to have the following meaning: "Minimum Monthly Amortization Amount" shall mean (a) $1,000,000.00 for each of the first twelve (12) monthly Payment Dates (ending on, and including, the Payment Date which is the first Business Day of January, 2002), (b) $800,000.00 for each of the second twelve (12) monthly Payment Dates (ending on, and including, the Payment Date which is the first Business Day of January, 2003)(the Payment Dates referred to in this clause (b) are herein sometimes referred to as the "2002 Payment Dates"), and (c) $2,333,000.00 for the Payment Date which is the first Business Day of February, 2003 and each monthly Payment Date thereafter; provided, that if no Event of Default exists and Borrower demonstrates to Lender's satisfaction (Lender's determinations in this respect being made in Lender's sole and absolute discretion) that Borrower has incurred net reductions in actual cash flow in calendar year 2002 (not otherwise offset by virtue of higher revenues or lower expenses in respect of other aspects of Borrower's direct or indirect operations and capital programs in relation to Borrower's 2002 budget and business plan previously submitted to Lender) due to tenant bankruptcies occurring in calendar year 2002 which were unplanned and not foreseen by Borrower or Lender to occur in calendar year 2002, including losses due to rent defaults on the part of bankrupt tenants occurring prior to such tenants' bankruptcy filings, so long as such bankruptcy filings actually occur ("Proven Unplanned Tenant Bankruptcy Losses"), Lender may elect by written notice to Borrower, if Borrower requests and Lender determines in Lender's sole and absolute discretion that an adjustment to the amount of the Loan amortization is necessary and appropriate under the circumstances (including a determination that no other cash reserves are available to Borrower to address the Proven Unplanned Bankruptcy Losses) and will result in increased Borrower cash flow sufficient to pay all Borrower's operating costs and expenses for the foreseeable future notwithstanding the occurrence of Proven Unplanned Tenant Bankruptcy Losses, to reduce the amount of the Minimum Monthly Amortization Amount payable on one or more of the 2002 Payment Dates occurring after such written notice is given by Lender, in each case in an amount determined by Lender, but in no event will the Minimum Monthly Amortization Amount be reduced below $500,000. In addition, the term "Applicable Current Pay Rate" as used in the Loan Agreement shall have the following meaning: "Applicable Current Pay Rate" shall mean the Applicable Interest Rate less 25 basis points (0.25%) per annum. Also, the term "Deferred Interest" as used in the Loan Agreement shall have the following meaning: "Deferred Interest" shall mean the amount determined by subtracting the interest accruing on the Loan from (and including) January 1, 2002 and thereafter calculated on the basis of the Applicable Interest Rate and interest accruing on the Loan for the same period calculated on the basis of the Applicable Current Pay Rate. Finally, the definition of "Available Consolidated Cash Flow" as used in the Loan Agreement shall be amended as follows: (i) the parenthetical in subparagraph (b) of such definition (as it appears in Exhibit B of the Loan Agreement), which presently reads "(other than the payment of Available Consolidated Cash Flow)" shall be and hereby is amended and restated to read and provide as follows: "(other than payments made from Available Consolidated Cash Flow and payments made from the Special Reserve Account)"; and (ii) at the end of the text of subparagraph (d) of such definition, a semicolon, rather than a period, shall be and hereby is added, followed by the addition of the word "plus" after such semi-colon and the addition of a new subparagraph (e) to such definition, which shall and hereby does read as follows: "(e) actual cash payments of the Monthly Special Reserve Deposits for deposit into the Special Reserve Account during the immediately preceding Fiscal Quarter." 2. Amendment Fee. Borrower shall pay to Lender, in consideration of Lender's execution and delivery of this Second Amendment, an amendment fee equal to $123,578.69, which shall be deemed fully and irrevocably earned and shall be paid in full on the Second Amendment Date. 3. Amendment and Restatement of Certain Provisions. Sections 2.5, 2.6, 2.7(a) and 2.7(b)(i) of the Original Loan Agreement are hereby amended and restated to read and provide as follows, effective from (and including) January 1, 2002 and thereafter: "2.5 Loan Interest and Amortization. (a) Borrower shall pay in advance on the Closing Date an amount equal to the interest accruing on the Loan from the Closing Date until January 1, 2001. Commencing on February 1, 2001 (the "First Payment Date"), and continuing on the first Business Day of each and every successive calendar month thereafter (each, including the First Payment Date, a "Payment Date") through and including the Payment Date immediately prior to the Maturity Date, Borrower shall pay to Lender monthly payments of accrued interest at the Applicable Interest Rate, provided, that Borrower shall not be obligated to pay Deferred Interest until the Maturity Date or upon the earlier occurrence of an Event of Default or a payment or prepayment of all or any portion of the Loan, at which time the Deferred Interest shall become due and payable in full (or, in the case of a partial prepayment of the Loan, the Deferred Interest shall be payable in full with respect to the portion of the principal balance of the Loan paid or prepaid). Without limiting the foregoing, each payment of principal of the Loan, whether required under the provisions of Section 2.7 of this Agreement or otherwise, shall be accompanied by the Deferred Interest allocable to such portion of the Loan paid or prepaid. (b) On each Payment Date, the Borrower shall pay to Lender, (i) for application in reduction of the principal balance of the Note, the Minimum Monthly Amortization Amount and (ii) the Additional Fee applicable thereto. (c) Within thirty (30) days following each Quarterly Payment Date, the Borrower shall pay to Lender, for application pro rata (i) in reduction of the principal balance of the Loan, (ii) payment of the Deferred Interest allocable to the principal balance of the Loan paid under this Section 2.5(c) and (iii) to the payment of the Additional Fee associated with such payment of the principal balance of the Loan, the Available Consolidated Cash Flow for the immediately preceding Fiscal Quarter. Borrower covenants and agrees with Lender that Available Consolidated Cash Flow applicable to each Fiscal Quarter shall be available solely for the application to the Loan as required hereunder. Notwithstanding the thirty (30) day grace period specified hereunder, Borrower acknowledges and agrees that it may only apply Available Consolidated Cash Flow with respect to the immediately preceding Fiscal Quarter to the payment required under this Section 2.5(c) and shall not apply Revenues attributable to periods after the applicable Quarterly Payment Date for such payment. 2.6 Maturity. The entire outstanding principal balance of the Note, together with accrued and unpaid interest, any Additional Fee and any other amounts due under the Note and the other Loan Documents shall be due and payable on September 30, 2003 (the "Maturity Date"), if not sooner paid in full pursuant to Section 2.7. 2.7 Prepayments; Commitment Reductions. (a) Voluntary Prepayment. Except for required principal amortization pursuant to Section 2.5, Borrower may not prepay all or any part of the principal balance of the Loan until January 1, 2002. On or after January 1, 2002, provided no Event of Default exists, the principal balance of the Note may be prepaid in whole or in part, provided that (i) written irrevocable notice of such prepayment specifying the intended date of prepayment is received by Lender not more than sixty (60) days and not less than ten (10) days prior to the date of such prepayment, (ii) such prepayment must be accompanied by all interest accrued but unpaid on the Loan (including Deferred Interest allocable to the portion of the Loan being prepaid, but excluding Deferred Interest for the portion of the Loan which remains outstanding), (iii) such prepayment must also be accompanied by all Breakage Costs, if any, with respect to such prepayment, and (iv) such prepayment must also be accompanied by the Additional Fee and all other sums due hereunder or under the other Loan Documents through the date of such prepayment. Notwithstanding anything to the contrary herein or in the Note, any notice of prepayment pursuant to this Section 2.7(a) shall be irrevocable and the principal balance of the Note specified for prepayment in such notice shall be absolutely and unconditionally due and payable on the date specified in such notice, unless (i) Borrower revokes such notice of prepayment in writing at least five (5) days prior to the date designated as the prepayment date in such notice of prepayment, and (ii) pays all of Lender's reasonable costs and expenses incurred related to such prospective prepayment. (b) Mandatory Prepayment. (i) Asset Dispositions. In the event of receipt by any Borrower Group Member of Asset Disposition Net Proceeds, the Borrower shall prepay the Loan (together with interest accrued on the portion of the Loan prepaid, including Deferred Interest allocable to the portion of the Loan prepaid) and the Additional Fee associated with such prepayment on the Business Day on which such Asset Disposition Net Proceeds are received. Any and all prepayments of the Loan required under this Section 2.7 shall be in addition to any and all other payments and prepayments of the Loan required under Section 2.5 above or otherwise under this Agreement. Any and all expenses of sale incurred or proposed to be incurred by Borrower or its Affiliates, and any and all closing and other prorations and other adjustments which affect the amount of Asset Disposition Net Proceeds, shall be subject to prior Lender review and written approval, which shall not be unreasonably withheld with respect to customary closing expenses typical for a transaction of the type being closed." 4. Reduction of Working Capital Reserve. The figure $4,000,000 appearing twice in Section 2.15 of the Original Loan Agreement, once in Section 12.3 of the Original Loan Agreement and in subpart (d) of the definition of Available Consolidated Cash Flow in Exhibit B to the Original Loan Agreement shall be and hereby is amended in each case to reduce such figure to $3,000,000, representing a reduction, from $4,000,000 to $3,000,000, in the required minimum Working Capital Reserve under the Loan Agreement. In no event shall Special Reserve Funds in the Special Reserve Account (each as defined in the revised Section 2.7(b)(v) set forth in paragraph 6 below) be included in the Working Capital Reserve or the determination of the amount thereof. 5. Restatement of Schedule V Covenants. Schedule V of the Original Loan Agreement is hereby amended and restated to read as provided in Schedule V attached to this Amendment and hereby made a part hereof and of the Loan Agreement by this reference ("Amended Schedule V"). All references in the Loan Agreement to "Schedule V Covenants" shall mean and refer to the covenants and agreements set forth on Amended Schedule V. 6. Revisions to Section 12.3. The parenthetical phrase "(provided, in the aggregate, there are sufficient funds in the six Deposit Accounts to reserve for the payment of all interest on the Note coming due on the next Payment Date and for the payment of the Minimum Monthly Amortization Amount plus the Additional Fee applicable thereto coming due on the next Payment Date (collectively referred to as the `Aggregate Deposit Requirement')", as such phrase appears in Section 12.3(c) of the Original Loan Agreement, is hereby amended and restated to read as follows: "(provided, in the aggregate, there are sufficient funds in the six Deposit Accounts to reserve for the payment of all interest on the Note and the Monthly Special Reserve Deposit coming due on the next Payment Date and for the payment of the Minimum Monthly Amortization Amount plus the Additional Fee applicable thereto coming due on the next Payment Date (collectively referred to as the `Aggregate Deposit Requirement'))" 7. Silverthorne/Lebanon Transaction. In connection with the Silverthorne/Lebanon Transaction (as defined in Section 2.7(e) of the Loan Agreement), The Prime Outlets at Silverthorne Limited Partnership acquired the Lebanon Property (as defined in the Loan Agreement) and changed its name to The Prime Outlets at Lebanon Limited Partnership. In connection with such name change, certain of the Loan Documents shall be deemed amended and are hereby changed as follows: a) Exhibit A to that certain Partnership Interest Pledge and Security Agreement dated December 22, 2000 executed by Prime Retail Capital I, L.L.C. for the benefit of Lender is amended by deleting the reference to "The Prime Outlets at Silverthorne Limited Partnership" and substituting "The Prime Outlets at Lebanon Limited Partnership (formerly known as The Prime Outlets at Silverthorne Limited Partnership)" therefor; b) Schedule I to the Negative Pledge Agreement dated December 22, 2000 executed by Prime Retail Finance II, Inc. in favor of Lender is amended by deleting the reference to "The Prime Outlets at Silverthorne Limited Partnership" and substituting "The Prime Outlets at Lebanon Limited Partnership (formerly known as The Prime Outlets at Silverthorne Limited Partnership)" therefor; c) Schedule I to the Negative Pledge Agreement dated December 22, 2000 executed by Borrower in favor of Lender is amended by deleting the reference to "The Prime Outlets at Silverthorne Limited Partnership" and substituting "The Prime Outlets at Lebanon Limited Partnership (formerly known as The Prime Outlets at Silverthorne Limited Partnership)" therefor; d) Schedule 12.2A to the Loan Agreement is amended by deleting the reference to "The Prime Outlets at Silverthorne Limited Partnership" and substituting "The Prime Outlets at Lebanon Limited Partnership (formerly known as The Prime Outlets at Silverthorne Limited Partnership)" therefor; and e) Schedule 12.2A to the Loan Agreement shall be amended to delete the reference to the Outlet Village of Lebanon Limited Partnership. Borrower, Prime Retail Capital I, L.L.C. and Prime Retail Finance II, Inc. hereby authorize Lender to file UCC financing statement amendments to reflect the foregoing amendments. 8. Loan Documents. This Amendment and all of the documents executed in connection herewith shall constitute Loan Documents. 9. Ratification. The Loan Agreement (as amended hereby) and the other Loan Documents are hereby ratified and remain in full force and effect. 10. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 11. Fees and Expenses. Borrower shall pay on demand the actual costs and attorney's reasonable fees and expenses incurred by Lender and not heretofore paid by Borrower in connection with this Amendment, the First Amendment, the BRWH Pledge (as defined in the First Amendment) and the BRWH Membership Pledge (as defined in the First Amendment). 12. Governing Law. This Amendment shall be governed by the laws of the State of New York, excluding application of any principle of conflicts of laws. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers, thereunto duly authorized, as of the date first above written. LENDER: FRIT PRT LENDING LLC, a Delaware limited liability company By: ----------------------------------------- Name: --------------------------------------- Title: Authorized Signatory The undersigned Assignee and Co-Lender hereby consents to and authorizes the execution and delivery of the foregoing Amendment and the transactions referenced therein. GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware corporation By: ----------------------------------------- Name: --------------------------------------- Title: Authorized Signatory BORROWER: PRIME RETAIL, L.P., a Delaware limited partnership By: PRIME RETAIL, INC., its general partner By: ------------------------------- Name: Title: The undersigned are executing this Amendment to acknowledge their agreement with and consent to the provisions contained in Section 7 of the foregoing Amendment. PRIME RETAIL CAPITAL I, L.L.C., a Delaware limited liability company By: PRIME RETAIL, L.P., a Delaware limited partnership, its managing member By: PRIME RETAIL INC., a Maryland corporation, its general partner By: -------------------------------- Name: Title: PRIME RETAIL FINANCE II, INC., a Maryland corporation By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- CONSENT OF GUARANTOR The undersigned, each being a Guarantor (as defined in the Loan Agreement referred to in the foregoing Amendment) and party to certain other Loan Documents (as defined in the Loan Agreement referred to in the foregoing Amendment) do hereby consent to the foregoing Amendment, and ratify and affirm that the Guaranty and such other Loan Documents as have been heretofore executed by each of the undersigned remains in full force and effect for the benefit of Lender under the Loan Agreement, as amended by the foregoing Amendment. IN WITNESS WHEREOF, the undersigned have each executed and delivered this Consent of Guarantor effective as of the date of the foregoing Amendment. GUARANTORS: PRIME RETAIL, INC., a Maryland corporation By: ---------------------------------------- Name: Title: PRIME RETAIL CAPITAL I, L.L.C., a Delaware limited liability company By: PRIME RETAIL, L.P., a Delaware limited partnership, its managing member By: PRIME RETAIL INC., a Maryland corporation, its general partner By: ------------------------------ Name: Title: PRIME BELLPORT LAND, L.L.C., a Delaware limited liability company By: PRIME RETAIL, L.P., a Delaware limited partnership, its managing member By: PRIME RETAIL INC., a Maryland corporation, its general partner By: ------------------------------ Name: Title: PRIME HAGERSTOWN LAND, L.L.C., a Delaware limited liability company By: PRIME RETAIL, L.P., a Delaware limited partnership, its sole member By: PRIME RETAIL, INC., a Maryland corporation, its general partner By: ------------------------------ Name: Title: PRIME WAREHOUSE ROW LIMITED PARTNERSHIP, an Illinois limited partnership By: PRIME RETAIL, L.P., a Delaware limited partnership, its general partner By: PRIME RETAIL, INC., a Maryland corporation, its general partner By: ------------------------------ Name: Title: SUN COAST FACTORY SHOPS LIMITED PARTNERSHIP, a Delaware limited partnership By: PRIME RETAIL, L.P., a Delaware limited partnership, its general partner By: PRIME RETAIL, INC., a Maryland corporation, its general partner By: ------------------------------ Name: Title: PRIME OUTLETS AT SAN MARCOS II LIMITED PARTNERSHIP, a Delaware limited partnership By: PRIME RETAIL, L.P., a Delaware limited partnership, its general partner By: PRIME RETAIL, INC., a Maryland corporation, its general partner By: -------------------------------- Name: Title: CHESAPEAKE DEVELOPMENT LIMITED PARTNERSHIP, a Delaware limited partnership By: PRIME RETAIL, L.P., a Delaware limited partnership, its general partner By: PRIME RETAIL, INC., a Maryland corporation, its general partner By: -------------------------------- Name: Title: CONSENT OF GUARANTOR The undersigned, being a Guarantor (as defined in the Loan Agreement referred to in the foregoing Amendment) and party to certain other Loan Documents (as defined in the Loan Agreement referred to in the foregoing Amendment) does hereby consent to the foregoing Amendment, and ratify and affirm that that certain Guaranty executed by it on June 28, 2001 and such other Loan Documents as have been heretofore executed by the undersigned remain in full force and effect for the benefit of Lender under the Loan Agreement, as amended by the foregoing Amendment. IN WITNESS WHEREOF, the undersigned has executed and delivered this Consent of Guarantor effective as of the date of the foregoing Amendment. GUARANTOR: PRIME RETAIL CAPITAL IV, L.L.C., a Delaware limited liability company By: PRIME RETAIL, L.P., a Delaware limited partnership, its managing member By: PRIME RETAIL INC., a Maryland corporation, its general partner By: -------------------------------- Name: Title: SCHEDULE V The following covenants and agreements of the Borrower set forth in this Schedule V shall be and hereby are incorporated by reference as if fully set forth in the body of the Loan Agreement, and shall constitute the Schedule V Covenants as defined and referred to in the Loan Agreement. This Schedule V shall constitute the Amended Schedule V referred to in the Second Amendment. 1. Minimum Sale and Associated Amortization Requirements. (a) Prior to May 1, 2002, Borrower shall cause the sale of Expanded Properties (in each case closing after January 31, 2002; sales of Expanded Properties closed on or prior to January 31, 2002 shall not be included in determining compliance with this subparagraph 1(a)) resulting in prepayments of the principal balance of the Loan from Asset Disposition Net Proceeds (after paying the Additional Fee and Deferred Interest associated with the principal Loan amount prepaid) of not less than $8,906,000. (b) Prior to July 1, 2002, Borrower shall cause the sale of Expanded Properties (in each case closing after January 31, 2002; sales of Expanded Properties closed on or prior to January 31, 2002 shall not be included in determining compliance with this subparagraph 1(b)) resulting in prepayments of the principal balance of the Loan from Asset Disposition Net Proceeds (after paying the Additional Fee and Deferred Interest associated with the principal Loan amount prepaid) of not less than $24,406,000 (inclusive of the $8,906,000 prepayment required prior to May 1, 2002 under the preceding subparagraph 1(a)); provided, that the June 30, 2002 required date for the minimum prepayment from Asset Disposition Net Proceeds of $24,406,000 under this subparagraph 1(b)(but not the minimum prepayment from Asset Disposition Net Proceeds of $8,906,000 prior to May 1, 2002 required under the preceding subparagraph 1(a)) may be extended by Lender pursuant to a written notice to Borrower to a date not later than October 31, 2002 in the event Borrower demonstrates to Lender's satisfaction that Borrower is actively engaged in a transaction sufficient to satisfy the $24,406,000 threshold that has a realistic likelihood of closing in Lender's sole determination, made in Lender's sole discretion. (c) Prior to November 1, 2002, Borrower shall cause the sale of Expanded Properties (in each case closing after January 31, 2002; sales of Expanded Properties closed on or prior to January 31, 2002 shall not be included in determining compliance with this subparagraph 1(c)) resulting in prepayments of the principal balance of the Loan from Asset Disposition Net Proceeds (after paying the Additional Fee and Deferred Interest associated with the principal Loan amount prepaid) of not less than $25,367,000 (inclusive of the $24,406,000 prepayment required prior to July 1, 2002 under the preceding subparagraph 1(b)(subject to the extension of such July 1, 2002 date to not later than November 1, 2002 as provided in the proviso in subparagraph 1(b))). (d) Any failure to satisfy the provisions of this paragraph 1 of the Schedule V Covenants within the time periods indicated above shall constitute an Event of Default under the Loan Agreement. 2. Special Reserve and Amortization. (a) Commencing on (and including) the Payment Date which is the first Business Day of February, 2002 and continuing until (and including) the Payment Date which is the first Business Day of January, 2003, Borrower shall pay to Lender on each Payment Date $250,000 (the "Monthly Special Reserve Deposit"), which Lender shall deposit into an interest bearing account (the "Special Reserve Account"). The Monthly Special Reserve Deposits and any interest accrued thereon (collectively, the "Special Reserve Funds") shall be held in the Special Reserve Account and applied by Lender in accordance with this paragraph 2. The Special Reserve Funds may be commingled with Lender's or its Servicer's or other representative's other funds, or funds held by them in trust for others or as security for other obligations under the Loan Documents or otherwise. The Special Reserve Account may be maintained as a subaccount under Lender's or its Servicer's or other designated representative's internal accounting methodology for accounts holding funds in addition to and other than the Special Reserve Funds. Lender shall have sole dominion, control and discretion (which may be exercised through the Servicer) over and the sole right to make withdrawals or transfers of funds from the Special Reserve Funds and the Special Reserve Account, and neither Borrower nor any other Person claiming on behalf of or through the Borrower shall have any right or authority, whether express or implied, to withdraw any funds, investments or other properties from, the Special Reserve Account or the Special Reserve Funds, or to give any instructions with respect to the Special Reserve Account or the Special Reserve Funds. (b) Subject to the provisions of this paragraph 2, the Special Reserve Funds shall be held for application to Loan amortization and the payment of Additional Fees in connection therewith, provided that if Borrower actually incurs, and produces evidence satisfactory to Lender in Lender's sole discretion that Borrower has incurred actual reductions in cash revenues in calendar year 2002 (not otherwise offset by virtue of higher revenues or lower expenses in respect of other aspects of Borrower's direct or indirect operations and capital programs in relation to Borrower's 2002 budget and business plan previously submitted to Lender) due to payment or settlement, in amounts and on terms first approved in writing by Lender, of tenant claims (including those of Dinnerware Plus Holdings, Inc. or other tenants operating under the name "Mikasa" (collectively, the "Mikasa Claims") for payments from Borrower or the Expanded Property Owners on account of alleged prior, present or future overpayment of common area pass-through charges by operation of clauses in such tenants' leases which purportedly provide or provided limitations on such pass-through charges on the basis of limitations on the pass-though charges involving, among other charges, common areas, taxes, insurance and promotional funds assessed against other tenants at the respective outlet centers (such claims, including the Mikasa Claims, are herein referred to as the "Tenant MFN Claims"; any actual cash reductions in 2002 net cash revenues due to the payment or settlement of Tenant MFN Claims on terms approved by Lender, as and when the same are actually incurred and demonstrated to have occurred to Lender's reasonable satisfaction from time to time, are herein referred to as the "Proven MFN Losses"), then, Borrower may, from time to time, but no more often than once per calendar month (and in no event after December 31, 2002), make a written request, accompanied by Borrower's certification as to the amount and nature of the Proven MFN Losses, for disbursement from the Special Reserve Funds in the amount of the then Proven MFN Losses (for which disbursement has not been previously made), whereupon Lender shall, provided no Event of Default exists and Lender has accepted Borrower's calculation of the amount and nature of the Proven MFN Losses, and further provided that Borrower demonstrates to Lender's reasonable satisfaction that Borrower shall, upon receipt of the requested Special Reserve Funds, have sufficient cash flow to pay the Proven MFN Losses and all other operating and capital costs and expenses for the reasonably foreseeable future, disburse to the Operating Account the requested Special Reserve Funds then available for disbursement and not previously otherwise applied or disbursed under this paragraph 2. (c) On each Payment Date which is either (1) the first Business Day of May, 2002, (2) the first Business Day of August, 2002, or (3) the first Business Day of November, 2002, the Special Reserve Funds (exclusive of the Monthly Special Reserve Deposit made on such Payment Date (such Payment Date is herein referred to as the "Application Date")) not previously otherwise applied or disbursed under this paragraph 2 shall be paid to Lender for application to the prepayment of the principal balance of the Loan and the payment of the Additional Fee associated with such prepayment, provided, that if and to the extent Borrower demonstrates prior to such Application Date, by means of an updated 2002 business plan and budget acceptable to Lender and provided by Borrower to Lender not more than thirty days nor less than ten days prior to such Application Date, that Proven MFN Losses for which disbursements have not yet been made under subparagraph 2(b) above are sufficiently likely to actually be incurred in calendar year 2002 in an amount which is in excess of the sum of the remaining Monthly Special Reserve Deposits made or to be made on the Application Date and each Payment Date thereafter (such excess is herein referred to as the "Reserve Excess") as to justify, in Lender's reasonable determination, retaining the Reserve Excess in the Special Reserve Account, then as long as Borrower has dealt with Tenant MFN Claims from the Second Amendment Date in a manner reasonably acceptable to Lender (including diligent pursuit of settlement and payment and settlement of such claims on terms reasonably satisfactory to Lender when appropriate), the application required on the Application Date to prepayment of the Loan and the associated Additional Fee shall be reduced by an amount equal to the Reserve Excess. (d) On the Payment Date which is the first Business Day of February, 2003, the entire remaining balance of the Special Reserve Funds shall be paid to Lender for application to the prepayment of the principal balance of the Loan and the payment of the Additional Fee associated with such prepayment. (e) Borrower hereby pledges, assigns and grants to Lender a continuing perfected security interest in and to and a first lien upon the Special Reserve Account and the Special Reserve Funds (collectively, the "Special Reserve Collateral") as additional security for the Loan and the payment and performance of all of the Obligations. Borrower acknowledges that the Servicer is acting as the agent of, and at the direction of, Lender in connection with the subject matter of this paragraph 2. This paragraph 2, together with the remainder of the Loan Agreement shall be deemed a security agreement within the meaning of the Uniform Commercial Code. Borrower agrees to promptly execute, acknowledge, deliver, file or do, at its sole cost and expense, all acts, assignments, notices, agreements or other instruments as Lender may reasonably require in order to effectuate, assure, convey, secure, assign, transfer and convey unto Lender any of the rights granted by the Loan Agreement and to more fully perfect and protect any assignment, pledge, lien and security interest confirmed or purported to be created hereby, or to enable Lender to exercise and enforce its rights and remedies hereunder, in respect of the Special Reserve Collateral. If Borrower fails, after the giving of required notices, if any, and the expiration of applicable grace periods, if any, to perform any agreement or obligation contained herein, Lender may perform or cause the performance of such agreement or obligation, and the reasonable expenses of Lender incurred in connection therewith shall be payable to Lender by the Borrower. (f) Lender may exercise in respect of the Special Reserve Collateral all rights and remedies available to Lender hereunder or under the other Loan Documents, or otherwise available at law or in equity. Upon the occurrence of an Event of Default, Lender may, at any time or from time to time, in addition to other rights and remedies provided for herein or otherwise available to it: (1) collect, appropriate, redeem, realize upon or otherwise enforc e its rights with respect to the Special Reserve Collateral, or any part thereof, without notice to the Borrower and without the need to institute any legal action, make demand to or upon the Borrower or any other Person, exhaust any other remedies or otherwise proceed to enforce its rights; (2) execute (in the name, place and stead of the Borrower) any endorsements, assignments or other instruments of conveyance which may be required for the withdrawal and negotiation of the Special Reserve Collateral; (3) exercise in respect of the Special Reserve Collateral all of the rights and remedies of a secured party upon default under the Uniform Commercial Code then in effect in the applicable jurisdiction; and/or (4) exercise all other rights and remedies available to Lender under applicable law, hereunder, or under any of the other Loan Documents. (g) Without limiting the generality of the foregoing or any other provisions of this paragraph 2 or any other provision of the Loan Agreement, the Borrower acknowledges and agrees that, upon the occurrence and during the continuance of an Event of Default, it will have no further right to request or otherwise require Lender to disburse, apply or transfer Special Reserve Funds or funds from the Special Reserve Account in accordance with the terms of the Loan Agreement, it being agreed that Lender may, at its option and among other rights and remedies available to it, continue to hold the Special Reserve Funds in the Special Reserve Account or transfer and apply all or any portion of the Special Reserve Funds then or thereafter held in the Special Reserve Account to the Obligations in any order and in such manner as Lender may determine in its sole discretion. EX-10 5 ex1048.txt EX-10.48 EMPLOYMENT AGREEMENT R. KELVIN ANTILL Ex-10.48 Employment Agreement THIS EMPLOYMENT AGREEMENT (the "Agreement"), effective as of March 21, 2002 (the "Effective Date"), by and between Prime Retail, Inc., a Maryland corporation ("Prime") and the sole general partner of Prime Retail, L.P., a Delaware limited partnership (the "Operating Partnership"), the Operating Partnership (Prime and the Operating Partnership are sometimes hereinafter together referred to as the "Company"), and R. Kelvin Antill, an individual domiciled in the State of Maryland ("Executive"). Witnesseth WHEREAS, the Company is engaged primarily in the ownership, development, construction, acquisition, leasing, marketing and management of factory outlet centers throughout North America, Puerto Rico and Western Europe; WHEREAS, the Company believes that it would benefit from the application of Executive's particular and unique skill, experience, and background to the management and operation of the Company as its Executive Vice President - General Counsel and Secretary; WHEREAS, Executive wishes to commit himself to serve the Company in the position set forth herein on the terms herein provided; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein set forth, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by each of the parties hereto, the Company and Executive hereby agree as follows: 1. Duties. During the Term hereof (as defined in Section 2 hereof), the Company agrees to retain Executive, and Executive agrees to be retained by the Company, as the Executive Vice President - General Counsel and Secretary on the terms and conditions provided in this Agreement. Executive shall serve as the Executive Vice President - General Counsel and Secretary and Executive shall exercise such powers and authority as are customarily inherent in a similar position in a comparable publicly-held entity or as provided by the By-laws of Prime ("By-laws") and the Agreement of Limited Partnership of the Operating Partnership, as amended (the "Partnership Agreement"). Prime, in its capacity as sole general partner of the Operating Partnership, may, from time to time, in its sole discretion, by action of its Board of Directors (the "Board") further define and clarify Executive's duties and services hereunder or under the By-laws or Partnership Agreement in a manner consistent with the office for which he has been retained hereunder and the scope of work set forth herein. Executive agrees to devote his best efforts and substantially all of his business time, attention, energy, and skill to performing his duties to the Company under this Agreement. Executive will report directly and exclusively to the Company's President and Chief Executive Officer ("CEO"), and he will perform all of his duties in accordance with such reasonable directions, requests, rules and regulations as are specified by the CEO in connection with his employment. Notwithstanding the foregoing, the parties acknowledge that the Company may alter the reporting relationship of Executive so that he thereafter reports to the Company's Chairman, President, CEO, or an individual who has been retained to serve as the Company's Chief Operating Officer, or a similar role, if that individual reports directly to the CEO; provided further that Executive may report to any such individual or a combination thereof. During the Term of this Agreement, it shall not be a violation of this Agreement for Executive to (i) serve on corporate, industry-related, civic, or charitable boards or committees or devote time to serving any such entities or organizations, (ii) deliver lectures, fulfill speaking engagements, or teach at educational institutions, or (iii) manage personal investments and finances and business and legal affairs, to the extent that such activities do not violate this Section 1 or Section 5 hereof. 2. Term. The term of this Agreement shall commence as of the Effective Date and, unless earlier terminated in accordance with the terms of this Agreement, will extend through June 30, 2003 ("the Original Term"); provided, however, that if this Agreement is not affirmatively terminated by either party, or extended or renewed for a specific duration in writing by agreement of the parties, prior to the last day of the Original Term, this Agreement will continue on a month-to-month basis thereafter (the "Extended Term"). The parties agree to cooperate and discuss in good faith their intentions with regard to this Agreement's extension or renewal 12 months prior to the end of the Original Term. Notwithstanding the foregoing, the Company agrees to provide Executive with a minimum of six months' advance written notice of its intent to terminate this Agreement during the Original Term or the Extended Term for any reason other than Cause, in which case the Company shall comply with the notice requirements of Sections 4(a)(2) and (3) hereof, and Executive agrees to provide the Company with a minimum of 60 days' advance written notice of his intent to terminate this Agreement during the Original Term for any reason other than Good Reason, in which case Executive shall comply with the notice requirements of Section 4(b)(1)(E) hereof. For purposes of this Agreement, the terms "Original Term" and "Extended Term" shall herein be collectively referred to as the "Term." 3. Compensation and Related Matters. (a) Base Salary. During the Term of this Agreement, the Operating Partnership agrees to pay to Executive a base salary in an aggregate amount of $210,000 per calendar year, payable in accordance with the general policies and procedures for payment of salaries to any other executive personnel of the Company but in all events payable no less frequently than monthly. The then applicable amount of yearly base salary payable to Executive pursuant to the provisions of this Section 3(a) shall herein be referred to as the "Base Salary." The Base Salary payable to Executive pursuant to the provisions of this Section 3(a) shall be subject to periodic review by the Compensation Committee of the Board of Directors of Prime (the "Committee") based upon periodic review of Executive's performance conducted on at least an annual basis and may be periodically increased as a result thereof; provided, however, that the Base Salary payable to Executive pursuant to the provisions of this Section 3(a) shall in no event be less than the aggregate amount set forth in the first sentence of this paragraph. In no event may Executive's Base Salary be reduced during the Term without his express written consent. (b) Performance Bonus. In addition to the Base Salary, Executive shall have the right to receive, and the Company agrees to pay to Executive, a performance bonus for each calendar year during the Term of this Agreement, in such amounts as the Committee, in its sole discretion, may determine (the "Performance Bonus"). If the Board, either directly or through the Committee, establishes performance measures for senior officers (which term is intended to include Executive), those established criteria will be used to determine Executive's entitlement to a Performance Bonus. Notwithstanding the foregoing, nothing in this Agreement obligates the Board to establish such performance measures, and the lack of established performance measures will not constitute a breach of this Agreement in any manner. In lieu of established performance measures, the Board will determine Executive's Performance Bonus solely in its discretion. The parties hereto acknowledge that any corporate or individual performance objectives established pursuant to this Section 3(b) will be determined prior to, or as soon as possible after, the beginning of each calendar year and that such objectives may objectively be met by Executive. The aggregate Performance Bonus for a calendar year payable in accordance with the provisions of this Section 3(b) is expected to be up to 100% of the Base Salary for such calendar year. Further, Executive shall only be entitled to receive a Performance Bonus for a calendar year if Executive has been and continues to be retained by the Company as an executive officer of the Company for the full calendar year (or such shorter period if Executive is promoted to an executive position during the calendar year in question) or if (i) the Company terminates Executive's employment without Cause (as defined below), (ii) Executive terminates his employment for Good Reason (as defined below), (iii) Executive terminates his employment for any reason simultaneously with, or within six months following, a Change of Control, or (iv) if Executive does not terminate his employment simultaneously with, or within six months following, a change of control, and Executive's employment ends for any reason within 24 months following a Change of Control. Any amount of Performance Bonus required to be paid to Executive for a calendar year during the Term of this Agreement shall be paid by the Company to Executive during the pay period of the Company following finalization of the audit for such calendar year and final review and approval of the bonus calculation by the Committee, and, in all events, on or before March 31 of the year immediately following the end of the calendar year for which such Performance Bonus is attributable. (c) Health Insurance and Other Benefits. (1) During the Term of this Agreement and subject to the limitations and affirmative rights set forth in this Section 3(c), Executive and his eligible dependents shall have the right to participate in any life, disability, health, dental, vision and other benefit plans or programs that have been or are hereafter adopted or maintained by the Company (or in which the Company participates) according to the terms of such plan or program with all of the benefits, rights and privileges as are enjoyed by any other senior executive officer of the Company (but in any event not less than what is offered to employees that are not senior executive officers). In addition, Executive shall be covered by any and all policies of directors and officers insurance coverage obtained by the Board from time to time for its senior executive officers, the terms of which shall be established by the Board in its sole discretion. (2) During the Term of this Agreement and subject to the limitations and affirmative rights set forth in this Section 3(c), Executive and his eligible dependents shall have the right to participate in any retirement, pension, or other similar benefit plan or program that has been or is hereafter adopted by the Company (or in which the Company participates) according to the terms of such plan or program with all the benefits, rights and privileges as are enjoyed by any other senior executive officer of the Company. (3) If the participation of Executive under a plan described in subsection (2) above would adversely affect the qualification of a plan intended to be qualified under the Internal Revenue Code of 1986, as amended from time to time (the "Code"), the Company shall have the right to exclude Executive from that plan in return for his participation in (x) a non-qualified deferred compensation plan or (y) an arrangement providing substantially comparable benefits on an after-tax basis under a plan that is either a qualified or non-qualified plan under the Code at the Company's option. (4) Notwithstanding anything to the contrary contained herein, the Company reserves the right to amend or terminate any plan described in this Section 3(c) for any reason; provided, however, that (i) no such amendment that would reduce the benefits of Executive will be adopted unless it affects other senior executive officers across-the-board, and (ii) if any plan amendment or termination reduces the benefits of Executive, the Company agrees to adopt or maintain one or more replacement plans that will provide Executive with reasonably comparable benefits on an after-tax basis throughout the Term of this Agreement. (d) Vacation and Leaves of Absence. Executive shall be entitled to five (5) weeks of paid vacation leave during each twelve (12) month calendar period (considered to be granted for each half-year as of the first day of that half-year) and paid holidays in accordance with the Company's established policies. Executive may accrue unused vacation time if not used in any calendar year or years, however, the maximum cumulative amount of vacation time that Executive may accrue and carry over to the next year is 240 hours. In addition to the foregoing, Executive may be granted leaves of absence with or without pay for such other reasons as shall be mutually agreed upon by the Board and Executive. (e) Expenses. Executive shall be reimbursed, subject to the Company's receipt of invoices or similar records as the Company may reasonably request in accordance with its policy and procedures, for all reasonable and necessary expenses incurred by Executive in the performance of his duties hereunder. In addition, the Company agrees to pay, or reimburse Executive for, any legal fees and costs he incurs in connection with the negotiation and execution of this Agreement, up to a maximum of $10,000, and for any reasonable legal fees and costs he incurs in connection with the negotiation and execution of renewals, extensions and amendments of this Agreement. (f) Life Insurance. The Company shall provide $2,000,000 of life insurance coverage for the benefit of Executive during the Term of this Agreement. 4. Termination and Termination Benefits. (a) Termination by Prime. (1) Without Cause. Subject to the notice provisions set forth in Section 2 hereof, the Company may terminate this Agreement and Executive's services at any time for any reason, and after any required notice is provided to Executive he shall continue to perform his duties under this Agreement during the notice period if the Company so elects. In connection with the termination of Executive's services without Cause during the Term of this Agreement, pursuant to this Section 4(a)(1), Executive (and Executive's eligible dependents with respect to paragraph (D) below) shall be entitled to receive: (A) all accrued but unpaid amounts of the Base Salary and vacation through the effective date of termination, payable upon termination and in accordance with the provisions of Sections 3(a) and 3(d) above; (B) if such termination occurs during the Original Term, a termination payment in an amount equal to the product of (x) the number of full and partial years remaining in the Original Term, and (y) the sum of (i) Executive's then current Base Salary and (ii) a bonus payment equal to 100% of the average annual bonus paid to Executive for the two most recent calendar years in which he received a bonus, or if no such bonus payments were made to Executive, a bonus payment equal to 50% of his then current Base Salary (the sum of the amounts determined by adding clauses (i) and (ii) is in the aggregate hereinafter referred to as the "One-Year Pay Equivalent"), and the product of (x) and (y) shall be payable within thirty (30) days of the effective date of termination; (C) any vested benefits or amounts pursuant to Sections 3(c), 3(e) and 3(f) hereof through the effective date of termination, payable in accordance with the provisions of any such plan(s); and (D) if such termination occurs during the Original Term, (i) the Company-paid health insurance benefits specified in Section 3(c)(1) above for a period of twelve (12) months following the effective date of termination and (ii) following such period, Executive shall be entitled to all rights afforded to him under the federal Consolidated Omnibus Budget Reconciliation Act ("COBRA") to purchase continuation coverage of health insurance benefits for himself and his dependents for the maximum period permitted by law. If such termination occurs during the Extended Term, Executive will be entitled to all rights afforded to him under COBRA to purchase continuation coverage of health insurance benefits for himself and his dependents for the maximum period permitted by law. In the event that Executive is terminated without Cause pursuant to this Section 4(a)(1) or resigns for Good Reason and within 12 months from the effective date of such termination or resignation there is a "Change in Control" of the Company (as defined below), then Executive shall be entitled to receive the benefits set forth in Section 4(d) hereof to the extent and in the amount that such benefits exceed the amounts paid or received by Executive pursuant to this Section 4(a)(1). (2) With Cause. The Company may terminate this Agreement with "Cause" immediately upon written notice to Executive. In connection with the termination of Executive's services pursuant to this Section 4(a)(2), Executive (and Executive's eligible dependents with respect to paragraph (C) below) shall be entitled to: (A) receive all accrued but unpaid amounts of the Base Salary and vacation through the effective date of termination, payable in accordance with the provisions of Sections 3(a) and 3(d) above; (B) receive the vested benefits or amounts pursuant to Sections 3(c), 3(e) and 3(f) hereof through the effective date of termination, payable as otherwise provided in such Sections; and (C) exercise all rights afforded to him under COBRA to purchase continuation coverage of health insurance benefits for himself and his dependents for the maximum period permitted by law. (3) "Cause" Defined. For purposes of this Agreement, "Cause" shall mean a reasonable, good faith finding by a majority of the Board (A) that Executive has harmed the Company through an act of dishonesty or material conflict of interest that relates to the performance of Executive's duties hereunder, (B) of Executive's conviction of a felony involving moral turpitude, fraud or embezzlement, (C) that Executive's willful failure to perform in any material respect his duties under this Agreement (other than a failure due to disability) that results in material harm to the Company, after written notice specifying the failure and a reasonable opportunity of at least thirty (30) days to cure (it being understood that if Executive's failure to perform is not of a type requiring a single action to fully cure, then Executive may commence the cure promptly after such written notice and thereafter diligently prosecute such cure to completion) or (D) of a material and willful breach by Executive of any of his obligations hereunder and the failure of Executive to cure such breach within thirty (30) days after receipt by Executive of a written notice of the Company specifying in reasonable detail the nature of the breach. The Company intends that "Cause" must be based only on meaningful and significant matters and not on matters of minor importance. For purposes of this Section, an act, or failure to act, on Executive's part shall be considered "willful" only if done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. (4) Disability. If due to illness or physical or mental disability, Executive shall fail to perform the material duties required by this Agreement during any four (4) consecutive months during the Term of this Agreement, the Company may terminate this Agreement, subject to the notice provisions set forth in Section 2 hereof. In such event, Executive (and Executive's eligible dependents with respect to paragraph (D) below) shall receive: (A) all accrued but unpaid amounts of the Base Salary and vacation through the effective date of termination, payable in accordance with the provisions of Sections 3(a) and 3(d) above; (B) if, and only if, the Company has terminated or otherwise materially reduced Executive's long-term disability coverage that was in effect on the Effective Date of this Agreement, then Executive shall be entitled to receive 1.5 times the One-Year Pay Equivalent; (C) any vested benefits or amounts pursuant to Sections 3(c), 3(e) and 3(f) hereof through the effective date of termination, payable in accordance with the provisions of any such plan(s); and (D) the benefits described in Section 4(a)(1)(D). This Section 4(a)(4) shall not limit the entitlement of Executive, his estate or beneficiaries to any disability or other benefits available to Executive under any disability insurance or other benefits plan or policy that is maintained by the Company for Executive's benefit. (b) Termination by Executive for Any Reason. (1) Subject to the notice requirements set forth in Section 2 hereof, Executive may terminate this Agreement at any time with or without Good Reason (as defined herein), and after any required notice is provided to the Company Executive shall continue to perform his duties under this Agreement during the notice period if the Company so elects. If Executive terminates his employment for Good Reason, the Company shall pay him the compensation and other benefits provided above in Section 4(a)(1) as if it had terminated his employment without Cause after providing the requisite notice pursuant to Section 2 hereof. In connection with the termination of this Agreement pursuant to this Section 4(b)(1) other than for Good Reason, Executive (and Executive's eligible dependents with respect to paragraph (D) below) shall be entitled to receive: (A) all accrued but unpaid amounts of the Base Salary and vacation through the effective date of termination, payable in accordance with the provisions of Sections 3(a) and 3(d) above; (B) any earned and unpaid bonus(es) otherwise payable to him in accordance with Section 3(b); (C) any vested benefits or amounts pursuant to Sections 3(c), 3(e) and 3(f) hereof through the effective date of termination, payable as otherwise provided in such Sections; and (D) all rights afforded to him under COBRA to purchase continuation coverage of health insurance benefits for himself and his dependents for the maximum period permitted by law. (E) "Good Reason" Defined. For purposes of this Agreement, "Good Reason" shall mean (A) the material breach by the Company of any of its obligations hereunder (a bona fide dispute regarding the Performance Bonus shall not be a material breach by the Company) and the failure of the Company to cure such breach within thirty (30) days (reduced to ten (10) days for failure to pay Base Salary) after receipt by the Company of a written notice from Executive specifying in reasonable detail the nature of the breach, unless such breach requires a longer period to cure, then the Company shall have the right to cure such breach within such additional period of time not to exceed sixty (60) days; (B) Executive's title or scope of responsibilities and duties are materially diminished from the level provided in this Agreement, or the Company fails to provide Executive with adequate office facilities and support services to perform such responsibilities and duties; or (C) the Company changes Executive's principal place of employment to a location more than 25 miles from the Company's principal Baltimore City office as of the Effective Date. Executive's delay in providing notice of his termination for Good Reason shall not be deemed to be a waiver of any such Good Reason unless and until Executive fails to provide such notice within six months after the occurrence of the event triggering such Good Reason, nor does the failure to resign for one Good Reason prevent any later Good Reason resignation for a similar or different reason. (c) Death. Notwithstanding any other provision of this Agreement, this Agreement shall terminate on the date of Executive's death. In this event, Executive's estate shall be entitled to receive all accrued but unpaid amounts of Executive's Base Salary, performance bonus and vacation through the date of Executive's death, payable in accordance with the provisions of Sections 3(a) and 3(d) above. In addition, Executive's eligible dependents shall be entitled to receive the benefits specified in Section 4(a)(1)(D) above, to the extent applicable to dependents. This Section 4(c) shall not limit the entitlement of Executive under any insurance or other benefits plan or policy that is maintained by Prime for Executive's benefit. (d) Termination Following a Change of Control. If (i) Executive terminates this Agreement for any reason simultaneously with a Change of Control (in which event notice under Section 2 above shall not be necessary and the termination payments to be made under Sections 4(d)(1), 4(d)(2) and 4(d)(3) shall be paid simultaneously with, and as a part of, the Change of Control), (ii) within six (6) months following a Change of Control Executive terminates this Agreement for any reason, subject to the notice provisions of Section 2 hereof, or (iii) within 24 months following a Change of Control, the Company terminates this Agreement during its Original Term other than for Cause or Executive terminates this Agreement during its Original Term with Good Reason, the Company shall pay Executive (and Executive's eligible dependents with respect to paragraph (D) below) the following benefits and payments: (1) all accrued but unpaid amounts of Base Salary and vacation through the effective date of termination, payable in accordance with the provisions of Sections 3(a) and 3(d) above; (2) a termination payment in an amount equal to the product of (x) the number of full and partial years remaining in the Original Term (or, if greater, 2 years) and (y) the One-Year Pay Equivalent, which amount shall be payable within thirty (30) days of the effective date of termination; (3) notwithstanding any other terms of any plan, any vested benefits or amounts pursuant to Section 3(c), 3(e) and 3(f) hereof through the effective date of termination, payable in accordance with the provisions of any such plan(s); and (4) the health insurance benefits described in Section 3(c)(1) above for the maximum period permitted under COBRA at the Company's sole expense, together with either (i) additional benefits equivalent to those in effect at the date of termination, such that Executive will receive Company-paid coverage for a total of 24 months or (ii) if providing such benefits is not permitted by the tax laws or applicable benefit plans, the after-tax equivalent of the premiums paid by the Company for such coverage. (e) "Change of Control" Defined. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if (1) any "person" or "group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, regardless of whether applicable), other than a trustee or other fiduciary holding securities under an employee benefit plan of Prime or a corporation owned directly or indirectly by the stockholders of Prime in substantially the same proportions as their ownership of stock of Prime becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of Prime representing 50% or more of the total voting power represented by Prime's then outstanding securities that vote generally in the election of directors (referred to herein as "Voting Securities"); (2) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new directors whose election by the Board or nomination for election by Prime's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board; (3) the individuals who constitute the Board immediately before a proxy contest cease to constitute at least a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied) immediately following the proxy contest; (4) a merger or consolidation of Prime with or into any other entity, other than a merger or consolidation (i) that would result in the Voting Securities of Prime outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 50% of the total voting power represented by the Voting Securities of Prime or such surviving entity outstanding immediately after such merger or consolidation or (ii) where more than 50% of the Board of Directors of the surviving entity is composed of members from the Board of Directors of Prime, with terms ending at least 11 months after the date of the merger or consolidation; or (5) the stockholders of Prime approve a plan of complete liquidation of Prime or an agreement for the sale or disposition by Prime of (in one transaction or a series of transactions) all or substantially all of Prime's assets, and such transaction is substantially completed. However, in no event will a Change of Control be deemed to have occurred, with respect to Executive, if Executive is part of a purchasing group that consummates the Change of Control transaction. Executive will be deemed to be "part of the purchasing group" for purposes of the preceding sentence if Executive is an equity participant in the purchasing company or group (except for: (i) passive ownership of less than three percent of the stock of the purchasing company; or (ii) ownership of equity participation in the purchasing company or group which is otherwise not significant, as determined prior to the Change of Control by a majority of the non-employee continuing directors). (f) The Company may make any payments due Executive under Sections 4(d) and 6 before the completion of the Change of Control, if, in the reasonable opinion of the Chairman of the Board's Compensation Committee (the "Chairman"), all conditions for completion of the Change of Control are substantially likely to be met. At that time, the Chairman may release the payments or authorize the option vesting, subject to Executive's agreement to promptly return such payments and agree to rescission of the vesting if the Change of Control does not then occur. (g) Purchase of Life Insurance. Notwithstanding anything to the contrary contained herein, in the event that the services of Executive with the Company terminate for any reason other than death, Executive shall have the right to acquire any life insurance policies maintained by the Company on the life of Executive by (i) notifying the Company in writing of his desire to so purchase such life insurance policy or policies and (ii) tendering to the Company a cashier's check in an amount equal to the interpolated surrender cash value of such life insurance policy or policies together with any unearned portion of any current year premium thereof, both within sixty (60) days of the effective date of such termination. 5. Covenants of Executive. (a) No Conflicts. Executive represents and warrants that he is not personally subject to any agreement, order or decree that restricts his acceptance of this Agreement and performance of his duties with the Company hereunder. (b) Non-Disclosure. Executive shall not disclose or use, except for or on behalf of the "Group" (consisting of Prime and the Operating Partnership and any of their direct and indirect subsidiaries), any Trade Secret (as hereinafter defined) of the Group, whether such Trade Secret is in Executive's memory or embodied in writing or other physical form. For purposes of this Section 5(b), "Trade Secret" means any information that derives independent economic value, actual or potential, with respect to the Company from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and is the subject of efforts to maintain its secrecy that are reasonable under the circumstances, including, but not limited to, trade secrets, customer lists, sales records and other proprietary commercial information. Said term, however, shall not include general "know-how" information acquired by Executive during the course of his service. Executive shall be subject to the restrictions of this Section 5(b) indefinitely. (c) Non-Solicitation. During the period of the later of (i) Executive's employment under this Agreement, or (ii) throughout the Original Term of this Agreement, but only if Executive resigns other than for Good Reason or is terminated by the Company with Cause, (the "Restrictive Period") and within the United States (the "Restrictive Geographic Area"), Executive shall not hire, cause to be hired, or induce or attempt to induce any officer, employee, agent, consultant, independent contractor, tenant or customer of the Company to discontinue such affiliation with the Company or to refrain from entering into new business relationships with the Company. Notwithstanding the foregoing, if any officer, employee, agent, consultant, independent contractor, tenant or customer of the Company is contacted by, or receives a general communication or solicitation directed to the general public from, an entity with which Executive has become employed or otherwise affiliated, the parties hereto agree that such contact or communication shall not violate this provision unless Executive directly or indirectly initiated it. The time period during which the prohibitions set forth above apply shall be extended by the length of time during which it is judicially determined that Executive has violated any such prohibition in any respect. (d) Non-Competition. In return for the performance of the management duties described in Section 1 hereof, Executive agrees that (A) during the Restrictive Period he will not directly or indirectly, in any capacity whatsoever, either on his own behalf or on behalf of any other person or entity with whom he may be employed or associated, perform or solicit services for any of the following entities: The Mills Corporation; Tanger Factory Outlet Centers, Inc.; Chelsea GCA Realty, Inc.; New Plan Excel Realty Trust, Inc.; and Charter Oak Partners. Executive agrees and acknowledges that during the Restrictive Period he is prohibited from providing accounting or other financial services to any of the named entities in this Section 5(d); however, Executive is not prohibited from joining or otherwise associating with an accounting or consulting firm in which other professionals provide such services to any of the named entities. (e) Return of Documents. Upon termination of his services with the Company, Executive shall return all originals and copies of books, records, documents, customer lists, sales materials, tapes, keys, credit cards and other tangible property of the Company within Executive's possession or under his control. Executive shall have the right to retain copies of forms and other documents used by the Company, redacted to remove the specific references to the Company. (f) Equitable Relief. In the event of any breach by Executive of any of the covenants contained in this Section 5, it is specifically understood and agreed that Company shall be entitled, in addition to any other remedy that it may have, to seek equitable relief by way of injunction, an accounting or otherwise. (g) Acknowledgment. Executive acknowledges that he will be directly and materially involved as a senior executive in important policy and operational decisions of Company. Executive further acknowledges that the scope of the foregoing restrictions has been specifically bargained between Company and Executive, each being fully informed of all relevant facts. Accordingly, Executive acknowledges that the foregoing restrictions of this Section 5 are fair and reasonable, are necessary to protect the Company, its other stockholders and the public from the unfair competition of Executive who, as a result of his performance of services on behalf of the Company, will have had unlimited access to the most confidential and important information of the Company, its business and future plans. Executive furthermore acknowledges that no unreasonable harm or injury will be suffered by him from enforcement of the covenants contained herein and that he will be able to earn a reasonable livelihood following termination of his services notwithstanding enforcement of the covenants contained herein. (h) Indemnification. The Company shall, to the maximum extent permitted by law, and in addition to any such rights granted to or available to Executive under the Company's Articles and By-Laws, or standing or other resolutions, defend, indemnify and hold harmless Executive from and against any and all claims made against Executive concerning or relative to his service, actions, or omissions on behalf of the Company as an employee, officer, director or agent of the Company. The Company shall, upon Executive's request, promptly advance or pay any amounts for costs, charges, or expenses (including, without limitation, legal fees and expenses incurred by counsel retained by Executive) in respect of his right to indemnification hereunder, subject to a later determination as to Executive's ultimate right to receive such payment. Executive's right to indemnification shall survive until the expiration of any applicable statute of limitations, without regard to the earlier termination of Executive's employment hereunder or of the Term. 6. Golden Parachute Provision. (a) Gross Up Payments. Anything in this Agreement to the contrary notwithstanding, in the event that any payment by or on behalf of the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section) (the "Payments") is determined to be an "excess parachute payment" pursuant to Code Section 280G or any successor or substitute provision of the Code, with the effect that Executive is liable for the payment of the excise tax described in Code Section 4999 or any successor or substitute provision of the Code, or any interest or penalties are incurred by Executive with respect to such Payments (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Executive shall be entitled to receive an additional payment from the Operating Partnership (the "Gross-Up Payment") in an amount such that after payment by Executive of all taxes imposed upon the Gross-Up Payment, including, without limitation, federal, state, local or other income taxes, FICA taxes, and additional Excise Tax (and any interest and penalties imposed with respect to such taxes), Executive retains a portion of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Determination of Gross-Up. Subject to the provisions of paragraph (c) below, all determinations required to be made under this Section 6, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that serves as the Company's auditors (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and Executive within 15 business days of the receipt of notice from the Company or Executive that there have been Payments, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, Executive shall designate another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 6, shall be paid by the Company to Executive within five days after the receipt by the Company and Executive of the Accounting firm's determination. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall furnish Executive with a written opinion that failure to report the Excise Tax on Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and Executive, except as provided in paragraph (c) below. (c) IRS Claims. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that the Internal Revenue Service or other agency will claim that a greater Excise Tax is due, and thus a greater amount of Gross-Up Payment should have been made by the Company than that determined pursuant to paragraph (a) above (an "Underpayment"). In the event that Executive is required to make a payment of any such Excise Tax, the Accounting Firm shall determine the amount of the additional Gross-Up Payment due to Executive based on the Underpayment, and such additional Gross-Up Payment shall be promptly paid by the Company to or for the benefit of Executive. Executive shall notify the Company in writing of any claim by the Internal Revenue Service or other agency that, if successful, would require the payment by the Company of the Gross-Up Payment or an Underpayment. 7. Transfer of Equity Interest to Employer Upon Termination of Employment. As of the Date of Termination and in consideration for the payment of $100.00 cash, Executive agrees to execute and deliver to Prime or its designee any and all certificates for shares of capital stock (with appropriate stock powers attached and properly signed) of Prime's subsidiaries and affiliates (other than the Operating Partnership), including, but not limited to Prime Retail E-Commerce, Inc., Prime Retail Stores, Inc., and Prime Retail Furniture, Inc. (all of which are Maryland corporations) (the "Subsidiary Shares"). Executive further agrees to execute and deliver such other documentation as Prime reasonably requests to effect the assignment of the Subsidiary Shares. For the avoidance of doubt, nothing contained in this Section 7 will be deemed to require Executive to transfer or carry any of his equity interests in Prime or the Operating Partnership. 8. Prior Agreement. This Agreement supersedes and is in lieu of any and all other employment or service arrangements between Executive, on the one hand, and Prime and/or the Operating Partnership or its predecessors or any subsidiaries, on the other hand, and any and all such employment or service agreements and arrangements are hereby terminated and deemed of no further force or effect. 9. Assignment. Neither this Agreement nor any rights or duties of Executive hereunder shall be assignable by Executive and any such purported assignment by him shall be void. Prime may assign all or any of its right hereunder provided that substantially all of the assets of the Company are also transferred to the same party; provided, however, that Prime and the Operating Partnership, jointly and severally shall remain primarily liable to Executive to fulfill all of the Company's obligations under this Agreement and that any such assignee also agrees to be primarily liable to Executive jointly and severally with the Company to fulfill all of the Company's obligations under this Agreement as provided in Section 10 below. 10. Successors. This Agreement shall inure to the benefit of and be enforceable by Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees and the Company's successors and assigns. If Executive should die while any amounts are still payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there be no such designee, to Executive's estate. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of the Company, as the case may be, by agreement in form and substance reasonably satisfactory to Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Any failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement. 11. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if delivered in person or sent by any national overnight delivery service or by certified mail to the following addresses (or to any other address that any party may designate by notice to the other parties hereto): (a) if to Executive, to: R. Kelvin Antill 23 Murray Hill Circle Baltimore, Maryland 21212 with a copy to (which shall not constitute notice): David C. Dembert, Esq. Suite 1910 One South Street Baltimore, Maryland 21202 (b) if to Prime or to the Operating Partnership, to: Prime Retail, Inc. Attn: Board of Directors 100 East Pratt Street 19th Floor Baltimore, Maryland 21202 with a copy to (which shall not constitute notice): Winston & Strawn Attn: Steven J. Gavin 35 West Wacker Drive Chicago, Illinois 60601 12. Amendment. This Agreement may not be changed, modified or amended except in writing signed by all of the parties hereto. 13. Waiver of Breach. The waiver by any of the parties hereto of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by any part. 14. Severability. The Company and Executive each expressly agree and contract that it is not the intention of any of the parties hereto to violate any public policy, statutory or common law, and that if any sentence, paragraph, clause or combination of the same of this agreement is in violation of the law of any state where applicable, such sentence, paragraph, clause or combination of the same shall be void in the jurisdictions where it is unlawful, and the remainder of such paragraph and this Agreement shall remain binding on the parties to make the covenants of this Agreement binding only to the extent that it may be lawfully done under existing applicable laws. In the event that any part of any covenant of this Agreement is determined by a court of competent jurisdiction to be overly broad thereby making the covenant unenforceable, the parties hereto agree, and it is their desire that such court shall substitute a judicially enforceable limitation in its place, and that as so modified the covenant shall be binding upon the parties as if originally set forth herein. 15. Opportunity to Employ Counsel. Executive acknowledges receipt of a copy of this Agreement prior to his execution of this Agreement with the Company and also acknowledges that he has had ample time and opportunity to employ counsel of his choice to provide advice concerning the terms and conditions of this Agreement. 16. Legal Fees. If any dispute or disagreement arising hereunder or related hereto shall result in legal action between the Company and Executive, Executive shall be entitled, within 30 days after incurring such fees and disbursements, to recover from the Company any reasonable expenses for attorney's fees and disbursements incurred by him in connection with Executive's good faith maintenance or defense of such action, on an after-tax basis, unless Executive does not prevail in such action. 17. No Mitigation. The Company waives, releases and remises (x) any obligation or duty under applicable law or otherwise on the part of Executive to seek or obtain other engagements or employment or to otherwise mitigate any payments or damages to which Executive may be entitled to by reason of any operation or termination of this Agreement; and (y) any right in or claim to any remuneration or compensation received by Executive pursuant to any engagements or employment subsequent to the termination of this Agreement. 18. Governing Law. This Agreement shall be governed by, and construed, interpreted and enforced in accordance with the laws of the State of Maryland, exclusive of the conflict of laws provisions of the State of Maryland. 19. Binding Effect. This Agreement shall be binding and legally enforceable against the parties hereto and their respective heirs, personal representatives, successors and assigns, as the case may be. (signature page follows) IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EXECUTIVE: /s/ R. Kelvin Antill - -------------------------------------------- R. Kelvin Antill PRIME RETAIL, INC., PRIME RETAIL, L.P., a Maryland corporation a Delaware limited partnership By: /s/ Glenn D. Reschke By: Prime Retail, Inc. ----------------------------------- Name: Glenn D. Reschke Its: Sole General Partner Title: President & Chief Executive Officer By: /s/ Glenn D. Reschke -------------------------- Name: Glenn D. Reschke Title: President and Chief Executive Officer Exhibit A Dispute Resolution Mediation If either party has a dispute or claim relating to this Agreement or their relationship and except as set forth in Alternatives, the parties must first seek to mediate the same before an impartial mediator the parties mutually designate, at the Company's expense (other than their respective attorneys' fees). Subject to the mediator's schedule, the mediation must occur within 45 days of either party's written demand. However, in an appropriate circumstance, a party may seek emergency equitable relief from a court of competent jurisdiction notwithstanding this obligation to mediate. Binding If the mediation reaches no solution or the parties Arbitration agree to forego mediation, the parties will promptly submit their disputes to binding arbitration before one or more arbitrators (collectively or singly, the "Arbitrator") the parties agree to select (or whom, absent agreement, a court of competent jurisdiction selects). The arbitration must follow applicable law related to arbitration proceedings and, where appropriate, the Employment Dispute Rules of the American Arbitration Association. Arbitration All statutes of limitations and substantive laws Principles applicable to a court proceeding will apply to this proceeding. The Arbitrator will have the power to grant relief in equity as well as at law, to issue subpoenas duces tecum, to question witnesses, to consider affidavits (provided there is a fair opportunity to rebut the affidavits), to require briefs and written summaries of the material evidence, and to relax the rules of evidence and procedure, provided that the Arbitrator must not admit evidence it does not consider reliable. The parties agree (and the Arbitrator must agree) that all proceedings and decisions of the Arbitrator will be maintained in confidence, to the extent legally permissible, and not be made public by any party or the Arbitrator without the prior written consent of all parties to the arbitration, except as the law may otherwise require. Discovery; The parties have selected arbitration to expedite the Evidence; resolution of disputes and to reduce the costs and Presumptions burdens associated with litigation. The parties agree that the Arbitrator should take these concerns into account when determining whether to authorize discovery and, if so, the scope of permissible discovery and other hearing and pre-hearing procedures. The Arbitrator may permit reasonable discovery rights in preparation for the arbitration, provided that it should accelerate the scheduling of and responses to such discovery so as not to unreasonably delay the arbitration. Exhibits must be marked and left with the Arbitrator until it has rendered a decision. Either party may elect, at its expense, to record the proceedings by audiotape or stenographic recorder (but not by video). The Arbitrator may conclude that the applicable law of any foreign jurisdiction would be identical to that of Maryland on the pertinent issue(s), absent a party's providing the Arbitrator with relevant authorities (and copying the opposing party) at least five business days before the arbitration hearing. Nature of Award The Arbitrator must render its award, to the extent feasible, within 30 days after the close of the hearing. The award must set forth the material findings of fact and legal conclusions supporting the award. The parties agree that it will be final, binding, and enforceable by any court of competent jurisdiction. Where necessary or appropriate to effectuate relief, the Arbitrator may issue equitable orders as part of or ancillary to the award. The Arbitrator may award reasonable attorneys' fees to the prevailing party to the extent a court could have made such an award. Appeal The parties may appeal the award based on the grounds allowed by statute, as well as upon the ground that the award misapplies the law to the facts, provided that such appeal is filed within the applicable time limits law allows. If the award is appealed, the court may consider the ruling, evidence submitted during the arbitration, briefs, and arguments but must not try the case de novo. The parties will bear the costs and fees associated with the appeal in accordance with the arbitration award or, in the event of a successful appeal, in accordance with the court's final judgment. Alternatives This Dispute Resolution provision does not preclude a party from seeking equitable relief from a court (i) to prevent imminent or irreparable injury or (ii) pending arbitration, to preserve the last peaceable status quo, nor does it preclude the parties from agreeing to a less expensive and faster means of dispute resolution. EX-10 6 ex1049.txt EX-10.49 EMPLOYMENT AGREEMENT GLENN D. RESCHKE Ex-10.49 Employment Agreement THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of July 24, 2000, by and between Prime Retail, Inc., a Maryland corporation ("Prime") and the sole general partner of Prime Retail, L.P., a Delaware limited partnership (the "Operating Partnership"), the Operating Partnership, (Prime and the Operating Partnership are sometimes hereinafter together referred to as the "Company"), and Glenn D. Reschke, an individual domiciled in the State of Maryland ("Executive"). Witnesseth WHEREAS, the Company is engaged primarily in the ownership, development, construction, acquisition, leasing, marketing and management of factory outlet centers throughout the United States; WHEREAS, Prime believes that it would benefit from the application of Executive's particular and unique skill, experience, and background to the management and operation of the Company; WHEREAS, Executive wishes to commit himself to serve the Company in the positions set forth herein on the terms herein provided; WHEREAS, the parties wish by this Agreement to amend and restate in entirety the terms and conditions of the relationship between the Company and Executive; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein set forth, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by each of the parties hereto, the Company and Executive hereby agree as follows: 1. Duties. During the Term hereof (as defined in Section 2 hereof), the Company agrees to retain Executive, and Executive agrees to be retained by the Company, as the Chief Executive Officer and, at the determination of the Board of Directors, President and/or Chairman of the Board, on the terms and conditions provided in this Agreement. Executive shall serve in such positions and his duties shall include oversight and responsibility for Employer's sales, marketing, operations, finance and administrative functions. Furthermore, Executive shall exercise such other powers and authority as are customarily inherent in a similar positions in a comparable publicly-held entity or as provided by the By-laws of Prime ("By-laws") and the Agreement of Limited Partnership of the Operating Partnership, as amended (the "Partnership Agreement"). Prime, in its capacity as sole general partner of the Operating Partnership, may, from time to time, in its sole discretion, by action of its Board of Directors (the "Board") further define and clarify Executive's duties and services hereunder or under the By-laws or Partnership Agreement in a manner consistent with the offices for which he has been retained hereunder and the scope of work set forth herein. Executive agrees to devote his best efforts and substantially all of his business time, attention, energy, and skill to performing his duties to the Company under this Agreement. 2. Term. Unless earlier terminated in accordance with the terms of this Agreement, the term of this Agreement shall be a period commending on the date hereof and ending on the third anniversary of such date. On such third anniversary and each succeeding anniversary, the Term of this Agreement shall automatically be extended for an additional one year period unless, not later than one hundred eighty (180) days prior to any such anniversary, either party to this Agreement gives notice to the other that the Term of this Agreement shall not be extended or further extended beyond its then automatically extended Term. 3. Compensation and Related Matters. -------------------------------- (a) Base Salary. For the period of the Term of this Agreement beginning July 24, 2000, and extending through December 31, 2000, the Operating Partnership agrees to pay to Executive a base salary in an aggregate amount of Three Hundred Fifty Thousand Dollars ($350,000) per calendar year, payable in accordance with the general policies and procedures for payment of salaries to any other executive personnel of the Company but in all events payable no less frequently than monthly. During the remainder of the Term of this Agreement, the Executive's annual base salary will be Four Hundred Thousand Dollars ($400,000). The yearly base salary payable to Executive pursuant to the provisions of this Section 3(a) shall be subject to periodic review by the Executive Committee of the Board of Directors of Prime (the "Committee") based upon periodic review of the Executive's performance conducted on at least an annual basis and may be periodically increased or decreased as a result thereof; provided, however, that the yearly base salary payable to the Executive pursuant to the provisions of this Section 3(a) shall in no event be less than Three Hundred Fifty Thousand Dollars ($350,000). The then applicable amount of yearly base salary payable to the Executive pursuant to the provisions of this Section 3(a) shall herein be referred to as the "Base Salary." (b) Performance Bonus. ----------------- (1) In addition to the Base Salary, the Executive shall have the right to receive, and the Operating Partnership agrees to pay to the Executive, a performance bonus for each calendar year during the Term of this Agreement, in such amounts as the Committee, in its sole discretion, may determine. The aggregate Performance Bonus for a calendar year payable in accordance with the provisions of this Section 3(b) shall in no event exceed 100% of the Base Salary for such calendar year. Further, the Executive shall only be entitled to receive a Performance Bonus for a calendar year if the Executive has been and continues to be retained by the Company as an Executive Officer of the Company for the full calendar year or if the Company terminates Executive's employment without cause (as defined below) or Executive terminates his employment for good reason (as defined below). Any amount of Performance Bonus to be paid to the Executive for a calendar year during the Term of this Agreement shall be paid by the Company to the Executive during the pay period of the Company following finalization of the audit for such calendar year and final review and approval of the bonus by the Committee, and, in all events, on or before March 31 of the year immediately following the end of the calendar year for which such Performance Bonus is attributable. (2) In the event of a disagreement with regard to the determination of the Performance Bonus amount, the Committee shall be the final arbiters of such amount, and their determination shall be final and binding on the Company and the Executive. (c) Health Insurance and Other Benefits. ----------------------------------- (1) During the Term of this Agreement and subject to the limitations and affirmative rights set forth in this Section 3(c), Executive and his eligible dependents shall have the right to participate in any health, dental, vision and other medical insurance benefit plans or programs that have been or are hereafter adopted or maintained by the Company (or in which the Company participates) according to the terms of such plan or program with all of the benefits, rights and privileges as are enjoyed by any other senior executive officer of the Company. (2) During the Term of this Agreement and subject to the limitations and affirmative rights set forth in this Section 3(c), Executive and his eligible dependents shall have the right to participate in any retirement, pension, or other similar benefit plan or program that has been or is hereafter adopted by the Company (or in which the Company participates) according to the terms of such plan or program with all the benefits, rights and privileges as are enjoyed by any other senior executive officer of the Company. (3) If the participation of Executive under a plan described in subsection (2) above would adversely affect the qualification of a plan intended to be qualified under the Internal Revenue Code of 1986, as amended from time to time (the "Code"), the Company shall have the right to exclude Executive from that plan in return for his participation in (x) a non-qualified deferred compensation plan or (y) an arrangement providing substantially comparable benefits under a plan that is either a qualified or non-qualified plan under the Code at the Company's option. (d) Vacation and Leaves of Absence. Executive shall be entitled to four (4) weeks of paid vacation leave during each twelve (12) month calendar period and paid holidays in accordance with the Company's established policies. Executive may accrue unused vacation time if not used in any calendar year or years, however, the maximum cumulative amount of vacation time that Executive may accrue and carry over to the next year is four weeks. In addition to the foregoing, Executive may be granted leaves of absence with or without pay for such other reasons as shall be mutually agreed upon by the Board and Executive. (e) Expenses. Executive shall be reimbursed, subject to the Company's receipt of invoices or similar records as the Company may reasonably request in accordance with its policy and procedures, for all reasonable and necessary expenses incurred by the Executive in the performance of his duties hereunder. (f) Life Insurance. The Company shall provide $4,000,000 of term life insurance for the benefit of the Executive during the Term of this Agreement. 4. Termination and Termination Benefits. ------------------------------------ (a) Termination by Prime. -------------------- (1) Without Cause. The Company may terminate this Agreement and Executive's services at any time for any reason or for no reason at all upon thirty (30) days' prior written notice to Executive. In connection with the termination of Executive's services pursuant to this Section 4(a)(1), Executive (and Executive's eligible dependents with respect to paragraph (D) below) shall be entitled to receive: (A) all accrued but unpaid amounts of the Base Salary through the effective date of termination, payable in accordance with the provisions of Section 3(a) above; (B) a termination payment in an amount equal to the sum of (x) one (1) times the amount of the Base Salary then applicable, plus (y) one (1) times the average of the amounts payable to the Executive pursuant to the provisions of Section 3(b) hereof for the two (2) calendar years immediately preceding the calendar year in which the effective date of the termination of this Agreement occurs (the sum of the amounts determined by adding subsection (x) and (y) is in the aggregate hereinafter referred to as the "Normal Termination Payment"), and the Normal Termination Payment shall be payable within thirty (30) days of the effective date of termination; (C) any vested benefits or amounts pursuant to Sections 3(c), 3(d), 3(e) and 3(f) hereof through the effective date of termination, payable in accordance with the provisions of any such plan(s); (D) the health insurance benefits specified in Section 3(c)(1) above for a period of twelve (12) months following the effective date of termination, and following such time period, the Executive shall be entitled to all rights afforded to him under the federal Consolidated Omnibus Budget Reconciliation Act ("COBRA") to purchase continuation coverage of such health insurance benefits for himself and his dependents for the maximum period permitted by law (with respect to this paragraph (D), to the extent required by applicable law, Executive shall be deemed to have elected to exercise his rights under COBRA as of the first day following the effective date of termination); and (E) the life insurance benefits specified in Section 3(f) above for a period of twelve (12) months following the effective date of termination. In the event that Executive is terminated without cause pursuant to this Section 4(a)(1) and within twelve months from the effective date of such termination there is a "Change in Control" of the Company (as defined below), then Executive shall be entitled to receive the benefits set forth in Section 4(e) hereof to the extent and in the amount that such benefits exceed the amounts paid or received by Executive pursuant to this Section 4(a)(1). (2) With Cause. The Company may terminate this Agreement with "cause" immediately upon written notice to Executive. In connection with the termination of Executive's services pursuant to this Section 4(a)(2), Executive (and Executive's eligible dependents with respect to paragraph (D) below) shall be entitled to: (A) receive all accrued but unpaid amounts of the Base Salary through the effective date of termination, payable in accordance with the provisions of Section 3(a) above; (B) forfeit his entitlement to any bonuses or other payments otherwise payable to him in accordance with Section 3(b) hereof; (C) receive the vested benefits or amounts pursuant to Sections 3(c), 3(d), 3(e) and 3(f) hereof through the effective date of termination, payable as otherwise provided in such Sections; (D) receive the health insurance benefits specified in Section 3(c)(1) above for a period of three (3) months following the effective date of termination, and following such time period, the Executive shall be entitled to all rights afforded to him under COBRA to purchase continuation coverage of such health insurance benefits for himself and his dependents for the maximum period permitted by law (with respect to this paragraph (D), to the extent required by applicable law, Executive shall be deemed to have elected to exercise his rights under COBRA as of the first day of following the effective date of termination); and (E) receive the life insurance benefits specified in Section 3(f) above for a period of three (3) months following the effective date of termination. (3) "Cause" Defined. For purposes of this Agreement, "Cause" shall mean a reasonable, good faith finding by a majority of the Board (A) that Executive has harmed the Company through an act of dishonesty or material conflict of interest that relates to the performance of Executive's duties hereunder, (B) of Executive's conviction of a felony involving moral turpitude, fraud or embezzlement, (C) that Executive's willful failure to perform in any material respect his duties under this Agreement (other than a failure due to disability) that results in material harm to the Company, after written notice specifying the failure and a reasonable opportunity of at least thirty (30) days to cure (it being understood that if Executive's failure to perform is not of a type requiring a single action to fully cure, then Executive may commence the cure promptly after such written notice and thereafter diligently prosecute such cure to completion) or (D) of a material and willful breach by Executive of any of his obligations hereunder and the failure of Executive to cure such breach within thirty (30) days after receipt by Executive of a written notice of the Company specifying in reasonable detail the nature of the breach. The Company intends that "Cause" must be based only on meaningful and significant matters and not on matters of minor importance. For purposes of this Section, an act, or failure to act, on Executive's part shall be considered "willful" only if done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. (4) Disability. If due to illness, physical or mental disability, or other incapacity, Executive shall fail to perform the duties required by this Agreement during any four (4) consecutive months during the Term of this Agreement, the Company may terminate this Agreement upon thirty (30) days written notice to Executive. In such event, Executive (and Executive's eligible dependents with respect to paragraph (D) below) shall receive: (A) all accrued but unpaid amounts of the Base Salary through the effective date of termination, payable in accordance with the provisions of Section 3(a) above; (B) a Normal Termination Payment which shall be payable within thirty (30) days of the effective date of termination; (C) any vested benefits or amounts pursuant to Sections 3(c), 3(d), 3(e) and 3(f) hereof through the effective date of termination, payable in accordance with the provisions of any such plan(s); (D) the health insurance benefits specified in Section 3(c)(1) above for a period of twelve (12) months following the effective date of termination, and following such time period, the Executive shall be entitled to all rights afforded to him under COBRA to purchase continuation coverage of such health insurance benefits for himself and his dependents for the maximum period permitted by law (with respect to this paragraph (D), to the extent required by applicable law, Executive shall be deemed to have elected to exercise his rights under COBRA as of the first day following the effective date of termination); and (E) the life insurance benefits specified in Section 3(f) above for a period of twelve (12) months following the date of termination. This Section 4(a)(iii) shall not limit the entitlement of the Executive, his estate or beneficiaries to any disability or other benefits available to Executive under any disability insurance or other benefits plan or policy that is maintained by the Company for Executive's benefit. (b) Termination by Executive. ------------------------ (1) With Good Reason. Executive may terminate this Agreement with "good reason" upon written notice to the Company. In connection with the termination of this Agreement pursuant to this Section 4(b)(1), Executive (and Executive's eligible dependents with respect to paragraph (E) below) shall be entitled to receive: (A) all accrued but unpaid amounts of the Base Salary through the effective date of termination, payable in accordance with the provisions of Section 3(a) above; (B) a termination payment in an amount equal to one (1) times the amount of the Base Salary, payable within thirty (30) days of the effective date of termination; (C) any earned and unpaid bonus(es) otherwise payable to him in accordance with Sections 3(b); (D) any vested benefits or amounts pursuant to Sections 3(c), 3(d), 3(e) and 3(f) hereof through the effective date of termination, payable as otherwise provided in such Sections; (E) the health insurance benefits specified in Section 3(c)(1) above for the for a period of twelve (12) months following the effective date of termination, and following such time period, the Executive shall be entitled to all rights afforded to him under COBRA to purchase continuation coverage of such health insurance benefits for himself and his dependents for the maximum period permitted by law (with respect to this paragraph (E), to the extent required by applicable law, Executive shall be deemed to have elected to exercise his rights under COBRA as of the first day following the effective date of termination); and (F) the life insurance benefits specified in Section 3(f) above for a period of twelve (12) months following the date of termination. (2) Without Good Reason. Executive may terminate this Agreement at any time for any reason or for no reason at all upon sixty (60) days' written notice to Company, during which period Executive shall continue to perform his duties under this Agreement if Prime so elects. In connection with the termination of Executive's services pursuant to this Section 4(b)(2), Executive (and Executive's eligible dependents with respect to paragraph (C) below) shall be entitled to receive: (A) all accrued but unpaid amounts of the Base Salary through the effective date of termination, paid in accordance with the provisions of Section 3(a) above; (B) the vested benefits and amounts set forth in Sections 3(c), 3(d), 3(e) and 3(f) hereof through the effective date of termination, payable in accordance with the provisions of such Sections; (C) the health insurance benefits specified in Section 3(c)(1) above for a period of six (6) months following the effective date of termination, and following such time period, the Executive shall be entitled to all rights afforded to him under COBRA to purchase continuation coverage of such health insurance benefits for himself and his dependents for the maximum period permitted by law (with respect to this paragraph (C), to the extent required by applicable law, Executive shall be deemed to have elected to exercise his rights under COBRA as of the first day following the effective date of termination); and (D) the life insurance benefits specified in Section 3(f) above for a period of three (3) months following the date of termination. (E) "Good Reason" Defined. For purposes of this Agreement, "good reason" shall mean (A) the material breach by the Company of any of its obligations hereunder (a bona fide dispute regarding the Performance Bonus shall not be a material breach by the Company) and the failure of the Company to cure such breach within thirty (30) days after receipt by the Company of a written notice from the Executive specifying in reasonable detail the nature of the breach, unless such breach requires a longer period to cure, then the Company shall have the right to cure such breach within such additional period of time not to exceed ninety (90) days, (B) Executive's title or scope of responsibilities and duties are diminished as they existed and as provided in this Agreement immediately prior to such event, or the Company fails to provide Executive with adequate office facilities and support services to perform such responsibilities and duties, (C) the amounts payable to the Executive as existed and as provided in this Agreement immediately prior to such event have been materially reduced in any way, or (D) the Company fails to continue in effect any cash or stock-based incentive or bonus plan, retirement plan, welfare benefit plan, or other benefit plan, program or arrangement, unless the aggregate value (as computed by an independent employee benefits consultant) of all such compensation, retirement and benefit plans, programs and arrangements provided to Executive is not materially less than their aggregate value as of the date of this Agreement (or as of the Change of Control, if greater). (c) Death. Notwithstanding any other provision of this Agreement, this Agreement shall terminate on the date of Executive's death. In this event, Executive's estate shall be entitled to receive all accrued but unpaid amounts of the Executive's Base Salary through the date of Executive's death, payable in accordance with the provisions of Section 3(a) above. In addition, the Executive's eligible dependents shall be entitled to receive the health insurance benefits specified in Section 3(c)(1) above for a period of twelve (12) months following the effective date of termination and following such time period, such eligible decedents shall be entitled to all rights afforded to them under COBRA to purchase continuation coverage of such health insurance benefits for the maximum period permitted by law. With respect to the preceding sentence, to the extent required by applicable law, the Executive's dependents shall be deemed to have elected to exercise their rights under COBRA as of the first day following the effective date of termination. This Section 4(c) shall not limit the entitlement of Executive under any insurance or other benefits plan or policy that is maintained by Prime for Executive's benefit. (d) Purchase of Life Insurance. Notwithstanding anything to the contrary contained herein, in the event that the services of the Executive with the Company terminate for any reason other than death, the Executive shall have the right to acquire any life insurance policies maintained by the Company on the life of the Executive by (i) notifying the Company in writing of his desire to so purchase such life insurance policy or policies and (ii) tendering to the Company a cashier's check in an amount equal to the interpolated surrender cash value of such life insurance policy or policies together with any unearned portion of any current year premium thereof, both within sixty (60) days of the effective date of such termination. (e) Termination Following a Change of Control. If, within twenty-four (24) months following a Change of Control, the Company terminates this Agreement and Executive's services other than for cause or Executive terminates this Agreement with good reason, in either case, by giving thirty (30) days' prior written notice, Executive (and Executive's eligible dependents with respect to paragraph (D) below) shall be entitled to receive the following benefits and payments: (A) all accrued but unpaid amounts of the Base Salary through the effective date of termination, payable in accordance with the provisions of Section 3(a) above; (B) a termination payment in an amount equal to $1,600,000, payable within thirty (30) days of the effective date of termination; (C) any vested benefits or amounts pursuant to Sections 3(c), 3(d), 3(e) and 3(f) hereof through the effective date of termination, payable in accordance with the provisions of any such plan(s); (D) the health insurance benefits specified in Section 3(c)(1) above for a period of twenty-four (24) months following the effective date of termination, and following such time period, the Executive shall be entitled to all rights afforded to him under COBRA to purchase continuation coverage of such health insurance benefits for himself and his dependents for the maximum period permitted by law (with respect to this paragraph (D), to the extent required by applicable law, Executive shall be deemed to have elected to exercise his rights under COBRA as of the first day following the effective date of termination); and (E) the life insurance benefits specified in Section 3(f) above for a period of twenty-four (24) months following the effective date of termination. (F) Executive shall be fully vested in all amounts accrued or accumulated on behalf of Executive under any non-qualified retirement plan established or maintained by the Company, and the Company will promptly pay or distribute all such amounts to Executive in accordance with the terms of such plan as in effect on the date of this Agreement (or as of Executive's employment termination, if more favorable to Executive). If Executive is not fully vested in his accounts or benefits under the Company's qualified retirement plan at his employment termination pursuant to this Section, the Company will make a cash payment to Executive, within 30 days of Executive's employment termination, equal to the amount of such account or benefit that is forfeited. (G) All stock awards or grants under the Prime Retail, Inc. [1998] Stock Incentive Plan shall be fully vested any exercisable as of Executive's employment termination. (H) "Change of Control" Defined. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if (1) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of Prime, a corporation owned directly or indirectly by the stockholders of Prime (immediately prior to the initial public offering of Prime) in substantially the same proportions as their ownership of stock of Prime (immediately prior to the initial public offering of Prime), Executive, Michael W. Reschke or Abraham Rosenthal or any of their respective affiliates, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of Prime representing 50% or more of the total voting power represented by Prime's then outstanding securities that vote generally in the election of directors (referred to herein as "Voting Securities"); (2) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new directors whose election by the Board or nomination for election by Prime's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board; (3) the stockholders of Prime approve a merger or consolidation of Prime with any other corporation, other than a merger or consolidation that (i) would result in the Voting Securities of Prime outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 50% of the total voting power represented by the Voting Securities of Prime or such surviving entity outstanding immediately after such merger or consolidation or (ii) 50% or more of the Board of Directors of the surviving entity is composed of members from the Board of Directors of Prime; (4) the stockholders of Prime approve a plan of complete liquidation of Prime or an agreement for the sale or disposition by Prime of (in one transaction or a series of transactions) all or substantially all of Prime's assets. 5. Covenants of Executive. ---------------------- (a) No Conflicts. Executive represents and warrants that he is not personally subject to any agreement, order or decree that restricts his acceptance of this Agreement and performance of his duties with the Company hereunder. (b) Non-Competition. In return for the performance of the management duties described in Section 1 hereof, during the Term of the Agreement and for a period of two years thereafter in the event of the termination of this Agreement pursuant to the provisions of Sections 4(a)(1), 4(a)(2), 4(b)(1), 4(b)(2), or 4(e) hereof (the "Restrictive Period"), Executive shall not, directly or indirectly, in any capacity whatsoever, either on his own behalf or on behalf of any other person or entity with whom he may be employed or associated, compete with the Business (as hereinafter defined) in any of the following described manners: (i) perform services of the types that Executive performs on behalf of the Group (as hereinafter defined) for himself, or any affiliate of himself or for any competitor of the Group if such competitor engages in the Business within the United States and any other geographic area or territory wherein the Group is engaged in the Business at the time of Executive's termination of services hereunder ("Restrictive Geographic Area"); or (ii) solicit or accept any Business (or help any other person solicit or accept any Business) from any person or entity that on the date of this Agreement is a vendor, customer or tenant of the Group or at the time of termination of this Agreement any vendor, customer or tenant that is actively being pursued by the Group and that Executive knows is being pursued. For purposes hereof, "Group" shall mean Prime and the Operating Partnership and any of their respective subsidiaries or affiliates, and the term "Business" means any interest in any real property within the retail business that is within the primary business of the Company, as determined from time to time, by a majority vote of the independent directors of the Company. Furthermore, during the Restrictive Period, Executive shall not, directly or indirectly, induce or attempt to persuade any employee or customer, vendor or tenant of the Group or any such entity being actively pursued by the Group to terminate its business relationship with the Group or not proceed with a business relationship with the Group. Notwithstanding the foregoing, nothing herein shall prohibit Executive from owning 5% or less of any securities of a competitor engaged in the same Business if such securities are listed on a nationally recognized securities exchange or traded over-the-counter on the National Association of Securities Dealers Automated Quotation System or otherwise. So long as the Executive is in compliance with the provisions of this Section 6(b), and in addition to the payments required under any other Section of this Agreement, the Company will pay the Executive an amount equal to $66,666.66 per calendar month in arrears for a period of two (2) years beginning with the first calendar month after termination of this Agreement pursuant to the provisions of Sections 4(a)(1), 4(b)(1), or 4(e) hereof. Upon written notice at any time prior to thirty (30) days before the expiration of the first year after termination, the Company or the Executive may elect to limit the Restrictive Period relating to a termination of this Agreement pursuant to Sections 4(a)(1), 4(b)(1) or 4(e) to one year; whereupon, the $66,666.66 monthly payments shall cease at the end of said first year. If this Agreement is terminated pursuant to the provisions of Sections 4(a)(2) or 4(b)(2) hereof, then the Executive shall not be entitled to receive any amounts during the Restrictive Period. (c) Non-Disclosure. During the Restrictive Period and in the Restrictive Geographic Area, Executive shall not disclose or use, except in the pursuit of the Business for or on behalf of the Group, any Trade Secret (as hereinafter defined) of the Group, whether such Trade Secret is in Executive's memory or embodied in writing or other physical form. For purposes of this Section 6(c), "Trade Secret" means any information that derives independent economic value, actual or potential, with respect to the Company from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and is the subject of efforts to maintain its secrecy that are reasonable under the circumstances, including, but not limited to, trade secrets, customer lists, sales records and other proprietary commercial information. Said term, however, shall not include general "know-how" information acquired by Executive during the course of his service which could have been obtained by him from public sources without the expenditure of significant time, effort and expense that does not relate to the Company. (d) Return of Documents. Upon termination of his services with the Company, Executive shall return all originals and copies of books, records, documents, customer lists, sales materials, tapes, keys, credit cards and other tangible property of the Company within Executive's possession or under his control. (e) Equitable Relief. In the event of any breach by Executive of any of the covenants contained in this Section 6, it is specifically understood and agreed that Company shall be entitled, in addition to any other remedy that it may have, to equitable relief by way of injunction, an accounting or otherwise and to notify any employer or prospective employer of Executive as to the terms and conditions hereof. (f) Acknowledgment. Executive acknowledges that he will be directly and materially involved as a senior executive in all important policy and operational decisions of Company. Executive further acknowledges that the scope of the foregoing restrictions has been specifically bargained between Company and Executive, each being fully informed of all relevant facts. Accordingly, Executive acknowledges that the foregoing restrictions of Section 6 are fair and reasonable, are minimally necessary to protect the Company, its other stockholders and the public from the unfair competition of Executive who, as a result of his performance of services on behalf of the Company, will have had unlimited access to the most confidential and important information of the Company, its business and future plans. Executive furthermore acknowledges that no unreasonable harm or injury will be suffered by him from enforcement of the covenants contained herein and that he will be able to earn a reasonable livelihood following termination of his services notwithstanding enforcement of the covenants contained herein. (g) Indemnification. Subject to the provisions of this Agreement, Executive shall indemnify the Company for any and all consequential damages, costs and expenses (including legal fees) resulting from any of his acts or omissions that constitute bad faith, willful or intentional conduct that cause harm to the Company's business or reputation. Executive also shall indemnify the Company for any and all consequential damages, costs and expenses resulting from his acts of omission constituting reckless disregard of his duties to the Company following notice thereof by either Prime or the Operating Partnership after either becomes aware of such conduct and Executive's failure to so cure within 30 days. 6. Gross Up Payments. Anything in this Agreement to the contrary notwithstanding, in the event that any payment by or on behalf of the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section) (the "Payments") is determined to be an "excess parachute payment" pursuant to Code Section 280G or any successor or substitute provision of the Code, with the effect that Executive is liable for the payment of the excise tax described in Code Section 4999 or any successor or substitute provision of the Code, or any interest or penalties are incurred by Executive with respect to such Payments (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Executive shall be entitled to receive an additional payment (the "Gross-Up Payment") in an amount such that after payment by Executive of all taxes imposed upon the Gross-Up Payment, including, without limitation, federal, state, local or other income taxes, FICA taxes, and additional Excise Tax (and any interest and penalties imposed with respect to such taxes), Executive retains a portion of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (a) Determination of Gross-Up. Subject to the provisions of paragraph (b) below, all determinations required to be made under this Section, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that serves as the Company's auditors (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and Executive within 15 business days of the receipt of notice from the Company or Executive that there have been Payments, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, Executive shall designate another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section, shall be paid by the Company to Executive within five days after the receipt by the Company and Executive of the Accounting firm's determination. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall furnish Executive with a written opinion that failure to report the Excise Tax on Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and Executive, except as provided in paragraph (b) below. (b) IRS Claims. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that the Internal Revenue Service or other agency will claim that a greater Excise Tax is due, and thus a greater amount of Gross-Up Payment should have been made by the Company than that determined pursuant to paragraph (a) above (an "Underpayment"). In the event that Executive is required to make a payment of any such Excise Tax, the Accounting Firm shall determine the amount of the additional Gross-Up Payment due to the Executive based on the Underpayment, and such additional Gross-Up Payment shall be promptly paid by the Company to or for the benefit of the Executive. Executive shall notify the Company in writing of any claim by the Internal Revenue Service or other agency that, if successful, would require the payment by the Company of the Gross-Up Payment or an Underpayment. 7. Prior Agreement. This Agreement supersedes and is in lieu of any and all other employment or service arrangements between Executive, on the one hand, and Prime and/or the Operating Partnership or its predecessors or any subsidiaries, on the other hand, and any and all such employment or service agreements and arrangements are hereby terminated and deemed of no further force or effect. 8. Assignment. Neither this Agreement nor any rights or duties of Executive hereunder shall be assignable by Executive and any such purported assignment by him shall be void. Prime may assign all or any of its right hereunder provided that substantially all of the assets of the Company are also transferred to the same party; provided, however, that Prime and the Operating Partnership, jointly and severally shall remain primarily liable to Executive to fulfill all of the Company's obligations under this Agreement and that any such assignee also agrees to be primarily liable to Executive jointly and severally with the Company to fulfil all of the Company's obligations under this Agreement as provided in Section 9 below. 9. Successors. This Agreement shall inure to the benefit of and be enforceable by Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees and the Company's successors and assigns. If Executive should die while any amounts are still payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there be no such designee, to Executive's estate. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of the Company, as the case may be, by agreement in form and substance reasonably satisfactory to Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Any failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement. 10. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if delivered in person or sent by any national overnight delivery service or by certified mail to the following addresses (or to any other address that any party may designate by notice to the other parties hereto): (a) if to Executive, to: Glenn D. Reschke 731 Swan Cove Road Pasadena, Maryland 21122 with a copy to (which will not constitute notice): Richard E. Levine Miles & Stockbridge P.C. 10 Light Street Baltimore, MD 21202 (b) if to Prime or to the Operating Partnership, to: Prime Retail, Inc. 100 East Pratt Street 19th Floor Baltimore, Maryland 21202 General Counsel with a copy to: Steven J. Gavin Winston & Strawn 35 West Wacker Drive Chicago, Illinois 60601 11. Amendment. This Agreement may not be changed, modified or amended except in writing signed by all of the parties hereto. 12. Waiver of Breach. The waiver by any of the parties hereto of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by any part. 13. Severability. The Company and Executive each expressly agree and contract that it is not the intention of any of the parties hereto to violate any public policy, statutory or common law, and that if any sentence, paragraph, clause or combination of the same of this agreement is in violation of the law of any state where applicable, such sentence, paragraph, clause or combination of the same shall be void in the jurisdictions where it is unlawful, and the remainder of such paragraph and this Agreement shall remain binding on the parties to make the covenants of this Agreement binding only to the extent that it may be lawfully done under existing applicable laws. In the event that any part of any covenant of this Agreement is determined by a court of competent jurisdiction to be overly broad thereby making the covenant unenforceable, the parties hereto agree, and it is their desire that such court shall substitute a judicially enforceable limitation in its place, and that as so modified the covenant shall be binding upon the parties as if originally set forth herein. 14. Opportunity to Employ Counsel. Executive acknowledges receipt of a copy of this Agreement prior to his execution of this Agreement with the Company and also acknowledges that he has had ample time and opportunity to employ counsel of his choice to provide advice concerning the terms and conditions of this Agreement. 15. Legal Fees. If the Company materially breaches any of its obligations to Executive under this Agreement and the Executive brings any action, claim, demand, suit or proceeding against the Company to enforce his rights under this Agreement, the Company agrees that it will pay all reasonable legal fees and related legal costs (collectively "Legal Fees") incurred by Executive no later than thirty (30) days following a judgment by a court of competent jurisdiction that the Company materially breached its obligations to the Executive under this Agreement; provided, however, that if it is determined by a final judgment or other final adjudication by a court of competent jurisdiction that the Company did not materially breach any of its obligations to Executive under this Agreement, Executive will pay to Company within thirty (30) days from such final judgment or adjudication the aggregate amount of legal fees and expenses incurred by Company with respect to such action and the amount of any Legal Fees that were previously paid to Executive by the Company pursuant to this Section 15. The Company acknowledges the indemnification obligations of Prime to the Executive and the other officers of Prime as set forth in its By-laws, as they may be amended from time to time. 16. Governing Law. This Agreement shall be governed by, and construed, interpreted and enforced in accordance with the laws of the State of Maryland, exclusive of the conflict of laws provisions of the State of Maryland. 17. Notice of Future Employment. Executive agrees that during the twenty-four (24) consecutive months immediately following the termination of this Agreement, Executive will within fourteen (14) days of each instance of new employment notify Prime in writing of the identity of his new employer and the job title associated with such employment. 18. Binding Effect. This Agreement shall be binding and legally enforceable against the parties hereto and their respective heirs, personal representatives, successors and assigns, as the case may be. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EXECUTIVE: /s/ Glenn D. Reschke - ---------------------------------- Glenn D. Reschke PRIME RETAIL, INC. PRIME RETAIL, L.P. By: /s/ C. Alan Schroeder By: Prime Retail, Inc. ----------------------------- Name: C. Alan Schroeder Its: General Partner Title: Executive Vice President General Counsel & Secretary By: /s/ C. Alan Schroeder --------------------- Name: C. Alan Schroeder Title: Executive Vice President General Counsel & Secretary EX-10 7 ex1050.txt EX-10.50 AMENDMENT EMPLOYMENT ROBERT A. BRVENIK Ex-10.50 AMENDMENT TO EMPLOYMENT AGREEMENT The EMPLOYMENT AGREEMENT (the "Agreement"), dated as of June 11, 2000, by and between Prime Retail, Inc., a Maryland corporation ("Prime"), and the sole general partner of Prime Retail, L.P., a Delaware limited partnership (the "Operating Partnership"), and Robert Brvenik (the "Executive"), is hereby amended by this Amendment, effective April 2, 2001, in the following respects: 1. Section 3(b) of the Agreement is hereby amended as follows: (b) Performance Bonus. In addition to the Base Salary, Executive shall have the right to receive, and the Company agrees to pay to Executive, a performance bonus for each calendar year during the Term of this Agreement, in such amounts as the Committee, in its sole discretion, may determine (the "Performance Bonus"). If the Board, either directly or through the Committee, establishes performance measures for senior officers (which term is intended to include Executive), those established criteria will be used to determine Executive's entitlement to a Performance Bonus. Notwithstanding the foregoing, nothing in this Agreement obligates the Board to establish such performance measures, and the lack of established performance measures will not constitute a breach of this Agreement in any manner. In lieu of established performance measures, the Board will determine Executive's Performance Bonus solely in its discretion. The parties hereto acknowledge that any corporate or individual performance objectives established pursuant to this Section 3(b) will be determined prior to, or as soon as possible after, the beginning of each calendar year and that such objectives may objectively be met by Executive. The aggregate Performance Bonus for a calendar year payable in accordance with the provisions of this Section 3(b) is expected to be up to 100% or more of the Base Salary for such calendar year. Further, Executive shall only be entitled to receive a Performance Bonus for a calendar year if Executive has been and continues to be retained by the Company as an executive officer of the Company for the full calendar year or if (i) the Company terminates Executive's employment without Cause (as defined below), (ii) Executive terminates his employment for Good Reason (as defined below), (iii) Executive terminates his employment for any reason simultaneously with, or within six months following, a Change of Control, or (iv) if Executive does not terminate his employment simultaneously with, or within six months following, a change of control, and Executive's employment ends for any reason within 24 months following a Change of Control. Any amount of Performance Bonus required to be paid to Executive for a calendar year during the Term of this Agreement shall be paid by the Company to Executive during the pay period of the Company following finalization of the audit for such calendar year and final review and approval of the bonus calculation by the Committee, and, in all events, on or before March 31 of the year immediately following the end of the calendar year for which such Performance Bonus is attributable. 2. Section 4(d) of the Agreement is hereby amended as follows: (d) Termination Following a Change of Control. If (i) Executive terminates this Agreement for any reason simultaneously with a Change of Control (in which event notice under Section 2 above shall not be necessary and the termination payments to be made under Sections 4(d)(1), 4(d)(2) and 4(d)(3) shall be paid simultaneously with, and as a part of, the Change of Control), (ii) within six (6) months following a Change of Control Executive terminates this Agreement for any reason, subject to the notice provisions of Section 2 hereof, or (iii) within 24 months following a Change of Control, the Company terminates this Agreement during its original term other than for Cause or Executive terminates this Agreement during its original term with Good Reason, the Company shall pay Executive (and Executive's eligible dependents with respect to paragraph (D) below) the following benefits and payments: (1) all accrued but unpaid amounts of Base Salary and vacation through the effective date of termination, payable in accordance with the provisions of Sections 3(a) and 3(d) above; (2) a termination payment in an amount equal to the product of (x) the number of full and partial years remaining in the Original Term (or, if greater, 2 years) and (y) the One-Year Pay Equivalent, which amount shall be payable within thirty (30) days of the effective date of termination; (3) any vested benefits or amounts pursuant to Section 3(c), 3(e), 3(f) and 3(g) hereof through the effective date of termination, payable in accordance with the provisions of any such plan(s); and (4) the health insurance benefits described in Section 3(c)(1) above for the maximum period permitted under COBRA at the Company's sole expense, together with either (i) additional benefits equivalent to those in effect at the date of termination, such that Executive will receive Company-paid coverage for a total of 24 months or (ii) if providing such benefits is not permitted by the tax laws or applicable benefit plans, the after-tax equivalent of the premiums paid by the Company for such coverage. 3. This Amendment may be executed in one or more counterparts which taken together shall constitute one and the same instrument. EXECUTIVE: /s/ Robert Brvenik - ------------------------ Robert Brvenik PRIME RETAIL, INC., a Maryland PRIME RETAIL, L.P., a Delaware corporation limited partnership By: /s/Glenn D. Reschke By: Prime Retail, Inc. ------------------------------ Name: Glenn D. Reschke Its: Sole General Partner Title: President & Chief Executive By: /s/ Glenn D. Reschke Officer --------------------------- Name: Glenn D. Reschke Title: President and Chief Executive Officer EX-10 8 ex1051.txt EX-10.51 EMPLOYMENT AGREEMENT DAVID G. PHILLIPS Ex-10.51 Employment Agreement THIS EMPLOYMENT AGREEMENT (the "Agreement"), effective as of January 10, 2002 (the "Effective Date"), by and between Prime Retail, Inc., a Maryland corporation ("Prime") and the sole general partner of Prime Retail, L.P., a Delaware limited partnership (the "Operating Partnership"), the Operating Partnership (Prime and the Operating Partnership are sometimes hereinafter together referred to as the "Company"), and David G. Phillips, an individual domiciled in the State of Maryland ("Executive"). Witnesseth WHEREAS, the Company is engaged primarily in the ownership, development, construction, acquisition, leasing, marketing and management of factory outlet centers throughout North America, Puerto Rico and Western Europe; WHEREAS, the Company believes that it would benefit from the application of Executive's particular and unique skill, experience, and background to the management and operation of the Company as its Executive Vice President - Leasing, International and New Business Development; WHEREAS, Executive wishes to commit himself to serve the Company in the position set forth herein on the terms herein provided; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein set forth, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by each of the parties hereto, the Company and Executive hereby agree as follows: 1. Duties. During the Term hereof (as defined in Section 2 hereof), the Company agrees to retain Executive, and Executive agrees to be retained by the Company, as the Executive Vice President - Leasing, International and New Business Development of the Company on the terms and conditions provided in this Agreement. Executive shall serve as the Executive Vice President - Leasing, International and New Business Development of the Company and Executive shall exercise such powers and authority as are customarily inherent in a similar position in a comparable publicly-held entity or as provided by the By-laws of Prime ("By-laws") and the Agreement of Limited Partnership of the Operating Partnership, as amended (the "Partnership Agreement"). Prime, in its capacity as sole general partner of the Operating Partnership, may, from time to time, in its sole discretion, by action of its Board of Directors (the "Board") further define and clarify Executive's duties and services hereunder or under the By-laws or Partnership Agreement in a manner consistent with the office for which he has been retained hereunder and the scope of work set forth herein. Executive agrees to devote his best efforts and substantially all of his business time, attention, energy, and skill to performing his duties to the Company under this Agreement. Executive will report to Robert A. Brvenik, Chief Financial Officer (the "CFO") with respect to leasing and Leasing Department matters and to Glenn D. Reschke, President and Chief Executive Officer (the "CEO") with respect to international and other non-leasing matters and will perform all of his duties in accordance with such reasonable directions, requests, rules and regulations as are specified by the CEO and CFO in connection with his employment. Notwithstanding the foregoing, the Company may alter the reporting relationship of Executive so that he thereafter, at least in part, reports to the Company's President, the CEO or an individual who has been retained to serve as the Company's Chief Operating Officer, or a similar role, if that individual reports directly to the CEO. During the Term of this Agreement, it shall not be a violation of this Agreement or a material conflict of interest for purposes of Section 4(a)(3) hereof for Executive to (i) serve on corporate, industry-related, civic, or charitable boards or committees or devote time to serving any such entities or organizations, (ii) deliver lectures, fulfill speaking engagements, or teach at educational institutions, (iii) manage personal investments and finances and business and legal affairs, to the extent that such activities do not violate this Section 1 or Section 5 hereof, or (iv) communicate with potential investors regarding their investment in the Company or its assets, which investments may include the potential for Executive to have an ownership interest, provided Executive discloses this involvement to the Company and the CEO's permission regarding such communications is obtained. 2. Term. The term of this Agreement shall commence as of January 1, 2002 and, unless earlier terminated in accordance with the terms of this Agreement, will extend to June 30, 2003 ("the Original Term"); provided, however, that if this Agreement is not affirmatively terminated by either party, or extended or renewed for a specific duration in writing by agreement of the parties, prior to the last day of the Original Term, this Agreement will continue on a month-to-month basis thereafter (the "Extended Term"). The parties agree to cooperate and discuss in good faith their intentions with regard to this Agreement's extension or renewal 12 months prior to the end of the Original Term. Notwithstanding the foregoing, the Company agrees to provide Executive with a minimum of six months' advance written notice of its intent to terminate this Agreement during the Original Term or the Extended Term for any reason other than Cause, in which case the Company shall comply with the notice requirements of Sections 4(a)(2) and (3) hereof, and Executive agrees to provide the Company with a minimum of 60 days' advance written notice of his intent to terminate this Agreement during the Original Term or the Extended Term for any reason other than Good Reason, in which case Executive shall comply with the notice requirements of Section 4(b)(1)(F) hereof. The Original Term and any Extended Term of this Agreement shall end only following termination by written notice by the Company or Executive in accordance with this Section. For purposes of this Agreement, the terms "Original Term" and "Extended Term" shall herein be collectively referred to as the "Term." 3. Compensation and Related Matters. (a) Base Salary. During the Term of this Agreement, the Operating Partnership agrees to pay to Executive a base salary in an aggregate amount of Two Hundred Fifty Thousand Dollars ($250,000) per calendar year, payable in accordance with the general policies and procedures for payment of salaries to any other executive personnel of the Company but in all events payable no less frequently than monthly. The then applicable amount of yearly base salary payable to Executive pursuant to the provisions of this Section 3(a) shall herein be referred to as the "Base Salary." The Base Salary payable to Executive pursuant to the provisions of this Section 3(a) shall be subject to periodic review by the Compensation Committee of the Board of Directors of Prime (the "Committee") based upon periodic review of Executive's performance conducted on at least an annual basis and may be periodically increased as a result thereof; provided, however, that the Base Salary payable to Executive pursuant to the provisions of this Section 3(a) shall in no event be less than the aggregate amount set forth in the first sentence of this paragraph. In no event may Executive's Base Salary be reduced during the Term without his express written consent. (b) Performance Bonus. (1) In addition to the Base Salary, Executive shall have the right to receive, and the Company agrees to pay to Executive, a performance bonus for each calendar year during the Term of this Agreement, in such amounts as the Committee, in its sole discretion, may determine (the "Performance Bonus"). If the Board, either directly or through the Committee, establishes performance measures for senior officers (which term is intended to include Executive), those established criteria will be used to determine Executive's entitlement to a Performance Bonus. Notwithstanding the foregoing, nothing in this Agreement obligates the Board to establish such performance measures, and the lack of established performance measures will not constitute a breach of this Agreement in any manner. In lieu of established performance measures, the Board will determine Executive's Performance Bonus solely in its discretion. The parties hereto acknowledge that any corporate or individual performance objectives established pursuant to this Section 3(b) will be determined prior to, or as soon as possible after, the beginning of each calendar year and that such objectives may objectively be met by Executive. The aggregate Performance Bonus for a calendar year payable in accordance with the provisions of this Section 3(b) is expected to be up to 100% of the Base Salary for such calendar year. Further, Executive shall only be entitled to receive a Performance Bonus for a calendar year if Executive has been and continues to be retained by the Company as an executive officer of the Company for the full calendar year or if (i) the Company terminates Executive's employment without Cause (as defined below), (ii) Executive terminates his employment for Good Reason (as defined below), (iii) Executive terminates his employment for any reason simultaneously with, or within six months following, a Change of Control, or (iv) if Executive does not terminate his employment simultaneously with, or within six months following, a change of control, and Executive's employment ends for any reason within 24 months following a Change of Control. Any amount of Performance Bonus required to be paid to Executive for a calendar year during the Term of this Agreement shall be paid by the Company to Executive during the pay period of the Company following finalization of the audit for such calendar year and final review and approval of the bonus calculation by the Committee, and, in all events, on or before March 31 of the year immediately following the end of the calendar year for which such Performance Bonus is attributable. (2) The Company agrees to make a payment to Executive in respect of his previous employment arrangements in the amount of $160,000, which shall be made within five business days of the execution of this Agreement. In the event the Company fails to make this payment as described directly above, Executive may, in his sole discretion, void this Agreement and all obligations hereunder, including any release of claims. Notwithstanding the foregoing, Executive has no right to receive and the Company has no obligation to make any bonus payment to Executive for the 2001 calendar year or any year thereafter, except as otherwise stated herein. (c) Health Insurance and Other Benefits. (1) During the Term of this Agreement and subject to the limitations and affirmative rights set forth in this Section 3(c), Executive and his eligible dependents shall have the right to participate in any life, disability, health, dental, vision and other benefit plans or programs that have been or are hereafter adopted or maintained by the Company (or in which the Company participates) according to the terms of such plan or program with all of the benefits, rights and privileges as are enjoyed by any other senior executive officer of the Company. In addition, Executive shall be covered by any and all policies of directors and officers insurance coverage obtained by the Board from time to time for its senior executive officers, the terms of which shall be established by the Board in its sole discretion. (2) During the Term of this Agreement and subject to the limitations and affirmative rights set forth in this Section 3(c), Executive and his eligible dependents shall have the right to participate in any retirement, pension, or other similar benefit plan or program that has been or is hereafter adopted by the Company (or in which the Company participates) according to the terms of such plan or program with all the benefits, rights and privileges as are enjoyed by any other senior executive officer of the Company. (3) If the participation of Executive under a plan described in subsection (2) above would adversely affect the qualification of a plan intended to be qualified under the Internal Revenue Code of 1986, as amended from time to time (the "Code"), the Company shall have the right to exclude Executive from that plan in return for his participation in (x) a non-qualified deferred compensation plan or (y) an arrangement providing substantially comparable benefits under a plan that is either a qualified or non-qualified plan under the Code at the Company's option. (4) Notwithstanding anything to the contrary contained herein, the Company reserves the right to amend or terminate any plan described in this Section 3(c) for any reason; provided, however, that (i) no such amendment that would reduce the benefits of Executive will be adopted unless it affects other senior executive officers across-the-board, and (ii) if any plan amendment or termination reduces the benefits of Executive, the Company agrees to adopt or maintain one or more replacement plans that will provide Executive with reasonably comparable benefits throughout the Term of this Agreement. (d) Vacation and Leaves of Absence. Executive shall be entitled to five (5) weeks of paid vacation leave during each twelve (12) month calendar period (considered to be granted for each half-year as of the first day of that half-year) and paid holidays in accordance with the Company's established policies. Executive may accrue unused vacation time if not used in any calendar year or years, however, the maximum cumulative amount of vacation time that Executive may accrue and carry over to the next year is four weeks. In addition to the foregoing, Executive may be granted leaves of absence with or without pay for such other reasons as shall be mutually agreed upon by the Board and Executive. (e) Expenses. Executive shall be reimbursed, subject to the Company's receipt of invoices or similar records as the Company may reasonably request in accordance with its policy and procedures, for all reasonable and necessary expenses incurred by Executive in the performance of his duties hereunder. In addition, simultaneously with execution of this Agreement, the Company shall pay directly to Executive's counsel Executive's reasonable legal fees in connection with the negotiation of this Agreement up to a maximum of $55,000. The Company also shall reimburse Executive for any reasonable legal fees and costs he incurs in connection with the negotiation and execution of renewals, extensions and amendments of this Agreement. (f) Life Insurance. The Company shall provide $2,000,000 of life insurance coverage for the benefit of Executive during the Term of this Agreement. (g) Stock Options. In consideration for Executive's employment hereunder, the Company agrees to grant Executive options to purchase shares of the Company's common stock to the same extent and on the same terms as it offers options to any other senior management level employees of the Company. In the event the Company offers options to any other management level employees of the Company, it shall grant the Executive a number of options at least equal to the number of options granted to the General Counsel or any Senior Vice President. 4. Termination and Termination Benefits. (a) Termination by Prime. (1) Without Cause. Subject to the notice provisions set forth in Section 2 hereof, the Company may terminate this Agreement and Executive's services at any time for any reason, and after any required notice is provided to Executive he shall continue to perform his duties under this Agreement during the notice period if the Company so elects. In connection with the termination of Executive's services without Cause during the Term of this Agreement, pursuant to this Section 4(a)(1), Executive (and Executive's eligible dependents with respect to paragraph (D) below) shall be entitled to receive: (A) all accrued but unpaid amounts of the Base Salary and vacation through the effective date of termination, payable in accordance with the provisions of Sections 3(a) and 3(d) above; (B) if such termination occurs during the Original Term, a termination payment in an amount equal to the product of (x) the number of full and partial years remaining in the Original Term, and (y) the sum of (i) Executive's then current Base Salary and (ii) a bonus payment equal to 100% of the average annual bonus paid to Executive for the two prior calendar years, provided that for purposes of this calculation, Executive's annual bonus shall be deemed to have been $160,000 both for year 2000 and for year 2001, or, if greater, a bonus payment equal to 50% of his then current Base Salary (the sum of the amounts determined by adding clauses (i) and (ii) is in the aggregate hereinafter referred to as the "One-Year Pay Equivalent"), and the product of (x) and (y) shall be payable within thirty (30) days of the effective date of termination; (C) any vested benefits or amounts pursuant to Sections 3(c), 3(e) and 3(f) hereof through the effective date of termination, payable in accordance with the provisions of any such plan(s); and (D) if such termination occurs during the Original Term, the Company-paid life insurance benefits specified in Section 3(f) above and the Company-paid health insurance benefits specified in Section 3(c)(1) above for a period of twelve (12) months following the effective date of termination. Following such period, Executive shall be entitled to all rights afforded to him under the federal Consolidated Omnibus Budget Reconciliation Act ("COBRA") to purchase continuation coverage of health insurance benefits for himself and his dependents for the maximum period permitted by law. If such termination occurs during the Extended Term, Executive will be entitled to all rights afforded to him under COBRA to purchase continuation coverage of health insurance benefits for himself and his dependents for the maximum period permitted by law. In the event that Executive is terminated without Cause pursuant to this Section 4(a)(1) or resigns for Good Reason and within 12 months from the effective date of such termination or resignation there is a "Change in Control" of the Company (as defined below), then Executive shall be entitled to receive the benefits set forth in Section 4(d) hereof to the extent and in the amount that such benefits exceed the amounts paid or received by Executive pursuant to this Section 4(a)(1). (2) With Cause. The Company may terminate this Agreement with "Cause" immediately upon written notice to Executive. In connection with the termination of Executive's services pursuant to this Section 4(a)(2), Executive (and Executive's eligible dependents with respect to paragraph (C) below) shall be entitled to: (A) receive all accrued but unpaid amounts of the Base Salary and vacation through the effective date of termination, payable in in accordance with the provisions of Sections 3(a) and 3(d) above; (B) receive the vested benefits or amounts pursuant to Sections 3(c), 3(e) and 3(f) hereof through the effective date of termination, payable as otherwise provided in such Sections; and (C) exercise all rights afforded to him under COBRA to purchase continuation coverage of health insurance benefits for himself and his dependents for the maximum period permitted by law. (3) "Cause" Defined. For purposes of this Agreement, "Cause" shall mean a reasonable, good faith finding by a majority of the Board (A) that Executive has harmed the Company through an act of dishonesty or material conflict of interest that relates to the performance of Executive's duties hereunder, (B) of Executive's conviction of a felony involving moral turpitude, fraud or embezzlement, (C) that Executive's willful failure to perform in any material respect his duties under this Agreement (other than a failure due to disability) that results in material harm to the Company, after written notice specifying the failure and a reasonable opportunity of at least thirty (30) days to cure (it being understood that if Executive's failure to perform is not of a type requiring a single action to fully cure, then Executive may commence the cure promptly after such written notice and thereafter diligently prosecute such cure to completion) or (D) of a material and willful breach by Executive of any of his obligations hereunder and the failure of Executive to cure such breach within thirty (30) days after receipt by Executive of a written notice of the Company specifying in reasonable detail the nature of the breach. The Company intends that "Cause" must be based only on meaningful and significant matters and not on matters of minor importance. For purposes of this Section, an act, or failure to act, on Executive's part shall be considered "willful" only if done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. (4) Disability. If due to illness or physical or mental disability, Executive shall fail to perform the material duties required by this Agreement during any four (4) consecutive months during the Term of this Agreement, the Company may terminate this Agreement, subject to the notice provisions set forth in Section 2 hereof. In such event, Executive (and Executive's eligible dependents with respect to paragraph (D) below) shall receive: (A) all accrued but unpaid amounts of the Base Salary and vacation through the effective date of termination, payable in accordance with the provisions of Sections 3(a) and 3(d) above; (B) if, and only if, the Company has terminated or otherwise materially reduced Executive's long-term disability coverage that was in effect on the Effective Date of this Agreement, then Executive shall be entitled to receive 1.5 times the One-Year Pay Equivalent; (C) any vested benefits or amounts pursuant to Sections 3(c), 3(e) and 3(f) hereof through the effective date of termination, payable in accordance with the provisions of any such plan(s); and (D) the benefits described in Section 4(a)(1)(D). This Section 4(a)(4) shall not limit the entitlement of Executive, his estate or beneficiaries to any disability or other benefits available to Executive under any disability insurance or other benefits plan or policy that is maintained by the Company for Executive's benefit. (b) Termination by Executive for Any Reason. (1) Subject to the notice requirements set forth in Section 2 hereof, Executive may terminate this Agreement at any time with or without Good Reason (as defined herein), and after any required notice is provided to the Company Executive shall continue to perform his duties under this Agreement during the notice period if the Company so elects. If Executive terminates his employment for Good Reason, the Company shall pay him the compensation and other benefits provided above in Section 4(a)(1) as if it had terminated his employment without Cause after providing the requisite notice pursuant to Section 2 hereof. In connection with the termination of this Agreement pursuant to this Section 4(b)(1) other than for Good Reason, Executive (and Executive's eligible dependents with respect to paragraph (D) below) shall be entitled to receive: (A) all accrued but unpaid amounts of the Base Salary and vacation through the effective date of termination, payable in accordance with the provisions of Sections 3(a) and 3(d) above; (B) any earned and unpaid bonus(es) otherwise payable to him in accordance with Section 3(b); (C) any vested benefits or amounts pursuant to Sections 3(c), 3(e), 3(f) and 3(g) hereof through the effective date of termination, payable as otherwise provided in such Sections; and (D) all rights afforded to him under COBRA to purchase continuation coverage of health insurance benefits for himself and his dependents for the maximum period permitted by law. (E) "Good Reason" Defined. For purposes of this Agreement, "Good Reason" shall mean (A) the material breach by the Company of any of its obligations hereunder (a bona fide dispute regarding the Performance Bonus shall not be a material breach by the Company) and the failure of the Company to cure such breach within thirty (30) days (reduced to ten (10) days for failure to pay Base Salary) after receipt by the Company of a written notice from Executive specifying in reasonable detail the nature of the breach, unless such breach requires a longer period to cure, then the Company shall have the right to cure such breach within such additional period of time not to exceed sixty (60) days; (B) Executive's title or scope of responsibilities and duties are materially diminished from the level provided in this Agreement, or the Company fails to provide Executive with adequate office facilities and support services to perform such responsibilities and duties; or (C) the Company changes Executive's principal place of employment to a location more than 25 miles from the Company's principal Baltimore City office as of the Effective Date. Executive's delay in providing notice of his termination for Good Reason shall not be deemed to be a waiver of any such Good Reason unless and until Executive fails to provide such notice within six months after the occurrence of the event triggering such Good Reason, nor does the failure to resign for one Good Reason prevent any later Good Reason resignation for a similar or different reason. (c) Death. Notwithstanding any other provision of this Agreement, this Agreement shall terminate on the date of Executive's death. In this event, Executive's estate shall be entitled to receive all accrued but unpaid amounts of Executive's Base Salary and vacation through the date of Executive's death, payable in accordance with the provisions of Sections 3(a) and 3(d) above. In addition, Executive's eligible dependents shall be entitled to receive the benefits specified in Section 4(a)(1)(D) above, to the extent applicable to dependents. This Section 4(c) shall not limit the entitlement of Executive under any insurance or other benefits plan or policy that is maintained by Prime for Executive's benefit. (d) Termination Following a Change of Control. If (i) Executive terminates this Agreement for any reason simultaneously with a Change of Control (in which event notice under Section 2 above shall not be necessary and the termination payments to be made under Sections 4(d)(1), 4(d)(2) and 4(d)(3) shall be paid simultaneously with, and as a part of, the Change of Control), (ii) within six (6) months following a Change of Control Executive terminates this Agreement for any reason, subject to the notice provisions of Section 2 hereof, or (iii) within 24 months following a Change of Control, the Company terminates this Agreement during its Original Term other than for Cause or Executive terminates this Agreement during its Original Term with Good Reason, the Company shall pay Executive (and Executive's eligible dependents with respect to paragraph (D) below) the following benefits and payments: (1) all accrued but unpaid amounts of Base Salary and vacation through the effective date of termination, payable in accordance with the provisions of Sections 3(a) and 3(d) above; (2) a termination payment in an amount equal to the product of (x) the number of full and partial years remaining in the Original Term (or, if greater, 2 years) and (y) the One-Year Pay Equivalent, which amount shall be payable within thirty (30) days of the effective date of termination; (3) any vested benefits or amounts pursuant to Section 3(c), 3(e), 3(f) and 3(g) hereof throug h the effective date of termination, payable in accordance with the provisions of any such plan(s); (4) the health insurance benefits described in Section 3(c)(1) above for the maximum period permitted under COBRA at the Company's sole expense, together with either (i) additional benefits equivalent to those in effect at the date of termination, such that Executive will receive Company-paid coverage for a total of 24 months or (ii) if providing such benefits is not permitted by the tax laws or applicable benefit plans, the after-tax equivalent of the premiums paid by the Company for such coverage. (e) "Change of Control" Defined. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if (1) any "person" or "group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, regardless of whether applicable), other than a trustee or other fiduciary holding securities under an employee benefit plan of Prime or a corporation owned directly or indirectly by the stockholders of Prime in substantially the same proportions as their ownership of stock of Prime becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of Prime representing 50% or more of the total voting power represented by Prime's then outstanding securities that vote generally in the election of directors (referred to herein as "Voting Securities"); (2) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new directors whose election by the Board or nomination for election by Prime's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board; (3) the individuals who constitute the Board immediately before a proxy contest cease to constitute at least a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied) immediately following the proxy contest; (4) a merger or consolidation of Prime with or into any other entity, other than a merger or consolidation (i) that would result in the Voting Securities of Prime outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 50% of the total voting power represented by the Voting Securities of Prime or such surviving entity outstanding immediately after such merger or consolidation or (ii) where more than 50% of the Board of Directors of the surviving entity is composed of members from the Board of Directors of Prime, with terms ending at least 11 months after the date of the merger or consolidation; or (5) the stockholders of Prime approve a plan of complete liquidation of Prime or an agreement for the sale or disposition by Prime of (in one transaction or a series of transactions) all or substantially all of Prime's assets, and such transaction is substantially completed. However, in no event will a Change of Control be deemed to have occurred, with respect to Executive, if Executive is part of a purchasing group that consummates the Change of Control transaction. Executive will be deemed to be "part of the purchasing group" for purposes of the preceding sentence if Executive is an equity participant in the purchasing company or group (except for: (i) passive ownership of less than three percent of the stock of the purchasing company; or (ii) ownership of equity participation in the purchasing company or group which is otherwise not significant, as determined prior to the Change of Control by a majority of the non-employee continuing directors). (f) The Company may make any payments due Executive under Sections 3(h), 4(e), and 6 before the completion of the Change of Control, if, in the reasonable opinion of the Chairman of the Board's Compensation Committee (the "Chairman"), all conditions for completion of the Change of Control are substantially likely to be met. At that time, the Chairman may release the payments or authorize the option vesting, subject to Executive's agreement to promptly return such payments and agree to rescission of the vesting if the Change of Control does not then occur. (g) Purchase of Life Insurance. Notwithstanding anything to the contrary contained herein, in the event that the services of Executive with the Company terminate for any reason other than death, Executive shall have the right to acquire any life insurance policies maintained by the Company on the life of Executive by (i) notifying the Company in writing of his desire to so purchase such life insurance policy or policies and (ii) tendering to the Company a cashier's check in an amount equal to the interpolated cash surrender value of such life insurance policy or policies together with any unearned portion of any current year premium thereof, both within sixty (60) days of the effective date of such termination. 5. Covenants of Executive. (a) No Conflicts. Executive represents and warrants that he is not personally subject to any agreement, order or decree that restricts his acceptance of this Agreement and performance of his duties with the Company hereunder. (b) Non-Disclosure. Executive shall not disclose or use, except for or on behalf of the "Group" (consisting of Prime and the Operating Partnership and any of their direct and indirect subsidiaries), any Trade Secret (as hereinafter defined) of the Group, whether such Trade Secret is in Executive's memory or embodied in writing or other physical form. For purposes of this Section 5(b), "Trade Secret" means any information that derives independent economic value, actual or potential, with respect to the Company from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and is the subject of efforts to maintain its secrecy that are reasonable under the circumstances, including, but not limited to, trade secrets, customer lists, sales records and other proprietary commercial information. Said term, however, shall not include general "know-how" information acquired by Executive during the course of his service. Executive shall be subject to the restrictions of this Section 5(b) indefinitely. (c) Non-Solicitation. During the period of the later of (i) Executive's employment under this Agreement, or (ii) throughout the Original Term of this Agreement, but only if Executive resigns other than for Good Reason or is terminated by the Company with Cause, (the "Restrictive Period") and within the United States (the "Restrictive Geographic Area"), Executive shall not hire, cause to be hired, or induce or attempt to induce any officer, employee, agent, consultant, independent contractor, tenant or customer of the Company to discontinue such affiliation with the Company or to refrain from entering into new business relationships with the Company. Notwithstanding the foregoing, if any officer, employee, agent, consultant, independent contractor, tenant or customer of the Company is contacted by, or receives a general communication or solicitation directed to the general public from, an entity with which Executive has become employed or otherwise affiliated, the parties hereto agree that such contact or communication shall not violate this provision. The time period during which the prohibitions set forth above apply shall be extended by the length of time during which it is judicially determined that Executive has violated any such prohibition in any respect. (d) Non-Competition. In return for the performance of the management duties described in Section 1 hereof, Executive agrees that during the Restrictive Period he will not directly or indirectly, in any capacity whatsoever, either on his own behalf or on behalf of any other person or entity with whom he may be employed or associated, perform or solicit services for any of the following entities: The Mills Corporation; Tanger Factory Outlet Centers, Inc.; Chelsea GCA Realty, Inc.; New Plan Excel Realty Trust, Inc.; and Charter Oak Partners. Executive agrees and acknowledges that during the Restrictive Period he is prohibited from providing accounting or other financial services to any of the named entities in this Section 5(d); however, Executive is not prohibited from joining or otherwise associating with an accounting or consulting firm in which other professionals provide such services to any of the named entities. Executive further agrees that in the event Executive terminates this Agreement for other than Good Reason or the Company terminates this Agreement for Cause, for a six-month period immediately following the date notice of termination is provided Executive shall be prohibited from being an employee of, or a consultant to, any firm or entity (or affiliate thereof) to which consulting services were provided by Prime while Executive was an employee or with which specific business opportunities were being explored (e.g., the opportunity fund in England). (e) Return of Documents. Upon termination of his services with the Company, Executive shall return all originals and copies of books, records, documents, customer lists, sales materials, tapes, keys, credit cards and other tangible property of the Company within Executive's possession or under his control. Executive shall have the right to retain copies of forms and other documents used by the Company, redacted to remove the specific references to the Company. (f) Mutual Release of Claims. Executive, on Executive's behalf as well as on behalf of Executive's spouse, agents, representatives, heirs, executors, administrators, successors, assigns and anyone claiming through Executive, hereby forever irrevocably releases, relinquishes and waives, except as provided herein, all known and unknown claims that Executive has had or now has against Prime or the Operating Partnership (including any past, present and future subsidiaries, affiliated entities, officers, directors, partners, shareholders, trustees, fiduciaries and agents) in any way related to his prior employment arrangements with the Company and its affiliates, or the termination thereof, provided, however, that Executive does not release, relinquish or waive (i) any known or unknown claim that Executive has had or now has against any party (including, but not limited to, Prime or the Operating Partnership) under any pension benefit plan or welfare benefit plan or program sponsored by the Company or offered by, or on behalf of, the Company to Executive at any time, or (ii) any right to have the Company indemnify, defend or hold harmless Executive in connection with his prior employment arrangements with the Company and its affiliates. Notwithstanding anything to the contrary in this Agreement, Executive retains and does not release, relinquish, or waive any rights he may have under any stock award agreement between Executive and the Company, including any stock option agreement or stock grant agreement. Executive represents that as of the execution of this Agreement he has vested, accrued benefits in a Company-sponsored 401(k) plan and that he has claims to those benefits, which if not paid may give rise to claims against the Company in its fiduciary capacity. Executive further represents that other than as stated above, he has no knowledge of any claims that he may bring at this time against Prime or the Operating Partnership (including any past, present and future subsidiaries, officers, directors, partners, shareholders, trustees, fiduciaries, and agents) under the plans described in the preceding sentence. Prime and the Operating Partnership, on their own behalf as well as on behalf of each's respective agents, representatives, affiliated entities, administrators, successors, assigns, and anyone claiming through each, hereby forever irrevocably releases, relinquishes and waives, except as otherwise provided herein, (i) all known and unknown claims that each has had or now has against Executive relating to Executive's performance or non-performance under prior employment agreements between Executive and the Company, including any amendment thereof, and (ii) all other known claims each has against Executive. The parties hereto understand and agree that the releases set forth herein do not in any way affect the rights of either party to take whatever steps may be necessary to enforce the terms of this Agreement or to obtain appropriate relief in the event of any breach of the terms of this Agreement. (g) Equitable Relief. In the event of any breach by Executive of any of the covenants contained in this Section 5, it is specifically understood and agreed that Company shall be entitled, in addition to any other remedy that it may have, to seek equitable relief by way of injunction, an accounting or otherwise. (h) Acknowledgment. Executive acknowledges that he will be directly and materially involved as a senior executive in all important policy and operational decisions of Company. Executive further acknowledges that the scope of the foregoing restrictions has been specifically bargained between Company and Executive, each being fully informed of all relevant facts. Accordingly, Executive acknowledges that the foregoing restrictions of this Section 5 may be fair and reasonable, may be necessary to protect the Company, its other stockholders and the public from the unfair competition of Executive who, as a result of his performance of services on behalf of the Company, will have had unlimited access to the most confidential and important information of the Company, its business and future plans. (i) Indemnification. The Company shall, to the maximum extent permitted by law, and in addition to any such rights granted to or available to Executive under the Company's Articles and By-Laws, or standing or other resolutions, defend, indemnify and hold harmless Executive from and against any and all claims made against Executive concerning or relative to his service, actions, or omissions on behalf of the Company as an employee, officer, director or agent of the Company. The Company shall, upon Executive's request, promptly advance or pay any amounts for costs, charges, or expenses (including, without limitation, legal fees and expenses incurred by counsel retained by Executive) in respect of his right to indemnification hereunder, subject to a later determination as to Executive's ultimate right to receive such payment. Executive's right to indemnification shall survive until the expiration of any applicable statute of limitations, without regard to the earlier termination of Executive's employment hereunder or of the Term. 6. Golden Parachute Provision. (a) Gross Up Payments. Anything in this Agreement to the contrary notwithstanding, in the event that any payment by or on behalf of the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section) (the "Payments") is determined to be an "excess parachute payment" pursuant to Code Section 280G or any successor or substitute provision of the Code, with the effect that Executive is liable for the payment of the excise tax described in Code Section 4999 or any successor or substitute provision of the Code, or any interest or penalties are incurred by Executive with respect to such Payments (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Executive shall be entitled to receive an additional payment from the Operating Partnership (the "Gross-Up Payment") in an amount such that after payment by Executive of all taxes imposed upon the Gross-Up Payment, including, without limitation, federal, state, local or other income taxes, FICA taxes, and additional Excise Tax (and any interest and penalties imposed with respect to such taxes), Executive retains a portion of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Determination of Gross-Up. Subject to the provisions of paragraph (c) below, all determinations required to be made under this Section 6, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that serves as the Company's auditors (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and Executive within 15 business days of the receipt of notice from the Company or Executive that there have been Payments, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, Executive shall designate another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 6, shall be paid by the Company to Executive within five days after the receipt by the Company and Executive of the Accounting firm's determination. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall furnish Executive with a written opinion that failure to report the Excise Tax on Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and Executive, except as provided in paragraph (c) below. (c) IRS Claims. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that the Internal Revenue Service or other agency will claim that a greater Excise Tax is due, and thus a greater amount of Gross-Up Payment should have been made by the Company than that determined pursuant to paragraph (a) above (an "Underpayment"). In the event that Executive is required to make a payment of any such Excise Tax, the Accounting Firm shall determine the amount of the additional Gross-Up Payment due to Executive based on the Underpayment, and such additional Gross-Up Payment shall be promptly paid by the Company to or for the benefit of Executive. Executive shall notify the Company in writing of any claim by the Internal Revenue Service or other agency that, if successful, would require the payment by the Company of the Gross-Up Payment or an Underpayment. 7. Transfer of Equity Interest to Employer Upon Termination of Employment. As of the Date of Termination and in consideration for the payment of $100.00 cash, Executive agrees to execute and deliver to Prime or its designee any and all certificates for shares of capital stock (with appropriate stock powers attached and properly signed) of Prime's subsidiaries and affiliates (other than the Operating Partnership), including, but not limited to Prime Retail E-Commerce, Inc., Prime Retail Stores, Inc., and Prime Retail Furniture, Inc. (all of which are Maryland corporations) (the "Subsidiary Shares"). Executive further agrees to execute and deliver such other documentation as Prime reasonably requests to effect the assignment of the Subsidiary Shares. For the avoidance of doubt, nothing contained in this Section 7 will be deemed to require Executive to transfer or carry any of his equity interests in Prime or the Operating Partnership. 8. Prior Agreement. This Agreement supersedes and is in lieu of any and all other employment or service arrangements between Executive, on the one hand, and Prime and/or the Operating Partnership or its predecessors or any subsidiaries, on the other hand, and any and all such employment or service agreements and arrangements are hereby terminated and deemed of no further force or effect. 9. Assignment. Neither this Agreement nor any rights or duties of Executive hereunder shall be assignable by Executive and any such purported assignment by him shall be void. Prime may assign all or any of its right hereunder provided that substantially all of the assets of the Company are also transferred to the same party; provided, however, that Prime and the Operating Partnership, jointly and severally shall remain primarily liable to Executive to fulfill all of the Company's obligations under this Agreement and that any such assignee also agrees to be primarily liable to Executive jointly and severally with the Company to fulfill all of the Company's obligations under this Agreement as provided in Section 10 below. 10. Successors. This Agreement shall inure to the benefit of and be enforceable by Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees and the Company's successors and assigns. If Executive should die while any amounts are still payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there be no such designee, to Executive's estate. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of the Company, as the case may be, by agreement in form and substance reasonably satisfactory to Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Any failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement. 11. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if delivered in person or sent by any national overnight delivery service or by certified mail to the following addresses (or to any other address that any party may designate by notice to the other parties hereto): if to Executive, to: (a) David G. Phillips 3115 Caves Road Owings Mills, Maryland 21117 with a copy to (which shall not constitute notice): Hogan & Hartson L.L.P. Attn: Walter G. Lohr, Jr. 111 South Calvert Street Suite 1600 Baltimore, MD 21202 (b) if to Prime or to the Operating Partnership, to: Prime Retail, Inc. Attn: Board of Directors 100 East Pratt Street 19th Floor Baltimore, Maryland 21202 with a copy to (which shall not constitute notice): Winston & Strawn Attn: Steven J. Gavin 35 West Wacker Drive Chicago, Illinois 60601 12. Amendment. This Agreement may not be changed, modified or amended except in writing signed by all of the parties hereto. 13. Waiver of Breach. The waiver by any of the parties hereto of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by any part. 14. Severability. The Company and Executive each expressly agree and contract that it is not the intention of any of the parties hereto to violate any public policy, statutory or common law, and that if any sentence, paragraph, clause or combination of the same of this agreement is in violation of the law of any state where applicable, such sentence, paragraph, clause or combination of the same shall be void in the jurisdictions where it is unlawful, and the remainder of such paragraph and this Agreement shall remain binding on the parties to make the covenants of this Agreement binding only to the extent that it may be lawfully done under existing applicable laws. In the event that any part of any covenant of this Agreement is determined by a court of competent jurisdiction to be overly broad thereby making the covenant unenforceable, the parties hereto agree, and it is their desire that such court shall substitute a judicially enforceable limitation in its place, and that as so modified the covenant shall be binding upon the parties as if originally set forth herein. 15. Opportunity to Employ Counsel. Executive acknowledges receipt of a copy of this Agreement prior to his execution of this Agreement with the Company and also acknowledges that he has had ample time and opportunity to employ counsel of his choice to provide advice concerning the terms and conditions of this Agreement. 16. Legal Fees. If any dispute or disagreement arising hereunder or related hereto shall result in legal action between the Company and Executive, Executive shall be entitled, within 30 days after incurring such fees and disbursements, to recover from the Company any reasonable expenses for attorney's fees and disbursements incurred by him in connection with Executive's good faith maintenance or defense of such action, on an after-tax basis, unless Executive does not prevail in such action. 17. No Mitigation. The Company waives, releases and remises (x) any obligation or duty under applicable law or otherwise on the part of Executive to seek or obtain other engagements or employment or to otherwise mitigate any payments or damages to which Executive may be entitled to by reason of any operation or termination of this Agreement; and (y) any right in or claim to any remuneration or compensation received by Executive pursuant to any engagements or employment subsequent to the termination of this Agreement. 18. Governing Law. This Agreement shall be governed by, and construed, interpreted and enforced in accordance with the laws of the State of Maryland, exclusive of the conflict of laws provisions of the State of Maryland. 19. Binding Effect. This Agreement shall be binding and legally enforceable against the parties hereto and their respective heirs, personal representatives, successors and assigns, as the case may be. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EXECUTIVE: /s/ David G. Phillips - ------------------------------------ David G. Phillips PRIME RETAIL, INC., a Maryland PRIME RETAIL, L.P., a Delaware corporation limited partnership By: /s/ Glenn D. Reschke By: Prime Retail, Inc. ------------------------------------ Name: Glenn D. Reschke Its: Sole General Partner Title: President, Chief Executive Officer By: /s/ Glenn D. Reschke --------------------------- Name: Glenn D. Reschke Title: President, Chief Executive Officer EX-10 9 ex1052.txt EX-10.52 EMPLOYMENT LETTER FREDERICK J. MENO IV Ex-10.52 December 7, 1998 VIA FEDERAL EXPRESS Mr. Frederick J. Meno, IV 5013 River Bluff Drive Fort Worth, Texas 76132 Dear Fred: Prime Retail, L.P. is pleased to extend to you an offer of employment as Senior Vice President - Operations. You will report to either the Executive Vice President - Marketing and Operations or the President and Chief Operating Officer. You will manage and supervise Prime Retail, L.P.'s factory outlet, strip and mixed-use shopping centers; and your responsibilities shall include, but not be limited to, involvement in long-term strategic planning and the management of day-to-day operations, budget and business plan creation and implementation, and employee training, development and motivation. This letter serves as a summary of the terms of your employment. Your bi-weekly base salary will be $7,500.00 ($195,000.00 on an annual basis). You will receive a commencement of employment bonus of $100,000, payable $50,000 upon commencement of your employment and $50,000.00 during March or April of 1999, simultaneously with the payment of annual bonuses to Prime Retail, L.P. employees. You will also receive options to purchase 25,000 shares of Prime Retail, Inc. common stock at $13.09 per share, with the options to vest immediately. The expiration date of the options shall be June 12, 2002; provided, however, the expiration date shall be either one year or three months (depending on the type of option) after your employment with Prime Retail, L.P. ends if it ends prior to June 12, 2008. (The number of shares, price per share, and expiration date are consistent with the 1998 grants made to Senior Vice Presidents of Prime Retail, L.P.) Beginning with the annual performance appraisal process during the first quarter of 2000, you will be eligible to receive an annual bonus each year based on your performance and the company's performance during the prior year. Such bonuses are customarily paid during the first four months of each year. Your bonus for 1999 shall be in an amount up to $105,000. Mr. Frederick J. Meno, IV December 7, 1998 Page 2 The amount of the bonus shall be based on the achievement during 1999 of certain goals established in connection with the 1999 budget and business plan and monitored throughout the year, as directed by the Executive Vice President - Marketing and Operations and the President and Chief Operating Officer. Your bonus shall be determined by performance in the following areas: ------------------------------------------------------------------------ Goal Percentage of Bonus ------------------------------------------------------------------------ 1. Net operating income (NOI) goal 25% ------------------------------------------------------------------------ 2. Sales and traffic goals 25% ------------------------------------------------------------------------ 3. Specialty leasing/temporary tenant income goals 25% ------------------------------------------------------------------------ 4. Discretionary 25% ------------------------------------------------------------------------ In addition, your manager may, either formally or informally, appraise your performance at any time during the year. Your position is exempt and, therefore, you will not be eligible for overtime compensation. You will be entitled to enroll in our medical and dental insurance and flexible spending account program. Prime Retail, L.P., however, retains the right to change, terminate or amend policies or unaccrued benefits at any time, comply with changes in the law, and/or respond to cost increases in benefits provided. Your medical insurance coverage will become effective the first day of the first month following thirty (30) consecutive days of employment. In other words, because your starting date is expected to be January 4, 1999, your insurance coverage will go into effect March 1, 1999. You will receive three (3) weeks of vacation (15 days) in your initial year of employment. Your relocation package will include reimbursement or payment of moving expenses (which shall not exceed the lower amount of at least two bids submitted by national moving companies reasonably acceptable to Prime Retail, L.P.); temporary living expenses in the Baltimore area for up to two months (such expenses not to exceed $4,000.00 per month); one-time expenses related to the move (such expenses not to exceed $2,500.00); and costs of two house hunting trips of your wife and you to the Baltimore area (including transportation, rental car, meals and hotel). Mr. Frederick J. Meno, IV December 7, 1998 Page 3 If a change of control (as defined below) of Prime Retail, L.P. occurs and either (i) your employment is terminated during the period beginning six months prior to the announcement of the change of control and ending six months after the change of control (except if you are terminated for cause (as defined below)) or (ii) you resign after, but within three months of, the change of control, then you will receive a one-time severance payment of $300,000.00. The one-time severance payment shall be made (i) simultaneously with the change of control if you are terminated in the six month period prior to the change of control, (ii) upon your termination if you are terminated after the change in control, or (iii) upon your resignation if you resign after the change in control. This change in control severance payment provision shall not change the at-will nature of your employment relationship with Prime Retail, L.P. "Change of Control" shall be deemed to have occurred if (1) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of Prime Retail, Inc. representing 50% or more of the total voting power represented by Prime Retail, Inc.'s then outstanding securities that vote generally in the election of directors (referred to herein as "Voting Securities"); (2) the stockholders of Prime Retail, Inc. approve a merger or consolidation of Prime Retail, Inc. with any other corporation, other than a merger or consolidation that would result in (i) the Voting Securities of Prime Retail, Inc. outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 50% of the total voting power represented by the Voting Securities of Prime Retail, Inc. or such surviving entity outstanding immediately after such merger or consolidation or (ii) 50% or more of the Board of Directors of the surviving entity is composed of members from the Board of Directors of Prime Retail, Inc.; (3) the stockholders of Prime Retail, Inc. approve a plan of complete liquidation of Prime Retail, Inc. or an agreement for the sale or disposition by Prime Retail, Inc. of (in one transaction or a series of transactions) all or substantially all of Prime Retail, Inc.'s assets; or (4) in connection with a merger or consolidation of Prime Retail, Inc. with any other corporation which is not described in either (1) or (2) above, an employee of the other corporation (or any of its affiliates) with whom Prime Retail, Inc. mergers or consolidates becomes the head of operations of Prime Retail, L.P. or assumes your responsibilities. "For cause" shall mean (a) a finding by the Executive Committee of the Board of Directors that you have materially harmed Prime Retail, L.P., its business, assets or employees through an act of dishonesty, material conflict of interest, gross misconduct or willful malfeasance; (b) your conviction of (or pleading nolo contendere to) a felony; (c) your sanction (including restrictions, prohibitions, and limitations agreed to under a consent decree or agreed order) under, or conviction for violation of, any federal or state securities law, rule or regulation; or (d) your willful breach of any material written policies or procedures of Prime Retail, L.P. Mr. Frederick J. Meno, IV December 7, 1998 Page 4 Please understand that the offer stated in this letter is the only offer being made to you. No officer, supervisor or employee of Prime Retail, L.P. has any authority to make any promises or commitments, either verbal or written, or enter into any agreement for employment for any specified period of time, or to make any assurances contrary to, or not contained in, this letter. Except as stated in this letter, you will be an at-will employee and your employment with Prime Retail, L.P. may be terminated either by you or Prime Retail, L.P. at any time for any reason or no reason and with or without cause and with or without notice. Further, by signing this letter, you agree to conform to the rules and regulations of Prime Retail, L.P. We look forward to your acceptance of the terms of your employment with Prime Retail, L.P. To do so, please sign, date and return the attached copy of this letter as soon as possible. Sincerely, /s/ C. Alan Schroeder C. Alan Schroeder Executive Vice President - General Counsel & Secretary Accepted: /s/ Frederick J. Meno - -------------------------------- Frederick J. Meno, IV 12/10/98 - -------------------------------- Date cc: W. Daniel Brown EX-10 10 ex1053.txt EX-10.53 SEVENTH AMENDMENT TO PURCHASE AND SALE Ex-10.53 SEVENTH AMENDMENT TO PURCHASE AND SALE AGREEMENT THIS SEVENTH AMENDMENT TO PURCHASE AND SALE (this "Amendment") made this fourth day of December, 2001 between THE PRIME OUTLETS AT BIRCH RUN, L.L.C., a Delaware limited liability company; THE PRIME OUTLETS AT WILLIAMSBURG, L.L.C., a Delaware limited liability company; and OUTLET VILLAGE OF HAGERSTOWN LIMITED PARTNERSHIP, a Delaware limited partnership (herein collectively called "Seller"), with an address at 100 East Pratt Street, 19th Floor, Baltimore, Maryland 21202, Attention: Glenn Reschke, telecopier number 410-234-1701; and WELP TRIPLE OUTLET, L.C., a Florida limited liability company (hereinafter called the "Buyer"), with an address c/o Estein & Associates USA, Ltd., 5200 International Drive, Orlando, Florida 32819, telecopier number 407-354-3243; WITNESSETH A. WHEREAS, Buyer and Seller have entered into a certain Purchase and Sale Agreement dated August 6, 1999 as amended by an Amendment dated September 27, 1999, a letter agreement dated September 28, 1999, an Amendment to Purchase and Sale Agreement dated November 18, 1999, a Third Amendment to Purchase and Sale Agreement dated February 24, 2000, a Fourth Amendment to Purchase and Sale Agreement dated April 14, 2000, a Fifth Amendment to Purchase and Sale Agreement dated May 1, 2000, and a Sixth Amendment to Purchase and Sale Agreement dated June 30, 2000 (as so amended, the "Agreement") for the purchase and sale of certain factory outlet shopping centers and other property more fully described therein; and B. WHEREAS, pursuant to a Settlement Agreement and Agreement Regarding Birch Run Refinancing dated as of August 15, 2001 (the "Settlement Agreement") OUTLET VILLAGE OF HAGERSTOWN LIMITED PARTNERSHIP ("H'TOWN") was released from its obligations under the Agreement and other agreements executed by H'TOWN in favor of Buyer, TRIPLE OUTLET WORLD, LTD., TRIPLE OUTLET WORLD JOINT VENTURE, BIRCH RUN OUTLETS, L.L.C. and WILLIAMSBURG OUTLETS, L.L.C. (collectively the "Other Obligations"); and C. WHEREAS, Buyer and Seller desire to revive and reinstate H'TOWN's obligations under the Agreement as well as the Other Obligations of H'TOWN and desire to amend the Agreement in the manner hereinafter set forth. NOW, THEREFORE, for and in consideration of the mutual entry into this Amendment by the parties hereto and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Seller and Buyer do agree as follows: 1. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Agreement. 2. Buyer is entitled to retain and keep as its sole and exclusive property, and without setoff or charge therefore, the entire amounts previously paid to Buyer under Section 8 of the Settlement Agreement and otherwise as a result of closing of the purchase and sale of the Project not occurring under the Agreement notwithstanding reinstatement hereunder of H'TOWN's obligations under the Agreement and its Other Obligations in accordance with the provisions hereof. 3. Effective as of the execution of this Amendment, all of the obligations from which H'TOWN was released under the terms of the Settlement (i.e., its obligations under the Agreement and its Other Obligations) are hereby reinstated and remain in full force and effect, as modified by this Amendment. If Buyer should terminate this Amendment for any reason or default in its obligations hereunder resulting in termination hereof by Seller, then H'TOWN's obligations under the Agreement shall again terminate and be of no further force or effect. 4. The Agreement remains in full force and effect with respect to the Birch Run Project and the Williamsburg Project, except as it may have been modified as to either of such Projects by the Settlement and/or by an Agreement Regarding Williamsburg Refinancing dated as of October 17, 2001, and except to the extent that the provisions thereof may have expired pursuant to their terms. The existing provisions of the Agreement pertaining to the Hagerstown Project are of no force or effect. The Agreement is hereby amended and restated, beginning with Article 1, with respect to the Hagerstown Project only to read as follows: ARTICLE 1 DEFINITIONS The following terms as used in this Amendment shall have the meanings ascribed to them below: 1.1 "Agreement". The Agreement as described in WHEREAS Clause A above. 1.2 "Amendment". This Seventh Amendment to Purchase and Sale Agreement. 1.3 "Bonds". Barkdoll Special Taxing District Bonds issued in connection with development of the Project and described on Exhibit I. 1.4 "Borrowing Entity". Prime Retail Finance VI, LLC, the borrower under the Mercantile Loan. 1.5 "BRWH". BRWH, L.L.C., one of the members of the Joint Venture. 1.6 "Effective Date". The date when this Amendment has been executed and delivered by Buyer and Seller. 1.7 "Escrow Agent". Chicago Title Insurance Company. 1.8 "Investigation Period". A period of time commencing on the Effective Date and ending the earlier of (i) notice from Buyer to Seller that the Investigation Period is over, or (ii) forty-five (45) days after the Effective Date. 1.9 "Joint Venture". Triple Outlet World Joint Venture, a Florida joint venture, which was formed by TOWL and BRWH. 1.10 "Key Property Materials". That part of the Property Materials consisting of: existing as-built surveys of the Real Property; current title commitment for the Real Property and existing title policy; existing most recent environmental studies or reports of the Project; current detailed rent roll of the Project; copies of operating statements for the Project for partial year 1998, all of 1999 and 2000 and year to date 2001 (through October 31, 2001) reflecting all income and expenses of the Project and copies of all federal, state and local tax returns of H'TOWN for such periods; copies of the Bond documentation (including copies of the Bonds); to the extent Seller has them in its possession, copies of certificates of occupancy or other evidence that all space in the Project may be lawfully occupied; copies of all current tax bills and special assessment notices for the Project; copies of the Agreement of Limited Partnership of H'TOWN and all amendments thereto certified to be true, correct and complete by Seller and copies of all Leases in effect on the date hereof for space in the Project. 1.11 "Leases". Leases for space in the Project with tenants which are identified on the Rent Roll attached as Exhibit II, together with any and all other leases which may be executed by Seller with tenants for the vacant spaces in the Project. 1.12 "Lender". The lender or lenders which agree(s) to make the Loans to be arranged by Seller pursuant to Section 1.13. 1.13 "Loans". There are two loans which make up the Loans, as described below: A. "Mercantile Loan". An indemnity deed of trust loan in the present principal amount of $49,062,000 and which at closing will be paid by Selling Partners out of the proceeds of closing down to the principal amount of $46,862,000 in favor of Mercantile Bank, the salient terms of which are set forth on Exhibit III; and B. "Permanent Loan". A loan to be secured by a deed of trust encumbering the Property which will refinance the Mercantile Loan at or prior to its maturity and will be in an amount not exceeding the principal balance of the Mercantile Loan as of the date of closing hereunder. The Mercantile Loan is to remain in effect after the time of closing hereunder. All other financing on the Project other than the Bonds will be paid and satisfied in full by H'TOWN or Selling Partners prior to closing hereunder being effective. Prime Retail, L.P. shall remain a guarantor of the Mercantile Loan but the Mercantile Loan documents are to be modified to provide that any insolvency, bankruptcy or other change in financial condition of Prime Retail, L.P. or any affiliate thereof (except H'TOWN, the Borrowing Entity and the Property Entity) shall not constitute a default under the Mercantile Loan. The Mercantile Loan is to be non-recourse to the Joint Venture and its Venturers except for customary carve-outs. Seller will be responsible for refinancing the Mercantile Loan by obtaining the Permanent Loan at or prior to its maturity. Buyer and the Joint Venture will be obligated to fully cooperate with and use commercially reasonable efforts to identify, assist with and cause the Permanent Loan to be obtained and closed. All terms and conditions of the Mercantile Loan will be reviewed by Buyer during the Investigation Period and if they are not satisfactory to Buyer, Buyer's sole remedy shall be to terminate this Amendment pursuant to Section 4.3. The Permanent Loan shall be subject to the approval of both venturers in the Joint Venture. Subject to the terms of the next sentence, the difference between the actual principal amount of the Permanent Loan and the then principal balance of the Mercantile Loan, will be paid by the Joint Venture through capital calls in the ratio of 30% by BRWH and 70% by TOWL. Notwithstanding the above, if the principal amount of the Permanent Loan is less than $44,000,000, Seller will loan the Joint Venture the difference between $44,000,000 and the principal amount of the Permanent Loan at an interest rate of 7.75%, with a maturity date the same as that for the Permanent Loan and with the same amortization period as that for the Permanent Loan (the "Seller Loan"). The Seller Loan will be secured by a pledge of all distributions from the Joint Venture, and monthly payments under the Seller Loan will be paid prior to any distributions by the Joint Venture. Seller and Buyer agree that the Permanent Loan will have a maturity date inclusive of extension options (or at leas t a prepayment period in which the Permanent Loan can be prepaid at par without penalty) of no earlier than June 1, 2009 and no later than ten (10) years after Closing hereunder. The Permanent Loan may be either fixed or variable rate debt, and shall be non recourse except for customary carve-outs (which, if required, shall be guaranteed by the joint venturers of the Joint Venture). BRWH will pledge its entire Joint Venture interests to secure Seller's obligation to refinance the Mercantile Loan and the Pledge and Escrow Agreement dated November 18, 1999 executed at the closing of the purchase and sale of the Birch Run Project (the "Pledge Agreement") will be amended to add this obligation as one that is secured by such Pledge Agreement. Once the Permanent Loan is closed, the Pledge Agreement will no longer secure the obligations to refinance the Mercantile Loan, but an extension and/or modification of the Mercantile Loan that does not meet all the requirements for the Permanent Loan shall not be deemed a Permanent Loan. Prior to obtaining the Permanent Loan at the current maturity date of the Mercantile Loan, Seller may elect to extend the maturity date of the Mercantile Loan, at Seller's sole expense, and, to the extent Seller wishes to cause an extension of the Mercantile Loan by means of a principal paydown (the "Principal Reduction Payment") of such loan, Seller will have the right to do so and have the Principal Reduction Payment treated as a Seller Loan. Notwithstanding the above, if a Seller Loan results from a Principal Reduction Payment, any amortization of the associated Seller Loan will be deferred until and paid at the time of closing of the Permanent Loan. If Seller so elects to extend the maturity of the Mercantile Loan, then Seller shall continue to be obligated to obtain the Permanent Loan as herein provided upon the maturity of the Mercantile Loan as so extended. Seller shall, at least fifteen (15) days prior to the maturity of the Mercantile Loan as it may be extended in accordance with the terms of this Section, either (i) cause the closing of the Permanent Loan, or (ii) provide a commitment letter (or other evidence reasonably acceptable to Buyer) for the Permanent Loan which provides for closing of such loan on or before the maturity of the Mercantile Loan (as extended). If the Permanent Loan is actually closed prior to June 1, 2004 to satisfy this obligation, Buyer agrees that the "June 1, 2009" date referenced above in this Section 1.13 will be changed to a date which is five (5) years from the Permanent Loan closing date. To the extent the interest rate on either the Mercantile Loan or the Permanent Loan is less than 7.75%, Seller will receive 100% of the savings as a Buyer Interest Savings Payment; to the extent the interest rate on the Mercantile Loan or the Permanent Loan exceeds 7.75%, Seller will pay 100% of the excess as a Seller Interest Subsidy Payment. The Buyer Interest Savings Payment and the Seller Interest Subsidy Payment shall be payable and secured as set forth in Section 3.3 of the Agreement which Section is hereby revived and made applicable to the Project and is incorporated herein by reference, except however, that the Buyer Interest Savings Payment and Seller Interest Subsidy Payment with respect to H'TOWN shall be based solely on the interest rate differential and not on any payment differential. BRWH will pledge its Joint Venture interests as security for the obligation to pay the Seller Interest Subsidy Payment. Seller and Selling Partners shall be responsible for all costs associated with assumption of the Mercantile Loan (excluding Buyer's attorneys fees) and shall be responsible for all costs associated with the origination and closing of the Permanent Loan, including reasonable attorneys fees of Buyer's attorneys and attorneys for the Property Entity and Joint Venture. If for any reason the Mercantile Loan does not remain structured as an indemnity deed of trust loan, Seller will not be obligated to proceed to closing provided that Seller has notified Buyer of its decision not to close on or before December 10, 2001; but failure to provide such notice will not affect the provisions of Section 11.3. All reserves, escrows and other deposits required under either of the Loans will be paid by the Joint Venture (or, in the case of the Mercantile Loan, if already held by the Lender thereunder, H'TOWN shall be reimbursed such amounts at closing by the Joint Venture). At closing of the Permanent Loan, the parties shall execute mutual indemnification agreements similar to those executed at the time of the refinancings of the Birch Run and Williamsburg Projects. The obligation to execute such indemnification agreements shall survive closing until the Permanent Loan is closed. 1.14 "Management Agreement". A Management and Leasing Agreement to be entered into between an entity designated by Seller and Buyer at the time of closing providing for Seller's designated entity to manage and lease the Project for and on behalf of Buyer. The Management Agreement will be in form similar to those for the Birch Run and Williamsburg Projects except that the Base Management Fee is to be reduced only if the reimbursement for home office accounting costs exceeds $6,000.00 in any month. The term of the Management Agreement will end on the earlier of maturity of the Permanent Loan (or earlier prepayment thereof), if the Permanent Loan in fact closes, or thirty (30) days after maturity of the Mercantile Loan without a Permanent Loan having closed. At closing, the existing management agreements for Birch Run and Williamsburg will be extended to end the earlier of maturity of the respective loan on each of the respective Projects or prepayment of the loans on those Projects. 1.15 "Net Operating Income". For purposes of Sections 10.2 Net Operating Income is aggregate net cash flow from operations of the Project based upon the rentals reflected on Exhibit II (but excluding revenues from insurance or condemnation proceeds, refinancings and other non-operation revenues) before payment of capital expenditures, leasing commissions and tenant allowances and principal and interest payments on indebtedness for borrowed money. 1.16 "Partnership Interests". One hundred percent of the ownership interests in H'TOWN consisting of all limited and general partner interests in H'TOWN. 1.17 "Personal Property". H'TOWN'S 100% membership interest in Borrowing Entity, the Bonds, all plans, drawings, permits, governmental authorizations, contracts, documents, surveys, site plans, engineering reports, soil and environmental studies, leases, construction and manufacturer warranties, supplies and all other tangible personal property located on, the Real Property and intangible property arising from ownership and/or operation thereof exclusive of accounts receivable for any period prior to the closing date and exclusive of the right of use of the name of the Project, which will be licensed to Buyer pursuant to Section 15.2. The Personal Property shall not include bonds (exclusive of the Bonds), bank accounts, accounts receivable letters of credit, deposits and other sureties placed by Seller with governmental authorities or utility companies in connection with the construction (but excluding such items as utility deposits required to remain in place for the operation of the Project) ("Construction Security"), all of which shall remain the property of Prime Retail, L.P. If, however, the Construction Security is required or is otherwise in the name of the Buyer, then, Buyer agrees to fully cooperate with Seller in obtaining the return of the Construction Security and upon any return of the Construction Security, Buyer shall immediately deliver the Construction Security to Seller to the extent received by Buyer. 1.18 "Project". That commercial real estate Prime Outlet Center located on and encompassing the Real Property. 1.19 "Property". All of the Real Property and the Personal Property. 1.20 "Property Entity". The entity which will own the Partnership Interests and which, after closing, along with H'TOWN, shall be a "Property Entity" as described in the Joint Venture Agreement of Joint Venture. 1.21 "Property Entity Subsidiary". A company to be formed as determined by TOWL and BRWH which will be wholly owned by the Property Entity. 1.22 "Property Materials". All instruments, documents, leases, contracts, surveys, plats, plans, specifications, reports, studies, permits, applications, authorizations, approvals, proposals, applicable copyright and trademark materials, estoppel letters from all tenants in form of Exhibit IV and as may be requested by Lender, and other materials owned by or within Seller's control or possession which consist of the Personal Property or which in any way pertain to the Real Property or Personal Property. The following enumerated items are included in the definition of "Property Materials" but are not intended to constitute a complete or comprehensive list thereof: as-built surveys; existing title policies and exceptions to title; site plan; Leases; copies of any lease proposals not yet finalized; soil tests; environmental studies; rent roll; service and utility letters, proposals and contracts; construction bids and contracts; copies of documents regarding joint use and/or maintenance of roads, parking areas and ingress and egress easements; zoning authorizations; copies of all Leases in effect on the date hereof for space in the Project; lease summaries and abstracts (but Seller does not represent or warrant the accuracy of such lease abstracts and lease summaries except for the information to be provided pursuant to Section 4.2); existing certificates of occupancy and other governmental approvals and permits; title insurance commitment and legible copies of all exceptions listed thereon to be issued pursuant to Section 6.1; copies of the Bond documents (including copies of the Bonds); copies of real property tax bills and special assesment notices for the Project; copies of all contracts to which H'TOWN is a party; copies of operating statements for the Project; H'TOWN local, state and federal tax returns of every kind for the years 1998, 1999, 2000 and, when filed, 2001; and copies of the agreement of limited partnership of H'TOWN and organizational documents of Borrowing Entity. 1.23 "Real Property". That parcel or parcels on which the Project is located, which is or are legally described on Exhibit V. Included within the term Real Property is all of Seller's right, title and interest in and to: A. Any land lying in the bed of any highway, street, road or avenue, open or proposed, in front of or abutting or adjoining the Real Property. B. All riparian rights. C. All appurtenances, hereditaments, tenements and air rights appertaining to the Real Property. D. All improvements located on or affixed to the Real Property. 1.24 "Title Insurance Company". Chicago Title Insurance Company, through its National Business Unit in Washington, D.C. Attention: Chris Naughton. 1.25 "TOWL". Triple Outlet World, Ltd., the managing venturer of the Joint Venture. 1.26 "Selling Partners". Prime Retail, L.P., the sole general partner and Prime Retail, Inc., the sole limited partner of H'TOWN. ARTICLE 2 SALE OF PARTNERSHIP INTERESTS 2.1. Subject to the terms and provisions herein contained, Selling Partners agree to sell to Buyer and Buyer agrees to purchase from Selling Partners all the Partnership Interests. Buyer will assign its rights under this Amendment to the Property Entity to acquire the general partner's 99% Partnership Interests and will assign its rights to acquire the limited partner's 1% Partnership Interest to the Property Entity Subsidiary (the assignees being sometimes called the Property Entity herein in either case for ease of reference), which will acquire the respective Partnership Interests. As in the case of the Birch Run and Williamsburg Projects, Prime Retail, L.P.'s 30% participation allocable to the purchase of the Project (in this case, the purchase of the Partnership Interests) under the Joint Venture Agreement of the Joint Venture will be contributed in the form of a credit to the buying entity. ARTICLE 3 PURCHASE PRICE 3.1. Price. The purchase price to b e paid for the Partnership Interests is $80,500,000.00. 3.2. Deposits. The first component of the purchase price is payment of a $250,000.00 earnest money deposit to the Escrow Agent within two business days after the Effective Date. An additional earnest money deposit will be due and payable by Buyer to Escrow Agent in the amount of $250,000.00 within one business day following the end of the Investigation Period, unless Buyer has terminated this Amendment as provided in Article 4. At the time of payment of the purchase price, the Deposit shall be credited to the purchase price. The earnest money deposits of $250,000.00 initially and $500,000.00 in the aggregate will be placed in an interest-bearing investment approved by Buyer and Seller, which approval will not be unreasonably withheld, with interest to be paid to Buyer unless Buyer shall default hereunder and Seller shall become entitled to the earnest money deposit(s), in which case all such interest shall be paid to Seller. All references in this Amendment to return of the earnest money deposit(s) hereunder to Buyer shall be deemed to include interest earned thereon. Interest on the earnest money deposits will be allocated for tax purposes to the party receiving it. 3.3. Loans. A portion of the purchase price in the amount of $46,862,000.00 will be paid by the Mercantile Loan remaining in place as provided in Section 1.13. 3.4. Balance. The balance of the purchase price shall be payable to the Escrow Agent at closing by wired funds or certified check drawn on a United States bank; subject, however, to prorations and adjustments as provided in Section 13.1. Notwithstanding the foregoing, the portion of the cash purchase price which would otherwise be required to be provided by BRWH as a 30% joint venture partner under the Joint Venture Agreement of the Joint Venture shall be contributed by crediting such amount against the cash portion of the purchase price due to Selling Partners. 3.5. Allocation. Buyer and Seller agree that the purchase price will be allocated separately among various components of the Property including the Bonds, land, buildings, mechanical systems and Personal Property, to the Covenant Not To Compete being provided pursuant to Section 16.3 hereof , and to the License to be granted by Seller under Section 16.2 hereof in accordance with Exhibit IV. The portion of the price allocable to the Bonds will be paid directly to Prime Retail, L.P. ARTICLE 4 INVESTIGATION 4.1. Buyer Investigation Rights. During the Investigation Period and upon prior reasonable notice and subject to the provisions of Section 4.4, Buyer and Buyer's agents, professionals and independent contractors shall have the right of access to the Property and to Seller's records in Baltimore, Maryland at any reasonable time during the Investigation Period to conduct tests; take measurements; complete surveys; review bids; review Leases, contracts, correspondence, tax returns and other records; conduct conversations with Seller and Seller's agents, employees (which shall mea Executive Vice President of Finance, Executive Vice President and Chief Financial Officer, Senior Vice President for Operations and their respective seconds in command at Prime Retail, L.P., as well as Prime Retail, L.P. senior staff members in Baltimore, Maryland, applicable regional operations individuals and local site employees, provided meetings with the local site employees will be arranged by senior staff in Baltimore) and independent contractors, and with tenants and prospective tenants (provided meetings with tenants and prospective tenants will be arranged by the senior staff of Prim e Retail, L.P. in Baltimore, Maryland), governmental officials, utility company representatives and all other parties having anything to do with the Property; and examine and investigate the Property, and Property Materials in any reasonable way for all other purposes consistent with evaluation of and potential ownership, development and operation of the Property and ownership of the Partnership Interests. Seller agrees to reasonably cooperate with Buyer in Buyer's investigation. 4.2. Costs. The cost and expense of delivering the Property Materials shall be borne by Seller. The cost and expense of all other aspects of Buyer's investigations shall be borne by Buyer. However, Seller shall, to the extent Seller has them in its control or possession deliver to Buyer as soon as possible after the Effective Date that portion of the Property Materials comprising all of the following, but only to the extent same are changed or updated since delivery of such Property Materials pursuant to the Agreement: soil tests, environmental tests, engineering studies, feasibility studies, traffic studies, surveys (including as-built surveys), plans and specifications, leases, rent roll and Key Property Materials not otherwise listed in this Section. If there is an extra charge to Seller for obtaining such certification or letter and such charge is reasonable and customary, Buyer will bear the cost thereof. Seller will not be obligated to obtain any new tests or studies for Buyer. Anything in this Amendment to the contrary notwithstanding, Seller will deliver to Buyer within six (6) business days of the Effective Date a list of all leases containing most favored nation or other similar clauses which might allow tenants to pay rentals at rates lower than those reflected on Exhibit II (along with a summary of the particular clause(s) in each such Lease) and a new rent roll reflecting such clauses and their impact (collectively the "Supplemental Lease Materials"). 4.3. Right of Termination. If Buyer, in Buyer's sole discretion, shall determine for any reason that Buyer is not entirely satisfied with the results of Buyer's inspections or that Buyer no longer desires to acquire the Partnership Interests, Buyer shall have the right to terminate this Amendment by giving notice to Seller and Escrow Agent hereunder at or prior to the expiration of the Investigation Period, in which case, Buyer will be entitled to return of its earnest money deposit. If Buyer does not terminate this Amendment as provided in the preceding sentence, Buyer shall pay the additional $250,000.00 earnest money deposit in accordance with Section 3.2. Upon the expiration of the Investigation Period without Buyer having terminated this Amendment, all of the earnest money deposits shall, subject to the provisions of this Amendment, be at risk. 4.4. Insurance, Repair and Indemnity. Prior to entry onto any of the Real Property to perform studies, tests, investigations or surveys, Buyer (or each contractor performing such services for Buyer) will provide a certificate of insurance to Seller naming Seller as an additional insured in amounts and form reasonably acceptable to Seller. Buyer agrees to repair, at Buyer's cost and expense, any damage caused to the Project caused by any of the studies performed by or for Buyer. Buyer also agrees all of its studies will be performed in a manner that will not unreasonably interfere with operation of the Project or tenants operating within the Project. Buyer will indemnify and hold H'TOWN and the Selling Partners harmless from and against any cost, expense, damage or liability incurred by H'TOWN as a result of Buyer or its agents or independent contractors entering the Real Property, and/or performing work or conducting studies thereon, which indemnification and hold harmless will survive closing hereunder or termination or this Amendment. 4.5 Delivery of Loan Documents. Promptly upon Seller's receipt of any Loan documents for either of the Loans, Seller shall provide copies thereof to Buyer to enable Buyer to confirm that the Loans and Loan documents satisfy the requirements of this Amendment. ARTICLE 5 TITLE 5.1. Permitted Exceptions. At closing, the Real Property is to be subject only to the following: A. Real estate taxes and special assessments for the year in which the closing shall occur. B. Zoning and/or restrictions and prohibitions imposed by governmental authorities, none of which shall prevent use of the Real Property as a factory outlet mall as presently configured. C. Restrictions, reservations and easements recorded in the Public Records of the county where the Project is located, none of which s hall interfere with the use of the Real Property for its intended purposes, contain any rights of reverter, or render the title unmarketable in the opinion of Buyer's attorney as determined during the title insurance review period set forth in Section 6.1, and all of which shall be subject to the reasonable approval of Buyer's attorney as provided in Section 6.1. D. Rights of tenants under the Leases, none of whom will have any option to purchase or rights of first refusal to purchase any portion of the Property. E. The deed of trust and other documents securing the Mercantile Loan and the Bonds. F. The Declaration(s) of Easements and Restrictions referred to in Section 16.5. G. Other matters agreed to pursuant to Section 6.1. ARTICLE 6 TITLE INSURANCE 6.1. Commitment. Seller shall, within ten (10) days after the Effective Date, deliver to Buyer an update to Chicago Title Insurance Company Commitment No. 4500-41977 (with an effective date of 5/31/00) together with legible copies of all exceptions shown on the update that did not appear on the original commitment. If the title insurance commitment, as updated, shall disclose any defects in title not disclosed in the 5/31/00 Commitment, Buyer shall so notify Seller in writing within ten (10) days after receipt thereof. The update will acknowledge that the existing title policy of H'TOWN will be endorsed to (i) delete those items which Buyer has objected to hereunder and which Seller has agreed or is obligated to cure, (ii) increase the amount of insurance to the amount of $80,500,000.00, (iii) bring the effective date to the date of closing, (iv) add a Fairways Endorsement, non-imputation endorsement and endorsements per Section 6.2 and (v) state the policy will be issued in connection with a purchase and sale of the Partnership Interests. Unless specifically withdrawn, any objections made by Buyer to the status of title during Buyer's previous review of title under the Agreement, shall be deemed to be included in any such writing whether or not specifically mentioned, and any matter not so objected to as part of Buyer's prior review of title shall be deemed to be approved by Buyer. Within ten (10) days after receipt of Buyer's notice of objection to any title matter, Seller will notify Buyer if Seller will undertake to attempt to cure the objectionable title matter. If Seller elects not to cure the objectionable matter, Buyer shall, by notice to Seller given within ten (10)days after receipt of Seller's notice, either terminate this Amendment or waive all such title objections which Seller has not agreed to cure. If Seller elects to cure the objectionable matter but is unable to do so after thirty (30) days, Buyer can elect to give Seller an additional 15 days to cure or terminate this Amendment. If after such additional period, the defect is still not cured, Seller or Buyer can terminate this Amendment. Any termination pursuant to this Section shall result in return of the earnest money deposit(s) to Buyer. Seller has no obligation to cure any title defects disclosed by the title commitment, but Seller agrees it will keep title to the Real Property in the same condition (except for (i) defects which Seller may elect to cure, and (ii) Leases entered into by Seller in accordance with the Agreement and this Amendment). H'TOWN shall be permitted to convey to Prime Retail, L.P. or an affiliate thereof title to any real property owned by H'TOWN but not included in the Real Property. The Title Insurance Company shall obtain reinsurance in such amounts and with such companies as are approved by Buyer, whose approval will not be unreasonably withheld. Buyer is to be given the right of direct access to any one or more reinsurers at its election. 6.2. Policies. The title insurance commitment shall be brought down to a current date at the time of closing, and at closing it shall be marked down or endorsed by the Title Insurance Company. Buyer and Seller shall each provide such copies of their documents of formation, resolutions and good standing certificates as required of them in Schedule B-I of the title commitments. The final title policy is not to contain the standard printed exceptions normally contained in title policies. The "gap" will be deleted from the commitment at closing as will all items listed in Schedule B-I. Seller shall pay all costs and expenses for issuance of the title insurance commitment, endorsement of the owner's title insurance policy as provided herein and any endorsements and/or title policies required by the Lender. In the event the title insurance commitment is issued by a title insurance agent rather than a branch office of the Title Insurance Company, a title insurance protection letter issued by the Title Insurance Company and addressed to Buyer will be supplied. The final policy will contain affirmative insurance endorsements, insuring that none of the restrictions applicable to the real Properties has been violated to date and that a future violation will not result in a reversion or forfeiture of title and shall contain all the endorsements contained in Title Commitment No. 4500-41977. However, the providing of such insurance shall not, in and of itself, render acceptable any otherwise objectionable restriction hereunder. ARTICLE 7 SURVEY 7.1. Existing Surveys and Updates. As part of the Property Materials, Seller has delivered to Buyer an existing as-built survey of the Real Property under seal of a surveyor licensed in Maryland. Seller shall have the survey updated or redone by the same or another surveyor under current date so that the standard survey exceptions are removed from the title policy. If the updated survey shows any encroachment on the Real Property surveyed, or that improvements located on the Real Property surveyed in fact encroach on lands of others or violate any of the applicable setbacks or restrictive covenants, or that there is not access to the Real Property surveyed from a public road, or that there are any gaps, gores, hiatuses, or overlaps, the same shall be treated as a title defect, and the provisions and conditions of Section 6.1 shall govern any obligation of Seller to cure the title defect and any rights of Buyer. ARTICLE 8 PARTNERSHIP INTERESTS 8.1. Purchase and Sale. Anything in this Amendment to the contrary notwithstanding, the purchase and sale hereunder shall be structured as a purchase by Buyer of all the Partnership Interests of the Selling Partners in lieu of a purchase of the Property, as provided in Section 2.1. The ownership structure when closing is complete is depicted on Exhibit V, subject to Lender approval. At closing, the agreement of limited partnership of H'TOWN shall be amended as determined by Prime Retail, L.P. and TOWL and approved by the Lender. 8.2. Agreement with Respect to Partnership Interests. Upon closing of the purchase and sale of the Partnership Interests, and as a condition thereof, the following will be provided to Buyer: A. If and when requested by Buyer, an election on the part of H'TOWN under Section 754 of the Internal Revenue Code, but only if required by Buyer. B. Indemnification from Prime Retail, L.P. in form and content reasonably satisfactory to Buyer indemnifying H'TOWN and its new partners from and against any and all claims that may be asserted by creditors of H'TOWN or other third parties making any claim against H'TOWN or its new partners for any alleged obligation or liability claimed to exist prior to closing except those which Buyer has specifically agreed pursuant to this Amendment are to remain in place and be assumed by Buyer. Such indemnification shall be secured for a period of twenty-four (24) months after closing by a right of set off against the management fees payable pursuant to the Management Agreement (as defined in this Amendment) and pursuant to the Management Agreements executed pursuant to the Agreement with The Prime Outlets of Birch Run, L.L.C. and The Prime Outlets at Williamsburg, L.L.C. The "Owners" under each of the aforesaid Management Agreements (including the Management Agreement) shall have the right to set off against management fees and leasing commissions payable pursuant to any and all such Management Agreements all costs, expenses, attorneys fees, and liabilities of every kind and nature incurred as the result of assertion of any claim indemnified against under this Section 8.2B; provided, however, that Prime Retail, L.P. is given reasonable notice of each claim for which a set off is sought and opportunity to pay, defend or contest such claim. C. Evidence of the authority and certificates of good standing in the states of organization (and Maryland, if they are required to register to transact business there) of all Selling Partners who are not individuals to sell their Partnership Interests and corporate resolutions, trust resolutions, limited liability company resolutions or partnership resolutions authorizing the actions of any corporate, trust, limited liability company and partnership Selling Partners and, if applicable, their general partners, trustees, members and managers. D. A certified copy of the Certificate of Limited Partnership of H'TOWN filed in Delaware and the qualification documents filed in Maryland. 8.3. Tax Returns. H'TOWN and Selling Partners agree that they will file H'TOWN's tax return for the year 2001 up to the date of closing on or before the time prescribed by applicable law as well as a final tax return for H'TOWN up to the date of closing; and all of the Selling Partners will pay when due any taxes which may be due or owing for all periods prior to closing as a result of their having been partners of H'TOWN. The indemnification contained in Section 8.2(B) shall apply with equal force to breach of any agreements pursuant to this Section 8.3, which agreements shall survive closing. ARTICLE 9 REPRESENTATIONS AND WARRANTIES 9.1. Representations and Warranties of Seller. H'TOWN and Prime Retail, L.P. (collectively "Selling Parties") and the other parties comprising Seller hereby represent and warrant all of following to Buyer, which are true and correct as of the Effective Date and will be true and correct as of the closing date, and all of such representations and warranties shall survive closing for a period of 18 months: A. Each of the parties comprising Seller, BRWH, Selling Partners and Borrowing Entity is a duly formed and validly existing limited partnership, limited liability company, corporation or trust as the case may be, under the laws of the State of formation, and each is, if required by law, duly qualified to transact business in the State in which the Project it owns is located. All appropriate resolutions and authorizations precedent to such parties' authority and power to execute this Amendment and perform their obligations hereunder have been properly and duly taken. B. Other than the Bonds or as reflected in financial information provided, real property tax bills, and special assessment notices, if any, there are no impact fees or hook up fees which will be due or payable by Buyer or H'TOWN after closing hereunder to any utility company or supplier, or governmental or quasi-governmental authority as a result of or in connection with development of any portion of the Project. C. To Selling Parties' and Seller's knowledge, the legal description which is attached to this Amendment as Exhibit VII describes the Real Property fully and does not omit any portion thereof. The Project contains the approximate acreage and square footage reflected on Exhibit VIII. D. To Selling Parties' and Seller's knowledge, (i) there are no violations by Seller of any copyrights or trademarks with respect to any of the Personal Property, and (ii) no claims have been asserted against use of the name "Prime Outlets at Hagerstown". Seller has full right, power and authority to authorize Buyer to utilize said name and will defend same against all third party claims. E. To Selling Parties' and Seller's knowledge, all of the Property Materials delivered or to be delivered to Buyer (other than lease abstracts and lease summaries as to which no representations or warranties are made except for the Supplemental Lease Materials to be delivered to Buyer pursuant to Section 4.2) are true, correct and complete with no misstatements and with no material omissions. Notwithstanding anything to the contrary contained in this Amendment, (i) no representations or warranties are made with respect to the financial condition of any tenant, including The Home Company, of the Project or as to the accuracy or completeness of any financial information on any tenant of the Project, including The Home Company, provided to Buyer, and (ii) income statements, operating statements and rent rolls (other than the rent roll to be provided as part of the Supplemental Lease Materials) may not take into account various rights of certain tenants under their leases to pay reduced rental charges under so-called most favored nations clauses or similar clauses and no party comprising Seller or Selling Partners shall have any liability to Buyer on account of any inaccuracy in such materials resulting therefrom. F. All service contracts, leases (other than tenant Leases) and other contracts of any kind or nature are for $10,000.00 or less per contract or are terminable on 30 days' notice or less (except as may be listed on Exhibit IX or disclosed in the title insurance commitment or e xcept as permitted in Section 10.2) which will be binding upon Buyer or H'TOWN after the closing date. G. Except as set forth on Exhibit X, H'TOWN has received no notice of any violations of any portion of the Project from any governmental agency or authority and to Selling Parties' knowledge a ll permits and governmental authorizations which are appropriate or necessary for construction and operation of the Project have been duly issued, are in full force and effect. H. To Selling Parties' and Seller's knowledge, except as disclosed in H'TOWN's existing environmental reports delivered or to be delivered by H'TOWN to Buyer hereunder, there is (i) no contaminant, pollutant or toxic or hazardous waste, substance or gas in, on, under, over or affecting any part of the Real Property or its water supplies and (ii) no adverse environmental condition or violation of any local, state or federal environmental law with respect to the Property or any part thereof. I. No brokerage commission or compensation of any kind is due or will be due from Buyer, H'TOWN or the Project or the rents therefrom for the leasing of any space in the Project (except for leasing commissions that may be payable pursuant to the Management Agreement for leases entered into after closing). Leasing commissions for Leases e ntered into after the date hereof shall be governed by the provisions of Section 10.2 hereof. J. Selling Parties and Seller have no knowledge of any pending or contemplated condemnation or eminent domain proceeding or of any moratorium affecting any portion of the Project. K. To Selling Parties' and Seller's knowledge, there are no third party claims pertaining to or affecting the Property or H'TOWN except for rights of tenants arising under the Leases, rights of the Lender under the Mercantile Loan documents, rights of parties under contracts listed on Exhibit IX and contracts referred to in paragraph F above, tort and similar claims covered by insurance maintained by Seller, rights of parties that will be reflected in the title insurance commitment delivered by Seller to Buyer hereunder, and those matters set forth on Exhibit XI. L. Except for leasing or financing arrangements entered into in the ordinary course of business and taken into account in the operating expenditures of the Project in the financial information delivered by Seller to Buyer or entered into after the Effective Date in accordance with the provisions of Section 10.2 hereof, and except for rights of architects and engineers in the plans and specifications, H'TOWN is the owner of the Personal Property (other than the Bonds, ownership of which shall be transferred to H'TOWN by Prime Retail, L.P. at or prior to closing, subject to the provisions of Article 22, subject to the lien securing the Mercantile Loan) free and clear of all liens, third party claims and encumbrances except for security interests therein incident to existing financing for the Project (which will be released prior to closing except those pertaining to the Mercantile Loan) and the Mercantile Loan. M. To Selling Parties' and Seller's knowledge and to the extent needed, all electricity, telephone, drinking water, irrigation water, water for fire purposes, sanitary sewage and storm drainage capacity in sufficient quantity to service the Project and its tenants adequately is available to the Real Property and is fully hooked up and operable without payment by Buyer, H'TOWN or the Project after closing h ereunder of any impact or connection fees, and all necessary and appropriate approvals for same have been obtained. The only fees payable by Buyer or H'TOWN in connection with such utilities after closing shall be normal usage fees, unless otherwise disclosed in the real property tax bills, special assessment notices, title commitments or financial information provided to Buyer in connection herewith. N. To Selling Parties' and Seller's knowledge and unless otherwise disclosed in the real property tax bills, special assessment notices or title commitment, all entrances and curb cuts for the Real Property reflected on the as-built survey have been approved by all governmental and quasi-governmental bodies having jurisdiction thereover, and any road construction or installation of traffic signals or similar off-site improvements which were required as a result of construction or operation of the Project has been fully completed and paid for. O. Unless otherwise disclosed in the title commitment, Selling Parties and Seller have no knowledge of any pending governmental or quasi-governmental assessment liens or of any planned improvements that might result in any assessments being levied by a governmental or quasi-governmental authority against the Project, other than the existing assessments levied in connection with the Bonds. P. There are no collective bargaining or union agreements with any employee of H'TOWN, and no employee contracts or relationships exist which will be binding upon H'TOWN or Buyer after closing. Q. The Rent Roll attached as Exhibit II is a true, correct and complete depiction of those terms set forth on the Rent Roll for all Leases for the Project as of the date of such Rent Roll, all of which are in full force and effect with no known defaults thereunder by the Landlord or Tenant, except as disclosed on Exhibit XII. To Selling Parties' and Seller's knowledge, except as set forth on Exhibit XII, all Leases are valid and enforceable in accordance with their terms. Except as disclosed in the Leases, no tenant will be entitled to any concession or rebate after Closing. No tenant improvement funds or allowances will be due from Buyer or H'TOWN after closing as to any Lease in effect as of Closing except for tenant improvement payments which are credited to Buyer at Closing and placed by Buyer in escrow to be used solely to pay tenant improvements. To Selling Parties' and Seller's knowledge, all spaces within the Project may legally be occupied for the purposes for which they are leased. R. Except as disclosed on Exhibit XI, H'TOWN has received no notice of any actions or claims filed or threatened by anyone against the Real Property or Personal Property, Seller or Seller's agents in connection with any personal injury or property damage sustained by reason of the development, use, occupancy or operation of the Project. S. All appropriate resolutions and authorizations precedent to each of the Selling Partner's authority to sell its Partnership Interest and to perform its obligations in connection herewith have been properly and duly taken, except for government approvals required to transfer the Bonds to H'TOWN, which Seller shall, subject to the provisions of Article 22, obtain prior to closing. T. H'TOWN has not had any employees during its existence to or for whom there will be any obligations after the closing date (except for the furnishing of W-2 forms, and payments of final paychecks, benefits and withholding, all of which will be done timely by the Selling Partners and at their cost and expense), including, without limitation, obligations for compensation, withholding taxes, ERISA and employee benefits. U. At closing, there will be no third-party claims pertaining to or affecting any of the Partnership Interests being sold, all of which will vest in Buyer free and clear of all third-party liens, claims and encumbrances. V. Borrowing Entity is 100% owned by H'TOWN. Borrowing Entity has no liabilities except in connection with the Mercantile Loan. W. All income taxes, withholding taxes, franchise taxes and all other liabilities of every kind and nature of H'TOWN except those being expressly assumed pursuant to this Amendment and claims fully covered by insurance will, upon conclusion of the closing, be fully paid and there shall be no sums due or owing to any third parties whatsoever except to the extent same are fully disclosed to Buyer at or prior to closing and covered by the indemnification under Section 8.2.B. X. The copy of the Agreement of Limited Partnership of H'TOWN attached as Exhibit XIII is a true, correct and complete copy of the original which is in full forc e and effect and is not modified or amended except as indicated on Exhibit XIII. There are no general partners of H'TOWN except Prime Retail, L.P. and no limited partners of H'TOWN except Prime Retail, Inc. Each of the Selling Partners owns and will convey its Partnership Interest pursuant to this Amendment free and clear of all third party liens, claims and encumbrances of every kind. Y. The copy of the letter from Mercantile Bank attached as Exhibit XIV is a true, correct and complete copy of the original which remains in full force and effect according to its terms and which is unamended and unmodified. Z. The Mercantile Loan is current and in good standing with no defaults thereunder by H'TOWN or any borrower, obligor or guarantor thereunder and all representations and warranties made by all of such parties in connection with the Mercantile Loan are true and correct except that representations and warranties regarding the financial condition of Selling Partners may not be accurate. 9.2. Update. At the time of closing, Seller and Prime Retail, L.P. will update the representations and warranties contained in Section 9.1(G), (H), (J), (K), (L), (M), (O), (Q) and (R) if they can truthfully do so. If they cannot do so as to any such paragraphs, then Seller and Selling Parties shall be in default hereunder unless the inability to update a representation and warranty is the result of actions of H'TOWN permitted pursuant to Section 10.2 or if the inability to update arises from any event beyond the reasonable control of Seller or Selling Parties or from any act or omission of a third party unrelated to S eller or Selling Parties and which cannot be timely corrected by Seller or Selling Parties by an expenditure of funds which in the aggregate will not exceed $250,000; provided, however, if there has been a notice of violation of the kind encompassed by paragraph (G), and if the cost to rectify same in Buyer's reasonable estimation will not exceed $250,000 [in the aggregate if there is more than one (1) violation], then Seller or Selling Parties shall not be in default but shall agree with Buyer to rectify the violation at Selling Partners' sole cost and expense. To secure Selling Partners' obligation to rectify the violation Selling Partners will deposit a sum equal to one hundred thirty percent (130%) of the estimated cost to complete rectification of the violation in escrow with the Escrow Agent which shall be released from escrow only when the violation(s) has (have) been rectified and final lien waivers are delivered from all parties supplying work and/or materials in connection therewith. The amount placed in escrow will not be the limit of Selling Partners' liability under this Section if the costs of rectification exceed the estimate plus thirty percent (30%) thereof. 9.3. Indemnification. Seller and Prime Retail, L.P. hereby agree to indemnify and hold Buyer free and harmless from and against all claims, costs and expenses incurred by Buyer as a result of a material breach of or the material falsity of any of the representations or warranties pursuant to Sections 9.1 and 9.2 and, in the event Buyer is made a party to any arbitration, mediation or litigation as a result of such breach or falsity, Seller and Prime Retail, L.P. will pay all the costs and expenses thereof including reasonable attorneys' fees. The provisions of this Section 9.3 will survive the closing as to any claim hereunder asserted by Buyer within eighteen (18) months after closing hereunder. If Buyer has actual knowledge of representations and warranties being incorrect and then closes, breach of the warranty is deemed waived. 9.4. Representations and Warranties of Buyer. Buyer hereby represents and warrants all of following to Seller and Selling Partners, which are true and correct as of the Effective Date and will be true and correct as of the closing date, and all of such representations and warranties shall survive closing for a period of 18 months: A. Buyer is a duly formed and validly existing limited liability company under the laws of the State of Florida, and is or, prior to Closing, will be duly qualified to transact business in the State in which the Project is located, if such qualification is required by applicable law. All appropriate resolutions and authorizations precedent to Buyer's authority and power to execute this Amendment and perform its obligations hereunder have been properly and duly taken. ARTICLE 10 OPERATING COVENANT 10.1. Maintenance and Operations. Seller and Selling Parties agree and covenant that H'TOWN will during the term of this Amendment operate, manage and maintain the Project in its present condition, normal wear and tear excepted, and at least to the same standards which H'TOWN has operated, managed and maintained the Project prior to the Effective Date. H'TOWN shall comply with all material obligations of the landlord under the Leases and all other material agreements and contractual arrangements affecting the Project by which H'TOWN is bound. H'TOWN shall provide written notice to Buyer of any notice from any party alleging that H'TOWN is in material default in its obligations under any of the Leases or under any permit, agreement or Loan document affecting the Property or any portion or portions thereof as well as any other notices pertaining to or affecting the Project in any material way received from any governmental or quasi-governmental body, utility supplier or fire underwriter. 10.2. Contracts and Leasing. No contract out of the ordinary course of business for or on behalf of or affecting H'TOWN or the Project shall be negotiated or entered into which is in excess of $10,000.00 or cannot be terminated on 30 days' or less notice unless Buyer shall have approved same, which approval will not be unreasonably withheld. Any and all new Leases and renewals other than those renewals of existing Leases (the terms of which are contained in the Leases provided to Buyer as part of the Property Materials) entered into from and after the Effective Date shall be subject to Buyer's prior approval, which approval shall not be unreasonably withheld or delayed (and shall be deemed given if written objection is not made within eight (8) business days after receipt). All of such Leases and renewals shall be in the ordinary course of H'TOWN's business and shall be for a use which is consistent with the present operations of the Project. Notwithstanding anything to the contrary in this Amendment, H'TOWN may modify Leases during the Investigation Period in order to resolve any issues that may have arisen with tenants thereunder with respect to most favored nation and other provisions of such Leases that may permit the tenants thereunder to pay reduced rental charges. Such modifications may be made, however, if, but only if, either (i) there is negligible adverse impact on Net Operating Income or (ii) Buyer has consented thereto, such consent not to be unreasonably ithheld. Copies of all Leases and modifications entered into by H'TOWN after the Effective Date shall be delivered to Buyer promptly after complete execution thereof. All leasing commissions, including leasing commissions to third party brokers, and tenant improvement allowances for Leases entered into after the Effective Date and prior to closing in accordance with the provisions of this Section 10.2 shall be paid by Selling Parties prior to closing hereunder (except for tenant improvement allowances not then payable which shall be credited to Buyer and escrowed as provided in Section 9.1.Q), and neither Seller nor any affiliate of Seller shall be entitled to any leasing commissions as to such Leases under the Management Agreement. H'TOWN will not enter into any new personal property leasing or financing arrangements on or after the Effective Date except in the ordinary course of business where impact on Net Operating Income is negligible. 10.3. Liabilities. Except to the extent closing adjustments and prorations have taken into account any obligations, expenses, costs, liabilities or claims accruing for periods before the closing date and in any way pertaining to or arising from the ownership or operation of either H'TOWN or the Project, Selling Parties shall be responsible to pay the same when due. Prime Retail, L.P. agrees to indemnify and save Buyer and H'TOWN free and harmless from all of such claims. This Section 10.3 will survive closing. Buyer shall pay all such obligations, expenses, costs, liabilities and claims first arising for periods after the closing date pertaining to or arising from the ownership or operation of either H'TOWN or the Project and shall indemnify and save Selling Partners free and harmless from all of such claims, unless such claims arise from a breach by Seller or Selling Parties of a representation and warranty under this Amendment of which Seller is given notice prior to the expiration of such representation or warranty. Anything in this Amendment to the contrary notwithstanding there shall not be any time limit on Buyer's ability to assert a claim against Selling Partners for any unpaid taxes of H'TOWN arising or attributable to the period of time prior to closing hereunder. ARTICLE 11 CONDITIONS PRECEDENT 11.1. Buyer's Preconditions. The following are conditions precedent to Buyer's obligations under this Amendment and in the event any one or more of such conditions in subparagraphs A, D, E, F, or G below are not met on or before the dates set forth (or the closing date if no other date is set forth), Buyer shall have the unqualified right (which, if such failure of condition also constitutes a default by Seller or Selling Partners, shall be in addition to the other remedies available to Buyer on account of Seller's or Selling Partners' default), to terminate this Amendment and obtain from Escrow Agent a refund of its earnest money deposits. If one or more of the conditions precedent in subparagraphs B, C, or H is not met, Buyer's sole remedy shall be to extend the closing date one time only for a period not to exceed thirty (30) days, to see if the condition can then be met or to terminate this Amendment (on the applicable extended closing date if the condition is still not met, at Buyer's election) and obtain a refund of its earnest money deposit(s) from Escrow Agent: A. The representations and warranties of Seller and Selling Parties shall be true and correct in all material respects as of the closing date and Selling Partners, Seller and Prime Retail, L.P. shall have performed all of their material obligations hereunder to be performed at or prior to the closing. B. H'TOWN will have obtained and delivered to Buyer estoppel letters addressed to Buyer substantially in the form attached hereto as Exhibit VI from tenants occupying at least 70% of the leasable space in the Project. To the extent estoppel letters are not required hereunder and not obtained, H'TOWN will deliver to Buyer Selling Partners' affidavit as to such Leases containing the same information that the estoppel letters contain. C. There shall not be any local insurrection, war, disaster, moratorium preventing tenants from operating, or other event (other than a matter covered by Article 14 hereof) preventing the Real Property from being occupied by a material number of tenants with concurrent right to tenants not to pay rent. D. Any and all loans made by any Selling Partners to H'TOWN will have been paid in full and will have been cancelled. E. A balance sheet dated as of the date of closing for H'TOWN shall be delivered to Buyer reflecting that the only assets of H'TOWN are the Property, the Leases pertaining thereto, the contracts referred to in this Amendment and rights under this Amendment. No liabilities are to be reflected on the balance sheet other than liabilities that are being assumed pursuant to this Amendment and those that will be paid and satisfied in full or fully reserved and escrowed for or fully insured against at the time of closing in the same manner as provided in Section 9.1(W). F. H'TOWN will have delivered to Buyer a certified copy of its Certificate of Limited Partnership filed in Delaware and the qualification documents filed in Maryland for H'TOWN. G. UCC tax lien and judgment searches on H'TOWN and all Selling Partners will be delivered to Buyer reflecting the absence of any liens, security interests or encumbrances against H'TOWN, the Partnership Interests or the Personal Property except for (i) security interests against H'TOWN incident to and securing the Mercantile Loan, (ii) equipment and other Personal Property leases otherwise permitted under this Amendment and (iii) those that will be released at closing. H. A certificate addressed to H'TOWN, the Borrowing Entity and the Property Entity (the "Certificate") will be delivered by Mercantile-Safe Deposit and Trus Company stating that the remaining principal balance of the Mercantile Loan (after payment of $2,200,000.00 principal at closing) is $46,862,000.00. (Seller and Prime Retail, L.P. will exercise commercially reasonable efforts to have the certificate also state that the Mercantile Loan is current and in good standing with no known defaults thereunder but such additional statement is not a precondition hereunder, nor shall a failure to obtain such additional statement constitute a default hereunder.) 11.2. Seller's Preconditions. The following are preconditions to Seller's obligations under this Amendment and in the event the condition in subparagraph A below is not met on or before the closing date, Buyer shall be in default hereunder and Seller shall be entitled to avail itself of the remedy provided in Article 17: A. The representations and warranties of Buyer shall be true and correct as of the closing date and Buyer shall have performed all of its material obligations hereunder to be performed at or prior to the closing. 11.3 Mutual Precondition. The following is a precondition to the obligations of all parties to this Amendment and, if not met, will entitle any party hereto to terminate this Amendment, in which case the earnest money deposits paid by Buyer will be refunded to Buyer: Mercantile-Safe Deposit and Trust Company will hav e consented to the transfer of the Partnership Interests and continuation of the Mercantile Loan on the terms set forth in this Amendment pursuant to documents reasonably satisfactory to Buyer and Seller. ARTICLE 12 CLOSING 12.1. Place, Time, Etc. Subject to satisfaction or waiver of the conditions precedent to closing set forth in Article 11 above and the other provisions of this Amendment, closing shall take place in Orlando, Florida at the office of the Title Insurance Company or the office of Buyer, or at such other place as the parties may mutually agree on that date which is thirty (30) days after expiration of the Investigation Period. 12.2. Documents, etc. by Seller. H'TOWN, Selling Partners and/or Seller, as appropriate, shall cause copies of the form of all closing documents that are to be prepared by them to be delivered to Buyer for review at least five(5) days prior to closing. The documents and other materials to be executed (where applicable) and delivered (where applicable) by Seller for closing include: A. Closing Statement. B. Intentionally omitted. C. Intentionally omitted. D. Intentionally omitted. E. Notices to tenants of the Project, if applicable. F. License Agreement of right of use of the name "Prime Outlets at Hagerstown" per Section 16.2. G. Seller's Affidavit typically required by the Title Insurance Company. H. FIRPTA Affidavits from all Selling Partners. I. Certificate updating representations and warranties in accordance with Section 9.2. J. Evidence of the authority of the Seller, H'TOWN, Selling Partners and, if applicable, the constituent partners of Selling Partners to act and corporate (or other entity, if applicable) resolutions authorizing the actions of any such party. K. Certificates of good standing of the corporate (or other entity, if applicable) general and limited partners of H'TOWN and, if applicable, the constituent partners of Selling Partners in the states of their organization and, if required by law, to qualify to do business in the State of Maryland. L. Delivery of all original permits, licenses, leases, contracts, approvals, plans, specifications, surveys, certifications, warranties, and authorizations referred to herein and all items of Personal Property (including evidence of transfer of the Bonds, subject to the provisions of Article 22), including originals of the Property Materials in Seller's possession or control. Included within the term "warranties" are all of H'TOWN's and Prime Retail, L.P.'s rights, if any, pertaining to the Project against Seller's architects, engineers, other professionals, contractors, manufacturers, suppliers and other third parties. M. Amendment to Pledge Agreement in accordance with Section 1.13. N. Estoppel letters from tenants (and affidavits of Seller per Section 11.1.(B) if applicable). O. Management Agreement. P. Mercantile Loan assumption documents (as soon as possible after the Lender has provided same). Q. Amendment of Joint Venture Agreement as provided under Article 16. R. Assignments of Partnership Interests b y the Selling Partners with warranties of title. S. All documents appropriate or necessary in connection with assignment of the Bonds from Prime Retail, L.P. to H'TOWN, including endorsement thereof and required consents to the transfer, subject to the provisions of Article 22. T. Covenant Not To Compete per Section 16.3. U. Articles of Organization, Operating Agreement and certificate of good standing of the Property Entity and the Property Entity Subsidiary. V. Original Agreement of Limited Partnership of H'TOWN and original and current Certificate of Limited Partnership. W. Indemnification agreements and all other instruments, documents and materials required pursuant to this Amendment including Sections 9.2, 9.3 and 1.13. X. Declaration(s) of Easements and Restrictions pursuant to Section 16.5. Y. Documents to change the bank account or signatories on the present bank account where rents from the Project are deposited. Z. Documents required pursuant to Section 22.2, if applicable. 12.3. Documents, etc. By Buyer. Buyer shall cause copies of documents that are to be delivered by Buyer to Seller at closing to be delivered to Seller for review at least five (5) days prior to closing. The documents and materials to be executed (where applicable) and/or delivered (where applicable) by Buyer for closing include: A. Evidence of the good standing and qualification to transact business in the State of Florida and in the state of Maryland, for Buyer, if required by applicable law. B. Evidence of authority of Buyer to act and resolution authorizing the actions of the general partner signing on behalf of the Buyer. C. Sufficient funds to the Title Insurance Company escrow account to complete the closing. (The funds need not be delivered until the day of closing.) D. Covenant Not to Compete. E. Management Agreement. F. Articles of Organization and Operating Agreements of Property Entity and Property Entity Subsidiary. . G. Mercantile Loan Modification Documents. H. Amendment to Joint Venture Agreement as provided under Article 16. I. The License Agreement referred to in Section 16.2. J. Declaration(s) of Restrictions pursuant to Section 16.5. K. Amendment to H'TOWN agreement of limited partnership. 12.4. Further Documents. Buyer and Seller each agree to execute all the documents contemplated by this Amendment to be executed by them to complete closing hereunder and such further documents and instruments and to deliver to each other such further materials in their possession at closing (or thereafter if forgotten at closing or if the need did not become apparent until after closing) as may be necessary or appropriate to accomplish the purpose and intent hereof. All documents are subject to the approval of Seller, Selling Partners and Buyer, which approval will not be unreasonably withheld or delayed. Under no circumstances shall any deed or other instrument of conveyance of the Real Property be executed, delivered or recorded in connection with the transactions contemplated by this Amendment. ARTICLE 13 CLOSING ADJUSTMENTS AND PRORATIONS 13.1. The following items are to be apportioned at closing in an equitable manner as of 11:59 p.m. on the last day immediately preceding the day on which the closing occurs ("the Adjustment Date") so that the income and expense items with respect to the period on and prior to the Adjustment Date will be for the account of Selling Partners and the income and expense items with respect to the period after the Adjustment Date will be for Buyer's account in the same manner as if the sale and purchase were of the Property instead of the Partnership Interests. A. Rents as and when collected. If at the time of the Adjustment Date there are basic rents owed by tenants that have not been collected by H'TOWN and are applicable to any period of time prior to the Adjustment Date, Seller shall deliver to Buyer a schedule of such uncollected rents, and Buyer agrees that such rents, if and when collected, shall be paid by Buyer to Selling Partners. Rents collected by Buyer shall be applied first to then current rents on a tenant by tenant basis, and only after they have been paid will application be made to past-due rents and then in reverse order of accrual. Any percentage rentals received after the closing date and attributable entirely or in part to a period before the closing date shall be allocated between Buyer and Seller such that Seller's share with respect to each tenant shall be an amount equal to the total percentage rentals received for such tenant's lease year, multiplied by a fraction equal to that portion of such tenant's lease year preceding the closing date. Prorated percentage rentals will be paid by the party receiving the percentage rentals from the tenants within ten days after receipt, as and when received. Payments of utility, common area, sprinkler, insurance, and other charges (including, without limitation, sewer charges and insurance, but excluding marketing fund or promotion fund charges) from tenants shall be apportioned in an equitable manner. Marketing fund or promotion fund charges and the costs expenses paid or to be paid with such charges shall be treated as a fund, which shall not be adjusted at Closing. Instead, the fund balance, whether positive or negative at Closing, shall be transferred to the manager under the Management Agreement who shall continue to collect all marketing fund and promotion fund charges and pay any marketing or promotion fund expenses after Closing through the end of the then fiscal year for the marketing or promotion fund. The Manager shall not be obligated to expend for marketing and advertising expenses in such fiscal year more than the marketing and promotion fund charges received after Closing plus or minus (if the fund has a negative balance) the balance in the fund delivered to the Manager at Closing. After the expiration of the then fiscal year of the marketing or advertising fund, the Manager shall deliver any excess moneys remaining in the fund to the Buyer or, at Buyer's discretion, retain such excess, in either case for application to marketing and promotion fund expenses subsequently incurred. B. Real estate taxes and annual installments of special assessments, and other state, county or city taxes or assessments, if any, on the basis of the fiscal year for which assessed. If the closing date shall occur before the tax rate or assessment is fixed, the apportionment of such real estate taxes at the closing shall be upon an estimate of the taxes for the year of closing; provided, however, that readjustment will be made based upon the actual tax amount, when determined. C. Amounts paid or payable in respect of any service contracts that remain in effect and all costs and expenses incurred in common area maintenance charges, or insurance charges; provided, however that Buyer shall have no liability on account of any of the foregoing (other than costs and expenses included in common area maintenance charges), unless included in the operating budgets, or income and expense statements provided by Seller to Buyer prior to the execution hereof. Following issuance of any annual reconciliations to the tenants of the Project and receipt of any reconciliation payments due from the tenants, Buyer and Seller shall readjust the items under this paragraph C and the corresponding income items under paragraph A. D. Personal property taxes, if any, on the basis of the fiscal year for which assessed. However, a readjustment shall be made based upon the actual tax amount effective for the Adjustment Date, when determined. E. Water, electricity, oil, gas, steam, telephone, sewer and other utilities based on actual charges when final meter readings have been obtained or actual expenses determined. Seller, to the extent current readings are available, shall endeavor to furnish readings made on or immediately prior to the Adjustment Date. F. Wages and payroll taxes, vacation pay and fringe benefits for employees of Seller, if any, to be hired by Buyer. G. Such other apportionments and adjustments as are customarily apportioned upon the transfers of property similar to the Project. H. Interest on the Mercantile Loan and any revenues, escrows and other deposits (exclusive of deposits which may secure potential liabilities of H'TOWN which arose prior to closing hereunder, which deposits shall be paid by Selling Partners and, if refunded, shall belong to them) held under the Mercantile Loan. I. Tenant security deposits. J. Interest and principal on the Bonds, but the adjustment shall be paid as and when payments thereof are received. Principal and interest are both payable in arrears, interest being payable semi-annually and principal being payable annually. 13.2. Liens. Notwithstanding the foregoing, certified, confirmed and ratified special assessment liens as of the date of closing are to be paid by Seller unless (a) the Leases provide for the tenants to pay them under their Leases or (b) such assessment liens were disclosed in the real property tax bills, special assessment notices or title commitments delivered to Buyer, or (c) the proceeds of the special assessments are used to pay principal and interest on the Bonds. Pending special assessments which have not yet been assessed against the Project as of the date of closing shall be assumed by Buyer, provided, however, that where the improvement has been substantially completed or where Seller or Selling Partners had knowledge of the proposed improvement on or before the date of Closing, such pending lien shall be considered as certified, confirmed or ratified and Selling Partners shall, at Closing, be charged an amount equal to the last estimate by the appropriate public body of the assessment for the improvement unless (a) the Leases provide for the tenants to pay same or (b) the proceeds of the special assessments are used to pay principal and interest on the Bonds, in which case such special assessments shall be adjusted between Buyer and Selling Partners as provided in Section 13.1 and paid thereafter by Buyer. ARTICLE 14 RISK OF LOSS 14.1. Damage. If the improvements at the Project are damaged by fire or other casualty prior to closing, then the following provisions shall apply. Seller shall promptly notify Buyer of the occurrence of the fire or other casualty. If the cost of restoring the damage, as reasonably estimated by the contractor selected by Seller to perform the restoration, is less than $5,000,000, then, unless the Lender then holding the Mercantile Loan requires that the insurance proceeds be applied to the Mercantile Loan and Seller does not elect to provide its own funds for such purpose (provided, however, that if the amount of insurance proceeds applied to the Mercantile Loan exceeds $500,000, Seller may not make such election without Buyer's written consent), Seller shall proceed to restore the Project at Seller's expense and closing shall occur as scheduled hereunder. If the Lender holding the Mercantile Loan applies the insurance proceeds to the Mercantile Loan and the Seller does not elect to provide its own funds for such purpose, or, if the insurance proceeds so applied exceed $500,000 and Buyer does not approve of Seller providing its own funds for such purpose within 15 days after a request therefor from Seller, then Seller shall terminate this Amendment. If restoration cannot be completed within 120 days after the closing date set forth herein, as reasonably estimated by the contractor selected by Seller to perform the restoration, Buyer may terminate this Amendment by giving written notice to Seller within 30 days after Seller notifies Buyer of such casualty and of the estimated time and cost of restoration. If the cost of restoring the damage is $5,000,000.00 or more, as reasonably estimated by the contractor selected by Seller to perform the restoration, either Seller or Buyer may terminate this Amendment. 14.2. Taking. In the event there shall be a threatened, pending or completed exercise of the power of eminent domain or deed in lieu thereof of any material or substantial portion of the Project, Buyer shall have the option, to be exercised within 30 days after Buyer is given written notice thereof, (a) if the amount of proceeds from the condemnation has not yet been determined, to postpone the date of closing for a period of up to 30 days, or (b) to complete closing hereunder and take an assignment of the proceeds paid or to be paid therefore, or (c) either at such time or prior to the expiration of the extension period as provided in (a) above, to terminate this Amendment. 14.3. Termination. Upon any termination under this Article 14, Buyer shall be refunded its entire earnest money deposit(s) and neither party shall have any further liability to the other under this Amendment, except that the indemnification and repair obligations of Buyer under Section 4.4 shall survive. ARTICLE 15 EXPENSES 15.1. Seller's Expenses. Subject to the provisions of Sections 1.13 and 12.4, Selling Partners shall pay all documentary stamps and/or transfer or recording taxes, if any, (provided, however, that any document which triggers liability for Florida documentary stamps will not be signed in Florida) the cost of the title insurance commitment and the owner's title insurance policy premiums; all costs of recording documents which may be necessary to deliver good and marketable title to Partnership Interests and the Property and of clearing title to the Property; any escrow fee charged by the Title Insurance Company; Seller's attorney's fees; all other costs and expenses necessary to deliver the Property Materials and title to the Property and the Partnership Interests to Buyer as required by the terms of this Amendment; the costs of updating the survey and of any title premiums for updating or endorsing the mortgagee title policies held by Lender; any transfer taxes in connection with assignment of the Partnership Interests; charges assessed in connection with transfer of the Bonds; and all costs and expenses associated with continuation of the Mercantile Loan and consent to the transfer of the Partnership Interests to Buyer by Mercantile (excluding Buyer's attorneys' fees). 15.2. Buyer's Expenses. Buyer shall pay the cost of recording any amendments to the certificate of limited partnership of H'TOWN and Buyer's attorney's fees and any of Buyer's Investigation Period studies and tests. ARTICLE 16 MANAGEMENT AGREEMENT; COVENANT NOT TO COMPETE; JOINT VENTURE AGREEMENT AND DECLARATION OF RESTRICTIONS 16.1. Management Agreement. As an inducement to Buyer and to Seller to enter into this Amendment, Buyer and Seller have agreed that the Project will be managed on behalf of Buyer in accordance with the terms of the Management Agreement. 16.2. Use of Name. Buyer and any successor to Buyer shall have a license to use the name "Prime Outlets at Hagerstown" until the final expiration or termination, as provided for therein, of the Management Agreement. If the Management Agreement is terminated in accordance with its terms for "good cause", such license shall simultaneously terminate, which termination shall require the immediate and permanent cessation of usage of such names. The form of the licensing agreement will be the same as for the Birch Run and Williamsburg Projects. "Good cause" for termination of the Management Agreement is defined in the Management Agreement. 16.3. Covenant Not to Compete. Prime Retail, L.P., the Prime Outlets at Birch Run, L.L.C. and the Prime Outlets at Williamsburg, L.L.C. will enter into a Covenant Not To Compete in form similar to that signed at the closing of the Birch Run Project except that no individual will join therein. 16.4. Joint Venture Agreement. The Joint Venture Agreement was entered into in accordance with Section 15.4 of the Agreement and subsequently amended. At closing, the Joint Venture Agreement will be further amended to provide: A. The purchase option for the Project only will be timed to allow either party time to close on the purchase of the Project after expiration of the prepayment premium under the Permanent Loan, with all deposits posted in connection with the exercise of the purchase option to be applied to the purchase price at the time that closing on the purchase of the last of the three Projects has occurred. B. Sale by the Joint Venture of the Bonds; all capital calls (except those provided for by the terms of this Amendment), operating and other budgets; dissolution of H'TOWN and the terms of the Permanent Loan will require approval of both Joint Venturers. C. Operating Distributions to TOWL under Section 8A(v)(a) of the Agreement of Joint Venture of the Joint Venture will be 11% per annum (in lieu of 10% per annum) of the amounts stated in such Section to the extent applicable to the Project only (and will remain at 10% per annum with respect to the Birch Run and Williamsburg Projects). D. Capital calls in the ratio of 30% BRWH and 70% TOWL will be made to make up any difference between the actual amount of the Permanent Loan to the extent it is at least $44,000,000.00 and the then principal amount of the Mercantile Loan at the time of closing the Permanent Loan and, if necessary, to provide funds for reserves required by the Lender making the Permanent Loan. 16.5. Declaration(s) of Easements and Restrictions. H'TOWN or other affiliates of Prime Retail, L.P. own parcels of vacant land which are adjacent to the Real Property and which, if owned by H'TOWN, will be transferred to other entities prior to closing. At closing, H'TOWN and the owners of such parcels will enter into (a) Declaration(s) of Easements and Restrictions. Such restrictions shall include those matters listed on Exhibit XIII. The Declaration(s) of Easements and Restrictions shall be recorded. ARTICLE 17 DEFAULT 17.1. If Buyer shall default in Buyer's obligations under this Amendment in any material manner, the earnest money deposit(s) paid to date by Buyer together with any interest that may have been earned thereon, shall be paid to Seller as full, complete and liquidated damages in full settlement of any and all claims hereunder, whereupon all parties shall be released of all obligations under this Amendment, except for those obligations of Buyer which, pursuant to specific provisions of this Amendment, survive any termination of this Amendment. If Seller or any of Selling Partners shall default in any of their obligations under this Amendment in any material manner, Buyer may elect as its sole and exclusive remedies to (i) terminate this Amendment and obtain a refund of its deposit(s) or (ii) Buyer may avail itself of specific performance, and, in either case, recover actual damages in a maximum amount equal to the amount of the earnest money deposits then being held pursuant to this Amendment. ARTICLE 18 BROKERAGE COMMISSION 18.1. No Broker. Seller, Selling Partners and Buyer each represent and warrant one to the other, that they have dealt with no broker, finder or similar individual or entity in connection with this transaction. Seller and Selling Partners hereby agree to hold Buyer free and harmless from all brokerage or similar claims made by any entity claiming through or as a result of dealings with them. Buyer hereby agrees to hold Seller and Selling Partners free and harmless from all brokerage or similar claims made by any entity claiming through or as a result of dealings with Buyer including Belz Enterprises and its employees. The provisions of this Section shall survive closing hereunder and shall survive any termination of this Amendment. ARTICLE 19 SURVIVAL OF CERTAIN PROVISIONS 19.1. Wherever in this Amendment obligations of any party are stated to survive closing hereunder, such obligations shall survive closing and delivery of the closing documents, subject to any limitations on the period of survival set forth in this Amendment. ARTICLE 20 NOTICES 20.1. How Given. All notices hereunder shall be written and shall be deemed given upon receipt thereof or, if receipt is refused, upon the date of refusal. Notices shall be valid if delivered by any of the following means: certified mail, return receipt requested; telecopier; hand delivery or delivery by bonded courier, reputable overnight delivery services, or telegram. 20.2. Notices to Seller and Selling Partners shall be sent to Seller at the address set forth at the beginning of this Amendment with copies to: R. Kelvin Antill, Esq. Prime Retail, L.P. 100 East Pratt Street, Suite 1900 Baltimore, Maryland 21202 Telecopier No. 410/234-1761 20.3. To Buyer. Notices to Buyer shall be sent to Buyer at the address set forth at the beginning of this Amendment with copies to: Dean Vegosen, Esq. Boose Casey Ciklin Lubitz Martens McBane & O'Connell 515 North Flagler Drive, 18th Floor West Palm Beach, Florida 33401 Telecopier No. 561/820-0389 20.4. Change. Any party may change its address or telecopier number for notices by giving due notice of such change to the other party hereto. ARTICLE 21 ESCROW AGENT The following provisions apply to the Escrow Agent, but only in its capacity as such and not in its capacity as a title insurer or otherwise: 21.1. Exculpation. Escrow Agent is hereby released and exculpated of all liability whatsoever arising out of or in connection with its activities as Escrow Agent hereunder, except to the extent of loss or damage caused by Escrow Agent's misconduct or negligence. 21.2. Reliance. Escrow Agent may rely and shall be protected in acting upon any paper or other document which may be submitted to it in connection with its duties hereunder and which is believed by it to be genuine and to have been signed or presented by the proper party or parties. 21.3. Standard of Duty. Except to the extent caused by Escrow Agent's misconduct or negligence, the Buyer, Seller, and Selling Partners jointly and severally promise and agree to indemnify and save Escrow Agent harmless from any claims, liabilities, judgments, reasonable attorneys' fees and other expenses of every kind and nature which may be incurred by Escrow Agent by reason of its acceptance of, and performance under, this instrument. 21.4. Compensation. Escrow Agent shall not be entitled to any fee or other compensation for acting as Escrow Agent hereunder. If Escrow Agent shall be required to interplead any escrow funds or shall become involved in litigation over the earnest money deposit(s) or any portion thereof, then Escrow Agent shall be entitled to the costs, expenses and attorneys' fees incurred in such action. 21.5. Disputes. Escrow Agent assumes no liability hereunder except that of a stakeholder. If there is any dispute as to whether Escrow Agent is obligated to deliver any funds or documents, or as to whom the funds or documents are to be delivered, Escrow Agent will not be obligated to make any delivery, but in such event may hold the funds or documents until receipt by Escrow Agent of an authorization in writing signed by all of the persons having an interest in such dispute, directing the disposition of any escrow funds or documents held by Escrow Agent. In the absence of such authorization, Escrow Agent may hold the deposit or documents until the final determination of the rights of the parties in an appropriate proceeding. If such written authorization is not given, or proceedings for such determination are not begun and diligently continued, Escrow Agent may, but is not required, to bring an appropriate action or proceeding for leave to place the deposit or documents with the court, pending such determination. Once Escrow Agent has tendered into the registry or custody of any court of competent jurisdiction all money and/or documents in its possession under this Amendment, or has made delivery of the deposit in any other manner provided for herein, Escrow Agent shall be discharged from all duties and shall have no further liability hereunder as Escrow Agent. 21.6. Investigation Period. Anything to the contrary in this Article 21 notwithstanding, if Buyer delivers notice to the Escrow Agent (and reflects that a copy thereof has also been provided to Seller) to terminate this Amendment within the time period and as set forth in Section 4.3, Escrow Agent will return the earnest money deposit to Buyer without requiring any confirmation from Seller or Selling Partners and notwithstanding any contrary request or demand from Seller and/or Selling Partners. ARTICLE 22 SPECIAL PROVISIONS REGARDING BONDS 22.1. Conveyance at Closing. It is the intention of the parties that the Bonds be conveyed to H'TOWN or the Property Entity at closing as elsewhere provided in this Amendment. Buyer agrees to cooperate with Prime Retail, L.P. in its efforts to convey the Bonds by signing documents reasonably requested by the issuer of the Bonds and/or bond counsel (provided same are subject to Buyer's approval which will not be unreasonably withheld or delayed), including certifications that Buyer is a sophisticated investor who is acquiring the Bonds for its own account and not with the intent of re-selling them. Prime Retail, L.P. agrees to use its commercially reasonable efforts prior to closing and its best efforts after closing to obtain the requisite governmental and other approvals required for transfer of the Bonds and to obtain transfer of the Bonds (the "Approvals and Transfers") by the time of closing. 22.2. Absence of Approvals and Transfers. If the Approvals and Transfers are not obtained at or prior to closing then the following shall apply: A. If it reasonably appears to Buyer that all of the Approvals and Transfers will never be forthcoming, Buyer shall have the right to terminate this Amendment. In such case, if Prime Retail, L.P. has exercised its commercially reasonable efforts to obtain the Approvals and Transfers, Buyer's earnest money deposits will be refunded; if Prime Retail, L.P. has not exercised its commercially reasonable efforts to obtain the Approvals and Transfers, Seller, and Prime Retail, L.P. shall be in default hereunder. B. If it reasonably appears to Buyer that all the Approvals and Transfers will be forthcoming in the future, closing will occur without the Approvals and Transfers with no reductions in or escrow of the purchase price, subject to all of the following: (i) Prime Retail, L.P. will exercise its best efforts to obtain all the Approvals and Transfers and will deliver the Approvals and Transfers and fully complete transfer of the Bonds on or before May 1, 2002. (ii) A bond power transferring the Bonds will be executed and delivered to Buyer by Prime Retail, L.P. along with such other documents that are necessary or appropriate for transfer of the Bonds that are possible to be executed and delivered in the absence of the Approvals and Transfers. (iii) Prime Retail, L.P. will execute a trust agreement acknowledging that it holds bare legal title to the Bonds for and on behalf of Buyer, who ha s full equitable title thereto, full rights to all interest and principal on the Bonds (subject to the adjustment therefor provided for in Section 13.1), full power and authority to make all decisions pertaining to the Bonds and the right to direct the trustee in all matters pertaining to the Bonds. Prime Retail, L.P. will serve in its capacity as trustee without compensation. (iv) BRWH will pledge one third (1/3rd) of its ownership interests (including all right to vote such interests and receive distributions with respect thereto), in the Joint Venture to Buyer to secure Prime Retail, L.P.'s obligation to complete conveyance of legal title to the Bonds with all requisite Approvals. Such pledge will be pursuant to a pledge agreement similar in form to the Pledge Agreement. UCC financing statements will be recorded with respect to such pledge. ARTICLE 23 MISCELLANEOUS 23.1. Binding Effect. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their successors and permitted assigns. Except for assignment by Buyer to the Joint Venture, the Property Entity or the Property Entity Subsidiary no party hereto may assign this Amendment without the prior written consent of the other parties, which, except as otherwise expressly provided herein, may be withheld in the sole discretion of the non-assigning party. This Amendment may be executed in multiple counterparts and, when executed by all parties, shall constitute one agreement effective and binding on all parties. No persons or entities other than the parties hereto and their respective successors and permitted assigns shall be deemed beneficiaries of any of the provisions of this Amendment. 23.2. Severability. In the event of the invalidity of any provision hereof, same shall be deemed stricken from this Amendment, which shall continue in full force and effect as if the offending provision were never a part hereof. 23.3. Pronouns. Use of pronouns or nouns in any form where they appear in this Amendment shall be read as either masculine, feminine or neuter and either singular or plural wherever the context and facts permit. 23.4. Headings and Exhibits. Article, Section and paragraph headings are inserted solely for ease of reference and shall not be construed to enlarge, modify or limit the provisions hereof. References to numbered or lettered Articles, Sections or paragraphs refer to Articles, Sections and paragraphs of this Amendment unless specified to the contrary. References to Exhibits are to the Exhibits attached hereto which are, by this reference, made a part hereof. 23.5. Time of the Essence. Time is of the essence hereunder. However, if any due date hereunder falls on a Saturday, Sunday or nationally-recognized holiday, the due date shall be the first day thereafter which is not a Saturday, Sunday or holiday. 23.6. Attorneys' Fees. In the event of any litigation arising out of this Amendment, the prevailing party shall be entitled to reimbursement of the costs and expenses thereof from the other party or parties, including reasonable attorneys' fees and including such costs, expenses and fees incurred on appeals of such litigation. 23.7. Construction of Agreement. The parties agree that this Amendment was prepared jointly by them and shall be construed on a parity as between the parties. There shall be no canon of construction for or against any party by reason of the physical preparation of this instrument. 23.8. Effect of Words. Wherever the word "including" appears in this Amendment, it shall be deemed to mean "including, without limitation" if the context permits. 23.9. No Amendment. No amendment, modification, change or alteration of this Amendment shall be valid or binding unless in writing and signed by all the parties. 23.10. No Agency. Nothing in this Amendment shall be deemed to create an agency relationship between Seller and Buyer. The relationship of the parties is strictly that of a seller and a buyer. 23.11. Governing Law. All matters involving this Amendment shall be governed by and construed in accordance with Maryland law. 23.12. Entire Agreement. Except for a Confidentiality Agreement among Lothar Estein, Estein & Associates USA, Ltd. and Prime Retail, L.P. dated December 3, 2001, the Agreement and the Settlement Agreement, which all shall survive execution hereof, this Amendment is the only agreement among the parties and/or their affiliates pertaining to the Project and all prior negotiations and agreements with respect thereto (except those specifically mentioned above) are merged herein. 23.13. Faxes. Faxed signatures hereon shall be binding as if they were originals. 23.14. Obligations. All obligations of Seller, Selling Partners, Selling Parties, H'TOWN and/or Prime Retail, L.P. hereunder are joint and several on the part of the parties who are named with respect to any particular obligation, except that (i) Prime Retail, Inc. shall be liable for covenants, representations and warranties and for indemnifications hereunder solely in its capacity as general partner of Prime Retail, L.P. and not as a Selling Partner or Selling Party (except Prime Retail, Inc. is directly responsible with respect to its obligation to convey its 1% Partnership Interest pursuant to this Amendment and for representations and warranties pertaining to its ownership thereof free and clear of all third party liens, claims and encumbrances); and (ii) any and all liabilities and obligations of the Prime Outlets at Birch Run, L.L.C. and of the Prime Outlets of Williamsburg, L.L.C. under this Amendment (but not otherwise) shall be of no force or effect unless and until closing occurs under this Amendment. All obligations of Seller under this Amendment shall, once closing has occurred, be obligations of the Prime Outlets at Birch Run, L.L.C. and of the Prime Outlets at Williamsburg, L.L.C. and not of H'TOWN. NO FURTHER TEXT - SIGNATURE PAGES FOLLOW. In the Presence of: SELLER: THE PRIME OUTLETS AT BIRCH RUN, L.L.C., a Delaware limited liability company By: PRIME RETAIL, L.P., its managing member BY: PRIME RETAIL, INC., its general partner - -------------------------- By: - -------------------------- ----------------------------- Printed Name:______________________ Title:______________________ THE PRIME OUTLETS AT WILLIAMSBURG, L.L.C., a Delaware limited liability company By: PRIME RETAIL, L.P., its managing member BY: PRIME RETAIL, INC., its general partner - -------------------------- By: - -------------------------- ----------------------------- Printed Name:______________________ Title:______________________ OUTLET VILLAGE OF HAGERSTOWN LIMITED PARTNERSHIP, a Delaware limited partnership By: PRIME RETAIL, L.P., its general partner BY: PRIME RETAIL, INC., its general partner - -------------------------- By: - -------------------------- ----------------------------- Printed Name:______________________ Title:______________________ BUYER: WELP TRIPLE OUTLET, L.C., a Florida limited liability company - -------------------------- By: - -------------------------- ----------------------------- Lothar Estein, Manager and Chief Executive Officer JOINDER Prime Retail, L.P. joins in this Amendment for the purpose of agreeing to be bound by the provisions of Section 1.13 pertaining to its guarantee of the Mercantile Loan and indemnification obligations under such Section. PRIME RETAIL, L.P. By: Prime Retail, Inc., general partner By: -------------------------------------------- JOINDER The Escrow Agent joins in this Amendment in its capacity as Escrow Agent only to acknowledge its agreement to the provisions of Article 21 and its agreement to hold the earnest money deposit(s) pursuant hereto. CHICAGO TITLE INSURANCE COMPANY, Escrow Agent By: -------------------------------------------- JOINDER Triple Outlet World, Ltd. joins in this Amendment for the purpose of agreeing to be bound by the provisions hereof pertaining to amendment of the Agreement of Joint Venture of the Joint Venture. TRIPLE OUTLET WORLD, LTD. By: WELP TRIPLE OUTLET, L.C. By: -------------------------------------------- Lothar Estein, Manager and Chief Executive Officer JOINDER BY SELLING PARTNERS The undersigned, comprising all of the Selling Partners join in this Amendment for the purpose of agreeing to be bound by its provisions and to evidence their (i) agreement to sell their respective Partnership Interests pursuant to this Amendment; (ii) their consent to the transfer by all other Selling Partners of the transfer of their respective Partnership Interests pursuant to this Amendment; and (iii) their agreement that Prime Retail, L.P. be jointly and severally responsible with Seller for all obligations of Seller, H'TOWN and Selling Partners under this Agreement. PRIME RETAIL, L.P., By: PRIME RETAIL, INC. By: --------------------------------------- PRIME RETAIL, INC. By: -------------------------------------------- JOINDER BY BRWH, LLC BRWH, LLC joins in this Amendment for the purpose of agreeing to be bound by the provisions hereof pertaining to its pledge of its interest in the Joint Venture and amendment of the Agreement of Joint Venture of the Joint Venture. BRWH, LLC By: -------------------------------------------- SCHEDULE OF EXHIBITS I. Bonds II. Rent Roll III. Mercantile Loan Terms IV. Allocation of Price V. Ownership Structure VI. Estoppel Certificate VII. Legal Description VIII. Acreage & Square Footage IX. Contracts over $10,000 Not Terminable on 30 days' or Less Notice X. Notices of Violations XI. Third Party Claims XII. Defaults under Tenant Leases XIII. H'TOWN Agreement of Limited Partnership XIV. Mercantile Letter Regarding Loan Assumption XV. Restrictions and Easements to be Included in Declaration(s) of Easements and Restrictions EXHIBIT I 1. Series 1998 SPECIAL OBLIGATION BONDS in the face principal amount of $3,100,000.00. 2. Series 1998 (B) SPECIAL OBLIGATION BONDS in the face principal amount of $1,517,000,00. 3. Series 2000 SPECIAL OBLIGATION BONDS in the face principal amount of $2,454,000.00. EXHIBIT III Basic Terms of Mercantile Loan Approximate Principal Balance as of 11/6/01: $49,062,000.00 Approximate Principal Balance as of Closing $46,862,000.00 Interest Rate: LIBOR plus 150 basis points Payments: Monthly payments of interest only until the Maturity Date. Maturity Date: June 1, 2004 Secured By: First Indemnity Deed of Trust on the Project and pledge of the Barkdoll Special Taxing District Bonds Guaranteed By: Prime Retail, L.P. Assumption Fee: 1% to be paid by Selling Partners EXHIBIT VI TENANT ESTOPPEL CERTIFICATE The undersigned ("Tenant"), as tenant, has entered into a certain Agreement of Lease dated _______________________ (the "Lease"), with , __________________ a ______________________ partnership, as landlord ("Landlord"), covering certain premises more particularly described in the Lease, and located in Space No. ____ (the "Demised Premises") in the Prime Outlets at Hagerstown shopping center, Hagerstown, Maryland (the "Shopping Center"). Tenant, for good and valuable consideration, hereby certifies to Landlord, to _______________________, the prospective purchaser of the Shopping Center ("Purchaser"), and to _________________________ ("Lender"), which will be making a loan to Purchaser secured by a mortgage covering the Shopping Center, and to their respective successors and assigns that: 1. The Lease is in full force and effect. There have been no amendments, modifications or supplements to the Lease, except as set forth below: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ______________________________________________________________________________. 2. The term of the Lease commenced on _____________________ and full rental is now accruing thereunder. The term of the Lease shall expire on ___________________________ unless sooner terminated or extended in accordance with the terms of the Lease. Tenant has no option to extend or renew the Lease, except as set forth below: ________________________________________________________________________________ ________________________________________________________________________________ _______________________________________________________________________________. 3. The current minimum annual rent payable under the Lease is $____________________. Tenant is also obligated to pay as additional rent the items checked below: 9 Percentage Rent of: ______________________; 9 Common Area Maintenance 9 Real Estate Taxes 9 Marketing Fund 9 Insurance 9 Other - _______________________________. 4. All rentals and other charges due and payable under the Lease by Tenant have been paid up to __________________________. No rent or other sums due under the Lease have been prepaid more than thirty (30) days in advance. 5. Tenant has accepted possession and is in occupancy of the Demised Premises. All items of an executory nature have been completed under the terms of the Lease, and all improvements required to be made by or paid for by Landlord have been completed or paid for by Landlord in accordance with the Lease and to the satisfaction of Tenant. 6. Tenant has no offsets, deductions or defenses to its obligations under the Lease and Tenant is not entitled to any free rent or other rent concessions after the date hereof, except as follows: _______________________________________________________________________, (if the preceding space is left blank, there are none). 7. Tenant is not in default in the performance of any of its obligations under the Lease, and Tenant has not received any notice of a default by Tenant under the Lease which has not been cured. 8. Tenant has not given the Landlord any notice of a default on the part of the Landlord under the Lease which has not been cured, and there are no defaults or conditions which with the giving of notice or the passage of time or both, will become a default by Landlord or under any of the terms or provisions of the Lease, except as follows: _______________________________________________________________________, (if the preceding space is left blank, there are none). 9. Landlord is holding a security deposit under the Lease in the amount of $_______________ (if the preceding is left blank, there is no security deposit). 10. Tenant has no purchase options, rights to purchase, rights of first refusal to purchase, or first offer rights to purchase with respect to the Shopping Center or any part thereof or any interest therein, except as follows:____________________________________________________________. 11. There are currently no actions, whether voluntary or otherwise, pending against Tenant under the bankruptcy laws of the United States or any other state thereof. 12. This Certificate is being executed and delivered by Tenant with the understanding that this Certificate may be relied upon by the parties identified above and their respective successors and assigns. 13. Tenant acknowledges that Purchaser has assigned or will assign to Lender all of its rights in the Lease, including the right to collect rents and any other payments from Tenant, and that Lender will waive its right to collect such payments until such time as Purchaser is in default under the mortgage. In consideration of Lender making its loan to the Purchaser, Tenant shall make all such payments to Lender, its successors or assigns upon receiving written notice from Lender that Purchaser is in default under the mortgage loan. 14. Tenant has paid in full all sums due or owing in connection with tenant improvements made to the Demised Premises by or on behalf of Tenant and there are no mechanics' or materialmen lien rights with respect thereto. 15. The signatory to this Certificate has full and complete authority to sign on behalf of Tenant. 16. Faxed signatures hereon shall be binding as originals. TENANT: ___________________________________(Name) By:________________________________ Title: Date:______________________________ __________________________, the Purchaser hereby joins in this Agreement for the purpose of consenting to the provisions of paragraph 13 hereof. PURCHASER: ___________________________________ By: ______________________________ By: ______________________________ EXHIBIT VIII Description of Project Approximately 485,471 square feet of gross leasable area and approximately 2,720 parking spaces situated on 61.635 acres. EXHIBIT XV RESTRICTIONS TO BE INCLUDED IN DECLARATIONS(S) OF RESTRICTIONS AND EASEMENTS 1. Reasonable Signage Limitations 2. Height Limitations on Buildings 3. Architectural and Design Harmony with the Project, Including Landscaping. 4. No use for discount or off price retail, including, without limitation, flea markets and factory outlets 5. No use with excessive parking requirements such as theaters, bingo halls, houses of worship, etc. 6. The outparcels will be provided with appropriate easements for access, utilities, etc. subject to reasonably appropriate controls to assure that there is no material adverse impact on the Project and the owners of the outparcels agree to share maintenance of the easement areas on an appropriate basis with H'TOWN. 7. Such other provisions as are reasonably acceptable to both parties. All holders of mortgages or deeds of trust on the properties which are subject to the Declaration(s) of Restrictions must subordinate their rights to the Declaration(s). The form of the Declarations(s) of Easements and Restrictions is to be agreed upon by Buyer and Seller during the Investigative Period. EXHIBIT IV ALLOCATION OF PURCHASE PRICE An amount equal to the remaining principal balance of the Bonds (the "Bond Amount"), as prorated in accordance with Article 13, shall be allocated to the Bonds. The following components will be allocated the following dollar amounts: Covenant Not To Compete $1,250,000 Use of Name $1,500,000 The total of the Bond Amount and the two items listed above will be subtracted from $80,500,000, with the remainder being called "Remaining Price" in this Exhibit. Each of the following components will be allocated its designated percentage of the Remaining Price: Component Percent of Remaining Price Land 7.35% Land Improvements 11.00% Building & Improvements 80.70% Furniture & Fixtures .95% ------- Total 100.00% EX-10 11 ex1054.txt EX-10.54 LETTER AGREEMENT ABRAHAM ROSENTHAL Ex-10.54 Prime Retail, Inc. Prime Retail, L.P. 100 East Pratt Street 19th Floor Baltimore, MD 21202 April 24, 2001 Mr. Abraham Rosenthal 3111 Blendon Road Owings Mills, Maryland 21117 Re: Separation Agreement Dear Abe: Reference is made to that certain Separation Agreement dated February 23, 2000 by and between Prime Retail, Inc., Prime Retail, L.P. and you. Capitalized terms that used herein but are not otherwise defined shall have the meanings set forth in the Agreement. This letter will confirm our understanding that, in consideration for your capital contribution of $200,000 in immediately available funds to the Operating Partnership, receipt of which is hereby acknowledged, the Operating Partnership will specially allocate to you, as a limited partner of the Operating Partnership for each taxable year of the Operating Partnership for federal income tax purposes in which the Operating Partnership reports (as is required by Section 2(c) of the Agreement, superceding any provisions in the Operating Partnership's Partnership Agreement to the contrary) the payments made to you under Section 2(a) and (c) of the Agreement as "guaranteed payments" within the meaning of Section 707(c) of the Internal Revenue Code of 1986, as amended (the "Code"), the corresponding deductions (if any) resulting from such guaranteed payments (the "Annual Corresponding Deductions"). The special allocation of Annual Corresponding Deductions to you for any Operating Partnership taxable year shall be reduced by the excess (if any) of (1) the excess (if any) of (a) the Annual Corresponding Deductions for an Operating Partnership taxable year over (b) the portion of such Annual Corresponding Deductions that otherwise would be allocated to Prime Retail, Inc., absent this letter agreement (and the similar letter agreement for William Carpenter), over (2) the other items of deductible expense allocated to Prime Retail, Inc. for such Operating Partnership taxable year. However, that to the extent the special allocation of Annual Corresponding Deductions to you for any such Operating Partnership shall carry forward this shortfall and supplement the special allocation of Annual Corresponding Deductions in subsequent Operating Partnership taxable years with special allocations of other items of deductible expense that would otherwise be allocated to Prime Retail, Inc. (subject to their being any such allocable items) in order to eliminate this shortfall. You acknowledge and agree that neither the Operating Partnership nor the Company has any responsibility or will have any liability with respect to your ability to utilize any of these special allocations of deductions or any other tax consequences to you under the Agreement. Except as expressly provided herein, the Agreement is otherwise reaffirmed in all respects. Please acknowledge your agreement to the foregoing by executing this letter in the space provided. Very truly yours, PRIME RETAIL, INC. By: /s/ C. Alan Schroeder ----------------------------------- Name: C. Alan Schroeder ----------------------------------- Title: E. V. P. ----------------------------------- PRIME RETAIL, L.P. By: Prime Retail, Inc. Its: General Partner By: /s/ C. Alan Schroeder ----------------------------------- Name: C. Alan Schroeder ----------------------------------- Title: E. V. P. ----------------------------------- Acknowledged this 25th day of April, 2001. /s/ Abraham Rosenthal - ---------------------------------------- Abraham Rosenthal EX-10 12 ex1055.txt EX-10.55 LETTER AGREEMENT WILLIAM H. CARPENTER Ex-10.55 Prime Retail, Inc. Prime Retail, L.P. 100 East Pratt Street 19th Floor Baltimore, MD 21202 April 24, 2001 Mr. William H. Carpenter, Jr. 659 Rock Cove Lane Severna Park, Maryland 21146 Re: Separation Agreement Dear Bill: Reference is made to that certain Separation Agreement dated August 24, 2000 by and between Prime Retail, Inc., Prime Retail, L.P. and you. Capitalized terms that used herein but are not otherwise defined shall have the meanings set forth in the Agreement. This letter will confirm our understanding that, in consideration for your capital contribution of $200,000 in immediately available funds to the Operating Partnership, receipt of which is hereby acknowledged, the Operating Partnership will specially allocate to you, as a limited partner of the Operating Partnership for each taxable year of the Operating Partnership for federal income tax purposes in which the Operating Partnership reports (as is required by Section 2(c) of the Agreement, superceding any provisions in the Operating Partnership's Partnership Agreement to the contrary) the payments made to you under Section 2(a) of the Agreement as "guaranteed payments" within the meaning of Section 707(c) of the Internal Revenue Code of 1986, as amended (the "Code"), the corresponding deductions (if any) resulting from such guaranteed payments (the "Annual Corresponding Deductions"). The special allocation of Annual Corresponding Deductions to you for any Operating Partnership taxable year shall be reduced by the excess (if any) of (1) the excess (if any) of (a) the Annual Corresponding Deductions for an Operating Partnership taxable year over (b) the portion of such Annual Corresponding Deductions that otherwise would be allocated to Prime Retail, Inc., absent this letter agreement (and the similar letter agreement for Abraham Rosenthal), over (2) the other items of deductible expense allocated to Prime Retail, Inc. for such Operating Partnership taxable year. However, that to the extent the special allocation of Annual Corresponding Deductions to you for any such Operating Partnership shall carry forward this shortfall and supplement the special allocation of Annual Corresponding Deductions in subsequent Operating Partnership taxable years with special allocations of other items of deductible expense that would otherwise be allocated to Prime Retail, Inc. (subject to their being any such allocable items) in order to eliminate this shortfall. You acknowledge and agree that neither the Operating Partnership nor the Company has any responsibility or will have any liability with respect to your ability to utilize any of these special allocations of deductions or any other tax consequences to you under the Agreement. Except as expressly provided herein, the Agreement is otherwise reaffirmed in all respects. Please acknowledge your agreement to the foregoing by executing this letter in the space provided. Very truly yours, PRIME RETAIL, INC. By: C. Alan Schroeder -------------------------------------- Name: C. Alan Schroeder -------------------------------------- Title: E. V. P. -------------------------------------- PRIME RETAIL, L.P. By: Prime Retail, Inc. Its: General Partner By: C. Alan Schroeder -------------------------------------- Name: C. Alan Schroeder -------------------------------------- Title: E. V. P. -------------------------------------- Acknowledged this 24th day of April, 2001. /s/ William H. Carpenter, Jr. - ------------------------------------------ William H. Carpenter, Jr. EX-12 13 ex12.txt RATIO OF EARNINGS TO FIXED CHARGES PRIME RETAIL, INC. EXHIBIT 12: COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DISTRIBUTIONS AND DIVIDENDS (Amounts in thousands, except for ratio information)
- ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Loss before minority interests $ (98,456) $ (138,246) Loss on sale of real estate 1,063 42,648 Interest incurred 88,926 102,664 Provision for asset impairment 63,026 68,663 Amortization of debt issuance costs 6,984 3,253 Amortization of interest rate protection contracts 41 68 Less capitalized interest - (3,412) --------- ---------- Earnings 61,584 74,900 --------- ---------- Interest incurred 88,926 102,664 Amortization of debt issuance costs 6,984 3,253 Amortization of interest rate protection contracts 41 68 Preferred stock distributions and dividends 22,672 22,672 --------- ---------- Combined Fixed Charges and Preferred Stock Distributions and Dividends 118,623 127,477 --------- ---------- Excess of Combined Fixed Charges and Preferred Stock Distributions and Dividends over Earnings $ (57,039) $ (53,019) ========= ========== ====================================================================================================================================
EX-21 14 ex21.txt SUBSIDIARIES OF PRIME RETAIL, INC.
Subsidiary State of Jurisdiction Owned (1) - ------------------------------------------------------------------------------------------------------------------------------------ 1. Arizona Factory Shops Limited Partnership Delaware 100 2. Arizona Outlets, L.L.C. Delaware 100 3. Bend Factory Outlets Limited Partnership Delaware 100 4. Birch Run Outlets II, L.L.C. Delaware 30(2) 5. Birch Run Outlets, L.L.C. Delaware 30(2) 6. BRWH, L.L.C. Delaware 100 7. Buckeye Factory Shops Limited Partnership Delaware 100 8. Camarillo Outlets Land II Limited Partnership Delaware 100 9. Camarillo Outlets Land, L.L.C. Delaware 100(3) 10. Camarillo Outlets, L.L.C. Delaware 100 11. Carolina Factory Shops Limited Partnership Delaware 100 12. Castle Rock Factory Shops Partnership Colorado 100 13. Chesapeake Development Limited Partnership Delaware 100 14. Coral Isle Factory Shops Limited Partnership Delaware 100 15. DesignerConnection.com, Inc. Maryland 100(3) 16. E-Outlets Resolution Corp. Maryland 99(4) 17. Factory Outlets at Post Falls Limited Partnership Delaware 100 18. Fine Furniture Direct, Inc. Maryland 44.57(5) 19. Finger Lakes Outlet Center, L.L.C. Delaware 100 20. First HGI, Inc. Delaware 100 21. First Horizon Group Limited Partnership Delaware 100 22. Florida Keys Factory Shops Limited Partnership Illinois 100 23. Gainesville Factory Shops Limited Partnership Illinois 100 24. Grove City Factory Shops Partnership Pennsylvania 100 25. Gulf Coast Factory Shops Limited Partnership Illinois 100 26. Gulfport Factory Shops Limited Partnership Delaware 100 27. Hagerstown Outlets, L.L.C. Delaware 30(2) 28. Huntley Factory Shops Limited Partnership Illinois 100 29. Kansas City Factory Shops Limited Partnership Delaware 100 30. Latham Factory Stores Limited Partnership Delaware 100 31. Loveland Factory Shops Limited Partnership Delaware 100 32. Magnolia Bluff Factory Shops Limited Partnership Delaware 100 33. Market Street, Ltd. Tennessee 98 34. Melrose Place, Ltd. Tennessee 100 35. MG Long Island Limited Partnership Virginia 95 36. MG Patchogue II Limited Partnership Virginia 51 37. MG Patchogue Limited Partnership D.C. 50 38. Nebraska Crossing Factory Shops Limited Partnership II Delaware 100 39. New River Outlets, L.L.C. Delaware 100 40. Oak Creek Factory Outlets Limited Partnership Delaware 100 41. Ohio Factory Shops Partnership Ohio 100 42. Outlet Shops at Camarillo Limited Partnership Delaware 100 43. Outlet Village Mall of St. Louis Limited Partnership, L.L.L.P. Delaware 75 44. Outlet Village of Hagerstown Limited Partnership Delaware 30(2) 45. Outlet Village of Kittery Limited Partnership Delaware 100 46. Outlet Village of Lebanon Limited Partnership Delaware 100 47. Outlet Village of Puerto Rico Limited Partnership, S.E. Delaware 100 48. Outlet Village of St. Louis Limited Partnership, L.L.L.P. Delaware 100 49. Oxnard Factory Outlet Partners California 50 50. Oxnard Factory Shops Limited Partnership Delaware 100 51. Oxnard Outlets, L.L.C. Delaware 100 52. Prime Bellport Land, L.L.C. Delaware 100 53. Prime Hagerstown Land, L.L.C. Delaware 100 54. Prime Lee Development Limited Partnership Delaware 100 55. Prime Northgate Plaza Limited Partnership Delaware 100 56. Prime Outdoor, L.P. Delaware 100 57. Prime Outlets at Edinburgh Land, L.L.C. Delaware 100 58. Prime Outlets at Hagerstown Management, L.L.C. Delaware 100 59. Prime Outlets at Niagara Falls USA Limited Partnership Delaware 100 60. Prime Outlets at Perryville Limited Partnership Maryland 100 61. Prime Outlets at Perryville, Inc. Maryland 100 62. Prime Outlets at San Marcos II Limited Partnership, L.L.C. Delaware 100 63. Prime Outlets at Williamsburg II Limited Partnership Delaware 100
Subsidiary State of Jurisdiction Owned (1) - ------------------------------------------------------------------------------------------------------------------------------------ 64. Prime Retail Capital I, L.L.C. Delaware 100 65. Prime Retail Capital III, L.L.C. Delaware 100 66. Prime Retail Capital IV, L.L.C. Delaware 100 67. Prime Retail Capital, L.L.C. Delaware 100 68. Prime Retail E-Commerce, Inc. Maryland 100(6) 69. Prime Retail Europe, L.L.C. Delaware 100 70. Prime Retail Europe, L.P. Delaware 100 71. Prime Retail Finance II, Inc. Maryland 100 72. Prime Retail Finance III, Inc. Maryland 100 73. Prime Retail Finance IV, Inc. Maryland 100 74. Prime Retail Finance IX, Inc. Maryland 100 75. Prime Retail Finance Limited Partnership Delaware 100 76. Prime Retail Finance V, Inc. Maryland 100 77. Prime Retail Finance VI, L.L.C. Delaware 100 78. Prime Retail Finance VII, Inc. Maryland 100 79. Prime Retail Finance VIII, Inc. Maryland 100 80. Prime Retail Finance X, Inc. Maryland 100 81. Prime Retail Finance XI, Inc. Maryland 100(2) 82. Prime Retail Finance XII, Inc. Maryland 100 83. Prime Retail Finance, Inc. Maryland 100 84. Prime Retail Furniture, Inc. Maryland 100(6) 85. Prime Retail Management Limited Partnership Delaware 100 86. Prime Retail Services Limited Partnership Delaware 100 87. Prime Retail Services, Inc. Maryland 100(6) 88. Prime Retail Stores, Inc. Maryland 100(6) 89. Prime Warehouse Row Limited Partnership Illinois 100 90. Prime Williamsburg Development, L.L.C. Delaware 100 91. San Marcos Factory Stores, Ltd. Texas 100 92. Second HGI, Inc. Delaware 100 93. Second Horizon Group Limited Partnership Delaware 100 94. Shasta Outlet Center Limited Partnership Delaware 100 95. Sun Coast Factory Shops Limited Partnership Delaware 100 96. The Prime Outlets at Bellport I, L.L.C. Delaware 100 97. The Prime Outlets at Bellport II, L.L.C. Delaware 100 98. The Prime Outlets at Birch Run, L.L.C. Delaware 100 99. The Prime Outlets at Calhoun Limited Partnership Delaware 100 100. The Prime Outlets at Camarillo, L.L.C. Delaware 100 101. The Prime Outlets at Conroe Limited Partnership Delaware 100 102. The Prime Outlets at Edinburgh Limited Partnership Delaware 100 103. The Prime Outlets at Edinburgh, L.L.C. Delaware 100 104. The Prime Outlets at Gilroy Limited Partnership Delaware 100 105. The Prime Outlets at Jeffersonville, L.L.C. Delaware 100 106. The Prime Outlets at Kenosha II Limited Partnership Delaware 100 107. The Prime Outlets at Lebanon Limited Partnership Illinois 100 108. The Prime Outlets at Lee Limited Partnership Delaware 100 109. The Prime Outlets at Michigan City Limited Partnership Delaware 100 110. The Prime Outlets at Vero Beach Limited Partnership Delaware 100 111. The Prime Outlets at Williamsburg, L.L.C. Delaware 100 112. The Prime Outlets at Woodbury, L.L.C. Delaware 100 113. Triangle Factory Stores Limited Partnership Illinois 100 114. Warehouse Row II Limited Partnership Tennessee 100 115. Warehouse Row, Ltd. Tennessee 99 116. Weisgarber Partners, Ltd. Tennessee 100 117. Williamsburg Outlets, L.L.C. Delaware 30(2) 118. Triple Outlet World Joint Venture Florida 30(2)
- --------------------- 1 Reflects collective ownership interests of Prime Retail, Inc. and Prime Retail, L.P. 2 Owned through Prime Retail, L.P.'s ownership of BRWH, L.L.C. 3 Owned by Prime Retail Stores, Inc. 4 Owned by Prime Retail E-Commerce, Inc. 5 Owned by Prime Retail Furniture, Inc. 6 Ownership of 100% of Preferred Stock EX-23 15 ex23.txt CONSENT OF ERNST & YOUNG LLP Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-19491) pertaining to the Prime Retail, Inc. Stock Incentive Plans of our report dated March 13, 2002, with respect to the consolidated financial statements and schedule of Prime Retail, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2001. Our audits also included the financial statement schedule of Prime Retail, Inc. listed in item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Baltimore, Maryland March 29, 2002 -----END PRIVACY-ENHANCED MESSAGE-----