-----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, LgXv1+CAbtxxyTGIdsZ8g2wndLyQ+DDJ4hoT6wtfUV3DvWTlTtY/RxIrA36QzgGt JN58Fy8nHaJ9oRUh7Yd33g== 0000911708-02-000008.txt : 20020814 0000911708-02-000008.hdr.sgml : 20020814 20020814170536 ACCESSION NUMBER: 0000911708-02-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13301 FILM NUMBER: 02737018 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-Q 1 a10q.txt FORM 10-Q PERIOD ENDED JUNE 30, 2002 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended June 30, 2002 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, for the Transition Period From ------- to------- 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 (I.R.S. Employer Identification No.) incorporation or organization) 100 East Pratt Street Nineteenth Floor Baltimore, Maryland 21202 - ---------------------------------------- ------------------------------------- (Address of principal executive offices) (Zip Code) (410) 234-0782 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NOT APPLICABLE - -------------------------------------------------------------------------------- (Former name, former address, or former fiscal year, if changed since last report) 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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. As of August 14, 2002, the issuer had outstanding 43,577,916 shares of Common Stock, $.01 par value per share. Prime Retail, Inc. Form 10-Q INDEX PART I: FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001............................................... 1 Consolidated Statements of Operations for the three and six months ended June 30, 2002 and 2001............................. 2 Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001............................. 3 Notes to the Consolidated Financial Statements.................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 20 Item 3. Quantitative and Qualitative Disclosures of Market Risk....... 43 PART II: OTHER INFORMATION Item 1. Legal Proceedings............................................. 44 Item 2. Changes in Securities......................................... 47 Item 3. Defaults Upon Senior Securities............................... 48 Item 4. Submission of Matters to a Vote of Security Holders........... 48 Item 5. Other Information............................................. 48 Item 6. Exhibits and Reports on Form 8-K.............................. 48 Signatures............................................................. 50 PRIME RETAIL, INC. Unaudited Consolidated Balance Sheets (Amounts in thousands, except share information)
- ------------------------------------------------------------------------------------------------------------------------------------ June 30, December 31, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Assets Investment in rental property: Land $ 126,267 $ 148,463 Buildings and improvements 994,835 1,208,568 Property under development 3,400 3,352 Furniture and equipment 14,461 15,225 ----------- ----------- 1,138,963 1,375,608 Accumulated depreciation (239,645) (258,124) ----------- ----------- 899,318 1,117,484 Cash and cash equivalents 5,201 7,537 Restricted cash 36,145 37,885 Accounts receivable, net 3,056 5,017 Deferred charges, net 7,233 11,789 Assets held for sale 115,924 54,628 Investment in partnerships 26,129 24,539 Other assets 4,274 3,629 ----------- ----------- Total assets $ 1,097,280 $ 1,262,508 =========== =========== Liabilities and Shareholders' Equity Bonds payable $ 24,975 $ 31,975 Notes payable 799,877 925,492 Accrued interest 6,997 7,643 Real estate taxes payable 8,757 8,091 Accounts payable and other liabilities 27,252 31,380 ----------- ----------- Total liabilities 867,858 1,004,581 Minority interests 1,487 1,487 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 $73,348), 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 $239,369), 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 (478,975) (453,470) ----------- ----------- Total shareholders' equity 227,935 256,440 ----------- ----------- Total liabilities and shareholders' equity $ 1,097,280 $ 1,262,508 =========== =========== ====================================================================================================================================
See accompanying notes to financial statements. PRIME RETAIL, INC. Unaudited Consolidated Statements of Operations (Amounts in thousands, except per share information)
- ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended June 30, Six Months Ended June 30, ---------------------------- ---------------------------- 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues Base rents $ 24,943 $ 27,813 $ 51,031 $ 57,170 Percentage rents 431 614 1,720 1,184 Tenant reimbursements 12,430 13,993 24,804 27,940 Interest and other 2,076 2,443 4,510 4,616 --------- --------- --------- --------- Total revenues 39,880 44,863 82,065 90,910 Expenses Property operating 11,063 10,702 21,557 21,865 Real estate taxes 3,962 3,994 7,846 8,078 Depreciation and amortization 9,531 10,480 19,710 21,001 Corporate general and administrative 2,877 3,352 6,296 6,653 Interest 15,867 17,839 32,193 36,926 Other charges 4,207 4,363 6,541 7,345 Provision for asset impairment 12,200 - 12,200 - --------- --------- --------- --------- Total expenses 59,707 50,730 106,343 101,868 --------- --------- --------- --------- Loss before gain (loss) on sale of real estate and minority interests (19,827) (5,867) (24,278) (10,958) Gain (loss) on sale of real estate, net (703) (180) (703) 552 --------- --------- --------- --------- Loss from continuing operations before minority interests (20,530) (6,047) (24,981) (10,406) Loss allocated to minority interests - 400 - 401 --------- --------- --------- --------- Loss from continuing operations (20,530) (5,647) (24,981) (10,005) Discontinued operations, including loss of $8,167 and $997 on dispositions in 2002 periods, respectively (9,656) (1,196) (3,524) (2,468) --------- --------- --------- --------- Net loss (30,186) (6,843) (28,505) (12,473) Income allocated to preferred shareholders (5,668) (5,668) (11,336) (11,336) --------- --------- --------- --------- Net loss applicable to common shares $ (35,854) $ (12,511) $ (39,841) $ (23,809) ========= ========= ========= ========= Basic and diluted earnings per common share: Loss from continuing operations $ (0.60) $ (0.26) $ (0.83) $ (0.49) Discontinued operations (0.22) (0.03) (0.08) (0.06) --------- --------- --------- --------- Net loss $ (0.82) $ (0.29) $ (0.91) $ (0.55) ========= ========= ========= ========= Weighted-average common shares outstanding - basic and diluted 43,578 43,578 43,578 43,578 ========= ========= ========= ========= ====================================================================================================================================
See accompanying notes to financial statements. PRIME RETAIL, INC. Unaudited Consolidated Statements of Cash Flows (Amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------ Six Months Ended June 30, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Activities Loss from continuing operations $ (24,981) $ (10,005) Adjustments to reconcile net loss to net cash provided by operating activities: Loss allocated to minority interests - (401) (Gain) loss on sale of real estate, net 703 (552) Depreciation and amortization 19,710 21,001 Amortization of deferred financing costs 3,273 3,613 Amortization of debt premiums (1,088) (1,246) Provision for uncollectible accounts receivable 2,672 5,658 Provision for asset impairment 12,200 - Discontinued operations 1,519 4,802 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable 957 (4,566) Decrease in restricted cash 57 17,061 Increase in other assets (427) (2,814) Decrease in accounts payable and other liabilities (5,316) (19,112) Increase in real estate taxes payable 1,101 2,022 Increase (decrease) in accrued interest (444) 2,699 --------- --------- Net cash provided by operating activities 9,936 18,160 --------- --------- Investing Activities Additions to investment in rental property (2,649) (14,023) Proceeds from sales of operating properties and land 22,320 9,503 --------- --------- Net cash provided by (used in) investing activities 19,671 (4,520) --------- --------- Financing Activities Proceeds from notes payable - 16,899 Principal repayments on notes payable (31,943) (35,447) Contributions from minority interests - 400 Deferred costs - (325) --------- --------- Net cash used in financing activities (31,943) (18,473) --------- --------- Decrease in cash and cash equivalents (2,336) (4,833) Cash and cash equivalents at beginning of period 7,537 8,906 --------- --------- Cash and cash equivalents at end of period $ 5,201 $ 4,073 ========= ========= ====================================================================================================================================
See accompanying notes to financial statements. PRIME RETAIL, INC. Unaudited 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:
- ------------------------------------------------------------------------------------------------------------------------------------ Six Months Ended June 30, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Book value of net assets disposed $ 119,940 $ 32,815 Notes payable paid (36,991) (24,044) Notes payable assumed by joint venture (46,862) - Notes payable transferred to lender (15,467) - Discontinued operations, loss on disposal 997 - Loss on sale of real estate 703 732 --------- -------- Cash received, net $ 22,320 $ 9,503 ========= ======== ====================================================================================================================================
See accompanying notes to financial statements. Prime Retail, Inc. Notes to Unaudited Consolidated Financial Statements (Amounts in thousands, except share and unit information) Note 1 -- Interim Financial Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments consisting only of recurring accruals considered necessary for a fair presentation have been included. Operating results for such interim periods are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the consolidated financial statements and footnotes included in Prime Retail, Inc.'s (the "Company") Annual Report on Form 10-K for the year ended December 31, 2001. 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 Prime Retail, L.P. (the "Operating Partnership"). The consolidated financial statements include the accounts of the Company, the Operating Partnership and the partnerships in which we have operational control. Profits and losses are allocated in accordance with the terms of the agreement of limited partnership of the Operating Partnership. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the (i) reported amounts of assets and liabilities (ii) disclosure of contingent liabilities at the date of the financial statements and (iii) 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 under the equity method of accounting. Income (loss) applicable to minority interests and common shares as presented in the consolidated statements of operations is allocated based on income (loss) before minority interests after income allocated to preferred shareholders. Significant inter-company accounts and transactions have been eliminated in consolidation. Certain prior period financial information has been reclassified to conform to the current period presentation. Note 2 - New Accounting Pronouncements In October, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("FAS") No. 144, "Accounting for Impairment of Disposal of Long-lived Assets." FAS No. 144 supercedes FAS 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, FAS 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." FAS No. 144 is effective for fiscal years beginning after December 15, 2001. Effective January 1, 2002 we adopted FAS No. 144. In accordance with the requirements of FAS No. 144, we have classified the operating results, including gains and losses related to disposition, for those properties either disposed of or classified as assets held for sale during 2002 as discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented. See "2002 Sales Transactions" in Note 3 - "Property Dispositions" for additional information. Below is a summary of the results of operations of these properties through their date of disposition:
- ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended June 30, Six Months Ended June 30, -------------------------------- ---------------------------- 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues Base rents $ 3,786 $ 7,492 $ 8,896 $ 15,067 Percentage rents 288 122 659 269 Tenant reimbursements 2,034 4,012 4,394 7,789 Interest and other 491 615 1,115 1,186 -------- -------- -------- -------- Total revenues 6,599 12,241 15,064 24,311 Expenses Property operating 1,797 2,944 3,708 5,914 Real estate taxes 666 1,146 1,421 2,288 Depreciation and amortization 1,416 3,243 3,460 6,397 Interest 4,007 5,495 8,342 10,851 Other charges 202 609 660 1,329 -------- -------- -------- -------- Total expenses 8,088 13,437 17,591 26,779 -------- -------- -------- -------- Loss before loss on sale of real estate, net (1,489) (1,196) (2,527) (2,468) Loss on sale of real estate, net (8,167) - (997) - -------- -------- -------- -------- Discontinued operations $ (9,656) $ (1,196) $ (3,524) $ (2,468) ======== ======== ======== ======== ====================================================================================================================================
Note 3 - Property Dispositions 2002 Sales Transactions On January 11, 2002, we completed the sale of Prime Outlets at Hagerstown (the "Hagerstown Center"), an outlet center located in Hagerstown, Maryland consisting of approximately 487,000 square feet of gross leasable area ("GLA"), for $80,500 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. Estein and we have 70% and 30% 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"); however, our guarantee of the Assumed Mortgage Indebtedness remains in place. The net cash proceeds from the sale, including the release of certain funds held in escrow, were $12,113 after (i) a pay-down of $11,052 of mortgage indebtedness on the Hagerstown Center and (ii) closing costs. The net proceeds from this sale were used to prepay $11,647 of principal outstanding under a mezzanine loan (the "Mezzanine Loan") obtained in December 2000 from FRIT PRT Lending LLC (the "Mezzanine Lender") in the original amount of $90,000. See Note 4 - Bonds and Notes Payable" for additional information. The operating results of the Hagerstown Center through the date of disposition are classified as discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented in accordance with the requirements of FAS No. 144. In connection with the sale of the Hagerstown Center, we recorded a gain on the sale of real estate of $16,795, also included in discontinued operations, during the first quarter of 2002. At December 31, 2001, the carrying value of the Hagerstown Center of $54,628 was classified as assets held for sale in the Consolidated Balance Sheet. Effective on the date of disposition, we have accounted for our 30% ownership interest in the Hagerstown Center in accordance with the equity method of accounting. We are obligated to refinance the Assumed Mortgage Indebtedness on behalf of the Prime/Estein Venture on or before June 1, 2004, the date on which such indebtedness matures. Additionally, 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%, or 3.34% as of June 30, 2002. On April 1, 2002, we completed the sale of Prime Outlets at Edinburgh (the "Edinburgh Center"), an outlet center located in Edinburgh, Indiana consisting of approximately 305,000 square feet of GLA and additional undeveloped land. The Edinburgh Center was sold to CPG Partners, L.P. for cash consideration of $27,000. The net cash proceeds from the sale were $9,551, after (i) repayment in full of $16,317 of existing first mortgage indebtedness on the Edinburgh Center and (ii) closing costs and fees. We used these net proceeds to make a mandatory principal payment of $9,178 on the Mezzanine Loan. The operating results of the Edinburgh Center through the date of disposition are classified as discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented in accordance with the requirements of FAS No. 144. During the first quarter of 2002, we recorded a loss on the sale of real estate of $9,625, also included in discontinued operations, related to the write-down of the carrying value of the Edinburgh Center to its net realizable value based on the terms of the sale agreement. On April 19, 2002, we completed the sale of Phases II and III of the Bellport Outlet Center (the "Bellport Outlet Center"), an outlet center located in Bellport, New York consisting of approximately 197,000 square feet of GLA. We had a 51% ownership interest in the joint venture partnership that owned the Bellport Outlet Center. The Bellport Outlet Center was sold to Sunrise Station, L.L.C., an affiliate of one of our joint venture partners, for cash consideration of $6,500. At closing, recourse first mortgage indebtedness of $5,500, which was scheduled to mature on May 1, 2002, was repaid in full. To date we have received $522 of cash proceeds from the sale, which were used to make a mandatory principal payment of $502 on the Mezzanine Loan. We accounted for our ownership interest in the Bellport Outlet Center in accordance with the equity method of accounting through the date of disposition. In connection with the sale of the Bellport Outlet Center, we recorded a loss on the sale of real estate of $703 during the second quarter of 2002. On June 17, 2002, we completed the sale of the Shops at Western Plaza ("Western Plaza"), a community center located in Knoxville, Tennessee, consisting of 205,000 square feet of GLA. Western Plaza was sold to WP General Partnership for cash consideration of $9,500. The net cash proceeds from the sale were $688, after (i) repayment of $9,467 (of which $2,467 was scheduled to mature on October 31, 2002) of existing recourse mortgage indebtedness on Western Plaza, (ii) payment of closing costs and fees and (iii) release of certain escrowed funds. We used these net proceeds to make a mandatory principal payment of $661 on the Mezzanine Loan. The operating results of Western Plaza through the date of disposition are classified as discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented in accordance with the requirements of FAS No. 144. In connection with the sale of Western Plaza, we recorded a gain on the sale of real estate of $2,122, also included in discontinued operations, during the second quarter of 2002. On July 26, 2002, we completed the sale of six outlet centers for aggregate consideration of $118,650 to wholly-owned affiliates of PFP Venture LLC, a joint venture (the "PFP Venture") (i) 29.8% owned by PWG Prime Holdings LLC ("PWG") and (ii) 70.2% owned by FP Investment LLC ("FP"). FP is a joint venture between FRIT PRT Bridge Acquisition LLC ("FRIT"), a Delaware limited liability company, and us. Through FP, FRIT and we indirectly have ownership interests of 50.4% and 19.8%, respectively, in the PFP Venture. The six outlet centers (collectively, the "Bridge Loan Properties") that were sold are located in Anderson, California; Calhoun, Georgia; Gaffney, South Carolina; Latham, New York; Lee, Massachusetts and Lodi, Ohio and contain an aggregate of 1,304,000 square feet of GLA. Under the terms of the transaction, for a five-year period, we will continue to manage, market and lease the Bridge Loan Properties for a fee on behalf of the PFP Venture. In connection with the sale, $111,009 of recourse mortgage indebtedness (the "Bridge Loan") on the Bridge Loan Properties was repaid in full. Our net cash proceeds of $6,762 from the sale were contributed to FP. FP used these proceeds along with a $17,236 capital contribution from FRIT to purchase a 70.2% ownership interest in the PFP Venture. Financing for the PFP Venture's purchase of the Bridge Loan Properties was provided by GMAC Mortgage in the form of a $90,000, four-year, non-recourse mortgage loan, of which $74,000 bears interest at LIBOR plus 4.25% (minimum of 7.00% for the first three years and 7.25% thereafter) and $16,000 bears interest at LIBOR plus 4.50% (minimum of 7.75%). Furthermore, subject to satisfaction of certain conditions, the PFP Venture may extend the maturity of the $74,000 portion of the loan for one additional year with the minimum interest rate continuing at 7.25%. Pursuant to certain venture-related documents, we have guaranteed FRIT (i) a 13% return on its $17,236 of invested capital, and (ii) the full return of its invested capital (the "Mandatory Redemption Obligation") by December 31, 2003. Our guarantee is secured by junior security interests in collateral similar to that pledged to the Mezzanine Lender. FP will be entitled to receive a 15% preferred return on its invested capital of $23,998 (approximately $3,600 on an annual basis) in the PFP Venture. Then PWG will be entitled to receive a 15% preferred return on its invested capital of $10,200. From FP's preferred return, FRIT will first receive its 13% return on its invested capital with the remainder applied towards the payment of the Mandatory Redemption Obligation. Upon satisfaction of the Mandatory Redemption Obligation, we will be entitled to FP's preferred return until such time as we have been repaid in full our invested capital, together with a 13% return on our invested capital. Thereafter, FRIT and we will share any cash flow due to FP on an approximate equal basis. FRIT, indirectly through affiliates, was the owner of the Bridge Loan that was repaid in full in connection with the sale of the Bridge Loan Properties and is a 50% participant in the Mezzanine Loan, which had an outstanding principal balance of $35,431 as of June 30, 2002. Effective June 30, 2002, the aggregate carrying value of the Bridge Loan Properties of $115,924 was classified as assets held for sale in the Consolidated Balance Sheet. The operating results of the Bridge Loan Properties are classified as discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented in accordance with the requirements of FAS No. 144. During the second quarter of 2002, we recorded a loss on the sale of real estate of $10,289, also included in discontinued operations, related to the write-down of the carrying value of the Bridge Loan Properties to their net realizable value based on the terms of the sale agreement. 2002 Foreclosure Sale During 2001, certain of our subsidiaries suspended regularly scheduled monthly debt service payments on two non-recourse mortgage loans held by New York Life Insurance Company ("New York Life") at the time of the suspension. These non-recourse mortgage loans were cross-defaulted and cross-collateralized by Prime Outlets at Jeffersonville II (the "Jeffersonville II Center"), located in Jeffersonville, Ohio and Prime Outlets at Conroe (the "Conroe Center"), located in Conroe, Texas. Effective January 1, 2002, New York Life foreclosed on the Conroe Center. Effective July 18, 2002, New York Life sold its remaining interest in the loan still encumbering the Jeffersonville II Center to a successor lender. On August 13, 2002, we transferred our ownership interest in the Jeffersonville II Center to New York Life's successor lender. See Note 4 - "Bonds and Notes Payable" of the Notes to Consolidated Financial Statements for additional information. 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 (the "Silverthorne Center"), an outlet center located in Silverthorne, Colorado consisting of approximately 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 the Silverthorne Center 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 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. Prior to its sale, the Silverthorne Center, was one of fifteen properties securing a first mortgage and expansion loan (the "First Mortgage and Expansion Loan"). In conjunction with the sale of the Silverthorne Center, we substituted Prime Outlets at Lebanon for the Silverthorne Center 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. 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 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. 2001 Foreclosure Sale On May 8, 2001, Prime Outlets at New River (the "New River Center"), an outlet center located in New River, Arizona, was sold through foreclosure. Affiliates of the Company and Fru-Con Development Corporation each own 50% of the partnership, which owned the New River Center. We accounted for our ownership interest in the partnership that owned the New River Center in accordance with the equity method of accounting through the date of foreclosure sale. In connection with the foreclosure sale of the New River Center, we recorded a loss on the sale of real estate of $180 during the second quarter of 2001. Note 4 - Bonds and Notes Payable Going Concern During 2002, we are required to make, in addition to scheduled monthly amortization, certain mandatory principal payments on the Mezzanine Loan aggregating $25,367 with net proceeds from asset sales, excluding our January 11, 2002 sale of a 70% joint venture partnership interest in the Hagerstown Center, or other capital transactions within specified periods (see "Mezzanine Loan Modification" for additional information). Through June 30, 2002, we have made mandatory principal payments aggregating $10,341. Although we continue to seek to generate additional liquidity through new financings and the sale of assets, there can be no assurance that we will be able to complete asset sales or other capital transactions within the specified periods or that such asset sales or other capital transactions, if they should occur, will generate sufficient proceeds to make the remaining mandatory payments of $15,026 due in 2002 under the Mezzanine Loan. Any failure to satisfy these mandatory principal payments within the specified time periods will constitute a default under the Mezzanine Loan. Based on our results for the three months ended June 30, 2002, we are not in compliance with respect to the debt service coverage ratio under our fixed rate tax-exempt revenue bonds (the "Affected Fixed Rate Bonds") in the amount of $18,390. As a result of our noncompliance, 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. If the holders of the Affected Fixed Rate Bonds make such an election and we are unable to repay such obligations, certain cross-default provisions with respect to other debt facilities, including the Mezzanine Loan may be triggered. We are working with holders of the Affected Fixed Rate Bonds regarding potential resolution, including waiver or amendment with respect to the applicable provisions. If we are unable to reach satisfactory resolution, we will look to (i) obtain alternative financing from other financial institutions, (ii) sell the projects subject to the affected debt or (iii) explore other possible capital transactions to generate cash to repay the amounts outstanding under such debt. There can be no assurance that we will obtain satisfactory resolution with the holders of the Affected Fixed Rate Bonds or that we will be able to complete asset sales or other capital raising activities sufficient to repay the amount outstanding under the affected Fixed Rate Bonds. As of June 30, 2002, we were in compliance with all financial debt covenants under our recourse loan agreements other than the Affected Fixed Rate Bonds. Nevertheless, there can be no assurance that we will remain in compliance with our financial debt covenants in future periods because our future financial performance is subject to various risks and uncertainties, including, but not limited to, the effects of current and future economic conditions, and the resulting impact on our revenue; the effects of increases in market interest rates from current levels; the risks associated with existing vacancy rates or potential increases in vacancy rates because of, among other factors, tenant bankruptcies and store closures, and the resulting impact on our revenue; risks associated with litigation, including pending and potential tenant claims with respect to lease provisions related to their pass-through charges, and promotional fund charges; 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. These above listed 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 the Mezzanine Loan 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 Mezzanine Lender's sole discretion, (ii) requires certain mandatory principal payments from net proceeds from asset sales 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) increases 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) changes 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. Pursuant to the terms of the Amendment, the Mezzanine Loan monthly principal payments for May and June of 2002, were reduced to $611 and $649, respectively. 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, at the Mezzanine Lender's sole discretion, the Escrowed Funds may be released to us for limited purposes. The Escrowed Funds not used at the end of each quarter, subject to certain exceptions, will be applied by the Mezzanine 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 mandatory principal payments with net proceeds from asset sales, excluding our January 11, 2002 sale of a 70% joint venture partnership interest in the Hagerstown Center (see Note 3 - "Property Dispositions" 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 mandatory principal payment, 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 payments or other payments within the specified time periods will constitute a default under the Mezzanine Loan. On July 1, 2002, the Mezzanine Lender elected to extend the July 1, 2002 mandatory principal payment due date to the earlier of (i) August 15, 2002 (the "Extended Date") or (ii) the occurrence of an event of default under the Mezzanine Loan. Additionally, upon satisfaction of certain conditions, the Extended Date can be automatically extended again to the earlier of (i) October 31, 2002, (ii) the occurrence of an event of default under the Mezzanine Loan, or (iii) the closing or termination of certain asset sales, with such date hereafter referred to as the "Second Mandatory Principal Payment Due Date." There can be no assurance that these conditions will be met. On April 1, 2002, we sold our Edinburgh Center and used the net proceeds to make a $9,178 mandatory payment on the Mezzanine Loan. Additionally, on April 19, 2002, we sold our ownership interest in the Bellport Outlet Center and used the net proceeds to make a $502 mandatory payment on the Mezzanine Loan. (See Note 3 - - "Property Dispositions" for additional information.) As a result, we satisfied the May 1, 2002 mandatory principal payment requirement. On June 17, 2002, we sold Western Plaza and used the net proceeds to make a mandatory principal payment of $661 on the Mezzanine Loan. (See Note 3 - "Property Dispositions" for additional information.) We are now required to complete additional asset sales or other capital transactions generating net proceeds aggregating $14,065 by the Second Mandatory Principal Payment Due Date and $15,026 (inclusive of the $14,065) by November 1, 2002. 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. Hagerstown Land, L.L.C. is the owner of three parcels of land adjacent to the Hagerstown Center. Debt Service Obligations Our aggregate indebtedness excluding (i) unamortized debt premiums of $9,639, (ii) mortgage indebtedness of $111,059 on the Bridge Loan Properties and (iii) non-recourse mortgage indebtedness of $17,768 on Prime Outlets at Jeffersonville II was $686,216 (the "Adjusted Indebtedness") at June 30, 2002. The mortgage indebtedness on the Bridge Loan Properties was repaid in full in connection with the sale of such properties on July 26, 2002. The non-recourse mortgage indebtedness on the Jeffersonville II Center was relieved in connection with the transfer of our ownership interest in such property to New York Life's successor on August 13, 2002. See Note 3 - "Property Dispositions" and "Defaults on Certain Non-recourse Mortgage Indebtedness" for additional information. At June 30, 2002 the Adjusted Indebtedness had a weighted-average maturity of 3.0 years and bore contractual interest at a weighted-average rate of 8.24% per annum. At June 30, 2002, $631,254, or 92.0%, of the Adjusted Indebtedness bore interest at fixed rates and $54,962 or 8.0%, of the Adjusted Indebtedness bore interest at variable rates. In certain cases, we utilize derivative financial instruments to manage our interest rate risk associated with variable rate debt. As of June 30, 2002, our scheduled principal payments for the remainder of 2002 and 2003 for the Adjusted Indebtedness aggregated $24,775 and $378,465, respectively. The remaining scheduled principal payments for 2002 include (i) principal amortization aggregating $9,749 (including an aggregate of $4,800 of scheduled monthly principal payments on the Mezzanine Loan, which may be further reduced subject to the terms of its Amendment specified above) and (ii) mandatory principal payments on the Mezzanine Loan aggregating $15,026 (see "Mezzanine Loan Modification" for additional information). The outstanding principal balance of the Mezzanine Loan as of June 30, 2002 was $35,431. The scheduled principal payment for 2003 include (i) obligations of $338,558 due in respect of a mortgage loan that is secured by 15 of our properties and matures in November 2003 and (ii) $15,605 of principal payments under the Mezzanine Loan. Guarantees of Indebtedness of Others On July 15, 2002, Horizon Group Properties, Inc. and its affiliates ("HGP") announced they had refinanced a secured credit facility (the "HGP Secured Credit Facility") through a series of new loans aggregating $32,500. Prior to the refinancing, we were a guarantor under the HGP Credit Facility in the amount of $10,000. In connection with the refinancing, our guarantee was reduced to a maximum of $4,000 as security for a $3,000 mortgage loan and a $4,000 mortgage loan (collectively, the "HGP Monroe Mortgage Loan") secured by HGP's outlet shopping center located in Monroe, Michigan. The HGP Monroe Mortgage Loan has a 3-year term, bears interest at the prime lending rate plus 2.50% (with a minimum of 9.90%) and requires monthly interest-only payments. The HGP Monroe Mortgage Loan may be prepaid without penalty after two years. Our guarantee with respect to the HGP Monroe Mortgage Loan will be extinguished if the principal amount of such obligation is reduced to $5,000 or less through repayments. Additionally, we are a guarantor with respect to certain mortgage indebtedness (the "HGP Office Building Mortgage") in the amount of $2,352 on HGP's corporate office building and related equipment located in Norton Shores, Michigan. The HGP Office Building Mortgage matures in December 2002, bears interest at LIBOR plus 2.50%, and requires monthly debt service payments of approximately $23. 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 do not constitute defaults under the HGP Monroe Mortgage Loan or the HGP Office Building Mortgage nor did they constitute a default under the HGP Secured Credit Facility. No claims have been made under our guarantees with respect to the HGP Monroe Mortgage Loan or the HGP Office Building Mortgage. HGP is a publicly traded company that was formed in connection with our merger with Horizon Group, Inc. in June 1998. On January 11, 2002, we sold the Hagerstown Center to the Prime/Estein Venture. In connection with the sale, the Prime/Estein Venture assumed $46,862 of mortgage indebtedness; however, our guarantee of such indebtedness remains in place. See Note 3 - "Property Dispositions" for additional information. On July 26, 2002, we sold the Bridge Properties to the PFP Venture. In connection with the sale, we guaranteed FRIT (i) a 13% return on its $17,236 of invested capital and (ii) the full return of its invested capital by December 31, 2003. See Note 3 - "Property Dispositions" for additional information. 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 which were cross-collateralized by the Jeffersonville II Center and the Conroe Center. At the time of suspension, these non-recourse mortgage loans were held by New York Life. Effective January 1, 2002, New York Life foreclosed on the Conroe Center and its related assets and liabilities, including $554 of cash and $15,467 of principal outstanding under the non-recourse mortgage loan, were transferred from our subsidiary that owned the Conroe Center to New York Life. No gain or loss was recorded in connection with the foreclosure action. The foreclosure of the Conroe Center did not have a material impact on our results of operations or financial condition because during 2001 all excess cash flow from the operations of the Conroe Center was utilized for debt service on its non-recourse mortgage loan. Effective July 18, 2002, New York Life sold its interest in the Jeffersonville II Center loan. On August 13, 2002, we transferred our ownership interest in the Jeffersonville II Center to New York Life's successor. As of June 30, 2002, the carrying value of the Jeffersonville II Center was $3,719 and the balance of the non-recourse mortgage indebtedness was $17,768 and unpaid accrued interest was $2,492. As a result of the transfer of our ownership interest in the Jeffersonville II Center, we expect to record a non-recurring gain for the difference between the carrying value of the Jeffersonville II Center and its related net assets and the outstanding loan balance, including accrued interest, during the third quarter of 2002. The transfer of our ownership interest in the Jeffersonville II Center did not have a material impact on our results of operations or financial condition because during 2001 and through the transfer date in 2002, all excess cash flow from the operations of the Jeffersonville II Center was utilized for debt service on its non-recourse mortgage loan. During August of 2002, certain of our subsidiaries suspended regularly scheduled monthly debt service payments on two non-recourse mortgage loans aggregating $40,829 as of June 30, 2002. These non-recourse mortgage loans which are held by John Hancock Life Insurance Company ("John Hancock") are cross-collateralized by Prime Outlets at Vero Beach (the "Vero Beach Center"), located in Vero Beach, Florida, and Prime Outlets at Woodbury (the "Woodbury Center"), located in Woodbury, Minnesota (collectively, the "John Hancock Properties"). John Hancock has commenced foreclosure proceedings with regard to the Vero Beach Center. Additionally, we are currently negotiating a transfer of our ownership interest in the Woodbury Center to John Hancock. During the second quarter of 2002, we incurred a provision for asset impairment of $12,200 to adjust the carrying values of the John Hancock Properties to their estimated fair value in accordance with the provisions of FAS No. 144. Foreclosure on the Vero Beach Center and transfer of our ownership interest in the Woodbury Center are not expected to have a material impact on our results of operations or financial condition because during 2002, all excess cash flow from the operations of the John Hancock Properties has been utilized for debt service on their non-recourse mortgage loans. 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. Through an affiliate we hold a 50% ownership interest in the partnership that owns Phase I of the Bellport Outlet Center. Fru-Con and we are each 50% partners 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 do not believe either of these mortgage loans is recourse to us. It is possible, however, that either or both of the respective lenders will file a lawsuit seeking to collect amounts due under the loan. If such an action is brought, the outcome, and our ultimate liability, if any, cannot be predicted at this time. 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 ownership interests in Phase I of the Bellport Outlet Center and the Oxnard Factory Outlet in accordance with the equity method of accounting. As of June 30, 2002, the carrying value of our investment in these properties was $0. Note 5 - Shareholders' Equity 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 Senior Preferred Stock, Series B Convertible Preferred Stock, common stock or common units of limited partnership interest in the Operating Partnership during 2002. As of August 15, 2002, we will be eleven quarters in arrears with respect to preferred stock distributions. Under the terms of the Mezzanine Loan, we are prohibited from paying dividends or distributions except to the extent necessary to maintain our status as a REIT. 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 June 30, 2002, unpaid dividends for the period beginning on November 16, 1999 through June 30, 2002 on the Series A Senior Preferred Stock and Series B Convertible Preferred Stock aggregated $15,848 and $43,666, 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 June 30, 2002 are $6,037 ($2.625 per share) and $16,635 ($2.125 per share), respectively. Note 6 - 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 and the Mikasa Plaintiffs filed a motion for reconsideration, which was denied. The remaining defendants, Prime Retail, Inc. and Prime Retail, L.P., answered the complaint. Subsequent efforts in the litigation were deferred while the parties attempted to resolve their claims through negotiation. As a result of these efforts, the parties entered into a settlement agreement on August 7, 2002 pursuant to which the lawsuit is to be dismissed with prejudice, and all potential claims, including claims and potential counterclaims for overpayments and underpayments of various pass-through charges, arising from the litigation are to be released, with all parties expressly denying liability. Pursuant to the settlement agreement, the Company will make payments to Mikasa over the next two months totaling $2,100, and various leases between Mikasa and its affiliates and the Company will be amended to, among other things, remove the specific provisions that were the primary basis of the dispute and modify remaining provisions concerning the collection of pass-through charges. This settlement, including the related lease modifications, is not expected to have a material impact on the Company's financial condition or results of operations. The Company previously accrued a reserve of $2,000 for this matter during the fourth quarter of 2001, which is included in accounts payable and other liabilities in its Consolidated Balance Sheet as of June 30, 2002. See "Mikasa Settlement" contained in "Liquidity and Capital Resources" of Item 2 - "Management's Discussion of Financial Condition and Results of Operations" for additional information. 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. Subsequent efforts in the litigation were deferred while the parties attempted to resolve their claims through negotiation. As a result of these efforts, the parties have entered into a settlement agreement on August 13, 2002 pursuant to which the lawsuit and any related litigation matters are to be dismissed, or in one instance satisfied, all potential claims and counterclaims are to be released, including claims for overpayments and underpayments of various pass-through charges, and with all parties expressly denying liability. Pursuant to the settlement agreement, no payments will be made to Melru Corporation by the Company, Melru Corporation will satisfy a prior judgment against it, and the leases between Melru Corporation and the Company will be modified, including to provide for extensions of the terms of a limited number of existing leases and the early termination of occupancy at one center. The Company does not expect this settlement, including the related lease modifications, will have a material impact on the Company's financial condition or results of operations. Additionally, numerous other tenants in the Company's portfolio have clauses in their leases pursuant to which they may claim under various circumstances that they were not required to pay some or all of the pass-through charges. Such claims, if asserted and found meritorious, could have a material effect upon the Company's financial condition. Determination of whether liability would exist to the Company from these claims would depend on interpretation of various lease clauses within a tenant's lease and all of the other leases at each center collectively at any given point in time. To date, Designs Inc., Brown Group Retail, Inc. and The Gap, Inc. have made allegations or have indicated to the Company that they are considering making allegations that their leases do not require them to pay some or all of the pass-through charges. The Company is in discussion with these tenants and is working to resolve any disputes with them, including wherever possible, satisfactorily modifying or eliminating clauses that are the source of the continuing disputes. During the second quarter of 2002, the Company recorded a non-recurring charge to establish a reserve in the amount of $3,000 for resolution of these matters, in addition to the Mikasa matter discussed above. This reserve, which is included in accounts payable and other liabilities in the Company's Consolidated Balance Sheet as of June 30, 2002, was estimated in accordance with the Company's established policies and procedures with respect to loss contingencies (see "Critical Accounting Policies and Estimates" of Item 2 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information.) Based on presently available information, the Company believes it is probable this reserve will be utilized over the next several years in connection with the resolution of claims relating to the pass-through and promotional fund provisions contained in its leases. The Company cautions, however, that given the inherent uncertainties of litigation and the complexities associated with a large number of leases and other factual questions at issue, actual costs may vary from this estimate. 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. On July 29, 2002, the Fourth Circuit denied the appeal of AFS. The Company believes that it has acted properly and will continue to defend this lawsuit vigorously if AFS continues with additional appeal efforts. The outcome of this lawsuit if additional appeal efforts of AFS are successful, 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. In spite of such counterclaims, the Company's affiliates usually elect to continue to pursue their collection or eviction actions. Although the Company and its affiliates believe that such counterclaims are typically 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. Briefs were filed and oral arguments were held on June 4, 2002 but a decision has not yet been issued by the Fourth Circuit. 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 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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Amounts in thousands, except share, unit and square foot information) Introduction The following discussion and analysis of the consolidated financial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. The Company's operations are conducted through the Operating Partnership. The Company controls the Operating Partnership as its sole general partner and is dependent upon the distributions or other payments from the Operating Partnership to meet its financial obligations. Historical results and percentage relationships set forth herein are not necessarily indicative of future operations. Cautionary Statements The following discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this Quarterly Report on Form 10-Q 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 following: o the risk associated with our high level of leverage and our ability to refinance such indebtedness as it becomes due; o the risks associated with our current non-compliance with respect to the debt service coverage ratio on fixed rate tax-exempt bonds in the amount of $18,390 and the resulting ability of the affected bondholders to elect to put such obligations to us, as well as the risk that cross-default provisions under other indebtedness may be triggered, including a mezzanine loan (the "Mezzanine Loan") in the amount of $35,431; o 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 respect to loan covenants under other indebtedness; including obligations to make mandatory principal payments as required under the terms of a modification to the Mezzanine Loan; o the risk of material adverse effects of future events, including tenant bankruptcies or abandonments, on our financial performance; o 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; o the risk associated with tenant bankruptcies, store closings and the non-payment by tenants of contractual rents and additional rents; o the risk associated with our potential asset sales; o the risk of potential increases in market interest rates from current levels; o 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; o the risk associated with litigation, including pending and potential tenant claims with regard to various lease provisions related to their pass-through charges and promotion fund charges; and o 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 Quarterly Report on Form 10-Q. 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 review our accounts receivable 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, including tenant disputes, 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 portfolio of properties (the "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 Properties 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 either actual sales price, when available, or 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 6 - "Legal Proceedings" of the Notes to the Consolidated Financial Statements for additional information). Additionally, we have guaranteed certain indebtedness of others (see Note 4 - "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 As a fully integrated real estate company, we provide finance, leasing, accounting, marketing and management services for all of our Properties, including those in which we have an ownership interest through joint venture partnerships. At June 30, 2002, our portfolio of properties consisted of (i) 42 outlet centers aggregating 11,893,000 square feet of gross leasable area ("GLA") (including 1,682,000 square feet of GLA at outlet centers owned through joint venture partnerships), (ii) one community shopping center totaling 27,000 square feet of GLA and (iii) 154,000 square feet of GLA of office space. This compares to 45 properties totaling 12,670,000 square feet of GLA at December 31, 2001 and June 30, 2001. The changes in our outlet center GLA are due to certain sales transactions during 2002 and 2001, including the loss of two outlet centers (Prime Outlets at New River and Prime Outlets at Conroe) through foreclosure sale. See Note 3 - "Property Dispositions" of the Notes to Consolidated Financial Statements for additional information. Our outlet center portfolio was 86.8% and 89.5% occupied as of June 30, 2002 and 2001, respectively. For the three and six months ended June 30, 2002, weighted average occupancy in our outlet center portfolio was 87.1% and 87.5%, respectively, compared to 89.5% and 89.8%, respectively, for the same periods in 2001. The decline in the 2002 weighted average and period-end occupancies was primarily attributable to certain tenant bankruptcies, abandonments and store closings. The table set forth below summarizes certain information with respect to our outlet centers as of June 30, 2002:
- ------------------------------------------------------------------------------------------------------------------------------------ Grand GLA Occupancy Outlet Centers Opening Date (Sq. Ft.) Percentage (1) - ------------------------------------------------------------------------------------------------------------------------------------ Prime Outlets at Fremont-- Fremont, Indiana October 1985 229,000 88% Prime Outlets at Birch Run (2)-- Birch Run, Michigan September 1986 724,000 90 Prime Outlets at Latham (3)-- Latham, New York August 1987 43,000 83 Prime Outlets at Williamsburg (2)-- Williamsburg, Virginia April 1988 274,000 94 Prime Outlets at Pleasant Prairie-- Kenosha, Wisconsin September 1988 269,000 92 Prime Outlets at Burlington-- Burlington, Washington May 1989 174,000 90 Prime Outlets at Queenstown-- Queenstown, Maryland June 1989 221,000 90 Prime Outlets at Hillsboro-- Hillsboro, Texas October 1989 359,000 86 Prime Outlets at Oshkosh-- Oshkosh, Wisconsin November 1989 260,000 93 Prime Outlets at Warehouse Row (4)-- Chattanooga, Tennessee November 1989 95,000 79 Prime Outlets at Perryville-- Perryville, Maryland June 1990 148,000 97 Prime Outlets at Sedona-- Sedona, Arizona August 1990 82,000 88 Prime Outlets at San Marcos-- San Marcos, Texas August 1990 549,000 94 Prime Outlets at Anderson (3)-- Anderson, California August 1990 165,000 82 Prime Outlets at Post Falls-- Post Falls, Idaho July 1991 179,000 70 Prime Outlets at Ellenton-- Ellenton, Florida October 1991 481,000 94 Prime Outlets at Morrisville-- Raleigh/Durham, North Carolina October 1991 187,000 74 Prime Outlets at Naples-- Naples/Marco Island, Florida December 1991 146,000 82 Prime Outlets at Niagara Falls USA-- Niagara Falls, New York July 1992 534,000 89 Prime Outlets at Woodbury (5)-- Woodbury, Minnesota July 1992 250,000 71 Prime Outlets at Calhoun (3)-- Calhoun, Georgia October 1992 254,000 85 Prime Outlets at Castle Rock-- Castle Rock, Colorado November 1992 480,000 97 Prime Outlets at Bend-- Bend, Oregon December 1992 132,000 98 Prime Outlets at Jeffersonville II (6)-- Jeffersonville, Ohio March 1993 314,000 42 Prime Outlets at Jeffersonville I-- Jeffersonville, Ohio July 1993 407,000 88 Prime Outlets at Gainesville-- Gainesville, Texas August 1993 316,000 68 Prime Outlets at Loveland-- Loveland, Colorado May 1994 328,000 91 Prime Outlets at Grove City-- Grove City, Pennsylvania August 1994 533,000 95
- ------------------------------------------------------------------------------------------------------------------------------------ Grand GLA Occupancy Outlet Centers Opening Date (Sq. Ft.) Percentage (1) - ------------------------------------------------------------------------------------------------------------------------------------ Prime Outlets at Huntley-- Huntley, Illinois August 1994 282,000 68% Prime Outlets at Florida City-- Florida City, Florida September 1994 208,000 65 Prime Outlets at Pismo Beach-- Pismo Beach, California November 1994 148,000 98 Prime Outlets at Tracy-- Tracy, California November 1994 153,000 91 Prime Outlets at Vero Beach (5)-- Vero Beach, Florida November 1994 326,000 88 Prime Outlets at Odessa-- Odessa, Missouri July 1995 296,000 74 Prime Outlets at Darien (7)-- Darien, Georgia July 1995 307,000 67 Prime Outlets at Gulfport (8)-- Gulfport, Mississippi November 1995 306,000 88 Prime Outlets at Lodi (3)-- Burbank, Ohio November 1996 313,000 87 Prime Outlets at Gaffney (3) (7)-- Gaffney, South Carolina November 1996 305,000 94 Prime Outlets at Lee (3)-- Lee, Massachusetts June 1997 224,000 96 Prime Outlets at Lebanon-- Lebanon, Tennessee April 1998 229,000 97 Prime Outlets at Hagerstown (9)-- Hagerstown, Maryland August 1998 487,000 98 Prime Outlets of Puerto Rico-- Barceloneta, Puerto Rico July 2000 176,000 97 ---------- -- Total Outlet Centers (10) 11,893,000 86% ========== == ====================================================================================================================================
Notes: (1) Percentage reflects occupied space as of June 30, 2002 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) On July 26, 2002, we sold this outlet center to a joint venture partnership in which we, through affiliates, have a 19.8% ownership interest. (4) 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 June 30, 2002. (5) Non-recourse mortgage loans on Prime Outlets at Vero Beach and Prime Outlets at Woodbury are cross-collateralized. The lender has commenced foreclosure proceedings on Prime Outlets at Vero Beach. We are currently negotiating a transfer of our ownership interest in Prime Outlets at Woodbury to the lender. (6) On August 13, 2002, we transferred our ownership interest in Prime Outlets at Jeffersonville II to a successor of the lender. (7) We operate this outlet center pursuant to a long-term ground lease under which we receive the economic benefit of a 100% ownership interest. (8) The real property on which this outlet center is located is subject to a long-term ground lease. (9) On January 11, 2002, we sold this outlet center to a joint venture partnership in which we, through affiliates, have a 30% ownership interest. (10) We also own one community shopping center, not included in this table, containing approximately 27,000 square feet that was 82% occupied as of June 30, 2002. Results of Operations Comparison of the three months ended June 30, 2002 to the three months ended June 30, 2001 Summary We reported losses from continuing operations of $20,530 and $5,647 for the three months ended June 30, 2002 and 2001, respectively. For the three months ended June 30, 2002, the net loss applicable to our common shareholders was $35,854, or $0.82 per common share on a basic and diluted basis. For the three months ended June 30, 2001, the net loss applicable to our common shareholders was $12,511, or $0.29 per common share on a basic and diluted basis. Effective January 1, 2002, we adopted Statement of Financial Accounting Standards ("FAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In accordance with the requirements of FAS No. 144, we have classified the operating results, including gains and losses related to disposition, for those properties either disposed of or classified as assets held for sale during 2002 as discontinued operations in the accompanying statements of operations for all periods presented. During the three months ended June 30, 2002, we reported a loss from discontinued operations of $9,656, or $0.22 per basic and diluted share. The loss from discontinued operations includes losses related to dispositions of $8,167. During the three months ended June 30, 2001, we reported a loss on discontinued operations of $1,196, or $0.03 per basic and diluted share. The 2002 results also reflect (i) a loss on the sale of real estate of $703, or $0.02 per basic and diluted share, attributable to the sale of our ownership interest in a joint venture partnership, (ii) a non-recurring charge of $3,000, or $0.07 per basic and diluted share, for pending and potential tenant claims with respect to lease provisions related to pass-through charges and promotional fund charges and (iii) a provision for asset impairment of $12,200, or $0.28 per basic and diluted share, for two outlet centers. The 2001 results reflect a loss on the sale of real estate of $180 for those properties sold during 2001. The following discussion regarding operating results for the comparable periods are reflective of the classification requirements under FAS No. 144. The operating results for properties disposed of during 2001 are not classified as discontinued operations. Their operating results through the dates of their respective disposition are collectively referred to as the "2001 Property Dispositions". Revenues Total revenues were $39,880 for the three months ended June 30, 2002, compared to $44,863 for the same period in 2001, a decrease of $4,983, or 11.1%. Base rents decreased $2,870, or 10.3%, to $24,943 during the three months ended June 30, 2002 compared to $27,813 for the same period in 2001. These decreases are primarily due to (i) the 2001 Property Dispositions, (ii) changes in economic rental rates and (iii) the reduction in outlet center occupancy during the 2002 period. Straight-line rent income (expense), included in base rent was $21 and $(198) for the three months ended June 30, 2002 and 2001, respectively. Tenant reimbursements, which represent the contractual recovery from tenants of various operating expenses, decreased by $1,563, or 11.1%, to $12,430 during the three months ended June 30, 2002 compared to $13,993 in the same period in 2001. This decrease was primarily due to (i) the 2001 Property Dispositions; (ii) changes in economic rental rates and (iii) the reduction in outlet center occupancy during the 2002 period. Tenant reimbursements as a percentage of recoverable property operating expenses and real estate taxes was 82.7% in 2002 compared to 95.2% in 2001. The decline in tenant reimbursements as a percentage of recoverable property operating expenses and real estate taxes was primarily attributable to changes in economic rental rates and the reduction in outlet center occupancy during the 2002 period. Interest and other income decreased by $367, or 15.0%, to $2,076 during the three months ended June 30, 2002 compared to $2,443 for same period in 2001. The decrease was primarily attributable to reductions in (i) lease termination income of $467 and (ii) all other income of $97. These items were partially offset by an increase in equity earnings from investment in partnerships of $197. Expenses Property operating expenses increased by $361, or 3.4%, to $11,063 during the three months ended June 30, 2002 compared to $10,702 for the same period in 2001. This increase was primarily attributable to higher utilities and insurance costs partially offset by the 2001 Property Dispositions. Real estate taxes expense decreased by $32, or 0.8%, to $3,962 during the three months ended June 30, 2002 compared to $3,994 for the same period in 2001. This decrease was primarily attributable to the 2001 Property Dispositions. As shown in TABLE 1, depreciation and amortization expense decreased by $949, or 9.1%, to $9,531 during the three months ended June 30, 2002, compared to $10,480 for the same period in 2001. This decrease was primarily attributable to (i) the 2001 Property Dispositions and (ii) reduced depreciation and amortization associated with a provision for impairment losses of $63,026 recorded during the third quarter of 2001. Table 1--Components of Depreciation and Amortization Expense - -------------------------------------------------------------------------------- Three Months ended June 30, 2002 2001 - -------------------------------------------------------------------------------- Building and improvements $ 4,459 $ 5,429 Land improvements 1,215 1,222 Tenant improvements 3,162 3,084 Furniture and fixtures 629 669 Leasing commissions 66 76 ------- -------- Total $ 9,531 $ 10,480 ======= ======== ================================================================================ As shown in TABLE 2, interest expense decreased by $1,972, or 11.1%, to $15,867 during the three months ended June 30, 2002 compared to $17,839 for the same period in 2001. This decrease reflects (i) lower interest incurred of $1,990 and (ii) a decrease in amortization of deferred financing costs of $166, partially offset by a reduction in amortization of debt premiums of $184. The decrease in interest incurred is primarily attributable to a reduction of $68,077 in our weighted-average debt outstanding, excluding debt premiums, during the three months ended June 30, 2002 compared to the same period in 2001. Also contributing to the decrease in interest incurred were lower weighted-average interest rates during the three months ended June 30, 2002 compared to the same period in 2001. The significant reduction in weighted-average debt outstanding was primarily attributable to debt prepayments on the Mezzanine Loan with net proceeds from (i) the sales of properties and (ii) the 2001 Property Dispositions. The weighted-average contractual interest rates for the three months ended June 30, 2002 and 2001 were 8.38% and 8.82%, respectively. The Mezzanine Loan was obtained in December 2000 from FRIT Lending LLC (the "Mezzanine Lender") in the original amount of $90,000. See Note 4 - "Bonds and Notes Payable" of the Notes to Consolidated Financial Statements for additional information. Table 2--Components of Interest Expense - -------------------------------------------------------------------------------- Three Months ended June 30, 2002 2001 - -------------------------------------------------------------------------------- Interest incurred $ 14,856 $ 16,846 Amortization of deferred financing costs 1,455 1,621 Amortization of debt premiums (444) (628) -------- -------- Total $ 15,867 $ 17,839 ======== ======== ================================================================================ During the second quarter of 2002, we recorded a non-recurring charge of $3,000 for pending and potential tenant claims with respect to lease provisions related to their pass-through charges and promotional fund charges (see Note 6 - "Legal Proceedings" of the Notes to Consolidated Financial Statements for additional information). This non-recurring charge was estimated in accordance with our aforementioned "Critical Accounting Policies and Estimates" with respect to loss contingencies and is based on our current assessment of the likelihood of any adverse judgments or outcomes to these matters. Excluding this non-recurring charge, other charges decreased by $3,156, or 72.3%, to $1,207 for the three months ended June 30, 2002 compared to $4,363 for the same period in 2001. This decrease reflects (i) a lower provision for uncollectible accounts receivable of $2,652, a decrease in corporate marketing costs of $494 and (iii) a reduction in all other expenses of $10. During the second quarter of 2002, we incurred a provision for asset impairment of $12,200 to adjust the carrying values of two of our properties (Prime Outlets at Vero Beach and Prime Outlets at Woodbury) to their estimated fair values in accordance with the provisions of FAS No. 144. These properties are cross-collateralized by non-recourse mortgage indebtedness on which we suspended payment of regularly scheduled monthly debt service payment during August of 2002. See "Defaults on Certain Non-recourse Mortgage Indebtedness" contained within Note 4 - "Bonds and Notes Payable" of the Notes to Consolidated Financial Statements for additional information. Comparison of the six months ended June 30, 2002 to the six months ended June 30, 2001 Summary We reported losses from continuing operations of $24,981 and $10,005 for the six months ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002, the net loss applicable to our common shareholders was $39,841, or $0.91 per common share on a basic and diluted basis. For the six months ended June 30, 2001, the net loss applicable to our common shareholders was 23,809, or $0.55 per common share on a basic and diluted basis. Effective January 1, 2002, we adopted FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In accordance with the requirements of FAS No. 144, we have classified the operating results, including gains and losses related to disposition, for those properties either disposed of or classified as assets held for sale during 2002 as discontinued operations in the accompanying statements of operations for all periods presented. During the six months ended June 30, 2002, we reported a loss from discontinued operations of $3,524, or $0.08 per basic and diluted share. The loss from discontinued operations includes losses related to disposition of $997. During the six months ended June 30, 2001, we reported a loss on discontinued operations of $2,468, or $0.06 per basic and diluted share. The 2002 results also reflect (i) a loss on the sale of real estate of $703, or $0.02 per basic and diluted share, attributable to the sale of our ownership interest in a joint venture partnership (ii) a non-recurring charge of $3,000, or $0.07 per basic and diluted share, for pending and potential tenant claims related to pass-through charges and promotional fund charges and (iii) a provision for asset impairment of $12,200, or $0.28 per basic and diluted share, for two outlet centers. The 2001 results reflect a gain on the sale of real estate of $552 for those properties sold during 2001. The following discussion regarding operating results for the comparable periods are reflective of the classification requirements under FAS No. 144. The operating results for properties disposed of during 2001 are not classified as discontinued operations. Their operating results through the dates of their respective disposition are collectively referred to as the "2001 Property Dispositions". Revenues Total revenues were $82,065 for the six months ended June 30, 2002, compared to $90,910 for the same period in 2001, a decrease of $8,845, or 9.7%. Base rents decreased $6,139, or 10.7%, to $51,031 during the six months ended June 30, 2002 compared to $57,170 for the same period in 2001. These decreases are primarily due to (i) the 2001 Property Dispositions, (ii) changes in economic rental rates and (iii) the reduction in outlet center occupancy during the 2002 period. Straight-line rent expense, included in base rent was $0 and $321 for the six months ended June 30, 2002 and 2001, respectively. Tenant reimbursements, which represent the contractual recovery from tenants of certain operating expenses, decreased by $3,136, or 11.2%, to $24,804 during the six months ended June 30, 2002 compared to $27,940 in the same period in 2001. These decreases are primarily due to (i) the 2001 Property Dispositions; (ii) changes in economic rental rates and (iii) the reduction in outlet center occupancy during the 2002 period. Tenant reimbursements as a percentage of recoverable property operating expenses and real estate taxes was 84.4% in 2002 compared to 93.3% in 2001. The decline in tenant reimbursements as a percentage of recoverable property operating expenses and real estate taxes was primarily attributable to changes in economic rental rates and the reduction in outlet center occupancy during the 2002 period. Interest and other income decreased by $106, or 2.3%, to $4,510 during the six months ended June 30, 2002 compared to $4,616 for same period in 2001. The decrease reflects reductions in (i) lease termination income of $730 and (ii) all other income of $390 partially offset by an increase in our equity earnings from investment in partnerships of $1,014. Expenses Property operating expenses decreased by $308, or 1.4%, to $21,557 during the six months ended June 30, 2002 compared to $21,865 for the same period in 2001. This decrease was primarily attributable to the 2001 Property Dispositions partially offset by higher utilities and insurance costs. Real estate taxes expense decreased by $232, or 2.9%, to $7,846 during the six months ended June 30, 2002 compared to $8,078 for the same period in 2001. This decrease was primarily attributable to the 2001 Property Dispositions. As shown in TABLE 3, depreciation and amortization expense decreased by $1,291, or 6.1%, to $19,710 during the six months ended June 30, 2002, compared to $21,001 for the same period in 2001. This decrease was primarily attributable to (i) the 2001 Property Dispositions and (ii) reduced depreciation and amortization associated with a provision for impairment losses of $63,026 recorded during the third quarter of 2001. Table 3--Components of Depreciation and Amortization Expense - -------------------------------------------------------------------------------- Six Months ended June 30, 2002 2001 - -------------------------------------------------------------------------------- Building and improvements $ 10,154 $ 10,872 Land improvements 2,438 2,440 Tenant improvements 5,702 6,160 Furniture and fixtures 1,280 1,375 Leasing commissions 136 154 -------- -------- Total $ 19,710 $ 21,001 ======== ======== ================================================================================ As shown in TABLE 4, interest expense decreased by $4,733, or 12.8%, to $32,193 during the six months ended June 30, 2002 compared to $36,926 for the same period in 2001. This decrease reflects (i) lower interest incurred of $4,551 and (ii) a decrease in amortization of deferred financing costs of $340, partially offset by a reduction in amortization of debt premiums of $158. The decrease in interest incurred is primarily attributable to a reduction of $62,518 in our weighted-average debt outstanding, excluding debt premiums, during the six months ended June 30, 2002 compared to the same period in 2001. Also contributing to the decrease in interest incurred were lower weighted-average interest rates during the six months ended June 30, 2002 compared to the same period in 2001. The significant reduction in weighted-average debt outstanding was primarily attributable to debt prepayments on the Mezzanine Loan with net proceeds from (i) the sales of properties and (ii) the 2001 Property Dispositions. The weighted-average contractual interest rates for the six months ended June 30, 2002 and 2001 were 8.41% and 8.86%, respectively. Table 4--Components of Interest Expense - -------------------------------------------------------------------------------- Six Months ended June 30, 2002 2001 - -------------------------------------------------------------------------------- Interest incurred $ 30,008 $ 34,559 Amortization of deferred financing costs 3,273 3,613 Amortization of debt premiums (1,088) (1,246) -------- -------- Total $ 32,193 $ 36,926 ======== ======== ================================================================================ During the second quarter of 2002, we recorded a non-recurring charge of $3,000 for pending and potential tenant claims with respect to lease provisions related to their pass-through charges and promotional fund charges (see Note 6 - "Legal Proceedings' of the Notes to Consolidated Financial Statements for additional information). This non-recurring charge was estimated in accordance with our aforementioned "Critical Accounting Policies and Estimates" with respect to loss contingencies and is based on our current assessment of the likelihood of any adverse judgments or outcomes to these matters. Excluding this non-recurring charge, other charges decreased by $3,804, or 51.8%, to $3,541 for the six months ended June 30, 2002 compared to $7,345 for the same period in 2001. The decrease was primarily attributable to (i) a lower provision for uncollectible accounts receivable of $2,986, (ii) a decrease in corporate marketing costs of $494 and (iii) a reduction in all other expenses of $324. During the second quarter of 2002, we incurred a provision for asset impairment of $12,200 to adjust the carrying values of two of our properties (Prime Outlets at Vero Beach and Prime Outlets at Woodbury) to their estimated fair values in accordance with the provisions of FAS No. 144. These properties are cross-collateralized by non-recourse mortgage indebtedness on which we suspended payment of regularly scheduled monthly debt service payment during August of 2002. See "Defaults on Certain Non-recourse Mortgage Indebtedness" contained within Note 4 - "Bonds and Notes Payable" of the Notes to Consolidated Financial Statements for additional information. Merchant Sales For the three and six months ended June 30, 2002, same-store sales in the Company's outlet center portfolio decreased 3.6% and 2.7%, respectively, compared to the same periods in 2001. "Same-store sales" is defined as the weighted-average sales per square foot reported by merchants for stores open since January 1, 2001. The weighted-average sales per square foot reported by all merchants were $241 for the year ended December 31, 2001. Liquidity and Capital Resources Sources and Uses of Cash For the six months ended June 30, 2002, net cash provided by operating activities was $9,936, net cash provided by investing activities was $19,671 and net cash used in financing activities was $31,943. The net cash provided by investing activities during the six months ended June 30, 2002 consisted of $22,320 of aggregate net proceeds from the disposition of assets, partially offset by $2,649 of additions to rental property. The net proceeds from asset sales consisted of (i) $12,113 from the January 11, 2002 sale of a 70% ownership interest in the Hagerstown Center, (ii) $9,551 from the April 1, 2002 sale of the Edinburgh Center, (iii) $522 from the April 19, 2002 sale of our 51% ownership interest in the Bellport Outlet Center and (iv) $688 from the June 17, 2002 sale of Western Plaza, partially offset by cash of $574 assumed by the lender in connection with the January 1, 2002 foreclosure sale of the Conroe Center. The additions to rental property were primarily costs incurred in connection with re-leasing space to new merchants. The gross uses of cash for financing activities of $31,943 during the six months ended June 30, 2002 consisted of (i) scheduled principal amortization on notes payable of $9,955 and (ii) a principal prepayments on the Mezzanine Loan aggregating $21,988, including $10,341 of mandatory prepayments, with net proceeds from the sales of properties. 2002 Sales Transactions On January 11, 2002, we completed the sale of Prime Outlets at Hagerstown (the "Hagerstown Center"), an outlet center located in Hagerstown, Maryland consisting of approximately 487,000 square feet of GLA, for $80,500 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. Estein and we have 70% and 30% 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"); however, our guarantee of the Assumed Mortgage Indebtedness remains in place. The net cash proceeds from the sale, including the release of certain funds held in escrow, were $12,113 after (i) a pay-down of $11,052 of mortgage indebtedness on the Hagerstown Center and (ii) closing costs. The net proceeds from this sale were used to prepay $11,647 of principal outstanding under the Mezzanine Loan. The operating results of the Hagerstown Center through the date of disposition are classified as discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented in accordance with the requirements of FAS No. 144. In connection with the sale of the Hagerstown Center, we recorded a gain on the sale of real estate of $16,795, also included in discontinued operations, during the first quarter of 2002. At December 31, 2001, the carrying value of the Hagerstown Center of $54,628 was classified as assets held for sale in the Consolidated Balance Sheet. Effective on the date of disposition, we have accounted for our 30% ownership interest in the Hagerstown Center in accordance with the equity method of accounting. We are obligated to refinance the Assumed Mortgage Indebtedness on behalf of the Prime/Estein Venture on or before June 1, 2004, the date on which such indebtedness matures. Additionally, 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%, or 3.34% as of June 30, 2002. On April 1, 2002, we completed the sale of Prime Outlets at Edinburgh (the "Edinburgh Center"), an outlet center located in Edinburgh, Indiana consisting of approximately 305,000 square feet of GLA and additional undeveloped land. The Edinburgh Center was sold to CPG Partners, L.P. for cash consideration of $27,000. The net cash proceeds from the sale were $9,551, after (i) repayment in full of $16,317 of existing first mortgage indebtedness on the Edinburgh Center and (ii) closing costs and fees. We used these net proceeds to make a mandatory principal payment of $9,178 on the Mezzanine Loan. The operating results of the Edinburgh Center through the date of disposition are classified as discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented in accordance with the requirements of FAS No. 144. During the first quarter of 2002, we recorded a loss on the sale of real estate of $9,625, also included in discontinued operations, related to the write-down of the carrying value of the Edinburgh Center to its net realizable value based on the terms of the sale agreement. On April 19, 2002, we completed the sale of Phases II and III of the Bellport Outlet Center (the "Bellport Outlet Center"), an outlet center located in Bellport, New York consisting of approximately 197,000 square feet of GLA. We had a 51% ownership interest in the joint venture partnership that owned the Bellport Outlet Center. The Bellport Outlet Center was sold to Sunrise Station, L.L.C., an affiliate of one of our joint venture partners, for cash consideration of $6,500. At closing, recourse first mortgage indebtedness of $5,500, which was scheduled to mature on May 1, 2002, was repaid in full. To date we have received $522 of cash proceeds from the sale, which were used to make a mandatory principal payment of $502 on the Mezzanine Loan. We accounted for our ownership interest in the Bellport Outlet Center in accordance with the equity method of accounting through the date of disposition. In connection with the sale of the Bellport Outlet Center, we recorded a loss on the sale of real estate of $703 during the second quarter of 2002. On June 17, 2002, we completed the sale of the Shops at Western Plaza ("Western Plaza"), a community center located in Knoxville, Tennessee, consisting of 205,000 square feet of GLA. Western Plaza was sold to WP General Partnership for cash consideration of $9,500. The net cash proceeds from the sale were $688, after (i) repayment of $9,467 (of which $2,467 was scheduled to mature on October 31, 2002) of existing recourse mortgage indebtedness on Western Plaza, (ii) payment of closing costs and fees and (iii) release of certain escrowed funds. We used these net proceeds to make a mandatory principal payment of $661 on the Mezzanine Loan. The operating results of Western Plaza through the date of disposition are classified as discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented in accordance with the requirements of FAS No. 144. In connection with the sale of Western Plaza, we recorded a gain on the sale of real estate of $2,122, also included in discontinued operations, during the second quarter of 2002. On July 26, 2002, we completed the sale of six outlet centers for aggregate consideration of $118,650 to wholly-owned affiliates of PFP Venture LLC, a joint venture (the "PFP Venture") (i) 29.8% owned by PWG Prime Holdings LLC ("PWG") and (ii) 70.2% owned by FP Investment LLC ("FP"). FP is a joint venture between FRIT PRT Bridge Acquisition LLC ("FRIT"), a Delaware limited liability company, and us. Through FP, FRIT and we indirectly have ownership interests of 50.4% and 19.8%, respectively, in the PFP Venture. The six outlet centers (collectively, the "Bridge Loan Properties") that were sold are located in Anderson, California; Calhoun, Georgia; Gaffney, South Carolina; Latham, New York; Lee, Massachusetts and Lodi, Ohio and contain an aggregate of 1,304,000 square feet of GLA. Under the terms of the transaction, for a five-year period, we will continue to manage, market and lease the Bridge Loan Properties for a fee on behalf of the PFP Venture. In connection with the sale, $111,009 of recourse mortgage indebtedness (the "Bridge Loan") on the Bridge Loan Properties was repaid in full. Our net cash proceeds of $6,762 from the sale were contributed to FP. FP used these proceeds along with a $17,236 capital contribution from FRIT to purchase a 70.2% ownership interest in the PFP Venture. Financing for the PFP Venture's purchase of the Bridge Loan Properties was provided by GMAC Mortgage in the form of a $90,000, four-year, non-recourse mortgage loan, of which $74,000 bears interest at LIBOR plus 4.25% (minimum of 7.00% for the first three years and 7.25% thereafter) and $16,000 bears interest at LIBOR plus 4.50% (minimum of 7.75%). Furthermore, subject to satisfaction of certain conditions, the PFP Venture may extend the maturity of the $74,000 portion of the loan for one additional year with the minimum interest rate continuing at 7.25%. Pursuant to certain venture-related documents, we have guaranteed FRIT (i) a 13% return on its $17,236 of invested capital, and (ii) the full return of its invested capital (the "Mandatory Redemption Obligation") by December 31, 2003. Our guarantee is secured by junior security interests in collateral similar to that pledged to the Mezzanine Lender. FP will be entitled to receive a 15% preferred return on its invested capital of $23,998 (approximately $3,600 on an annual basis) in the PFP Venture. Then PWG will be entitled to receive a 15% return on its invested capital of $10,200. From FP's preferred return, FRIT will first receive its 13% return on its invested capital with the remainder applied towards the payment of the Mandatory Redemption Obligation. Upon satisfaction of the Mandatory Redemption Obligation, we will be entitled to FP's preferred return until such time as we have been repaid in full our invested capital, together with a 13% return on our invested capital. Thereafter, FRIT and us will share any cash flow due to FP on an approximate equal basis. FRIT, indirectly through affiliates, was the owner of Bridge Loan that was repaid in full in connection with the sale of the Bridge Loan Properties and is a 50% participant in the Mezzanine Loan, which had an outstanding principal balance of $35,431 as of June 30, 2002. Effective June 30, 2002, the aggregate carrying value of the Bridge Loan Properties of $115,924 was classified as assets held for sale in the Consolidated Balance Sheet. The operating results of the Bridge Loan Properties are classified as discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented in accordance with the requirements of FAS No. 144. During the second quarter of 2002, we recorded a loss on the sale of real estate of $10,289, also included in discontinued operations, related to the write-down of the carrying value of the Bridge Loan Properties to their net realizable value based on the terms of the sale agreement. 2002 Foreclosure Sale During 2001, certain of our subsidiaries suspended regularly scheduled monthly debt service payments on two non-recourse mortgage loans held by New York Life Insurance Company ("New York Life") at the time of the suspension. These non-recourse mortgage loans were cross-defaulted and cross-collateralized by Prime Outlets at Jeffersonville II (the "Jeffersonville II Center"), located in Jeffersonville, Ohio and Prime Outlets at Conroe (the "Conroe Center"), located in Conroe, Texas. Effective January 1, 2002, New York Life foreclosed on the Conroe Center. Effective July 18, 2002, New York Life sold its remaining interest in the loan still encumbering the Jeffersonville II Center to a successor lender. On August 13, 2002, we transferred our ownership interest in the Jeffersonville II Center to New York Life's successor lender. See Note 4 - "Bonds and Notes Payable" of the Notes to Consolidated Financial Statements for additional information. Going Concern During 2002, we are required to make, in addition to scheduled monthly amortization, certain mandatory principal payments on the Mezzanine Loan aggregating $25,367 with net proceeds from asset sales, excluding our January 11, 2002 sale of a 70% joint venture partnership interest in the Hagerstown Center, or other capital transactions within specified periods (see "Mezzanine Loan Modification" for additional information). Through June 30, 2002, we have made mandatory principal payments aggregating $10,341. Although we continue to seek to generate additional liquidity through new financings and the sale of assets, there can be no assurance that we will be able to complete asset sales or other capital transactions within the specified periods or that such asset sales or other capital transactions, if they should occur, will generate sufficient proceeds to make the remaining mandatory payments of $15,026 due in 2002 under the Mezzanine Loan. Any failure to satisfy these mandatory principal payments within the specified time periods will constitute a default under the Mezzanine Loan. Based on our results for the three months ended June 30, 2002, we are not in compliance with respect to the debt service coverage ratio under our fixed rate tax-exempt revenue bonds (the "Affected Fixed Rate Bonds") in the amount of $18,390. As a result of our noncompliance, 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. If the holders of the Affected Fixed Rate Bonds make such an election and we are unable to repay such obligations, certain cross-default provisions with respect to other debt facilities, including the Mezzanine Loan may be triggered. We are working with holders of the Affected Fixed Rate Bonds regarding potential resolutions, including waiver or amendment with respect to the applicable provisions. If we are unable to reach satisfactory resolution, we will look to (i) obtain alternative financing from other financial institutions, (ii) sell the projects subject to the affected debt or (iii) explore other possible capital transactions to generate cash to repay the amounts outstanding under such debt. There can be no assurance that we will obtain satisfactory resolutions with the holders of the Affected Fixed Rate Bonds or that we will be able to complete asset sales or other capital raising activities sufficient to repay the amount outstanding under the affected Fixed Rate Bonds. As of June 30, 2002, we were in compliance with all financial debt covenants under our recourse loan agreements other than the Affected Fixed Rate Bonds. Nevertheless, there can be no assurance that we will remain in compliance with our financial debt covenants in future periods because our future financial performance is subject to various risks and uncertainties, including, but not limited to, the effects of current and future economic conditions, and the resulting impact on our revenue; the effects of increases in market interest rates from current levels; the risks associated with existing vacancy rates or potential increases in vacancy rates because of, among other factors, tenant bankruptcies and store closures, and the resulting impact on our revenue; risks associated with litigation, including pending and potential tenant claims with respect to lease provisions related to their pass-through charges and promotional fund charges; 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. These above listed 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. Strategic Alternatives We have engaged Houlihan Lokey Howard & Zurkin Capital to assist us in exploring recapitalization, restructuring, financing and other strategic alternatives designed to strengthen our financial position and address our long-term capital requirements. There can be no assurance as to the timing, terms or completion of any transaction. Mezzanine Loan Modification Effective January 31, 2002, we entered into a modification to the original terms of the Mezzanine Loan 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 Mezzanine Lender's sole discretion, (ii) requires certain mandatory principal payments from net proceeds from asset sales 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) increases 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) changes 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. Pursuant to the terms of the Amendment, the Mezzanine Loan monthly principal payments for May and June of 2002, were reduced to $611 and $649, respectively. 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, at the Mezzanine Lender's sole discretion, the Escrowed Funds may be released to us for limited purposes. The Escrowed Funds not used at the end of each quarter, subject to certain exceptions, will be applied by the Mezzanine 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 mandatory principal payments with net proceeds from asset sales, excluding our January 11, 2002 sale of a 70% joint venture partnership interest in the Hagerstown Center (see Note 3 - "Property Dispositions" 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 mandatory principal payment, 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 payments or other payments within the specified time periods will constitute a default under the Mezzanine Loan. On July 1, 2002, the Mezzanine Lender elected to extend the July 1, 2002 mandatory principal payment due date to the earlier of (i) August 15, 2002 (the "Extended Date") or (ii) the occurrence of an event of default under the Mezzanine Loan. Additionally, upon satisfaction of certain conditions, the Extended Date can be automatically extended again to the earlier of (i) October 31, 2002, (ii) the occurrence of an event of default under the Mezzanine Loan, or (iii) the closing or termination of certain asset sales, with such date hereafter referred to as the "Second Mandatory Principal Payment Due Date." There can be no assurance that these conditions will be met. On April 1, 2002, we sold our Edinburgh Center and used the net proceeds to make a $9,178 mandatory payment on the Mezzanine Loan. Additionally, on April 19, 2002, we sold our ownership interest in the Bellport Outlet Center and used the net proceeds to make a $502 mandatory payment on the Mezzanine Loan. (See Note 3 - - "Property Dispositions" of Notes to Consolidated Financial Statements for additional information.) As a result, we satisfied the May 1, 2002 mandatory principal payment requirement. On June 17, 2002, we sold Western Plaza and used the net proceeds to make a mandatory principal payment of $661 on the Mezzanine Loan. (See Note 3 - "Property Dispositions" of Notes to Consolidated Financial Statements for additional information.) We are now required to complete additional asset sales or other capital transactions generating net proceeds aggregating $14,065 by the Second Mandatory Principal Payment Due Date and $15,026 (inclusive of the $14,065) by November 1, 2002. 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. Hagerstown Land, L.L.C. is the owner of three parcels of land adjacent to the Hagerstown Center. Debt Service Obligations Our aggregate indebtedness excluding (i) unamortized debt premiums of $9,639, (ii) mortgage indebtedness of $111,059 on the Bridge Loan Properties and (iii) non-recourse mortgage indebtedness of $17,768 on Prime Outlets at Jeffersonville II was $686,216 (the "Adjusted Indebtedness") at June 30, 2002. The mortgage indebtedness on the Bridge Loan Properties was repaid in full in connection with the sale of such properties on July 26, 2002. The non-recourse mortgage indebtedness on the Jeffersonville II Center was relieved in connection with the transfer of our ownership interest in such property to New York Life's successor on August 13, 2002. See Note 3 - "Property Dispositions" and "Defaults on Certain Non-recourse Mortgage Indebtedness" of Notes to Consolidated Financial Statements for additional information. At June 30, 2002 the Adjusted Indebtedness had a weighted-average maturity of 3.0 years and bore contractual interest at a weighted-average rate of 8.24% per annum. At June 30, 2002, $631,254, or 92.0%, of the Adjusted Indebtedness bore interest at fixed rates and $54,962 or 8.0%, of the Adjusted Indebtedness bore interest at variable rates. In certain cases, we utilize derivative financial instruments to manage our interest rate risk associated with variable rate debt. As of June 30, 2002, our scheduled principal payments for the remainder of 2002 and 2003 for the Adjusted Indebtedness aggregated $24,775 and $378,465, respectively. The remaining scheduled principal payments for 2002 include (i) principal amortization aggregating $9,749 (including an aggregate of $4,800 of scheduled monthly principal payments on the Mezzanine Loan, which may be further reduced subject to the terms of its Amendment specified above) and (ii) mandatory principal payments on the Mezzanine Loan aggregating $15,026 (see "Mezzanine Loan Modification" for additional information). The outstanding principal balance of the Mezzanine Loan as of June 30, 2002 was $35,431. The scheduled principal payment for 2003 include (i) obligations of $338,558 due in respect of a mortgage loan that is secured by 15 of our properties and matures in November 2003 and (ii) $15,605 of principal payments under the Mezzanine Loan. Mikasa Settlement On August 7, 2002, we entered into a settlement agreement (the "Mikasa Settlement") with Dinnerware Plus Holdings, Inc., which operates under the trade name Mikasa. Pursuant to the Mikasa Settlement, we are obligated to make aggregate payments of $2,100 to Mikasa and various lease terms between both our affiliates and Mikasa's affiliates will be amended to reflect the terms of the Mikasa Settlement, including modifications of the provisions concerning the collection of pass though charges over the remaining terms of the respective leases. On August 9, 2002, we made an initial payment of $1,750 to Mikasa using Escrowed Funds (see "Mezzanine Loan Modification for additional information) released by the Mezzanine Lender. We are obligated to make additional payments to Mikasa in September and October of 2002 in the amount of $250 and $100, respectively. We expect to make these additional payments using the Escrowed Funds. See Note 6 - "Legal Proceedings" for additional information. The Mikasa Settlement did not have a material impact on our financial condition or our results from operations. We previously accrued a reserve of $2,000 for the Mikasa Settlement during the fourth quarter of 2001. This reserve is included in accounts payable and other liabilities in our Consolidated Balance Sheet as of June 30, 2002. Guarantees of Indebtedness of Others On July 15, 2002, Horizon Group Properties, Inc. and its affiliates ("HGP") announced they had refinanced a secured credit facility (the "HGP Secured Credit Facility") through a series of new loans aggregating $32,500. Prior to the refinancing, we were a guarantor under the HGP Credit Facility in the amount of $10,000. In connection with the refinancing, our guarantee was reduced to a maximum of $4,000 as security for a $3,000 mortgage loan and a $4,000 mortgage loan (collectively, the "HGP Monroe Mortgage Loan") secured by HGP's outlet shopping center located in Monroe, Michigan. The HGP Monroe Mortgage Loan has a 3-year term, bears interest at the prime lending rate plus 2.50% (with a minimum of 9.90%) and requires monthly interest-only payments. The HGP Monroe Mortgage Loan may be prepaid without penalty after two years. Our guarantee with respect to the HGP Monroe Mortgage Loan will be extinguished if the principal amount of such obligation is reduced to $5,000 or less through repayments. Additionally, we are a guarantor with respect to certain mortgage indebtedness (the "HGP Office Building Mortgage") in the amount of $2,352 on HGP's corporate office building and related equipment located in Norton Shores, Michigan. The HGP Office Building Mortgage matures in December 2002, bears interest at LIBOR plus 2.50%, and requires monthly debt service payments of approximately $23. 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 do not constitute defaults under the HGP Monroe Mortgage Loan or the HGP Office Building Mortgage nor did they constitute a default under the HGP Secured Credit Facility. No claims have been made under our guarantees with respect to the HGP Monroe Mortgage Loan or the HGP Office Building Mortgage. HGP is a publicly traded company that was formed in connection with our merger with Horizon Group, Inc. in June 1998. On January 11, 2002, we sold the Hagerstown Center to the Prime/Estein Venture. In connection with the sale, the Prime/Estein Venture assumed $46,862 of mortgage indebtedness; however, our guarantee of such indebtedness remains in place. See Note 3 - "Property Dispositions" of Notes to Consolidated Financial Statements for additional information. On July 26, 2002, we sold the Bridge Properties to the PFP Venture. In connection with the sale, we guaranteed FRIT (i) a 13% return on its $17,236 of invested capital and (ii) the full return of its invested capital by December 31, 2003. See Note 3 - "Property Dispositions" of Notes to Consolidated Financial Statements for additional information. 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 which were cross-collateralized by the Jeffersonville II Center and the Conroe Center. At the time of suspension, these non-recourse mortgage loans were held by New York Life. Effective January 1, 2002, New York Life foreclosed on the Conroe Center and its related assets and liabilities, including $554 of cash and $15,467 of principal outstanding under the non-recourse mortgage loan, were transferred from our subsidiary that owned the Conroe Center to New York Life. No gain or loss was recorded in connection with the foreclosure action. The foreclosure of the Conroe Center did not have a material impact on our results of operations or financial condition because during 2001 all excess cash flow from the operations of the Conroe Center was utilized for debt service on its non-recourse mortgage loan. Effective July 18, 2002, New York Life sold its interest in the Jeffersonville II Center loan. On August 13, 2002, we transferred our ownership interest in the Jeffersonville II Center to New York Life's successor. As of June 30, 2002, the carrying value of the Jeffersonville II Center was $3,719 and the balance of the non-recourse mortgage indebtedness was $17,768 and unpaid accrued interest was $2,492. As a result of the transfer of our ownership interest in the Jeffersonville II Center, we expect to record a non-recurring gain for the difference between the carrying value of the Jeffersonville II Center and its related net assets and the outstanding loan balance, including accrued interest, during the third quarter of 2002. The transfer of our ownership interest in the Jeffersonville II Center did not have a material impact on our results of operations or financial condition because during 2001 and through the transfer date in 2002, all excess cash flow from the operations of the Jeffersonville II Center was utilized for debt service on its non-recourse mortgage loan. During August of 2002, certain of our subsidiaries suspended regularly scheduled monthly debt service payments on two non-recourse mortgage loans aggregating $40,829 as of June 30, 2002. These non-recourse mortgage loans which are held by John Hancock Life Insurance Company ("John Hancock") are cross-collateralized by Prime Outlets at Vero Beach (the "Vero Beach Center"), located in Vero Beach, Florida, and Prime Outlets at Woodbury (the "Woodbury Center"), located in Woodbury, Minnesota (collectively, the "John Hancock Properties"). John Hancock has commenced foreclosure proceedings with regard to the Vero Beach Center. Additionally, we are currently negotiating a transfer of our ownership interest in the Woodbury Center to John Hancock. During the second quarter of 2002, we incurred a provision for asset impairment of $12,200 to adjust the carrying values of the John Hancock Properties to their estimated fair value in accordance with the provisions of FAS No. 144. Foreclosure on the Vero Beach Center and transfer of our ownership interest in the Woodbury Center are not expected to have a material impact on our results of operations or financial condition because during 2002, all excess cash flow from the operations of the John Hancock Properties has been utilized for debt service on their non-recourse mortgage loans. 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. Through an affiliate we hold a 50% ownership interest in the partnership that owns Phase I of the Bellport Outlet Center. Fru-Con and we are each 50% partners 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 do not believe either of these mortgage loans is recourse to us. It is possible, however, that either or both of the respective lenders will file a lawsuit seeking to collect amounts due under the loan. If such an action is brought, the outcome, and our ultimate liability, if any, cannot be predicted at this time. 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 ownership interests in Phase I of the Bellport Outlet Center and the Oxnard Factory Outlet in accordance with the equity method of accounting. As of June 30, 2002, the carrying value of our investment in these properties was $0. 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. Although derivative financial instruments are an important component of our interest rate management program, their incremental effect on interest expense for the three and six months ended June 30, 2002 and 2001 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 Senior Preferred Stock, Series B Convertible Preferred Stock, common stock or common units of limited partnership interest in the Operating Partnership during 2002. As of August 15, 2002, we will be eleven quarters in arrears with respect to preferred stock distributions. Under the terms of the Mezzanine Loan, we are prohibited from paying dividends or distributions except to the extent necessary to maintain our status as a REIT. 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 June 30, 2002, unpaid dividends for the period beginning on November 16, 1999 through June 30, 2002 on the Series A Senior Preferred Stock and Series B Convertible Preferred Stock aggregated $15,848 and $43,666, 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 June 30, 2002 are $6,037 ($2.625 per share) and $16,635 ($2.125 per share), respectively. Development Activities During the six months ended June 30, 2002, we did not engage in any development activities other than (i) post-opening work related to Prime Outlets of Puerto Rico, which opened in July, 2000, and (ii) certain consulting activities in Europe. New Accounting Pronouncements In October 2001, the Financial Accounting Standards Board issued FAS No. 144. FAS No. 144 supercedes FAS 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, FAS 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." FAS No. 144 is effective for fiscal years beginning after December 15, 2001. Effective January 1, 2002 we adopted FAS No. 144. In accordance with the requirements of FAS No. 144, we have classified the operating results, including gains and losses related to disposition, for those properties either disposed of or classified as assets held for sale during 2002 as discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented. See Note 2 - "New Accounting Pronouncements" and "2002 Sales Transactions" and "2002 Foreclosure Sale" in Note 3 - "Property Dispositions" of Notes to Consolidated Financial Statements for additional information. 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 1991, NAREIT adopted its definition of FFO. This definition was clarified in 1995, 1999 and 2002. FFO is currently defined by NAREIT as net income or loss (computed in accordance with GAAP), excluding gains or losses from provisions for asset 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 partnerships and joint ventures and discontinued operations. FFO includes non-recurring events, except for those that are defined as "extraordinary items" in accordance with GAAP. FFO excludes the earnings impact of "cumulative effects of accounting changes" as defined by GAAP. Effective January 1, 2002, FFO related to assets held for sale, sold or otherwise transferred and included in results of discontinued operations (in accordance with the requirements of FAS No. 144) should continue to be included in FFO. 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 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 5 provides a reconciliation of income (loss) from continuing operations before allocations to minority interests and preferred shareholders to FFO for the three and six months ended June 30, 2002 and 2001. FFO decreased $4,875, or 68.4%, to $2,256 for the three months ended June 30, 2002 from $7,131 for the same period in 2001. FFO decreased $5,211, or 36.1%, to $9,219 for the six months ended June 30, 2002 from $14,430 for the same period in 2001. The decrease in FFO for the three and six months ended June 30, 2002 compared to the same periods in 2001 is primarily due to (i) a loss in net operating income, partially offset by interest expense savings, resulting from dispositions of certain properties during the comparable periods, (ii) reduced occupancy in our portfolio during the 2002 periods, (iii) economic changes in rental rates and (iv) the aforementioned non-recurring charge of $3,000 recorded during the second quarter of 2002. The following operating properties were disposed of during 2001 and through June 30, 2002: Property Name Date of Disposition ------------- ------------------- Northgate Plaza February 2, 2001 Silverthorne Center March 16, 2001 New River Center (i) May 8, 2001 Conroe Center January 1, 2002 Hagerstown Center (ii) January 11, 2002 Edinburgh Center April 1, 2002 Bellport Outlet Center (iii) April 19, 2002 Western Plaza June 17, 2002 Notes: (i) Prior to its disposition, we owned 50% of this property through a joint venture partnership and accounted for our ownership interest in accordance with the equity method of accounting. (ii) We sold a 70% ownership interest in this property and now own 30% of this property through a joint venture partnership. Commencing on the date of disposition, we account for our remaining ownership interest in accordance with the equity method of accounting. (iii) Prior to its disposition, we owned 51% of this property through a joint venture partnership and accounted for our ownership interest in accordance with the equity method of accounting. Table 5--Funds from Operations
- ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended June 30, Six Months Ended June 30, ------------------------------ ---------------------------- 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Loss from continuing operations before minority interests $ (20,530) $ (6,047) $ (24,981) $(10,406) Adjustments: Loss (gain) on sale of real estate 703 180 703 (552) Provision for asset impairment 12,200 - 12,200 - Depreciation and amortization 9,531 10,480 19,710 21,001 Non-real estate depreciation and amortization (538) (562) (1,092) (1,130) Other items: Unconsolidated joint venture adjustments 963 1,033 1,746 1,588 Discontinued operations (9,656) (1,196) (3,524) (2,468) Discontinued operations - loss on disposition 8,167 - 997 - Discontinued operations - depreciation and amortization 1,416 3,243 3,460 6,397 --------- -------- --------- -------- FFO before allocations to minority interests and preferred shareholders $ 2,256 $ 7,131 $ 9,219 $ 14,430 ========= ======== ========= ======== Other Data: Net cash provided by operating activities $ 5,268 $ 11,575 $ 9,936 $ 18,160 Net cash provided by (used in) investing activities 9,095 (8,397) 19,671 (4,520) Net cash used in financing activities (15,252) (4,794) (31,943) (18,473) ====================================================================================================================================
Item 3. Quantitative and Qualitative Disclosures of Market Risk Market Risk Sensitivity We are subject to various market risks and uncertainties, including, but not limited to, the effects of current and future economic conditions, and the resulting impact on our revenue; the effects of increases in market interest rates from current levels (see below); the risks associated with existing vacancy rates or potential increases in vacancy rates because of, among other factors, tenant bankruptcies and store closures, 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. Interest Rate Risk In the ordinary course of business, we are exposed to the impact of interest rate changes. We employs established policies and procedures to manage our exposure to interest rate changes. See "Interest Rate Risk" of Item 2 - 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 manage our overall borrowing costs. The following table provides a summary of principal cash flows, excluding (i) unamortized debt premiums of $9,639, (ii) mortgage indebtedness of $111,059 on the Bridge Loan Properties and (iii) non-recourse mortgage indebtedness of $17,768 on Prime Outlets at Jeffersonville II (see "2002 Sales Transactions" and "Defaults on Certain Non-recourse Mortgage Indebtedness" of Item 2 - 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 June 30, 2002.
- ------------------------------------------------------------------------------------------------------------------------------------ Year of Maturity - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2003 2004 2005 2006 Thereafter Total - ------------------------------------------------------------------------------------------------------------------------------------ Fixed Rate: Principal $ 4,574 $ 343,704 $ 7,022 $ 51,147 $ 121,931 $ 102,876 $ 631,254 Average interest rate 7.14% 7.77% 7.20% 7.92% 8.76% 7.54% 7.96% Variable Rate: Principal $ 20,201 $ 34,761 $ 54,962 Average interest rate 14.58% 9.56% 11.41% ====================================================================================================================================
PART II: OTHER INFORMATION Item 1. 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 and the Mikasa Plaintiffs filed a motion for reconsideration, which was denied. The remaining defendants, Prime Retail, Inc. and Prime Retail, L.P., answered the complaint. Subsequent efforts in the litigation were deferred while the parties attempted to resolve their claims through negotiation. As a result of these efforts, the parties entered into a settlement agreement on August 7, 2002 pursuant to which the lawsuit is to be dismissed with prejudice, and all potential claims, including claims and potential counterclaims for overpayments and underpayments of various pass-through charges, arising from the litigation are to be released, with all parties expressly denying liability. Pursuant to the settlement agreement, the Company will make payments to Mikasa over the next two months totaling $2,100, and various leases between Mikasa and its affiliates and the Company will be amended to, among other things, remove the specific provisions that were the primary basis of the dispute and modify remaining provisions concerning the collection of pass-through charges. This settlement, including the related lease modifications, is not expected to have a material impact on the Company's financial condition or results of operations. The Company previously accrued a reserve of $2,000 for this matter during the fourth quarter of 2001, which is included in accounts payable and other liabilities in its Consolidated Balance Sheet as of June 30, 2002. See "Mikasa Settlement" contained in "Liquidity and Capital Resources" of Item 2 - "Management's Discussion of Financial Condition and Results of Operations" for additional information. 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. Subsequent efforts in the litigation were deferred while the parties attempted to resolve their claims through negotiation. As a result of these efforts, the parties have entered into a settlement agreement on August 13, 2002 pursuant to which the lawsuit and any related litigation matters are to be dismissed, or in one instance satisfied, all potential claims and counterclaims are to be released, including claims for overpayments and underpayments of various pass-through charges, and with all parties expressly denying liability. Pursuant to the settlement agreement, no payments will be made to Melru Corporation by the Company, Melru Corporation will satisfy a prior judgment against it, and the leases between Melru Corporation and the Company will be modified, including to provide for extensions of the terms of a limited number of existing leases and the early termination of occupancy at one center. The Company does not expect this settlement, including the related lease modifications, will have a material impact on the Company's financial condition or results of operations. Additionally, numerous other tenants in the Company's portfolio have clauses in their leases pursuant to which they may claim under various circumstances that they were not required to pay some or all of the pass-through charges. Such claims, if asserted and found meritorious, could have a material effect upon the Company's financial condition. Determination of whether liability would exist to the Company from these claims would depend on interpretation of various lease clauses within a tenant's lease and all of the other leases at each center collectively at any given point in time. To date, Designs Inc., Brown Group Retail, Inc. and The Gap, Inc. have made allegations or have indicated to the Company that they are considering making allegations that their leases do not require them to pay some or all of the pass-through charges. The Company is in discussion with these tenants and is working to resolve any disputes with them, including wherever possible, satisfactorily modifying or eliminating clauses that are the source of the continuing disputes. During the second quarter of 2002, the Company recorded a non-recurring charge to establish a reserve in the amount of $3,000 for resolution of these matters, in addition to the Mikasa matter discussed above. This reserve, which is included in accounts payable and other liabilities in the Company's Consolidated Balance Sheet as of June 30, 2002, was estimated in accordance with the Company's established policies and procedures with respect to loss contingencies (see "Critical Accounting Policies and Estimates" of Item 2 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information.) Based on presently available information, the Company believes it is probable this reserve will be utilized over the next several years in connection with the resolution of claims relating to the pass-through and promotional fund provisions contained in its leases. The Company cautions, however, that given the inherent uncertainties of litigation and the complexities associated with a large number of leases and other factual questions at issue, actual costs may vary from its estimate. 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. On July 29, 2002, the Fourth Circuit denied the appeal of AFS. The Company believes that it has acted properly and will continue to defend this lawsuit vigorously if AFS continues with additional appeal efforts. The outcome of this lawsuit if additional appeal efforts of AFS are successful, and the ultimate liability of the defendants, if any, cannot be predicted in that case 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. In spite of such counterclaims, the Company's affiliates usually elect to continue to pursue their collection or eviction actions. Although the Company and its affiliates believe that such counterclaims are typically 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. Briefs were filed and oral arguments were held on June 4, 2002 but a decision has not yet been issued by the Fourth Circuit. 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 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 2. Changes in Securities None Item 3. Defaults Upon Senior Securities The Company is currently in arrears in the payment of distributions on its 10.5% Series A Senior Cumulative Preferred Stock ("Series A Senior Preferred Stock") and 8.5% Series B Cumulative Participating Convertible Preferred Stock ("Series B Convertible Preferred Stock"). As of June 30, 2002, the aggregate arrearage on the Series A Senior Preferred Stock and the Series B Convertible Preferred Stock was $15,848 and $43,666, respectively. Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Shareholders' Meeting held on June 11, 2002, certain matters were submitted to the vote of the holders of the Company's Common Stock. The following summarizes these matters and the results of the voting. (a) The two nominees proposed for Director by the Company were elected. The votes cast for the nominees were as follows: Name For Against ---- --- ------- Governor James R. Thompson 40,032,248 1,307,130 Marvin S. Traub 40,032,248 1,307,130 (b) The proposal to ratify the selection of Ernst & Young LLP as the independent auditors of the Company for the year ending December 31, 2002 was approved. The votes cast with respect to the proposal were as follows: For Against Abstain --- ------- ------- 41,150,383 158,058 30,937 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are included in this Form 10-Q: Exhibit 10.1 Second Amended and Restated Guaranty and Indemnity Agreement dated July 10, 2002 by and among Horizon Group Properties, Inc., Horizon Group Properties, L.P., Prime Retail, Inc. and Prime Retail, L.P. Exhibit 10.2 Guaranty Agreement dated July 10, 2002 by Horizon Group Properties, Inc., Horizon Group Properties, L.P. and Prime Retail, L.P., collectively, as guarantors, in favor of Beal Bank, S.S.B. Exhibit 10.3 Real Estate Sale Agreement, dated January 9, 2002, by and between (i) Shasta Outlet Center Limited Partnership, The Prime Outlets at Calhoun Limited Partnership, Carolina Factory Shops Limited Partnership, Latham Factory Stores Limited Partnership, The Prime Outlets at Lee Limited Partnership, Prime Lee Development Limited Partnership and Buckeye Factory Shops Limited Partnership, collectively, as sellers and (ii) PWG Capital, LLC, as purchaser (incorporated by reference to the Exhibit 10.1 to the Company's Current Report on Form 8-K dated August 8, 2002). Exhibit 10.4 First Amendment to Real Estate Sale Agreement dated March 27, 2002 (incorporated by reference to the Exhibit 10.2 to the Company's Current Report on Form 8-K dated August 8, 2002). Exhibit 10.5 Second Amendment to Real Estate Sale Agreement dated April 5, 2002 (incorporated by reference to the Exhibit 10.3 to the Company's Current Report on Form 8-K dated August 8, 2002). Exhibit 10.6 Amendment to Employment Agreement, dated June 6, 2002, by and between Prime Retail, Inc. and R. Kelvin Antill. Exhibit 10.7 Second Amendment to Employment Agreement, dated June 6, 2002, by and between Prime Retail, Inc. and Robert A. Brvenik. Exhibit 10.8 Amendment to Employment Agreement, dated June 6, 2002, by and between Prime Retail, Inc. and David G. Phillips. Exhibit 10.9 Amendment to Employment Agreement, dated June 6, 2002, by and between Prime Retail, Inc. and Glenn D. Reschke. Exhibit 99.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Reports on Form 8-K: On August 8, 2002, we filed a Current Report on Form 8-K relating to our sale of six outlet centers (collectively, the "Bridge Loan Properties") on July 26, 2002. The filing included unaudited pro forma financial information pursuant to Article 11 of Regulation S-X and certain exhibits, including (i) the real estate sale agreement related to the Bridge L oan Properties and the first and second amendments to the real estate sale agreement and (ii) the Press Release issued July 31, 2002 regarding completion of the sale of the Bridge Loan Properties. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PRIME RETAIL, INC. Registrant Date: August 14, 2002 /s/ Robert A. Brvenik --------------- ------------------------------------- Robert A. Brvenik Executive Vice President, Chief Financial Officer and Treasurer EX-10 3 ex101.txt EXHIBIT 10.1 SECOND AMENDED AND RESTATED GUARANTY SECOND AMENDED AND RESTATED GUARANTY AND INDEMNITY AGREEMENT THIS SECOND AMENDED AND RESTATED GUARANTY AND INDEMNITY AGREEMENT (this "Agreement") is entered into as of this 10th day of July, 2002 by and among Horizon Group Properties, Inc., a Maryland corporation ("HGP"), Horizon Group Properties, L.P. a Delaware limited partnership ("HGP LP"), Prime Retail, Inc., a Maryland corporation ("Prime Retail"), and Prime Retail, L.P., a Delaware limited partnership ("Prime LP"). RECITALS: A. Certain affiliates of HGP and HGP LP borrowed funds pursuant to that certain Loan Agreement dated as of June 15, 1998 among Indiana Factory Shops, L.L.C. ("Indiana LLC"), Nebraska Crossing Factory Shops, L.L.C. ("Nebraska LLC"), Third Horizon Group Limited Partnership ("Third Horizon") and Nomura Asset Capital Corporation, as amended by that certain First Amendment to Loan Agreement dated as of June 1999 among Third Horizon, Nebraska LLC, Indiana LLC and LaSalle Bank National Association (the "Trustee"), as trustee for CDC Depositor Trust ST-I (formerly known as Nomura Depositor Trust ST-I), Commercial Mortgage Pass-Through Certificates, Series 1998-ST-I (the predecessor in interest to CDC Mortgage Capital Inc. and as further amended by that certain Second Amendment to Loan Agreement and Settlement Agreement dated as of July 30, 2001 among Third Horizon, HGP, HGP LP and the Trustee (collectively, the "CDC Loan Agreement"). B. Pursuant to that certain Guaranty dated as of June 15, 1998 (as reaffirmed by that certain Reaffirmation of Guaranty dated as of July 30, 2001, the "CDC Guaranty"), Prime LP agreed to guarantee certain obligations arising under the CDC Loan Agreement and related loan documents. C. Pursuant to that certain Guaranty and Indemnity Agreement dated as of June 15, 1998 (as amended and restated by that certain Amended and Restated Guaranty and Indemnity Agreement dated as of July 30, 2001, the "Guaranty and Indemnity Agreement"), HGP and HGP LP, among other things, agreed, jointly and severally, to indemnify Prime Retail, Prime LP and certain related parties from losses they may incur as a result of the execution and delivery of the CDC Guaranty by Prime LP. D. Prime LP, as the successor to Horizon/Glen Outlet Centers Limited Partnership ("Horizon/Glen LP"), is jointly and severally liable with HGP for any and all obligations arising under that certain promissory note by Horizon/Glen LP in favor of First of America Bank - Michigan, N.A. ("First of America") dated December 28, 1995 in the original principal amount of $2,800,000 (as amended from time to time, together with any other documents or instruments executed and/or delivered in connection with or otherwise related to such note, collectively, the "First of America Loan Documents"). E. Beal Bank, S.S.B., a savings bank organized under the laws of the State of Texas (the "Lender"), has agreed to refinance a portion of the amount outstanding under the CDC Loan Agreement by making a loan (the "Loan") to Monroe Outlet Center L.L.C., a Delaware limited liability company (the "Borrower"), in the maximum principal amount of $7,000,000.00, evidenced by (i) that certain Promissory Note I ("Note I"), of even date herewith, in the stated principal amount of $3,000,000.00 and (ii) that certain Promissory Note II ("Note II"), of even date herewith, in the stated principal amount of $4,000,000.00 (collectively the "Notes"), each secured by instruments including, without limitation, two Mortgages, Security Agreements and Assignments of Leases and Rents (collectively, the "Mortgages"), executed by the Borrower. Such Mortgages, Notes and any other documents executed in connection with the Loan are collectively referred to herein as the "Loan Documents". F. One of the conditions to the Lender's agreement to make the Loan is that Prime LP guarantee (the "Beal Guaranty") to the Lender the full and timely payment of up to $4,000,000 of the duties and obligations of the Borrower under Note II, the Mortgage which encumbers the real property located in Monroe County, Michigan owned by Borrower and the other Loan Documents to the extent they relate to the real property described above, whether or not the Borrower has personal liability thereunder or therefor. G. Concurrent with the making of the Loan, the balance of the amount outstanding under the CDC Loan Agreement will be refinanced or otherwise retired and the CDC Guaranty will be terminated and of no further force and effect. H. In consideration of the agreement of Prime LP to provide the foregoing accommodations, Prime Retail, Prime LP, HGP and HGP LP have agreed to further amend and restate the Guaranty and Indemnity Agreement in its entirety as set forth herein. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE ONE DEFINITIONS Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Loan Documents. ARTICLE TWO REPRESENTATIONS AND WARRANTIES 2.1 Representations and Warranties of HGP and HGP LP. In order to induce Prime LP to enter into the Beal Guaranty and this Agreement, HGP and HGP LP jointly and severally represent and warrant, as of the date hereof, that: (a) HGP is a Maryland corporation duly organized, validly existing and in good standing under the laws of the state of its organization. HGP LP is a Delaware limited partnership duly organized, validly existing and in good standing under the laws of the state of its organization. Each of HGP and HGP LP is qualified to do business and is in good standing under the laws of each jurisdiction in which the nature of its business requires it to be so qualified, (ii) has full power to own and lease its properties and to conduct its business as now being conducted and as contemplated to be conducted in the future, and (iii) has full power and authority and legal right, has taken all necessary corporate and partnership action, as applicable, and has obtained all necessary consents and approvals required by applicable law to permit it to execute, deliver and perform its obligations under this Agreement. This Agreement has been duly and validly authorized, executed and delivered by each of HGP and HGP LP, and constitutes the legal, valid and binding obligations of each of HGP and HGP LP, enforceable against each of HGP and HGP LP in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors rights generally, and to general principles of equity. (b) The execution, delivery and performance of this Agreement by each of HGP and HGP LP do not (i) conflict with or violate the Amended and Restated Articles of Incorporation or other charter documents or By-laws, limited partnership agreement or other organizational documents, as the case may be, of HGP or HGP LP, (ii) contravene or conflict with any law, statute, rule, or regulation applicable to HGP or HGP LP, (iii) contravene or conflict with, result in any breach of, or constitute a default under, any material agreement or instrument binding on HGP or HGP LP, or to which any of their respective properties or assets are subject, (iv) result in or require the creation or imposition of any lien whatsoever upon any of the properties or assets of HGP or HGP LP (other than the liens arising pursuant to this Agreement or any other documents or instruments required or contemplated by this Agreement), or (v) require any approval of stockholders or partners or any approval or consent of any Person under any agreement or instrument binding on HGP or HGP LP or to which any of their respective properties or assets are subject which has not already been obtained. (c) To the best knowledge of HGP and HGP LP, after execution and delivery of the Loan Documents by the parties thereto, no Event of Default has occurred and is continuing. (d) There are no offsets or defenses available to HGP or HGP LP to the payment of any amounts required under the Loan Documents or otherwise to the enforcement by the Lender of the Loan Documents. (e) The outstanding principal balance of the Loan, after giving effect to funding of such Loan, will be approximately $7 million. ARTICLE THREE GUARANTY FEE HGP and HGP LP, jointly and severally, agree to pay Prime LP an annual fee of $60,000 which shall accrue from June 30, 2002 until the date of the termination and unconditional release of any and all obligations under the Beal Guaranty and be payable in equal quarterly installments in arrears on each March 31, June 30, September 30 and December 31, commencing June 30, 2002 (and on the date of termination and release). At such time as Prime LP is no longer liable as a guarantor with respect to any debt obligations of HGP, HGP LP or any of their affiliates, Prime LP will pay to HGP LP an amount equal to the lesser of (i) $60,000 or (b) the amount that HGP and/or HGP LP had previously paid to Prime LP pursuant to this Article Three since June 30, 2002. ARTICLE FOUR COVENANTS RELATING TO GUARANTEES Each of HGP and HGP LP covenants and agrees with Prime Retail and Prime LP that the covenants set forth in this Section 4 will terminate upon the termination and unconditional release of any and all obligations of Prime Retail and Prime LP under the Loan Documents and the First of America Loan Documents and the payment and performance in full of the reimbursement obligations of HGP and HGP LP under this Agreement; provided, that notwithstanding anything to the contrary in the foregoing, the covenants set forth in Sections 4.5 and 4.6 shall not terminate unless and until there also has been an unconditional release of any and all obligations of Prime Retail and Prime LP under the Loan Documents and the First of America Loan Documents and the payment and performance in full of all obligations of HGP and HGP LP under this Agreement in respect thereto. 4.1 Deliveries under Loan Documents. HGP will deliver copies to Prime Retail and Prime LP of any notices or other information delivered or received by HGP or HGP LP under the Loan Documents and the First of America Loan Documents, promptly following the delivery or receipt of such notices or information. HGP and HGP LP will also provide to Prime Retail and Prime LP such other data and information (financial and otherwise) as Prime Retail or Prime LP, from time to time, may reasonably request bearing upon or related to the financial condition, results of operations and credit worthiness of HGP and HGP LP. 4.2 Amendments. Neither HGP nor HGP LP will amend, modify, grant, or permit the amendment, modification, termination or grant of, or any waiver under (or consent to, or permit or suffer to occur any action or omission which results in, or is equivalent to, an amendment, modification, or grant of a waiver under) the Loan Documents or the First of American Loan Documents without the prior written consent of Prime Retail and Prime LP, which consent shall not be unreasonably withheld. 4.3 Refinancings and Releases. HGP and HGP LP hereby agree to use commercially reasonable efforts to obtain the release of Prime Retail and Prime LP from any and all obligations under the First of America Loan Documents as promptly as practicable. 4.4 Application of Excess Proceeds. HGP and HGP LP hereby agree to apply or to cause their subsidiaries to apply any Excess Proceeds first to the payment of any outstanding obligations under Note II (for so long as Prime LP remains liable as a guarantor in respect of such debt) and second to permanently reduce any other indebtedness (including permitted pre-payments of principal amortization) with respect to which Prime Retail or Prime LP is or may be liable as a guarantor, co-obligor or otherwise. "Excess Proceeds" shall mean the aggregate amount of net cash proceeds (after transaction costs and expenses) received by HGP or any of its subsidiaries, including HGP LP, with respect to (i) any financing, refinancing, sale, transfer or other disposition, including a pledge, of the property currently held by any of Lakeshore Marketplace, LLC, Medford Outlet Center LLC, Laughlin Outlet Center LLC or Warrenton Outlet Center LLC or (ii) the issuance of any equity interest; provided, however, "Excess Proceeds" shall not include any such proceeds applied to make mandatory payments in respect of any indebtedness of HGP or HGP LP. 4.5 Restrictions on Distributions. Neither HGP nor HGP LP will (i) declare or pay any cash dividends, (ii) make any cash distributions to any partners, members or shareholders of any of HGP or HGP LP (other than distributions to HGP from HGP LP to fund corporate administrative expenses incurred in the ordinary course of business) or (iii) set aside any funds for any such purpose, other than dividends or distributions in the minimum amount necessary under the Internal Revenue Code of 1986 (the "Code") in order to maintain HGP's status as a real estate investment trust under the Code. 4.6 Pledge Agreement. Each of Prime Retail and Prime LP acknowledge and agree that certain Pledge Agreement, dated as of July 31, 2001, made by HGP and HGP LP in favor of Prime Retail and Prime LP, pursuant to which HGP LP and Third HGI, L.L.C., among other things, pledged to Prime Retail and Prime LP (i) a 99% limited partnership interest in Third Horizon and (ii) a 1% general partnership interest in Third Horizon, shall be deemed terminated and of no further force and effect upon the execution and delivery of this Agreement and the Pledge Agreement. 4.7 Restrictions on Encumbrances. Except only for (i) the liens and security interests arising under the Mortgage and related documents dated July 30, 2001 with Greenwich Capital Financial Products related to the Lakeshore Marketplace center and (ii) the liens and security interests arising under the mortgages and related documents dated of even date herewith with UBS Warburg Real Estate Investments Inc. and each of Medford Outlet Center LLC, Laughlin Outlet Center LLC and Warrenton Outlet Center LLC, without the written consent of Prime LP and Prime Retail, which Prime LP and Prime Retail may withhold in their sole discretion, HGP LP shall not, and HGP and HGP LP shall cause each of Lakeshore Marketplace Finance Company, Inc., Medford Holdings LLC, Laughlin Holdings LLC and Warrenton Holdings LLC not to, execute, cause, allow or suffer any pledge or encumbrance of their limited liability company interests in any of Lakeshore Marketplace, LLC, Medford Outlet Center LLC, Laughlin Outlet Center LLC or Warrenton Outlet Center LLC. 4.8 Notices Regarding Events of Default. HGP and HGP LP will promptly notify Prime Retail and Prime LP of any event or circumstance that is reasonably likely to result in an Event of Default under the Loan Documents or the First of America Loan Documents. ARTICLE FIVE INTENTIONALLY OMITTED ARTICLE SIX CONSENT OF PRIME RETAIL 6.1 Consent. Prime Retail hereby consents to HGP, HGP LP and their affiliates entering into the Loan Documents. ARTICLE SEVEN INDEMNITY 7.1 Indemnity. HGP and HGP LP jointly and severally agree to indemnify, defend, protect and hold Prime Retail and Prime LP and each of the their respective officers, directors and affiliates (collectively, the "Indemnified Parties") harmless from and against, and to pay within ten (10) days after demand, any and all claims, damages, losses, liabilities, judgments, costs and expenses of any kind or nature whatsoever which the Indemnified Parties may incur or suffer by reason of, in connection with, or by virtue of any breach or violation of this Agreement by HGP or HGP LP or by reason of the execution, delivery or performance of, this Agreement, the Beal Guaranty or any other credit enhancement relating to the Loan Documents or the First of America Loan Documents including, without limitation, the reasonable fees and expenses of counsel for the Indemnified Parties with respect thereto. Promptly after receipt by the Indemnified Parties of notice of the commencement, or threatened commencement, of any action subject to the indemnities contained in this Section, the Indemnified Parties shall promptly notify HGP thereof, provided, however, that the failure of any Indemnified Party so to notify HGP will not affect the obligation of HGP and HGP LP to indemnify the Indemnified Parties with respect to such actions or any other action pursuant to this Section except to the extent such obligation shall have been incurred solely and as a direct consequence of such failure. The obligations of HGP and HGP LP under this Section shall survive forever, regardless of the termination of this Agreement or the payment in full of all of HGP and HGP LP's obligations hereunder. To the extent that the undertaking to indemnify, defend, protect and hold harmless set forth herein may be unenforceable as violative of any law or public policy, HGP and HGP LP agree to pay the maximum portion which is permitted to be paid under applicable law. Any amounts unpaid following demand pursuant to this Section shall accrue interest at a rate of 12% per annum. ARTICLE EIGHT MISCELLANEOUS 8.1 Modification of this Agreement. No amendment, modification or waiver of any provision of this Agreement shall be effective unless the same shall be in writing and signed by Prime Retail, Prime LP, HGP and HGP LP. Any such waiver or consent shall be effective only in the specific instance and for the purpose for which given. 8.2 Waiver of Rights by Prime Retail and Prime LP. No course of dealing or failure or delay on the part of Prime Retail or Prime LP in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise or the exercise of any other right or privilege. The rights of Prime Retail and Prime LP under this Agreement are cumulative and not exclusive of any rights or remedies which Prime Retail or Prime LP would otherwise have, including, without limitation, any rights of subrogation. 8.3 Severability. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 8.4 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF MARYLAND, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICT OF LAWS THEREOF. 8.5 Notices All notices or other communications required or permitted hereunder shall be (i) in writing and shall be deemed to be given (A) when received, if delivered in person, (B) three business days after deposit in a receptacle of the United States mail as registered or certified mail, postage prepaid, (C) the business day after notice on which the party to whom such notice is addressed refuses delivery by mail or by private courier service and (ii) addressed as follows: If to HGP or HGP LP Horizon Group Properties, Inc. 5000 Hakes Drive Norton Shores, MI 49411 Attn: President with a copy to: Schiff, Hardin & Waite 6600 Sears Tower Chicago, IL 60606-6473 Attn: David Grossberg, Esq. If to Prime Retail or Prime Retail, Inc. Prime LP 100 East Pratt Street 19th Floor Baltimore, MD 21202 Attn: R. Kelvin Antill with a copy to: Winston & Strawn 35 W. Wacker Drive Chicago, IL 60601 Attn: Steven J. Gavin 8.6 Waiver of Offset and Counterclaim. HGP and HGP LP hereby waive any and all rights of offset or counterclaim which HGP and HGP LP may otherwise have against Prime Retail and Prime LP in connection with the enforcement of their rights hereunder. 8.7 Joint and Several Liability. The obligations of HGP and HGP LP hereunder shall be joint and several. Neither Prime Retail nor Prime LP shall not obligated to exercise any right or take any action against either HGP or HGP LP prior to the enforcement of its rights against the other. 8.8 Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any federal court located in Maryland this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (a) consents to submit itself (without making such submission exclusive) to the personal jurisdiction of any federal court located in Maryland in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement and (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court. 8.9 Entire Agreement. This Agreement (including the exhibits attached hereto) contains the entire agreement among the parties hereto with respect to the transactions contemplated hereunder, and supercedes all negotiations, representations, warranties, commitments, offers, contracts and writings prior to the date hereof including without limitation the original Guaranty and Indemnity Agreement and the amended and restated Guaranty and Indemnity Agreement. [signature page follows] IN WITNESS WHEREOF the parties hereto have executed this instrument as of the date and year first above written. HORIZON GROUP PROPERTIES, INC. By: /s/ ______________ Its: President HORIZON GROUP PROPERTIES, L.P. By: HORIZON GROUP PROPERTIES, INC. By: /s/ ______________ Its: President PRIME RETAIL, INC. By: /s/ Glenn D. Reschke Its: President, Chief Executive Officer PRIME RETAIL, L.P. By: PRIME RETAIL, INC. By: /s/ Glenn D. Reschke Its: President, Chief Executive Officer EX-10 4 ex102.txt EXHIBIT 10.2 GUARANTY AGREEMENT GUARANTY AGREEMENT THIS GUARANTY AGREEMENT ("Guaranty") is made as of the 10th day of July, 2002, by the undersigned (hereinafter referred to individually as "Guarantor" and collectively as "Guarantors"), in favor of BEAL BANK, S.S.B., a savings bank organized under the laws of the State of Texas ("Lender"). W I T N E S S E T H: A. Lender has agreed to make a loan (the "Loan") to MONROE OUTLET CENTER,LLC, a Michigan limited liability company ("Borrower"), in the maximum principal amount of $7,000,000.00, evidenced by (i) that certain Promissory Note I ("Note I"), of even date herewith, in the stated principal amount of $3,000,000.00 and (ii) that certain Promissory Note II ("Note II"), of even date herewith, in the stated principal amount of $4,000,000.00 (collectively the "Notes"), each secured by instruments including, without limitation, two Commercial Mortgages (collectively, the "Mortgages"), executed by Borrower, which Notes and Mortgages are being executed and delivered by Borrower to Lender contemporaneously herewith. B. One of the conditions to Lender's agreement to make the Loan is that Guarantors guarantee to Lender the full and timely payment of the Loan and the performance and payment of all debts, duties and obligations of Borrower under the Notes, the Mortgages, and the other documents executed in connection with the Loan (collectively, the "Loan Documents"), whether or not Borrower has personal liability thereunder or therefor. NOW, THEREFORE, as a material inducement to Lender to make the Loan to Borrower, and for further good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, each Guarantor does hereby, unconditionally, irrevocably and absolutely, jointly and severally, warrant and represent to and covenant and agree with Lender as follows: 1. Guaranty of Obligation. (a) Each Guarantor unconditionally, irrevocably and absolutely, jointly and severally, guarantees to Lender (i) that all obligations and indebtedness evidenced by or provided in the Notes, the Mortgages and the other Loan Documents will be promptly paid when due and in accordance with the terms and provisions thereof (and as they may be amended, extended or renewed from time to time), and (ii) the prompt and full payment, performance and observance, when due, of all other indebtedness, liabilities, obligations and duties of every kind and character of Borrower to Lender relating in any way to the Loan, whether absolute or contingent, joint or several, secured or unsecured, due or not due, contractual or tortious, liquidated or unliquidated, arising by operation of law or otherwise, direct or indirect, relating in any way to the Loan, and including, but not limited to, any debt, obligation or liability of Borrower to Lender as a member of any partnership, syndicate, association or other group, or whether incurred by Borrower as principal, surety, endorser, accommodation party or otherwise; including, without limitation, interest on all of the above amounts as agreed upon between Borrower and Lender, or if there is no agreement, at the highest lawful rate, and any and all renewals, extensions and rearrangements of all or any part of the indebtedness, obligations and liabilities hereinabove described. Notwithstanding anything contained in this Guaranty to the contrary, (i) the liability of Prime Retail, L.P. as a Guarantor, is limited tothe maximum amount of (x) $4,000,000.00 (the "Guaranty Amount"), (y) is with regard only to the payment and performance of the obligations of the Borrower in regard to Note II and the Mortgage which encumbers the real property located in Monroe County, Michigan which is described on Exhibit "A" attached hereto and the other Loan Documents to the extent they relate to the real property described on Exhibit "A" attached hereto and (z) shall arise only upon the occurrence of an Event of Default under Note II which shall be solely the result of Borrower's failure to pay any installment of principal and/or interest due under Note II as and when the same becomes due and such failure shall continue beyond the expiration of any cure or grace period, if any is applicable, under Note II, (ii) the Guaranty Amount shall be reduced by the amount of any principal payments made upon any of the indebtedness evidenced by Note I derived from the Property (as defined in the Mortgage entered into in connection with Note II), (iii) once the principal balance of the Loan is reduced to $5,000,000.00, Prime Retail, L.P. will have no further liability as a Guarantor. The foregoing limitation of liability applies only to Prime Retail, L.P. and no other Guarantors, whether now or hereafter owned by or merged into the Prime Retail, L.P. Following written request from Borrower to Lender given subsequent to the date Prime Retail, L.P. has no further liability hereunder, Lender will so confirm in writing. This agreement of Lender is solely for the benefit of Prime Retail, L.P. (b) All indebtedness, duties, obligations and liabilities described above or otherwise covered by this Guaranty, or intended so to be, are hereinafter sometimes collectively referred to as the "Guaranteed Indebtedness". 2. Continuing Guaranty. This is a continuing guaranty and shall continue to apply without regard to the form or amount of Guaranteed Indebtedness which Borrower may create, renew, extend or alter in whole or in part, without notice to Guarantors. The circumstance that at any time or from time to time the Guaranteed Indebtedness may be paid or performed in full shall not affect the obligation of Guarantors with respect to Guaranteed Indebtedness of Borrower to Lender incurred or arising thereafter. 3. Liability for Other Indebtedness. If any Guarantor is or becomes liable for any indebtedness owing by Borrower to Lender by endorsement or otherwise than under this Guaranty, such liability shall not be in any manner impaired or affected hereby, and the rights of Lender hereunder shall be cumulative of any and all other rights that Lender may ever have against Guarantors. The exercise by Lender of any right or remedy hereunder or under any other instrument, or at law or in equity, shall not preclude the concurrent or subsequent exercise of any other right or remedy. Without in any way diminishing the generality of the foregoing, it is specifically understood and agreed that this Guaranty is given by each Guarantor as an additional guaranty to any and all other guaranties heretofore or hereafter executed and delivered to Lender by any Guarantor in favor of Lender relating to indebtedness of Borrower to Lender, and nothing herein shall ever be deemed to replace or be in lieu of any other of such previous or subsequent guaranties. 4. No Release From Obligations. The obligations, covenants, agreements and duties of Guarantors under this Guaranty shall not be released or impaired in any manner whatsoever, without the written consent of Lender, on account of any or all of the following: (a) any assignment, endorsement or transfer, in whole or in part, of the Guaranteed Indebtedness, although made without notice to or the consent of any Guarantor; (b) any waiver by Lender of the performance or observance by Borrower or any Guarantor of any of the agreements, covenants, terms or conditions contained in any document evidencing, governing or securing the Guaranteed Indebtedness; (c) any extension of the time for payment or performance of all or any portion of the Guaranteed Indebtedness; (d) the renewal, rearrangement, modification or amendment (whether material or otherwise) of any duty, agreement or obligation of Borrower set forth in any document evidencing, governing or securing any of the Guaranteed Indebtedness; (e) the voluntary or involuntary liquidation, sale or other disposition of all or substantially all of the assets of Borrower or any Guarantor; (f) any receivership, insolvency, bankruptcy, reorganization or other similar proceedings or lack of corporate power, affecting Borrower or any Guarantor or any of the assets of Borrower or any Guarantor; (g) any release, withdrawal, surrender, exchange, substitution, subordination or loss of any security or other guaranty at any time existing in connection with all or any portion of the Guaranteed Indebtedness, or the acceptance of additional or substitute property as security therefor; (h) the release or discharge of Borrower or any other obligor from the observance or performance of any agreement, covenant, term or condition contained in any document evidencing, governing or securing any of the Guaranteed Indebtedness; (i) any action which Lender may take or omit to take by virtue of any document evidencing, governing or securing any of the Guaranteed Indebtedness or through any course of dealing with Borrower; (j) the addition of a new guarantor or guarantors; (k) the operation of law or any other cause, whether similar or dissimilar to the foregoing; (l) any adjustment, indulgence, forbearance or compromise that may be granted or given by Lender to any party; (m) the failure by Lender to file or enforce a claim against the estate (either in administration, bankruptcy or other proceeding) of Borrower or any other person or entity; (n) if the recovery from Borrower or any other person or entity (including, without limitation, any other Guarantor) becomes barred by any statute of limitations or is otherwise prevented; (o) any defenses, set-offs or counterclaims which may be available to Borrower or any other person or entity (including, without limitation, any other Guarantor); (p) any impairment, modification, change, release or limitation of liability of, or stay of actions of lien enforcement proceedings against, Borrower, any Guarantor, the property of Borrower or any Guarantor, or the estate in bankruptcy of Borrower or any Guarantor resulting from the operation of any present or future provision of the Bankruptcy Code or any other similar federal or state statute, or from the decision of any court; or (q) any neglect, delay, omission, failure or refusal of Lender to take or prosecute any action for the collection of any of the Guaranteed Indebtedness or to foreclose or take or prosecute any action in connection with any lien, security interest or other right of security (including perfection thereof), existing or to exist in connection with, or as security for, any of the Guaranteed Indebtedness, it being the intention hereof that each Guarantor shall remain liable as principal on the Guaranteed Indebtedness, notwithstanding any act, omission or thing which might, but for the provisions hereof, otherwise operate as a legal or equitable discharge of such Guarantor. Guarantors hereby expressly waive all rights of Guarantors arising under Section 34.02 of the Texas Business and Commerce Code, as amended (regarding the right to require Lender to sue Borrower on an accrued right of action following written notice to Lender), Section 17.001 of the Texas Civil Practice and Remedies Code, as amended (allowing suit against any Guarantor without suit against Borrower, but precluding entry of judgment against any Guarantor before entry of judgment against Borrower), and Rule 31 of the Texas Rules of Civil Procedure, as amended (requiring Lender to join Borrower in any suit against any Guarantor unless judgment has been previously entered against Borrower). 5. Payment and Performance of Obligations. If an Event of Default, as defined in the Mortgage, occurs, Guarantors shall, without notice or demand, and without any notice having been given to Guarantors of the acceptance by Lender of this Guaranty and without any notice having been given to Guarantors of the creating or incurring of such indebtedness, pay the Guaranteed Indebtedness due thereon to Lender, at its office in Plano, Texas, or at such other place as may be designated in writing by Lender, and it shall not be necessary for Lender, in order to enforce such payment by Guarantors, first, to institute suit or exhaust its remedies against Borrower or others liable on such Guaranteed Indebtedness, or to enforce its rights against any security which shall ever have been given to secure such Guaranteed Indebtedness. 6. Waiver of Notice. Notice to Guarantors of the acceptance of this Guaranty and of the making, renewing or assignment of the Guaranteed Indebtedness and each item thereof, are hereby expressly waived by each Guarantor. 7. Payments by Borrower. Each payment on the Guaranteed Indebtedness shall be deemed to have been made by Borrower unless express written notice is given to Lender at the time of such payment that such payment is made by Guarantor(s) as specified in such notice. 8. Releases and Waivers. If all or any part of the Guaranteed Indebtedness at any time is secured, Guarantors agree that Lender may at any time and from time to time, at its discretion and with or without valuable consideration, allow substitution or withdrawal of collateral or other security and release collateral or other security without impairing or diminishing the obligations of Guarantors hereunder. Guarantors further agree that if Borrower executes in favor of Lender any collateral agreement, deed of trust or other security instrument, including, without limitation, the Mortgages, the exercise by Lender of any right or remedy thereby conferred on Lender shall be wholly discretionary with Lender, subject, however, to all applicable notice and opportunity to cure provisions set forth in the Loan Documents, and that the exercise or failure to exercise any such right or remedy shall in no way impair or diminish the obligations of Guarantors hereunder. Guarantors further agree that Lender shall not be liable for its failure to use diligence in the collection of any of the Guaranteed Indebtedness or in preserving the liability of any person liable on the Guaranteed Indebtedness, and Guarantors hereby waive presentment for payment, notice of nonpayment, protest and notice thereof, notice of acceleration, and diligence in bringing suits against any person liable on the Guaranteed Indebtedness, or any part thereof. 9. No Release of Guarantors. If the Guaranteed Indebtedness at any time exceeds the amount permitted by law, or Borrower is not liable because the act of creating the Guaranteed Indebtedness is ultra vires, or the officers or persons creating the Guaranteed Indebtedness acted in excess of their authority, or for any other reason, and for any of these reasons the Guaranteed Indebtedness which Guarantors agree to pay cannot be enforced against Borrower, such fact shall in no manner affect any Guarantor's liability hereunder, but each Guarantor shall be liable under this Guaranty notwithstanding that Borrower is not liable for the Guaranteed Indebtedness, to the same extent Guarantors would have been liable if the Guaranteed Indebtedness had been enforceable against Borrower. 10. Optional Acceleration. In the event of the dissolution or insolvency of Borrower, or the inability of Borrower to pay its debts as they mature, or an assignment by Borrower for the benefit of creditors, or the institution of any proceedings by or against Borrower under the federal bankruptcy laws alleging that Borrower is insolvent or unable to pay its debts as they mature, or if any of the foregoing events occur with respect to any Guarantor, and if such event shall constitute an Event of Default, as defined in the Mortgage, and shall occur at a time when any of the Guaranteed Indebtedness may not then be due and payable, such Guaranteed Indebtedness, at the option of Lender, shall thereupon be deemed to be immediately due and payable in full, and any Guarantor shall pay to Lender forthwith the full amount which would be payable hereunder if all Guaranteed Indebtedness were then due and payable. 11. Successors and Assigns. This Guaranty is for the benefit of Lender, its successors and assigns, and in the event of an assignment by Lender, or its successors or assigns, of the Guaranteed Indebtedness, or any part thereof, the rights and benefits hereunder, to the extent applicable to the indebtedness so assigned, may be transferred with such indebtedness. 12. Modifications and Waivers; Cumulative Rights. No modification, consent, amendment or waiver of any provision of this Guaranty, nor consent to any departure by any Guarantor therefrom, shall be effective unless the same shall be in writing and signed by an authorized officer of Lender, and then shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any Guarantor in any case shall, of itself, entitle any Guarantor to any other or further notice or demand in similar or other circumstances. No delay or omission by Lender in exercising any power or right hereunder shall impair any such right or power or be construed as a waiver thereof or any acquiescence therein, nor shall any single or partial exercise of any such power preclude other or further exercise thereof, or the exercise of any other right or power hereunder. All rights and remedies of Lender hereunder are cumulative of each other and of every other right or remedy which Lender may otherwise have at law or in equity or under any other contract or document, and the exercise of one or more rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of other rights or remedies. In this Guaranty, whenever the context so requires, the singular number includes the plural, and conversely. 13. Compliance with Laws. No provision herein or in any promissory note, instrument or any other loan document executed by Borrower or any Guarantor evidencing, governing or securing the Guaranteed Indebtedness shall require the payment or permit the collection of interest in excess of the maximum permitted by law. If any excess interest in such respect is provided for herein or in any such promissory note, instrument, or any other Loan Document, the provisions of this paragraph shall govern, and neither Borrower nor any Guarantor shall be obligated to pay the amount of such interest to the extent that it is in excess of the amount permitted by law. The intention of the parties is to conform strictly to the usury laws now in force, and all promissory notes, instruments and other loan documents executed by Borrower or Guarantors evidencing the Guaranteed Indebtedness shall be held subject to reduction of the interest charged to the amount allowed under said usury laws as now or hereafter construed by the courts having jurisdiction. 14. Benefit to Guarantors. Each Guarantor acknowledges and warrants that such Guarantor has derived or expects to derive financial and other advantage and benefit, directly or indirectly, from the Guaranteed Indebtedness and each and every advance thereof and from each and every renewal, extension, release of collateral or other relinquishment of legal rights made or granted or to be made or granted by Lender to Borrower. 15. Attorney's Fees and Collection Costs. If any Guarantor should breach or fail to perform any provision of this Guaranty, Guarantors agree to pay to Lender all reasonable costs and expenses (including court costs and reasonable attorneys' fees to the extent enforceable under the laws of the State of Texas) incurred by Lender in the enforcement hereof. 16. Guarantor's Warranties. Each Guarantor hereby severally, but not jointly, warrants and represents unto Lender the following except that Prime Retail, L.P. makes no representations or warranties with respect to clauses (b) and (d) of this Section 16 and Horizon Group Properties, Inc. and Horizon Group Properties, Ltd. make no representations or warranties with respect to clause (e) of this Section 16: (a) Each Guarantor has received or will receive, direct or indirect benefit from the making of this Guaranty; (b) Each and every warranty and representation made by Borrower in the Loan Documents is true and correct; (c) This Guaranty constitutes a legal, valid and binding obligation of each Guarantor, and is fully enforceable against each Guarantor in accordance with its terms; (d) Any and all balance sheets, net worth statements and other financial data that have heretofore been given to Lender with respect to Guarantors (other than Prime Retail, L.P.) fairly present the financial condition of such Guarantors as of the date(s) thereof and, since the date(s) thereof, there has been no material, adverse change in the financial condition of any such Guarantor; (e) The financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2001, as amended, and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (together, the "34 Act Reports") filed by Prime Retail, Inc., a Maryland corporation, pursuant to the Securities Exchange Act of 1934, as amended, are true and complete in all material respects; (f) Except as may be set out on Exhibit "B" attached hereto and made a part hereof for all purposes and, with respect only to the representation and warranty made by Prime Retail, L.P. pursuant to this Section 16 (f), except as disclosed in the 34 Act Reports or except as would, individually or in the aggregate, not have a material adverse effect on the business or results of operations of Prime Retail, L.P., (i) there are no legal proceedings, claims or demands pending against, or to the knowledge of any Guarantor, threatened against, any Guarantor or any Guarantor's assets, (ii) no Guarantor is in breach or default of any legal requirement, contract or commitment, and (iii) no event (including specifically Guarantors' execution and delivery of this Guaranty) has occurred which, with the lapse of time or action by a third party, could result in any Guarantor's breach or default under any legal requirement, contract or commitment; and (g) Each Guarantor hereby agrees to furnish to Lender from time to time, and as required by the Mortgages, promptly upon request therefor, current financial reports and statements setting out in complete and accurate detail each Guarantor's financial condition at the time of such request, containing such information as Lender may reasonably request, and prepared in accordance with generally accepted accounting principles consistently applied or in other form acceptable to Lender, in the exercise of its reasonable discretion. 17. Subordination and No Subrogation. If, for any reason whatsoever, Borrower now or hereafter becomes indebted to any Guarantor, such indebtedness and all interest thereon, shall, at all times, be subordinate in all respects to the Loan, the other Guaranteed Indebtedness and each of the Loan Documents, and no Guarantor shall be entitled to enforce or receive payment thereof until the Guaranteed Indebtedness has been fully paid and satisfied. Notwithstanding anything to the contrary contained in this Guaranty or any payments made by any Guarantor hereunder, no Guarantor shall have any right of subrogation in or under the Loan Documents or to participate in any way therein, or any right, title or interest in and to any mortgaged property or any collateral for the Guaranteed Indebtedness, all such rights of subrogation and participation being hereby expressly waived and released, until the Guaranteed Indebtedness has been fully paid and satisfied. 18. Law Governing and Jurisdiction. This Guaranty shall be governed by and construed in accordance with the laws of the State of Texas and is performable in Collin County, Texas. 19. Severability. If any provision of this Guaranty or the application thereof to any person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, neither the remainder of this Guaranty nor the application of such provision to any other person or circumstance shall be affected thereby, but rather the same shall be enforced to the greatest extent permitted by law. 20. Counterparts. This Guaranty may be executed in multiple counterparts, each of which shall be an original, but all of which shall constitute but one instrument. 21. Paragraph Headings. The paragraph headings inserted in this Guaranty have been included for convenience only and are not intended, and shall not be construed, to limit or define in any way the substance of any paragraph contained herein. 22. Compounding and Settlement. Each Guarantor agrees that Lender, in its discretion, may (i) bring suit against Guarantors and any other obligor for any of the Loan jointly and severally or against any one or more of them, (ii) compound or settle with any one or more of the Guarantors and any other obligor for any of the Loan for such consideration as the Lender may deem proper, and (iii) release one or more of the Guarantors and any other obligor for any of the Loan from liability hereunder or otherwise in regard to the Guaranteed Indebtedness, and that no such action shall impair the rights of Lender to collect the Guaranteed Indebtedness (or the unpaid balance thereof) from Guarantors and any other obligor for any of the Loan, or any of them, not so sued, settled with or released. 23. Consent to Jurisdiction. Each Guarantor hereby irrevocably submits, for such Guarantor and in respect of such Guarantor's property, generally and unconditionally, at the election of Lender, to the jurisdiction of the courts of the State of Texas or of the United States of America for the State of Texas over any suit, action or proceeding arising out of or relating to this Guaranty. Each Guarantor irrevocably waives, to the fullest extent permitted by law, any objection which such Guarantor may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court that such suit has been brought in an inconvenient forum. Each Guarantor agrees that final judgement in any such suit, action or proceeding brought in any such court shall be conclusive and binding upon such Guarantor and may be enforced in the courts of Texas by a suit upon such judgment, a certified or exemplified copy of which shall be conclusive evidence of the fact and of the amount of such Guarantor's indebtedness, provided that service of process is effected upon such Guarantor in one of the manners specified herein or as otherwise permitted by law. 24. Service of Process. Each Guarantor hereby irrevocably consents to process being served in any suit, action or proceeding hereunder (a) by serving a copy thereof upon Borrower and/or the Secretary of State of the State of Texas, as such Guarantor's agents for service of process (provided a copy shall be mailed by registered or certified mail, postage prepaid, return receipt requested, to such Guarantor at its address specified below, or to any other address which such Guarantor shall have designated by written notice to Lender), or (b) if such service is impossible or impracticable in the sole judgment of the party serving such process, by the mailing of a copy thereof by registered or certified mail, postage prepaid, return receipt requested, to such Guarantor at its address set forth below or to any other address within the continental United States to which certified or registered mail may be sent which such Guarantor shall have designated by written notice to Lender. Each Guarantor irrevocably waives, to the fullest extent permitted by law, all claims of error by reason of any such service and agrees that such service (i) shall be deemed in every respect effective service of process upon such Guarantor in any such suit, action or proceeding, and (ii) shall, to the fullest extent permitted by law, be taken and held to be valid personal service upon personal delivery to such Guarantor. Nothing in this section shall affect the rights of Lender to serve process in any manner permitted by law or limit the right of Lender to bring proceedings against Guarantors in the competent courts of any jurisdiction or jurisdictions. EXECUTED AND DELIVERED on the date first above recited. GUARANTORS: ADDRESS FOR NOTICE: HORIZON GROUP PROPERTIES, INC. 77 West Wacker Drive, Suite 4200 Chicago, Illinois 60601 By: /s/ David Tinkham Name: David Tinkham Title: CFO ADDRESS FOR NOTICE: HORIZON GROUP PROPERTIES, L.P. By: Horizon Group Properties, Inc., General Partner 77 West Wacker Drive, Suite 4200 Chicago, Illinois 60601 By: /s/ David Tinkham Name: David Tinkham Title: CFO ADDRESS FOR NOTICE: PRIME RETAIL, L.P. By: Prime Retail, Inc., its sole General Partner 100 E. Pratt Street 19th Floor Baltimore, Maryland 21202 By: /s/ Glenn D. Reschke Name: Glenn D. Reschke Title: President, Chief Executive Officer ACKNOWLEDGMENT STATE OF Illinois COUNTY OF Cook This instrument was acknowledged before me on this the 11th day of July, 2002, by David K. Tinkham, as CFO of HORIZON GROUP PROPERTIES, INC., a Maryland corporation, on behalf of such corporation. /s/ Sherry L. Sickles Notary Public in and for the State of Illinois My Commission Expires: September 14, 2002 ACKNOWLEDGMENT STATE OF Illinois COUNTY OF Cook This instrument was acknowledged before me on this the 11th day of July, 2002, by David K. Tinkham, as CFO of Horizon Group Properties, Inc., as General Partner of HORIZON GROUP PROPERTIES, LTD., a Delaware limited partnership, on behalf of such limited partnership. /s/ Sherry L. Sickles Notary Public in and for the State of Illinois My Commission Expires: September 14, 2002 ACKNOWLEDGMENT STATE OF MARYLAND CITY OF BALTIMORE This instrument was acknowledged before me on this the 11th day of July, 2002, by Glenn D. Reschke, as President and CEO of Prime Retail, Inc., the sole General Partner of PRIME RETAIL, L.P., a Delaware limited partnership, on behalf of such limited partnership. /s/ Gail Steptoe Notary Public in and for the State of Maryland EXHIBIT "A" Litigation EXHIBIT "B" Monroe County, Michigan Property EX-10 5 ex106.txt EXHIBIT 10.6 AMENDMENT TO E A BY R. KELVIN ANTILL AMENDMENT TO EMPLOYMENT AGREEMENT The EMPLOYMENT AGREEMENT (the "Agreement"), dated as of March 21, 2002, 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 R. Kelvin Antill (the "Executive"), is amended by this Amendment, effective June 6, 2002 (unless otherwise noted herein) in the following respects: 1. Section 2 of the Agreement is hereby deleted in its entirety and replaced with the following: 2. Term. ---- The term of this Agreement, unless earlier terminated in accordance with the terms of this Agreement, will extend to June 6, 2005 (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)(E) 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." 2. Section 3(a) of the Agreement is hereby deleted in its entirety and replaced with the following: (a) Base Salary. For the period beginning June 10, 2002 and extending throughout the Term of this Agreement, the Operating Partnership agrees to pay to Executive a base salary in an aggregate amount of $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. 3. The last sentence of Section 3(b), "Performance Bonus," is hereby deleted in its entirety and replaced with the following: 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 on the earlier of (x) 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 or (y) February 28 (or the next business day) of the year immediately following the end of the calendar year for which such Performance Bonus is attributable. 4. A new Section 3(g) is hereby added to the Agreement as follows: (g) Stock Options. As additional consideration for Executive's employment hereunder, as of June 6, 2002 (the "Date of Grant"), Prime granted Executive an option (the "Option") to purchase 250,000 shares of Prime's common stock, par value $0.01 per share (the "Common Stock"). The purchase price per share was $0.11 (the "Exercise Price"). The Option is subject to the terms and conditions contained in the Stock Award Agreement entered into between Prime and Executive, which terms include: (i) the Option will have a term of ten years measured from the date of grant; (ii) the greatest portion of the Option shares allowable will be issued as incentive stock options (as determined on a prorated basis for all recipients of option awards on June 6, 2002); (iii) the Option shares will vest and become exercisable as follows: 1/3 will vest upon the first anniversary of the Date of Grant, 1/3 will vest upon the second anniversary of the Date of Grant, and 1/3 will vest upon the third anniversary of the Date of Grant, assuming Executive's employment with Prime continues through such dates; (iv) the Option will remain exercisable for 30 days following termination of Executive for Cause, and in the event of Executive's termination of employment for any other reason the Option will remain exercisable for 90 days; and (v) upon Executive's resignation for Good Reason or termination without Cause (each as herein defined and without regard to whether a Change of Control has occurred) during the Term of this Agreement, the entire Option, in addition to all other outstanding options awarded by Prime to Executive, will become fully vested and exercisable, to the extent not previously exercised. Prime will take all steps necessary to ensure that all options held by Executive survive any Change of Control. 5. Subparagraph 4(d)(2) of the Agreement is hereby deleted in its entirety and replaced with the following: (2) a termination payment in an amount equal to two times the One-Year Pay Equivalent, which amount shall be payable within thirty (30) days of the effective date of termination; 6. The following sentence is hereby added at the end of Section 4(d): The termination benefits pursuant to subsections (a) to (d) of this Section 4 are mutually exclusive, and Executive shall not be entitled to seek termination benefits under more than one such subsection (other than as described in the last paragraph of Section 4(a)(1)). 7. This Amendment may be executed in one or more counterparts which taken together shall constitute one and the same instrument. EXECUTIVE: - ------------------------------ R. Kelvin Antill PRIME RETAIL, INC., a Maryland corporation PRIME RETAIL, L.P., a Delaware limited partnership By:___________________________ By: Prime Retail, Inc. Name:_________________________ Its: Sole General Partner Title:________________________ By:____________________________ Name:__________________________ Title:_________________________ EX-10 6 ex107.txt EXHIBIT 10.7 2ND AMDMT TO EA BY ROBERT A. BRVENIK SECOND 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 A. Brvenik (the "Executive"), as amended by the first Amendment thereto, effective April 2, 2001, is further amended by this Second Amendment, effective June 6, 2002 (unless otherwise noted herein) in the following respects: 1. Section 1 of the Agreement is hereby deleted in its entirety and replaced with the following: 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 President, Chief Financial Officer and Treasurer of the Company on the terms and conditions provided in this Agreement. Executive shall serve in such positions and Executive shall exercise such powers and authority as are customarily inherent in 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. Executive will report directly and exclusively to the Company's 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. 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. Section 2 of the Agreement is hereby deleted in its entirety and replaced with the following: 2. Term. ---- The term of this Agreement, unless earlier terminated in accordance with the terms of this Agreement, will extend to June 6, 2005 (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)(E) 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. Section 3(a) of the Agreement is hereby deleted in its entirety and replaced with the following: (a) Base Salary. For the period beginning January 1, 2002 and extending throughout the Term of this Agreement, the Operating Partnership agrees to pay to Executive a base salary in an aggregate amount of Four Hundred Thousand Dollars ($400,000) 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. 4. The last sentence of Section 3(b), "Performance Bonus," is hereby deleted in its entirety and replaced with the following: 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 on the earlier of (x) 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 or (y) February 28 (or the next business day) of the year immediately following the end of the calendar year for which such Performance Bonus is attributable. 5. The following paragraph shall be added at the end of Section 3(g), "Stock Options": As additional consideration for Executive's employment hereunder, as of June 6, 2002 (the "Date of Grant"), Prime granted Executive an option (the "Option") to purchase 500,000 shares of Prime's common stock, par value $0.01 per share (the "Common Stock"). The purchase price per share was $0.11 (the "Exercise Price"). The Option is subject to the terms and conditions contained in the Stock Award Agreement entered into between Prime and Executive, which terms include: (i) the Option will have a term of ten years measured from the date of grant; (ii) the greatest portion of the Option shares allowable will be issued as incentive stock options (as determined on a prorated basis for all recipients of option awards on June 6, 2002); (iii) the Option shares will vest and become exercisable as follows: 1/3 will vest upon the first anniversary of the Date of Grant, 1/3 will vest upon the second anniversary of the Date of Grant, and 1/3 will vest upon the third anniversary of the Date of Grant, assuming Executive's employment with Prime continues through s uch dates; (iv) the Option will remain exercisable for 30 days following termination of Executive for Cause, and in the event of Executive's termination of employment for any other reason the Option will remain exercisable for 90 days; and (v) upon Executive's resignation for Good Reason or termination without Cause (each as herein defined and without regard to whether a Change of Control has occurred) during the Term of this Agreement, the entire Option, in addition to all other outstanding options awarded by Prime to Executive, will become fully vested and exercisable, to the extent not previously exercised. Prime will take all steps necessary to ensure that all options held by Executive survive any Change of Control. 6. Subparagraph 4(d)(2) of the Agreement is hereby deleted in its entirety and replaced with the following: (2) a termination payment in an amount equal to two times the One-Year Pay Equivalent, which amount shall be payable within thirty (30) days of the effective date of termination; 7. The following sentence is hereby added at the end of Section 4(d), "Termination Following a Change of Control": The termination benefits pursuant to subsections (a) to (d) of this Section 4 are mutually exclusive, and Executive shall not be entitled to seek termination benefits under more than one such subsection (other than as described in the last paragraph of Section 4(a)(1)). 8. This Amendment may be executed in one or more counterparts which taken together shall constitute one and the same instrument. EXECUTIVE: - ------------------------------ Robert A. Brvenik PRIME RETAIL, INC., a Maryland corporation PRIME RETAIL, L.P., a Delaware limited partnership By:___________________________ By: Prime Retail, Inc. Name:_________________________ Its: Sole General Partner Title:________________________ By:____________________________ Name:__________________________ Title:_________________________ EX-10 7 ex108.txt EXHIBIT 10.8 AMENDMENT TO EA BY DAVID G. PHILLIPS AMENDMENT TO EMPLOYMENT AGREEMENT The EMPLOYMENT AGREEMENT (the "Agreement"), dated as of January 10, 2002, 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 David G. Phillips (the "Executive"), is amended by this Amendment, effective June 6, 2002 (unless otherwise noted herein) in the following respects: 1. Section 2 of the Agreement is hereby deleted in its entirety and replaced with the following: 2. Term. ---- The term of this Agreement, unless earlier terminated in accordance with the terms of this Agreement, will extend to June 6, 2005 (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)(E) 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." 2. Section 3(a) of the Agreement is hereby deleted in its entirety and replaced with the following: (a) Base Salary. For the period beginning June 10, 2002 and extending throughout the Term of this Agreement, the Operating Partnership agrees to pay to Executive a base salary in an aggregate amount of $300,000 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. 3. The last sentence of subsection (1) in Section 3(b), "Performance Bonus," is hereby deleted in its entirety and replaced with the following: 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 on the earlier of (x) 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 or (y) February 28 (or the next business day) of the year immediately following the end of the calendar year for which such Performance Bonus is attributable. 4. The following paragraph is hereby added at the end of Section 3(g), "Stock Options": As additional consideration for Executive's employment hereunder, as of June 6, 2002 (the "Date of Grant"), Prime granted Executive an option (the "Option") to purchase 300,000 shares of Prime's common stock, par value $0.01 per share (the "Common Stock"). The purchase price per share was $0.11 (the "Exercise Price"). The Option is subject to the terms and conditions contained in the Stock Award Agreement entered into between Prime and Executive, which terms include: (i) the Option will have a term of ten years measured from the date of grant; (ii) the greatest portion of the Option shares allowable will be issued as incentive stock options (as determined on a prorated basis for all recipients of option awards on June 6, 2002); (iii) the Option shares will vest and become exercisable as follows: 1/3 will vest upon the first anniversary of the Date of Grant, 1/3 will vest upon the second anniversary of the Date of Grant, and 1/3 will vest upon the third anniversary of the Date of Grant, assuming Executive's employment with Prime continues through such dates; (iv) the Option will remain exercisable for 30 days following termination of Executive for Cause, and in the event of Executive's termination of employment for any other reason the Option will remain exercisable for 90 days; and (v) upon Executive's resignation for Good Reason or termination without Cause (each as herein defined and without regard to whether a Change of Control has occurred) during the Term of this Agreement, the entire Option, in addition to all other outstanding options awarded by Prime to Executive, will become fully vested and exercisable, to the extent not previously exercised. Prime will take all steps necessary to ensure that all options held by Executive survive any Change of Control. 5. Subparagraph 4(d)(2) of the Agreement is hereby deleted in its entirety and replaced with the following: (2) a termination payment in an amount equal to two times the One-Year Pay Equivalent, which amount shall be payable within thirty (30) days of the effective date of termination; 6. The following sentence is hereby added at the end of Section 4(d): The termination benefits pursuant to subsections (a) to (d) of this Section 4 are mutually exclusive, and Executive shall not be entitled to seek termination benefits under more than one such subsection (other than as described in the last paragraph of Section 4(a)(1)). 7. This Amendment may be executed in one or more counterparts which taken together shall constitute one and the same instrument. EXECUTIVE: - ------------------------------ David G. Phillips PRIME RETAIL, INC., a Maryland corporation PRIME RETAIL, L.P., a Delaware limited partnership By:___________________________ By: Prime Retail, Inc. Name:_________________________ Its: Sole General Partner Title:________________________ By:____________________________ Name:__________________________ Title:_________________________ EX-10 8 ex109.txt EXHIBIT 10.9 AMENDMENT TO EA BY GLENN D. RESCHKE AMENDMENT TO EMPLOYMENT AGREEMENT The EMPLOYMENT AGREEMENT (the "Agreement"), 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"), and Glenn D. Reschke (the "Executive"), is amended by this Amendment, effective June 6, 2002 (unless otherwise noted herein) in the following respects: 1. Section 1 of the Agreement is hereby deleted in its entirety and replaced with the following: 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, Chairman of the Board, on the terms and conditions provided in this Agreement. Executive shall serve in such positions and report to the Board of Directors and his duties will include oversight and responsibility for the Company's sales, marketing, operations, finance and administrative functions. Furthermore, Executive shall exercise such other powers and authority as are customarily inherent in 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. Section 2 of the Agreement is hereby deleted in its entirety and replaced with the following: 2. Term. Unless earlier terminated in accordance with the terms of this Agreement, the term of this Agreement shall be a period commencing on June 6, 2002 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. The last sentence of Section 3(b)(1), "Performance Bonus," is hereby deleted in its entirety and replaced with the following: 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 on the earlier of (x) the next 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 or (y) March 31 (or the next business day) of the year immediately following the end of the calendar year for which such Performance Bonus is attributable. 4. A new Section 3(g), "Stock Options," is hereby added to the Agreement as follows: (g) Stock Options. As additional consideration for Executive's employment hereunder, as of June 6, 2002 (the "Date of Grant"), Prime granted Executive an option (the "Option") to purchase 500,000 shares of Prime's common stock, par value $0.01 per share (the "Common Stock"). The purchase price per share is $0.11 (the "Exercise Price"). The Option is subject to the terms and conditions contained in the Stock Award Agreement entered into between Prime and Executive, which terms include: (i) the Option will have a term of ten years measured from the date of grant; (ii) the greatest portion of the Option shares allowable will be issued as incentive stock options (as determined on a prorated basis for all recipients of option awards on June 6, 2002); (iii) the Option shares will vest and become exercisable as follows: 1/3 will vest upon the first anniversary of the Date of Grant, 1/3 will vest upon the second anniversary of the Date of Grant, and 1/3 will vest upon the third anniversary of the Date of Grant. The vesting on each of the above anniversary dates shall occur if Executive is employed with Prime on the date on which that portion vests. (iv) the Option will remain exercisable for 30 days following termination of Executive for Cause, and in the event of Executive's termination of employment for any other reason, including without Good Reason as that term has hereinafter been defined, the Option will remain exercisable for 90 days; and (v) upon Executive's resignation for Good Reason or termination without Cause (each as herein defined and without regard to whether a Change of Control has occurred) during the Term of this Agreement, the entire Option, in addition to all other outstanding options awarded by Prime to Executive, will become fully vested and exercisable, to the extent not previously exercised. Prime will take all steps necessary to ensure that all options held by Executive survive any Change of Control. 5. The following subpart (F) is hereby added to Sections 4(a)(1), 4(a)(2), and 4(a)(4): (F) the right to exercise stock options and purchase shares as set forth in Section 3(g) herein. 6. The following subpart (G) is hereby added to Section 4(b)(1): (G) the right to exercise stock options and purchase shares as set forth in Section 3(g) herein. 7. The following subpart (F) is hereby added to Section 4(b)(2): (F) the right to exercise stock options and purchase shares as set forth in Section 3(g) herein. 8. Paragraph (G) of Section 4(e), "Termination Following a Change of Control," is hereby deleted in its entirety and replaced with the following: (G) The right to exercise stock options and purchase shares in accordance with Section 3(g) herein. 9. The following paragraphs are hereby added as Subsection I to Subsection 4(e): I. Notwithstanding the foregoing, if Executive terminates this Agreement for any reason or without Good Reason (i) simultaneously with a Change of Control (in which event notice under Section 4(b) (2) hereof will not be necessary and the termination payments to be made under paragraphs (A), (B) and (C) below shall be paid simultaneously with, and as a part of, the Change of Control) or (ii) within six (6) months following a Change of Control, subject to the notice provisions of Section 4(b)(2) hereof, the Company shall pay Executive (and Executive's eligible dependents with respect to paragraph (D) below) the following benefits and payments: (A) all accrued but unpaid amounts of Base Salary, bonus and vacation through the effective date of termination, payable in accordance with the provisions of Sections 3(a), 3(b) and 3(d), above, which amounts will be paid on or before the earlier of (i) the date required by applicable law or (ii) the 30th day following the effective date of termination; (B) a termination payment in an amount equal to two times the sum of (x) Executive's then current Base Salary and (y) 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 paid to Executive, a bonus payment equal to fifty percent (50%) of his then current Base Salary; (C) 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 (D) 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. The termination benefits pursuant to subsections (a), (b), (c) and (e) of this Section 4 are mutually exclusive, and Executive shall not be entitled to seek termination benefits under more than one such subsection (other than as described in the last paragraph of Section 4(a)(1)). Provided, however, that nothing in this Subsection I shall reduce or extinguish Executive's rights to payments as set forth in Paragraphs 4(e) (A), (B), (C), (D), (E), (F) and (G) in the event of a termination as set forth in the first paragraph of this Section 4(e). 10. This Amendment may be executed in one or more counterparts which taken together shall constitute one and the same instrument. EXECUTIVE: - ------------------------------ Glenn D. Reschke PRIME RETAIL, INC., a Maryland corporation PRIME RETAIL, L.P., a Delaware limited partnership By:___________________________ By: Prime Retail, Inc. Name:_________________________ Its: Sole General Partner Title:________________________ By:____________________________ Name:__________________________ Title:_________________________ EX-99 9 ex991.txt EXHIBIT 99.1 CERTIFICATION BY CEO CERTIFICATION PURSUANT TO 18 U.S.C. SECTION. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing of the Current Report on Form 10-Q for the fiscal quarter ended June 30, 2002 (the Report) by Prime Retail, Inc. (the Company), the undersigned, as the Chief Executive Officer of the Company, hereby certifies pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 14, 2002 /s/ Glenn D. Reschke ---------------------- Glenn D. Reschke President and Chief Executive Officer EX-99 10 ex992.txt EXHIBIT 99.2 CERTIFICATION BY CFO CERTIFICATION PURSUANT TO 18 U.S.C. SECTION. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing of the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002 (the Report) by Prime Retail, Inc. (the Company), the undersigned, as the Chief Financial Officer of the Company, hereby certifies pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 14, 2002 /s/ Robert A. Brvenik -------------------------- Robert A. Brvenik Executive Vice President, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----