-----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, O8DKXYiu7prIsCwZxA5isuUd3sIkxeX8VvhS4g+i8BzJ3DEkgxsDU/45KKM6yV4s TVJmyZkdbwKjJDahEKhrPg== 0000911708-02-000011.txt : 20021118 0000911708-02-000011.hdr.sgml : 20021118 20021114174436 ACCESSION NUMBER: 0000911708-02-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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: 02826666 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 e10q902.txt FORM 10-Q THIRD QUARTER PERIOD ENDED 9/30/2002 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 September 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 November 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 September 30, 2002 and December 31, 2001................................................ 1 Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001......................... 2 Consolidated Statements of Cash Flows for the nine months ended September 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........ 44 Item 4. Controls and Procedures........................................ 45 PART II: OTHER INFORMATION Item 1. Legal Proceedings.............................................. 46 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.............................................................. 49 Certifications of Chief Executive Officer and Chief Financial Officer... 50 PRIME RETAIL, INC. Unaudited Consolidated Balance Sheets (Amounts in thousands, except share information)
- ------------------------------------------------------------------------------------------------------------------------------------ September 30, December 31, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Assets Investment in rental property: Land $ 115,087 $ 148,463 Buildings and improvements 829,614 1,208,568 Property under development 3,450 3,352 Furniture and equipment 14,006 15,225 --------- ----------- 962,157 1,375,608 Accumulated depreciation (233,787) (258,124) --------- ----------- 728,370 1,117,484 Cash and cash equivalents 6,039 7,537 Restricted cash 36,764 37,885 Accounts receivable, net 2,916 5,017 Deferred charges, net 5,571 11,789 Assets held for sale 33,022 54,628 Investment in partnerships 33,151 24,539 Other assets 5,276 3,629 --------- ----------- Total assets $ 851,109 $ 1,262,508 ========= =========== Liabilities and Shareholders' Equity Bonds payable $ 23,008 $ 31,975 Notes payable 621,748 867,414 Mortgage debt on assets held for sale 21,306 58,078 Accrued interest 4,449 7,643 Real estate taxes payable 8,777 8,091 Accounts payable and other liabilities 25,905 31,380 --------- ----------- Total liabilities 705,193 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 $74,858), 2,300,000 shares issued and outstanding 23 23 8.5% Series B Cumulative Participating Convertible Preferred Stock, $0.01 par value (liquidation preference of $243,528), 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 (565,481) (453,470) --------- ----------- Total shareholders' equity 144,429 256,440 --------- ----------- Total liabilities and shareholders' equity $ 851,109 $ 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 September 30, Nine Months Ended September 30, ------------------------------------- ----------------------------------- 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues Base rents $ 22,645 $ 25,246 $ 69,480 $ 78,297 Percentage rents 1,036 1,014 2,624 2,137 Tenant reimbursements 11,486 11,085 34,443 36,854 Interest and other 3,684 2,120 8,005 6,535 --------- --------- ---------- ---------- Total revenues 38,851 39,465 114,552 123,823 Expenses Property operating 10,579 8,744 30,476 28,706 Real estate taxes 3,607 3,429 10,979 10,912 Depreciation and amortization 9,129 9,601 27,067 28,836 Corporate general and administrative 3,366 4,192 9,662 10,845 Interest 14,155 16,377 43,871 50,699 Other charges 1,477 6,230 7,803 12,775 Provision for asset impairment 81,619 63,026 81,619 63,026 --------- --------- ---------- ---------- Total expenses 123,932 111,599 211,477 205,799 --------- --------- ---------- ---------- Loss before gain (loss) on sale of real estate and minority interests (85,081) (72,134) (96,925) (81,976) Gain (loss) on sale of real estate, net - - (703) 552 --------- --------- ---------- ---------- Loss from continuing operations before minority interests (85,081) (72,134) (97,628) (81,424) Loss allocated to minority interests - - - 401 --------- --------- ---------- ---------- Loss from continuing operations (85,081) (72,134) (97,628) (81,023) Discontinued operations, including net gains of $17,120 and $16,123 on dispositions in 2002 periods, respectively 1,575 (1,118) (14,383) (4,702) --------- --------- ---------- ---------- Net loss (83,506) (73,252) (112,011) (85,725) Income allocated to preferred shareholders (5,668) (5,668) (17,004) (17,004) --------- --------- ---------- ---------- Net loss applicable to common shares $ (89,174) $ (78,920) $ (129,015) $ (102,729) ========= ========= ========== ========== Basic and diluted earnings per common share: Loss from continuing operations $ (2.09) $ (1.78) $ (2.63) $ (2.25) Discontinued operations 0.04 (0.03) (0.33) (0.11) --------- --------- ---------- ---------- Net loss $ (2.05) $ (1.81) $ (2.96) $ (2.36) ========= ========= ========== ========== 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)
- ------------------------------------------------------------------------------------------------------------------------------------ Nine Months Ended September 30, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Activities Loss from continuing operations $ (97,628) $ (81,023) 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 27,067 28,836 Amortization of deferred financing costs 4,188 5,020 Amortization of debt premiums (1,506) (1,438) Provision for uncollectible accounts receivable 2,235 6,650 Provision for asset impairment 81,619 63,026 Discontinued operations 4,135 9,931 Changes in operating assets and liabilities: Increase in accounts receivable (585) (4,992) (Increase) decrease in restricted cash (3,851) 11,260 (Increase) decrease in other assets (2,048) 14 Decrease in accounts payable and other liabilities (764) (19,315) Increase in real estate taxes payable 2,628 762 Increase in accrued interest 233 2,545 --------- --------- Net cash provided by operating activities 16,426 20,323 --------- --------- Investing Activities Additions to investment in rental property (4,127) (17,723) Proceeds from repayment of notes receivable, net - 8,286 Proceeds from sales of operating properties and land 22,320 9,503 --------- --------- Net cash provided by investing activities 18,193 66 --------- --------- Financing Activities Proceeds from notes payable - 16,899 Principal repayments on notes payable (36,117) (41,187) Contributions from minority interests - 400 Deferred costs - (585) --------- --------- Net cash used in financing activities (36,117) (24,473) --------- --------- Decrease in cash and cash equivalents (1,498) (4,084) Cash and cash equivalents at beginning of period 7,537 8,906 --------- --------- Cash and cash equivalents at end of period $ 6,039 $ 4,822 ========= ========= ====================================================================================================================================
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 disposition of properties during the periods indicated:
- ------------------------------------------------------------------------------------------------------------------------------------ Nine Months Ended September 30, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Book value of net assets disposed $ 271,891 $ 32,815 Notes payable paid (147,845) (24,044) Notes payable assumed by joint venture (46,862) - Notes payable transferred to lender (58,410) - Discontinued operations - net gain on disposals (16,123) - Discontinued operations - provision for impairment 12,200 - Investment in unconsolidated partnerships 6,766 - 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) 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 or 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 Note 3 - "Property Dispositions" for additional information. Below is a summary of the results of operations of these properties through their dates of disposition:
- ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended September 30, Nine Months Ended September 30, ------------------------------- -------------------------------- 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues Base rents $ 2,438 $ 9,956 $ 15,530 $ 29,142 Percentage rents 62 269 853 599 Tenant reimbursements 1,666 4,181 7,907 14,141 Interest and other 172 889 1,476 2,276 ------- ------- -------- -------- Total revenues 4,338 15,295 25,766 46,158 Expenses Property operating 1,441 3,273 6,809 11,090 Real estate taxes 293 1,364 2,188 4,247 Depreciation and amortization 661 4,165 5,893 12,328 Interest 1,901 6,464 12,720 19,919 Provision for impairment 15,557 - 27,757 - Other charges 30 1,147 905 3,276 ------- ------- -------- -------- Total expenses 19,883 16,413 56,272 50,860 ------- ------- -------- -------- Loss before loss on sale of real estate, net (15,545) (1,118) (30,506) (4,702) Gain on sale of real estate, net 17,120 - 16,123 - ------- ------- -------- -------- Discontinued operations $ 1,575 $(1,118) $(14,383) $ (4,702) ======= ======= ======== ======== ====================================================================================================================================
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 and Greenwich Capital Financial Products, Inc. (collectively, 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 accompanying 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 3.32% as of September 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 is 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 is entitled to receive a 15% preferred return on its invested capital of $10,200. From FP's preferred return, FRIT first receives 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. As of September 30, 2002, the Mandatory Redemption Obligation was $17,005. 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 $33,195 as of September 30, 2002. The operating results of the Bridge Loan Properties 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 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. Assets Held for Sale On October 30, 2002, we completed the sale of Melrose Place, a community center located in Knoxville, Tennessee, consisting of 27,000 square feet of GLA. Melrose Place was sold to Melrose Place Tennessee General Partnership for cash consideration of $2,500. The net cash proceeds from the sale were $555, after (i) repayment of $1,935 of existing recourse mortgage indebtedness on Melrose Place, (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 $533 on the Mezzanine Loan. The operating results of Melrose Place 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. As of September 30, 2002, the carrying value of Melrose Place of $1,527 was classified as assets held for sale and its related indebtedness of $1,935 was classified as mortgage debt on assets held for sale in the accompanying Consolidated Balance Sheet. We have entered into an agreement to sell (i) Prime Outlets of Puerto Rico, an outlet center located in Barceloneta, Puerto Rico, consisting of 176,000 square feet of GLA and (ii) certain adjacent parcels of land being developed for non-outlet retail use (collectively, the "Puerto Rico Property"). Although we expect to close on the sale of the Puerto Rico Property during the fourth quarter of 2002, there can be no assurance that the transaction will be consummated. As a result, the operating results of the Puerto Rico Property 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 third quarter of 2002, we recorded an impairment loss of $15,557, also included in discontinued operations, related to the write-down of the carrying value of the Puerto Rico Property to its estimated net realizable value based on the terms of the sale agreement. As of September 30, 2002, the carrying value of the Puerto Rico Property of $31,495 was classified as assets held for sale and its related indebtedness of $19,371 was classified as mortgage debt on assets held for sale in the accompanying Consolidated Balance Sheet. 2002 Foreclosure Sales 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 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. 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 a result of the transfer of our ownership interest in the Jeffersonville II Center, we recorded a non-recurring gain of $17,120 during the third quarter of 2002, representing the difference between our carrying value of the Jeffersonville II Center and its related net assets and the outstanding loan balance, including accrued interest, as of the date of transfer. 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. The operating results, including related gains or losses on disposition, of the Conroe Center and the Jeffersonville II Center are classified as discontinued operations in the accompanying Consolidated Statements of Operations through their respective disposition dates for all periods presented in accordance with the requirements of FAS No. 144. No gain or loss was recorded in connection with the foreclosure of the Conroe Center. See Note 4 - "Bonds and Notes Payable" for additional information. During August of 2002, certain of our subsidiaries suspended regularly scheduled monthly debt service payments on two non-recourse mortgage loans which were 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"). These non-recourse mortgage loans were held by John Hancock Life Insurance Company ("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 Vero Beach Center to its estimated fair value in accordance with the provisions of FAS No. 144. Effective September 9, 2002, John Hancock foreclosed on the Vero Beach Center and its related assets and liabilities, including $24,497 of principal outstanding under the non-recourse mortgage loan, were transferred to John Hancock. Additionally, we are currently negotiating a transfer of our ownership interest in the Woodbury Center to John Hancock. Foreclosure on the Vero Beach Center and the expected 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. The carrying value of the Woodbury Center approximates $12,346 as of September 30, 2002. Such value is exceeded by the balance of the associated non-recourse mortgage indebtedness of $16,331 as of September 30, 2002. If we were to transfer our ownership interest in the Woodbury Center to John Hancock, we would record a non-recurring gain for the difference between the carrying value of the Woodbury Center and its related net assets and the outstanding loan balance. The operating results of the Vero Beach Center are classified as discontinued operations in the accompanying Consolidated Statements of Operations through the disposition date for all periods presented in accordance with the requirements of FAS No. 144. No gain or loss was recorded in connection with the foreclosure of the Vero Beach Center. See Note 4 - "Bonds and Notes Payable" 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 Fru-Con Development Corporation and us each own 50% of the partnership, which owned the New River Center. We accounted for our ownership interest in 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 We are required to make, in addition to scheduled monthly amortization, mandatory principal payments on our Mezzanine Loan in an aggregate amount of at least $12,000 with net proceeds from asset dispositions or other capital transactions by December 31, 2002 (see "Mezzanine Loan Modifications" for additional information). We have entered into an agreement for the sale of the Puerto Rico Property, which we currently expect to close during the fourth quarter of 2002, and therefore, have classified its net carrying value to assets held for sale in the accompanying Consolidated Balance Sheet as of September 30, 2002 and have included its results from operations in discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented pursuant to the requirements of FAS No. 144 (see Note 3 - "Property Dispositions" for additional information). The sale of the Puerto Rico Property is expected to generate estimated net proceeds of approximately $12,000, after repayment of existing mortgage indebtedness and closing costs, sufficient to satisfy the required December 2002 mandatory principal repayment amount under the Mezzanine Loan. However, the sale of the Puerto Rico Property remains subject to customary closing conditions and, accordingly, there can be no assurance as to the timing, terms or completion of the proposed sale. In addition to the proposed sale of the Puerto Rico Property discussed above, we continue to seek to generate additional liquidity through other asset sales, financings and other capital raising activities, however, there can be no assurance that we will be able to complete such transactions within the specified period or that such transactions, if they should occur, will generate sufficient proceeds to make required payments under the Mezzanine Loan. Any failure to satisfy the required mandatory principal payments within the specified time period or the scheduled monthly principal payments under the terms of the Mezzanine Loan will constitute a default. Based on our results for the three months ended June 30, 2002 and September 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 continue to work with holders of the Affected Fixed Rate Bonds regarding potential resolution, including forbearance, 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 September 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 Modifications 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 "First Amendment"), among other things, (i) reduced required monthly principal amortization for the period February 1, 2002 through January 1, 2003 ("Year 2") from $1,667 to $800, which could be further reduced to a minimum of $500 per month under certain limited circumstances, provided no defaults existed under the Mezzanine Loan and certain other conditions had been satisfied at the Mezzanine Lender's sole discretion, (ii) required certain mandatory principal payments from net proceeds from asset sales or other capital transactions pursuant to the schedule set forth in the second paragraph below and (iii) reduced 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 First Amendment (i) increased the interest rate from LIBOR plus 9.50% to the greater of LIBOR plus 9.75% (rounded up to nearest 0.125%) or 14.75%), (ii) changed the Mezzanine Loan maturity date from December 31, 2003 to September 30, 2003 and (iii) required a 0.25% fee, which was paid at the time of the modification, on the outstanding principal balance. The First Amendment also required 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 could be released to us for limited purposes. The Escrowed Funds not used at the end of each quarter, subject to certain exceptions, may be applied by the Mezzanine Lender to amortize the Mezzanine Loan. The required monthly principal amortization of $2,333, at the time commencing on February 1, 2003 through the new maturity date of September 30, 2003 ("Year 3"), was unchanged. The First Amendment also required 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 were 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 were also required to pay any interest, including deferred interest, accrued thereon and the additional fees provided for in the Mezzanine Loan. On July 1, 2002, the Mezzanine Lender further amended the Mezzanine Loan (the "Second Amendment") 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 was 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. Effective November 1, 2002, we entered into an additional modification (the "Third Amendment") to the terms of the Mezzanine Loan. The Third Amendment (i) terminated our obligation to make mandatory principal payments with net proceeds from asset dispositions or other capital transactions on or prior to October 31, 2002 and November 1, 2002, respectively, (ii) requires mandatory principal payments in an aggregate amount of not less than $12,000 from net proceeds from asset dispositions or other capital transactions on or before December 31, 2002 and (iii) increases the required monthly principal amortization payment due on January 1, 2003 from $800 to $2,333. Additionally, the Third Amendment (i) increases the interest rate from the greater of LIBOR plus 9.50% (rounded up to nearest 0.125%) or 14.75% to a fixed-rate of 19.75% and (ii) requires a 2% amendment fee on the outstanding principal balance of the Mezzanine Loan as of November 1, 2002. Half of the amendment fee was paid at the time of the modification and half will be payable on December 31, 2002 provided the Mezzanine Loan has not been repaid in full. If the Mezzanine Loan is repaid in full by December 31, 2002, the payment of the second half of the amendment fee will be waived. Any failure to satisfy the mandatory principal payments requirement or other payments pursuant to the terms of the Mezzanine Loan will constitute a default. Debt Service Obligations Our aggregate indebtedness as adjusted for the terms of the Third Amendment to the Mezzanine Loan and excluding (i) unamortized debt premiums of $8,468, (ii) mortgage indebtedness of $1,935 on Melrose Place and (iii) non-recourse mortgage indebtedness of $16,331 on the Woodbury Center was $639,328 (the "Adjusted Indebtedness") as of September 30, 2002. The mortgage indebtedness on Melrose Place was repaid in full in connection with the sale of such property on October 30, 2002. Additionally, we are currently negotiating a transfer of our ownership interest in the Woodbury Center to John Hancock. See Note 3 - "Property Dispositions" and "Defaults on Certain Non-recourse Mortgage Indebtedness" for additional information. At September 30, 2002 the Adjusted Indebtedness had a weighted-average maturity of 2.7 years and bore contractual interest at a weighted-average rate of 8.50% per annum. At September 30, 2002, $619,957, or 97.0%, of the Adjusted Indebtedness bore interest at fixed rates and $19,371 or 3.0%, 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 September 30, 2002, our scheduled principal payments for the remainder of 2002 and 2003 for the Adjusted Indebtedness aggregated $17,002 and $380,544, respectively. The remaining scheduled principal payments for 2002 include (i) principal amortization aggregating $5,002 (including an aggregate of $2,400 of scheduled monthly principal payments on the Mezzanine Loan, which may be further reduced subject to the terms of its modification specified above) and (ii) mandatory principal payments on the Mezzanine Loan in an aggregate amount of not less than $12,000 (see "Mezzanine Loan Modifications" for additional information). The outstanding principal balance of the Mezzanine Loan as of September 30, 2002 was $33,195. The scheduled principal payments 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, (ii) $18,795 of principal payments under the Mezzanine Loan and (iii) an obligation of $19,156 due in respect to a mortgage loan secured by the Puerto Rico Property. We have entered into an agreement to sell the Puerto Rico Property. See "Assets Held for Sale" in Note 3 - "Property Dispositions" for additional information. 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 $2,311 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. As of September 30, 2002, our Mandatory Redemption Obligation with respect to the full return of FRIT's invested capital was $17,005. 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. 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. See "2002 Foreclosure Sales" of Note 3 - "Property Dispositions" for additional information. During August of 2002, certain of our subsidiaries suspended regularly scheduled monthly debt service payments on two non-recourse mortgage loans which were cross-collateralized by the Vero Beach Center and the Woodbury Center. These non-recourse mortgage loans were held by John Hancock. Effective September 9, 2002, John Hancock foreclosed on the Vero Beach Center. Additionally, we are currently negotiating a transfer of our ownership interest in the Woodbury Center to John Hancock. See "2002 Foreclosure Sales" of Note 3 - "Property Dispositions" for additional information. 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 a 50% partner in the partnership that owns the Oxnard Factory Outlet. Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center and a receiver was appointed March 27, 2001 by the court involved in the foreclosure action. Effective May 1, 2001, a manager hired by the receiver began managing and leasing Phase I of the Bellport Outlet Center. We continue to negotiate the terms of a transfer of our ownership interest in Oxnard Factory Outlet to Fru-Con. We do not manage or lease Oxnard Factory Outlet. We 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 September 30, 2002, the carrying value of our investment in these properties was $0. Note 5 - Shareholders' Equity 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 September 30, 2002, we were 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 September 30, 2002, unpaid dividends for the period beginning on November 16, 1999 through September 30, 2002 on the Series A Senior Preferred Stock and Series B Convertible Preferred Stock aggregated $17,358 and $47,825, 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 September 30, 2002 are $6,037 ($2.625 per share) and $16,635 ($2.125 per share), respectively. Note 6 - Special Charges Provision for Asset Impairment During the third quarter of 2002, certain events and circumstances occurred, including changes to our anticipated holding periods, reduced occupancy and limited leasing success, that indicated that certain of our properties were impaired on an other than temporary basis. Accordingly, we recorded a provision for asset impairment aggregating $81,619, representing the write-down of the carrying value of these properties to their estimated fair values in accordance with the requirements of FAS 144. As a result, the balance of associated non-recourse mortgage debt exceeds the carrying value of certain properties by an aggregate of $25,364 as of September 30, 2002. Non-Recurring Other Charges During the second quarter of 2002, we recorded a non-recurring charge in the amount of $3,000 to establish a reserve for pending and potential tenant claims with respect to lease provisions related to their pass-through charges and promotional fund charges. We had previously recorded a non-recurring charge in the amount of $2,000 to establish a reserve for similar matters during the fourth quarter of 2001. To date, we have entered into settlement agreements providing for payments aggregating $2,560, of which $2,000 had been paid as of September 30, 2002. The remaining reserve of $3,000 is included in accounts payable and other liabilities in the accompanying Consolidated Balance Sheet as of September 30, 2002. See Note 7 - "Legal Proceedings" for additional information. These reserves were estimated in accordance with our 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, we believe it is probable the remaining reserve will be utilized over the next several years in connection with the resolution of further claims relating to the pass-through and promotional fund provisions contained in our leases. We caution, 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. Note 7 - Legal Proceedings Except as described below or previously disclosed by the Company in its Quarterly Report on Form 10-Q for the period ended June 30, 2002, 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. On October 3, 2002, the Company entered into a settlement agreement with Brown Group Retail, Inc., which operates under the trade names Famous Footwear, Factory Brand Shoes and Naturalizer. The Company does not believe the settlement will have a material impact on the Company's financial condition or results of operations. See "Settlement of Tenant Matters" contained in "Liquidity and Capital Resources" of Item 2 - "Management's Discussion of Financial Condition and Results of Operations" and Note 6 - "Special Charges" for additional information. 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 (the "Fourth Circuit"). Argument before a Fourth Circuit panel of judges 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. AFS requested further review by the same panel of judges as well as all judges of the Fourth Circuit. This request was denied on October 21, 2002. The Company believes that it has acted properly and will continue to defend this lawsuit vigorously if AFS petitions the United States Supreme Court for a writ of certiorari. 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. 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 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 were brought by alleged stockholders of the Company, individually and purportedly as class actions on behalf of other stockholders of the Company. The complaints alleged that the individual defendants made statements about the Company that were in violation of the federal securities laws. The complaints sought 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. On September 3, 2002 the Fourth Circuit affirmed the dismissal. Plaintiffs have agreed not to seek further review of the dismissal. 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. On November 5, 2002 the Chapter 7 Bankruptcy trustee of E-Outlets Resolution Corp. filed suit against the Company, an affiliate, and eOutlets' directors. The claims include alter ego, piercing the corporate veil, improper preference payments, and other claims against the entities, and breach of fiduciary duty and similar claims against the individual defendants. The Company, on its own behalf and on behalf of its affiliates and the individual defendants, intend to 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. In the case captioned J. Walter Thompson v. Prime Retail, Inc. et al., in the Circuit Court for Wayne County (Michigan) the plaintiff alleged that the Company and Operating Partnership were the alter ego of primeoutlets.com inc., that the corporate veil should be pierced, that it had a direct contract with the Company and Operating Partnership, and that the Company and Operating Partnership committed "silent fraud". The court dismissed the alter ego and piercing the corporate veil claims. Trial for the remaining claims is scheduled for February of 2003. 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 because of FCC's failure to dispose of the collateral in a commercially reasonable manner and that FCC's use of the mark "Prime Outlets" violated United States trademark law. 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. In addition, as part of the same action, Fru-Con filed suit against the Company and affiliates. On October 25, 2002, following a motion for summary judgment, the court dismissed several claims made by Fru-Con, limiting Fru-Con's counter suit to the following claims: the Company and affiliates are improperly withholding partnership funds; prospective tenants at New River were improperly diverted to an outlet project in Sedona, Arizona (the "Sedona Project"); and the Company and affiliates breached its contract with Fru-Con by not allowing it to participate in 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. 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 operations of Prime Retail, Inc. (the "Company") are conducted through Prime Retail, L.P. (the "Operating Partnership"). The Company controls the Operating Partnership as its sole general partner and is dependent upon the distributions or other payments from the Operating Partnership to meet its financial obligations. Historical results and percentage relationships set forth herein are not necessarily indicative of future operations. Cautionary Statements The following discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" 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 our mezzanine loan (the "Mezzanine Loan") in the amount of $33,195 as of September 30, 2002; 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 or monthly debt service payments as required under the terms of 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; o the risk associated with competition from other outlet centers and value discount centers, including existing or those that could be built in the future; and o The risks associated with changes in the distribution channels of outlet center merchandise. 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 7 - "Legal Proceedings" 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 September 30, 2002, our portfolio of properties consisted of (i) 40 outlet centers aggregating 11,253,000 square feet of gross leasable area ("GLA") (including 2,789,000 square feet of GLA at nine outlet centers owned through joint venture partnerships). This compares to 45 properties totaling 12,670,000 square feet of GLA at December 31, 2001 and September 30, 2001. The changes in our outlet center GLA are due to certain sales transactions during 2002 and 2001, including the loss of four outlet centers through foreclosure sale or transfer of our ownership interest. See Note 3 - "Property Dispositions" for additional information. Our outlet center portfolio was 89.1% and 89.4% occupied as of September 30, 2002 and 2001, respectively. For the three and nine months ended September 30, 2002, weighted-average occupancy in our outlet center portfolio was 88.1% and 87.4%, respectively, compared to 89.6% and 89.7%, 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 September 30, 2002:
- ------------------------------------------------------------------------------------------------------------------------------------ Grand GLA Occupancy Outlet Centers Opening Date (Sq. Ft.) Percentage (1) - ------------------------------------------------------------------------------------------------------------------------------------ Prime Outlets at Fremont-- Fremont, Indiana October 1985 229,000 89% Prime Outlets at Birch Run (2)-- Birch Run, Michigan September 1986 724,000 91 Prime Outlets at Latham (3)-- Latham, New York August 1987 43,000 83 Prime Outlets at Williamsburg (2)-- Williamsburg, Virginia April 1988 274,000 99 Prime Outlets at Pleasant Prairie-- Kenosha, Wisconsin September 1988 269,000 94 Prime Outlets at Burlington-- Burlington, Washington May 1989 174,000 94 Prime Outlets at Queenstown-- Queenstown, Maryland June 1989 221,000 98 Prime Outlets at Hillsboro-- Hillsboro, Texas October 1989 359,000 92 Prime Outlets at Oshkosh-- Oshkosh, Wisconsin November 1989 260,000 91 Prime Outlets at Warehouse Row (4)-- Chattanooga, Tennessee November 1989 95,000 81 Prime Outlets at Perryville-- Perryville, Maryland June 1990 148,000 87 Prime Outlets at Sedona-- Sedona, Arizona August 1990 82,000 91 Prime Outlets at San Marcos-- San Marcos, Texas August 1990 549,000 94 Prime Outlets at Anderson (3)-- Anderson, California August 1990 165,000 80 Prime Outlets at Post Falls-- Post Falls, Idaho July 1991 179,000 74 Prime Outlets at Ellenton-- Ellenton, Florida October 1991 481,000 94 Prime Outlets at Morrisville-- Raleigh/Durham, North Carolina October 1991 187,000 73 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 91 Prime Outlets at Woodbury (5)-- Woodbury, Minnesota July 1992 250,000 76 Prime Outlets at Calhoun (3)-- Calhoun, Georgia October 1992 254,000 84 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 I-- Jeffersonville, Ohio July 1993 407,000 91 Prime Outlets at Gainesville-- Gainesville, Texas August 1993 316,000 73 Prime Outlets at Loveland-- Loveland, Colorado May 1994 328,000 95 Prime Outlets at Grove City-- Grove City, Pennsylvania August 1994 533,000 97
- ------------------------------------------------------------------------------------------------------------------------------------ Grand GLA Occupancy Outlet Centers Opening Date (Sq. Ft.) Percentage (1) - ------------------------------------------------------------------------------------------------------------------------------------ Prime Outlets at Huntley-- Huntley, Illinois August 1994 282,000 70% Prime Outlets at Florida City-- Florida City, Florida September 1994 208,000 63 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 Odessa-- Odessa, Missouri July 1995 296,000 73 Prime Outlets at Darien (6)-- Darien, Georgia July 1995 307,000 67 Prime Outlets at Gulfport (7)-- Gulfport, Mississippi November 1995 306,000 88 Prime Outlets at Lodi (3)-- Burbank, Ohio November 1996 313,000 86 Prime Outlets at Gaffney (3) (6)-- Gaffney, South Carolina November 1996 305,000 95 Prime Outlets at Lee (3)-- Lee, Massachusetts June 1997 224,000 100 Prime Outlets at Lebanon-- Lebanon, Tennessee April 1998 229,000 99 Prime Outlets at Hagerstown (8)-- Hagerstown, Maryland August 1998 487,000 99 Prime Outlets of Puerto Rico-- Barceloneta, Puerto Rico July 2000 176,000 95 ---------- --- Total Outlet Centers (9) 11,253,000 89% ========== === ====================================================================================================================================
Notes: (1) Percentage reflects occupied space as of September 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 September 30, 2002. (5) Non-recourse mortgage loans on Prime Outlets at Vero Beach and Prime Outlets at Woodbury were cross-collateralized. The lender foreclosed on Prime Outlets at Vero Beach on September 9, 2002. We are currently negotiating a transfer of our ownership interest in Prime Outlets at Woodbury to the lender. (6) We operate this outlet center pursuant to a long-term ground lease under which we receive the economic benefit of a 100% ownership interest. (7) The real property on which this outlet center is located is subject to a long-term ground lease. (8) On January 11, 2002, we sold this outlet center to a joint venture partnership in which we, through affiliates, have a 30% ownership interest. (9) Excludes Oxnard Factory Outlet. We, through affiliates, have a 50% legal ownership interest in the joint venture partnership that owns this outlet center. However, we currently receive no economic benefit from the Oxnard Factory Outlet. Results of Operations Comparison of the three months ended September 30, 2002 to the three months ended September 30, 2001 Summary We reported losses from continuing operations of $85,081 and $72,134 for the three months ended September 30, 2002 and 2001, respectively. For the three months ended September 30, 2002, the net loss applicable to our common shareholders was $89,174, or $2.05 per common share on a basic and diluted basis. For the three months ended September 30, 2001, the net loss applicable to our common shareholders was $78,920, or $1.81 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 September 30, 2002, we reported a gain from discontinued operations of $1,575, or $0.04 per basic and diluted share. This gain from discontinued operations also reflects (i) a net gain related to dispositions of $17,120 and (ii) a provision for asset impairment of $15,557. During the three months ended September 30, 2001, we reported a loss on discontinued operations of $1,118, or $0.03 per basic and diluted share. The 2002 results from continuing operations also include a non-recurring provision for asset impairment of $81,619, or $1.87 per basic and diluted share. The 2001 results from continuing operations also reflect (i) a non-recurring provision for asset impairment of $63,026, or $1.45 per basic and diluted share, (ii) a non-recurring loss charge of $1,882, or $0.04 per basic and diluted share, related to an interest rate subsidy agreement and (iii) a non-recurring loss of $1,036, or $0.02 per basic and diluted share, related to the refinancing of first mortgage loans on Prime Outlets at Birch Run. 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 $38,851 for the three months ended September 30, 2002, compared to $39,465, for the same period in 2001, a decrease of $614, or 1.6%. Base rents decreased $2,601, or 10.3%, to $22,645 during the three months ended September 30, 2002 compared to $25,246 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 $269 and $42 for the three months ended September 30, 2002 and 2001, respectively. Tenant reimbursements, which represent the contractual recovery from tenants of various operating expenses, increased by $401, or 3.6%, to $11,486 during the three months ended September 30, 2002 compared to $11,085 in the same period in 2001. This increase was primarily attributable to higher recoverable property operating expenses and real estate taxes expense during the three months ended September 30, 2002 compared to the same period in 2001. Tenant reimbursements as a percentage of recoverable property operating expenses and real estate taxes were 81.0% in 2002 compared to 91.1% 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 increased by $1,564, or 73.8%, to $3,684 during the three months ended September 30, 2002 compared to $2,120 for same period in 2001. The increase was primarily attributable to higher (i) equity earnings from investment in partnerships of $609, (ii) temporary tenant income of $298, (iii) property management fees of $286, (iv) lease termination income of $200 and (v) all other income of $171. Expenses Property operating expenses increased by $1,835, or 21.0%, to $10,579 during the three months ended September 30, 2002 compared to $8,744 for the same period in 2001. This increase was primarily attributable to increases in marketing, utilities and insurance costs during the three months ended September 30, 2002 compared to the same period in 2001. Real estate taxes expense increased by $178, or 5.2%, to $3,607 during the three months ended September 30, 2002 compared to $3,429 for the same period in 2001. This increase was primarily attributable to higher assessments for certain properties. As shown in TABLE 1, depreciation and amortization expense decreased by $472, or 4.9%, to $9,129 during the three months ended September 30, 2002, compared to $9,601 for the same period in 2001. This decrease was primarily attributable to reduced depreciation and amortization associated with the provision for asset impairment of $63,026 recorded during the third quarter of 2001. Table 1--Components of Depreciation and Amortization Expense
- ------------------------------------------------------------------------------------------------------------------------------------ Three Months ended September 30, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Building and improvements $ 5,249 $ 4,995 Land improvements 1,040 1,099 Tenant improvements 2,169 2,762 Furniture and fixtures 610 660 Leasing commissions 61 85 ------- ------- Total $ 9,129 $ 9,601 ======= ======= ====================================================================================================================================
As shown in TABLE 2, interest expense decreased by $2,222, or 13.6%, to $14,155 during the three months ended September 30, 2002 compared to $16,377 for the same period in 2001. This decrease reflects (i) lower interest incurred of $1,753, (ii) a decrease in amortization of deferred financing costs of $446 and (iii) an increase in amortization of debt premiums of $23. The decrease in interest incurred is primarily attributable to a reduction of $53,393 in our weighted-average debt outstanding, excluding debt premiums, during the three months ended September 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 September 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 September 30, 2002 and 2001 were 8.54% and 8.90%, respectively. The Mezzanine Loan was obtained in December 2000 from FRIT Lending LLC and Greenwich Capital Financial Products, Inc. (collectively, the "Mezzanine Lender") in the original amount of $90,000. See Note 4 - "Bonds and Notes Payable" for additional information. Table 2--Components of Interest Expense
- ------------------------------------------------------------------------------------------------------------------------------------ Three Months ended September 30, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Interest incurred $ 13,578 $ 15,331 Amortization of deferred financing costs 1,085 1,531 Amortization of debt premiums (508) (485) -------- -------- Total $ 14,155 $ 16,377 ======== ======== ====================================================================================================================================
Other charges decreased by $4,753, or 76.3%, to $1,477 for the three months ended September 30, 2002 compared to $6,230 for the same period in 2001. During the third quarter of 2001, we recorded (i) a non-recurring charge of $1,882 related to an interest rate subsidy agreement and (ii) a non-recurring loss of $1,036 related to the refinancing of first mortgage loans on Prime Outlets at Birch Run. Excluding the effect of the 2001 non-recurring items, other charges decreased by $1,835, or 55.4%, to $1,477 for the three months ended September 30, 2002 compared to $3,312 for the same period in 2001. This decrease is primarily attributable to a lower provision for uncollectible accounts receivable of $1,845 partially offset by an increase all other expenses of $10. During the third quarter of 2002, certain events and circumstances occurred, including changes to our anticipated holding periods, reduced occupancy and limited leasing success, that indicated that certain of our properties were impaired on an other than temporary basis. As a result, we recorded a provision for asset impairment aggregating $81,619, representing the write-down of the carrying value of these properties to their estimated fair values in accordance with the requirements of FAS 144. During the third quarter of 2001, we determined that certain events and circumstances had occurred, including reduced occupancy and limited leasing success, that indicated that certain of our properties were permanently impaired. As a result, we recorded a provision for asset impairment aggregating $63,026, representing the write-down of the carrying value of these properties to their estimated fair values in accordance with the requirements of FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." Comparison of the nine months ended September 30, 2002 to the nine months ended September 30, 2001 Summary We reported losses from continuing operations of $97,628 and $81,023 for the nine months ended September 30, 2002 and 2001, respectively. For the nine months ended September 30, 2002, the net loss applicable to our common shareholders was $129,015, or $2.96 per common share on a basic and diluted basis. For the nine months ended September 30, 2001, the net loss applicable to our common shareholders was $102,729, or $2.36 per common share on a basic and diluted basis. 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 statements of operations for all periods presented. During the nine months ended September 30, 2002, we reported a loss from discontinued operations of $14,383, or $0.33 per basic and diluted share. This loss from discontinued operations reflects (i) a net gain related to dispositions of $16,123 and (ii) a provision for asset impairment of $27,525. During the nine months ended September 30, 2001, we reported a loss on discontinued operations of $4,702, or $0.11 per basic and diluted share. The 2002 results from continuing operations reflect (i) a non-recurring provision for asset impairment of $81,619, or $1.89 per basic and diluted share, (ii) 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 and (iii) 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. The 2001 results from continuing operations reflect (i) a non-recurring provision for asset impairment of $63,026, or $1.45 per basic and diluted share, (ii) a non-recurring loss charge of $1,882, or $0.04 per basic and diluted share, related to an interest rate subsidy agreement, (iii) a non-recurring loss of $1,036, or $0.02 per basic and diluted share, related to the refinancing of first mortgage loans on Prime Outlets at Birch Run and (iv) a gain on the sale of real estate of $552, or $0.01 per basic and diluted share, for the 2001 Property Dispositions. 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 $114,552 for the nine months ended September 30, 2002, compared to $123,823 for the same period in 2001, a decrease of $9,271, or 7.5%. Base rents decreased $8,817, or 11.3%, to $69,480 during the nine months ended September 30, 2002 compared to $78,297 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 $344 and $404 for the nine months ended September 30, 2002 and 2001, respectively. Tenant reimbursements, which represent the contractual recovery from tenants of certain operating expenses, decreased by $2,411, or 6.5%, to $34,443 during the nine months ended September 30, 2002 compared to $36,854 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 83.1% in 2002 compared to 93.0% 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 increased by $1,470, or 22.5%, to $8,005 during the nine months ended September 30, 2002 compared to $6,535 for same period in 2001. The increase was primarily attributable to higher (i) equity earnings from investment in partnerships of $1,623, (ii) temporary tenant income of $496 and (iii) property management fees of $437, partially offset by reductions in (i) lease termination income of $895 and (ii) all other income of $191. Expenses Property operating expenses increased by $1,770, or 6.2%, to $30,476 during the nine months ended September 30, 2002 compared to $28,706 for the same period in 2001. This increase was primarily attributable to higher marketing, utilities and insurance costs partially offset by the 2001 Property Dispositions. Real estate taxes expense increased by $67, or 0.6%, to $10,979 during the nine months ended September 30, 2002 compared to $10,912 for the same period in 2001. This increase was primarily attributable to higher assessments for certain properties partially offset by the 2001 Property Dispositions. As shown in TABLE 3, depreciation and amortization expense decreased by $1,769, or 6.1%, to $27,067 during the nine months ended September 30, 2002, compared to $28,836 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 the provision for asset impairment of $63,026 recorded during the third quarter of 2001. Table 3--Components of Depreciation and Amortization Expense
- ------------------------------------------------------------------------------------------------------------------------------------ Nine Months ended September 30, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Building and improvements $ 14,358 $ 14,974 Land improvements 3,097 3,163 Tenant improvements 7,567 8,433 Furniture and fixtures 1,851 2,033 Leasing commissions 194 233 -------- -------- Total $ 27,067 $ 28,836 ======== ======== ====================================================================================================================================
As shown in TABLE 4, interest expense decreased by $6,828, or 13.5%, to $43,871 during the nine months ended September 30, 2002 compared to $50,699 for the same period in 2001. This decrease reflects (i) lower interest incurred of $5,928, (ii) a decrease in amortization of deferred financing costs of $832 and (iii) an increase in amortization of debt premiums of $68. The decrease in interest incurred is primarily attributable to a reduction of $59,090 in our weighted-average debt outstanding, excluding debt premiums, during the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2002 and 2001 were 8.50% and 8.91%, respectively. Table 4--Components of Interest Expense
- ------------------------------------------------------------------------------------------------------------------------------------ Nine Months ended September 30, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Interest incurred $ 41,189 $ 47,117 Amortization of deferred financing costs 4,188 5,020 Amortization of debt premiums (1,506) (1,438) -------- -------- Total $ 43,871 $ 50,699 ======== ======== ====================================================================================================================================
Other charges decreased by $4,972, or 38.9%, to $7,803 for the nine months ended September 30, 2002 compared to $12,775 for the same period in 2001. 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 7 - "Legal Proceedings" 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. During the third quarter of 2001, we recorded a non-recurring charge of $1,882 related to an interest rate subsidy agreement and a non-recurring loss of $1,036 related to the refinancing of first mortgage loans on Prime Outlets at Birch Run. Excluding the above-noted non-recurring items, other charges decreased by $5,054, or 51.3%, to $4,803 for the nine months ended September 30, 2002 compared to $9,857 for the same period in 2001. The decrease was primarily attributable to (i) a lower provision for uncollectible accounts receivable of $4,416 and (ii) a decrease in corporate marketing costs of $645 partially offset by an increase in all other expenses of $7. During the third quarter of 2002, certain events and circumstances occurred, including changes to our anticipated holding periods, reduced occupancy and limited leasing success, that indicated that certain of our properties were impaired on an other than temporary basis. As a result, we recorded a provision for asset impairment aggregating $81,619, representing the write-down of the carrying value of these properties to their estimated fair values in accordance with the requirements of FAS 144. During the third quarter of 2001, we determined that certain events and circumstances had occurred, including reduced occupancy and limited leasing success, that indicated that certain of our properties were permanently impaired. As a result, we recorded a provision for asset impairment aggregating $63,026, representing the write-down of the carrying value of these properties to their estimated fair values in accordance with the requirements of FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." Merchant Sales For the three and nine months ended September 30, 2002, same-store sales in our outlet center portfolio decreased 5.6% and 4.1%, 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 nine months ended September 30, 2002, net cash provided by operating activities was $16,426, net cash provided by investing activities was $18,193 and net cash used in financing activities was $36,117. The net cash provided by investing activities during the nine months ended September 30, 2002 consisted of $22,320 of aggregate net proceeds from the disposition of assets, partially offset by $4,127 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 aggregate cash of $554 assumed by the lender in connection with the January 1, 2002 foreclosure sale of the Conroe. 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 $36,117 during the nine months ended September 30, 2002 consisted of (i) scheduled principal amortization on notes payable of $14,129 and (ii) 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 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 and Greenwich Capital Financial Products, Inc. (collectively, 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 accompanying 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 3.32% as of September 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 is 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 is entitled to receive a 15% preferred return on its invested capital of $10,200. From FP's preferred return, FRIT first receives 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. As of September 30, 2002, the Mandatory Redemption Obligation was $17,005. 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 $33,195 as of September 30, 2002. The operating results of the Bridge Loan Properties 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 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. Assets Held for Sale On October 30, 2002, we completed the sale of Melrose Place, a community center located in Knoxville, Tennessee, consisting of 27,000 square feet of GLA. Melrose Place was sold to Melrose Place Tennessee General Partnership for cash consideration of $2,500. The net cash proceeds from the sale were $555, after (i) repayment of $1,935 of existing recourse mortgage indebtedness on Melrose Place, (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 $533 on the Mezzanine Loan. The operating results of Melrose Place 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. As of September 30, 2002, the carrying value of Melrose Place of $1,527 was classified as assets held for sale and its related indebtedness of $1,935 was classified as mortgage debt on assets held for sale in the accompanying Consolidated Balance Sheet. We have entered into an agreement to sell (i) Prime Outlets of Puerto Rico, an outlet center located in Barceloneta, Puerto Rico consisting of 176,000 square feet of GLA, and (ii) certain adjacent parcels of land being developed for non-outlet retail use (collectively, the "Puerto Rico Property"). Although we expect to close on the sale of the Puerto Rico Property during the fourth quarter of 2002, there can be no assurance that the transaction will be consummated. As a result, the operating results of the Puerto Rico Property 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 third quarter of 2002, we recorded an impairment loss of $15,557, also included in discontinued operations, related to the write-down of the carrying value of the Puerto Rico Property to its estimated net realizable value based on the terms of the sale agreement. As of September 30, 2002, the carrying value of the Puerto Rico Property of $31,495 was classified as assets held for sale and its related indebtedness of $19,371 was classified as mortgage debt on assets held for sale in the accompanying Consolidated Balance Sheet. 2002 Foreclosure Sales 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 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. 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 a result of the transfer of our ownership interest in the Jeffersonville II Center, we recorded a non-recurring gain of $17,120 during the third quarter of 2002, representing the difference between our carrying value of the Jeffersonville II Center and its related net assets and the outstanding loan balance, including accrued interest, as of the date of transfer. 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. The operating results, including related gains or losses on disposition, of the Conroe Center and the Jeffersonville II Center are classified as discontinued operations in the accompanying Consolidated Statements of Operations through their respective disposition dates for all periods presented in accordance with the requirements of FAS No. 144. No gain or loss was recorded in connection with the foreclosure of the Conroe Center. See Note 4 - "Bonds and Notes Payable" for additional information. During the second quarter of 2002, we incurred a provision for asset impairment of $12,200 to adjust the carrying values of the Vero Beach Center to its estimated fair value in accordance with the provisions of FAS No. 144. Effective September 9, 2002, John Hancock foreclosed on the Vero Beach Center and its related assets and liabilities, including $24,497 of principal outstanding under the non-recourse mortgage loan, were transferred to John Hancock. Additionally, we are currently negotiating a transfer of our ownership interest in the Woodbury Center to John Hancock. Foreclosure on the Vero Beach Center and the expected 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. The carrying value of the Woodbury Center approximates $12,346 as of September 30, 2002. Such value is exceeded by the balance of the associated non-recourse mortgage indebtedness of $16,331 as of September 30, 2002. If we were to transfer our ownership interest in the Woodbury Center to John Hancock, we would record a non-recurring gain for the difference between the carrying value of the Woodbury Center and its related net assets and the outstanding loan balance. The operating results of the Vero Beach Center are classified as discontinued operations in the accompanying Consolidated Statements of Operations through the disposition date for all periods presented in accordance with the requirements of FAS No. 144. No gain or loss was recorded in connection with the foreclosure of the Vero Beach Center. See Note 4 - "Bonds and Notes Payable" for additional information. Going Concern We are required to make, in addition to scheduled monthly amortization, mandatory principal payments on our Mezzanine Loan in an aggregate amount of at least $12,000 with net proceeds from asset dispositions or other capital transactions by December 31, 2002 (see "Mezzanine Loan Modifications" for additional information). We have entered into an agreement for the sale of the Puerto Rico Property, which we currently expect to close during the fourth quarter of 2002, and therefore, have classified its net carrying value to assets held for sale in the accompanying Consolidated Balance Sheet as of September 30, 2002 and have included its results from operations in discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented pursuant to the requirements of FAS No. 144 (see Note 3 - "Property Dispositions" for additional information). The sale of the Puerto Rico Property is expected to generate estimated net proceeds of approximately $12,000, after repayment of existing mortgage indebtedness and closing costs, sufficient to satisfy the required December 2002 mandatory principal repayment amount under the Mezzanine Loan. However, the sale of the Puerto Rico Property remains subject to customary closing conditions and, accordingly, there can be no assurance as to the timing, terms or completion of the proposed sale. In addition to the proposed sale of the Puerto Rico Property discussed above, we continue to seek to generate additional liquidity through other asset sales, financings and other capital raising activities, however, there can be no assurance that we will be able to complete such transactions within the specified period or that such transactions, if they should occur, will generate sufficient proceeds to make required payments under the Mezzanine Loan. Any failure to satisfy the required mandatory principal payments within the specified time period or the scheduled monthly principal payments under the terms of the Mezzanine Loan will constitute a default. Based on our results for the three months ended June 30, 2002 and September 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 continue to work with holders of the Affected Fixed Rate Bonds regarding potential resolution, including forbearance, 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 September 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 Modifications 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 "First Amendment"), among other things, (i) reduced required monthly principal amortization for the period February 1, 2002 through January 1, 2003 ("Year 2") from $1,667 to $800, which could be further reduced to a minimum of $500 per month under certain limited circumstances, provided no defaults existed under the Mezzanine Loan and certain other conditions had been satisfied at the Mezzanine Lender's sole discretion, (ii) required certain mandatory principal payments from net proceeds from asset sales or other capital transactions pursuant to the schedule set forth in the second paragraph below and (iii) reduced 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 First Amendment (i) increased the interest rate from LIBOR plus 9.50% to the greater of LIBOR plus 9.50% (rounded up to nearest 0.125%) or 14.75%), (ii) changed the Mezzanine Loan maturity date from December 31, 2003 to September 30, 2003 and (iii) required a 0.25% fee, which was paid at the time of the modification, on the outstanding principal balance. The First Amendment also required 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 could be released to us for limited purposes. The Escrowed Funds not used at the end of each quarter, subject to certain exceptions, may be applied by the Mezzanine Lender to amortize the Mezzanine Loan. The required monthly principal amortization of $2,333, at the time commencing on February 1, 2003 through the new maturity date of September 30, 2003 ("Year 3"), was unchanged. The First Amendment also required 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 were 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 were also required to pay any interest, including deferred interest, accrued thereon and the additional fees provided for in the Mezzanine Loan. On July 1, 2002, the Mezzanine Lender further amended the Mezzanine Loan (the "Second Amendment") 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 was 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. Effective November 1, 2002, we entered into an additional modification (the "Third Amendment") to the terms of the Mezzanine Loan. The Third Amendment (i) terminated our obligation to make mandatory principal payments with net proceeds from asset dispositions or other capital transactions on or prior to October 31, 2002 and November 1, 2002, respectively, (ii) requires mandatory principal payments in an aggregate amount of not less than $12,000 from net proceeds from asset dispositions or other capital transactions on or before December 31, 2002 and (iii) increases the required monthly principal amortization payment due on January 1, 2003 from $800 to $2,333. Additionally, the Third Amendment (i) increases the interest rate from the greater of LIBOR plus 9.50% (rounded up to nearest 0.125%) or 14.75% to a fixed-rate of 19.75% and (ii) requires a 2% amendment fee on the outstanding principal balance of the Mezzanine Loan as of November 1, 2002. Half of the amendment fee was paid at the time of the modification and half will be payable on December 31, 2002 provided the Mezzanine Loan has not been repaid in full. If the Mezzanine Loan is repaid in full by December 31, 2002, the payment of the second half of the amendment fee will be waived. Any failure to satisfy the mandatory principal payments requirement or other payments pursuant to the terms of the Mezzanine Loan will constitute a default. Debt Service Obligations Our aggregate indebtedness as adjusted for the terms of the Third Amendment to the Mezzanine Loan and excluding (i) unamortized debt premiums of $8,468, (ii) mortgage indebtedness of $1,935 on Melrose Place and (iii) non-recourse mortgage indebtedness of $16,331 on the Woodbury Center was $639,328 (the "Adjusted Indebtedness") as of September 30, 2002. The mortgage indebtedness on Melrose Place was repaid in full in connection with the sale of such property on October 30, 2002. Additionally, we are currently negotiating a transfer of our ownership interest in the Woodbury Center to John Hancock. See Note 3 - "Property Dispositions" and "Defaults on Certain Non-recourse Mortgage Indebtedness" for additional information. At September 30, 2002 the Adjusted Indebtedness had a weighted-average maturity of 2.7 years and bore contractual interest at a weighted-average rate of 8.50% per annum. At September 30, 2002, $619,957, or 97.0%, of the Adjusted Indebtedness bore interest at fixed rates and $19,371 or 3.0%, 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 September 30, 2002, our scheduled principal payments for the remainder of 2002 and 2003 for the Adjusted Indebtedness aggregated $17,002 and $380,544, respectively. The remaining scheduled principal payments for 2002 include (i) principal amortization aggregating $5,002 (including an aggregate of $2,400 of scheduled monthly principal payments on the Mezzanine Loan, which may be further reduced subject to the terms of its modification specified above) and (ii) mandatory principal payments on the Mezzanine Loan in an aggregate amount of not less than $12,000 (see "Mezzanine Loan Modifications" for additional information). The outstanding principal balance of the Mezzanine Loan as of September 30, 2002 was $33,195. The scheduled principal payments 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, (ii) $18,795 of principal payments under the Mezzanine Loan and (iii) an obligation of $19,156 due in respect to a mortgage loan secured by the Puerto Rico Property. We have entered into an agreement to sell the Puerto Rico Property. See "Assets Held for Sale" in Note 3 - "Property Dispositions" for additional information. 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 $2,311 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. As of September 30, 2002, our Mandatory Redemption Obligation with respect to the full return of FRIT's invested capital was $17,005. 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. 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. See "2002 Foreclosure Sales" of Note 3 - "Property Dispositions" for additional information. During August of 2002, certain of our subsidiaries suspended regularly scheduled monthly debt service payments on two non-recourse mortgage loans which were cross-collateralized by the Vero Beach Center and the Woodbury Center. These non-recourse mortgage loans were held by John Hancock. Effective September 9, 2002, John Hancock foreclosed on the Vero Beach Center. Additionally, we are currently negotiating a transfer of our ownership interest in the Woodbury Center to John Hancock. See "2002 Foreclosure Sales" of Note 3 - "Property Dispositions" for additional information. 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 a 50% partner in the partnership that owns the Oxnard Factory Outlet. Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center and a receiver was appointed March 27, 2001 by the court involved in the foreclosure action. Effective May 1, 2001, a manager hired by the receiver began managing and leasing Phase I of the Bellport Outlet Center. We continue to negotiate the terms of a transfer of our ownership interest in Oxnard Factory Outlet to Fru-Con. We do not manage or lease Oxnard Factory Outlet. We 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 September 30, 2002, the carrying value of our investment in these properties was $0. Strategic Alternatives We have engaged Houlihan Lokey Howard & Zukin 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. Settlement of Tenant Matters To date, we have entered into settlement agreements with respect to certain tenant matters providing for aggregate payments of $2,560. Through November 14, 2002, we have made approximately $2,253 of such required payments using certain Escrowed Funds (see "Mezzanine Loan Modifications" for additional information) released by the Mezzanine Lender. We expect to make the remaining required payments of approximately $307 from the Escrowed Funds by December 31, 2002. These settlement agreements did not have a material impact on our financial condition or our results from operations. We had previously established reserves aggregating $5,000 for the settlement of such matters. See Note 6 - "Special Charges" and Note 7 - "Legal Proceedings" for additional information. 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 September 30, 2002, we were 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 September 30, 2002, unpaid dividends for the period beginning on November 16, 1999 through September 30, 2002 on the Series A Senior Preferred Stock and Series B Convertible Preferred Stock aggregated $17,358 and $47,825, 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 September 30, 2002 are $6,037 ($2.625 per share) and $16,635 ($2.125 per share), respectively. Development Activities During the nine months ended September 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 Note 3 - "Property Dispositions" 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 nine months ended September 30, 2002 and 2001. FFO increased $1,411, or 25.6%, to $6,890 for the three months ended September 30, 2002 from $5,479 for the same period in 2001. FFO decreased $3,800, or 19.1%, to $16,109 for the nine months ended September 30, 2002 from $19,909 for the same period in 2001. The increase in FFO for the three months ended September 30, 2002 compared to the same period in 2001 reflects (i) lower interest expense during the 2002 period primarily resulting from principal payments on our Mezzanine Loan and (ii) the reduction in our provision for uncollectible accounts receivable during the 2002 period. Additionally, the FFO results for 2001 include a third quarter non-recurring loss of $1,036 related to the refinancing of Prime Outlets at Birch Run. These items were partially offset by the reduced occupancy in our portfolio during the 2002 period as well as the impact of economic changes in rental rates. The decrease in FFO for the nine months ended September 30, 2002 compared to the same period in 2001 is primarily due to (i) the aforementioned second quarter non-recurring charge of $3,000 recorded during 2002, (ii) the reduced occupancy in our portfolio during the 2002 period and (iii) the impact of economic changes in rental rates. These items have been partially offset by (i) lower interest expense in the 2002 period primarily resulting from principal payments on our Mezzanine Loan, (ii) a reduction in our provision for uncollectible accounts receivable during the 2002 period. Additionally, the FFO results for the 2001 period include a third quarter non-recurring loss of $1,036 related to the refinancing of Prime Outlets at Birch Run. Table 5--Funds from Operations
- ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended September 30, Nine Months Ended September 30, ---------------------------------- ---------------------------------- 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Loss from continuing operations before minority interests $ (85,081) $ (72,134) $ (97,628) $ (81,424) Adjustments: Loss (gain) on sale of real estate - - 703 (552) Provision for asset impairment 81,619 63,026 81,619 63,026 Depreciation and amortization 9,129 9,601 27,067 28,836 Non-real estate depreciation and amortization (601) (563) (1,693) (1,693) Other items: Unconsolidated joint venture adjustments 1,151 620 2,897 2,208 Non-cash joint venture interest subsidy - 1,882 - 1,882 Discontinued operations 1,575 (1,118) (14,383) (4,702) Discontinued operations - (gain) loss on disposition (17,120) - (16,123) - Discontinued operations - provision for impairment 15,557 - 27,757 - Discontinued operations - depreciation and amortization 661 4,165 5,893 12,328 --------- --------- --------- --------- FFO before allocations to minority interests and preferred shareholders $ 6,890 $ 5,479 $ 16,109 $ 19,909 ========= ========= ========= ========= Other Data: Net cash provided by operating activities $ 6,490 $ 2,163 $ 16,426 $ 20,323 Net cash provided by (used in) investing activities (1,478) 4,586 18,193 66 Net cash used in financing activities (4,174) (6,000) (36,117) (24,473) ====================================================================================================================================
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 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) to manage our overall borrowing costs. The following table provides a summary of principal cash flows, excluding (i) unamortized debt premiums of $8,468, (ii) mortgage indebtedness of $1,935 on Melrose Place and (iii) non-recourse mortgage indebtedness of $16,331 on the Woodbury Outlet Center, and related contractual interest rates by fiscal year of maturity. Variable interest rates are based on the weighted-average rates of the portfolio at September 30, 2002. The mortgage indebtedness on Melrose Place has been excluded since it was repaid in full in connection with the sale of such property on October 30, 2002. Additionally, we are currently negotiating a transfer of our ownership interest in the Woodbury Center to John Hancock and therefore, have excluded such non-recourse mortgage indebtedness since we do not intend to pay it. See Note 3 - "Property Dispositions" and Note 4 - "Bonds and Notes Payable" for additional information.
- ------------------------------------------------------------------------------------------------------------------------------------ Year of Maturity - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2003 2004 2005 2006 Thereafter Total - ------------------------------------------------------------------------------------------------------------------------------------ Fixed Rate: Principal $ 16,787 $ 361,388 $ 5,823 $ 12,925 $ 121,886 $ 101,148 $ 619,957 Average interest rate 17.85% 8.40% 7.12% 8.08% 8.76% 7.55% 8.60% Variable Rate: Principal $ 215 $ 19,156 $ 19,371 Average interest rate 5.32% 5.32% 5.32% ====================================================================================================================================
Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures Within the 90 days prior to the date of this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chairman and Chief Executive Officer along with the Company's President, Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Company's Chairman and Chief Executive Officer along with the Company's President, Chief Financial Officer and Treasurer concluded that the Company's disclosure controls and procedures are effective. (b) Changes in Internal Controls There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation. PART II: OTHER INFORMATION Item 1. Legal Proceedings For a description of legal proceedings involving the Company and its properties, please see Part II, Item 1 of the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002. The following information updates such disclosure. As previously disclosed by the Company, Brown Group Retail, Inc. had alleged that its leases did not require the payment of some or all of pass-through charges. The parties have since reached a settlement on the issue. The Company does not believe the settlement will have a material impact on its financial condition or results of operations. See Note 6 - "Special Charges" and Note 7 - "Legal Proceedings" for additional information. 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 (the "Fourth Circuit"). Argument before a Fourth Circuit panel of judges 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. AFS requested further review by the same panel of judges as well as all judges of the Fourth Circuit. This request was denied on October 21, 2002. The Company believes that it has acted properly and will continue to defend this lawsuit vigorously if AFS petitions the United States Supreme Court for a writ of certiorari. 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. 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 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 were brought by alleged stockholders of the Company, individually and purportedly as class actions on behalf of other stockholders of the Company. The complaints alleged that the individual defendants made statements about the Company that were in violation of the federal securities laws. The complaints sought 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. On September 3, 2002 the Fourth Circuit affirmed the dismissal. Plaintiffs have agreed not to seek further review of the dismissal. 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. On November 5, 2002 the Chapter 7 Bankruptcy trustee of E-Outlets Resolution Corp. filed suit against the Company, an affiliate, and eOutlets' directors. The claims include alter ego, piercing the corporate veil, improper preference payments, and other claims against the entities, and breach of fiduciary duty and similar claims against the individual defendants. The Company, on its own behalf and on behalf of its affiliates and the individual defendants, intend to 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. In the case captioned J. Walter Thompson v. Prime Retail, Inc. et al., in the Circuit Court for Wayne County (Michigan) the plaintiff alleged that the Company and Operating Partnership were the alter ego of primeoutlets.com inc., that the corporate veil should be pierced, that it had a direct contract with the Company and Operating Partnership, and that the Company and Operating Partnership committed "silent fraud". The court dismissed the alter ego and piercing the corporate veil claims. Trial for the remaining claims is scheduled for February of 2003. 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 because of FCC's failure to dispose of the collateral in a commercially reasonable manner and that FCC's use of the mark "Prime Outlets" violated United States trademark law. 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. In addition, as part of the same action, Fru-Con filed suit against the Company and affiliates. On October 25, 2002, following a motion for summary judgment, the court dismissed several claims made by Fru-Con, limiting Fru-Con's counter suit to the following claims: the Company and affiliates are improperly withholding partnership funds; prospective tenants at New River were improperly diverted to an outlet project in Sedona, Arizona (the "Sedona Project"); and the Company and affiliates breached its contract with Fru-Con by not allowing it to participate in 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. 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 September 30, 2002, the aggregate arrearage on the Series A Senior Preferred Stock and the Series B Convertible Preferred Stock was $17,358 and $47,825, respectively. Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information On August 13, 2002, the board of directors of the Company approved a long-term incentive plan, a summary of which is attached as Exhibit 99.3 to this Quarterly Report on Form 10-Q. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are included in this Quarterly Report on Form 10-Q: 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. Exhibit 99.3 Summary of Prime Retail, Inc. 2002 Long-Term Incentive Plan. Exhibit 99.4 Employment Agreement, dated June 6, 2002, by and between Prime Retail, Inc, and Frederick J. Meno, IV. Reports on Form 8-K: None 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: November 14, 2002 /s/ Robert A. Brvenik ---------------------------------- Robert A. Brvenik President, Chief Financial Officer and Treasurer CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Glenn D. Reschke, Chairman and Chief Executive Officer of Prime Retail, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Prime Retail, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Glenn D. Reschke -------------------- Glenn D. Reschke Chairman and Chief Executive Officer CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Robert A. Brvenik, President, Chief Financial Officer and Treasurer of Prime Retail, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Prime Retail, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Robert A. Brvenik --------------------- Robert A. Brvenik President, Chief Financial Officer and Treasurer EX-99 3 e991.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 8-K (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. Section 1350, as adopted pursuant to Section 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: November 14, 2002 /s/ Glenn D. Reschke --------------------- Glenn D. Reschke Chairman and Chief Executive Officer EX-99 4 e992.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 Current Report on Form 8-K (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. Section 1350, as adopted pursuant to Section 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: November 14, 2002 /s/ Robert A. Brvenik ---------------------- Robert A. Brvenik President, Chief Financial Officer and Treasurer EX-99 5 e993.txt EXHIBIT 99.3 2002 LONG-TERM INCENTIVE PLAN PRIME RETAIL, INC. 2002 LONG-TERM INCENTIVE PLAN Our board of directors approved the Prime Retail, Inc. 2002 Long-Term Incentive Plan on August 13, 2002. The following is only a summary of the plan and is qualified in its entirety by reference to the full text of the plan. Summary of the Plan Purpose. The purpose of the plan is to optimize our profitability and growth through long term incentives that are consistent with our objectives and that link participants' interests to those of our shareholders. The plan authorizes the granting of performance awards payable in stock or cash. Eligibility. Our executive officers and key employees are eligible to participate in the plan. As of September 30, 2002, eight executive officers and key employees had been selected to participate in the plan. Administration. The plan shall be administered by our board of directors pursuant to the terms and conditions contained in the plan. The board of directors may delegate its authority to administer the plan to the compensation committee at any time. If it does so, the compensation committee will have all the powers of the board of directors with respect to administering the plan. Milestone Bonuses. Each participant shall have the right to receive a portion of the contributions to be made to the plan upon achievement of the two milestones described below. A participant's entitlement to share in one or both of the milestone bonuses will vest as follows: (i) 50% upon achievement of the applicable milestone (provided the participant remains employed by us on such achievement date); and (ii) with respect to each milestone that is achieved, the remaining 50% on December 31, 2005 (provided the participant is still employed by us on that date). Awards will be payable within 60 days of the applicable vesting date. Distributions will be made either in cash, shares of common stock or a combination of cash and shares of common stock, as determined by the board of directors. Any distributions in shares of common stock must be made in compliance with applicable laws and regulatory provisions. o Restructuring/Recapitalization Plan Milestone. A contribution of $2.5 million will be made to the plan upon the completion of a successful restructuring/recapitalization plan that is approved by the board of directors and that includes the redemption or exchange of our Series A and B Preferred Stock. Such a restructuring/recapitalization may or may not occur in conjunction with the transfer of a controlling interest in us to a third-party investor, but shall not include a transaction which does not benefit the company and our existing shareholders. o Mega Deal VI Loan Milestone. A contribution of $1.5 million will be made to the plan upon the completion of a successful refinancing of the Mega Deal VI Loan (as defined in the plan) and/or the sale of assets securing the Mega Deal VI Loan resulting in the retirement of the existing Mega Deal VI Loan in a manner approved by the board of directors. Value Bonus. Each participant shall have the right to receive a portion of the contribution to be made to the plan upon achievement of the Net Asset Value (as defined in the plan) target(s) set forth below on December 31, 2005. A contribution of $1.5 million will be made to the plan if the Net Asset Value is equal to or greater than $200 million. An additional contribution equal to 1.5% of the amount by which the Net Asset Value exceeds $200 million will also be made to the plan. The $200 million dollar target shall be increased by the amount of any equity contributed to us after the adoption of the plan, and decreased by the cost to us of any stock repurchases or reductions effected by us after the effective date of the plan or distributions to our shareholders (other than distributions paid from operating cash flow). A participant's entitlement to share in the value bonus will vest on December 31, 2005 (provided the participant is still employed by us on that date). Awards will be payable within 60 days of the vesting date. Distributions will be made either in cash, shares of common stock or a combination of cash and shares of common stock, as determined by the board of directors. Any distributions in shares of common stock must be made in compliance with applicable laws and regulatory provisions. Limitations on Transfer; Beneficiaries. No award will be assignable or transferable by a participant other than by will or the laws of descent and distribution. A participant may, in the manner determined by the board of directors, designate a beneficiary to exercise the rights of the participant and to receive any distribution with respect to any award upon the participant's death. Acceleration Upon Certain Events. With respect to each milestone that is achieved, if a participant's employment is terminated as a result of his or her involuntary termination without cause, death or disability, the remaining 50% of the participant's entitlement to share in the applicable milestone bonus(es) will become immediately vested. With respect to each milestone that is achieved, if a change in control (as defined in the plan) occurs, the remaining 50% of the participant's entitlement to share in the applicable milestone bonus(es) will become immediately vested upon the effective date of the change in control (provided the participant is employed by us on that date). In the event a participant is entitled to a change of control payment under his or her employment agreement, the remaining 50% of the applicable milestone bonus(es) payable to such participant shall be reduced by an amount equal to 50% of the change of control payment payable under such participant's employment agreement. Termination and Amendment. Our board of directors may, at any time and from time to time, terminate, amend or modify the plan without shareholder approval. The board of directors may modify, extend or renew outstanding awards, or accept the surrender of outstanding awards (to the extent not already distributed) and grant new awards in substitution of them (to the extent not already distributed). EX-99 6 e994.txt EXHIBIT 99.4 EMP AGRMNT FOR FREDERICK J. MENO, IV Employment Agreement THIS EMPLOYMENT AGREEMENT (the "Agreement"), effective as of June 6, 2002 (the "Effective Date"), by and between Prime Retail, Inc., a Maryland corporation ("Prime") and the sole general partner of Prime Retail, L.P., a Delaware limited partnership (the "Operating Partnership"), the Operating Partnership (Prime and the Operating Partnership are sometimes hereinafter together referred to as the "Company"), and Frederick J. Meno IV, an individual domiciled in the State of Maryland ("Executive"). Witnesseth WHEREAS, the Company is engaged primarily in the ownership, development, construction, acquisition, leasing, marketing and management of factory outlet centers throughout North America, Puerto Rico and Western Europe; WHEREAS, the Company believes that it would benefit from the continued application of Executive's particular and unique skill, experience, and background to the management and operation of the Company; WHEREAS, Executive wishes to commit himself to serve the Company in the position set forth herein on the terms herein provided; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein set forth, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by each of the parties hereto, the Company and Executive hereby agree as follows: 1. Duties. During the Term hereof (as defined in Section 2 hereof), the Company agrees to retain Executive, and Executive agrees to be retained by the Company, as the Company's Senior Vice President - Operations and Marketing on the terms and conditions provided in this Agreement. Executive shall serve in such position and Executive shall exercise such powers and authority as are customarily inherent in a similar position in a comparable publicly-held entity or as provided by the By-laws of Prime ("By-laws") and the Agreement of Limited Partnership of the Operating Partnership, as amended (the "Partnership Agreement"). Prime, in its capacity as sole general partner of the Operating Partnership, may, from time to time, in its sole discretion, by action of its Board of Directors (the "Board") further define and clarify Executive's duties and services hereunder or under the By-laws or Partnership Agreement in a manner consistent with the office for which he has been retained hereunder and the scope of work set forth herein. Executive agrees to devote his best efforts and substantially all of his business time, attention, energy, and skill to performing his duties to the Company under this Agreement. Executive will report directly and exclusively to the Company's Chief Executive Officer ("CEO") and the Company's President ("President"), and he will perform all of his duties in accordance with such reasonable directions, requests, rules and regulations as are specified by the CEO and/or the President in connection with his employment. Notwithstanding the foregoing, the parties acknowledge that the Company may alter the reporting relationship of Executive so that he thereafter reports to the Company's Chairman, President, CEO, or an individual who has been retained to serve as the Company's Chief Operating Officer, or a similar role, if that individual reports directly to the CEO; provided further that Executive may report to any such individual or a combination thereof. During the Term of this Agreement, it shall not be a violation of this Agreement for Executive to (i) serve on corporate, industry-related, civic, or charitable boards or committees or devote time to serving any such entities or organizations, (ii) deliver lectures, fulfill speaking engagements, or teach at educational institutions, or (iii) manage personal investments and finances and business and legal affairs, to the extent that such activities do not violate this Section 1 or Section 5 hereof. 2. Term. The term of this Agreement shall commence as of the Effective Date and, unless earlier terminated in accordance with the terms of this Agreement, will extend to the second anniversary of such date ("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 six months prior to the end of the Original Term. Notwithstanding the foregoing, the Company agrees to provide Executive with a minimum of three months' advance written notice of its intent to terminate this Agreement during the Original Term or the Extended Term for any reason other than Cause, in which case the Company shall comply with the notice requirements of Sections 4(a)(2) and (3) hereof, and Executive agrees to provide the Company with a minimum of 60 days' advance written notice of his intent to terminate this Agreement during the Original Term for any reason other than Good Reason, in which case Executive shall comply with the notice requirements of Section 4(b)(1)(E) hereof. The Term and any Extended Term of this Agreement shall end only following termination by written notice by the Company or Executive in accordance with this Section. For purposes of this Agreement, the terms "Original Term" and "Extended Term" shall herein be collectively referred to as the "Term." 3. Compensation and Related Matters. (a) Base Salary. For the period beginning June 10, 2002 and extending through 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. (b) Performance Bonus. In addition to the Base Salary, Executive shall have the right to receive, and the Company agrees to pay to Executive, a performance bonus for each calendar year during the Term of this Agreement, in such amounts as the Committee, in its sole discretion, may determine (the "Performance Bonus"). If the Board, either directly or through the Committee, establishes performance measures for senior officers (which term is intended to include Executive), those established criteria will be used to determine Executive's entitlement to a Performance Bonus. Notwithstanding the foregoing, nothing in this Agreement obligates the Board to establish such performance measures, and the lack of established performance measures will not constitute a breach of this Agreement in any manner. In lieu of established performance measures, the Board will determine Executive's Performance Bonus solely in its discretion. The parties hereto acknowledge that any corporate or individual performance objectives established pursuant to this Section 3(b) will be determined prior to, or as soon as possible after, the beginning of each calendar year and that such objectives may objectively be met by Executive. The aggregate Performance Bonus for a calendar year payable in accordance with the provisions of this Section 3(b) is expected to be up to 100% of the Base Salary for such calendar year. Further, Executive shall only be entitled to receive a Performance Bonus for a calendar year if Executive has been and continues to be retained by the Company as an executive officer of the Company for the full calendar year (or such shorter period if Executive is promoted to an executive position during the calendar year in question) or if (i) the Company terminates Executive's employment without Cause (as defined below), (ii) Executive terminates his employment for Good Reason (as defined below), (iii) Executive terminates his employment for any reason simultaneously with, or within six months following, a Change of Control, or (iv) if Executive does not terminate his employment simultaneously with, or within six months following, a Change of Control, and Executive's employment ends for any reason within 24 months following a Change of Control. Any amount of Performance Bonus required to be paid to Executive for a calendar year during the Term of this Agreement shall be paid by the Company to Executive 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) 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. (c) Health Insurance and Other Benefits. (1) During the Term of this Agreement and subject to the limitations and affirmative rights set forth in this Section 3(c), Executive and his eligible dependents shall have the right to participate in any life, disability, health, dental, vision and other benefit plans or programs that have been or are hereafter adopted or maintained by the Company (or in which the Company participates) according to the terms of such plan or program with all of the benefits, rights and privileges as are enjoyed by any other senior executive officer of the Company (but in any event not less than what is offered to employees that are not senior executive officers). In addition, Executive shall be covered by any and all policies of directors and officers insurance coverage obtained by the Board from time to time for its senior executive officers, the terms of which shall be established by the Board in its sole discretion. (2) During the Term of this Agreement and subject to the limitations and affirmative rights set forth in this Section 3(c), Executive and his eligible dependents shall have the right to participate in any retirement, pension, or other similar benefit plan or program that has been or is hereafter adopted by the Company (or in which the Company participates) according to the terms of such plan or program with all the benefits, rights and privileges as are enjoyed by any other senior executive officer of the Company. (3) If the participation of Executive under a plan described in subsection (2) above would adversely affect the qualification of a plan intended to be qualified under the Internal Revenue Code of 1986, as amended from time to time (the "Code"), the Company shall have the right to exclude Executive from that plan in return for his participation in (x) a non-qualified deferred compensation plan or (y) an arrangement providing substantially comparable benefits on an after-tax basis under a plan that is either a qualified or non-qualified plan under the Code at the Company's option. (4) Notwithstanding anything to the contrary contained herein, the Company reserves the right to amend or terminate any plan described in this Section 3(c) for any reason; provided, however, that (i) no such amendment that would reduce the benefits of Executive will be adopted unless it affects other senior executive officers across-the-board, and (ii) if any plan amendment or termination reduces the benefits of Executive, the Company agrees to adopt or maintain one or more replacement plans that will provide Executive with reasonably comparable benefits on an after-tax basis throughout the Term of this Agreement. (d) Vacation and Leaves of Absence. Executive shall be entitled to paid vacation leave and paid holidays in accordance with the Company's established policies. In addition to the foregoing, Executive may be granted leaves of absence with or without pay for such other reasons as shall be mutually agreed upon by the Board and Executive. (e) Expenses. Executive shall be reimbursed, subject to the Company's receipt of invoices or similar records as the Company may reasonably request in accordance with its policy and procedures, for all reasonable and necessary expenses incurred by Executive in the performance of his duties hereunder. (f) Life Insurance. The Company shall provide $1,000,000 of life insurance coverage for the benefit of Executive during the Term of this Agreement. (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. 4. Termination and Termination Benefits. (a) Termination by Prime. (1) Without Cause. Subject to the notice provisions set forth in Section 2 hereof, the Company may terminate this Agreement and Executive's services at any time for any reason, and after any required notice is provided to Executive he shall continue to perform his duties under this Agreement during the notice period if the Company so elects. In connection with the termination of Executive's services without Cause during the Term of this Agreement, pursuant to this Section 4(a)(1), Executive (and Executive's eligible dependents with respect to paragraph (D) below) shall be entitled to receive: (A) all accrued but unpaid amounts of the Base Salary and vacation through the effective date of termination, payable upon termination and in accordance with the provisions of Sections 3(a) and 3(d) above; (B) if such termination occurs during the Original Term, a termination payment in an amount equal to the product of (x) the number of full and partial years remaining in the Original Term, and (y) the sum of (i) Executive's then current Base Salary and (ii) a bonus payment equal to 100% of the average annual bonus paid to Executive for the two most recent calendar years in which he received a bonus, or if no such bonus payments were made to Executive, a bonus payment equal to 50% of his then current Base Salary (the sum of the amounts determined by adding clauses (i) and (ii) is in the aggregate hereinafter referred to as the "One-Year Pay Equivalent"), and the product of (x) and (y) shall be payable within thirty (30) days of the effective date of termination; (C) any vested benefits or amounts pursuant to Sections 3(c), 3(e) and 3(f) hereof through the effective date of termination, payable in accordance with the provisions of any such plan(s); and (D) if such termination occurs during the Original Term, (i) the Company-paid health insurance benefits specified in Section 3(c)(1) above for a period of twelve (12) months following the effective date of termination and (ii) following such period, Executive shall be entitled to all rights afforded to him under the federal Consolidated Omnibus Budget Reconciliation Act ("COBRA") to purchase continuation coverage of health insurance benefits for himself and his dependents for the maximum period permitted by law. If such termination occurs during the Extended Term, Executive will be entitled to all rights afforded to him under COBRA to purchase continuation coverage of health insurance benefits for himself and his dependents for the maximum period permitted by law. In the event that Executive is terminated without Cause pursuant to this Section 4(a)(1) or resigns for Good Reason and within 12 months from the effective date of such termination or resignation there is a "Change in Control" of the Company (as defined below), then Executive shall be entitled to receive the benefits set forth in Section 4(d) hereof to the extent and in the amount that such benefits exceed the amounts paid or received by Executive pursuant to this Section 4(a)(1). (2) With Cause. The Company may terminate this Agreement with "Cause" immediately upon w ritten notice to Executive. In connection with the termination of Executive's services pursuant to this Section 4(a)(2), Executive (and Executive's eligible dependents with respect to paragraph (C) below) shall be entitled to: (A) receive all accrued but unpaid amounts of the Base Salary and vacation through the effective date of termination, payable in accordance with the provisions of Sections 3(a) and 3(d) above; (B) receive the vested benefits or amounts pursuant to Sections 3(c), 3(e) and 3(f) hereof through the effective date of termination, payable as otherwise provided in such Sections; and (C) exercise all rights afforded to him under COBRA to purchase continuation coverage of health insurance benefits for himself and his dependents for the maximum period permitted by law. (3) "Cause" Defined. For purposes of this Agreement, "Cause" shall mean a reasonable, good faith finding by a majority of the Board (A) that Executive has harmed the Company through an act of dishonesty or material conflict of interest that relates to the performance of Executive's duties hereunder, (B) of Executive's conviction of a felony involving moral turpitude, fraud or embezzlement, (C) that Executive's willful failure to perform in any material respect his duties under this Agreement (other than a failure due to disability) that results in material harm to the Company, after written notice specifying the failure and a reasonable opportunity of at least thirty (30) days to cure (it being understood that if Executive's failure to perform is not of a type requiring a single action to fully cure, then Executive may commence the cure promptly after such written notice and thereafter diligently prosecute such cure to completion) or (D) of a material and willful breach by Executive of any of his obligations hereunder and the failure of Executive to cure such breach within thirty (30) days after receipt by Executive of a written notice of the Company specifying in reasonable detail the nature of the breach. The Company intends that "Cause" must be based only on meaningful and significant matters and not on matters of minor importance. For purposes of this Section, an act, or failure to act, on Executive's part shall be considered "willful" only if done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. (4) Disability. If due to illness or physical or mental disability, Executive shall fail to perform the material duties required by this Agreement during any four (4) consecutive months during the Term of this Agreement, the Company may terminate this Agreement, subject to the notice provisions set forth in Section 2 hereof. In such event, Executive (and Executive's eligible dependents with respect to paragraph (D) below) shall receive: (A) all accrued but unpaid amounts of the Base Salary and vacation through the effective date of termination, payable in accordance with the provisions of Sections 3(a) and 3(d) above; (B) if, and only if, the Company has terminated or otherwise materially reduced Executive's long-term disability coverage that was in effect on the Effective Date of this Agreement, then Executive shall be entitled to receive 1.5 times the One-Year Pay Equivalent; (C) any vested benefits or amounts pursuant to Sections 3(c), 3(e) and 3(f) hereof through the effective date of termination, payable in accordance with the provisions of any such plan(s); and (D) the benefits described in Section 4(a)(1)(D). This Section 4(a) (4) shall not limit the entitlement of Executive, his estate or beneficiaries to any disability or other benefits available to Executive under any disability insurance or other benefits plan or policy that is maintained by the Company for Executive's benefit. (b) Termination by Executive for Any Reason. (1) Subject to the notice requirements set forth in Section 2 hereof, Executive may terminate this Agreement at any time with or without Good Reason (as defined herein), and after any required notice is provided to the Company Executive shall continue to perform his duties under this Agreement during the notice period if the Company so elects. If Executive terminates his employment for Good Reason, the Company shall pay him the compensation and other benefits provided above in Section 4(a)(1) as if it had terminated his employment without Cause after providing the requisite notice pursuant to Section 2 hereof. In connection with the termination of this Agreement pursuant to this Section 4(b)(1) other than for Good Reason, Executive (and Executive's eligible dependents with respect to paragraph (D) below) shall be entitled to receive: (A) all accrued but unpaid amounts of the Base Salary and vacation through the effective date of termination, payable in accordance with the provisions of Sections 3(a) and 3(d) above; (B) any earned and unpaid bonus(es) otherwise payable to him in accordance with Section 3(b); (C) any vested benefits or amounts pursuant to Sections 3(c), 3(e) and 3(f) hereof through the effective date of termination, payable as otherwise provided in such Sections; and (D) all rights afforded to him under COBRA to purchase continuation coverage of health insurance benefits for himself and his dependents for the maximum period permitted by law. (E) "Good Reason" Defined. For purposes of this Agreement, "Good Reason" shall mean (A) the material breach by the Company of any of its obligations hereunder (a bona fide dispute regarding the Performance Bonus shall not be a material breach by the Company) and the failure of the Company to cure such breach within thirty (30) days (reduced to ten (10) days for failure to pay Base Salary) after receipt by the Company of a written notice from Executive specifying in reasonable detail the nature of the breach, unless such breach requires a longer period to cure, then the Company shall have the right to cure such breach within such additional period of time not to exceed sixty (60) days; (B) Executive's title or scope of responsibilities and duties are materially diminished from the level provided in this Agreement, or the Company fails to provide Executive with adequate office facilities and support services to perform such responsibilities and duties; or (C) the Company changes Executive's principal place of employment to a location more than 25 miles from the Company's principal Baltimore City office as of the Effective Date. Executive's delay in providing notice of his termination for Good Reason shall not be deemed to be a waiver of any such Good Reason unless and until Executive fails to provide such notice within six months after the occurrence of the event triggering such Good Reason, nor does the failure to resign for one Good Reason prevent any later Good Reason resignation for a similar or different reason. (c) Death. Notwithstanding any other provision of this Agreement, this Agreement shall terminate on the date of Executive's death. In this event, Executive's estate shall be entitled to receive all accrued but unpaid amounts of Executive's Base Salary, performance bonus and vacation through the date of Executive's death, payable in accordance with the provisions of Sections 3(a) and 3(d) above. In addition, Executive's eligible dependents shall be entitled to receive the benefits specified in Section 4(a)(1)(D) above, to the extent applicable to dependents. This Section 4(c) shall not limit the entitlement of Executive under any insurance or other benefits plan or polic y that is maintained by Prime for Executive's benefit. (d) Termination Following a Change of Control. If (i) Executive terminates this Agreement for any reason simultaneously with a Change of Control (in which event notice under Section 2 above shall not be necessary and the termination payments to be made under Sections 4(d)(1), 4(d)(2) and 4(d)(3) shall be paid simultaneously with, and as a part of, the Change of Control), (ii) within six (6) months following a Change of Control Executive terminates this Agreement for any reason, subject to the notice provisions of Section 2 hereof, or (iii) within 24 months following a Change of Control, the Company terminates this Agreement during its Original Term other than for Cause or Executive terminates this Agreement during its Original Term with Good Reason, the Company shall pay Executive (and Executive's eligible dependents with respect to paragraph (D) below) the following benefits and payments: (1) all accrued but unpaid amounts of Base Salary and vacation through the effective date of termination, payable in accordance with the provisions of Sections 3(a) and 3(d) above; (2) a termination payment in an amount equal to 1.5 times the One-Year Pay Equivalent, which amount shall be payable within thirty (30) days of the effective date of termination; (3) notwithstanding any other terms of any plan, any vested benefits or amounts pursuant to Section 3(c), 3(e) and 3(f) hereof through the effective date of termination, payable in accordance with the provisions of any such plan(s); and (4) the health insurance benefits described in Section 3(c)(1) above for the maximum period permitted under COBRA at the Company's sole expense, together with either (i) additional benefits equivalent to those in effect at the date of termination, such that Executive will receive Company-paid coverage for a total of 24 months or (ii) if providing such benefits is not permitted by the tax laws or applicable benefit plans, the after-tax equivalent of the premiums paid by the Company for such coverage. 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)). (e) "Change of Control" Defined. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if (1) any "person" or "group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, regardless of whether applicable), other than a trustee or other fiduciary holding securities under an employee benefit plan of Prime or a corporation owned directly or indirectly by the stockholders of Prime in substantially the same proportions as their ownership of stock of Prime becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of Prime representing 50% or more of the total voting power represented by Prime's then outstanding securities that vote generally in the election of directors (referred to herein as "Voting Securities"); (2) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new directors whose election by the Board or nomination for election by Prime's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board; (3) the individuals who constitute the Board immediately before a proxy contest cease to constitute at least a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied) immediately following the proxy contest; (4) a merger or consolidation of Prime with or into any other entity, other than a merger or consolidation (i) that would result in the Voting Securities of Prime outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 50% of the total voting power represented by the Voting Securities of Prime or such surviving entity outstanding immediately after such merger or consolidation or (ii) where more than 50% of the Board of Directors of the surviving entity is composed of members from the Board of Directors of Prime, with terms ending at least 11 months after the date of the merger or consolidation; or (5) the stockholders of Prime approve a plan of complete liquidation of Prime or an agreement for the sale or disposition by Prime of (in one transaction or a series of transactions) all or substantially all of Prime's assets, and such transaction is substantially completed. However, in no event will a Change of Control be deemed to have occurred, with respect to Executive, if Executive is part of a purchasing group that consummates the Change of Control transaction. Executive will be deemed to be "part of the purchasing group" for purposes of the preceding sentence if Executive is an equity participant in the purchasing company or group (except for: (i) passive ownership of less than three percent of the stock of the purchasing company; or (ii) ownership of equity participation in the purchasing company or group which is otherwise not significant, as determined prior to the Change of Control by a majority of the non-employee continuing directors). (f) The Company may make any payments due Executive under Sections 4 (d) and 6 before the completion of the Change of Control, if, in the reasonable opinion of the Chairman of the Board's Compensation Committee (the "Chairman"), all conditions for completion of the Change of Control are substantially likely to be met. At that time, the Chairman may release the payments or authorize the option vesting, subject to Executive's agreement to promptly return such payments and agree to rescission of the vesting if the Change of Control does not then occur. (g) Purchase of Life Insurance. Notwithstanding anything to the contrary contained herein, in the event that the services of Executive with the Company terminate for any reason other than death, Executive shall have the right to acquire any life insurance policies maintained by the Company on the life of Executive by (i) notifying the Company in writing of his desire to so purchase such life insurance policy or policies and (ii) tendering to the Company a cashier's check in an amount equal to the interpolated surrender cash value of such life insurance policy or policies together with any unearned portion of any current year premium thereof, both within sixty (60) days of the effective date of such termination. 5. Covenants of Executive. (a) No Conflicts. Executive represents and warrants that he is not personally subject to any agreement, order or decree that restricts his acceptance of this Agreement and performance of his duties with the Company hereunder. (b) Non-Disclosure. Executive shall not disclose or use, except for or on behalf of the "Group" (consisting of Prime and the Operating Partnership and any of their direct and indirect subsidiaries), any Trade Secret (as hereinafter defined) of the Group, whether such Trade Secret is in Executive's memory or embodied in writing or other physical form. For purposes of this Section 5(b), "Trade Secret" means any information that derives independent economic value, actual or potential, with respect to the Company from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and is the subject of efforts to maintain its secrecy that are reasonable under the circumstances, including, but not limited to, trade secrets, customer lists, sales records and other proprietary commercial information. Said term, however, shall not include general "know-how" information acquired by Executive during the course of his service. Executive shall be subject to the restrictions of this Section 5(b) indefinitely. (c) Non-Solicitation. During the period of the later of (i) Executive's employment under this Agreement, or (ii) throughout the Original Term of this Agreement, but only if Executive resigns other than for Good Reason or is terminated by the Company with Cause, (the "Restrictive Period") and within the United States (the "Restrictive Geographic Area"), Executive shall not hire, cause to be hired, or induce or attempt to induce any officer, employee, agent, consultant, independent contractor, tenant or customer of the Company to discontinue such affiliation with the Company or to refrain from entering into new business relationships with the Company. Notwithstanding the foregoing, if any officer, employee, agent, consultant, independent contractor, tenant or customer of the Company is contacted by, or receives a general communication or solicitation directed to the general public from, an entity with which Executive has become employed or otherwise affiliated, the parties hereto agree that such contact or communication shall not violate this provision unless Executive directly or indirectly initiated it. The time period during which the prohibitions set forth above apply shall be extended by the length of time during which it is judicially determined that Executive has violated any such prohibition in any respect. (d) Non-Competition. In return for the performance of the management duties described in Section 1 hereof, Executive agrees that (A) during the Restrictive Period he will not directly or indirectly, in any capacity whatsoever, either on his own behalf or on behalf of any other person or entity with whom he may be employed or associated, perform or solicit services for any of the following entities: The Mills Corporation; Tanger Factory Outlet Centers, Inc.; Chelsea GCA Realty, Inc.; New Plan Excel Realty Trust, Inc.; and Charter Oak Partners. (e) Return of Documents. Upon termination of his services with the Company, Executive shall return all originals and copies of books, records, documents, customer lists, sales materials, tapes, keys, credit cards and other tangible property of the Company within Executive's possession or under his control. Executive shall have the right to retain copies of forms and other documents used by the Company, redacted to remove the specific references to the Company. (f) Equitable Relief. In the event of any breach by Executive of any of the covenants contained in this Section 5, it is specifically understood and agreed that Company shall be entitled, in addition to any other remedy that it may have, to seek equitable relief by way of injunction, an accounting or otherwise. (g) Acknowledgment. Executive acknowledges that he will be directly and materially involved as a senior executive in important policy and operational decisions of Company. Executive further acknowledges that the scope of the foregoing restrictions has been specifically bargained between Company and Executive, each being fully informed of all relevant facts. Accordingly, Executive acknowledges that the foregoing restrictions of this Section 5 are fair and reasonable, are necessary to protect the Company, its other stockholders and the public from the unfair competition of Executive who, as a result of his performance of services on behalf of the Company, will have had unlimited access to the most confidential and important information of the Company, its business and future plans. Executive furthermore acknowledges that no unreasonable harm or injury will be suffered by him from enforcement of the covenants contained herein and that he will be able to earn a reasonable livelihood following termination of his services notwithstanding enforcement of the covenants contained herein. (h) Indemnification. The Company shall, to the maximum extent permitted by law, and in addition to any such rights granted to or available to Executive under the Company's Articles and By-Laws, or standing or other resolutions, defend, indemnify and hold harmless Executive from and against any and all claims made against Executive concerning or relative to his service, actions, or omissions on behalf of the Company as an employee, officer or agent of the Company. The Company shall, upon Executive's request, promptly advance or pay any amounts for costs, charges, or expenses (including, without limitation, legal fees and expenses incurred by counsel retained by Executive) in respect of his right to indemnification hereunder, subject to a later determination as to Executive's ultimate right to receive such payment. Executive's right to indemnification shall survive until the expiration of any applicable statute of limitations, without regard to the earlier termination of Executive's employment hereunder or of the Term. 6. Golden Parachute Provision. (a) Gross Up Payments. Anything in this Agreement to the contrary notwithstanding, in the event that any payment by or on behalf of the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section) (the "Payments") is determined to be an "excess parachute payment" pursuant to Code Section 280G or any successor or substitute provision of the Code, with the effect that Executive is liable for the payment of the excise tax described in Code Section 4999 or any successor or substitute provision of the Code, or any interest or penalties are incurred by Executive with respect to such Payments (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Executive shall be entitled to receive an additional payment from the Operating Partnership (the "Gross-Up Payment") in an amount such that after payment by Executive of all taxes imposed upon the Gross-Up Payment, including, without limitation, federal, state, local or other income taxes, FICA taxes, and additional Excise Tax (and any interest and penalties imposed with respect to such taxes), Executive retains a portion of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Determination of Gross-Up. Subject to the provisions of paragraph (c) below, all determinations required to be made under this Section 6, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that serves as the Company's auditors (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and Executive within 15 business days of the receipt of notice from the Company or Executive that there have been Payments, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, Executive shall designate another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 6, shall be paid by the Company to Executive within five days after the receipt by the Company and Executive of the Accounting firm's determination. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall furnish Executive with a written opinion that failure to report the Excise Tax on Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and Executive, except as provided in paragraph (c) below. (c) IRS Claims. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that the Internal Revenue Service or other agency will claim that a greater Excise Tax is due, and thus a greater amount of Gross-Up Payment should have been made by the Company than that determined pursuant to paragraph (a) above (an "Underpayment"). In the event that Executive is required to make a payment of any such Excise Tax, the Accounting Firm shall determine the amount of the additional Gross-Up Payment due to Executive based on the Underpayment, and such additional Gross-Up Payment shall be promptly paid by the Company to or for the benefit of Executive. Executive shall notify the Company in writing of any claim by the Internal Revenue Service or other agency that, if successful, would require the payment by the Company of the Gross-Up Payment or an Underpayment. 7. Transfer of Equity Interest to Employer Upon Termination of Employment. As of the Date of Termination and in consideration for the payment of $100.00 cash, Executive agrees to execute and deliver to Prime or its designee any and all certificates for shares of capital stock (with appropriate stock powers attached and properly signed) of Prime's subsidiaries and affiliates (other than the Operating Partnership), including, but not limited to Prime Retail E-Commerce, Inc., Prime Retail Stores, Inc., and Prime Retail Furniture, Inc. (all of which are Maryland corporations) (the "Subsidiary Shares"). Executive further agrees to execute and deliver such other documentation as Prime reasonably requests to effect the assignment of the Subsidiary Shares. For the avoidance of doubt, nothing contained in this Section 7 will be deemed to require Executive to transfer or carry any of his equity interests in Prime or the Operating Partnership. 8. Prior Agreement. This Agreement supersedes and is in lieu of any and all other employment or service arrangements between Executive, on the one hand, and Prime and/or the Operating Partnership or its predecessors or any subsidiaries, on the other hand, and any and all such employment or service agreements and arrangements are hereby terminated and deemed of no further force or effect. 9. Assignment. Neither this Agreement nor any rights or duties of Executive hereunder shall be assignable by Executive and any such purported assignment by him shall be void. Prime may assign all or any of its right hereunder provided that substantially all of the assets of the Company are also transferred to the same party; provided, however, that Prime and the Operating Partnership, jointly and severally shall remain primarily liable to Executive to fulfill all of the Company's obligations under this Agreement and that any such assignee also agrees to be primarily liable to Executive jointly and severally with the Company to fulfill all of the Company's obligations under this Agreement as provided in Section 10 below. 10. Successors. This Agreement shall inure to the benefit of and be enforceable by Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees and the Company's successors and assigns. If Executive should die while any amounts are still payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there be no such designee, to Executive's estate. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of the Company, as the case may be, by agreement in form and substance reasonably satisfactory to Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Any failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement. 11. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if delivered in person or sent by any national overnight delivery service or by certified mail to the following addresses (or to any other address that any party may designate by notice to the other parties hereto): (a) if to Executive, to: Frederick J. Meno IV 30 Sparks Farm Road Sparks, Maryland 21152 (b) if to Prime or to the Operating Partnership, to: Prime Retail, Inc. Attn: Board of Directors 100 East Pratt Street 19th Floor Baltimore, Maryland 21202 with a copy to (which shall not constitute notice): Winston & Strawn Attn: Steven J. Gavin 35 West Wacker Drive Chicago, Illinois 60601 12. Amendment. This Agreement may not be changed, modified or amended except in writing signed by all of the parties hereto. 13. Waiver of Breach. The waiver by any of the parties hereto of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by any part. 14. Severability. The Company and Executive each expressly agree and contract that it is not the intention of any of the parties hereto to violate any public policy, statutory or common law, and that if any sentence, paragraph, clause or combination of the same of this agreement is in violation of the law of any state where applicable, such sentence, paragraph, clause or combination of the same shall be void in the jurisdictions where it is unlawful, and the remainder of such paragraph and this Agreement shall remain binding on the parties to make the covenants of this Agreement binding only to the extent that it may be lawfully done under existing applicable laws. In the event that any part of any covenant of this Agreement is determined by a court of competent jurisdiction to be overly broad thereby making the covenant unenforceable, the parties hereto agree, and it is their desire that such court shall substitute a judicially enforceable limitation in its place, and that as so modified the covenant shall be binding upon the parties as if originally set forth herein. 15. Opportunity to Employ Counsel. Executive acknowledges receipt of a copy of this Agreement prior to his execution of this Agreement with the Company and also acknowledges that he has had ample time and opportunity to employ counsel of his choice to provide advice concerning the terms and conditions of this Agreement. 16. Legal Fees. If any dispute or disagreement arising hereunder or related hereto shall result in legal action between the Company and Executive, Executive shall be entitled, within 30 days after incurring such fees and disbursements, to recover from the Company any reasonable expenses for attorney's fees and disbursements incurred by him in connection with Executive's good faith maintenance or defense of such action, on an after-tax basis, unless Executive does not prevail in such action. 17. No Mitigation. The Company waives, releases and remises (x) any obligation or duty under applicable law or otherwise on the part of Executive to seek or obtain other engagements or employment or to otherwise mitigate any payments or damages to which Executive may be entitled to by reason of any operation or termination of this Agreement; and (y) any right in or claim to any remuneration or compensation received by Executive pursuant to any engagements or employment subsequent to the termination of this Agreement. 18. Governing Law. This Agreement shall be governed by, and construed, interpreted and enforced in accordance with the laws of the State of Maryland, exclusive of the conflict of laws provisions of the State of Maryland. 19. Binding Effect. This Agreement shall be binding and legally enforceable against the parties hereto and their respective heirs, personal representatives, successors and assigns, as the case may be. (signature page follows) IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EXECUTIVE: - ----------------------- Frederick J. Meno IV PRIME RETAIL, INC., a Maryland PRIME RETAIL, L.P., a Delaware corporation limited partnership By: ______________________ By: Prime Retail, Inc. Name: ______________________ Its: Sole General Partner Title: ______________________ By: ___________________ Name: ___________________ Title: ___________________ Exhibit A Dispute Resolution Mediation If either party has a dispute or claim relating to this Agreement or their relationship and except as set forth in Alternatives, the parties must first seek to mediate the same before an impartial mediator the parties mutually designate, at the Company's expense (other than their respective attorneys' fees). Subject to the mediator's schedule, the mediation must occur within 45 days of either party's written demand. However, in an appropriate circumstance, a party may seek emergency equitable relief from a court of competent jurisdiction notwithstanding this obligation to mediate. Binding If the mediation reaches no solution or the parties Arbitration agree to forego mediation, the parties will promptly submit their disputes to binding arbitration before one or more arbitrators (collectively or singly, the "Arbitrator") the parties agree to select (or whom, absent agreement, a court of competent jurisdiction selects). The arbitration must follow applicable law related to arbitration proceedings and, where appropriate, the Employment Dispute Rules of the American Arbitration Association. Arbitration All statutes of limitations and substantive laws Principles applicable to a court proceeding will apply to this proceeding. The Arbitrator will have the power to grant relief in equity as well as at law, to issue subpoenas duces tecum, to question witnesses, to consider affidavits (provided there is a fair opportunity to rebut the affidavits), to require briefs and written summaries of the material evidence, and to relax the rules of evidence and procedure, provided that the Arbitrator must not admit evidence it does not consider reliable. The parties agree (and the Arbitrator must agree) that all proceedings and decisions of the Arbitrator will be maintained in confidence, to the extent legally permissible, and not be made public by any party or the Arbitrator without the prior written consent of all parties to the arbitration, except as the law may otherwise require. Discovery; The parties have selected arbitration to expedite the Evidence; resolution of disputes and to reduce the costs and Presumptions burdens associated with litigation. The agree that the Arbitrator should take these concerns into account when determining whether to authorize discovery and, if so, the scope of permissible discovery and other hearing and pre-hearing procedures. The Arbitrator may permit reasonable discovery rights in preparation for the arbitration, provided that it should accelerate the scheduling of and responses to such discovery so as not to unreasonably delay the arbitration. Exhibits must be marked and left with the Arbitrator until it has rendered a decision. Either party may elect, at its expense, to record the proceedings by audiotape or stenographic recorder (but not by video). The Arbitrator may conclude that the applicable law of any foreign jurisdiction would be identical to that of Maryland on the pertinent issue(s), absent a party's providing the Arbitrator with relevant authorities (and copying the opposing party) at least five business days before the arbitration hearing. Nature of Award The Arbitrator must render its award, to the extent feasible, within 30 days after the close of the hearing. The award must set forth the material findings of fact and legal conclusions supporting the award. The parties agree that it will be final, binding, and enforceable by any court of competent jurisdiction. Where necessary or appropriate to effectuate relief, the Arbitrator may issue equitable orders as part of or ancillary to the award. The Arbitrator may award reasonable attorneys' fees to the prevailing party to the extent a court could have made such an award. Appeal The parties may appeal the award based on the grounds allowed by statute, as well as upon the ground that the award misapplies the law to the facts, provided that such appeal is filed within the applicable time limits law allows. If the award is appealed, the court may consider the ruling, evidence submitted during the arbitration, briefs, and arguments but must not try the case de novo. The parties will bear the costs and fees associated with the appeal in accordance with the arbitration award or, in the event of a successful appeal, in accordance with the court's final judgment. Alternatives This Dispute Resolution provision does not preclude a party from seeking equitable relief from a court (i) to prevent imminent or irreparable injury or (ii) pending arbitration, to preserve the last peaceable status quo, nor does it preclude the parties from agreeing to a less expensive and faster means of dispute resolution. -----END PRIVACY-ENHANCED MESSAGE-----