-----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, K3kyDjZpUaFvQEuogMPSL56WhRuY7TcnO/nbz2bwfRycSU791tWdeGHlbmyc/GQP /7KzMeT6snknYJDY8FvvcA== 0000911708-03-000010.txt : 20030328 0000911708-03-000010.hdr.sgml : 20030328 20030328173017 ACCESSION NUMBER: 0000911708-03-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIME RETAIL INC/BD/ CENTRAL INDEX KEY: 0000911708 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 382559212 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13301 FILM NUMBER: 03626485 BUSINESS ADDRESS: STREET 1: 100 E PRATT ST STREET 2: 1900 FLOOR CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4102340782 MAIL ADDRESS: STREET 1: 100 EAST PRATT STREET STREET 2: 1900 FLOOR CITY: BALTIMORE STATE: MD ZIP: 21202 10-K 1 h10k2002.txt FORM 10-K YEAR ENDED 12/31/02 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 2002 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) Commission file number: 001-13301 PRIME RETAIL, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its Charter) Maryland 38-2559212 - ------------------------------------- ---------------------------------- (State or other jurisdiction of (IRS employer identification no.) incorporation or organization) 100 East Pratt Street Baltimore, MD 21202 (410) 234-0782 - ---------------------------------------- ---------------------------------- (Address of principal executive offices, (Registrant's telephone number, including zip code) including area code) Securities registered pursuant to Section 12(b) of the Act: None (Title of class) Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value 10.5% Series A Cumulative Preferred Stock, $0.01 par value 8.5% Series B Cumulative Participating Convertible Preferred Stock, $0.01 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $5,665,129 on March 25, 2003 (based on the closing price per share as reported on the OTC Bulletin Board). The number of outstanding shares of the registrant's Common Stock as of March 28, 2003 was 43,577,916. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents of the registrant are incorporated herein by reference: Part of Form 10-K Into Which Document Document Is Incorporated - -------- --------------- Proxy Statement for the 2003 annual meeting of Part III of Form10-K shareholders PRIME RETAIL, INC. Form 10-K December 31, 2002 TABLE OF CONTENTS ----------------- Part I Page - ------ ----- Item 1. Business........................................................1 Item 2. Properties......................................................5 Item 3. Legal Proceedings...............................................8 Item 4. Submission of Matters to a Vote of Security Holders................................................9 Part II - ------- Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.....................................10 Item 6. Selected Financial Data.........................................11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................13 Item 7A. Quantitative and Qualitative Disclosures About Material Risk...................................................34 Item 8. Financial Statements and Supplementary Data.....................34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........................34 Part III - -------- Item 10. Directors and Executive Officers of the Registrant..............35 Item 11. Executive Compensation..........................................35 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters......................35 Item 13. Certain Relationships and Related Transactions..................35 Part IV - ------- Item 14. Controls and Procedures.........................................36 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................................................36 Other - ----- Signatures......................................................42 Certifications..................................................43 Page - (1) PART I ITEM 1 - BUSINESS The Company Prime Retail, Inc. (the "Company") was organized as a Maryland corporation on July 16, 1993. We are a self-administered and self-managed real estate investment trust ("REIT") that primarily owns and operates outlet centers. As of December 31, 2002, our outlet center portfolio, including nine properties owned through unconsolidated joint ventures, consists of 38 properties (the "Properties") in 24 states, which total 10,269,000 square feet of gross leasable area ("GLA"). As a fully-integrated real estate firm, we provide accounting, finance, leasing, marketing and management services for the Properties. Prime Retail, L.P. (the "Operating Partnership"), a Delaware limited partnership, is the entity through which we conduct substantially all of our business and operations and own (either directly or through subsidiaries) substantially all of our assets including the Properties. We control the Operating Partnership as its sole general partner and are dependent upon the distributions or other payments from the Operating Partnership to meet our financial obligations. Unless the context otherwise requires, all references to "we," "us," "our" or the "Company" herein mean Prime Retail, Inc. and those entities owned or controlled by Prime Retail, Inc., including the Operating Partnership. Additionally, our website can be accessed at www.primeretail.com. A copy of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as filed with the Securities and Exchange Commission, can be obtained free of charge on our website. Our principal executive offices are located at 100 East Pratt Street, 19th Floor, Baltimore, Maryland 21202 and our telephone number is 410-234-0782. Tax Status We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, we generally are not subject to federal income tax at the corporate level on income we distribute to our stockholders so long as we distribute at least 90% of our taxable income (excluding any net capital gain) each year. Since our initial public offering ("IPO") on March 22, 1994, we believe that we have complied with the tax regulations to maintain our status as a REIT. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Even if we qualify as a REIT, we may be subject to certain state and local taxes on our income and property. Business of the Company We are engaged primarily in the ownership, leasing, marketing and management of outlet centers. Outlet centers are an established segment of the retail industry, enabling value-oriented shoppers to purchase designer and brand-name products directly from manufacturers at discounts. Since entering the outlet center business in 1988 (as the retail division of The Prime Group, Inc. ("PGI"), from which we later acquired certain Properties and simultaneously assumed management and development operations with the completion of our IPO), we have become a significant owner, operator and developer in the outlet center sector. Our outlet centers feature a diversified mix of nationally recognized manufacturers of designer and brand name merchandise with which we have long-standing relationships. As of December 31, 2002, our outlet center portfolio consisted of 38 properties in 24 states totaling 10,269,000 square feet of GLA. The average outlet center in our portfolio contained approximately 270,327 square feet of GLA at December 31, 2002. Business Strategy Our current strategy is to use the cash flow from the Properties to fund property level improvements and reduce debt levels over time. We have, and will continue to pursue, on a selective basis, the disposition (e.g., sales, joint venture arrangements and/or potential givebacks to lenders) of certain properties in order to reduce our overall leverage and generate additional liquidity. See Item 7 - "Management's Discussion of Financial Condition and Results of Operations" contained herein for recent developments. Page - (2) We actively manage the Properties in an effort to maintain and increase the sales and profitability of our merchants and ultimately improve occupancy levels and rental income. In this regard we have employed and will employ various strategies, including the following: o Tenant Mix. We will continue to evaluate the tenant mix at the Properties and seek to enhance, if possible, the representation of those tenants considered the biggest and best draws in the outlet industry. We believe that an increase in the representation of such tenants positively affects consumer traffic and leads to overall higher sales for all tenants. Additionally, we will continue to explore the addition of new tenants to the outlet sector to strengthen our competitive position. o Marketing Strategies. We operate the majority of our current outlet center portfolio under the "Prime Outlets" brand name. In addition to the "Prime Outlets" brand name, we use on-site management teams to develop individualized property specific marketing programs. We often augment marketing dollars received from tenants with our own contributions. We have and will continue to evaluate our marketing programs and make enhancements as appropriate. Furthermore, we will continue to seek strategic marketing alliances with companies who desire to utilize the customer base of our outlet center portfolio. o Operating Expenses. Generally, we manage and lease our properties with in-house personnel, thereby reducing our reliance on third-party service providers and enabling us to continually monitor and control the expenses associated with these functions. We strive to minimize the occupancy cost of our tenants through active management of operating expenses at the property, regional and corporate levels. Whenever possible, we leverage the size of our portfolio to obtain favorable rates from vendors and suppliers. Competition Our outlet centers compete for customers primarily with traditional shopping malls, "off-price" retailers and other outlet centers. The tenants of outlet centers usually attempt to avoid direct competition with major retailers and their own full-price stores. They generally accomplish this by locating outlet stores only in outlet centers at least 20 miles from the nearest regional mall. For this reason, our outlet centers are often located in relatively undeveloped areas and, therefore, compete only to a limited extent with traditional retail malls in or near metropolitan areas. In addition to the traditional sources of competition faced by our outlet centers, our outlet centers also compete with web-based and catalogue retailers for customers. Because a number of our outlet centers are located in relatively undeveloped areas, there are often other potential sites for retail opportunities near our outlet centers that may be developed by competitors. The existence or development of other retail venues with a more convenient location or the offer of lower rent may attract our tenants or cause them to seek more favorable lease terms at or prior to renewal of their leases with us and, accordingly, may affect adversely the business, revenues and sales volume of our outlet centers. In addition, the success of tenants in our outlet centers which are located in relatively undeveloped areas, and, thus, the success of such outlet centers themselves, depends on shoppers traveling significant distances to shop. If shoppers should become less willing to travel the distances necessary to shop at our remote outlet centers, the business of our tenants would likely decline. Such a decline would likely cause the value, business, revenue and sales volume of such outlet centers to decline. Environmental Matters Under various federal, state and local laws and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous substances on their property. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of the hazardous substances. The costs of remediation or removal may be substantial, and the presence of the hazardous substances, or the failure to promptly remediate them, may adversely affect the owner's ability to sell the real estate or to borrow using the real estate as collateral. In connection with our ownership and operation of the Properties, we may be potentially liable for the costs of removal or remediation of hazardous substances. We have no knowledge, nor have we been notified by any governmental authority, of any material noncompliance, liability or claim relating to hazardous substances in connection with any properties, in which we now have or heretofore had an interest. However, no assurances can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the Properties will not be affected by merchants and occupants of the Properties, by the condition of properties in the vicinity of the Properties (such as the presence of underground storage tanks) or by third parties unrelated to the us. Insurance We believe that each of the Properties is adequately insured, including coverage for liability, fire, flood, earthquake, terrorism and property insurance. Such insurance policies are provided by reputable companies and have commercially reasonable deductibles and limits. Page - (3) Employees As of December 31, 2002, we had 656 employees. We believe that our relations with employees are satisfactory. Liquidity Our liquidity depends on cash provided by operations and potential capital raising activities such as funds obtained through borrowings, particularly refinancing of existing debt, and cash generated through asset sales. Although we believe that estimated cash flows from operations and potential capital raising activities will be sufficient to satisfy our scheduled debt service and other obligations and sustain our operations for the next year, there can be no assurance that we will be successful in obtaining the required amount of funds for these items or that the terms of the potential capital raising activities, if they should occur, will be as favorable as we have experienced in prior periods. During 2003, our first mortgage and expansion loan (the "Mega Deal Loan") matures on November 11, 2003. The Mega Deal Loan, which is secured by a 13 property collateral pool, had an outstanding principal balance of approximately $263.8 million as of December 31, 2002 and will require a balloon payment of approximately $260.7 million at maturity. Based on our initial discussions with various prospective lenders, we are currently projecting a potential shortfall with respect to refinancing the Mega Deal Loan. However, we believe this shortfall may be alleviated through potential asset sales and/or other capital raising activities, including the placement of mezzanine level debt. We caution that our assumptions are based on current market conditions and, therefore, are subject to various risks and uncertainties, including changes in economic conditions which may adversely impact our ability to refinance the Mega Deal Loan at favorable rates or in a timely and orderly fashion, or which may adversely impact our ability to consummate various asset sales or other capital raising activities. In connection with the completion of the sale of six outlet centers (the "Bridge Properties") in July 2002, we guaranteed to FRIT PRT Bridge Acquisition LLC ("FRIT") (i) a 13% return on its approximately $17.2 million of invested capital, and (ii) the full return of its invested capital (the "Mandatory Redemption Obligation") in FP Investment, LLC by December 31, 2003. As of December 31, 2002, the Mandatory Redemption Obligation (included in accounts payable and other liabilities in the accompanying Consolidated Balance Sheet) was approximately $16.2 million. See Note 3 - "Property Dispositions" of the Notes to Consolidated Financial Statements contained herein for additional information. Although we are in the process of seeking to generate additional liquidity to repay the Mandatory Redemption Obligation through (i) the sale of FRIT's ownership interest in the Bridge Properties and/or (ii) the placement of additional indebtedness on the Bridge Properties, there can be no assurance that we will be able to complete such capital raising activities by December 31, 2003 or that such capital raising activities, if they should occur, will generate sufficient proceeds to repay the Mandatory Redemption Obligation in full. Failure to repay the Mandatory Redemption Obligation by December 31, 2003 would constitute a default, which would enable FRIT to exercise its rights with respect to the collateral pledged as security to the guarantee, including some of our partnership interests in the 13 property collateral pool under the aforementioned Mega Deal Loan. See Item 7 - "Management's Discussion of Financial Condition and Results of Operations" contained herein for additional information. Executive Officers The following table sets forth the name and position of the current executive officers of the Company as of the date of this filing along with their age as of December 31, 2002:
- ------------------------------------------------------------------------------------------------------------------------------------ Name Position Age - ------------------------------------------------------------------------------------------------------------------------------------ Glenn D. Reschke Chief Executive Officer and Chairman of the Board 51 Robert A. Brvenik President, Chief Financial Officer and Treasurer 47 R. Kelvin Antill Executive Vice President - General Counsel 43 and Secretary David G. Phillips Executive Vice President - Leasing, International 41 and New Business Development Frederick J. Meno, IV Senior Vice President - Operations & Marketing 45 ====================================================================================================================================
Page - (4) Glenn D. Reschke. Glenn D. Reschke is Chief Executive Officer and Chairman of the Board of Directors of Prime Retail, Inc. Reporting to the Board of Directors, Mr. G. Reschke is responsible for all aspects of the Company, its outlet centers and other properties and all of its employees, including the leasing, operations, marketing, development, finance and administrative functions. In addition, Mr. G. Reschke is responsible for developing and implementing the long-term strategic goals and objectives of the Company as approved by the Board of Directors. Mr. G. Reschke has been a member of the Board of Directors since 1997. Mr. G. Reschke became President and Chief Operating Officer of the Company on October 6, 1999; acting Chief Executive Officer of the Company on February 25, 2000; and Chief Executive Officer and Chairman of the Board of Directors of the Company on July 19, 2000. Mr. G. Reschke relinquished his duties as President to Mr. Brvenik effective August 15, 2002. From the inception of the Company in 1994 through October 6, 1999, Mr. G. Reschke served as Executive Vice President--Development and Acquisitions. Prior to his employment by the Company, Mr. G. Reschke worked for PGI, which he joined in 1983 and served as Vice President, Senior Vice President and Executive Vice President. Mr. G. Reschke was responsible for PGI's multi-family, senior housing, single family and land development divisions. Mr. G. Reschke received a Masters in Business Administration from Eastern Michigan University with a specialization in finance after receiving a Bachelor of Science degree with honors in Chemical Engineering from Rose Hulman Institute of Technology in Terre Haute, Indiana. Mr. G. Reschke is the brother of Michael W. Reschke, a member of the Board of Directors of the Company. Robert A. Brvenik. Robert A. Brvenik is President, Chief Financial Officer and Treasurer of the Company. Mr. Brvenik joined the Company on June 15, 2000 as Executive Vice President, Chief Financial Officer and Treasurer. Mr. Brvenik assumed the duties of President of the Company effective August 15, 2002. In his role as President, Mr. Brvenik is responsible for many of the Company's day-to-day operations including oversight of its finance, accounting and leasing departments. As Chief Financial Officer and Treasurer, Mr. Brvenik's responsibilities include capital market activities, corporate budgeting, financial reporting, investor relations, accounting, taxation, treasury and management information systems. Prior to joining the Company, Mr. Brvenik was associated for 13 years with Pyramid Management Group, Inc. where he served in several key capacities including Chief Financial Officer, Chief Operating Officer, Director of Development and Senior Leasing Representative in addition to liaison with several large commercial and investment banks. Mr. Brvenik has also held positions at Arthur Andersen & Co. and CitiCorp. He received his B.S. in Accounting from Utica College of Syracuse University and is a certified public accountant. R. Kelvin Antill. R. Kelvin Antill is Executive Vice President - General Counsel and Secretary of the Company. Mr. Antill assumed his current position on January 31, 2002. Since joining the Company in 1995, Mr. Antill served as Vice President--Assistant General Counsel and Assistant Secretary from 1995 until July 2000 and Senior Vice President--Assistant General Counsel and Assistant Secretary from July 2000 until January 2002. Prior to joining the Company, Mr. Antill was associated for three years with Ballard, Spahr, Andrews and Ingersoll, and for four years prior to that with Frank, Bernstein, Conway & Goldman, both based in Baltimore, Maryland. Mr. Antill received a Juris Doctorate from the University of Virginia and a Bachelor of Arts in Economics with an additional emphasis in Government and Politics from the University of Maryland at College Park. Mr. Antill is licensed to practice law in the state of Maryland. David G. Phillips. David G. Phillips is Executive Vice President - Leasing, International and New Business Development of the Company. From July 1999 to January 2002, Mr. Phillips was Executive Vice President of the Company and President of Prime Retail Europe pursuant to which he oversaw the Company's development, marketing, leasing and operations efforts in Europe. Prior to becoming President of Prime Retail Europe, Mr. Phillips was Executive Vice President--Leasing of the Company from 1994 to 1996 and then Executive Vice President--Operations, Marketing and Leasing of the Company from 1996 until 1999. From 1989 to 1994, Mr. Phillips was Vice President--Director of Leasing of PGI. Prior to joining PGI, Mr. Phillips was a leasing representative at D.I. Realty, Inc., leasing a variety of retail projects including outlet centers and traditional and specialty malls. Mr. Phillips received a Masters of Science degree in Real Estate Development from Johns Hopkins University and a Bachelor of Science degree in Business Administration from the University of Vermont. Mr. Phillips is a member of the ICSC with a CLS (Certified Leasing Specialist) designation. Frederick J. Meno, IV. Frederick J. Meno, IV is Senior Vice President - Operations & Marketing. Mr. Meno joined the Company in January of 1999 and he is responsible for supervising the management, operations, construction management, marketing and specialty leasing programs for the Company's portfolio of outlet centers. Prior to joining the Company, Mr. Meno was Executive Director of Insignia/ESG, Inc., where he was responsible for all management, leasing, construction management, and business development activities for Insignia/ESG's 10 million square foot national enclosed mall portfolio, as well as Insignia/ESG's Dallas/Fort Worth office, industrial and non-enclosed retail portfolio. For 10 years prior to joining Insignia/ESG, Inc., Mr. Meno was President of the Woodmont Property Management Company in Fort Worth, Texas. A 1979 graduate of Ohio State University, having majored in Urban Land Development/Economics with a degree in Business Administration, Mr. Meno is a member of the Institute of Real Estate Management and the ICSC. Mr. Meno has achieved the designations of Certified Property Manager, Real Property Administrator and Certified Shopping Center Manager and is a licensed Real Estate Salesman in the State of Texas. Mr. Meno is also on the Advisory Board of the Shopping Center Management Insider Publication and he was the 2001 Dean for ICSC's University of Shopping Centers School of Outlet Retailing, Value Oriented and Community Centers. Page - (5) ITEM 2 - PROPERTIES General As a fully-integrated real estate company, we provide finance, leasing, accounting, marketing and management services for all of our Properties, including those which we have an ownership interest through unconsolidated joint ventures. At December 31, 2002, our portfolio of Properties consisted of (i) 38 outlet centers aggregating 10,269,000 square feet of GLA (including 2,789,000 square feet of GLA at outlet centers owned through unconsolidated joint ventures) and (ii) 154,000 square feet of GLA of office space. The table set forth below summarizes certain information with respect to our outlet centers as of December 31, 2002 (see Note 6 - "Debt" of the Notes to the Consolidated Financial Statements contained herein for information with respect to mortgage indebtedness on our Properties).
- ------------------------------------------------------------------------------------------------------------------------------------ Grand GLA Occupancy Outlet Centers Opening Date (Sq. Ft.) Percentage (1) - ------------------------------------------------------------------------------------------------------------------------------------ Prime Outlets at Fremont-- Fremont, Indiana October 1985 229,000 90% Prime Outlets at Birch Run (2)-- Birch Run, Michigan September 1986 724,000 93 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 98 Prime Outlets at Burlington-- Burlington, Washington May 1989 174,000 90 Prime Outlets at Queenstown-- Queenstown, Maryland June 1989 221,000 99 Prime Outlets at Hillsboro-- Hillsboro, Texas October 1989 359,000 96 Prime Outlets at Oshkosh-- Oshkosh, Wisconsin November 1989 260,000 93 Prime Outlets at Warehouse Row (4)-- Chattanooga, Tennessee November 1989 95,000 85 Prime Outlets at Perryville-- Perryville, Maryland June 1990 148,000 96 Prime Outlets at Sedona-- (5) Sedona, Arizona August 1990 82,000 95 Prime Outlets at San Marcos-- San Marcos, Texas August 1990 549,000 97 Prime Outlets at Anderson-- (3) Anderson, California August 1990 165,000 95 Prime Outlets at Post Falls-- (5) Post Falls, Idaho July 1991 179,000 68 Prime Outlets at Ellenton-- Ellenton, Florida October 1991 481,000 98 Prime Outlets at Morrisville-- Raleigh - Durham, North Carolina October 1991 187,000 75 Prime Outlets at Naples-- Naples/Marco Island, Florida December 1991 146,000 85 Prime Outlets at Niagara Falls USA-- Niagara Falls, New York July 1992 534,000 92 Prime Outlets at Woodbury-- (6) Woodbury, Minnesota July 1992 250,000 75 Prime Outlets at Calhoun-- (3) Calhoun, Georgia October 1992 254,000 91 Prime Outlets at Bend-- (5) Bend, Oregon December 1992 132,000 100 Prime Outlets at Jeffersonville I-- Jeffersonville, Ohio July 1993 407,000 97 Prime Outlets at Gainesville-- Gainesville, Texas August 1993 316,000 74
Page - (6)
- ------------------------------------------------------------------------------------------------------------------------------------ Grand GLA Occupancy Outlet Centers Opening Date (Sq. Ft.) Percentage (1) - ------------------------------------------------------------------------------------------------------------------------------------ Prime Outlets at Grove City-- Grove City, Pennsylvania August 1994 533,000 100% Prime Outlets at Huntley-- Huntley, Illinois August 1994 282,000 71 Prime Outlets at Florida City-- Florida City, Florida September 1994 208,000 70 Prime Outlets at Pismo Beach-- Pismo Beach, California November 1994 148,000 100 Prime Outlets at Tracy-- Tracy, California November 1994 153,000 97 Prime Outlets at Odessa-- Odessa, Missouri July 1995 296,000 76 Prime Outlets at Darien (7)-- Darien, Georgia July 1995 307,000 65 Prime Outlets at Gulfport (8)-- Gulfport, Mississippi November 1995 306,000 88 Prime Outlets at Lodi-- (3)Burbank, Ohio November 1996 313,000 87 Prime Outlets at Gaffney (3) (7)-- Gaffney, South Carolina November 1996 305,000 99 Prime Outlets at Lee-- (3) Lee, Massachusetts June 1997 224,000 96 Prime Outlets at Lebanon-- Lebanon, Tennessee April 1998 229,000 98 Prime Outlets at Hagerstown (2)-- Hagerstown, Maryland August 1998 487,000 100 ---------- --- Total Outlet Centers (9) 10,269,000 90% ========== === ====================================================================================================================================
Notes: (1) Percentage reflects occupied space as of December 31, 2002 as a percent of available square feet of GLA. (2) Through affiliates, we have a 30% ownership interest in the joint venture partnership that owns this outlet center. (3) Through affiliates, we have an 18.2% ownership interest in the joint venture partnership that owns this outlet center. (4) We own a 2% partnership interest as the sole general partner in 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 also includes approximately 154,000 square feet of office space, not included in this table, which was 95% occupied as of December 31, 2002. (5) Non-recourse mortgage loans cross-collateralized by Prime Outlets at Bend, Prime Outlets at Post Falls and Prime Outlets at Sedona are currently in default and we are in the process of negotiating a transfer of our ownership interests in these outlet centers to the lender. See Note 6 - "Debt" of the Notes to Consolidated Financial Statements for additional information. (6) 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 the transfer of our ownership interest in Prime Outlets at Woodbury with the lender. See Note 6 - "Debt" of the Notes to Consolidated Financial Statements for additional information. (7) We operate this outlet center pursuant to a long-term ground lease under which we receive the economic benefit of a 100% ownership interest. (8) The real property on which this outlet center is located is subject to a long-term ground lease. (9) Excludes Oxnard Factory Outlet. Through an affiliate, we have a 50% legal ownership interest in the joint venture partnership that owns this outlet center. However, we are currently receiving no economic benefit from the Oxnard Factory Outlet. Lease Terms In general, the leases relating to our outlet centers have terms of three to five years. The majority of leases provide for the payment of percentage rents for annual sales in excess of certain thresholds. In addition, lease agreements generally provide for (i) the recovery of a merchant's proportionate share of actual costs of common area maintenance ("CAM"), refuse removal, insurance, and real estate taxes, (ii) a contribution for advertising and promotion and (iii) an administrative fee. CAM includes items such as utilities, security, parking lot cleaning, maintenance and repair of common areas, capital replacement reserves, landscaping, seasonal decorations, public restroom maintenance and certain administrative expenses. We continually monitor our lease provisions in light of current and expected economic conditions and other factors. In this regard, we may consider alternative lease provisions (e.g., fixed CAM) where appropriate. Page - (7) The following table sets forth, as of December 31, 2002, tenant lease expirations, assuming that none of the tenants exercises any renewal option, over the next 10 years for our outlet center portfolio, including 9 outlet centers we own through unconsolidated joint ventures, but excluding four outlet centers secured by non-recourse mortgage indebtedness that is currently in default (see "Defaults on Certain Non-recourse Mortgage Indebtedness" in Note 6 - - "Debt" of the Notes to Consolidated Financial Statements contained herein for additional information):
- ------------------------------------------------------------------------------------------------------------------------------------ Lease Expirations - Outlet Centers ---------------------------------- % of Total Number of Annualized Annualized Leases Approximate Minimum Rent Minimum Rent of Year Expiring GLA (Sq. Ft.) of Expiring Leases Expiring Leases - ------- ----------------- ------------------ --------------------- ----------------------------- 2003 560 2,224,432 $ 23,045,116 21.25% 2004 457 1,787,527 21,164,320 19.52% 2005 335 1,385,992 19,500,907 17.98% 2006 225 904,911 13,718,451 12.65% 2007 200 852,756 13,345,631 12.31% 2008 115 514,380 6,743,522 6.22% 2009 22 108,351 1,583,008 1.46% 2010 37 231,567 3,149,311 2.90% 2011 32 183,338 2,709,736 2.50% 2012 25 105,445 1,692,392 1.56% ====================================================================================================================================
Tenants In our view, tenant mix is an important factor in determining an outlet center's success. Our outlet centers are managed to attract and retain, if possible, a diverse mix of nationally and internationally recognized manufacturers of moderate to upscale designer and brand name products. Crucial to the success of an outlet center is the presence of lead tenants. Lead tenants are manufacturers that may potentially attract a large number of qualified consumers to the outlet center due to the strength of their brand name and the value offered to the consumer. Lead tenants generally are placed in strategic locations designed to draw customers into the outlet center and to encourage them to shop at more than one store. We continually examine the placement of tenants within each center and, in collaboration with our tenants, adjust the size and location of their spaces within each center in an effort to improve sales per square foot. 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 reclassified the operating results, including gains or losses from disposition, of certain property 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. The following discussion is reflective of the reclassifications made pursuant to the requirements of FAS No. 144 and relates to our operating results from continuing operations. During the year ended December 31, 2002, no group of tenants under common control accounted for more than 4.6% of our gross revenues or leased more than 5.6% of our total GLA. During the years ended December 31, 2002 and 2001, our total provision for uncollectible accounts receivable ("bad debt expense"), which is included in other charges in the accompanying Consolidated Statements of Operations, was approximately $1.9 million, or 1.2%, and $9.0 million, or 4.9%, of total revenues, respectively. Bad debt expense is mainly attributable to tenant bankruptcies, disputes, abandonments and store closings. Page - (8) ITEM 3 - LEGAL PROCEEDINGS Except as described below, neither we nor any of our properties are currently subject to any material litigation, nor to our knowledge, is any material or other litigation threatened against us, other than routine litigation arising in the ordinary course of business, some of which is expected to be covered by liability insurance and all of which collectively is not expected to have an adverse effect on our consolidated financial statements. The Company and its affiliates were defendants in a lawsuit filed by Accrued Financial Services ("AFS") on August 10, 1999 in the Circuit Court for Baltimore City. The lawsuit was removed to United States District Court for the District of Maryland (the "U.S. District Court") on August 20, 1999. AFS claimed that certain tenants had assigned to AFS their rights to make claims under leases such tenants had with affiliates of the Company and alleged that the Company and its affiliates overcharged such tenants for common area maintenance charges and promotion fund charges. The U.S. District Court dismissed the lawsuit on June 19, 2000. AFS appealed the U.S. District Court's decision to the United States Court of Appeals for the Fourth Circuit. Briefs were submitted and oral argument before a panel of judges of the United States Court of Appeals for the Fourth Circuit was held on October 30, 2001, during which the panel of judges requested further briefing of certain issues. On July 29, 2002, the Fourth Circuit affirmed the dismissal. AFS filed a request for further review by the Fourth Circuit which request was denied. In January 2003, AFS filed a petition for a writ of certiorari by the United States Supreme Court and the Company filed its opposition on February 24, 2003. The Company believes it has acted properly and will continue to defend the suit vigorously if AFS's petition is granted. Nevertheless, if the AFS writ of certiorari is successful, the outcome of this lawsuit and the ultimate liability of the defendants, if any, cannot be predicted at this time. In addition, certain tenants in the Company's and its affiliates' outlet centers have made or may make allegations concerning overcharging for CAM and promotion fund charges because of varying clauses in their leases pursuant to which they claim under various circumstances that they were not required to pay some or all of the pass-through charges. Such claims if asserted and found meritorious, could have a material affect on the Company's financial condition. Determination of whether liability would exist to the Company would depend on interpretation of various lease clauses within a tenant's lease and all of the other leases at each center collectively. To date such issues have been raised and resolved with Dinnerware Plus Holdings, Inc. ("Mikasa"), Melru Corporation, Designs, Inc. and Brown Group Retail, Inc., all of which at one time or another were in litigation, or threatened litigation with the Company. During the second quarter of 2002, the Company recorded a non-recurring charge to establish a reserve in the amount of $3.0 million for resolution of these matters, in addition to the Mikasa matter referred to above. This reserve which is included in the accounts payable and other liabilities in the accompanying Consolidated Balance Sheet as of December 31, was estimated in accordance with our established policies and procedures concerning loss contingencies (see "Critical Accounting Policies and Estimates" of Item 2 - "Management Discussion and Analysis of Financial Condition and Results of Operations" for additional information). The balance of the unused reserve is approximately $2.4 million as of December 31, 2002. Based on presently available information, the Company believes it is probable this reserve will be utilized over the next several years in resolving claims relating to the pass-through and promotional fund provisions contained in its leases. The Company cautions, however, that given the inherent uncertainties of litigation and the complexities associated with a large number of leases and other factual questions at issue, actual costs may vary from this estimate. No other such tenant, however, has filed a suit or indicated to the Company that it intends to file as suit. Nevertheless, it is too early to make any predictions as to whether the Company or its affiliates may be found liable with respect to other tenants, or to predict damages should liability be found. Affiliates of the Company routinely file lawsuits to collect past rent due from, and to evict, tenants which have defaulted under their leases. There are currently dozens of such actions pending. In addition to defending against the Company's affiliates' claims and eviction actions, some tenants file counterclaims against the Company's affiliates. A tenant who files such a counterclaim typically claims that the Company's affiliate which owns the outlet center in question has defaulted under the tenant's lease, has overcharged the tenant for CAM and promotion fund charges, made misrepresentations during the leasing process, or has failed to maintain or market the outlet center in question as required by the lease. One such case involves a collections and eviction action in Puerto Rico captioned Outlet Village of Puerto Rico Limited Partnership, S.E. v. WEPA, Inc., and another, for instance, involves a collection case in San Marcos, Texas, captioned, San Marcos Factory Stores, Ltd. v. SM Collectibles, Inc. d/b/a Country Clutter. Usually such counterclaims are without merit. In response to such counterclaims the Company's affiliates usually continue to pursue their collection or eviction actions and defend against the counterclaims. Despite the fact that the Company and its affiliates believe such counterclaims are without merit and defend against them vigorously, the outcome of all such counterclaims, and, thus, the liability, if any, of the Company and its affiliates, cannot be predicted at this time. Page - (9) Several entities (the "eOutlets Plaintiffs") filed or stated an intention to file lawsuits (collectively, the "eOutlets Lawsuits") against the Company and its affiliates arising out of the Company's on-line venture, primeoutlets.com. inc., also known as eOutlets, an affiliate of the Company. The eOutlets Plaintiffs seek to hold the Company and its affiliates responsible under various legal theories for liabilities incurred by primeoutlets.com, inc., including the theories that the Company guaranteed the obligations of eOutlets and that the Company was the "alter-ego" of eOutlets. The Company believes that it is not liable to eOutlets Plaintiffs as there was no privity of contract between it and the various eOutlets Plaintiffs. 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 another matter, J. Walter Thompson, USA, Inc. v. Prime Retail, L.P. and Prime Retail, Inc. the Company succeeded in having the corporate veil piercing and alter ego claims dismissed and settled the remaining claims in February 2003. primeoutelts.com, inc. filed for protection under Chapter 7 of the United States Bankruptcy Code in November of 2000 under the name E-Outlets Resolution Corp. (the "Debtor"). On November 5, 2002, the bankruptcy trustee for the Debtor brought suit against Prime Retail, L.P. , Prime Retail, Inc., and Prime Retail E-Commerce, Inc. (the "Entity Defendants") and certain former directors of the Debtor (the "Individual Defendants"). The Trustee has asserted claims of alter ego, promissory estoppel, breach of contract, breach of fiduciary duty, tortious interference with prospective business advantage, unjust enrichment and quantum meruit against the Entity Defendants and breach of fiduciary duty and gross negligence against the individual defendants. The Company has tendered the suit, both as to the Entity Defendants and Individual Defendants, to its Directors' and Officers' ("D&O") insurance carrier. Motions to dismiss the suit have been filed by all Defendants. All Defendants believe the suit is without merit and plan on defending it vigorously. Nevertheless, the outcome of this lawsuit, and the ultimate liability of the Company, 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 as a result of a violation of federal trademark laws. The Company, through affiliates, has also filed suit against The Fru-Con Projects, Inc. ("Fru-Con"), a partner in Arizona Factory Shops Partnership and an affiliate of FCC. The Company and its affiliates allege that Fru-Con failed to use reasonable efforts to assist in obtaining refinancing. Fru-Con has claims pending against the Company and its affiliates, as part of the same suit, alleging that the Company and its affiliates breached their contract with Fru-Con by not allowing Fru-Con to participate in an outlet project in Sedona, Arizona (the "Sedona Project") and breached a management and leasing agreement by managing and leasing the Sedona Project. The Company believes its affiliates and it acted property and FCC did not act properly. The Company and its affiliates will vigorously defend the claims filed against them and prosecute the claims they filed. Nevertheless, the ultimate outcome of the suit, including the liability, if any, of the Company and its affiliates, cannot be predicted at this time. ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS Pursuant to our Amended and Restated Articles of Incorporation, if and whenever dividends payable on the Preferred Stock shall be in arrears for six or more consecutive quarterly periods, then the holders of Preferred Stock, voting together as a single class, shall be entitled at the next meeting of stockholders or at any special meeting called for such purpose, to elect two additional directors (the "Preferred Directors") to our Board of Directors until the full dividends accumulated on all outstanding shares of the Preferred Stock have been paid in full or declared and a sum of money sufficient for the payment thereof set aside for payment. In December 2001, the holders of the Preferred Stock elected Howard Amster and Robert H. Kanner as the Preferred Directors with terms expiring at our Annual Meeting of Shareholders in 2003 or until their successors are duly elected and qualified, or, if earlier, the date on which the full dividends accumulated on all outstanding shares of Preferred Stock have been paid in full or declared and a sum of money sufficient for their payment set aside for payment. On July 12, 2002, Mr. Kanner resigned as a Preferred Director for reasons unrelated to the company or management. At a special meeting of the holders of the Preferred Stock held on December 5, 2002, Gary J. Skoien was elected to replace Mr. Kanner as a Preferred Director. Mr. Skoien will serve out the balance of Mr. Kanner's term. Page - (10) PART II ITEM 5 - MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS Our common stock trades on the OTC Bulletin Board under the trading symbol "PRME". Our common stock previously traded through September 26, 2001 on the New York Stock Exchange under the trading symbol "PRT". The following table sets forth the quarterly high, low and end of period closing sales prices per share of our common stock as reported on the OTC Bulletin Board and NYSE during the years ended December 31, 2002 and 2001, respectively. We did not pay any distributions during 2002 or 2001.
- ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 - ---------------------------------------------------------------------------------- ---------------------------------------------- Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Market price per common share: High $ 0.17 $ 0.15 $ 0.17 $ 0.24 $ 0.20 $ 0.30 $ 0.42 $ 0.70 Low 0.04 0.06 0.08 0.09 0.09 0.16 0.26 0.36 End of period close 0.12 0.06 0.12 0.18 0.10 0.17 0.27 0.39 ====================================================================================================================================
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 distributions, if necessary, 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 policy remains to pay distributions only to the extent necessary to maintain our status as a REIT for federal income tax purposes. During 2002, we were not required to pay any distributions in order to maintain our status as a REIT and based on our current federal income tax projections, we do not expect to pay any distributions during 2003. We are currently in arrears on thirteen quarters of preferred stock distributions due February 15, 2000 through February 15, 2003, respectively. We may not make distributions to our common shareholders or our holders of common units of limited partnership interests in the Operating Partnership unless we are current with respect to distributions to our preferred shareholders. As of December 31, 2002, unpaid dividends for the period beginning on November 16, 1999 through December 31, 2002 on our Series A Senior Preferred Stock and Series B Convertible Preferred Stock aggregated $18.9 million and $52.0 million, respectively. The annualized dividends on our 2,300,000 shares of Series A Senior Preferred Stock and 7,828,125 shares of Series B Convertible Preferred Stock outstanding as of December 31, 2002 are $6.0 million ($2.625 per share) and $16.6 million ($2.125 per share), respectively. The approximate number of holders of record of our common stock was 561, including participants in security position listings, as of March 11, 2003. Page - (11) ITEM 6 - SELECTED FINANCIAL DATA (Amounts in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Statements of Operations Data (1): Revenues Base rents $ 86,184 $ 113,546 $ 151,605 $ 166,828 $ 126,319 Percentage rents 3,756 3,469 5,566 7,334 5,679 Tenant reimbursements 48,730 54,178 70,749 77,350 57,364 Interest and other 13,361 12,126 13,728 12,743 8,948 ---------- ----------- ----------- ----------- ------------ Total revenues 152,031 183,319 241,648 264,255 198,310 Expenses Property operating 42,446 44,472 58,494 61,581 45,742 Real estate taxes 12,931 15,054 17,655 18,587 13,499 Depreciation and amortization 34,301 45,863 57,930 63,470 45,380 Corporate general and administrative 14,562 14,290 21,581 12,687 7,980 Interest 61,826 79,864 91,161 86,055 52,060 Other charges 8,684 19,632 22,907 13,204 5,218 Provision for asset impairment 84,093 63,026 77,115 18,309 - ---------- ----------- ----------- ----------- ------------ Total expenses 258,843 282,201 346,843 273,893 169,879 ---------- ----------- ----------- ----------- ------------ Income (loss) before gain (loss) on sale of real estate and minority interests (106,812) (98,882) (105,195) (9,638) 28,431 Gain (loss) on sale of real estate, net 5,802 (1,063) (42,648) (15,153) (15,461) ---------- ----------- ----------- ----------- ------------ Income (loss) from continuing operations before minority interests (101,010) (99,945) (147,843) (24,791) 12,970 Loss allocated to minority interests - 408 738 (3,226) (2,456) ---------- ----------- ----------- ----------- ------------ Income (loss) from continuing operations (101,010) (99,537) (147,105) (28,017) 10,514 Discontinued operations, including provision for asset impairment of $27,757 and net gain of $26,152 on dispositions in 2002 1,942 1,489 4,653 (6,812) 7,016 ---------- ----------- ----------- ----------- ------------ Net income (loss) (99,068) (98,048) (142,452) (34,829) 17,530 Allocations to preferred shareholders (22,672) (22,672) (22,672) (9,962) (24,604) ---------- ----------- ----------- ----------- ------------ Net loss applicable to common shares $ (121,740) $ (120,720) $ (165,124) $ (44,791) $ (7,074) ========== =========== =========== =========== =========== Basic loss per common share $ (2.79) $ (2.77) $ (3.79) $ (1.04) $ (0.20) ========== =========== =========== =========== =========== Diluted loss per common share $ (2.79) $ (2.77) $ (3.79) $ (1.30) $ (0.20) ========== =========== =========== =========== =========== Other Data: Funds from operations (2) $ 22,882 $ 25,256 $ 57,967 $ 84,163 $ 90,020 Net cash provided by operating activities 30,124 32,911 32,450 97,815 59,182 Net cash provided by investing activities 41,451 5,595 1,095 (56,666) (145,596) Net cash used in financing activities (72,204) (39,875) (31,982) (39,571) 85,806 Distributions declared per common share (3) - - - 0.885 1.680 Reported merchant sales 2,047,114 2,473,830 2,745,923 3,286,917 3,169,268 - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Balance Sheet Data: Rental property before accumulated depreciation $ 854,862 $ 1,375,608 $ 1,493,107 $ 1,826,551 $ 2,015,722 Net investment in rental property 641,258 1,117,484 1,275,538 1,642,597 1,887,975 Assets held for sale - 54,628 43,230 - - Investment in unconsolidated joint ventures 49,889 24,539 21,610 18,941 8,386 Total assets 818,088 1,262,508 1,462,021 1,856,058 1,976,464 Bonds payable 22,495 31,975 32,455 32,900 32,900 Notes payable 511,443 925,492 997,698 1,227,770 1,184,607 Defeased notes payable 74,764 - - - - Total liabilities and minority interests 660,716 1,006,068 1,107,533 1,359,371 1,332,730 Shareholders' equity 157,372 256,440 354,488 496,687 643,734 Other Data: Total outlet center GLA (4) 10,269 12,670 13,497 14,699 14,348 Total outlet centers (4) 38 45 48 51 50 ====================================================================================================================================
Page - (12) Notes: (1) 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 certain properties either disposed of or classified as assets held for sale during 2002 as discontinued operations in the statements of operations for all periods presented. (2) Industry analysts generally consider funds from operations ("FFO"), as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), an alternative non-"GAAP" 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 accounting principles generally accepted in the United States "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 non-GAAP 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. A reconciliation of income (loss) from continuing operations before allocations to minority interests and preferred shareholders to FFO is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) from continuing operations before minority interests $ (101,010) $ (99,945) $ (147,843) $ (24,791) $ 12,970 Adjustments: Loss (gain) on sale of real estate (5,802) 1,063 42,648 15,153 15,461 Provision for asset impairment - operating properties 84,093 63,026 68,663 2,270 - Depreciation and amortization 34,301 45,863 57,930 63,470 45,380 Non-real estate depreciation and amortization (2,166) (2,251) (1,703) (587) (432) Unconsolidated joint venutres' adjustments 3,957 3,074 3,269 1,639 1,211 Non-cash joint venture interest subsidy - 1,882 - - - Discontinued operations 1,942 1,489 4,653 (6,812) 7,016 Discontinued operations - net gain on disposition (26,152) - - - - Discontinued operations - provision for impairment 27,757 - - 13,572 - Discontinued operations - depreciation and amortization 5,437 11,055 9,626 10,170 7,347 ---------- --------- ---------- --------- -------- FFO before adjustments for non-recurring losses 22,357 25,256 37,243 74,084 88,953 Non-recurring loss on early extinguishment of debt(1) 525 - 4,206 3,518 - Loss on eOutlets(2) - - 14,703 - - Loss on Designer Connection(3) - - 1,815 6,561 1,067 ---------- --------- ---------- --------- -------- FFO before allocations to minority interests and preferred shareholders $ 22,882 $ 25,256 $ 57,967 $ 84,163 $ 90,020 ========== ========= ========== ========= ======== ====================================================================================================================================
Notes: (1) Represents non-recurring charges incurred in connection with the early extinguishment of debt. We adopted FAS No. 145 effective December 31, 2002 and accordingly, classified such costs as a component of interest expense. The costs are attributable to financing activities ancillary to our core real estate operations. (2) Represents the results of business activities ancillary to our core real estate operations. Due to financial constraints, we decided to discontinue the Designer Connection and eOutlets.com businesses in December 1999 and April 2000, respectively. See Note 12 - "Special Charges" of the Notes to Consolidated Financial Statements for additional information. (3) Includes special cash distribution during 1998 of $0.50 per common share relating to our merger with Horizon Group, Inc. completed in June 1998. (4) Includes outlet centers we operate under unconsolidated joint ventures with unrelated third parties as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Aggregate GLA 2,789 1,195 1,764 1,494 595 Number of outlet centers 9 3 5 4 3 ====================================================================================================================================
Page - (13) ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in thousands, except per share, per unit, and per square foot information) The following discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this Form 10-K contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect management's current views with respect to future events and financial performance. In addition, we may make forward-looking statements in future filings with the Securities and Exchange Commission and in written material, press releases and oral statements issued by us or on our behalf. Forward-looking statements include statements regarding the intent, belief, or current expectations of us or our officers, including statements preceded by, followed by, or including forward-looking terminology such as "may," "will," "should," believe," "expect," "anticipate," "estimate," "continue," "predict," or similar expressions with respect to various matters. These statements are subject to potential risks and uncertainties and, therefore, actual results may differ materially. Such forward-looking statements are subject to certain risks and uncertainties, including, but not limited to, the risk associated with our high level of leverage and our ability to refinance such indebtedness as it becomes due; the risk that we or one or more of our subsidiaries are not able to satisfy scheduled debt service obligations or will not remain in compliance with existing loan covenants; the risk of material adverse affects of future events, including tenant bankruptcies, abandonments and the non-payment by tenants of contractual rents and additional rents, on our financial performance; the risk related to the retail industry in which our outlet centers compete, including the potential adverse impact of external factors, such as inflation, consumer confidence, unemployment rates and consumer tastes and preferences; the risk associated with our potential asset sales; the risk of potential increases in market interest rates from current levels; the risk associated with real estate ownership, such as the potential adverse impact of changes in local economic climate on the revenues and the value of our properties; the risk associated with litigation; and the risk associated with competition from web-based and catalogue retailers. All forward-looking statements in this report are based on information available to us on the date of this report. We do not undertake to update any forward-looking statements that may be made by us or on our behalf in this report or otherwise. Introduction The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report on Form 10-K. Our operations are conducted through the Operating Partnership. We control the Operating Partnership as its sole general partner and are dependent upon the distributions or other payments from the Operating Partnership to meet our financial obligations. Historical results and percentage relationships set forth herein are not necessarily indicative of future operations. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report on Form 10-K. These Consolidated Financial Statements and Notes thereto have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of such statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent liabilities. We evaluate our estimates on an on-going basis; including those related to (i) revenue recognition, (ii) provisions for bad debt on accounts receivable, (iii) potential impairment of the carrying value of rental properties held for use, (iv) capitalization and depreciation of significant renovations and improvements and (v) contingencies for debt guarantees and litigation. We base our estimates on historical trends and certain other assumptions that we believe are reasonable under the particular circumstances. These estimates ultimately form the basis for making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. To assist you in understanding our financial condition and results from operations, we have identified our critical accounting policies and discussed them below. These accounting policies are most important to the portrayal of our financial condition and results from operations, either because of the significance of the financial statement items to which they relate or because they require our management's most difficult, subjective or complex judgments. Page - (14) Revenue Recognition Leases with tenants are accounted for as operating leases. Minimum rental income is recognized on a straight-line basis over the term of the lease and unpaid rents are included in accounts receivable, net in the accompanying Consolidated Balance Sheets. Certain lease agreements contain provisions, which provide for rents based on a percentage of sales or based on a percentage of sales volume above a specified threshold. These contingent rents are not recognized until the required thresholds are exceeded. In addition, the lease agreements generally provide for the reimbursement of real estate taxes, insurance, advertising and certain common area maintenance costs. These additional rents and tenant reimbursements are accounted for on the accrual basis. Bad Debt Expense We regularly review our accounts receivable to determine an appropriate amount for the allowance for doubtful accounts based upon the impact of economic conditions on ours tenants' ability to pay, past collection experience and such other factors which, in our judgment, deserve current recognition. In turn, a provision for uncollectible accounts receivable ("bad debt expense") is charged against the allowance to maintain the allowance level within this range. If the financial condition of our tenants were to deteriorate, resulting in impairment in their ability to make payments due under their leases, additional allowances may be required. Impairment of Rental Property We monitor our Properties for indicators of impairment on an on-going basis. We record a provision for impairment when we believe certain events and circumstances have occurred which indicate that the carrying value of our Properties might have experienced a decline in value that is other than temporary and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Impairment losses are measured as the difference between 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 estimated costs to dispose. Fair value is based on estimated cash flows discounted at a risk-adjusted rate of return. Adverse changes in market conditions or deterioration in the operating results of our outlet centers and other rental properties could result in losses or an inability to recover the current carrying value of such assets. Such potential losses or the inability to recover the current carrying value may not be reflected in our Properties' current carrying value, thereby possibly requiring an impairment charge in the future. Capitalization and Depreciation of Significant Renovations and Improvements Depreciation is calculated on the straight-line basis over the estimated useful lives of the assets, based upon management's estimates. Significant renovations and improvements, which improve and/or extend the useful life of assets are capitalized and depreciated over their estimated useful lives, based upon management's estimates. Contingencies We are subject to proceedings, lawsuits, and other claims related to various matters (see Note 13 - "Legal Proceedings" of the Notes to the Consolidated Financial Statements for additional information). Additionally, we have guaranteed certain indebtedness of others (see Note 6 - "Debt" of the Notes to Consolidated Financial Statements 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 because of (i) new developments or changes to the approach in which we deal with each matter or (ii) if unasserted claims arise. Outlet Center Portfolio Portfolio GLA and Occupancy Our outlet center portfolio size reflects (i) our past development (both new outlet centers and expansions to outlet centers) and acquisition activities and (ii) our more recent disposition activities. Our outlet portfolio consisted of 38 properties totaling 10,269,000 square feet of gross leasable area ("GLA") at December 31, 2002 compared to 45 properties totaling 12,670,000 square feet of GLA at December 31, 2001 and 48 properties totaling 13,497,000 square feet of GLA at December 31, 2000. The changes in our outlet center GLA are because of certain property dispositions during 2002, 2001 and 2000. Such changes are discussed below. Our outlet center portfolio was 90.5%, 91.2% and 92.7% occupied as of December 31, 2002, 2001 and 2000, respectively. The weighted-average occupancy of our outlet center portfolio (excluding properties disposed of during 2002 whose results are included in discontinued operations) during the years ended December 31, 2002, 2001 and 2000 was 88.0%, 90.9% and 92.3%, respectively. We have disposed of certain properties through various transactions (including sale, joint venture arrangements, foreclosure and transfer of ownership to the applicable lender) during the years ended December 31, 2002, 2001 and 2000 (see Note 3 - "Property Dispositions" of the Notes to Consolidated Financial Statements for additional information). These transactions have had a significant impact on the size of our portfolio for the periods presented and are summarized below. Page - (15) During 2002, we completed transactions involving 17 properties aggregating 4,431,000 square feet of GLA. These transactions included (i) the sale of seven outlet centers aggregating 1,791,000 square feet of GLA into joint venture arrangements, (ii) the sale of five (including one consisting of 197,000 square feet of GLA that we owned 51% through an unconsolidated joint venture) outlet centers aggregating 1,486,000 square feet of GLA to unrelated third parties, (iii) the foreclosure sale and/or transfer of three outlet centers aggregating 922,000 square feet of GLA to the applicable lender and (iv) the sale of two community centers aggregating 232,000 square feet of GLA to unrelated third parties. The seven centers sold into joint venture arrangements consisted of two separate transactions involving (i) Prime Outlets at Hagerstown (the "Hagerstown Center"), which was sold to an existing joint venture partnership (the "Prime/Estein Venture"), and (ii) six outlet centers (collectively, the Bridge Properties"). Such properties are collectively referred to as the "2002 Joint Venture Properties". Commencing on the date of disposition, we account for our ownership interest in the 2002 Joint Venture Properties in accordance with the equity method of accounting. The operating results of the 2002 Joint Venture Properties are reflected in our results from continuing operations for all periods presented through their respective dates of disposition. Their operating results have not been classified to discontinued operations because we have a significant continuing involvement in these properties. Additionally, we sold Phases II and III of the Bellport Outlet Center. We accounted for our ownership interest in the Bellport Outlet Center in accordance with the equity method of accounting through its date of disposition. The operating results of the remaining disposed properties have been classified as discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented. During 2001, we completed transactions involving three properties aggregating 723,000 square feet of GLA. These transactions included (i) the sale of one outlet center consisting of 257,000 square feet of GLA to an unrelated third party, (ii) the foreclosure sale of one outlet center (that we owned 50% through an unconsolidated joint venture) consisting of 326,000 square feet of GLA and (iii) the sale of one community center consisting of 140,000 square feet of GLA to an unrelated third party. The operating results for properties disposed of during 2001 are not classified as discontinued operations in the accompanying Consolidated Statements of Operations. Such properties are collectively referred to as the "2001 Property Dispositions". During 2000, we completed transactions involving five properties aggregating 1,866,000 square feet of GLA. These transactions included (i) the sale of one outlet center consisting of 274,000 square feet of GLA to the Prime/Estein Venture and (ii) the sale of four outlet centers aggregating 1,592,000 square feet of GLA to unrelated third parties. The operating results for properties disposed of during 2000 are not classified as discontinued operations in the accompanying Consolidated Statements of Operations. Such properties are collectively referred to as the "2000 Property Dispositions". 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 certain 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. The operating results for properties that were sold into joint venture partnerships during 2002 have not been classified to discontinued operations in the accompanying Consolidated Statements of Operations because we still retain a significant continuing involvement in their operations. Such properties and/or their operating results through the dates of their respective disposition are collectively referred to as the "2002 Joint Venture Properties". The operating results for properties disposed of before January 1, 2002 are not classified as discontinued operations. Such properties and/or their operating results through the dates of their respective disposition are collectively referred to as the "2001 Property Dispositions" or "2000 Property Dispositions". The following discussion and tables regarding operating results for the comparable periods are reflective of the classification requirements under FAS No. 144 and relate to operating results from continuing operations unless otherwise indicated. Page - (16) Results of Operations Table 1 - Consolidated Statements of Operations
- ------------------------------------------------------------------------------------------------------------------------------------ 2002 vs. 2001 2001 vs. 2000 -------------------------- ---------------------- % % Years Ended December 31, 2002 2001 Change Change 2000 Change Change - ------------------------------------------------------------------------------------------------------------------------------------ Revenues Base rents $ 86,184 $ 113,546 $(27,362) -24.1% $ 151,605 $(38,059) -25.1% Percentage rents 3,756 3,469 287 8.3% 5,566 (2,097) -37.7% Tenant reimbursements 48,730 54,178 (5,448) -10.1% 70,749 (16,571) -23.4% Interest and other 13,361 12,126 1,235 10.2% 13,728 (1,602) -11.7% --------- --------- -------- ----- --------- -------- ------ Total revenues 152,031 183,319 (31,288) -17.1% 241,648 (58,329) -24.1% Expenses Property operating 42,446 44,472 (2,026) -4.6% 58,494 (14,022) -24.0% Real estate taxes 12,931 15,054 (2,123) -14.1% 17,655 (2,601) -14.7% Depreciation and amortization 34,301 45,863 (11,562) -25.2% 57,930 (12,067) -20.8% Corporate general and administrative 14,562 14,290 272 1.9% 21,581 (7,291) -33.8% Interest 61,826 79,864 (18,038) -22.6% 91,161 (11,297) -12.4% Other charges 8,684 19,632 (10,948) -55.8% 22,907 (3,275) -14.3% Provision for asset impairment 84,093 63,026 21,067 n/m 77,115 (14,089) n/m --------- --------- -------- ----- --------- -------- ------ Total expenses 258,843 282,201 (23,358) -8.3% 346,843 (64,642) -18.6% --------- --------- -------- ----- --------- -------- ------ Loss before gain (loss) on sale of real estate and minority interests (106,812) (98,882) (7,930) 8.0% (105,195) 6,313 -6.0% Gain (loss) on sale of real estate, net 5,802 (1,063) 6,865 n/m (42,648) 41,585 n/m --------- --------- -------- ----- --------- -------- ------ Loss from continuing operations before minority interests (101,010) (99,945) (1,065) 1.1% (147,843) 47,898 -32.4% Loss allocated to minority interests - 408 (408) n/m 738 (330) n/m --------- --------- -------- ----- --------- -------- ------ Loss from continuing operations (101,010) (99,537) (1,473) 1.5% (147,105) 47,568 -32.3% Discontinued operations, including provision for asset impairment of $27,757 and net gain of $26,152 on dispositions in 2002 1,942 1,489 453 n/m 4,653 (3,164) n/m --------- --------- -------- ----- --------- -------- ------ Net loss (99,068) (98,048) (1,020) 1.0% (142,452) 44,404 -31.2% Allocations to preferred shareholders (22,672) (22,672) - 0.0% (22,672) - 0.0% --------- --------- -------- ----- --------- -------- ------ Net loss applicable to common shares $(121,740) $(120,720) $ (1,020) 0.8% $(165,124) $ 44,404 -26.9% ========= ========= ======== ===== ========= ======== ====== Basic and diluted earnings per common share: Loss from continuing operations $ (2.83) $ (2.80) $ (3.90) Discontinued operations 0.04 0.03 0.11 --------- --------- --------- Net loss $ (2.79) $ (2.77) $ (3.79) ========= ========= ========= Weighted-average common shares outstanding - basic and diluted 43,578 43,578 43,517 ========= ========= ========= ====================================================================================================================================
Page - (17) Table 2 - Statements of Operations on a Weighted-Average per Square Foot Basis A summary of the operating results for the years ended December 31, 2002, 2001 and 2000 is presented in the following table, expressed in amounts calculated on a weighted-average occupied GLA basis.
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ GLA at end of period (1) 7,458 11,864 12,322 Portfolio weighted-average occupied GLA (1) 7,216 8,606 10,360 Outlet center weighted-average occupied GLA (1) 7,070 8,453 10,051 Number of outlet centers at end of period (2) 38 45 48 New outlet centers opened (2) - - 1 Outlet centers expanded (2) - - 2 Community centers at end of period - 2 3 Number of states and territories at end of period 24 26 26 Portfolio Weighted-Average per Square Foot (3): Revenues Rental revenues (4) $ 19.21 $ 19.89 $ 22.00 Interest and other 1.85 1.41 1.09 ------- ------- ------- Total revenues 21.06 21.30 23.09 Expenses (5) Recoverable expenses 7.67 6.92 7.35 Depreciation and amortization 4.75 5.33 5.59 Corporate general and administrative 2.02 1.66 1.64 Interest 8.50 9.28 8.39 Other charges 0.79 1.71 1.40 ------- ------- ------- Total expenses 23.73 24.90 24.37 ------- ------- ------- Loss $ (2.67) $ (3.60) $ (1.28) ======= ======= ======= Outlet Center Weighted-Average per Square Foot (3): Revenues Rental revenues $ 19.33 $ 20.02 $ 22.39 Interest and other 0.89 0.97 0.68 ------- ------- ------- Total revenues 20.22 20.99 23.07 Expenses (5) Recoverable expenses (6) 7.68 6.97 7.42 Depreciation and amortization 4.54 5.16 5.57 Interest 7.40 7.42 7.52 Other charges 0.75 1.56 0.81 ------- ------- ------- Total expenses 20.37 21.11 21.32 ------- ------- ------- Income (loss) $ (0.15) $ (0.12) $ 1.75 ======= ======= ======= ====================================================================================================================================
Notes: (1) Includes total GLA in which we receive substantially all of the economic benefit. Does not include GLA in which we have an ownership interest through unconsolidated joint ventures. The portfolio weighted-average occupied GLA and the factory outlet weighted-average occupied GLA amounts only include those properties whose operating results are reflected in continuing operations for all periods presented (See Note 3 - "Property Dispositions" of the Notes to Consolidated Financial Statements for additional.) (2) Includes outlet centers operated under unconsolidated joint ventures. (3) Based on occupied GLA weighted by months of operation for properties included in continuing operations. The occupied GLA on a weighted-average basis for the 2002 Joint Venture Properties, the 2001 Property Dispositions and the 2000 Property Dispositions are included in the weighted-average GLA through the dates of their respective dispositions. (See Note 3 - "Property Dispositions" of the Notes to Consolidated Financial Statements for additional information. (4) Rental revenues is comprised of base rent, percentage rents and tenant reimbursable income. (5) Excludes the following non-recurring items:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Gain on sale of outparcel land (excluded from interest income) $ - $ - $ 2,472 Provision for asset impairment 84,093 63,026 77,115 Loss on early extinguishment of debt (excluded from interest expense) 525 - 4,206 Corporate general and administrative(i) - - 4,610 Other charges(ii) 3,000 4,918 6,617 - ------------------------------------------------------------------------------------------------------------------------------------
Notes: (i.) Excludes non-recurring costs incurred during 2000 aggregating $4,610 consisting of (i) severance and other compensation costs of $2,421, (ii) professional fees of $1,455 relating to refinancing activities and (iii) $734 of general and administrative costs related to eOutlets.com. (ii.)Excludes non-recurring other charges aggregating $3,000, $4,918 and $6,617 in 2002, 2001 and 2000, respectively. The 2002 non-recurring charge of $3,000 related to pending and potential tenant claims with respect to certain lease provisions. The 2001 non-recurring other charges aggregating $4,918 includes (i) a charge of $2,000 related to pending and potential tenant claims with respect to certain lease provisions, (ii) a loss of $1,882 related to an interest rate subsidy agreement and (iii) a loss of $1,036 related to the refinancing of first mortgage loans on Prime Outlets at Birch Run. The 2000 non-recurring costs aggregating $6.617 include (i) $5,517 of costs related to eOutlets.com, (ii) a loss on operations of our Designer Connection outlet stores of $1,815 and (iii) $1,100 of costs related to the termination of a sale agreement. (6) Recoverable expenses is comprised of property operating expenses and real estate taxes. Page - (18) Comparison of the Year Ended December 31, 2002 to the Year Ended December 31, 2001 Summary We reported losses from continuing operations of $101,010 and $99,537 for the years ended December 31, 2002 and 2001, respectively. For the year ended December 31, 2002, the net loss applicable to our common shareholders was $121,740, or $2.79 per common share. For the year ended December 31, 2001, the net loss applicable to our common shareholders was $120,720, or $2.77 per common share. During the year ended December 31, 2002, we reported a loss from discontinued operations of $1,942, or $0.04 per common share. This loss from discontinued operations includes (i) a net gain related to dispositions of $26,152 and (ii) a provision for asset impairment of $27,557. During the year ended December 31, 2001, we reported a gain on discontinued operations of $1,489, or $0.03 per common share. The 2002 results from continuing operations include (i) an aggregate provision for asset impairment of $84,093, or $1.93 per common share, (ii) a net gain on the sale of real estate of $5,802, or $1.33 per common share, (iii) a second quarter non-recurring charge (included in other charges) of $3,000, or $0.07 per common share, related to pending and potential tenant claims with respect to certain lease provisions and (iv) a fourth quarter non-recurring loss (included in interest expense) of $525, or $0.01 per common share, related to the early extinguishment of debt. The 2001 results from continuing operations include (i) a provision for asset impairment of $63,026, or $1.45 per common share, (ii) a fourth quarter non-recurring charge (included in other charges) of $2,000, or $0.05 per common share, related to pending and potential tenant claims with respect to certain lease provisions, (iii) a third quarter non-recurring loss (included in other charges) of $1,882, or $0.04 per common share, related to an interest rate subsidy agreement, (iv) a third quarter non-recurring loss (included in other charges) of $1,036, or $0.02 per common share, related to the refinancing of first mortgage loans on Prime Outlets at Birch Run (the "Birch Run Center") and (v) a net loss on the sale of real estate of $1,036, or $0.02 per common share. Revenues Total revenues were $152,031 for the year ended December 31, 2002 compared to $183,319 for the year ended December 31, 2001, a decrease of $31,288, or 17.1%. Base rents decreased $27,362, or 24.1%, to $86,184 in 2002 compared to $113,546 in 2001. These decreases are primarily due to (i) transactions involving the 2002 Joint Venture Properties, (ii) the 2001 Property Dispositions, (iii) changes in economic rental rates and (iv) the reduction in outlet center occupancy during the 2002 period. Straight-line rent expense, included in base rent was $497 and $439 for the years ended December 31, 2002 and 2001, respectively. Percentage rents, which represent rents based on a percentage of sales volume above a specified threshold, increased $287, or 8.3%, to $3,756 during the year ended December 31, 2002 compared to $3,469 for the same period in 2001. This increase was primarily attributable to changes in economic rental rates. As summarized in TABLE 3, merchant sales reported for centers remaining in our outlet center portfolio at period-end were $2,047 million and $2,474 million for the years ended December 31, 2002 and 2001, respectively. The weighted-average reported merchant sales per square foot increased to $245 per square foot in 2002 from $241 per square foot in 2001. Total merchant occupancy cost per square foot increased to $20.75 in 2002 from $20.68 in 2001 and as a percentage of reported sales decreased from 8.65% in 2001 to 8.43% in 2002. Total merchant occupancy costs, excluding marketing contributions, as a percentage of reported sales decreased to 7.85% in 2002 from 7.99% in 2001. Page - (19) Table 3 - Summary of Reported Merchant Sales A summary of reported outlet merchant sales and related data for 2002, 2001 and 2000 follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Total reported merchant sales (in millions) (1) $ 2,047 $ 2,474 $ 2,746 Weighted-average reported merchant sales per square foot (2) All stores sales $ 245 $ 241 $ 245 Change in same store sales versus prior year -3.6% Total merchant occcupancy costs per square foot (3) $ 20.75 $ 20.68 $ 22.03 Total merchant occcupancy costs, excluding marketing contributions, per square foot (3) Merchant occupancy costs as a percentage of reported sales (4) 8.47% 8.65% 8.99% Merchant occupancy costs, excluding marketing contributions, as a percentage of reported sales (5) 7.85% 7.99% 8.26% ====================================================================================================================================
Notes: (1) Total reported merchant sales summarizes gross sales generated by merchants and includes changes in merchant mix. (2) Weighted-average reported sales per square foot is based on reported sales divided by the weighted-average square footage occupied by the merchants reporting those sales. Same-store sales is defined as the weighted-average reported merchant sales per square foot for stores open since the beginning of the prior year. (3) Total merchant occupancy cost per square foot consists of base rent, percentage rent and tenant reimbursement income which includes tenant marketing contributions. (4) Computed as follows: total merchant occupancy cost per square foot divided by total weighted-average reported merchant sales per square foot. (5) Computed as follows: total merchant occupancy cost per square foot (excluding marketing contributions paid by merchants) divided by total weighted-average reported merchant sales per square foot. Tenant reimbursements, which represent the contractual recovery from tenants of certain operating expenses, decreased by $5,448, or 10.1%, to $48,730 in 2002 compared to $54,178 in 2001. This decline is primarily due to (i) transactions involving the 2002 Joint Venture Properties, (ii) the 2001 Property Dispositions, (iii) changes in economic rental rates and (iv) reduced aggregate outlet center weighted-average occupancy during the 2002. As shown in TABLE 4, tenant reimbursements as a percentage of recoverable property operating expenses and real estate taxes was 88.0% in 2002 compared to 91.0% in 2001. The decline in tenant reimbursements as a percentage of recoverable property operating expenses and real estate taxes was primarily attributable to the aforementioned changes in economic rental rates and weighted-average occupancy. Table 4 -Tenant Recoveries as a Percentage of Total Recoverable Expenses
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Tenant reimbursements $ 48,730 $ 54,178 $ 70,749 Recoverable Expenses: Property operating $ 42,446 $ 44,472 $ 58,494 Real estate taxes 12,931 15,054 17,655 -------- -------- -------- Total recoverable expenses $ 55,377 $ 59,526 $ 76,149 ======== ======== ======== Tenant reimbursements as a percentage of total recoverable expenses 88.0% 91.0% 92.9% ======== ======== ======== ====================================================================================================================================
Interest and other income increased by $1,235, or 10.2%, to $13,361 during the year ended December 31, 2002 compared to $12,126 for the year ended December 31, 2001. The increase was primarily attributable to (i) higher equity earnings in unconsolidated joint ventures of $2,560, (ii) increased other ancillary income of $577 and (iii) higher property management and leasing commission income of $351. These items were partially offset by (i) reduced lease termination income of $1,159 and (ii) decreased municipal assistance income of $1,094. Expenses Property operating expenses decreased by $2,026, or 4.6%, to $42,466 in 2002 compared to $44,472 in 2001. Real estate taxes expense decreased by $2,123, or 14.1%, to $12,931 in 2002 from $15,054 in 2001. These decreases are primarily because of the transactions involving the 2002 Joint Venture Properties and the 2001 Property Dispositions. As shown in TABLE 5, depreciation and amortization expense decreased by $11,562, or 25.2%, to $34,301 in 2002 compared to $45,863 in 2001. This decrease was primarily attributable to the depreciation and amortization of assets associated with the transactions involving the 2002 Joint Venture Properties and the 2001 Property Dispositions. Page - (20) Table 5 - Components of Depreciation and Amortization Expense The components of depreciation and amortization expense for 2002, 2001 and 2000 are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Building and improvements $ 16,899 $ 22,761 $ 31,171 Land improvements 4,080 4,866 5,250 Tenant improvements 10,641 15,106 18,524 Furniture and fixtures 2,467 2,733 2,372 Leasing commissions 214 397 613 -------- -------- -------- Total $ 34,301 $ 45,863 $ 57,930 ======== ======== ======== ====================================================================================================================================
As shown in TABLE 6, interest expense decreased by $17,953, or 22.5%, to $61,911 in 2002 compared to $79,864 in 2001. This decrease reflects (i) lower interest incurred of $16,877, (ii) a decrease in amortization of deferred financing costs of $1,509 and (iii) higher amortization of debt premiums of $92. Partially offsetting these items was a non-recurring loss of $525 related to the write-off of unamortized deferred financing costs because of the early repayment of a mezzanine loan (the "Mezzanine Loan") in December 2002. The Mezzanine Loan was scheduled to mature in September 2003. The decrease in interest incurred is primarily attributable to (i) a reduction of $159,064 in our weighted-average debt outstanding, excluding debt premiums, during the year ended December 31, 2002 compared to the same period in 2001 and (ii) a decrease in the weighted-average contractual interest rate on our debt for the year ended December 31, 2002 compared to the same period in 2001. The decrease in weighted-average debt outstanding was primarily attributable to asset dispositions. The weighted-average contractual interest rates for 2002 and 2001 were 8.95% and 9.27%, respectively. Table 6 - Components of Interest Expense The components of interest expense for 2002, 2001 and 2000 are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Interest incurred $ 58,574 $ 75,451 $ 89,286 Amortization of deferred financing costs 4,747 6,341 2,922 Non-recurring loss on early extinguishment of debt 525 - 4,206 Amortization of debt premiums (2,020) (1,928) (1,841) Interest capitalized to development projects - - (3,412) -------- -------- -------- Total $ 61,826 $ 79,864 $ 91,161 ======== ======== ======== ====================================================================================================================================
Other charges were $8,684 and $19,632 for the years ended December 31, 2002 and 2001, respectively, which includes non-recurring charges aggregating $3,000 and $4,918 in 2002 and 2001, respectively. Excluding the effect of these non-recurring items, which are discussed below, other charges decreased by $9,030, or 61.4%, to $5,684 for the year ended December 31, 2002 compared to $14,714 for the same period in 2001. This decrease was primarily attributable to (i) lower bad debt expense of $7,150 and (ii) reduced corporate marketing costs of $2,186. These items were partially offset by an increase in all other expenses of $306. The decrease in bad debt expense was primarily attributable to (i) resolution of certain disputes with tenants and (ii) reduced tenant bankruptcies, abandonments and store closings during the 2002 period. 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 $2,760, of which $2,607 was paid as of December 31, 2002. The remaining reserve of $2,393 is included in accounts payable and other liabilities in the accompanying Consolidated Balance Sheet as of December 31, 2002. See Note 13 - "Legal Proceedings" of the Notes to Consolidated Financial Statements 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" for additional information) and is based on our current assessment of the likelihood of any adverse judgments or outcomes to these matters. 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 our estimate. 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 the Birch Run Center. Page - (21) During the third quarter of 2002, certain events and circumstances occurred, including (i) changes to the anticipated holding periods of certain of our long-lived assets and (ii) 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 these properties to their estimated fair values in accordance with the requirements of FAS No. 144. Additionally, during the fourth quarter of 2002, we recognized a provision for asset impairment of $2,474 to fully write-off the carrying value of certain costs previously capitalized in connection with former development activities based on our current assessment as to our ability to recover their carrying value. During the third quarter of 2001, we had also determined that certain events and circumstances had occurred, including 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 $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". Table 7 - Capital Expenditures The components of capital expenditures for 2002, 2001 and 2000 are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Expansions and renovations $ 2,353 $ 4,404 $ 26,068 Re-leasing tenant allowances 5,360 8,273 8,050 New development - 3,336 17,715 ------- -------- -------- Total $ 7,713 $ 12,677 $ 34,118 ======= ======== ======== ====================================================================================================================================
Table 8 - Consolidated Quarterly Summary of Operations (1)
- ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 - -------------------------------------------------------------------------------------- ------------------------------------------- Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues (2) $36,163 $ 36,246 $ 38,299 $ 41,323 $ 45,143 $ 44,554 $ 46,194 $ 47,428 Total expenses (3) 40,933 122,268 47,937 47,705 55,985 118,483 53,455 54,278 ------- -------- -------- -------- -------- -------- -------- -------- Loss before gain (loss) on sale of real estate and minority interests (4,770) (86,022) (9,638) (6,382) (10,842) (73,929) (7,261) (6,850) Gain (loss) on sale of real estate - - (10,991) 16,793 (1,615) - (180) 732 ------- -------- -------- -------- -------- -------- -------- -------- Loss from continuing operations before minority interests (4,770) (86,022) (20,629) 10,411 (12,457) (73,929) (7,441) (6,118) Allocations to minority interests - - - - 7 - 400 1 ------- -------- -------- -------- -------- -------- -------- -------- Loss from continuing operations (4,770) (86,022) (20,629) 10,411 (12,450) (73,929) (7,041) (6,117) Discontinued operations 17,712 2,517 (9,557) (8,730) 127 677 198 487 ------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) 12,942 (83,505) (30,186) 1,681 (12,323) (73,252) (6,843) (5,630) Allocations to preferred shareholders (5,668) (5,668) (5,668) (5,668) (5,668) (5,668) (5,668) (5,668) ------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) applicable common shares 7,274 (89,173) (35,854) (3,987) (17,991) (78,920) (12,511) (11,298) ======= ======== ======== ======== ======== ======== ======== ======== Basic and diluted earnings per common share: Loss from continuing operations $ (0.24) $ (2.11) $ (0.60) $ 0.11 $ (0.41) $ (1.83) $ (0.29) $ (0.27) Discontinued operations 0.41 0.06 (0.22) (0.20) - 0.02 - 0.01 ------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 0.17 $ (2.05) $ (0.82) $ (0.09) $ (0.41) $ (1.81) $ (0.29) $ (0.26) ======= ======== ======== ======== ======== ======== ======== ======== Weighted-average common shares outstanding - basic and diluted 43,578 43,578 43,578 43,578 43,578 43,578 43,578 43,578 ======= ======== ======== ======== ======== ======== ======== ======== ====================================================================================================================================
Notes: (1) Certain prior quarterly financial information has been reclassified pursuant to the requirements of FAS No. 144. (2) The first quarter of 2001 total revenues includes a non-recurring gain on the sale of outparcel land of $2,472. (3) The following non-recurring charges and costs are reflected in total expenses for the period indicated:
- ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 - ----------------------------------------------------------------------------------- ---------------------------------------------- Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ Provision for asset impairment $2,474 $81,619 $ - $ - $ - $63,026 $ - $ - Interest expense(i) 525 - - - - - - - Other charges(ii) - - 3,000 - 2,000 2,918 - - - ------------------------------------------------------------------------------------------------------------------------------------
Notes: (i.) During the fourth quarter of 2002, we incurred a non-recurring loss on the early extinguishment of debt of $525 in connection with the repayment of the Mezzanine Loan. (ii.)The 2002 non-recurring second quarter charge of $3,000 related to pending and potential tenant claims with respect to certain lease provisions. The 2001 non-recurring other charges include (i) a fourth quarter charge of $2,000 related to pending and potential tenant claims with respect to certain lease provisions and third quarter non-recurring charges and costs aggregating $2,918 (loss of $1,882 related to an interest rate subsidy agreement and a loss of $1,036 related to the refinancing of first mortgage loans on the Birch Run Center). Page - (22) Comparison of the Year Ended December 31, 2001 to the Year Ended December 31, 2000 Summary We reported losses from continuing operations of $99,537 and $147,105 for the years ended December 31, 2001 and 2000, respectively. For the year ended December 31, 2001, the net loss applicable to our common shareholders was $120,720, or $2.77 per common share. For the year ended December 31, 2000, the net loss applicable to our common shareholders was $165,124, or $3.79 per common share. During the years ended December 31, 2001 and 2000, we reported gains on discontinued operations of $1,489, or $0.03 per common share, and $4,653, or $0.11 per common share, respectively. The 2001 results from continuing operations include (i) a provision for asset impairment of $63,026, or $1.45 per common share, (ii) a fourth quarter non-recurring charge (included in other charges) of $2,000, or $0.05 per common share, related to pending and potential tenant claims with respect to certain lease provisions, (iii) a third quarter non-recurring loss (included in other charges) of $1,882, or $0.04 per common share, related to an interest rate subsidy agreement, (iv) a third quarter non-recurring loss (included in other charges) of $1,036, or $0.02 per common share, related to the refinancing of first mortgage loans on the Birch Run Center and (v) a net loss on the sale of real estate of $1,036, or $0.02 per common share. The 2000 results from continuing operations include (i) a third quarter provision for asset impairment of $68,663, or $1.58 per common share, (ii) a net loss on the sale of real estate of $42,648, or $0.98 per common share, (iii) a loss on eOutlets.com aggregating $14,703 ($8,452, $5,517 and $734 included in provision for asset impairment, other charges and corporate general and administrative expense, respectively), or $0.34 per common share, (iv) non-recurring costs (included in interest expense) of $4,206, or $0.10 per common share, related to the prepayment and modification to the terms of certain indebtedness, (v) a first quarter gain on the sale of outparcel land (included in interest and other income) of $2,472, or $0.06 per common share, (vi ) a loss on Designer Connection (included in other charges) of $1,815 and (vii) non-recurring third quarter costs (included in other charges) of $1,100, or $0.03 per common share, related to the termination of a sale agreement. Revenues Total revenues were $183,319 for the year ended December 31, 2001 compared to $241,648 for the year ended December 31, 2000, a decrease of $58,329, or 24.1%. Base rents decreased $38,059, or 25.1%, to $113,546 in 2001 compared to $151,605 in 2000. These decreases are primarily due to (i) the 2001 Property Dispositions, (ii) the 2000 Property Dispositions, (iii) changes in economic rental rates and (iv) the reduction in outlet center occupancy during the 2001 period. Straight-line rent expense, included in base rent was $439 and $51 for the years ended December 31, 2001 and 2000, respectively. Percentage rents, which represent rents based on a percentage of sales volume above a specified threshold, decreased $2,097, or 37.3%, to $3,469 during the year ended December 31, 2001 compared to $5,566 for the same period in 2000. This decrease was primarily attributable to the 2001 Property Dispositions and the 2000 Property Dispositions. As summarized in TABLE 3, merchant sales reported for centers remaining in our outlet center portfolio at period-end were $2,474 million and $2,746 million for the years ended December 31, 2001 and 2000, respectively. The weighted-average reported merchant sales per square foot decreased to $241 per square foot in 2001 from $245 per square foot in 2000. Total merchant occupancy cost per square foot decreased from $22.03 in 2000 to $20.68 in 2001 and as a percentage of reported sales from 8.99% to 8.65%, respectively. Tenant reimbursements, which represent the contractual recovery from tenants of certain operating expenses, decreased by $16,571, or 23.4%, to $54,178 in 2001 compared to $70,749 in 2000. This decline is primarily because of (i) the 2001 Property Dispositions, (ii) the 2000 Property Dispositions, (iii) changes in economic rental rates and (iv) reduced aggregate weighted-average outlet center occupancy during 2001. As shown in TABLE 4, tenant reimbursements as a percentage of recoverable property operating expenses and real estate taxes was 91.0% in 2001 compared to 92.9% in 2000. The decline in tenant reimbursements as a percentage of recoverable property operating expenses and real estate taxes was primarily attributable to the aforementioned changes in economic rental rates and weighted average occupancy. Interest and other income was $12,126 and $13,728 for the years ended December 31, 2001 and 2000, respectively, which includes a non-recurring gain on the sale of outparcel land of $2,472 during the 2000 period. Excluding the effect of this non-recurring item, interest and other income increased by $870, or 7.7%, to $12,126 for year ended December 31, 2001 compared to $11,256 for the same period in 2000. This increase was primarily attributable to (i) higher equity earnings in unconsolidated joint ventures of $958, (ii) increased property management and leasing commission income of $830, (iii) higher municipal assistance income of $401 and (iv) increased other ancillary income of $380. Partially offsetting these items were (i) less amortization of deferred income of $782, (ii) lower lease termination income of $572 and (iii) decreased temporary tenant income of $345. Page - (23) Expenses Property operating expenses decreased by $14,022, or 24.0%, to $44,472 in 2001 compared to $58,494 in 2000. Real estate taxes expense decreased by $2,601, or 14.7%, to $15,054 in 2001 from $17,655 in 2000. These decreases are primarily because of the (i) the 2001 Property Dispositions and (ii) the 2000 Property Dispositions. As shown in TABLE 5, depreciation and amortization expense decreased by $12,067, or 20.8%, to $45,863 in 2001 compared to $57,930 in 2000. This decrease was primarily attributable to the depreciation and amortization of assets associated with the 2001 Property Dispositions and the 2000 Property Dispositions. As shown in TABLE 6, interest expense decreased by $11,297, or 12.4%, to $79,864 in 2001 compared to $91,161 in 2000. This decrease reflects (i) lower interest incurred of $13,835, (ii) non-recurring costs in 2000 of $4,206 related to the prepayment and modification to the terms of certain indebtedness and (iii) increased amortization of debt premiums of $87. Partially offsetting these items were (i) higher amortization of deferred financing costs of $3,419 primarily related to the Mezzanine Loan originated in December 2000 and (ii) a decrease in the amount of interest capitalized in connection with development activities of $3,412. The decrease in interest incurred is primarily attributable to a reduction of $239,243 in our weighted-average debt outstanding, excluding debt premiums, during the year ended December 31, 2001 compared to the same period in 2000. The effect of the reduction in weighted-average debt outstanding was partially offset by an increase in the weighted-average contractual interest rate on our debt for the year ended December 31, 2001 compared to the same period in 2000. The decrease in weighted-average debt was primarily attributable to asset dispositions. The weighted-average contractual interest rates for 2001 and 2000 were 9.27% and 8.48%, respectively. Other charges were $19,632 and $22,907 for the years ended December 31, 2001 and 2000, respectively, which includes non-recurring charges aggregating $4,918 and $8,432, respectively. Excluding the effect of these non-recurring items, which are discussed below, other charges increased by $239, or 1.7%, to $14,714 for the year ended December 31, 2001 compared to $14,475 for the same period in 2000. This increase was primarily attributable to higher bad debt expense of $2,742 (resulting in part from certain tenant bankruptcies, disputes, abandonments and store closings during the 2001 period) partially offset by (i) lower ground lease expense of $1,172 (resulting from the 2000 Property Dispositions), (ii) lower marketing expenses of $1,020 and (iii) a decrease in all other expenses of $313. During the fourth quarter of 2001, we recorded a non-recurring charge in the amount of $2,000 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. Additionally, the 2001 results include (i) a third quarter non-recurring loss of $1,882 related to an interest rate subsidy agreement and (ii) a third quarter non-recurring loss of $1,036 related to the refinancing of first mortgage loans on the Birch Run Center. The 2000 results include (i) non-recurring costs of $5,517 related to eOutlets.com (as discussed below), (ii) a loss on operations of our Designer Connection outlet stores of $1,815 and (iii) non-recurring third quarter costs of $1,100 related to the termination of a sale agreement. We ceased the operations of our Designer Connection outlet stores during 2000. 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 impaired on an other than temporary basis. 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. During 2000, we recorded a provision for asset impairment aggregating $77,115. This provision for asset impairment consisted of (i) a $28,047 write-down of the carrying value of certain properties resulting from their classification to assets held for sale, (ii) a $40,616 write-down of the carrying values of certain properties resulting from other than temporary declines in their values and (iii) a $8,452 write-down associated with our discontinuance of eOutlets.com. In April 2000, we announced that we had been unable to conclude an agreement to transfer ownership of our wholly-owned e-commerce subsidiary, primeoutlets.com inc., also known as eOutlets.com, to a management-led investor group comprised of eOutlets.com management and outside investors. Effective April 12, 2000, eOutlets.com ceased all operations and on November 6, 2000 filed for bankruptcy under Chapter 7. eOutlets.com was a new, development-stage, internet-based business. During 2000, we incurred a non-recurring loss aggregating $14,703 related to eOutlets.com. This loss consisted of (i) the write-off of $8,452 of capitalized costs (included in provision for asset impairment), (ii) $5,517 of costs included in other charges and (iii) $734 of costs included in corporate general and administrative expense. Page - (24) Liquidity and Capital Resources Sources and Uses of Cash For the year ended December 31, 2002, net cash provided by operating activities was $29,827, net cash provided by investing activities was $41,748 and net cash used in financing activities was $72,204. The net cash provided by investing activities during the year ended December 31, 2002 consisted of $49,461 of aggregate net proceeds from the disposition of properties, partially offset by $7,713 of additions to rental property. These additions to rental property included (i) costs incurred in connection with re-leasing space to new merchants of $5,360 and (ii) costs associated with renovations of $2,353. During the year ended December 31, 2002, we did not engage in any development activities other than certain consulting activities in Europe, which did not have a significant impact on our liquidity or financial condition. The gross uses of cash for financing activities of $72,204 during year ended December 31, 2002 consisted of (i) scheduled principal amortization on debt of $14,129 and (ii) principal repayments on the Mezzanine Loan aggregating $63,029 including $10,341 of mandatory prepayments, with net proceeds from the sales of properties. The following tables summarize our contractual obligations and other commitments as of December 31, 2002:
- ------------------------------------------------------------------------------------------------------------------------------------ Payments Due by Period --------------------------------------------------------------------------------- Less than After Contractual Obligations (1) Total 1 year 1 to 3 years 4 to 5 years 5 years - ------------------------------------------------------------------------------------------------------------------------------------ Bonds payable $ 22,495 $ 680 $ 1,499 $ 1,698 $ 18,618 Notes payable, excluding debt premiums 462,238 266,659 14,649 121,439 59,491 Defeased notes payable 74,764 74,764 Mandatory Redemption Obligation 16,667 16,667 Interest rate guarantee obligation 1,477 177 1368 377 555 Operating lease payments 8,713 1,519 1,547 469 5,178 --------- ---------- -------- --------- -------- Total $ 586,354 $ 360,466 $ 18,063 $ 123,983 $ 83,842 ========= ========== ======== ========= ======== ====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------ Annualized In Arrears as Dividend Preferred Stock Dividends (2) of 12/31/02 Requirement - ------------------------------------------------------------------------------------------------------------------------------------ Series A Senior Preferred Stock $ 18,867 $ 6,037 Series B Convertible Preferred Stock 51,984 16,635 -------- -------- Total $ 70,851 $ 22,672 ======== ======== ====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------ Amount of Guarantee as Maturity Guarantees of Indebtedness of Others(3) of 12/31/02 Date - ------------------------------------------------------------------------------------------------------------------------------------ HGP mortgage loan facility $ 4,000 July 2005 HGP office and equipment debt 2,240 April 2003 First Mortgage Loan - Prime Outlets at Hagerstown 46,862 June 2004 -------- Total $ 53,102 ======== ====================================================================================================================================
Notes: (1) Notes payable, excluding debt premiums also excludes contractual obligations related to four outlet centers secured by non-recourse mortgage indebtedness that is currently in default (see "Defaults on Certain Non-recourse Mortgage Indebtedness" for additional information). For additional information with respect to our indebtedness, see Note 6 - "Debt" of the Notes to Consolidated Financial Statements. For information regarding the "Mandatory Redemption Obligation" and the "Interest Rate Subsidy Obligation" see "Guarantees and Guarantees of Indebtedness of Others". For information regarding future operating lease payments, see Note 11 - "Lease Agreements" of the Notes to Consolidated Financial Statements. (2) See "Dividends and Distributions" for additional information. (3) See "Guarantees and Guarantees of Indebtedness of Others" for additional information. Page - (25) Guarantees and Guarantees of Indebtedness of Others HGP Guarantees 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 Secured 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 $2,240 on HGP's corporate office building and related equipment located in Norton Shores, Michigan. The HGP Office Building Mortgage matures in April 2003, bears interest at LIBOR plus 5.50%, and requires monthly debt service payments. On October 11, 2001, HGP announced that it was in default under two loans with an aggregate principal balance of approximately $45.5 million 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. We have not recorded any liabilities related to these guarantees and 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. ("Horizon") in June 1998. Prime/Estein Venture Guarantees We own three outlet centers through the Prime/Estein Venture. The Prime/Estein Venture is an unconsolidated joint venture partnership between one of our affiliates and an affiliate of Estein & Associates USA, Ltd. ("Estein"), a real estate investment company. Pursuant to Prime/Estein Venture-related documents to which affiliates of ours are parties, we are obligated to provide to, or obtain for, the Prime/Estein Venture fixed-rate financing at an annual rate of 7.75% (the "Interest Rate Subsidy Agreement") for the Birch Run Center, the Prime Outlets at Williamsburg (the "Williamsburg Center") and the Hagerstown Center. In August 2001, we, through affiliates, completed a refinancing of $63,000 of first mortgage loans secured by the Birch Run Center. The refinanced loan (the "Birch Run First Mortgage") (i) has a term of 10-years, (ii) bears interest at an effective rate of 8.12% and (iii) requires monthly payments of principal and interest pursuant to a 25-year amortization schedule. Pursuant to the Interest Rate Subsidy Agreement, we are required to pay to the Prime/Estein Venture the difference between the cost of the financing at an assumed rate of 7.75% and the actual cost of such financing at the annual rate of 8.12% (the "Interest Rate Subsidy Obligation"). The total payments to the Prime/Estein Venture by us over the term of the Birch Run First Mortgage Loan will be approximately $2,723. In connection with the refinancing, we recorded a non-recurring loss of $1,882 (included in other charges in the accompanying Consolidated Statements of Operations) during the third quarter of 2001 representing the net present value of the Interest Rate Subsidy Obligation. Additionally, we also incurred $1,036 of non-recurring refinancing costs (included in other charges) in the third quarter of 2001. As of December 31, 2002, the Interest Rate Subsidy Obligation (included in accounts payable and other liabilities in the accompanying Consolidated Balance Sheet) was $1,477. In October 2001, we, through affiliates, completed the refinancing of a $32,500 first mortgage loan secured by the Williamsburg Center. The new first mortgage loan (the "Williamsburg First Mortgage") (i) has a term of 10-years, (ii) bears interest at a fixed-rate of 7.69% and (iii) requires monthly payments of principal and interest pursuant to a 25-year amortization schedule. Pursuant to the Interest Rate Subsidy Agreement, the Prime/Estein Venture is required to pay to us the difference between the cost of the financing at an assumed rate of 7.75% and the actual cost of such financing at the annual rate of 7.69%. Page - (26) On January 11, 2002, we sold the Hagerstown Center to the Prime/Estein Venture. In connection with the sale, the Prime/Estein Venture assumed the Hagerstown First Mortgage in the amount of $46,862; however, our guarantee of such indebtedness remains in place. Additionally, we are obligated to refinance the Hagerstown First Mortgage 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 Hagerstown First Mortgage 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 10-year period, we will be obligated to pay the difference to the Prime/Estein Venture. If the actual cost of such indebtedness is less than 7.75% at any time during the 10-year period, however, the Prime/Estein Venture will be obligated to pay the difference to us. The actual cost of the Hagerstown First Mortgage is 30-day LIBOR plus 1.50%, or 2.88% as of December 31, 2002. Because the Hagerstown First Mortgage bears interest at a variable rate, we are exposed to the impact of interest rate changes. We have not recorded any liability related to our guarantee of the Hagerstown First Mortgage; however, in connection with the sale of the Hagerstown Center, we established a reserve for estimated refinancing costs in the amount of $937, which is included in accounts payable and other liabilities in the accompanying Consolidated Balance Sheet as of December 31, 2002. See Note 3 - "Property Dispositions" of the Notes to Consolidated Financial Statements for additional information. Mandatory Redemption Obligation In connection with our sale of the Bridge Properties in July 2002, we guaranteed FRIT PRT Bridge Acquisition LLC ("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") in FPI by December 31, 2003. As of December 31, 2002, our Mandatory Redemption Obligation with respect to the full return of FRIT's invested capital was $16,667 (included in accounts payable and other liabilities in the accompanying Consolidated Balance Sheet). See Note 3 - "Property Dispositions" of the Notes to Consolidated Financial Statements for additional information. Defaults on Certain Non-recourse Mortgage Indebtedness During 2001, certain of our subsidiaries suspended regularly scheduled monthly debt service payments on two non-recourse mortgage loans 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 Conroe (the "Conroe Center"), located in Conroe, Texas, and Prime Outlets at Jeffersonville II (the "Jeffersonville II Center"), located in Jeffersonville, Ohio. 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 Note 3 - "Property Dispositions" for additional information. 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. Additionally, 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 the non-recourse mortgage loan. During August of 2002, certain of our subsidiaries suspended regularly scheduled monthly debt service payments on two non-recourse mortgage loans 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"). 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. Foreclosure on the Vero Beach Center did not, and the expected transfer of our ownership interest in the Woodbury Center is 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 was utilized for debt service on their non-recourse mortgage loans. Page - (27) In December 2002, we notified the servicer of certain non-recourse mortgage loans (cross-collateralized by Prime Outlets at Bend, Prime Outlets at Post Falls and Prime Outlets at Sedona) totaling $24,919 as of December 31, 2002 that the net cash flow from the properties securing the loans was insufficient to fully pay the required monthly debt service. At that time, certain of our subsidiaries suspended the regularly scheduled monthly debt service payments. Subsequent to our notification to the servicer, we have been remitting on a monthly basis all available cash flow from the properties, after a reserve for monthly operating expenses, as partial payment of the debt service. The failure to pay the full amount due constitutes a default under the loan agreements which allows the lenders to accelerate the loan and to exercise various remedies contained in the loan agreements, including application of escrow balances to delinquent payments and, ultimately, foreclosure on the properties which collateralize the loans. The lender has notified us that it has accelerated the loan. Since that time we have initiated discussions with the servicer of the loans regarding restructuring of the loans. There can be no assurance that such discussions will result in any modification to the terms of the loans. However, any action by the lender with respect to these properties is not expected to have a material impact on our results of operations or financial condition because we are currently only remitting available cash flow. Defeasance of Mega Deal Loan On December 6, 2002, we completed the sale of two outlet centers (together, the "Colorado Properties"), which were part of the 15 properties contained in the collateral pool securing a first mortgage and expansion loan (the "Mega Deal Loan"), which had a then outstanding balance of $338,940. In connection with the release of the Colorado Properties from the collateral pool, we were required to partially defease the Mega Deal Loan. Therefore, the Mega Deal Loan was bifurcated into (i) a defeased portion in the amount of $74,849 (the "Defeased Notes Payable") and (ii) an undefeased portion in the amount of $264,091, which is still referred to as the Mega Deal Loan. Both the Defeased Notes Payable and the Mega Deal Loan (i) bear interest at a fixed-rate of 7.782%, (ii) require monthly payments of principal and interest pursuant to a 30-year amortization schedule and (iii) mature on November 11, 2003. The Mega Deal Loan is now secured by the remaining 13 properties contained in the collateral pool. We used $79,257 of the gross proceeds from the sale of the Colorado Properties to purchase US Treasury Securities, which were placed into a trustee escrow (the "Trustee Escrow"). The Trustee Escrow is used to make the scheduled monthly debt service payments, including the payment of the then outstanding principal amount, together with all accrued and unpaid interest on the maturity date of November 11, 2003, under the Defeased Notes Payable. As of December 31, 2002, the outstanding balance of the Defeased Notes Payable was $74,764 and the balance of the Trustee Escrow was $79,042 (included in restricted cash in the accompanying Consolidated Balance Sheet). See Note 3 - "Property Dispositions" of the Notes to Consolidated Financial Statements for additional information. Furthermore, in connection with the partial defeasance of the Mega Deal Loan we amended the Mega Deal Loan so that (i) we are required to fund 10 monthly payments of $500 into a lender escrow to be used as additional cash collateral and (ii) release prices for the remaining 13 properties in the collateral pool were amended to provide for a more orderly refinancing of the Mega Deal Loan. Debt Service Obligations The scheduled principal maturities of our debt, excluding (i) unamortized debt premiums of $7,955 and (ii) $41,250 of aggregate non-recourse mortgage indebtedness in default (see "Defaults on Certain Non-recourse Mortgage Indebtedness" above), and related average contractual interest rates by year of maturity as of December 31, 2002 are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Bonds Payable (including sinking Defeased fund payments) Notes Payable Notes Payable Total Debt --------------------- ------------------------ ---------------------- ----------------------- Average Average Average Average Interest Principal Interest Principal Interest Principal Interest Principal Years Ended December 31, Rates Maturities Rates Maturities Rates Maturities Rates Maturities - ------------------------------------------------------------------------------------------------------------------------------------ 2003 6.33% $ 680 7.79% $ 266,659 7.78% $ 74,764 7.78% $ 342,103 2004 6.34% 726 8.44% 3,075 8.04% 3,801 2005 6.34% 773 8.58% 11,574 8.44% 12,347 2006 6.34% 820 8.83% 120,437 8.81% 121,257 2007 6.34% 878 7.60% 1,002 7.02% 1,880 Thereafter 6.52% 18,618 7.57% 59,491 7.32% 78,109 ---- -------- ---- --------- ---- -------- ---- ---------- 6.49% $ 22,495 8.06% $ 462,238 7.78% $ 74,764 7.96% $ 559,497 ==== ======== ==== ========= ==== ======== ==== ========== ====================================================================================================================================
Such indebtedness in the amount of $559,497 had a weighted-average maturity of 2.6 years and bore contractual interest at a weighted-average rate of 7.96% per annum. At December 31, 2002, all of such indebtedness bore interest at fixed rates. Our scheduled principal payments during 2003 for such indebtedness aggregated $342,103. In addition to regularly scheduled principal payments, the 2003 scheduled principal payments also reflect balloon payments of (i) $260,681 for the Mega Deal Loan and (ii) $73,882 due for the Defeased Notes Payable. Both the Mega Deal Loan and the Defeased Notes Payable are scheduled to mature on November 11, 2003. All debt service due under the Defeased Notes Payable, including the balloon payment due at maturity, will be made from the Trustee Escrow. See "Going Concern" for additional information. Page - (28) Going Concern Our liquidity depends on cash provided by operations and potential capital raising activities such as funds obtained through borrowings, particularly refinancing of existing debt, and cash generated through asset sales. Although we believe that estimated cash flows from operations and potential capital raising activities will be sufficient to satisfy our scheduled debt service and other obligations and sustain our operations for the next year, there can be no assurance that we will be successful in obtaining the required amount of funds for these items or that the terms of the potential capital raising activities, if they should occur, will be as favorable as we have experienced in prior periods. During 2003, our Mega Deal Loan matures on November 11, 2003. The Mega Deal Loan, which is secured by a 13 property collateral pool, had an outstanding principal balance of $263,793 as of December 31, 2002 and will require a balloon payment of $260,681 at maturity. Based on our initial discussions with various prospective lenders, we are currently projecting a potential shortfall with respect to refinancing the Mega Deal Loan. However, we believe this shortfall may be alleviated through potential asset sales and/or other capital raising activities, including the placement of mezzanine level debt. We caution that our assumptions are based on current market conditions and, therefore, are subject to various risks and uncertainties, including changes in economic conditions which may adversely impact our ability to refinance the Mega Deal Loan at favorable rates or in a timely and orderly fashion, or which may adversely impact our ability to consummate various asset sales or other capital raising activities. In connection with the completion of the sale of the Bridge Properties in July 2002, we guaranteed to FRIT (i) a 13% return on its $17,236 of invested capital, and (ii) the full return the Mandatory Redemption Obligation by December 31, 2003. Although we are in the process of seeking to generate additional liquidity to repay the Mandatory Redemption Obligation through (i) the sale of FRIT's ownership interest in the Bridge Properties and/or (ii) the placement of additional indebtedness on the Bridge Properties, there can be no assurance that we will be able to complete such capital raising activities by December 31, 2003 or that such capital raising activities, if they should occur, will generate sufficient proceeds to repay the Mandatory Redemption Obligation in full. Failure to repay the Mandatory Redemption Obligation by December 31, 2003 would constitute a default, which would enable FRIT to exercise its rights with respect to the collateral pledged as security to the guarantee, including some of our partnership interests in the 13 property collateral pool under the aforementioned Mega Deal Loan. These conditions raise substantial doubt about our ability to continue as a going concern. The financial statements contained herein do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties. Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated Partnerships Two mortgage loans related to projects in which we, through subsidiaries, indirectly own joint venture interests have matured and are in default. The mortgage loans, at the time of default, were (i) a $10,389 first mortgage loan on Phase I of the Bellport Outlet Center, held by Union Labor Life Insurance Company ("Union Labor"); and (ii) a $13,338 first mortgage loan on Oxnard Factory Outlet, an outlet center located in Oxnard, California, held by Fru-Con. An affiliate of ours has a 50% ownership interest in the partnership, which owns Phase I of the Bellport Outlet Center. Fru-Con and us are each a 50% partner in the partnership that owns the Oxnard Factory Outlet. Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center and a receiver was appointed March 27, 2001 by the court involved in the foreclosure action. Effective May 1, 2001, a manager hired by the receiver began managing and leasing Phase I of the Bellport Outlet Center. A judgment for foreclosure was entered on January 25, 2003 in the amount of $12,711. The foreclosure occurred on March 17, 2003 with Union Labor acquiring the property for $5,100. We continue to negotiate the terms of a transfer of our ownership interest in Oxnard Factory Outlet to Fru-Con. We do not manage or lease Oxnard Factory Outlet. We believe neither of these mortgage loans is recourse to us. It is possible, however, that either or both of the respective lenders will, after completing its foreclosure action, file a lawsuit seeking to collect from us the difference between the value of the mortgaged property and the amount due under the loan. If such an action is brought, the outcome, and our ultimate liability, if any, cannot be predicted at this time. In addition, we are currently not receiving, directly or indirectly, any cash flow from Oxnard Factory Outlet and were not receiving any cash flow from Phase I of the Bellport Outlet Center prior to the loss of control of such project. We account for our interests in (i) Phases I of the Bellport Outlet Center and (ii) the Oxnard Factory Outlet in accordance with the equity method of accounting. As of December 31, 2002, the carrying value of our investment in these properties was $0. Page - (29) 2002 Debt Transactions We disposed of certain properties through various transactions, including sale, joint venture arrangements, foreclosure and transfer to lender, during the year ended December 31, 2002. In connection with these dispositions, we reduced our indebtedness by $349,378, including the partial defeasance of $74,849 of the Mega Deal Loan. This reduction also includes (i) the repayment of associated mortgage indebtedness aggregating $168,982, (ii) debt assumed by the purchaser of $46,862 and (iii) debt associated with foreclosure or transfer of properties aggregating $58,685. See Note 3 - "Property Dispositions" of the Notes to Consolidated Financial Statements for additional information. At the beginning of 2002, our Mezzanine Loan had an outstanding balance of $62,079. During 2002 we repaid the Mezzanine Loan in full through (i) regularly scheduled monthly principal payments aggregating $9,295, (ii) additional principal payments aggregating $45,467 made with excess proceeds from our asset sales (see Note 3 - "Property Dispositions" for additional information) and (iii) a payoff of $7,317 with cash from escrows and operating cash. In connection with the early extinguishment of the Mezzanine Loan, we incurred a non-recurring loss of $525 (included in interest expense in the accompanying Consolidated Statements of Operations) in the fourth quarter of 2002 representing the write-off of remaining unamortized deferred financing costs. The Mezzanine Loan was obtained in December 2000 in the original amount of $90,000 and was scheduled to mature on September 30, 2003. Through a series of amendments and modifications to its terms, the Mezzanine Loan bore interest at a fixed-rate of 19.75% at the time of retirement. 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 distributions, if necessary, 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 policy remains to pay distributions only to the extent necessary to maintain our status as a REIT for federal income tax purposes. During 2002, we were not required to pay any distributions in order to maintain our status as a REIT and based on our current federal income tax projections, we do not expect to pay any distributions during 2003. We are currently in arrears on thirteen quarters of preferred stock distributions due February 15, 2000 through February 15, 2003, respectively. We may not make distributions to our common shareholders or our holders of common units of limited partnership interests in the Operating Partnership unless we are current with respect to distributions to our preferred shareholders. As of December 31, 2002, unpaid dividends for the period beginning on November 16, 1999 through December 31, 2002 on our Series A Senior Preferred Stock and Series B Convertible Preferred Stock aggregated $18,867 and $51,984, respectively. The annualized dividends on our 2,300,000 shares of Series A Senior Preferred Stock and 7,828,125 shares of Series B Convertible Preferred Stock outstanding as of December 31, 2002 are $6,037 ($2.625 per share) and $16,635 ($2.125 per share), respectively. 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 $2,760. Through December 31, 2002, we made approximately $2,607 of such required payments. These payments were principally made from certain funds escrowed under our Mezzanine Loan, which was repaid in full in December 2002. The remaining payment of $153 was made in January 2003 with cash from operations. 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 12 - "Special Charges" and Note 13- "Legal Proceedings" of the Notes to Consolidated Financial Statements for additional information. Page - (30) Development Activities and Capital Expenditures During 2003, we will continue to explore potential international opportunities and will selectively consider expansion and/or redevelopment of certain of our existing outlet centers. We do not currently expect such activities to have a significant impact on our liquidity or financial condition. Additionally, we expect to incur costs during 2003 (i) in connection with releasing space to new tenants and (ii) for repairs and maintenance of our properties. However, we do not expect such expenditures to have a significant impact on our liquidity or financial condition because reserves for such costs are paid monthly into escrow accounts under many of our loans. See Note 4 - "Restricted Cash" of the Notes to Consolidated Financial Statements for additional information. Recent Accounting Pronouncements In October, 2001, the Financial Accounting Standards Board ("FASB") issued FAS No. 144, "Accounting for Impairment of Disposal of Long-lived Assets." FAS No. 144 supercedes FAS No. 121, however it retains the fundamental provisions of that statement as related to the recognition and measurement of the impairment of long-lived assets to be "held and used." In addition, FAS No. 144 (i) provides further guidance regarding the estimation of cash flows in the performance of a recoverability test, (ii) 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 (iii) established more restrictive criteria to classify an asset as "held for sale." As previously mentioned, effective January 1, 2002, we adopted FAS No. 144. Our adoption of FAS No. 144 effective January 1, 2002 did not have a material impact on our results of operations or financial position. In May 2002, the FASB issued FAS No. 145, "Reporting Gains and Losses from Extinguishment of Debt", which rescinded FAS No. 4, FAS No. 44 and FAS No. 64 and amended FAS No. 13. FAS No. 145 addresses the income statement classification of gains or losses from the extinguishment of debt and criteria for classification as extraordinary items. FAS No. 145 is effective for fiscal years beginning after May 15, 2002. We early adopted FAS No. 145 on December 31, 2002. As a result of our adoption of FAS No. 145, any non-recurring costs incurred in connection with the early extinguishment of debt are classified as a component of interest expense in the accompanying Consolidated Statements of Operations for all periods presented. Nevertheless, the adoption of FAS No. 145 did not have a material impact on our results of operations or financial position. In December 2002, the FASB issued Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the disclosures to be made by a guarantor in interim and annual financial statements about the obligations under certain guarantees. FIN No. 45 also clarifies that a guarantor is required to recognize, at the inception of the guarantee, an initial liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN No. 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. We adopted the disclosure provisions of FIN No. 45 effective December 31, 2002. The initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. We are in the process of determining the impact, if any, on our results of operations or financial condition from the adoption of FIN No. 45. See "Guarantees and Guarantees of Indebtedness of Others" contained in Note 6 - "Debt" of the Notes to Consolidated Financial Statements for additional information. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 clarifies the application of existing accounting pronouncements to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN No. 46 will be immediately effective for all variable interests in variable interest entities created after January 31, 2003, and we will need to apply the provisions of FIN No. 46 to any existing variable interests in variable interest entities by no later than December 31, 2004. We do not believe that FIN No. 46 will have a significant impact on our financial statements. Risk Management Activities 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. Page - (31) 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. Historically, we have used a mix of fixed and variable-rate debt to (i) limit the impact of interest rate changes on our results from operations and cash flows and (ii) lower our overall borrowing costs. In certain cases, we have used derivative financial instruments such as interest rate protection agreements to manage interest rate risk associated with variable-rate indebtedness. Nevertheless, as of December 31, 2002, all of our outstanding indebtedness bore interest at fixed rates. See Item 7 Item 7A - "Quantitative and Qualitative Disclosures About Material Risk" for additional information. Economic Conditions In general, the leases relating to our outlet centers have terms of three to five years and most contain provisions that somewhat mitigate the impact of inflation. Such provisions include clauses providing for increases in base rent and clauses enabling us to receive percentage rents for annual sales in excess of certain thresholds based on merchants' gross sales. In addition, lease agreements generally provide for (i) the recovery of a merchant's proportionate share of actual costs of common area maintenance ("CAM"), refuse removal, insurance, and real estate taxes, (ii) a contribution for advertising and promotion and (iii) an administrative fee. CAM includes items such as utilities, security, parking lot cleaning, maintenance and repair of common areas, capital replacement reserves, landscaping, seasonal decorations, public restroom maintenance and certain administrative expenses. We continually monitor our lease provisions in light of current and expected economic conditions and other factors. In this regard, we may consider alternative lease provisions (e.g., fixed CAM) where appropriate. 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 non-GAAP 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 non-GAAP 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 10 provides a reconciliation of loss from continuing operations before allocations to minority interests and preferred shareholders to FFO for the years ended December 31, 2002, 2001 and 2000. FFO decreased $2,374, or 9.4%, to $22,882 for the year ended December 31, 2002 from $25,256 for the same period in 2001. FFO decreased $32,711, or 56.4%, to $25,256 for the year ended December 31, 2001 from $57,967 for the year ended December 31, 2000. The 2002 FFO results include a second quarter non-recurring charge (included in other charges) of $3,000 related to pending and potential tenant claims with respect to certain lease provisions. The 2001 FFO results include non-recurring charges and losses aggregating $3,036 (included in other charges) consisting of (i) a fourth quarter non-recurring of $2,000 related to pending and potential tenant claims with respect to certain lease provisions and (ii) a third quarter non-recurring loss of $1,036 related to the refinancing of first mortgage loans on the Birch Run Center. The 2000 FFO results include net non-recurring items totaling ($2,504). Such non-recurring items include non-recurring costs aggregating $4,876 consisting of (i) general and administrative costs aggregating $3,876 and (ii) $1,100 of costs (included in other charges) related to the termination of a sale agreement; partially offset by (iii) a gain on the sale of outparcel land of $2,472 (included in interest and other income). Excluding the net impact of these non-recurring items, FFO was $25,882, $28,292 and $60,471 for the years ended December 31, 2002, 2001 and 2000, respectively. Page - (32) Table 10 - Funds from Operations
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Loss from continuing operations before minority interests $ (101,010) $ (99,945) $ (147,843) Adjustments: Loss (gain) on sale of real estate (5,802) 1,063 42,648 Provision for asset impairment 84,093 63,026 68,663 Depreciation and amortization 34,301 45,863 57,930 Non-real estate depreciation and amortization (2,166) (2,251) (1,703) Unconsolidated joint ventures' adjustments 3,957 3,074 3,269 Non-cash partnership interest subsidy - 1,882 - Discontinued operations 1,942 1,489 4,653 Discontinued operations - net gain on dispositions (26,152) - - Discontinued operations - provision for impairment 27,757 - - Discontinued operations - depreciation and amortization 5,437 11,055 9,626 ---------- --------- ---------- FFO before adjustments for non-recurring losses 22,357 25,256 37,243 Non-recurring loss on early extinguishment of debt(1) 525 - 4,206 Loss on eOutlets(2) - - 14,703 Loss on Designer Connection(2) - - 1,815 ---------- --------- ---------- FFO before allocations to minority interests and preferred shareholders $ 22,882 $ 25,256 $ 57,967 ========== ========= ========== Other Data: Net cash provided by operating activities $ 29,827 $ 32,911 $ 32,450 Net cash provided by investing activities 41,748 5,595 1,095 Net cash used in financing activities (72,204) (39,875) (31,982) ====================================================================================================================================
Notes: (1) Represents non-recurring charges incurred in connection with the early extinguishment of debt. We adopted FAS No. 145 effective December 31, 2002 and, accordingly, classified such costs as a component of interest expense. These costs are attributable to financing activities ancillary to our core real operations. (2) Represents the results of business activities ancillary to our core real estate operations. Due to financial constraints, we decided to discontinue the Designer Connection and eOutlets.com businesses in December 1999 and April 2000, respectively. See Note 12 - "Special Charges" of the Notes to Consolidated Financial Statements for additional information. Page - (33) TABLE 11 provides a reconciliation of income (loss) from continuing operations before allocations to minority interests and preferred shareholders to FFO for each of the quarterly periods in 2002 and 2001. Table 11 - Consolidated Quarterly Summary of Funds from Operations (1)
- ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 - ---------------------------------------------------------------------------------------- ----------------------------------------- Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) from continuing operations before minority interests $(4,770) $(86,022) $(20,629) $ 10,411 $(12,457) $(73,929) $(7,441) $ (6,118) Adjustments: Loss (gain) on sale of real estate - - 10,991 (16,793) 1,615 - 180 (732) Provision for asset impairment 2,474 81,619 - - - 63,026 - - Depreciation and amortization 6,537 8,342 9,214 10,208 12,301 11,241 11,114 11,207 Non-real estate depreciation and amortization (473) (601) (538) (554) (558) (563) (562) (568) Unconsolidated joint ventures' adjustments 1,060 1,151 963 783 866 620 1,033 555 Non-cash joint venture interest subsidy - - - - - 1,882 - - Discontinued operations 17,712 2,517 (9,557) (8,730) 127 677 198 487 Discontinued operations - net (gain) loss on disposition (16,533) (17,121) (2,121) 9,623 - - - - Discontinued operations - provision for impairment - 15,557 12,200 - - - - - Discontinued operations - depreciation and amortization 241 1,448 1,733 2,015 3,453 2,525 2,609 2,468 ------- -------- -------- -------- -------- -------- ------- -------- FFO before adjustments for non-recurring losses 6,248 6,890 2,256 6,963 5,347 5,479 7,131 7,299 Non-recurring loss on early extinguishment of debt(2) 525 - - - - - - - ------- -------- -------- -------- -------- -------- ------- -------- FFO before allocations to minority interests and preferred shareholders $ 6,773 $ 6,890 $ 2,256 $ 6,963 $ 5,347 $ 5,479 $ 7,131 $ 7,299 ======= ======== ======== ======== ======== ======== ======= ======== Other Data: Net cash provided by operating activities $13,401 $ 6,490 $ 5,268 4,668 12,588 2,163 10,200 7,960 Net cash provided by (used in) investing activities 23,555 (1,478) 9,095 10,576 5,529 4,586 (7,022) 2,502 Net cash used in financing activities (36,087) (4,174) (15,252) $(16,691) $(15,402) $ (6,000) $(4,795) $(13,678) ====================================================================================================================================
Notes: (1) Certain prior quarterly financial information has been reclassified pursuant to the requirements of FAS No. 144. (2) Represents non-recurring charges incurred in connection with the early extinguishment of debt. We adopted FAS No. 145 effective December 31, 2002 and, accordingly, classified such costs as a component of interest expense. These costs are attributable to financing activities ancillary to our core real estate operations. Page - (34) ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MATERIAL 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. Historically, we have used a mix of fixed and variable-rate debt to (i) limit the impact of interest rate changes on our results from operations and cash flows and (ii) lower our overall borrowing costs. Nevertheless, as of December 31, 2002, all of our outstanding indebtedness bore interest at fixed rates. The following table provides a summary of principal cash flows, excluding (i) unamortized debt premiums of $7,955 and (ii) non-recourse mortgage indebtedness aggregating $41,250 on certain properties which is in default (see "Defaults on Certain Non-recourse Mortgage Indebtedness" within "Liquidity and Capital Resources" of Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information), and related contractual interest rates by fiscal year of maturity. See Note 6 - "Debt" of the Notes to Consolidated Financial Statements contained herein for additional information with respect to the terms of our debt instruments.
- ------------------------------------------------------------------------------------------------------------------------------------ Year of Maturity - ------------------------------------------------------------------------------------------------------------------------------------ 2003 2004 2005 2006 2007 Thereafter Total - ------------------------------------------------------------------------------------------------------------------------------------ Bonds Payable Principal $ 680 $ 726 $ 773 $ 820 $ 878 $ 18,618 $ 22,495 Average interest rate 6.33% 6.34% 6.34% 6.34% 6.34% 6.52% 6.49% Notes Payable Principal $266,659 $ 3,075 $ 11,574 $ 120,437 $ 1,002 $ 59,491 $ 462,238 Average interest rate 7.79% 8.44% 8.58% 8.83% 7.60% 7.57% 8.06% Defeased Notes Payable Principal $ 74,764 $ 74,764 Average interest rate 7.78% 7.78% ====================================================================================================================================
Additionally, we sold Prime Outlets at Hagerstown (the "Hagerstown Center") on January 11, 2002 to an existing joint venture partnership (the "Prime/Estein Venture"). In connection with the sale, the Prime/Estein Venture assumed the first mortgage loan on the Hagerstown Center (the "Hagerstown First Mortgage") in the amount of $46,862; however, our guarantee of such indebtedness remains in place. Additionally, we are obligated to refinance the Hagerstown First Mortgage 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 Hagerstown First Mortgage 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 10-year period, we will be obligated to pay the difference to the Prime/Estein Venture. If the actual cost of such indebtedness is less than 7.75% at any time during the 10-year period, however, the Prime/Estein Venture will be obligated to pay the difference to us. The actual cost of the Hagerstown First Mortgage is 30-day LIBOR plus 1.50%, or 2.88% as of December 31, 2002. Because the Hagerstown First Mortgage bears interest at a variable rate, we are exposed to the impact of interest rate changes. At December 31, 2002, a hypothetical 100 basis point move in the LIBOR rate would impact our guarantee by $469. See Note 3 - "Property Dispositions" of the Notes to Consolidated Financial Statements for additional information. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this Item is set forth at the pages indicated in Item 14(a) below. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Page - (35) PART III ITEMS 10, 11 and 13 The information required by Items 10, 11, and 13 (except that information regarding executive officers called for by Item 10 that is contained in Part I) is incorporated herein by reference from the definitive proxy statement (the "Proxy Statement") that the Company intends to file pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, on or before April 30, 2003. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Except as set forth herein, the information required by Item 12 is incorporated by reference from the Proxy Statement entitled "Security Ownership of Certain Beneficial Owners and Management." Equity Compensation Plans The following table summarizes information, as of December 31, 2002, relating to our equity compensation plans pursuant to which grants of options, restricted stock, restricted stock units or other rights to acquire shares may be granted from time to time. EQUITY COMPENSATION PLAN INFORMATION
Number of securities remaining available for Number of securities to Weighted-average future issuance under be issued upon exercise exercise price equity compensation of outstanding options, of outstanding options, plans (excluding securities warrants and rights warrants and rights reflected in column (a)) ---------------------------- -------------------------- --------------------------- Plan Category (a) (b) (c) Equity compensation plans approved by stockholders(1) 4,060,313 (3) $4.83 (4) 1,225,224 Equity compensation plans not approved by stockholders(2) - - - Total(2) 4,060,313 $4.83 (4) 1,225,224
Notes: (1) Includes the 1994 Stock Incentive Plan, the 1995 Stock Incentive Plan, the 1998 Long-Term Incentive Plan, the Nonemployee Director Plan and plans assumed in connection with acquisition transactions. (2) Excludes the Prime Retail, Inc. 2002 Long-term Incentive Plan, which is attached as Exhibit 10.9 hereto. Awards under such plan may be paid in stock at the Company's discretion. (3) Includes 3,377,617 outstanding options (including 682,696 outstanding options granted under plans assumed in connection with acquisition transactions). (4) Reflects outstanding options at a weighted-average exercise price of $2.24 under the 1994 Stock Incentive Plan, $4.48 under the 1995 Stock Incentive Plan, $3.06 under the 1998 Long-Term Incentive Plan, $8.50 under the Nonemployee Director Plan and $12.75 under plans assumed in connection with acquisition transactions. Page - (36) PART IV ITEM 14 - CONTROLS AND PROCEDURES The Company, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this annual report. Based on inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. However, based on their evaluation, our principal executive officer and our principal financial officer have concluded that these controls and procedures are effective. In addition, they concluded that there were no significant deficiencies in the design or operation of internal controls, which could significantly affect our ability to record, process, summarize and report financial data. There have been no significant changes in our internal controls or in other factors which could significantly affect these controls subsequent to the date of their evaluation. Our disclosure controls and other procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements Report of Independent Auditors F-1 Consolidated Balance Sheets as of December 31, 2002 and 2001 F-2 Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 F-3 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2002, F-6 2001 and 2000 Notes to Consolidated Financial Statements F-7 2. Financial Statement Schedules The following financial statement schedule is included in Item 15 (d): Schedule III--Real Estate and Accumulated Depreciation F-32 Notes to Schedule III F-33
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 3. Exhibits Exhibit Number Description 3.1 Amended and Restated Articles of Incorporation of Prime Retail, Inc. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as amended (File No. 0-23616).] 3.2 Articles Supplementary of Prime Retail, Inc. relating to Series B Preferred Stock. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as amended (File No. 0-23616).] Page - (37) Exhibit Number Description 3.3 Second Amended and Restated By-Laws of Prime Retail, Inc. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-23616).] 4.1 Form of Series A Preferred Stock Certificate [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).] 4.2 Form of Series B Preferred Stock Certificate [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).] 4.3 Form of Common Stock Certificate [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).] 4.4 Warrant to Purchase Common Stock Certificate of the Company dated December 22, 2000 issued to FRIT PRT Lending LLC [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 0-23616).] 4.5 Warrant to Purchase Common Stock Certificate of the Company dated December 22, 2000 issued to Greenwich Capital Financial Products, Inc. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 0-23616).] 10.1 Third Amended and Restated Agreement of Limited Partnership of Prime Retail, L.P. dated as of October 15, 1998 and effective as of June 15, 1998. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as amended (File No. 0-23616).] 10.2 Amendment No. 1 to Third Amended and Restated Agreement of Limited Partnership of Prime Retail, L.P. dated as of September 28, 1999. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-23616).] 10.3 Amendment No. 2 to Third Amended and Restated Agreement of Limited Partnership of Prime Retail, L.P., dated as of April 15, 2002. [Incorporated by reference to the same titled exhibit in the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002 (File No. 001-13301).] 10.4 1994 Stock Incentive Plan [Incorporated by reference to the same titled exhibit in the Company's registration statement on Form S-11 (Registration No. 33-68536).] 10.5 1995 Stock Incentive Plan [Incorporated by reference to the same titled exhibit in the Company's registration statement on Form S-11 (Registration No. 333-1666).] 10.6 Non-employee Director Stock Plan [Incorporated by reference to Appendix I in the Company's registration statement on Form S-4 (File No. 333-51285).] 10.7 1998 Long-Term Stock Incentive Plan [Incorporated by reference to Appendix J in the Company's registration statement on Form S-4 (File No. 333-51285).] 10.8 Description of the 1999 Long-Term Incentive Plan [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as amended (File No. 0-23616).] ** 10.9 Prime Retail, Inc. 2002 Long-Term Incentive Plan 10.10 Employment agreement dated July 24, 2000 between Prime Retail, Inc. and Glenn D. Reschke. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 01-13301).] ** 10.11 Second Amendment to Employment Agreement, dated August 12, 2002, by and between Prime Retail, Inc. and Glenn D. Reschke. 10.12 Employment Agreement dated June 11, 2000 between Prime Retail, Inc. and Robert A. Brvenik. [Incorporated by reference to the same titled exhibit in the Company's Quarterly Report on Form 10-Q/A for the quarterly period ended September 30, 2000 (File No. 01-13301).] Page - (38) Exhibit Number Description 10.13 Amendment to Employment Agreement dated April 2, 2001 between Prime Retail, Inc. and Robert A. Brvenik. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 01-13301).] ** 10.14 Third Amendment to Employment Agreement, dated August 12, 2002, by and between Prime Retail, Inc. and Robert A. Brvenik. 10.15 Employment Agreement dated March 21, 2002 between Prime Retail, Inc. and R. Kelvin Antill. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 01-13301).] ** 10.16 Second Amendment to Employment Agreement, dated August 12, 2002, by and between Prime Retail, Inc. and R. Kelvin Antill. 10.17 Employment Agreement dated January 10, 2002 between Prime Retail, Inc. and David G. Phillips. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 01-13301).] ** 10.18 Second Amendment to Employment Agreement, dated August 12, 2002, by and between Prime Retail, Inc. and David G. Phillips. 10.19 Employment Agreement, dated June 6, 2002, by and between Prime Retail, Inc. and Frederick J. Meno IV. [Incorporated by reference to the same titled exhibit in the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002 (File No. 01-13301).] ** 10.20 Amendment to Employment Agreement, dated August 12, 2002, by and between Prime Retail, Inc. and Frederick J. Meno IV. 10.21 Separation Agreement dated February 23, 2000 by and between Prime Retail, Inc. and Abraham Rosenthal. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-23616).] 10.22 Separation Agreement dated August 24, 2000 by and between Prime Retail, Inc. and Prime Retail, L.P. and William H. Carpenter, Jr. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 0-23616).] 10.23 Letter Agreement dated April 24, 2001 between Prime Retail, Inc., and Prime Retail, L.P. and Abraham Rosenthal amending Separation Agreement dated February 23, 2000. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 01-13301).] 10.24 Letter Agreement dated April 24, 2001 between Prime Retail, Inc., Prime Retail, L.P. and William H. Carpenter, Jr. amending Separation Agreement dated August 24, 2000. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 01-13301).] 10.25 Letter Agreement with David G. Phillips regarding the purchase of units in Prime Retail, L.P. dated August 6, 1996. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-23616).] 10.26 Registration Rights Agreement dated June 15, 1998 by and between Prime Retail, Inc. and Prime Retail, L.P. for the benefit of holders of common units of Prime Retail, L.P. and certain stockholders of Prime Retail, Inc. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as amended (File No. 0-23616).] 10.27 Form of Property Level General Partnership Agreement [Incorporated by reference to the same titled exhibit in the Company's registration statement on Form S-11 (Registration No. 33-68536).] 10.28 Form of Property Level Limited Partnership Agreement [Incorporated by reference to the same titled exhibit in the Company's registration statement of Form S-11 (Registration No. 33-68536).] Page - (39) Exhibit Number Description 10.29 Noncompetition and Restriction Agreement with Michael W. Reschke of PGI [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).] ** 10.30 Release Agreement dated January 22, 2001 by and between Prime Retail, Inc., Prime Retail, L.P. and Michael W. Reschke. 10.31 Consulting Agreement between the Company and Marvin Traub Associates, Inc. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).] 10.32 Waiver, Recontribution and Indemnity Agreement by the Limited Partners [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, as amended (File No. 0-23616).] 10.33 Indemnity Agreement made by the Company in favor of The Prime Group, Inc. and Prime Group Limited Partnership [Incorporated by reference to the same titled exhibit in the Company's registration statement on Form S-11 (Registration No. 333-1666).] 10.34 Promissory Note dated October 31, 1996 by and between Prime Retail, L.P. and Nomura Asset Capital Corporation [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).] 10.35 Form of Deed of Trust, Security Agreement, Assignment of Tents and Fixture Filings with Nomura Asset Capital Corporation [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).] 10.36 Consulting Agreement between the Company and Financo, Inc. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).] 10.37 Amended and Restated Agreement and Plan of Merger among Prime Retail, Inc., Prime Retail, L.P., Horizon Group, Inc., Sky Merger Corp., Horizon Group Properties, Inc., Horizon Group Properties, L.P., and Horizon/Glen Outlet Centers Limited Partnership dated as of February 1, 1998 [Incorporated by reference to the same titled exhibit in the Company's Current Report on Form 8-K dated February 1, 1998 (File No. 0-23616).] 10.38 Agreement among Prime Retail, Inc., Horizon Group, Inc., Mr. David H. Murdock, Castle & Cooke Properties, Inc., and Pacific Holding Company dated as of February 1, 1998 [Incorporated by reference to the same titled exhibit in the Company's Current Report on Form 8-K dated February 1, 1998 (File No. 0-23616).] 10.39 Master Modification Agreement dated as of December 22, 2000 between Buckeye Factory Shops Limited Partnership, Latham Factory Stores Limited Partnership, Carolina Factory Shops Limited Partnership, Shasta Outlet Center Limited Partnership, The Prime Outlets at Calhoun Limited Partnership and The Prime Outlets at Lee Limited Partnership, Nomura Asset Capital Corporation, Prime Retail, Inc. and Prime Retail, L.P. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 0-23616).] 10.40 The Agreement for Purchase and Sale, dated December 22, 2000, by and between Finger Lakes Outlet Center, L.L.C., The Prime Outlets at Michigan City Limited Partnership, The Prime Outlets at Gilroy Limited Partnership and Outlet Village of Kittery Limited Partnership as seller and F/C Waterloo Development LLC, F/C Michigan City Development LLC, F/C Gilroy Development LLC, F/C Kittery Development LLC and F/C Michigan Parking LLC as buyer. [Incorporated by reference to the same titled exhibit in the Company's Amended Current Report on Form 8-K/A dated December 22, 2000 (File No. 001-13301).] 10.41 Amended and Restated Guaranty and Indemnity Agreement dated as of July 31, 2001 by and among Horizon Group Properties, Inc., Horizon Group Properties, L.P., Prime Retail, Inc. and Prime Retail, L.P. [Incorporated by reference to the same titled exhibit in the Company's Quarterly Report on Form 10-Q dated September 30, 2001 (File No. 0-23616).] Page - (40) Exhibit Number Description 10.42 Second Amended and Restated Guaranty and Indemnity Agreement dated as of July 10, 2002 by and among Horizon Group Properties, Inc., Horizon Group Properties, L.P., Prime Retail, Inc. and Prime Retail, L.P. [Incorporated by reference to the same titled exhibit in the Company's Quarterly Report on Form 10-Q dated June 30, 2002 (File No. 001-13301).] 10.43 Contribution Agreement dated as of June 15, 1998 by and among Horizon Group, Inc., Sky Merger Corp., Horizon/Glen Outlet Centers Limited Partnership, Horizon Group Properties, Inc., and Horizon Group Properties, L.P. [Incorporated by reference to the same titled exhibit in the Company's Current Report on Form 8-k dated June 15, 1998 (File No. 001-13301).] 10.44 Purchase and Sale Agreement, dated as of August 6, 1999, among The Prime Outlets at Birch Run, L.L.C., The Prime Outlets at Williamsburg, L.L.C., and Outlet Village of Hagerstown Limited Partnership and Welp Triple Outlet, L.C. [Incorporated by reference to the same titled exhibit in the Company's Current Report on Form 8-K dated August 11, 1999 (File No. 001-13301).] 10.45 Seventh Amendment dated December 4, 2001 to Purchase and Sale Agreement, dated as of August 6, 1999, among The Prime Outlets at Birch Run, L.L.C., The Prime Outlets at Williamsburg, L.L.C., and Outlet Village of Hagerstown Limited Partnership and Welp Triple Outlet L.C. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as amended (File No. 0-23616).] 10.46 Guaranty Agreement dated July 10, 2002 by Horizon Group Properties, Inc., Horizon Group Properties, L.P. and Prime Retail, L.P., collectively, as guarantors, in favor of Beal Bank, S.S.B. [Incorporated by reference to the same titled exhibit in the Company's Quarterly Report on Form 10-Q dated September 30, 2002 (File No. 001-13301).] 10.47 Real Estate Sale Agreement, dated January 9, 2002, by and between (i) Shasta Outlet Center Limited Partnership, The Prime Outlets at Calhoun Limited Partnership, Carolina Factory Shops Limited Partnership, Latham Factory Stores Limited Partnership, The Prime Outlets at Lee Limited partnership, Prime Lee Development Limited Partnership and Buckeye Factory Shops Limited Partnership, collectively, as sellers and (ii) PWG Capital, LLC, as purchaser [Incorporated by reference to the same titled exhibit in the Company's Current Report on Form 8-K dated August 8, 2002).] 10.48 First Amendment to Real Estate Sale Agreement dated March 27, 2002 [Incorporated by reference to the same titled exhibit in the Company's Current Report on Form 8-K dated August 8, 2002).] 10.49 Second Amendment to Real Estate Sale Agreement dated April 5, 2002 [Incorporated by reference to the same titled exhibit in the Company's Report on Form 8-K dated August 8, 2002).] ** 10.50 Amended and Restated Promissory Note dated December 6, 2002 between Coral Isle Factory Shops Limited Partnership, Gulf Coast Factory Shops Limited Partnership, Coral Isle Factory Shop Limited Partnership, Kansas City Factory Shops Limited Partnership, Ohio Factory Shops Limited Partnership, San Marcos Factory Store, LTD, Triangle Factory Store Limited Partnership, Gainesville Factory Shops Limited Partnership, Florida Keys Factory Shops Limited Partnership, The Prime Outlets at Lebanon Limited Partnership, Magnolia Bluff Factory Shops Limited Partnership, Huntley Factory Shops Limited Partnership, Gulfport Factory Shops Limited Partnership and Defeasance Borrowers (solely for purposes joining into Section 4.12), collectively as borrowers, and LaSalle Bank National Association, as Trustee for the Holders of Asset Securitization Corporation Commercial Mortgage Pass-Through Certificates, Series 1996-MD VI. ** 10.51 Defeasance Promissory Note dated December 6, 2002 between Castle Rock Factory Shops Partnership and Loveland Factory Shops Limited Partnership, collectively as Defeasance Borrowers, and LaSalle Bank National Association, as Trustee for the Holders of Asset Securitization Corporation Commercial Mortgage Pass-Through Certificates, Series 1996-MD VI. ** 10.52 Form of Modification Agreement dated December 6, 2002 between Prime Retail, L.P. and LaSalle Bank National Association, as Trustee for the Holders of Asset Securitization Corporation Commercial Mortgage Pass-Through Certificates, Series 1996-MD VI. Page - (41) Exhibit Number Description ** 12.1 Statements Re: Computation of Ratios ** 21.1 Subsidiaries of Prime Retail, Inc. ** 23.1 Consent of Ernst & Young LLP ** 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. ** 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. ** Filed herewith. (b) Reports on Form 8-K On December 19, 2002, we filed a Current Report on Form 8-K relating to the completion of two separate transactions involving the sale of three outlet centers for aggregate cash consideration of $132.5 million on December 6, 2002. The first transaction involved the sale of two outlet centers (together, the "Colorado Properties" and the second transaction involved the sale of Prime Outlets of Puerto Rico and certain adjacent parcels of land (the "Puerto Rico Center"). In connection with the sale of Colorado Properties we partially defeased a first mortgage and expansion loan. The filing included unaudited pro forma financial information pursuant to Article 11 of Regulation S-X and certain exhibits, including (i) the Press Release issued December 6, 2002 regarding completion of the transactions and (ii) the Press Release issued December 16, 2002 announcing we had repaid a mezzanine loan in full. On March 5, 2003 we filed a Current Report on Form 8-K relating to information furnished under Regulation FD disclosure. The filing included as an exhibit, the Press Release issued March 4, 2003 regarding our disclosure of limited discussions among certain of our restricted preferred shareholders. (c) Exhibits The list of exhibits filed with this report is set forth in response to Item 15(a)(3). The required exhibits have been filed as indicated in the Exhibit Index. The Company agrees to furnish a copy of any long-term debt instrument wherein the securities authorized do not exceed 10 percent of the registrant's total assets on a consolidated basis upon the request of the Securities and Exchange Commission. (d) Financial Statements and Schedules Schedule III -- Real Estate and Accumulated Depreciation attached hereto is hereby incorporated by reference to this Item. Page - (42) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 28, 2003. PRIME RETAIL, INC. /s/ Robert A. Brvenik Robert A. Brvenik President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ Glenn D. Reschke March 28, 2003 -------------------------------------- Glenn D. Reschke Chairman of the Board and Chief Executive Officer /s/ Howard Amster March 28, 2003 -------------------------------------- Howard Amster Director /s/ Kenneth A. Randall March 28, 2003 -------------------------------------- Kenneth A. Randall Director /s/ Michael W. Reschke March 28, 2003 -------------------------------------- Michael W. Reschke Director /s/ Sharon Sharp March 28, 2003 -------------------------------------- Sharon Sharp Director /s/ Gary J. Skoien March 28, 2003 -------------------------------------- Gary J. Skoien Director /s/ James R. Thompson March 28, 2003 -------------------------------------- James R. Thompson Director /s/ Marvin S. Traub March 28, 2003 -------------------------------------- Marvin S. Traub Director Page - (43) CERTIFICATIONS I, Glenn D. Reschke, certify that: 1. I have reviewed this annual report on Form 10-K of Prime Retail, Inc; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report; 4. The registrant's other certifying officer 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 annual 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 annual report (the "Evaluation Date"); and c) presented in this annual 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 officer 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 functions): 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 officer and I have indicated in this annual report whether 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: March 28, 2003 /s/ Glenn D. Reschke -------------------- Glenn D. Reschke, Chairman and Chief Executive Officer Page - (44) CERTIFICATIONS I, Robert A. Brvenik, certify that: 1. I have reviewed this annual report on Form 10-K of Prime Retail, Inc; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report; 4. The registrant's other certifying officer 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: d) 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 annual report is being prepared; e) 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 annual report (the "Evaluation Date"); and f) presented in this annual 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 officer 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 functions): c) 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 d) 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 officer and I have indicated in this annual report whether 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: March 28, 2003 /s/ Robert A. Brvenik --------------------- Robert A. Brvenik, President, Chief Financial Officer and Treasurer Page - (F-1) Report of Independent Auditors To the Board of Directors and Shareholders Prime Retail, Inc. We have audited the accompanying consolidated balance sheets of Prime Retail, Inc. (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2002. We have also audited the related financial statement schedule listed in the Index at Item 15 (a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements, taken as a whole, present fairly, in all material respects, the information set forth therein. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 6, the Company's ability to refinance maturing debt and repay a guaranteed obligation is dependent upon completing certain capital raising activities by specific dates. If the Company is unable to complete certain capital raising activities by the specified dates, it may not be able to refinance maturing debt and repay a guaranteed obligation. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 6. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. As discussed in Note 2 to the consolidated financial statements, in 2002 the Company adopted the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." In addition, as discussed in Note 2 to the consolidated financial statements, in 2002 the Company changed its method of accounting for losses on the early extinguishment of debt. /s/ Ernst & Young LLP Baltimore, Maryland March 21, 2003 Page - (F-2) PRIME RETAIL, INC. Consolidated Balance Sheets (Amounts in thousands, except share information)
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Assets Investment in rental property: Land $ 101,546 $ 148,463 Buildings and improvements 740,024 1,208,568 Property under development - 3,352 Furniture and equipment 13,292 15,225 --------- ----------- 854,862 1,375,608 Accumulated depreciation (213,604) (258,124) --------- ----------- 641,258 1,117,484 Cash and cash equivalents 6,908 7,537 Restricted cash 107,037 37,885 Accounts receivable, net 3,049 5,017 Deferred charges, net 3,766 11,789 Assets held for sale - 54,628 Investment in unconsolidated joint ventures 49,889 24,539 Other assets 6,181 3,629 --------- ----------- Total assets $ 818,088 $ 1,262,508 ========= =========== Liabilities and Shareholders' Equity Bonds payable, including $17,920 in default in 2002 $ 22,495 $ 31,975 Notes payable, including $41,632 in default in 2002 511,443 925,492 Defeased notes payable 74,764 - Accrued interest 3,984 7,643 Real estate taxes payable 3,484 8,091 Accounts payable and other liabilities 43,059 31,380 --------- ----------- Total liabilities 659,229 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 $76,367), 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 $247,687), 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 (552,538) (453,470) --------- ----------- Total shareholders' equity 157,372 256,440 --------- ----------- Total liabilities and shareholders' equity $ 818,088 $ 1,262,508 ========= =========== ====================================================================================================================================
See accompanying notes to consolidated financial statements. Page - (F-3) PRIME RETAIL, INC. Consolidated Statements of Operations (Amounts in thousands, except per share information)
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues Base rents $ 86,184 $ 113,546 $ 151,605 Percentage rents 3,756 3,469 5,566 Tenant reimbursements 48,730 54,178 70,749 Interest and other 13,361 12,126 13,728 ---------- ---------- ---------- Total revenues 152,031 183,319 241,648 Expenses Property operating 42,446 44,472 58,494 Real estate taxes 12,931 15,054 17,655 Depreciation and amortization 34,301 45,863 57,930 Corporate general and administrative 14,562 14,290 21,581 Interest 61,826 79,864 91,161 Other charges 8,684 19,632 22,907 Provision for asset impairment 84,093 63,026 77,115 ---------- ---------- ---------- Total expenses 258,843 282,201 346,843 ---------- ---------- ---------- Loss before gain (loss) on sale of real estate and minority interests (106,812) (98,882) (105,195) Gain (loss) on sale of real estate, net 5,802 (1,063) (42,648) ---------- ---------- ---------- Loss from continuing operations before minority interests (101,010) (99,945) (147,843) Loss allocated to minority interests - 408 738 ---------- ---------- ---------- Loss from continuing operations (101,010) (99,537) (147,105) Discontinued operations, including provision for asset impairment of $27,757 and net gain of $26,152 on dispositions in 2002 1,942 1,489 4,653 ---------- ---------- ---------- Net loss (99,068) (98,048) (142,452) Allocations to preferred shareholders (22,672) (22,672) (22,672) ---------- ---------- ---------- Net loss applicable to common shares $ (121,740) $ (120,720) $ (165,124) ========== ========== ========== Basic and diluted earnings per common share: Loss from continuing operations $ (2.83) $ (2.80) $ (3.90) Discontinued operations 0.04 0.03 0.11 ---------- ---------- ---------- Net loss $ (2.79) $ (2.77) $ (3.79) ========== ========== ========== Weighted-average common shares outstanding - basic and diluted 43,578 43,578 43,517 ========== ========== ========== ====================================================================================================================================
See accompanying notes to consolidated financial statements. Page - (F-4) PRIME RETAIL, INC. Consolidated Statements of Cash Flows (Amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Activities Loss from continuing operations $ (101,010) $ (99,537) $ (147,105) Adjustments to reconcile net loss to net cash provided by operating activities: Loss allocated to minority interests - (408) (738) (Gain) loss on sale of real estate, net (5,802) 1,063 42,648 Loss on early extringuishment of debt 525 - 4,206 Gain on sale of outparcel land - - (2,472) Depreciation and amortization 34,301 45,863 57,930 Amortization of deferred financing costs 4,747 6,341 2,922 Amortization of debt premiums (2,020) (1,928) (1,841) Provision for uncollectible accounts receivable 1,881 9,031 6,288 Provision for asset impairment 84,093 63,026 68,663 Discontinued operations 10,186 14,401 14,450 Loss on eOutlets - - 14,703 Loss on Designer Connection - - 1,815 Changes in operating assets and liabilities: Increase in accounts receivable (1,179) (3,092) (4,903) (Increase) decrease in restricted cash 7,635 15,477 (28,151) (Increase) decrease in other assets (1,410) 3,307 3,285 Increase (decrease) in accounts payable and other liabilities (1,793) (23,151) 4,272 Increase (decrease) in real estate taxes payable (150) 142 (2,145) Increase (decrease) in accrued interest (177) 2,376 (1,377) ---------- --------- ---------- Net cash provided by operating activities 29,827 32,911 32,450 ---------- --------- ---------- Investing Activities Additions to investment in rental property (7,713) (15,170) (51,833) Payments made for eOutlets.com - (2,170) (11,161) Proceeds from repayment of notes receivable, net - 14,523 - Contributions to investments in partnerships - (2,950) (3,000) Proceeds from sales of operating properties and land 49,461 11,362 67,089 ---------- --------- ---------- Net cash provided by investing activities 41,748 5,595 1,095 ---------- --------- ---------- Financing Activities Proceeds from notes payable - 16,899 134,497 Principal repayments on notes payable (72,092) (56,222) (155,120) Contributions from minority interests - 400 - Deferred costs (112) (952) (11,359) ---------- --------- ---------- Net cash used in financing activities (72,204) (39,875) (31,982) ---------- --------- ---------- Increase (decrease) in cash and cash equivalents (629) (1,369) 1,563 Cash and cash equivalents at beginning of period 7,537 8,906 7,343 ---------- --------- ---------- Cash and cash equivalents at end of period $ 6,908 $ 7,537 $ 8,906 ========== ========= ========== ====================================================================================================================================
See accompanying notes to consolidated financial statements. Page - (F-5) PRIME RETAIL, INC. Consolidated Statements of Cash Flows (continued) (Amounts in thousands) Supplemental Disclosure of Non-cash Investing and Financing Activities The following assets and liabilities were disposed in connection with the disposition of properties during the periods indicated:
- ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Book value of net assets disposed $ 380,086 $ 42,696 $ 333,906 Notes payable paid (168,982) (30,271) - Notes payable assumed by buyer (46,862) - (206,735) Notes payable transferred to lender (58,685) - - Deposits to restricted cash (79,257) - - Investment in unconsolidated joint ventures (26,327) (3,000) (4,962) Accounts payable and other liabilities 17,237 Promissory note received from buyer - 3,000 (10,000) Gain on sale of outparcel land (included in other income) - - (2,472) Discontinued operations - net gain on disposals 26,152 - - Gain (loss) on sale of real estate 5,802 (1,063) (42,648) --------- -------- --------- Cash received, net $ 49,164 $ 11,362 $ 67,089 ========= ======== ========= ====================================================================================================================================
See accompanying notes to consolidated financial statements Page - (F-6) PRIME RETAIL, INC. Consolidated Statements of Shareholders' Equity (Amounts in thousands, except share information)
- ------------------------------------------------------------------------------------------------------------------------------------ Series A Series B Senior Convertible Additional Distributions Total Preferred Preferred Common Paid-in in Excess of Shareholders' Stock Stock Stock Capital Earnings Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 1, 2000 $ 23 $ 78 $ 434 $ 709,122 $ (212,970) $ 496,687 Issuance of 180,000 restricted shares of common stock - - 2 251 - 253 Exchange of 29,296 common units for common stock - - - - - - Net loss - - - - (142,452) (142,452) ---- ---- ----- --------- ---------- --------- Balance, December 31, 2000 23 78 436 709,373 (355,422) 354,488 Net loss - - - - (98,048) (98,048) ---- ---- ----- --------- ---------- --------- Balance, December 31, 2001 23 78 436 709,373 (453,470) 256,440 Net loss - - - - (99,068) (99,068) ---- ---- ----- --------- ---------- --------- Balance, December 31, 2002 $ 23 $ 78 $ 436 $ 709,373 $ (552,538) $ 157,372 ==== ==== ===== ========= ========== ========= ====================================================================================================================================
See accompanying notes to consolidated financial statements. Page - (F-7) PRIME RETAIL, INC. Notes to Consolidated Financial Statements (Amounts in thousands, except share and unit information) Note 1 - Organization and Basis of Presentation Organization Prime Retail, Inc. (the "Company") was organized as a Maryland corporation on July 16, 1993. We are a self-administered and self-managed real estate investment trust ("REIT") that primarily develops, acquires, owns and operates outlet centers. As of December 31, 2002, the Company's outlet center portfolio, including nine properties owned through unconsolidated joint ventures, consists of 38 properties (the "Properties") in 24 states, which total 10,269,000 square feet of gross leasable area ("GLA"). As a fully integrated real estate firm, we provide accounting, finance, leasing, marketing, and management services for the Properties. Prime Retail, L.P. (the "Operating Partnership"), a Delaware limited partnership, is the entity through which we conduct substantially all of our business and operations and own (either directly or through subsidiaries) substantially all of our assets including the Properties. We control the Operating Partnership as its sole general partner and are dependent upon the distributions or other payments from the Operating Partnership to meet our financial obligations. Unless the context otherwise requires, all references to "we," "us," "our" or the "Company" herein mean Prime Retail, Inc. and those entities owned or controlled by Prime Retail, Inc., including the Operating Partnership. At December 31, 2002, the Company owned 2,300,000 Series A Senior Preferred Units of the Operating Partnership (the "Series A Senior Preferred Units"), 7,828,125 Series B Convertible Preferred Units of the Operating Partnership (the "Series B Convertible Preferred Units"), and 43,577,916 Common Units of partnership interest in the Operating Partnership (the "Common Units"). Each Senior Preferred Unit, and Series B Convertible Preferred Unit, (collectively, the "Preferred Units") entitles us to receive distributions from the Operating Partnership in an amount equal to the dividend declared or paid with respect to a share of our Series A Senior Cumulative Preferred Stock ("Series A Senior Preferred Stock") and Series B Cumulative Convertible Participating Preferred Stock ("Series B Convertible Preferred Stock"), respectively, prior to the payment by the Operating Partnership of distributions with respect to the Common Units. Series B Convertible Preferred Units will be automatically converted into Common Units to the extent of any conversion of Series B Convertible Preferred Stock into Common Stock. The Preferred Units will be redeemed by the Operating Partnership to the extent of any redemption of Senior Preferred Stock or Series B Convertible Preferred Stock. A summary of the holders of units in the Operating Partnership as of December 31, 2002 is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Number of Units ---------------------------------------------------- Holder Series A Series B Common - ------------------------------------------------------------------------------------------------------------------------------------ Prime Retail, Inc. 2,300,000 7,828,125 43,577,916 Affiliates of the Prime Group and others - - 10,810,912 --------- --------- ---------- 2,300,000 7,828,125 54,388,828 ========= ========= ========== ====================================================================================================================================
As of December 31, 2002, we had an 80% general partnership interest in the Operating Partnership with full and complete control over the management of the Operating Partnership as the sole general partner, not subject to removal by the limited partners. Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company, the Operating Partnership and the partnerships in which it has a controlling financial interest. Profits and losses are allocated in accordance with the terms of the Operating Partnership agreement. The preparation of financial statements, in conformity with accounting principles generally accepted in the United States ("GAAP"), requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. See Note 2 - "Significant Accounting Policies" for additional information. Page - (F-8) Investments in unconsolidated joint ventures are accounted for in accordance with the equity method of accounting. Income (loss) applicable to minority interests of the Operating Partnership and common shares as presented in the Consolidated Statements of Operations is allocated based on income (loss) before minority interests after income allocated to preferred shareholders. Significant inter-company accounts and transactions have been eliminated in consolidation. Certain amounts in prior years have been reclassified to the current year presentation, which did not have an impact on our results of operations or financial position. Note 2 - Summary of Significant Accounting Policies Rental Property Depreciation is calculated on the straight-line basis over the estimated useful lives of the assets, which are as follows: Land improvements 20 years Buildings and improvements Principally 40 years Tenant improvements Principally term of related lease Furniture and equipment 5 years Rental property is generally carried at historical cost, net of accumulated depreciation. Our prior development costs, which included fees and costs incurred in the development of new properties or the expansion to existing properties, were capitalized as incurred. We commence amortization of capitalized development costs upon completion of construction over the useful lives of the respective properties on a straight-line basis. Expenditures for ordinary maintenance and repairs are expensed to operations (included in property operating expenses in the Consolidated Statements of Operations) as incurred. Significant renovations and improvements, which improve and/or extend the useful life of assets are capitalized and depreciated over their estimated useful lives. We monitor our Properties for indicators of impairment on a periodic 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 and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Impairment losses are measured as the difference between 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 estimated costs to dispose. Fair value is based on estimated cash flows discounted at a risk-adjusted rate of return. Adverse changes in market conditions or deterioration in the operating results of our outlet centers and other rental properties could result in losses or an inability to recover the current carrying value of such assets. Such potential losses or the inability to recover the current carrying value may not be reflected in our Properties' current carrying value, thereby possibly requiring an impairment charge in the future. Cash and Cash Equivalents and Restricted Cash We consider highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying value of cash and cash equivalents and restricted cash as reported in the Consolidated Balance Sheets approximates their fair value. We maintain our cash and cash equivalents and restricted cash in accounts at various financial institutions. The majority of these accounts are interest bearing. Although the combined account balances at each institution periodically may exceed FDIC insurance coverage, and as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage, we believe that the risk is not significant. During the years ended December 31, 2002, 2001 and 2000, we earned interest income of $482, $1,846 and $1,899, respectively (included in interest and other income in the Consolidated Statements of Operations). See Note 4 - "Restricted Cash" for additional information. Accounts Receivable and Bad Debt Expense We regularly review our accounts receivable to determine an appropriate amount for the allowance for doubtful accounts based upon the impact of economic conditions on ours tenants' ability to pay, past collection experience and such other factors which, in our judgment, deserve current recognition. In turn, a provision for uncollectible accounts receivable ("bad debt expense") 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. Page - (F-9) Our allowances for doubtful accounts at December 31, 2002 and 2001 were $3,093 and $12,515, respectively. During the years ended December 31, 2002, 2001 and 2000, we recorded bad debt expense of $1,881, $9,031 and $6,288, respectively (included in other charges in the Consolidated Statements of Operations). Net accounts receivable representing straight-line rents was $2,652 and $4,524 at December 31, 2002 and 2001, respectively. Deferred Charges Deferred charges generally consist of leasing commissions and financing costs. Deferred leasing commissions representing costs incurred to originate and renew operating leases are deferred and amortized on a straight-line basis over the term of the related lease. Fees and costs incurred to obtain financing are deferred and are amortized as a component of interest expense over the terms of the respective loans on a basis that approximates the effective interest method. Contingencies We are subject to proceedings, lawsuits, and other claims related to various matters (see Note 13 - "Legal Proceedings"). Additionally, we have guaranteed certain indebtedness of others (see Note 6 - "Debt"). 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 because of (i) new developments or changes to the approach in which we deal with each matter or (ii) if unasserted claims arise. Revenue Recognition Leases with tenants are accounted for as operating leases. Minimum rental income is recognized on a straight-line basis over the term of the lease and unpaid rents are included in accounts receivable, net in the Consolidated Balance Sheets. Certain lease agreements contain provisions, which provide for rents based on a percentage of sales or based on a percentage of sales volume above a specified threshold. These contingent rents are not recognized until the required thresholds are exceeded. In addition, the lease agreements generally provide for the reimbursement of real estate taxes, insurance, advertising and certain common area maintenance costs. These additional rents and tenant reimbursements are accounted for on the accrual basis. Earnings per Share Basic earnings per share ("EPS") is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the period. Diluted EPS includes the potentially dilutive effect, if any, which would occur if outstanding (i) options to purchase Common Stock were exercised, (ii) Common Units were converted into shares of Common Stock and (iii) shares of Series B Convertible Preferred Stock were converted into shares of Common Stock. For the years ended December 31, 2002, 2001 and 2000, respectively, the effect of all exercises and conversions was anti-dilutive and, therefore, dilutive EPS is equivalent to basic EPS. Stock Based Compensation Stock based compensation is accounted for by using the intrinsic-value method in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees". Under APB No. 25, because the exercise price of our stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. As permitted, we have elected to adopt only the disclosure provisions of FAS No. 123, "Accounting for Stock-Based Compensation." Additional compensation expense under FAS No. 123 would have been $53, $161 and $1,664 for the years ended December 31, 2002, 2001 and 2000, respectively. See Note 10 - "Stock Incentive Plans" for pro forma information on the impact of the fair-value method of accounting for stock options. Income Taxes We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As a REIT, we generally are not subject to federal income tax at the corporate level on income we distribute to our shareholders so long as we distribute at least 90% of our taxable income (excluding any net capital gain) each year. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Even if we qualify as a REIT, we may be subject to certain state and local taxes on our income and property. We incurred $180, $201 and $197 of state and local taxes for the years ended December 31, 2002, 2001 and 2000, respectively. We paid $88, $417 and $235 of state and local taxes during the years ended December 31, 2002, 2001 and 2000, respectively. See Note 9 - "Shareholders' Equity" for additional information with respect to our policy on distributions to shareholders. Page - (F-10) Risks and Uncertainties Our results of operations are dependent on the overall health of the retail industry. Our tenant base is comprised almost exclusively of merchants in the retail industry. The retail industry is subject to external factors such as inflation, consumer confidence, unemployment rates and consumer tastes and preferences. A decline in the retail industry could reduce merchant sales, which could adversely affect our operating results. Our outlet centers compete for customers primarily with traditional shopping malls, "off-price" retailers and other outlet centers. The tenants of outlet centers usually attempt to avoid direct competition with major retailers and their own full-price stores. They accomplish this by locating outlet stores only in outlet centers at least 20 miles from the nearest regional mall. For this reason, our outlet centers are often located in relatively undeveloped areas and, therefore, compete only to a limited extent with traditional retail malls in or near metropolitan areas. In addition to the traditional sources of competition faced by our outlet centers, our outlet centers also compete with web-based and catalogue retailers for customers. Because a number of our outlet centers are located in relatively undeveloped areas, there are often other potential sites for retail opportunities near our outlet centers that may be developed by competitors. The existence or development of other retail venues with a more convenient location or the offer of lower rent may attract our tenants or cause them to seek more favorable lease terms at or prior to renewal of their leases with us and, accordingly, may affect adversely the business, revenues and sales volume of our outlet centers. In addition, the success of tenants in our outlet centers which are located in relatively undeveloped areas, and, thus, the success of such outlet centers themselves, depends on shoppers traveling significant distances to shop. If shoppers should become less willing to travel the distances necessary to shop at our remote outlet centers, the business of our tenants would likely decline. Such a decline would likely cause the value, business, revenue and sales volume of such outlet centers to decline. Investment in Unconsolidated Joint Ventures We account for our investment in unconsolidated joint ventures in accordance with the equity method of accounting as we exercise significant influence, but do not control these entities. In all of our joint venture arrangements, the rights of the investors are both protective as well as participating. Therefore, these participating rights preclude us from consolidating our investments. Our investments are recorded initially at our cost and subsequently adjusted for equity in earnings (losses) and cash contributions and distributions. See Note 7 - "Investment in Unconsolidated Joint Ventures" for additional information. Recent Accounting Pronouncements In October, 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") No. 144, "Accounting for Impairment of Disposal of Long-lived Assets." FAS No. 144 supercedes FAS No. 121, however it retains the fundamental provisions of that statement as related to the recognition and measurement of the impairment of long-lived assets to be "held and used." In addition, FAS No. 144 (i) provides further guidance regarding the estimation of cash flows in the performance of a recoverability test, (ii) 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 (iii) established more restrictive criteria to classify an asset as "held for sale." Effective January 1, 2002, we adopted FAS No. 144. Our adoption of FAS No. 144 effective January 1, 2002 did not have a material impact on our results of operations or financial position. In accordance with the requirements of FAS No. 144, we have classified the operating results, including gains and losses related to disposition, for certain properties either disposed of or classified as assets held for sale during 2002 as discontinued operations in the Consolidated Statements of Operations for all periods presented. The operating results for properties disposed of before January 1, 2002 are not classified as discontinued operations. See Note 3 - "Property Dispositions" for additional information. In May 2002, the FASB issued FAS No. 145, "Reporting Gains and Losses from Extinguishment of Debt", which rescinded FAS No. 4, FAS No. 44 and FAS No. 64 and amended FAS No. 13. FAS No. 145 addresses the income statement classification of gains or losses from the extinguishment of debt and criteria for classification as extraordinary items. FAS No. 145 is effective for fiscal years beginning after May 15, 2002. We early adopted FAS No. 145 on December 31, 2002. As a result of our adoption of FAS No. 145, any non-recurring costs incurred in connection with the early extinguishment of debt are classified as a component of interest expense in the Consolidated Statements of Operations for all periods presented. Nevertheless, the adoption of FAS No. 145 did not have a material impact on our results of operations or financial position. Page - (F-11) In December 2002, the FASB issued Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the disclosures to be made by a guarantor in interim and annual financial statements about the obligations under certain guarantees. FIN No. 45 also clarifies that a guarantor is required to recognize, at the inception of the guarantee, an initial liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN No. 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. We adopted the disclosure provisions of FIN No. 45 effective December 31, 2002. The initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. We are in the process of determining the impact, if any, on our results of operations or financial condition from the adoption of FIN No. 45. See "Guarantees and Guarantees of Indebtedness of Others" contained in Note 6 - "Debt" for additional information. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 clarifies the application of existing accounting pronouncements to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN No. 46 will be immediately effective for all variable interests in variable interest entities created after January 31, 2003, and we will need to apply the provisions of FIN No. 46 to any existing variable interests in variable interest entities by no later than December 31, 2004. We do not believe that FIN No. 46 will have a significant impact on our financial statements. Note 3 - Property Dispositions We have disposed of certain properties through various transactions (including sale, joint venture arrangements, foreclosure and transfer of ownership to the respective lender) during the years ended December 31, 2002, 2001 and 2000. The following table summarizes these dispositions by year:
- ------------------------------------------------------------------------------------------------------------------------------------ Provision Reduction Gain/Loss for Date of Sales of Net on Sales/ Asset Disposition Property Type GLA Price Debt Proceeds Disposition Impairment - ------------------------------------------------------------------------------------------------------------------------------------ Year 2002 Continuing Operations: Hagerstown Center January 2002 Outlet Center 487,000 $ 80,500 $ (57,914) $12,113 $ 16,793 $ - Bellport Outlet Center - Phases II/III April 2002 Outlet Center 197,000 6,500 - 522 (703) - Bridge Properties July 2002 Outlet Centers 1,304,000 118,650 (111,009) - (10,288) - --------- -------- --------- ------- -------- ------- Subtotal 1,988,000 205,650 (168,923) 12,635 5,802 - --------- -------- --------- ------- -------- ------- Discontinued Operations: Conroe Center January 2002 Outlet Center 282,000 - (15,621) (554) - - Edinburgh Center January 2002 Outlet Center 305,000 27,000 (16,317) 9,551 (9,623) - Western Plaza June 2002 Community Center 205,000 9,500 (9,467) 688 2,121 - Jeffersonville II August 2002 Outlet Center 314,000 - (17,938) - 17,121 - Vero Beach September 2002 Outlet Center 326,000 - (25,126) - - 12,200 Melrose Place October 2002 Community Center 27,000 2,500 (1,935) 555 990 - Puerto Rico Center December 2002 Outlet Center 176,000 36,500 (19,202) 13,958 - 15,557 Colorado Properties December 2002 Outlet Center 808,000 96,000 (74,849) 12,628 15,543 - --------- -------- --------- ------- -------- ------- Subtotal 2,443,000 171,500 (180,455) 36,826 26,152 27,757 --------- -------- --------- ------- -------- ------- Total 4,431,000 $377,150 $(349,378) $49,461 $ 31,954 $27,757 ========= ======== ========= ======= ======== ======= - ------------------------------------------------------------------------------------------------------------------------------------ Year 2001 Northgate Plaza February 2001 Community Center 140,000 $ 7,050 $ (5,966) $ 510 $ 732 $ - Silverthorne Center March 2001 Outlet Center 257,000 29,000 (18,078) 8,993 - - New River Center May 2001 Outlet Center 326,000 - - - (180) - Camarillo land November 2001 Land N/A 7,150 (6,227) 1,859 (1,615) - --------- -------- --------- ------- -------- ------- Total 723,000 $ 43,200 $ (30,271) $11,362 $ (1,063) $ - ========= ======== ========= ======= ======== ======= - ------------------------------------------------------------------------------------------------------------------------------------ Year 2000 Williamsburg Center February 2000 Outlet Center 274,000 $ 59,000 $ (32,500) $11,063 $ - $ - Camarillo outparcel land March 2000 Outparcel land N/A 4,563 - 4,623 2,472 - Permanent Loan Properties December 2000 Outlet Centers 1,592,000 239,500 (174,235) 51,403 (42,648) - --------- -------- --------- ------- -------- ------- Total 1,866,000 $303,063 $(206,735) $67,089 $(40,176) $ - ========= ======== ========= ======= ======== ======= ====================================================================================================================================
Page - (F-12) 2002 Dispositions - Continuing Operations The operating results for certain properties that were sold to joint venture partnerships during 2002 and in which we still have a significant continuing involvement are not classified as discontinued operations in the Consolidated Statements of Operations. Such properties and/or their operating results through the dates of their respective disposition are collectively referred to as the "2002 Joint Venture Properties". The 2002 Joint Venture Properties consist of our sales of (i) Prime Outlets at Hagerstown (the "Hagerstown Center") and six outlet centers (collectively, the Bridge Properties"). The following discussion summarizes the terms of such dispositions. Hagerstown Center On January 11, 2002, we completed the sale of the Hagerstown Center, an outlet center located in Hagerstown, Maryland, for aggregate consideration of $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. Our affiliate and Estein have 30% and 70% ownership interests, respectively, in the Prime/Estein Venture. In connection with the sale transaction, the Prime/Estein Venture assumed first mortgage indebtedness of $46,862 on the Hagerstown Center (the "Hagerstown First Mortgage"); however, our guarantee of the Hagerstown First Mortgage remains in place. The net 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) prorations, closing costs and fees. The net proceeds from this sale were used to make a principal payment of $11,647 on 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 6 - "Debt" for additional information. Under the terms of the transaction, we will continue to manage, market and lease the Hagerstown Center for a fee on behalf of the Prime/Estein Venture. The operating results of the Hagerstown Center are reflected in our results from continuing operations through the date of disposition. In connection with the sale of the Hagerstown Center, we recorded a gain on the sale of real estate of $16,793 during the first quarter of 2002. At December 31, 2001, the carrying value of the Hagerstown Center of $54,628 was classified as assets held for sale in the Consolidated Balance Sheet. Effective on the date of disposition, we have accounted for our 30% ownership interest in the Hagerstown Center in accordance with the equity method of accounting. We are obligated to refinance the Hagerstown First Mortgage 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 Hagerstown First Mortgage 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. If the actual cost of such indebtedness is less than 7.75% at any time during the ten-year period, however, the Prime/Estein Venture will be obligated to pay the difference to us. The actual cost of the Hagerstown First Mortgage is 30-day LIBOR plus 1.50%, or 2.88% as of December 31, 2002. Bellport Center II/III 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. We had a 51% ownership interest in the joint venture partnership that owned the Bellport Outlet Center and accounted for our ownership interest in accordance with the equity method of accounting. 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. We received $522 of cash proceeds from the sale, which were used to make a principal payment of $502 on the Mezzanine Loan. 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. Bridge Properties On July 26, 2002, we completed the sale of the Bridge Properties for aggregate consideration of $118,650 to affiliates of PFP Venture LLC, a new joint venture (the "PFP Venture") (i) 30.4% owned by PWG Prime Holdings LLC ("PWG"), a third party, and (ii) 69.6% owned by FP Investment LLC ("FPI"). FPI is a new joint venture between (i) FRIT PRT Bridge Acquisition LLC ("FRIT"), a third party, and (ii) an affiliate of ours. Through FPI, FRIT and we indirectly had initial ownership interests of 51.4% and 18.2%, respectively, in the PFP Venture. PWG is the managing member of the PFP Venture. FPI and PWG have certain protective rights over the operations of the Bridge Properties, which are pari passu. The Bridge Properties are located in Anderson, California; Calhoun, Georgia; Gaffney, South Carolina; Latham, New York; Lee, Massachusetts and Lodi, Ohio. Page - (F-13) In connection with the sale, $111,009 of recourse mortgage indebtedness (the "Bridge Loan") on the Bridge Properties was deemed repaid in full. Our net proceeds of $6,112 from the sale were contributed to FPI. FPI used these proceeds along with a $17,236 capital contribution from FRIT to purchase a 69.6% ownership interest in the PFP Venture. Financing for the PFP Venture's purchase of the Bridge Properties was provided by GMAC Commercial Mortgage Corporation 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 at LIBOR plus 4.75% with the minimum interest rate continuing at 7.25%. Under the terms of the transaction, we will continue to manage, market and lease the Bridge Properties for a fee on behalf of the PFP Venture. FRIT, indirectly through affiliates, was the owner of the Bridge Loan that was deemed repaid in full in connection with the sale of the Bridge Properties and was also a 50% participant in the Mezzanine Loan, which was repaid in full in December 2002. Pursuant to certain venture-related documents, we have guaranteed FRIT (i) a 13% return on its initial $17,236 of invested capital, and (ii) the full return of its invested capital (the "Mandatory Redemption Obligation") in FPI by December 31, 2003. Our guarantee is secured by junior security interests in collateral similar to that previously pledged to the Mezzanine Lender. Distributions from the PFP Venture and FPI are both made on a monthly basis. FPI is entitled to receive a 15% preferred return on its invested capital of $23,348 (approximately $3,502 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 FPI's preferred return, FRIT first receives its 13% return on its invested capital with the remainder (2% return on FRIT's invested capital and 15% on our invested capital) applied towards the payment of the Mandatory Redemption Obligation. Upon satisfaction of the Mandatory Redemption Obligation, we will be entitled to FPI'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 FPI on an approximate equal basis. Because we have guaranteed the Mandatory Redemption Obligation to FRIT and FRIT has no risk of loss with respect to the Bridge Properties, we have included FRIT's initial investment in FPI as part of our total investment in PFP of $23,348 ($17,236 initial Mandatory Redemption Obligation plus $6,112 contributed capital). We have also recorded the initial Mandatory Redemption Obligation as a corresponding liability. Although we have not received any cash from the PFP Venture, our Mandatory Redemption Obligation has been reduced monthly for the excess between FPI's 15% per annum preferred return from PFP Venture and FRIT's 13% per annum guaranteed return. As of December 31, 2002, the remaining Mandatory Redemption Obligation was $16,667 (included in accounts payable and other liabilities in the Consolidated Balance Sheet). The operating results of the Bridge Properties are reflected in our results from continuing operations through the date of disposition. In connection with the sale of the Bridge Properties, we recorded a loss on the sale of real estate of $10,288 during the second quarter of 2002. This loss represented the write-down of our carrying value of the Bridge Properties to their fair value less estimated costs to dispose, based on the terms of the sale agreement. Because PWG is the managing member of the PFP Venture and because of the pari passu nature of the protective rights of FPI and PWG, we are not deemed in control of the PFP Venture. Accordingly, we commenced accounting for our indirect ownership interest in the PFP Venture in accordance with the equity method of accounting effective on the date of disposition. We record our share of the operations of the Bridge Properties using an assumed book value liquidation model because both FPI and the PFP Venture have specific allocations for distribution. For the years ended December 31, 2002, 2001 and 2000, respectively, combined revenues were $14,414, $37,466 and $37,200, respectively, and combined expenses were $17,003, $42,456 and $36,925, respectively, for the Hagerstown Center and the Bridge Properties as reflected in our results from continuing operations through their respective dates of disposition. For the years ended December 31, 2002, 2001 and 2000, our equity in losses (included in interest and other income in the Consolidated Statements of Operations) for the Bellport Outlet Center were $378, $661 and $398, respectively. 2002 Dispositions - Discontinued Operations We have classified the operating results, including gains and losses related to disposition, for certain properties either disposed of or classified as assets held for sale during 2002 as discontinued operations in the Consolidated Statements of Operations for all periods presented. The following discussion summarizes the terms of such dispositions. Conroe Center 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 Conroe (the "Conroe Center"), located in Conroe, Texas, and Prime Outlets at Jeffersonville II (the "Jeffersonville II Center"), located in Jeffersonville, Ohio. Page - (F-14) Effective January 1, 2002, New York Life foreclosed on the Conroe Center and its related assets and liabilities, including $554 of cash and our carrying value of the indebtedness of $15,621 (principal outstanding of $15,467 and unamortized debt premium of $154), 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 the non-recourse mortgage loan. See "Jeffersonville II Center" below for additional information. The operating results of the Conroe Center are classified as discontinued operations in the Consolidated Statements of Operations through the date of disposition for all periods presented. No gain or loss was recorded in connection with the foreclosure of the Conroe Center. Edinburgh Center On April 1, 2002, we completed the sale of Prime Outlets at Edinburgh (the "Edinburgh Center"), an outlet center located in Edinburgh, Indiana 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) prorations, closing costs and fees. We used these net proceeds to make a 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 Consolidated Statements of Operations for all periods. During the first quarter of 2002, we recorded a loss on the sale of real estate of $9,623 (also included in discontinued operations) representing the write-down of our carrying value of the Edinburgh Center to its estimated fair value less estimated costs to dispose, based on the terms of the sale agreement. Western Plaza On June 17, 2002, we completed the sale of the Shops at Western Plaza ("Western Plaza"), a community center located in Knoxville, Tennessee. Western Plaza was sold to WP General Partnership for cash consideration of $9,500. The net 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) prorations, closing costs and fees and (iii) release of certain escrowed funds. We used these net proceeds to make a 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 Consolidated Statements of Operations for all periods. In connection with the sale of Western Plaza, we recorded a gain on the sale of real estate of $2,121 (also included in discontinued operations) during the second quarter of 2002. Jeffersonville II 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. As a result of the transfer of our ownership interest in the Jeffersonville II Center, we recorded a non-recurring gain of $17,121 (included in discontinued operations) during the third quarter of 2002, representing the difference between our carrying value of the Jeffersonville II Center and its related assets and liabilities, including our carrying value of the indebtedness of $17,938 (principal outstanding of $17,768 and unamortized debt premium of $170), 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 the non-recourse mortgage loan. The operating results of the Jeffersonville II Center are classified as discontinued operations in the Consolidated Statements of Operations through the date of disposition for all periods presented. See "Conroe Center" above for additional information. Vero Beach Center 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"). Page - (F-15) During the second quarter of 2002, we incurred a provision for asset impairment of $12,200 to adjust our carrying value 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 our carrying value of the indebtedness of $25,126 (principal outstanding of $24,497 and unamortized debt premium of $629), 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 did not, and the expected transfer of our ownership interest in the Woodbury Center is 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 was utilized for debt service on their non-recourse mortgage loans. The carrying value of the Woodbury Center was $15,736 as of December 31, 2002. Such value is exceeded by our carrying value of the associated indebtedness of $16,713 (principal outstanding of $16,331 and unamortized debt premium of $382) as of December 31, 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 carrying value of the indebtedness as of the date of transfer. The operating results of the Vero Beach Center are classified as discontinued operations in the Consolidated Statements of Operations through the date of disposition for all periods. No gain or loss was recorded in connection with the foreclosure of the Vero Beach Center. See Note 6 - "Debt" for additional information. Melrose Place On October 30, 2002, we completed the sale of Melrose Place, a community center located in Knoxville, Tennessee. Melrose Place was sold to Melrose Place Tennessee General Partnership for cash consideration of $2,500. The net proceeds from the sale were $555, after (i) repayment of $1,935 of existing recourse mortgage indebtedness on Melrose Place, (ii) prorations, closing costs and fees and (iii) release of certain escrowed funds. We used these net proceeds to make a principal payment of $533 on the Mezzanine Loan. The operating results of Melrose Place are classified as discontinued operations in the Consolidated Statements of Operations for all periods presented. In connection with the sale of Melrose, we recorded a gain on the sale of real estate of $990 (also included in discontinued operations) during the fourth quarter of 2002. Puerto Rico Center On December 6, 2002, we completed the sale of (i) Prime Outlets of Puerto Rico, an outlet center located in Barceloneta, Puerto Rico and (ii) certain adjacent parcels of land being developed for non-outlet retail use (collectively, the "Puerto Rico Center"). The Puerto Rico Center was sold to PR Barceloneta, LLC for cash consideration of $36,500. The net proceeds from the sale were $13,958, after (i) repayment of $19,202 of existing first mortgage indebtedness on the Puerto Rico Center, (ii) pro-rations, closing costs and fees, (iii) establishment of certain escrows at closing and (iv) release of certain escrowed funds. We used these net proceeds to make a principal payment of $12,637 on the Mezzanine Loan. At the closing of the sale of the Puerto Rico Center, we were required to fund $2,800 into an escrow account which will be returned to us only upon satisfaction of certain conditions no later than December 31, 2004. The escrow account is included in restricted cash (see Note 4 - - "Restricted Cash") and an offsetting deferred liability is included in accounts payable and other liabilities in the Consolidated Balance Sheet as of December 31, 2002. Under the terms of the transaction, we will continue to manage, market and lease the Puerto Rico Center for a fee on behalf of PR Barceloneta, LLC. The operating results of the Puerto Rico Center through the date of disposition are classified as discontinued operations in the Consolidated Statements of Operations for all periods. During the third quarter of 2002, we recorded an impairment loss of $15,557 (also included in discontinued operations) representing the write-down of our carrying value of the Puerto Rico Center to its fair value less estimated costs to sell, based on the terms of the sale agreement. Colorado Properties On December 6, 2002, we completed the sale of two outlet centers (together, the "Colorado Properties") to TGS (U.S.) Realty, Inc. for aggregate cash consideration of $96,000. The Colorado Properties are located in Castle Rock, Colorado and Loveland, Colorado. The net proceeds from the sale of the Colorado Properties were $12,628, after (i) required defeasance of $74,849 of mortgage indebtedness and the costs related to such defeasance (see Note 6 - "Debt for additional information), (ii) prorations, closing costs and fees and (iii) the release of certain escrowed funds. We used these net proceeds to make a principal payment of $10,309 on the Mezzanine Loan. The operating results of the Colorado Properties through the date of disposition are classified as discontinued operations in the Consolidated Statements of Operations for all periods presented. In connection with the sale of the Colorado Properties, we recorded a gain on the sale of real estate of $15,543 (also included in discontinued operations) during the fourth quarter of 2002. Page - (F-16) The following summary presents the operating results of those properties disposed of during 2002 whose results are classified as discontinued operations in the Consolidated Statements of Operations for all periods:
- ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues Base rents $ 17,695 $ 27,570 $ 27,225 Percentage rents 639 751 803 Tenant reimbursements 9,574 13,145 12,601 Interest and other 991 1,295 1,073 -------- -------- -------- Total revenues 28,899 42,761 41,702 Expenses Property operating 7,277 9,979 10,043 Real estate taxes 3,131 4,229 4,121 Depreciation and amortization 5,437 11,055 9,626 Interest 8,954 12,995 11,279 Provision for asset impairment 27,757 - - Other charges 553 3,014 1,980 -------- -------- -------- Total expenses 53,109 41,272 37,049 -------- -------- -------- Income (loss) before gain (24,210) 1,489 4,653 on sale of real estate Gain on sale of real estate, net 26,152 - - -------- -------- -------- Discontinued operations $ 1,942 $ 1,489 $ 4,653 ======== ======== ======== ====================================================================================================================================
2001 Sales Transactions The operating results for properties disposed of during 2001 are not classified as discontinued operations in the Consolidated Statements of Operations. Such properties and/or their operating results through the dates of their respective disposition are collectively referred to as the "2001 Property Dispositions". The following discussion summarizes the terms of such dispositions. 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 prorations, closing costs and fees, the net 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, to Silverthorne Factory Stores, LLC for aggregate consideration of $29,000. The net proceeds from the sale of the Silverthorne Center were $8,993, after the repayment of certain mortgage indebtedness (see below) of $18,078 on Prime Outlets at Lebanon (the "Lebanon Center") and prorations, 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 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 the sale of the Silverthorne Center, it was one of the properties securing our Mega Deal Loan. In conjunction with the closing of the Silverthorne Center, we substituted the Lebanon Center for the Silverthorne Center in the cross-collateralized asset pool securing the Mega Deal Loan pursuant to the collateral substitution provisions contained in the loan agreement. In conjunction with adding the Lebanon Center as security for the Mega Deal Loan, we repaid certain mortgage indebtedness on the Lebanon Center of $18,078 (see above). 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. 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. Page - (F-17) For the years ended December 31, 2001 and 2000, respectively, combined revenues were $1,551 and $6,354, respectively, and combined expenses were $982 and $27,303 (including provision for asset impairment of $20,606), respectively for Northgate Plaza and the Silverthorne Center as reflected in our results from continuing operations through their respective dates of disposition. For the years ended December 31, 2001 and 2000, our equity in losses (included in interest and other income in the Consolidated Statements of Operations) for the New River Center were $181 and $446, respectively. 2000 Sales Transactions The operating results for properties disposed of during 2000 are not classified as discontinued operations in the Consolidated Statements of Operations. The following discussion summarizes the terms of such dispositions. On February 23, 2000, we completed the sale of Prime Outlets at Williamsburg (the "Williamsburg Center") to the Prime/Estein Venture for aggregate consideration of $59,000, including the assumption of mortgage indebtedness of $32,500. In connection with the sale of the Williamsburg Center, we received (i) cash proceeds of $11,063, net of prorations, closing costs and fees, and (ii) a promissory note in the amount of $10,000 from the Prime/Estein Venture (of which Estein's obligation was $7,000). In connection with our refinancing of the mortgage indebtedness on the Williamsburg Center in October 2001, the promissory note was deemed repaid in full (we received $7,000 from Estein and our equity in the Prime/Estein Venture was increased by $3,000). Effective on the date of disposition, we have accounted for our ownership interest in the Williamsburg Center in accordance with the equity method of accounting. See Note 6 - "Debt" for additional information. Under the terms of the transaction, we will continue to manage, market and lease the Williamsburg Center for a fee on behalf of the Prime/Estein Venture. During March 2000, we completed the sale of an outparcel land located in Camarillo, California for aggregate consideration of $4,563. The net cash proceeds from the sale, including the release of certain funds held in escrow, were $4,623, after closing costs and fees. In connection with this sale, we recorded a gain on the sale of outparcel land (included in interest and other income in the Consolidated Statements of Operations) of $2,472 during the first quarter of 2000. On December 22, 2000, we completed the sale of four outlet centers to a joint venture partnership comprised of Fortress Investment Fund LLC ("Fortress") and Chelsea GCA Realty, Inc. ("Chelsea") for aggregate consideration of $239,500, including the assumption of first mortgage debt of $174,235. The four outlet centers (collectively, the "Permanent Loan Properties") that were sold are located in Gilroy, California; Michigan City, Indiana; Waterloo, New York; and Kittery, Maine. In connection with the sale of the Permanent Loan Properties, we incurred a loss on sale of real estate of $42,648 in the fourth quarter of 2000. The net proceeds from the sale, after closing costs and fees and the required purchase of land in the amount of $7,325 related to the outlet center in Gilroy, California, was $51,403. Net proceeds from the sale were used for the prepayment of certain long-term debt. The operating results of the Permanent Loan Properties are included in our results of operations through the date of disposition. For the year ended December 31, 2000, combined revenues were $40,813 and combined expenses were $34,609, respectively for the Williamsburg Center and the Permanent Loan Properties as reflected in our results from continuing operations through their respective dates of disposition. Note 4 - Restricted Cash As of December 31, 2002 and 2001, $107,037 and $37,885, respectively, of cash and cash equivalents were placed in various escrows and, therefore, classified as restricted cash in the Consolidated Balance Sheet. Restricted cash as of December 31, 2002 includes $79,042 of US Treasury Securities held in escrow for debt service associated with our defeased notes payable (see "Defeased Notes Payable" contained in Note 6 - "Debt" for additional information). The remainder of restricted cash generally consists of (i) lender escrows for the payment of debt service, real estate taxes, insurance, capital expenditures and certain operating expenses and (ii) escrows for tenant marketing contributions. Restricted cash also (i) includes a cash collateral account of $1,925 and $2,825 (10% of the original issuance amount) as of December 31, 2002 and 2001, respectively, for certain fixed rate tax-exempt revenue bonds (see Note 6 - "Debt" for additional information) and (ii) a $2,800 escrow as of December 31, 2002 related to our sale of the Puerto Rico Center (see "Note 3 - "Property Dispositions" for additional information). Page - (F-18) Note 5 - Deferred Charges Deferred charges were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Leasing commissions $ 7,031 $ 9,590 Financing costs 11,526 27,489 -------- -------- 18,557 37,079 Accumulated amortization (14,791) (25,290) -------- -------- $ 3,766 $ 11,789 ======== ======== ====================================================================================================================================
Note 6 - Debt Bonds Payable Bonds payable, consisting of tax-exempt revenue bonds and Urban Development Action Grant ("UDAG") loans, were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Chattanooga Bonds, 7%, monthly interest and sinking fund payments, due December 15, 2012, collateralized by properties in Chattanooga, TN (In Default) $ 17,920 $ 18,390 UDAG loans, 6%, monthly principal and interest payments, due August 2016 to September 2019, collateralized by properties in Chattanooga, TN 4,575 4,650 Knoxville Bonds, 6.88%, monthly interest and sinking fund payments, due December 1, 2014, collateralized by properties in Knoxville, TN - 8,935 -------- -------- $ 22,495 $ 31,975 ======== ======== ====================================================================================================================================
In 1999, we refinanced $28,250 of variable-rate, tax-exempt revenue bonds by issuing an aggregate of $28,250 of fixed rate tax-exempt revenue bonds (the "Fixed Rate Bonds"). The Fixed Rate Bonds consisted of (i) $19,250 of bonds collateralized by properties located in Chattanooga, Tennessee (the "Chattanooga Bonds") and $9,000 of bonds collateralized by properties located in Knoxville, Tennessee (the "Knoxville Bonds"). The Chattanooga Bonds (i) bear interest at 7%, (ii) require semi-annual interest payments, (iii) require monthly sinking fund payments and (iv) mature on December 15, 2012. The Knoxville Bonds were repaid in full during 2002 in connection with the sales of the Shops at Western Plaza and Melrose Place in June and October, respectively (see Note 3 - "Property Dispositions" for additional information. The Chattanooga Bonds are redeemable by us commencing in December 2006 at 102% of the then outstanding principal balance. The redemption price decreases incrementally each year thereafter through December 2008, at which date the redemption price is fixed at 100% of the then outstanding principal balance. Additionally, we are required to maintain an amount equal to 10% of the original issuance amounts of the Chattanooga Bonds in escrow (see Note 4 - "Restricted Cash" for additional information). Fixed Rate Bonds of $470 and $480 were redeemed from the sinking fund during the years ended December 31, 2002 and 2001, respectively. The Chattanooga Bonds contain (i) certain covenants, including a minimum debt-service coverage ratio financial covenant (the "Financial Covenant") and (ii) cross-default provisions with respect to certain of our other credit agreements. Based on the operations of the collateral properties, we were not in compliance with the Financial Covenant for the quarters ended June 30, September 30 and December 31, 2002. In the event of non-compliance with the Financial Covenant or default, the holders of the Chattanooga Bonds (the "Bondholders") have the ability to put such obligations to us at a price equal to par plus accrued interest. On January 31, 2003, we entered into an agreement (the "Forbearance Agreement") with the Bondholders. The Forbearance Agreement provides amendments to the underlying loan and other agreements that allow us to be in compliance with various financial covenants, including the Financial Covenant. So long as we continue to comply with the provisions of the Forbearance Agreement and are not otherwise in default of the underlying loan and other documents through December 31, 2004, the revised financial covenants will govern. Additionally, certain quarterly tested financial covenants and other covenants become effective June 30, 2004. Pursuant to the terms of the Forbearance Agreement, we were required to fund $1,000 into an escrow account to be used for conversion of certain of the retail space in the collateral properties to office space and agreed that an event of default with respect to the other debt obligations related to the property would also constitute a default under the Chattanooga Bonds. We funded this required escrow in February 2003. Page - (F-19) Notes Payable Notes payable consisted of the following:
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Mega Deal Loan, 7.782%, monthly principal and interest of $2010, due November 11, 2003, collateralized by 13 properties located throughout the United States $ 263,793 $ 342,629 Mortgage, 6.927% effective rate, monthly principal and interest of $565, due October 11, 2006, collateralized by four properties located throughout the United States 71,326 72,954 Mortgage, 6.927% effective rate, monthly principal and interest of $527, due March 11, 2006, collateralized by four properties located throughout the United States 61,621 63,521 Mortgage, 7.60%, monthly principal and interest of $450, due May 10, 2009, collateralized by property located in Niagara Falls, NY 60,805 61,488 Mortgage, 8.35%, monthly principal and interest of $215, due June 11, 2007, collateralized by three properties located throughout the United States (In Default) 24,919 25,327 Mortgage, 6.95% effective rate, monthly principal and interest of $140, due November 1, 2005, collateralized by properties located in Vero Beach, FL (Foreclosed in September 2002) and Woodbury, MN (In Default) 16,713 42,652 Mortgage, 6.95% effective rate, monthly principal and interest of $81, due November 1, 2005, collateralized by property located in Perryville, MD 9,274 9,593 Other Notes Payable 2,992 2,992 Mezzanine Loan, LIBOR plus 9.50% (minimum of 14.50%) through December 31, 2001 (14.50% at December 31, 2001), LIBOR plus 9.75% (minimum of 14.75%) thereafter, monthly principal and interest payments, due September 30, 2003, collateralized by pledges of equity interests in certain properties - 62,079 Construction Mortgage Loan, LIBOR plus 1.50% (3.62% at December 31, 2001), monthly interest-only payments through May 31, 2002, monthly principal and interest thereafter, due June 1, 2004, collateralized by property located in Hagerstown, MD - 49,062 Mortgage, 6.915% effective rate, monthly principal and interest of $357, due June 10, 2002, collateralized by properties located in Conroe, TX and Jeffersonville, OH - 33,559 Bridge Loan, 13%, monthly interest plus principal of the greater of $50 or 50% of excess cash flow, due December 31, 2003, collateralized by six properties located throughout the United States - 111,375 Puerto Rico First Mortgage Loan, LIBOR plus 3.50% (5.64% at December 31, 2001), monthly interest plus (i) principal based on a 25-year amortization schedule at 9% through January 1, 2002 and (ii) principal based on a 15-year amortization schedule at 9% thereafter, due December 31, 2003, collateralized by property located in Barceloneta, Puerto Rico - 19,817 Edinburgh First Mortgage Loan, LIBOR plus 3.50% (minimum of 8.00%) (8.00% at December 31, 2001), monthly principal and interest of $159, due July 1, 2004, collateralized by property located in Edinburgh, IN - 16,456 Hagerstown Second Mortgage Loan, LIBOR plus 2.50% (4.62% at December 31, 2001), monthly interest-only payments through June 30, 2001, monthly principal of $164 plus interest thereafter, due June 1, 2004, collateralized by property located in Hagerstown, MD - 9,016 Mortgage, 7.50%, monthly principal and interest of $29, due April 30, 2002, collateralized by property located in Knoxville, TN - 2,972 --------- --------- $ 511,443 $ 925,492 ========= ========= ====================================================================================================================================
Notes payable included unamortized debt premiums of $7,955 and $11,051 in the aggregate at December 31, 2002 and 2001, respectively. Our debt premiums are being amortized over the terms of the related debt instruments in accordance with the effective interest method. Amortization of debt premiums (included in interest expense in the Statements of Operations) was $2,020, $1,928 and $1,841 for the years ended December 31, 2002, 2001 and 2000, respectively. Defaults on Certain Non-recourse Mortgage Indebtedness During 2001, certain of our subsidiaries suspended regularly scheduled monthly debt service payments on 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 Note 3 - "Property Dispositions" for additional information. Page - (F-20) During August 2002, certain of our subsidiaries suspended regularly scheduled monthly debt service payments on 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. The aggregate carrying value of the Woodbury Center was $15,736 as of December 31, 2002. Such amount is exceeded by the aggregate carrying value of the non-recourse mortgage loan of $16,713, including an unamortized debt premium of $382, as of December 31, 2002. Upon the transfer of the Woodbury Center to John Hancock, we expect to record a non-recurring gain for the difference between the carrying value of the property and its related net assets and the outstanding loan balance and related liabilities. See Note 3 - - "Property Dispositions" for additional information. In December 2002, we notified the servicer of certain non-recourse mortgage loans (cross-collateralized by Prime Outlets at Bend, Prime Outlets at Post Falls and Prime Outlets at Sedona) totaling $24,919 as of December 31, 2002 that the net cash flow from the properties securing the loans was insufficient to fully pay the required monthly debt service. At that time, certain of our subsidiaries suspended the regularly scheduled monthly debt service payments. Subsequent to our notification to the servicer, we have been remitting on a monthly basis all available cash flow from the properties, after a reserve for monthly operating expenses, as partial payment of the debt service. The failure to pay the full amount due constitutes a default under the loan agreements which allows the lender to accelerate the loan and to exercise various remedies contained in the loan agreements, including application of escrow balances to delinquent payments and, ultimately, foreclosure on the properties which collateralize the loans. The lender has notified us that it has accelerated the loan. Since that time we have initiated discussions with the servicer of the loans regarding restructuring of the loans. There can be no assurance that such discussions will result in any modification to the terms of the loans. However, any action by the lender with respect to these properties is not expected to have a material impact on our results of operations or financial condition because we are currently only remitting available cash flow. These non-recourse mortgage loans require the monthly funding of escrow accounts for the payment of real estate taxes, insurance and capital improvements. Such escrow accounts totaled $314 as of December 31, 2002, which is included in restricted cash in the Consolidated Balance Sheet (see Note 3 - "Restricted Cash" for additional information). The aggregate carrying value of these properties was $21,891 as of December 31, 2002. Such amount is exceeded by the aggregate outstanding balance of the non-recourse mortgage loans of $24,919 as of December 31, 2002. If the lender were to foreclose on the collateral properties or we were to transfer our ownership interest in the collateral properties to the lender, we would record a non-recurring gain for the difference between the carrying value of the properties and their related net assets and the outstanding loan balances and related liabilities. Defeased Notes Payable On December 6, 2002, we completed the sale of our Colorado Properties, which were part of the 15 properties contained in the collateral pool securing the Mega Deal Loan, which had a then outstanding balance of $338,940. In connection with the release of the Colorado Properties from the collateral pool, we were required to partially defease the Mega Deal Loan. Therefore, the Mega Deal Loan was bifurcated into (i) a defeased portion in the amount of $74,849 (the "Defeased Notes Payable") and (ii) an undefeased portion in the amount of $264,091, which is still referred to as the Mega Deal Loan. Both the Defeased Notes Payable and the Mega Deal Loan (i) bear interest at a fixed-rate of 7.782%, (ii) require monthly payments of principal and interest pursuant to a 30-year amortization schedule and (iii) mature on November 11, 2003. The Mega Deal Loan is now secured by the remaining 13 properties contained in the collateral pool. We used $79,257 of the gross proceeds from the sale of the Colorado Properties to purchase US Treasury Securities, which were placed into a trustee escrow (the "Trustee Escrow"). The Trustee Escrow is used to make the scheduled monthly debt service payments, including the payment of the then outstanding principal amount, together with all accrued and unpaid interest on the maturity date of November 11, 2003, under the Defeased Notes Payable. As of December 31, 2002, the outstanding balance of the Defeased Notes Payable was $74,764 and the balance of the Trustee Escrow was $79,042 (included in restricted cash in the Consolidated Balance Sheet). See Note 3 - "Property Dispositions" for additional information. Furthermore, in connection with the partial defeasance of the Mega Deal Loan we amended the Mega Deal Loan so that (i) we are required to fund 10 monthly payments of $500 into a lender escrow to be used as additional cash collateral and (ii) release prices for the remaining 13 properties in the collateral pool were amended to provide for a more orderly refinancing of the Mega Deal Loan. Page - (F-21) Debt Service Obligations The scheduled principal maturities of our debt, excluding (i) unamortized debt premiums of $7,955 and (ii) $41,250 of aggregate non-recourse mortgage indebtedness in default (see "Defaults on Certain Non-recourse Mortgage Indebtedness" above), and related average contractual interest rates by year of maturity as of December 31, 2002 are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Bonds Payable (including sinking Defeased fund payments) Notes Payable Notes Payable Total Debt --------------------- ------------------------ ---------------------- ----------------------- Average Average Average Average Interest Principal Interest Principal Interest Principal Interest Principal Years Ended December 31, Rates Maturities Rates Maturities Rates Maturities Rates Maturities - ------------------------------------------------------------------------------------------------------------------------------------ 2003 6.33% $ 680 7.79% $ 266,659 7.78% $ 74,764 7.78% $ 342,103 2004 6.34% 726 8.44% 3,075 8.04% 3,801 2005 6.34% 773 8.58% 11,574 8.44% 12,347 2006 6.34% 820 8.83% 120,437 8.81% 121,257 2007 6.34% 878 7.60% 1,002 7.02% 1,880 Thereafter 6.52% 18,618 7.57% 59,491 7.32% 78,109 ---- -------- ---- --------- ---- -------- ---- ---------- 6.49% $ 22,495 8.06% $ 462,238 7.78% $ 74,764 7.96% $ 559,497 ==== ======== ==== ========= ==== ======== ==== ========== ====================================================================================================================================
Such indebtedness in the amount of $559,497 had a weighted-average maturity of 2.6 years and bore contractual interest at a weighted-average rate of 7.96% per annum. At December 31, 2002, all of such indebtedness bore interest at fixed rates. Our scheduled principal payments during 2003 for such indebtedness aggregated $342,103. In addition to regularly scheduled principal payments, the 2003 scheduled principal payments also reflect balloon payments of (i) $260,681 for the Mega Deal Loan and (ii) $73,882 due for the Defeased Notes Payable. Both the Mega Deal Loan and the Defeased Notes Payable are scheduled to mature on November 11, 2003. All debt service due under the Defeased Notes Payable, including the balloon payment due at maturity, will be made from the Trustee Escrow. See "Going Concern" for additional information. Interest Expense Interest costs are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Interest incurred $ 58,574 $ 75,451 $ 89,286 Amortization of deferred financing costs 4,747 6,341 2,922 Non-recurring loss on early extinguishment of debt 525 - 4,206 Amortization of debt premiums (2,020) (1,928) (1,841) Interest capitalized to development projects - - (3,412) -------- -------- -------- Total $ 61,826 $ 79,864 $ 91,161 ======== ======== ======== Interest paid $ 64,757 $ 86,551 $ 99,611 ======== ======== ======== ====================================================================================================================================
The aggregate carrying amount of our debt at December 31, 2002 approximated its fair value. Additionally, as of December 31, 2002, substantially all of our assets were pledged as collateral for our debt. Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated Partnerships Two mortgage loans related to projects in which we, through subsidiaries, indirectly own joint venture interests have matured and are in default. The mortgage loans, at the time of default, were (i) a $10,389 first mortgage loan on Phase I of the Bellport Outlet Center, held by Union Labor Life Insurance Company ("Union Labor"); and (ii) a $13,338 first mortgage loan on Oxnard Factory Outlet, an outlet center located in Oxnard, California, held by Fru-Con. An affiliate of ours has a 50% ownership interest in the partnership, which owns Phase I of the Bellport Outlet Center. Fru-Con and us are each a 50% partner in the partnership that owns the Oxnard Factory Outlet. Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center and a receiver was appointed March 27, 2001 by the court involved in the foreclosure action. Effective May 1, 2001, a manager hired by the receiver began managing and leasing Phase I of the Bellport Outlet Center. A judgment for foreclosure was entered on January 25, 2003 in the amount of $12,711. The foreclosure occurred on March 17, 2003 with Union Labor acquiring the property for $5,100. We continue to negotiate the terms of a transfer of our ownership interest in Oxnard Factory Outlet to Fru-Con. We do not manage or lease Oxnard Factory Outlet. We believe neither of these mortgage loans is recourse to us. It is possible, however, that either or both of the respective lenders will, after completing its foreclosure action, file a lawsuit seeking to collect from us the difference between the value of the mortgaged property and the amount due under the loan. If such an action is brought, the outcome, and our ultimate liability, if any, cannot be predicted at this time. Page - (F-22) In addition, we are currently not receiving, directly or indirectly, any cash flow from Oxnard Factory Outlet and were not receiving any cash flow from Phase I of the Bellport Outlet Center prior to the loss of control of such project. We account for our interests in (i) Phases I of the Bellport Outlet Center and (ii) the Oxnard Factory Outlet in accordance with the equity method of accounting. As of December 31, 2002, we had no carrying value for our investment in these properties. 2002 Debt Transactions We disposed of certain properties through various transactions, including sale, joint venture arrangements, foreclosure and transfer to lender, during the year ended December 31, 2002. In connection with these dispositions, we reduced our indebtedness by $349,378, including the partial defeasance of $74,849 of the Mega Deal Loan. This reduction also includes (i) the repayment of associated mortgage indebtedness aggregating $168,982, (ii) debt assumed by the purchaser of $46,862 and (iii) debt associated with foreclosure or transfer of properties aggregating $58,685. See Note 3 - "Property Dispositions" for additional information. At the beginning of 2002, our Mezzanine Loan had an outstanding balance of $62,079. During 2002 we repaid the Mezzanine Loan in full through (i) regularly scheduled monthly principal payments aggregating $9,295, (ii) additional principal payments aggregating $45,467 made with excess proceeds from our asset sales (see Note 3 - "Property Dispositions" for additional information) and (iii) a payoff of $7,317 with cash from escrows and operating cash. In connection with the early extinguishment of the Mezzanine Loan, we incurred a non-recurring loss of $525 (included in interest expense in the Consolidated Statements of Operations) in the fourth quarter of 2002 representing the write-off of remaining unamortized deferred financing costs. The Mezzanine Loan was obtained in December 2000 in the original amount of $90,000 and was scheduled to mature on September 30, 2003. Through a series of amendments and modifications to its terms, the Mezzanine Loan bore interest at a fixed-rate of 19.75% at the time of the retirement. Guarantees and Guarantees of Indebtedness of Others HGP Guarantees 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 Secured 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 $2,240 on HGP's corporate office building and related equipment located in Norton Shores, Michigan. The HGP Office Building Mortgage matures in April 2003, bears interest at LIBOR plus 5.50%, and requires monthly debt service payments. On October 11, 2001, HGP announced that it was in default under two loans with an aggregate principal balance of approximately $45.5 million 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. We have not recorded any liability related to these guarantees and 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. ("Horizon") in June 1998. Prime/Estein Venture Guarantees Pursuant to Prime/Estein Venture-related documents to which affiliates of ours are parties, we are obligated to provide to, or obtain for, the Prime/Estein Venture fixed-rate financing at an annual rate of 7.75% (the "Interest Rate Subsidy Agreement") for the Birch Run Center, the Williamsburg Center and the Hagerstown Center. Page - (F-23) In August 2001, we, through affiliates, completed a refinancing of $63,000 of first mortgage loans secured by the Birch Run Center. The refinanced loan (the "Birch Run First Mortgage") (i) has a term of 10-years, (ii) bears interest at an effective rate of 8.12% and (iii) requires monthly payments of principal and interest pursuant to a 25-year amortization schedule. Pursuant to the Interest Rate Subsidy Agreement, we are required to pay to the Prime/Estein Venture the difference between the cost of the financing at an assumed rate of 7.75% and the actual cost of such financing at the annual rate of 8.12% (the "Interest Rate Subsidy Obligation"). The total payments to the Prime/Estein Venture by us over the term of the Birch Run First Mortgage Loan will be approximately $2,723. In connection with the refinancing, we recorded a non-recurring loss of $1,882 (included in other charges in the Consolidated Statements of Operations) during the third quarter of 2001 representing the net present value of the Interest Rate Subsidy Obligation. Additionally, we also incurred $1,036 of non-recurring refinancing costs (included in other charges) in the third quarter of 2001. As of December 31, 2002, the Interest Rate Subsidy Obligation (included in accounts payable and other liabilities in the Consolidated Balance Sheet) was $1,477. In October 2001, we, through affiliates, completed the refinancing of a $32,500 first mortgage loan secured by the Williamsburg Center. The new first mortgage loan (the "Williamsburg First Mortgage") (i) has a term of 10-years, (ii) bears interest at a fixed-rate of 7.69% and (iii) requires monthly payments of principal and interest pursuant to a 25-year amortization schedule. Pursuant to the Interest Rate Subsidy Agreement, the Prime/Estein Venture is required to pay to us the difference between the cost of the financing at an assumed rate of 7.75% and the actual cost of such financing at the annual rate of 7.69%. On January 11, 2002, we sold the Hagerstown Center to the Prime/Estein Venture. In connection with the sale, the Prime/Estein Venture assumed the Hagerstown First Mortgage in the amount of $46,862; however, our guarantee of such indebtedness remains in place. Additionally, we are obligated to refinance the Hagerstown First Mortgage 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 Hagerstown First Mortgage 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 10-year period, we will be obligated to pay the difference to the Prime/Estein Venture. If the actual cost of such indebtedness is less than 7.75% at any time during the 10-year period, however, the Prime/Estein Venture will be obligated to pay the difference to us. The actual cost of the Hagerstown First Mortgage is 30-day LIBOR plus 1.50%, or 2.88% as of December 31, 2002. Because the Hagerstown First Mortgage bears interest at a variable rate, we are exposed to the impact of interest rate changes. We have not recorded any liability related to our guarantee of the Hagerstown First Mortgage; however, in connection with the sale of the Hagerstown Center, we established a reserve for estimated refinancing costs in the amount of $937, which is included in accounts payable and other liabilities in the Consolidated Balance Sheet as of December 31, 2002. See Note 3 - "Property Dispositions" of the Notes to Consolidated Financial Statements for additional information. Mandatory Redemption Obligation 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. As of December 31, 2002, our Mandatory Redemption Obligation with respect to the full return of FRIT's invested capital was $16,667 (included in accounts payable and other liabilities in the Consolidated Balance Sheet). See Note 3 - "Property Dispositions" for additional information. Going Concern Our liquidity depends on cash provided by operations and potential capital raising activities such as funds obtained through borrowings, particularly refinancing of existing debt, and cash generated through asset sales. Although we believe that estimated cash flows from operations and potential capital raising activities will be sufficient to satisfy our scheduled debt service and other obligations and sustain our operations for the next year, there can be no assurance that we will be successful in obtaining the required amount of funds for these items or that the terms of the potential capital raising activities, if they should occur, will be as favorable as we have experienced in prior periods. During 2003, our Mega Deal Loan matures on November 11, 2003. The Mega Deal Loan, which is secured by a 13 property collateral pool, had an outstanding principal balance of $263,793 as of December 31, 2002 and will require a balloon payment of $260,681 at maturity. Based on our initial discussions with various prospective lenders, we are currently projecting a potential shortfall with respect to refinancing the Mega Deal Loan. Nevertheless, we believe this shortfall may be alleviated through potential asset sales and/or other capital raising activities, including the placement of mezzanine level debt. We caution that our assumptions are based on current market conditions and, therefore, are subject to various risks and uncertainties, including changes in economic conditions which may adversely impact our ability to refinance the Mega Deal Loan at favorable rates or in a timely and orderly fashion and which may adversely impact our ability to consummate various asset sales or other capital raising activities. Page - (F-24) In connection with the completion of the sale of the Bridge Properties in July 2002, we guaranteed to FRIT (i) a 13% return on its $17,236 of invested capital, and (ii) the full return of the Mandatory Redemption Obligation by December 31, 2003. As of December 31, 2002, the Mandatory Redemption Obligation (included in accounts payable and other liabilities in the Consolidated Balance Sheet) was $16,237. See Note 3 - "Property Dispositions" for additional information. Although we are in the process of seeking to generate additional liquidity to repay the Mandatory Redemption Obligation through (i) the sale of FRIT's ownership interest in the Bridge Properties and/or (ii) the placement of additional indebtedness on the Bridge Properties, there can be no assurance that we will be able to complete such capital raising activities by December 31, 2003 or that such capital raising activities, if they should occur, will generate sufficient proceeds to repay the Mandatory Redemption Obligation in full. Failure to repay the Mandatory Redemption Obligation by December 31, 2003 would constitute a default, which would enable FRIT to exercise its rights with respect to the collateral pledged as security to the guarantee, including some of our partnership interests in the 13 property collateral pool under the aforementioned Mega Deal Loan. These conditions raise substantial doubt about our ability to continue as a going concern. The financial statements contained herein do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties. Note 7 - Investment in Unconsolidated Joint Ventures We account for our investment in unconsolidated joint ventures in accordance with the equity method of accounting as we exercise significant influence, but do not control these entities. In all of our joint venture arrangements, the rights of the investors are both protective as well as participating. Therefore, these participating rights preclude us from consolidating our investments. Our investments are recorded initially at our cost and subsequently adjusted for equity in earnings (losses) and cash contributions and distributions. As of December 31, 2002 our interests in joint venture partnerships included (i) three outlet centers owned by the Prime/Estein Venture and (ii) six properties owned by the PFP Venture. The Prime/Estein Venture owns the Birch Run Center, the Williamsburg Center and the Hagerstown Center which contain an aggregate 1,485,000 square feet of GLA. The PFP Venture owns the Bridge Properties (Prime Outlets at Anderson, Prime Outlets at Calhoun, Prime Outlets at Gaffney, Prime Outlets at Latham, Prime Outlets at Lee and Prime Outlets at Lodi) which contain an aggregate 1,304,000 square feet of GLA. On April 19, 2002, we completed the sale of the Bellport Outlet Center. We had a 51% ownership interest in the joint venture partnership that owned the Bellport Outlet Center and accounted for our ownership interest in accordance with the equity method of accounting through the date of disposition. See Note 3 - "Property Dispositions" and Note 6 - "Debt" for additional information. The following summarizes unaudited condensed financial information for the Bellport Outlet Center, the Prime/Estein Venture and the PFP Venture as of and for the year ended December 31, 2002:
- ------------------------------------------------------------------------------------------------------------------------------------ Bellport Prime/Estein Years Ended December 31, 2002 Outlet Center Venture PFP Venture Total - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues $ 622 $ 35,712 $ 10,571 $ 46,905 Total expenses 1,000 33,547 8,604 43,151 ------ -------- -------- -------- Net income (loss) $ (378) $ 2,165 $ 1,967 $ 3,754 ====== ======== ======== ======== ====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------ Prime/Estein December 31, 2002 Venture PFP Venture Total - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 242,921 $ 127,933 $ 370,854 Total liabilities 144,063 92,779 236,842 Total partners' capital 98,858 35,154 134,012 ====================================================================================================================================
Page - (F-25) The following summarizes our investment in unconsolidated joint ventures as of December 31, 2002, and 2001 and related activity during the year ended December 31, 2002:
- ------------------------------------------------------------------------------------------------------------------------------------ Bellport Prime/Estein Outlet Center Venture PFP Venture Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 2001 $ 1,689 $ 22,850 $ - $ 24,539 Capital contributions - 2,974 23,349 26,323 Equity in earnings (losses) (1) (378) 673 671 966 Distributions (86) (62) (566) (714) Proceeds from sale (522) - - (522) Loss on sale (703) - - (703) ------- -------- -------- -------- Balance, December 31, 2002 $ - $ 26,435 $ 23,454 $ 49,889 ======= ======== ======== ======== ====================================================================================================================================
Note: (1) Equity in earnings (losses) is included in interest and other income in the Consolidated Statements of Operations. Additionally, our share of equity in losses for the years ended December 31, 2001 and 2000 were $1,594 and $2,552, respectively. Note 8 - Minority Interests In conjunction with the formation of the Operating Partnership and us, the predecessor owners contributed interests in certain properties to the Operating Partnership and, in exchange, received 8,505,472 limited partnership interests in the Operating Partnership ("Common Units"). Additionally, 3,782,121 Common Units were issued in June 1998 in connection with our merger with Horizon Group, Inc. Subject to certain conditions, each Common Unit held by a Limited Partner may be exchanged for one share of Common Stock or, at our option, cash equal to the fair market value of a share of Common Stock at the time of exchange. During 2002 and 2001, no Common Units were exchanged for shares of Common Stock. During 2000, 29,296 Common Units were exchanged for shares of Common Stock. As of December 31, 2002, 10,810,912 Common Units were issued and outstanding. Minority interests also include interests in two property partnerships that are not wholly owned by the Company. During the years ended December 31, 2002, 2001, and 2000, expenses totaling $1,687, $1,981 and $2,928, respectively, related solely to our operation were allocated only to the common shareholders. Such allocation is consistent with the federal and state tax treatment of these expenses. During the year ended December 31, 2002, there was no allocation of losses or income to minority interests. During the years ended December 31, 2001 and 2000, the loss allocated to minority interests totaled $408 and $738, respectively. Previous cash distributions and losses allocated to minority interests have reduced our minority interests' balance related to Common Units to zero. After reducing the minority interests' balance to zero, cash distributions, if any, related to Common Units would be treated as income allocated to minority interests. Note 9 - Shareholders' Equity We are authorized to issue up to (i) 150,000,000 shares of common stock and (ii) 24,315,000 shares of preferred stock in one or more series. At December 31, 2002, 43,577,916 shares of common stock, 2,300,000 shares of Series A Senior Preferred Stock and 7,828,125 shares of Series B Convertible Preferred Stock were issued and outstanding. The Series A Senior Preferred Stock and Series B Convertible Preferred Stock have a liquidation preference equivalent to $25.00 per share plus the amount equal to any accrued and unpaid dividends thereon. Dividends, if declared, on the Series A Senior Preferred Stock are payable quarterly in the amount of $2.625 per share per annum. Dividends, if declared, on the Series B Convertible Preferred Stock are payable quarterly at the greater of (i) $2.125 per share per annum or (ii) the dividends on the number of shares of Common Stock into which a share of Series B Convertible Preferred Stock will be convertible at the conversion price of $20.90 per share of Common Stock. At December 31, 2002, there were 9,363,786 shares of Common Stock reserved for future issuance upon conversion of the Series B Convertible Preferred Stock. We have the right to redeem our Series A Senior Preferred Stock and Series B Convertible Preferred Stock beginning on and after March 31, 1999 at $26.75 and $27.125 per share, respectively, plus the amount equal to any accrued and unpaid dividends thereon. The redemption price decreases incrementally each year thereafter through March 31, 2004, at which date the redemption price is fixed at $25.00 per share plus the amount equal to any accrued and unpaid dividends thereon. Page - (F-26) 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 distributions, if necessary, 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 policy remains to pay distributions only to the extent necessary to maintain our status as a REIT for federal income tax purposes. During 2002, we were not required to pay any distributions in order to maintain our status as a REIT and based on our current federal income tax projections, we do not expect to pay any distributions during 2003. We are currently in arrears on thirteen quarters of preferred stock distributions due February 15, 2000 through February 15, 2003, respectively. We may not make distributions to our common shareholders or our holders of common units of limited partnership interests in the Operating Partnership unless we are current with respect to distributions to our preferred shareholders. As of December 31, 2002, unpaid dividends for the period beginning on November 16, 1999 through December 31, 2002 on our Series A Senior Preferred Stock and Series B Convertible Preferred Stock aggregated $18,867 and $51,984, respectively. The annualized dividends on our 2,300,000 shares of Series A Senior Preferred Stock and 7,828,125 shares of Series B Convertible Preferred Stock outstanding as of December 31, 2002 are $6,037 ($2.625 per share) and $16,635 ($2.125 per share), respectively. Note 10 - Stock Incentive Plans Under various plans, we may grant stock options and other awards to executive officers, other key employees, outside directors and consultants. The exercise price for stock options granted is no less than the fair market value of our common stock on the date of grant. In general, stock options are fully vested on the date of grant and have a term of 10 years. In certain cases stock options granted become exercisable over periods up to six years. During 2002 we granted options to executive officers and other key employees to purchase 1,892,524 shares of common stock at $0.11 per share. These options, which have a term of 10 years, vest pro-ratable on the anniversary date of the grant over a three-year period. As of December 31, 2002, none of these options were vested. During 2001, we granted options to an executive officer to purchase 300,000 shares of common stock at $2.00 per share. These options, which have a term of 10 years, were fully vested on the date of grant. During 2000, we granted options to executive officers and other key employees to purchase 1,087,600 shares of common stock at $2.00 per share. These options, which have a term of 10 years, were 50% vested as of December 31, 2000 and fully vested on June 30, 2001. Additionally, during 2000, we awarded 180,000 shares of restricted common stock and granted options to outside directors to purchase 420,0000 shares of common stock at $1.69 per share. The restricted common stock was fully vested as of September 1, 2000. The options, which have a term of 10 years, vested pro-ratably on a monthly basis from May 1, 2000 through February 1, 2001. We have adopted the disclosure-only provisions of FAS No. 123, "Accounting for Stock Based Compensation." Accordingly, no compensation expense has been recognized for employee stock option grants. If we had elected to recognize compensation based on the fair value of the options granted at grant date as prescribed by FAS No. 123, our unaudited pro forma net loss per share would have been as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Net loss $ (99,121) $ (98,209) $ (144,116) ========== ========== ========== Net loss applicable to common shares $ (121,793) $ (120,881) $ (166,788) ========== ========== ========== Basic and diluted loss per common share $ (2.79) $ (2.77) $ (3.83) ========== ========== ========== - ------------------------------------------------------------------------------------------------------------------------------------
The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Risk-free interest rate 5.0% 5.0% 5.0% Dividend yield 0.0% 0.0% 0.0% Volatility factor 0.37 0.37 0.87 Weighted average life (in years) 10.0 10.0 10.0 ====================================================================================================================================
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. Page - (F-27) A summary of our stock option plans for the years ended December 31 are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2000 --------------------------- -------------------------- -------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ------------------------------------------------------------------------------------------------------------------------------------ Beginning of year 4,388,756 $ 9.49 4,131,056 $ 9.98 3,280,317 $ 14.12 Granted 1,892,524 0.11 300,000 2.00 1,507,600 1.91 Cancelled (2,220,967) 5.69 (42,300) 4.09 (656,861) 12.13 ---------- ------ --------- ------- --------- ------- End of year 4,060,313 $ 4.83 4,388,756 $ 9.49 4,131,056 $ 9.98 ========== ====== ========= ======= ========= ======= Exercisable - end of year 2,167,789 $ 8.96 3,998,756 $ 10.10 3,276,987 $ 11.84 ========== ====== ========= ======= ========= ======= ====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------ Options Outstanding Options Exercisable ------------------------------------------------- ---------------------------- Weighted Weighted Weighted Average Average Average Remaining Exercise Exercise Range of Exercise Price Shares Life in Years Price Shares Price - ------------------------------------------------------------------------------------------------------------------------------------ $0.11 1,892,524 9.4 $ 0.11 - $ - $1.69 to $2.00 753,230 6.0 1.83 753,230 1.83 $8.50 60,000 6.6 8.50 60,000 8.50 $11.15 to $13.09 1,140,705 4.5 12.25 1,140,705 12.25 $13.60 to $14.19 142,490 4.3 13.67 142,490 13.67 $19.00 30,000 1.2 19.00 30,000 19.00 $23.53 13,788 3.3 23.53 13,788 23.53 $24.55 to $26.57 27,576 2.2 26.13 27,576 26.13 --------- --- ------ --------- ------ Total 4,060,313 7.1 $ 4.83 2,167,789 $ 8.96 ========= === ====== ========= ====== ====================================================================================================================================
The weighted fair value of options granted during the years ended December 31, 2002, 2001 and 2000 was $0 per share. Under our various plans there were 1,225,224 and 1,170,986 shares reserved for future grants at December 31, 2002 and 2001, respectively. Note 11 - Lease Agreements Certain non-recourse mortgage loans on four outlet centers are currently in default. We are currently negotiating the transfer of one of these outlet centers, the Woodbury Center, to the lender. The other three properties (Prime Outlets at Bend, Prime Outlets at Post Falls and Prime Outlets at Sedona) secure first mortgage loans that are cross-collateralized. We are currently in discussion with the loan servicer regarding restructuring the loans. See "Defaults on Certain Non-recourse Indebtedness" contained in Note 6 - "Debt" for additional information. The following disclosures exclude the lease agreements related to these properties. We are the lessors of retail and office space under operating leases with lease terms that expire from 2003 to 2017. Many of these leases contain renewal provisions at the lessee's option. Future minimum base rent to be received under noncancelable operating leases as of December 31, 2002 were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 2003 $ 67,929 2004 51,002 2005 36,160 2006 25,261 2007 16,870 Thereafter 31,327 --------- $ 228,549 ========= ====================================================================================================================================
Page - (F-28) We lease certain land, buildings, and equipment under various noncancelable operating lease agreements. Rental expense for operating leases was $1,759, $1,782, and $2,988 for the years ended December 31, 2002, 2001, and 2000, respectively. Future minimum rental payments by year and in the aggregate, payable under these noncancelable operating leases with initial or remaining terms of one year or more as of December 31, 2002 consisted of the following:
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 2003 $ 1,519 2004 1,199 2005 348 2006 268 2007 201 Thereafter 5,178 ------- $ 8,713 ======= ====================================================================================================================================
Note 12 - Special Charges 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 $2,760, of which $2,607 was paid as of December 31, 2002. The remaining reserve of $2,393 is included in accounts payable and other liabilities in the Consolidated Balance Sheet as of December 31, 2002. See Note 13 - "Legal Proceedings" for additional information. These reserves were estimated in accordance with our established policies and procedures with respect to loss contingencies (see "Contingencies" contained in Note 2 - "Significant Accounting Policies" for additional information) and is based on our current assessment of the likelihood of any adverse judgments or outcomes to these matters. 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 our estimate. Additionally, the 2001 results include (i) a third quarter non-recurring loss of $1,882 representing the net present value of our Interest Rate Subsidy Obligation on the Birch Run Center and (ii) a third quarter non-recurring loss of $1,036 related to the refinancing of first mortgage loans on the Birch Run Center. See "Prime/Estein Venture Guarantees" contained in Note 6 - "Debt" for additional information. The 2000 results include (i) non-recurring costs of $5,517 related to eOutlets.com (as discussed below), (ii) a loss on operations of our Designer Connection outlet stores of $1,815 and (iii) non-recurring third quarter costs of $1,100 related to the termination of a sale agreement. We ceased the operations of our Designer Connection outlet stores during 2000. Provision for Asset Impairment During the third quarter of 2002, certain events and circumstances occurred, including (i) changes to the anticipated holding periods of certain of our long-lived assets and (ii) 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 these properties to their estimated fair values in accordance with the requirements of FAS No. 144. Additionally, during the fourth quarter of 2002, we recognized a provision for asset impairment of $2,474 to fully write-off the carrying value of certain costs previously capitalized in connection with former development activities based on our current assessment as to our ability to recover their carrying value. During the third quarter of 2001, we had also determined that certain events and circumstances had occurred, including 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 $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". During 2000, we recorded a provision for asset impairment aggregating $77,115. This provision for asset impairment consisted of (i) a $28,047 write-down of the carrying value of certain properties resulting from their classification to assets held for sale, (ii) a $40,616 write-down of the carrying values of certain properties resulting from other than temporary declines in their values and (iii) a $8,452 write-down associated with our discontinuance of eOutlets.com (as discussed below). Page - (F-29) eOutlets.com In April 2000, we announced that we had been unable to conclude an agreement to transfer ownership of our wholly-owned e-commerce subsidiary, primeoutlets.com inc., also known as eOutlets.com, to a management-led investor group comprised of eOutlets.com management and outside investors. Effective April 12, 2000, eOutlets.com ceased all operations and on November 6, 2000 filed for bankruptcy under Chapter 7. eOutlets.com was a new, development-stage, internet-based business. During 2000, we incurred a non-recurring loss aggregating $14,703 related to eOutlets.com. This loss consisted of (i) the write-off of $8,452 of capitalized costs (included in provision for asset impairment), (ii) $5,517 of costs included in other charges and (iii) $734 of costs included in corporate general and administrative expense. Note 13 - Legal Proceedings Except as described below, neither we nor any of our properties are currently subject to any material litigation, nor to our knowledge, is any material or other litigation threatened against us, other than routine litigation arising in the ordinary course of business, some of which is expected to be covered by liability insurance and all of which collectively is not expected to have an adverse effect on our consolidated financial statements. The Company and its affiliates were defendants in a lawsuit filed by Accrued Financial Services ("AFS") on August 10, 1999 in the Circuit Court for Baltimore City. The lawsuit was removed to United States District Court for the District of Maryland (the "U.S. District Court") on August 20, 1999. AFS claimed that certain tenants had assigned to AFS their rights to make claims under leases such tenants had with affiliates of the Company and alleged that the Company and its affiliates overcharged such tenants for common area maintenance charges and promotion fund charges. The U.S. District Court dismissed the lawsuit on June 19, 2000. AFS appealed the U.S. District Court's decision to the United States Court of Appeals for the Fourth Circuit. Briefs were submitted and oral argument before a panel of judges of the United States Court of Appeals for the Fourth Circuit was held on October 30, 2001, during which the panel of judges requested further briefing of certain issues. On July 29, 2002, the Fourth Circuit affirmed the dismissal. AFS filed a request for further review by the Fourth Circuit which request was denied. In January, 2003, AFS filed a petition for a writ of certiorari by the United States Supreme Court and the Company filed its opposition on February 24, 2003. The Company believes it has acted properly and will continue to defend the suit vigorously if AFS's petition is granted. Nevertheless, if the AFS writ of certiorari is successful, the outcome of this lawsuit and the ultimate liability of the defendants, if any, cannot be predicted at this time. In addition, certain tenants in the Company's and its affiliates' outlet centers have made or may make allegations concerning overcharging for CAM and promotion fund charges because of varying clauses in their leases pursuant to which they claim under various circumstances that they were not required to pay some or all of the pass-through charges. Such claims if asserted and found meritorious, could have a material affect on the Company's financial condition. Determination of whether liability would exist to the Company would depend on interpretation of various lease clauses within a tenant's lease and all of the other leases at each center collectively. To date such issues have been raised and resolved with Dinnerware Plus Holdings, Inc. ("Mikasa"), Melru Corporation, Designs, Inc. and Brown Group Retail, Inc., all of which at one time or another were in litigation, or threatened litigation with the Company. During the second quarter of 2002, the Company recorded a non-recurring charge to establish a reserve in the amount of $3,000 for resolution of these matters, in addition to the Mikasa matter referred to above. This reserve which is included in the accounts payable and other liabilities in the Consolidated Balance Sheet as of December 31, was estimated in accordance with our established policies and procedures concerning loss contingencies for additional information). The balance of the unused reserve is $2,393 as of December 31, 2002. Based on presently available information, the Company believes it is probable this reserve will be utilized over the next several years in resolving claims relating to the pass-through and promotional fund provisions contained in its leases. The Company cautions, however, that given the inherent uncertainties of litigation and the complexities associated with a large number of leases and other factual questions at issue, actual costs may vary from this estimate. No other such tenant, however, has filed a suit or indicated to the Company that it intends to file a suit. Nevertheless, it is too early to make any predictions as to whether the Company or its affiliates may be found liable with respect to other tenants, or to predict damages should liability be found. Page - (F-30) Affiliates of the Company routinely file lawsuits to collect past rent due from, and to evict, tenants which have defaulted under their leases. There are currently dozens of such actions pending. In addition to defending against the Company's affiliates' claims and eviction actions, some tenants file counterclaims against the Company's affiliates. A tenant who files such a counterclaim typically claims that the Company's affiliate which owns the outlet center in question has defaulted under the tenant's lease, has overcharged the tenant for CAM and promotion fund charges, made misrepresentations during the leasing process, or has failed to maintain or market the outlet center in question as required by the lease. One such case involves a collections and eviction action in Puerto Rico captioned Outlet Village of Puerto Rico Limited Partnership, S.E. v. WEPA, Inc., and another, for instance, involves a collection case in San Marcos, Texas, captioned, San Marcos Factory Stores, Ltd. v. SM Collectibles, Inc. d/b/a Country Clutter. Usually such counterclaims are without merit. In response to such counterclaims the Company's affiliates usually continue to pursue their collection or eviction actions and defend against the counterclaims. Despite the fact that the Company and its affiliates believe such counterclaims are without merit and defend against them vigorously, the outcome of all such counterclaims, and, thus, the liability, if any, of the Company and its affiliates, cannot be predicted at this time. Several entities (the "eOutlets Plaintiffs") filed or stated an intention to file lawsuits (collectively, the "eOutlets Lawsuits") against the Company and its affiliates arising out of the Company's on-line venture, primeoutlets.com. inc., also known as eOutlets, an affiliate of the Company. The eOutlets Plaintiffs seek to hold the Company and its affiliates responsible under various legal theories for liabilities incurred by primeoutlets.com, inc., including the theories that the Company guaranteed the obligations of eOutlets and that the Company was the "alter-ego" of eOutlets. The Company believes that it is not liable to eOutlets Plaintiffs as there was no privity of contract between it and the various eOutlets Plaintiffs. 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 another matter, J. Walter Thompson, USA, Inc. v. Prime Retail, L.P. and Prime Retail, Inc. the Company succeeded in having the corporate veil piercing and alter ego claims dismissed and settled the remaining claims in February 2003. primeoutelts.com, inc. filed for protection under Chapter 7 of the United States Bankruptcy Code in November of 2000 under the name E-Outlets Resolution Corp. (the "Debtor"). On November 5, 2002, the bankruptcy trustee for the Debtor brought suit against Prime Retail, L.P. , Prime Retail, Inc., and Prime Retail E-Commerce, Inc. (the "Entity Defendants") and certain former directors of the Debtor (the "Individual Defendants"). The Trustee has asserted claims of alter ego, promissory estoppel, breach of contract, breach of fiduciary duty, tortious interference with prospective business advantage, unjust enrichment and quantum meruit against the Entity Defendants and breach of fiduciary duty and gross negligence against the individual defendants. The Company has tendered the suit, both as to the Entity Defendants and Individual Defendants, to its Directors' and Officers' ("D&O") insurance carrier. Motions to dismiss the suit have been filed by all Defendants. All Defendants believe the suit is without merit and plan on defending it vigorously. Nevertheless, the outcome of this lawsuit, and the ultimate liability of the Company, 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 as a result of a violation of federal trademark laws. The Company, through affiliates, has also filed suit against The Fru-Con Projects, Inc. ("Fru-Con"), a partner in Arizona Factory Shops Partnership and an affiliate of FCC. The Company and its affiliates allege that Fru-Con failed to use reasonable efforts to assist in obtaining refinancing. Fru-Con has claims pending against the Company and its affiliates, as part of the same suit, alleging that the Company and its affiliates breached their contract with Fru-Con by not allowing Fru-Con to participate in an outlet project in Sedona, Arizona (the "Sedona Project") and breached a management and leasing agreement by managing and leasing the Sedona Project. The Company believes its affiliates and it acted property and FCC did not act properly. The Company and its affiliates will vigorously defend the claims filed against them and prosecute the claims they filed. Nevertheless, the ultimate outcome of the suit, including the liability, if any, of the Company and its affiliates, cannot be predicted at this time. Page - (F-31) Note 14 - Risk Management Activities 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. Historically, we have used a mix of fixed and variable-rate debt to (i) limit the impact of interest rate changes on our results from operations and cash flows and (ii) lower our overall borrowing costs. In certain cases, we have used derivative financial instruments such as interest rate protection agreements to manage interest rate risk associated with variable-rate indebtedness. Nevertheless, as of December 31, 2002, all of our outstanding indebtedness bore interest at fixed rates. As discussed in "Guarantees and Guarantees of Indebtedness of Others" of Note 6 - "Debt", we sold the Hagerstown Center on January 11, 2002 to the Prime/Estein Venture. In connection with the sale, the Prime/Estein Venture assumed the Hagerstown First Mortgage in the amount of $46,862; however, our guarantee of such indebtedness remains in place. Additionally, we are obligated to refinance the Hagerstown First Mortgage 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 Hagerstown First Mortgage 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 10-year period, we will be obligated to pay the difference to the Prime/Estein Venture. If the actual cost of such indebtedness is less than 7.75% at any time during the 10-year period, however, the Prime/Estein Venture will be obligated to pay the difference to us. The actual cost of the Hagerstown First Mortgage is 30-day LIBOR plus 1.50%, or 2.88% as of December 31, 2002. Because the Hagerstown First Mortgage bears interest at a variable rate, we are exposed to the impact of interest rate changes. At December 31, 2002, a hypothetical 100 basis point move in the LIBOR rate would impact our guarantee by $469. See Note 3 - "Property Dispositions" for additional information. Economic Conditions In general, the leases relating to our outlet centers have terms of three to five years and most contain provisions that somewhat mitigate the impact of inflation. Such provisions include clauses providing for increases in base rent and clauses enabling us to receive percentage rents for annual sales in excess of certain thresholds based on merchants' gross sales. In addition, lease agreements generally provide for (i) the recovery of a merchant's proportionate share of actual costs of common area maintenance ("CAM"), refuse removal, insurance, and real estate taxes, (ii) a contribution for advertising and promotion and (iii) an administrative fee. CAM includes items such as utilities, security, parking lot cleaning, maintenance and repair of common areas, capital replacement reserves, landscaping, seasonal decorations, public restroom maintenance and certain administrative expenses. We continually monitor our lease provisions in light of current and expected economic conditions and other factors. In this regard, we may consider alternative lease provisions (e.g., fixed CAM) where appropriate. Page - (F-32) PRIME RETAIL, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2002 (in thousands)
Costs Capitalized Initial Cost to Subsequent to Gross Amount at Which Company Acquisition Carried at Close of Period --------------- ----------------- ---------------------------- Bldgs & Bldgs & Bldgs & Accumulated Constructed(C) Description Encumbrance Land Improve Land Improve Land Improve Total Depreciation Acquired (A) - ------------------------------------------------------------------------------------------------------------------------------------ First Mortgage and Expansion Loan: - ------------------ Prime Outlets at Darien $ 24,090 $ - $ - $ 2,948 $ 12,022 $ 2,948 $ 12,022 $ 14,970 $ 7,826 1995 (C) Prime Outlets at Ellenton 27,997 - - 5,457 49,609 5,457 49,608 55,065 15,098 1991 (C) Prime Outlets at Florida City 14,867 - - 4,275 8,328 4,275 8,328 12,603 6,113 1994 (C) Prime Outlets at Gainesville 19,804 - - 1,100 15,363 1,100 15,363 16,463 9,860 1993 (C) Prime Outlets at Grove City 39,282 1,123 58,630 800 2,730 1,923 61,360 63,283 12,237 1996 (A) Prime Outlets at Gulfport 18,990 - - - 35,593 - 35,593 35,593 10,216 1995 (C) Prime Outlets at Huntley 16,928 - - 1,970 17,784 1,970 17,784 19,754 9,464 1994 (C) Prime Outlets at Jeffersonville I 25,229 843 31,084 196 15,362 1,039 46,446 47,485 13,265 1994 (A) Prime Outlets at Lebanon 24,741 - - 2,689 31,854 2,689 31,854 34,543 7,720 1998 (C) Prime Outlets at Morrisville 8,959 - - 2,502 12,977 2,502 12,977 15,479 6,866 1991 (C) Prime Outlets at Naples 10,309 2,753 15,602 5 (6,583) 2,758 9,019 11,777 4,175 1994 (A) Prime Outlets at Odessa 13,890 815 31,311 - (19,754) 815 11,557 12,372 6,609 1996 (A) Prime Outlets at San Marcos 37,600 - - 1,995 46,698 1,995 46,698 48,693 17,306 1990 (C) Unallocated defeased debt (18,893) - - - - - - - - Not applicable -------- ------- -------- ------- -------- -------- -------- -------- -------- Total 263,793 5,534 136,627 23,937 221,983 29,471 358,609 388,080 126,755 -------- ------- -------- ------- -------- -------- -------- -------- -------- First Mortgage Loan: - -------------------- Prime Outlets at Bend 7,383 2,560 8,476 1,101 449 3,661 8,925 12,586 2,299 1997 (A) Prime Outlets at Post Falls 10,983 3,100 12,163 - (7,608) 3,100 4,555 7,655 1,880 1997 (A) Prime Outlets at Sedona 6,553 1,924 9,099 750 (4,464) 2,674 4,635 7,309 1,480 1997 (A) -------- ------- -------- ------- -------- -------- -------- -------- -------- Total 24,919 7,584 29,738 1,851 (11,623) 9,435 18,115 27,550 5,659 -------- ------- -------- ------- -------- -------- -------- -------- -------- First Mortgage Loan: - -------------------- Prime Outlets at Burlington 12,331 3,694 21,370 (164) 300 3,530 21,670 25,200 3,572 1998 (A) Prime Outlets at Fremont 12,830 3,250 24,096 - 247 3,250 24,343 27,593 4,010 1998 (A) Prime Outlets at Kenosha 21,080 6,995 39,558 138 4,913 7,133 44,471 51,604 7,240 1998 (A) Prime Outlets at Oshkosh 12,694 2,160 26,895 - 445 2,160 27,340 29,500 5,066 1998 (A) -------- ------- -------- ------- -------- -------- -------- -------- -------- Total 58,935 16,099 111,919 (26) 5,905 16,073 117,824 133,897 19,888 -------- ------- -------- ------- -------- -------- -------- -------- -------- First Mortgage Loan: - -------------------- Prime Outlets at Hillsboro 27,283 7,121 50,894 - 1,047 7,121 51,941 59,062 8,342 1998 (A) Prime Outlets at Pismo Beach 11,296 9,048 17,617 - 148 9,048 17,765 26,813 3,249 1998 (A) Prime Outlets at Queenstown 16,657 4,422 35,592 - 1,533 4,422 37,125 41,547 5,045 1998 (A) Prime Outlets at Tracy 11,584 6,170 16,715 - 385 6,170 17,100 23,270 3,456 1998 (A) -------- ------- -------- ------- -------- -------- -------- -------- -------- Total 66,820 26,761 120,818 - 3,113 26,761 123,931 150,692 20,092 -------- ------- -------- ------- -------- -------- -------- -------- -------- Other: - ------ Prime Outlets at Niagara Falls USA 60,805 7,247 82,842 - (36,612) 7,247 46,230 53,477 11,119 1997 (A) Prime Outlets at Perryville 8,893 3,089 16,287 - 1,783 3,089 18,070 21,159 2,517 1998 (A) Prime Outlets at San Marcos II 2,992 - - 4,468 17,691 4,468 17,691 22,159 2,156 1999 (C) Prime Outlets at Warehouse Row 22,495 - - 1,174 26,672 1,174 26,672 27,846 15,283 1989 (C) Prime Outlets at Woodbury 16,331 2,528 27,645 - (11,039) 2,528 16,606 19,134 3,398 1998 (A) Other Property - - - 1,300 9,568 1,300 9,568 10,868 6,737 1999 (A) -------- ------- -------- ------- -------- -------- -------- -------- -------- Total 111,516 12,864 126,774 6,942 8,063 19,806 134,837 154,643 41,210 -------- ------- -------- ------- -------- -------- -------- -------- -------- TOTAL $525,983 $68,842 $525,876 $32,704 $227,441 $101,546 $753,316 $854,862 $213,604 ======== ======= ======== ======= ======== ======== ======== ======== ========
Page - (F-33) PRIME RETAIL, INC. Notes to Schedule III - Real Estate and Accumulated Depreciation December 31, 2002 (in thousands) Depreciation is calculated on the straight-line basis over the estimated useful lives of the assets, which are as follows: Land improvements 20 years Buildings and improvements Principally 40 years Tenant improvements Principally term of related lease Furniture and equipment 5 years The aggregate cost for federal income tax purposes was $966,709 at December 31, 2002.
- ------------------------------------------------------------------------------------------------------------------------------------ Investment in Rental Property - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of year $ 1,375,608 $ 1,493,107 $ 1,826,551 Retirements (3,815) (7,406) (6,281) Improvements 7,713 16,013 51,833 Dispositions (412,794) (416) (309,942) Transfers to assets held for sale, net - (62,664) (4,513) Provision for asset impairment - operating properties (84,093) (63,026) (64,541) Provision for asset impairment - discontinued operations (27,757) - - ----------- ----------- ----------- Balance, end of year $ 854,862 $ 1,375,608 $ 1,493,107 =========== =========== =========== ====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Depreciation - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of year $ 258,124 $ 217,569 $ 183,954 Retirements (3,815) (7,406) (6,281) Other (23) (387) (818) Dispositions (80,156) - (23,469) Transfers to assets held for sale, net - (8,036) (2,672) Depreciation expense 34,087 45,466 57,317 Depreciation expense - discontinued operations 5,387 10,918 9,538 --------- --------- ---------- Balance, end of year $ 213,604 $ 258,124 $ 217,569 ========= ========= ========= ====================================================================================================================================
EX-10 3 hex109.txt EXHIBIT 10.9 - 2002 LONG TERM INCENTIVE PLAN EXHIBIT 10.9 PRIME RETAIL, INC. 2002 LONG-TERM INCENTIVE PLAN Article 1. Establishment, Objectives and Duration 1.1 Establishment of the Plan. Prime Retail, Inc., a Maryland corporation, has adopted this "Prime Retail, Inc. 2002 Long-Term Incentive Plan." Capitalized terms will have the meanings given to them in Article 2. The Plan permits the grant of two types of Milestone Bonuses and a Value Bonus. 1.2 Objectives of the Plan. The Plan's purpose is to optimize the profitability and growth of the Company through long-term incentives that are consistent with the Company's objectives and that link Participants' interests to those of the Company's shareholders; to give Participants an incentive for excellence in individual performance; to promote teamwork among Participants; and to give the Company a significant advantage in attracting and retaining key employees. 1.3 Effective Date and Term of the Plan. (a) The Plan will be effective August 13, 2002. In addition to the Awards granted herein to the Participants on attached Appendix A under Sections 5.1 and 5.2 of the Plan, the Board may grant, subject to Section 7.1 of the Plan, additional Awards under the Plan at any time after the Plan's Effective Date and on or before December 31, 2005. Notwithstanding the foregoing, no shares of Common Stock will be issued under the Plan, until the Company's shareholders approve the issuance of shares of Common Stock under the Plan. (b) Unless amended or modified by the Board pursuant to Section 7.1, the Plan will terminate upon the date on which all Awards granted under the Plan have been distributed. Article 2. Definitions Whenever used in the Plan, the following terms have the meanings set forth below, and when the meaning is intended, the initial letter of the word will be capitalized: "Actual Net Operating Income" means, with respect to any wholly-owned property of the Company or any of its subsidiaries, the net operating income of the property for the twelve month period ending on December 31, 2005 before depreciation and debt service and after deducting a 3% management fee and adding back the Company's charge back to such property for accounting, administration and regional offices. "Award" means an award of a share of one or both of the Milestone Bonuses and/or the Value Bonus. "Beneficiary" means the Person or Persons a Participant designates in a signed writing, filed with the Company, as the beneficiary of any amounts the Participant is to receive under the Plan. If the Participant has not designated a beneficiary hereunder, the Beneficiary shall be the Person or Persons eligible to receive the proceeds of the Participant's life insurance policy under the life insurance policy maintained by the Company as in effect at the time of the Participant's death. If the Participant has not designated a beneficiary under the life insurance policy or does not have a life insurance policy maintained by the Company or if the Participant's Beneficiary is not living on the relevant date hereunder, the Company will treat the Participant's estate as the Beneficiary. Page - (2) "Board" shall mean the Board of Directors of the Company. "Change in Control" means the occurrence of any of the following: (a) any "person" or "group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act, regardless of whether applicable), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company's then outstanding securities that vote generally in the election of directors (referred to herein as "Voting Securities"); (b) 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 the Company's shareholders 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; (c) 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; (d) a merger or consolidation of the Company with or into any other entity, other than a merger or consolidation (i) that would result in the Voting Securities of the Company 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 the Company 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, with terms ending at least 11 months after the date of the merger or consolidation; or (e) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of transactions) all or substantially all of the Company'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 a Participant if the Participant is part of a purchasing group that consummates the Change of Control transaction. A Participant will be deemed to be "part of the purchasing group" for purposes of the preceding sentence if the Participant is an equity participant in the purchasing company or group (except for: (x) passive ownership of less than three percent of the stock of the purchasing company; or (y) ownership of equity participation in the purchasing company or group that is otherwise not significant, as determined prior to the Change of Control by a majority of the non-employee continuing directors). "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute. Page - (3) "Committee" means the Compensation Committee of the Board unless another committee is designated by the Board to administer the Plan. "Common Stock" means the Company's Common Stock, par value $0.01 per share, or if the outstanding Common Stock is hereafter changed into or exchanged for different stock or securities of the Company, such other stock or securities. "Company" means Prime Retail, Inc., a Maryland corporation, and any successor thereto as provided in Article 9. "Cause" will have the meaning set forth in any employment, consulting, or other agreement between the Company and the Participant. If there is no employment, consulting, or other agreement between the Company and the Participant, or if such agreement does not define "Cause," then "Cause" will mean (i) that a Participant has harmed the Company through an act of dishonesty or material conflict of interest that relates to the performance of the Participant's duties, responsibilities and functions of the Participant's position with the Company, (ii) a Participant's conviction of a felony involving moral turpitude, fraud or embezzlement, or (iii) a Participant's willful failure to perform in any material respect the duties, responsibilities and functions of the Participant's position with the Company (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 the Participant's failure to perform is not of a type requiring a single action to fully cure, then the Participant may commence the cure promptly after such written notice and thereafter diligently prosecute such cure to completion). 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 definition of "Cause," an act, or failure to act, on a Participant's part shall be considered "willful" only if done, or omitted to be done, by him or her not in good faith and without reasonable belief that his or her action or omission was in the best interest of the Company. "Disability" will have the meaning set forth in any employment, consulting, or other agreement between the Company and the Participant. If there is no employment, consulting, or other agreement between the Company and the Participant, or if such agreement does not define "Disability," then "Disability" will mean the inability of a Participant to perform the essential duties, responsibilities and functions of the Participant's position with the Company for four consecutive months as a result of any mental or physical disability or incapacity even with reasonable accommodations of such disability or incapacity provided by the Company or if providing such accommodations would be unreasonable, all as determined in the reasonable judgment of the Board. "Effective Date" means August 13, 2002. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. "Fair Market Value" means, as it relates to Common Stock, the value determined by the Board, in its reasonable discretion, after taking into account such factors as the Board deems appropriate; provided, however, that in no event shall the Fair Market Value be less than the average of the closing sale prices (or if no sales occurred on such date, the average between the last reported bid price and ask price on the applicable day) for the twenty trading days immediately preceding the date of determination. Page - (4) "Good Reason" will have the meaning set forth in any employment, consulting, or other agreement between the Company and the Participant. If there is no employment, consulting, or other agreement between the Company and the Participant, or if such agreement does not define "Good Reason," then "Good Reason" will mean (A) the Participant's title or scope of responsibilities and duties are materially diminished from the highest level attained by the Participant with the Company, or the Company fails to provide the Participant with adequate office facilities and support services to perform such responsibilities and duties; or (B) the Company changes the Participant'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. The Participant'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 the Participant 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. "Indebtedness" means, the liabilities other than current liabilities of the Company and its subsidiaries as reported in the Company's financial statements for the year ended December 31, 2005. "Joint Venture Value" means, with respect to any joint venture property in which the Company or any of its subsidiaries has an interest on December 31, 2005, the valuation of the joint venture property based on the present value of the projected operating cash flows expected from such joint venture property (assuming a sale in 2010 at a purchase price based on the same methodology employed in calculating Property Value and assuming projected occupancy levels and cash flows) discounted at a 16% discount rate. "Mega Deal VI Loan" means that certain loan made as of October 31, 1996 in the original principal amount of $359,000,000 from Nomura Asset Capital Corporation to Castle Rock Factory Shops Partnership; Coral Isle Factory Shops Limited Partnership; Florida Keys Factory Shops Limited Partnership; Gainesville Factory Shops Limited Partnership; Grove City Factory Shops Partnership; Gulf Coast Factory Shops Limited Partnership; Gulfport Factory Shops Limited Partnership; Huntley Factory Shops Limited Partnership; Kansas City Factory Shops Limited Partnership; Loveland Factory Shops Limited Partnership; Magnolia Bluff Factory Shops Limited Partnership; Ohio Factory Shops Partnership; The Prime Outlets at Lebanon Limited Partnership; Triangle Factory Stores Limited Partnership and San Marcos Factory Stores, Ltd., as amended. "Milestone" means each of the performance targets set forth in Sections 5.1(a) and (b). "Milestone Bonus" means each of the contributions to the Plan set forth in Sections 5.1(a) and (b). Page - (5) "Net Asset Value" means, as of December 31, 2005, (a) the sum of (i) the Property Value for each wholly-owned property of the Company or its subsidiaries, and (ii) the Joint Venture Value for each of the joint venture properties in which the Company or any of its subsidiaries has an interest; plus (b) the Third Party Agreement Value for each of the management, leasing and consulting agreements to which the Company or any of its subsidiaries is a party; plus (c) the result of (i) any current assets (cash, receivables, etc.) of the Company and its subsidiaries, minus (ii) any current liabilities (short term notes, payables, etc.) of the Company and its subsidiaries; minus (d) the Company's outstanding Indebtedness. The determination of Net Asset Value shall be made by the Board pursuant to the terms of the Plan as soon as practicable following December 31, 2005, but in no event later than March 1, 2006. "Participant" means a Person whom the Board has selected to receive an Award under the Plan, including such Persons set forth on Appendix A hereto, or who has an outstanding Award granted under the Plan. "Person" means any individual, partnership, corporation, limited liability company, association, joint stock company, trust, joint venture, unincorporated organization and any governmental entity or any department, agency or political subdivision thereof. "Plan" means the Prime Retail, Inc. 2002 Long-Term Incentive Plan, as set forth in this document, as from time to time amended. "Property Value" means, with respect to each property, the product of (a) the Actual Net Operating Income of such property for the twelve-month period ended December 31, 2005, times (b) the applicable multiple listed on the schedule set forth below based on the annual sales per square foot for such property; provided, that, if the annual sales per square foot for a property are between $100 and $150 for the twelve-month period ended December 31, 2005, then the Property Value of such property shall mean the product of (i) the aggregate square footage of such property, times (ii) $20; provided, further, that if the annual sales per square foot for a property are less than $100 for the twelve-month period ended December 31, 2005, then the Property Value of such property shall mean the product of (i) the aggregate square footage of such property, times (ii) $10. Annual Sales Per Square Foot Multiple (Implied Cap Rate) ---------------------------- --------------------------- > $350 10 (10%) $300 - 350 9.524 (10.5%) $275 - 300 9.091 (11.0%) $250 - 275 8.696 (11.5%) $225 - 250 8.333 (12.0%) $200 - 225 8.0 (12.5%) $175 - 200 7.407 (13.5%) $150 - 175 6.897 (14.5%) "Third Party Agreement Value" means, with respect to any management, leasing or consulting agreement to which the Company or any of its subsidiaries is a party, the value of the management, leasing or consulting agreement based on the net present value of the expected net cash profit to the Company or its subsidiary over the remaining term of such agreement discounted at a 25% discount rate. Page - (6) "Value Bonus" means the contribution to the Plan set forth in Section 5.2. Article 3. Administration 3.1 Plan Administration. The Plan will be administered by the Board or, if so delegated by the Board, by the Committee. The Board or the Committee (as the case may be) will act by a majority of its members at the time in office and eligible to vote on any particular matter, and the Board or the Committee (as the case may be) action may be taken either by a vote at a meeting or in writing without a meeting. 3.2 Authority of the Board. Except as limited by law and subject to the provisions of the Plan, including, but not limited to, Section 7.1, the Board will have full power to: (i) select eligible Persons to participate in the Plan; (ii) determine the size of Awards; (iii) determine the terms and conditions of Awards in a manner consistent with the Plan; (iv) construe and interpret the Plan and any agreement or instrument entered into under the Plan; (v) establish, amend or waive rules and regulations for the Plan's administration; and (vi) subject to the provisions of the Plan, including, but not limited to, Section 7.1, amend the terms and conditions of any outstanding Award to the extent the terms are within the Board's discretion under the Plan. Further, the Board will make all other determinations that may be necessary or advisable to administer the Plan. As permitted by law and consistent with Section 3.1, the Board may delegate some or all of its authority under the Plan. 3.3 Decisions Binding. All determinations and decisions made by the Board pursuant to the provisions of the Plan will be final, conclusive and binding on all Persons, including, without limitation, the Company, its Board, its shareholders, all affiliates, employees, Participants and their estates and beneficiaries. Article 4. Eligibility and Participation 4.1 Eligibility. Eligibility to participate in the Plan shall be limited to executives and key employees of the Company designated by the Board. 4.2 Actual Participation. The executives and key employees of the Company set forth in attached Appendix A are hereby granted the right to receive Awards under the Plan. Article 5. Awards 5.1 Milestone Bonuses. Each Participant set forth in attached Appendix A is hereby allocated a portion of the following Milestone Bonuses equal to the percentage set forth next to such Participant's name in attached Appendix A. (a) 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 and that includes the redemption or exchange of the Company's Series A and B Preferred Stock (the "Preferred Stock") for cash and/or a new equity security. Such a restructuring/recapitalization may occur in conjunction with the transfer of a controlling interest in the Company to a third-party investor, but shall not include a sale of the Company where the redemption of the preferred shares does not benefit the Company. Page - (7) (b) 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 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. 5.2 Value Bonus. Each Participant set forth in attached Appendix A is hereby allocated a portion of the Value Bonus equal to the percentage set forth next to such Participant's name in attached Appendix A. The Value Bonus shall be comprised of: (i) a contribution of $1.5 million to the Plan if the Net Asset Value is equal to or greater than $200 million on December 31, 2005 and (ii) an additional contribution to the Plan equal to 1.5% of the amount by which the Net Asset Value exceeds $200 million on December 31, 2005. The $200 million target shall be increased by the amount of any equity contributed to the Company after the Effective Date and on or before December 31, 2005, and decreased by the cost to the Company of any stock repurchases or reductions effected by the Company or distributions to the Company's shareholders (other than distributions paid from operating cash flow) after the Effective Date and on or before December 31, 2005. 5.3 Vesting. A Participant's Awards under the Plan shall become vested as set forth below. (a) A Participant's entitlement to share in one or both of the Milestone Bonuses will vest as follows: (i) 50% will vest upon achievement of the applicable Milestone, provided the Participant remains employed by the Company on such achievement date; and (ii) with respect to each Milestone that is achieved, the remaining 50% will vest on December 31, 2005, provided the Participant remains employed by the Company on such date. Except as set forth in clauses (iii) and (iv) below, a Participant will forfeit his or her unvested entitlement to share in one or both of the Milestone Bonuses (or any portion thereof) if his or her employment terminates prior to either of the applicable vesting dates set forth in this clause (ii) and clause (i) above. (iii) Notwithstanding Section 5.3(a)(ii) above, with respect to each Milestone that is achieved, the remaining 50% of the Participant's entitlement to share in the applicable Milestone Bonus will become immediately vested if a Participant's employment terminates as a result of (A) his or her involuntary termination by the Company without Cause, (B) the death or Disability of the Participant, or (C) the Participant voluntarily terminating his or her employment with the Company for Good Reason. For purposes of this Section 5.3(iii), the failure of the Company to renew a Participant's employment agreement will be deemed to constitute an involuntary termination of such Participant by the Company without Cause unless such Participant has been terminated for Cause prior to the non-renewal of such employment agreement. Page - (8) (iv) Notwithstanding Sections 5.3(a)(ii) and (iii) above, with respect to each Milestone that is achieved, the remaining 50% of the Participant's entitlement to share in the applicable Milestone Bonus will become immediately vested upon a Change in Control, provided the Participant remains employed by the Company on the effective date of the Change in Control. (b) A Participant's entitlement to share in the Value Bonus shall vest on December 31, 2005, provided the Participant remains employed by the Company on such date. In the event a Participant is terminated by the Company without Cause after July 1, 2005 or has voluntarily terminated his or her employment with the Company with Good Reason after July 1, 2005, then such Participant's entitlement to share in the Value Bonus shall vest on December 31, 2005 notwithstanding the fact that he or she is not employed by the Company on such date. (c) Any portion of the Milestone Bonuses and/or Value Bonus attributable to Awards that are forfeited according to this Section 5.3 will be returned to the Company. 5.4 Distribution of Awards. Awards will be payable within 60 days of the applicable vesting date; provided, however, if the vesting of an Award is accelerated because of a Change in Control then such Award will be paid on the accelerated vesting date. Distributions will be made either in cash, shares of Common Stock equal to the cash value of the Award divided by the Fair Market Value of the Common Stock on the applicable vesting date, or a combination of cash and shares of Common Stock, as determined by the Board in its sole discretion. Notwithstanding the foregoing, any remaining 50% payments of any Milestone Bonuses to be distributed to a Participant under Section 5.3(a)(ii) of the Plan will be reduced by $0.50 for each $1.00 due and owing under the "change in control" provisions of such Participant's employment agreement. 5.7 Nontransferability of Awards. No Award granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. The Board may, in its discretion, require a Participant's guardian or legal representative to supply it with the evidence the Board deems necessary to establish the authority of the guardian or legal representative to act on behalf of the Participant. Article 6. Rights to Employment Nothing in the Plan will interfere with or limit in any way the right of the Company or any affiliate (as defined in federal securities laws) of the Company to terminate any Participant's employment at any time, or confer upon any Participant any right to continue in the employment of the Company or any affiliate; provided, however, that any termination of employment shall be subject to the terms and conditions of the applicable Participant's employment agreement, if any. Page - (9) Article 7. Amendment, Modification and Termination 7.1 Amendment, Modification and Termination. Subject to the terms and conditions of the Plan including the last sentence of this Section 7.1, the Board may at any time and from time to time, alter, amend, modify or terminate the Plan in whole or in part. Subject to the terms and conditions of the Plan including the last sentence of this Section 7.1, the Board may modify, extend or renew outstanding Awards under the Plan, 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) or grant additional Awards pursuant to Section 1.3 of the Plan. Notwithstanding the foregoing or the authority granted to the Board pursuant to Sections 1.3 and 3.2 of the Plan, no alteration, amendment, modification or termination of the Plan or modification, extension or renewal of an Award or grant of an additional Award will adversely affect any rights or economic benefits under any Awards heretofore granted under the Plan or change the objectives or other measures of performance applicable to any Awards heretofore granted under the Plan in a manner adverse to the Participants granted such Awards. 7.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. In recognition of unusual or nonrecurring events affecting the Company or its financial statements, or in recognition of changes in applicable laws, regulations, or accounting principles, and, whenever the Board determines that adjustments are appropriate to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, the Board may, using reasonable care, adjust the terms and conditions of, and the criteria included in, Awards. Notwithstanding the foregoing and subject to Section 7.1, the Board will have the discretion to adjust the Milestones and/or criteria established with respect to either of the Milestone Bonuses and/or the Value Bonus; provided, however, that Awards designed to qualify for the performance-based exception under Code Section 162(m) may not be adjusted upward, except to the extent permitted under Code Section 162(m), to reflect accounting changes or other events. Article 8. Withholding 8.1 Tax Withholding. The Company will have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount (either in cash or shares of Common Stock) sufficient to satisfy federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising under the Plan. 8.2 Share Withholding. With respect to withholding required upon the distribution of shares of Common Stock pursuant to an Award granted hereunder, the Company may, subject to the last sentence in this Section 8.2, satisfy the minimum withholding requirement for supplemental wages, in whole or in part, by withholding shares of Common Stock having a Fair Market Value (determined on the date the Participant recognizes taxable income on the Award) equal to the minimum amount of withholding tax required to be collected on the transaction. In the event the Company intends to withhold shares to satisfy the minimum withholding requirement, the Company shall notify the Participant of such proposed withholding of shares and refrain from making any withholdings with respect to such Participant until the Participant has replied, or deemed to have replied, to such notice. Following such notice from the Company, the Participant may elect to deliver the necessary funds to satisfy the withholding obligation to the Company, in which case there will be no reduction in the shares of Common Stock otherwise distributable to the Participant. If the Participant does not respond within 15 days of receipt of the notice from the Company, the Participant will be deemed to have elected not to deliver the necessary funds to satisfy the withholding obligation. Page - (10) Article 9. Successors All obligations of the Company under the Plan will be binding on any successor to the Company, whether the existence of the successor results from a direct or indirect purchase of all or substantially all of the business and/or assets of the Company, or a merger, consolidation, or otherwise. Article 10. Legal Construction 10.1 Number. Except where otherwise indicated by the context, any plural term used in the Plan includes the singular and a singular term includes the plural. 10.2 Severability. If any provision of the Plan is held illegal or invalid for any reason, the illegality or invalidity will not affect the remaining parts of the Plan, and the Plan will be construed and enforced as if the illegal or invalid provision had not been included. 10.3 Requirements of Law. The granting of Awards and the issuance of shares of Common Stock and/or cash payouts under the Plan will be subject to all applicable laws, rules, and regulations, and to any approvals by governmental agencies or national securities exchanges as may be required. 10.4 Securities Law Compliance. As to any individual who is, on the relevant date, an officer, director or ten percent beneficial owner of any class of the Company's equity securities that is registered pursuant to Section 12 of the Exchange Act, all as defined under Section 16 of the Exchange Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 under the Exchange Act, or any successor rule. To the extent any provision of the Plan or action by the Board fails to so comply, such provision or action will be deemed null and void, unless otherwise permitted by law and deemed advisable by the Board. 10.5 Unfunded Status of the Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments of cash or deliveries of shares of Common Stock not yet made to a Participant by the Company, the Participant's rights are no greater than those of a general creditor of the Company. The Board may authorize the establishment of trusts or other arrangements to meet the obligations created under the Plan, so long as the arrangement does not cause the Plan to lose its legal status as an unfunded plan. 10.6 Governing Law. To the extent not preempted by federal law, the Plan and all agreements hereunder will be construed and enforced in accordance with, and governed by, the laws of the State of Maryland, without giving effect to its conflict of laws principles. Page - (11) APPENDIX A ---------- Key Executives Participation Percentage in -------------- --------------------------- Long-Term Incentive Plan ------------------------ Glenn D. Reschke 24.0% Robert A. Brvenik 24.0% David G. Phillips 17.0% R. Kelvin Antill 13.0% Frederick J. Meno 10.0% William Ellis 4.0% Nicholas McCoy 4.0% Mark Hertz 4.0% EX-10 4 hex1011.txt EXHIBIT 10.11 - 2ND AMENDMENT FOR G. RESCHKE Execution Copy SECOND AMENDMENT TO EMPLOYMENT AGREEMENT The EMPLOYMENT AGREEMENT (the "Agreement"), entered into as of July 24, 2000, by and between Prime Retail, Inc., a Maryland corporation ("Prime"), and the sole general partner of Prime Retail, L.P., a Delaware limited partnership (the "Operating Partnership"), and Glenn D. Reschke (the "Executive"), as amended by the first Amendment thereto, effective June 6, 2002, is further amended by this Second Amendment, effective August 12, 2002 in the following respects: 1. Section 2, "Term," of the Agreement is hereby deleted in its entirety and replaced with the following: 2. Term. Unless earlier terminated in accordance with the terms of this Agreement, the term of this Agreement shall be a period commencing on June 6, 2002 and ending on December 31, 2005. On December 31, 2005, and each succeeding anniversary of such date, the Term of this Agreement shall automatically be extended for an additional one year period unless, not later than one hundred eighty (180) days prior to December 31, 2005, or any anniversary of such date, either party to this Agreement gives notice to the other that the Term of this Agreement shall not be extended or further extended beyond its then automatically extended Term. 2. Subpart (B) of Section 4(a)(1) is hereby deleted in its entirety and replaced with the following: (B) a termination payment in an amount equal to the sum of (x) one (1) times the amount of the Base Salary then applicable, plus (y) one (1) times the average of the amounts payable to the Executive pursuant to the provisions of Section 3(b) hereof (which section excludes awards received pursuant to the Prime Retail, Inc. 2002 Long-Term Incentive Plan) for the two (2) calendar years immediately preceding the calendar year in which the effective date of the termination of this Agreement occurs (the sum of the amounts determined by adding subsection (x) and (y) is in the aggregate hereinafter referred to as the "Normal Termination Payment"), and the Normal Termination Payment shall be payable within thirty (30) days of the effective date of termination; 3. The following subpart (G) is hereby added to Sections 4(a)(1), 4(a)(2), and 4(a)(4) of the Agreement: (G) all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan. Page (2) 4. The following subpart (H) is hereby added to Section 4(b)(1) of the Agreement: (H) all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan. 5. The following subpart (G) is hereby added to Section 4(b)(2) of the Agreement: (G) all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan. 6. The following sentence is hereby added at the end of Section 4(c), "Death": In addition, the Executive's estate shall be entitled to receive all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to the estate in accordance with the provisions of that plan. 7. Subpart (B) of Section 4(e), "Termination Following a Change of Control," is hereby deleted in its entirety and replaced with the following: (B) a termination payment in an amount equal to $1,600,000, payable within thirty (30) days of the effective date of termination; provided, however, that if Executive has received a milestone bonus under the Prime Retail, Inc. 2002 Long-Term Incentive Plan the vesting of which was accelerated pursuant to Section 5.3(a)(iv) thereof but the amount of which was not reduced pursuant to the last sentence of Section 5.4 thereof (the "Change of Control Accelerated Award"), the termination payment described in this subpart (B) shall be reduced by the amount that such Change of Control Accelerated Award would have been reduced pursuant to the last sentence of Section 5.4 of the Prime Retail, Inc. 2002 Long-Term Incentive Plan had the termination payment been due and owing under this Section 4(e) at the time the Change of Control Accelerated Award was distributed to Executive; 8. Subpart (B) of Section 4(e)(I) is hereby deleted in its entirety and replaced with the following: (B) a termination payment in an amount equal to two times the sum of (x) Executive's then current Base Salary and (y) a bonus payment equal to 100% of the average annual bonus paid to Executive for the two most recent calendar years in which he received a bonus, or if no such bonus payments were paid to Executive, a bonus payment equal to fifty percent (50%) of his then current Base Salary; provided, however, that if Executive has received a milestone bonus under the Prime Retail, Inc. 2002 Long-Term Incentive Plan the vesting of which was accelerated pursuant to Section 5.3(a)(iv) thereof but the amount of which was not reduced pursuant to the last sentence of Section 5.4 thereof (the "Change of Control Accelerated Award"), the termination payment described in this subpart (B) shall be reduced by the amount that such Change of Control Accelerated Award would have been reduced pursuant to the last sentence of Section 5.4 of the Prime Retail, Inc. 2002 Long-Term Incentive Plan had the termination payment been due and owing under this Section 4(e)(I) at the time the Change of Control Accelerated Award was distributed to Executive; Page (3) 9. This Amendment may be executed in one or more counterparts which taken together shall constitute one and the same instrument. EXECUTIVE: /s/ Glenn D. Reschke - ------------------------------ Glenn D. Reschke PRIME RETAIL, INC., a Maryland PRIME RETAIL, L.P., a Delaware limited corporation partnership By: /s/ Robert A. Brvenik By: Prime Retail, Inc. --------------------- Name: ROBERT A. BRVENIK Its: Sole General Partner Title: PRESIDENT By: /s/ Robert A. Brvenik ---------------------- Name: ROBERT A. BRVENIK Title: PRESIDENT EX-10 5 hex1014.txt EXHIBIT 10.14 - 3RD AMENDMENT FOR R. BRVENIK Execution Copy THIRD AMENDMENT TO EMPLOYMENT AGREEMENT The EMPLOYMENT AGREEMENT (the "Agreement"), dated as of June 11, 2000, by and between Prime Retail, Inc., a Maryland corporation ("Prime"), and the sole general partner of Prime Retail, L.P., a Delaware limited partnership (the "Operating Partnership"), and Robert A. Brvenik (the "Executive"), as amended by the first Amendment thereto, effective April 2, 2001, and further amended by the Second Amendment thereto, effective June 6, 2002, is further amended by this Third Amendment, effective August 12, 2002 in the following respects: 1. Section 2, "Term," of the Agreement is hereby deleted in its entirety and replaced with the following: 2. Term. The term of this Agreement, unless earlier terminated in accordance with the terms of this Agreement, will extend to December 31, 2005 (the "Original Term"); provided, however, that if this Agreement is not affirmatively terminated by either party, or extended or renewed for a specific duration in writing by agreement of the parties, prior to the last day of the Original Term, this Agreement will continue on a month-to-month basis thereafter (the "Extended Term"). The parties agree to cooperate and discuss in good faith their intentions with regard to this Agreement's extension or renewal 12 months prior to the end of the Original Term. Notwithstanding the foregoing, the Company agrees to provide Executive with a minimum of six months' advance written notice of its intent to terminate this Agreement during the Original Term or the Extended Term for any reason other than Cause, in which case the Company shall comply with the notice requirements of Sections 4(a)(2) and (3) hereof, and Executive agrees to provide the Company with a minimum of 60 days' advance written notice of his intent to terminate this Agreement during the Original Term or the Extended Term for any reason other than Good Reason, in which case Executive shall comply with the notice requirements of Section 4(b)(1)(E) hereof. The Original Term and any Extended Term of this Agreement shall end only following termination by written notice by the Company or Executive in accordance with this Section. For purposes of this Agreement, the terms "Original Term" and "Extended Term" shall herein be collectively referred to as the "Term." 2. Subpart (B) of Section 4(a)(1) is hereby deleted in its entirety and replaced with the following: (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 (which term shall exclude awards received pursuant to the Prime Retail, Inc. 2002 Long-Term Incentive Plan) 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; Page - (2) 3. The following subpart (E) is hereby added to Section 4(a)(1) of the Agreement: (E) all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan. 4. The following subpart (D) is hereby added to Section 4(a)(2) of the Agreement: (D) receive all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan. 5. The following subpart (E) is added to Section 4(a)(4) of the Agreement: (E) all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan. 6. Subpart (B) of Section 4(b)(1) is hereby deleted in its entirety and replaced with the following: (B) any earned and unpaid bonus(es) otherwise payable to him in accordance with Section 3(b), and all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan; 7. The following sentence is hereby added at the end of Section 4(c), "Death": In addition, the Executive's estate shall be entitled to receive all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to the estate in accordance with the provisions of that plan. 8. Subpart (2) of Section 4(d), "Termination Following A Change of Control," is hereby deleted in its entirety and replaced with the following: (2) a termination payment in an amount equal to two times the One-Year Pay Equivalent, which amount shall be payable within thirty (30) days of the effective date of termination; provided, however, that if Executive has received a milestone bonus under the Prime Retail, Inc. 2002 Long-Term Incentive Plan the vesting of which was accelerated pursuant to Section 5.3(a)(iv) thereof but the amount of which was not reduced pursuant to the last sentence of Section 5.4 thereof (the "Change of Control Accelerated Award"), the termination payment described in this subpart (2) shall be reduced by the amount that such Change of Control Accelerated Award would have been reduced pursuant to the last sentence of Section 5.4 of the Prime Retail, Inc. 2002 Long-Term Incentive Plan had the termination payment been due and owing under this Section 4(d) at the time the Change of Control Accelerated Award was distributed to Executive; Page - (3) 9. This Amendment may be executed in one or more counterparts which taken together shall constitute one and the same instrument. EXECUTIVE: /s/ Robert A. Brvenik - ------------------------------ Robert A. Brvenik PRIME RETAIL, INC., a Maryland PRIME RETAIL, L.P., a Delaware limited corporation partnership By: /s/ Glenn D. Reschke By: Prime Retail, Inc. -------------------- Name: GLENN D. RESCHKE Its: Sole General Partner Title: CHAIRMAN AND CEO By: /s/ Glenn D. Reschke -------------------- Name: GLENN D. RESCHKE Title: CHAIRMAN AND CEO EX-10 6 hex1016.txt EXHIBIT 10.16 - 2ND AGREEMENT FOR R. K. ANTILL Execution Copy SECOND AMENDMENT TO EMPLOYMENT AGREEMENT The EMPLOYMENT AGREEMENT (the "Agreement"), dated as of March 21, 2002, by and between Prime Retail, Inc., a Maryland corporation ("Prime"), and the sole general partner of Prime Retail, L.P., a Delaware limited partnership (the "Operating Partnership"), and R. Kelvin Antill (the "Executive"), as amended by the first Amendment thereto, effective June 6, 2002, is further amended by this Second Amendment, effective August 12, 2002, in the following respects: 1. Section 2 of the Agreement is hereby deleted in its entirety and replaced with the following: 2. Term. The term of this Agreement, unless earlier terminated in accordance with the terms of this Agreement, will extend to December 31, 2005 (the "Original Term"); provided, however, that if this Agreement is not affirmatively terminated by either party, or extended or renewed for a specific duration in writing by agreement of the parties, prior to the last day of the Original Term, this Agreement will continue on a month-to-month basis thereafter (the "Extended Term"). The parties agree to cooperate and discuss in good faith their intentions with regard to this Agreement's extension or renewal 12 months prior to the end of the Original Term. Notwithstanding the foregoing, the Company agrees to provide Executive with a minimum of six months' advance written notice of its intent to terminate this Agreement during the Original Term or the Extended Term for any reason other than Cause, in which case the Company shall comply with the notice requirements of Sections 4(a)(2) and (3) hereof, and Executive agrees to provide the Company with a minimum of 60 days' advance written notice of his intent to terminate this Agreement during the Original Term or the Extended Term for any reason other than Good Reason, in which case Executive shall comply with the notice requirements of Section 4(b)(1)(E) hereof. The Original Term and any Extended Term of this Agreement shall end only following termination by written notice by the Company or Executive in accordance with this Section. For purposes of this Agreement, the terms "Original Term" and "Extended Term" shall herein be collectively referred to as the "Term." Page (2) 2. Subpart (B) of Section 4(a)(1) is hereby deleted in its entirety and replaced with the following: (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 (which term shall exclude awards received pursuant to the Prime Retail, Inc. 2002 Long-Term Incentive Plan) 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; 3. The following subpart (E) is hereby added to Section 4(a)(1) of the Agreement: (E) all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan. 4. The following subpart (D) is hereby added to Section 4(a)(2) of the Agreement: (D) receive all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan. 5. The following subpart (E) is added to Section 4(a)(4) of the Agreement: (E) all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan. 6. Subpart (B) of Section 4(b)(1) is hereby deleted in its entirety and replaced with the following: (B) any earned and unpaid bonus(es) otherwise payable to him in accordance with Section 3(b), and all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan; 7. The following sentence is hereby added at the end of Section 4(c), "Death": In addition, the Executive's estate shall be entitled to receive all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to the estate in accordance with the provisions of that plan. Page (3) 8. Subpart (2) of Section 4(d), "Termination Following a Change of Control," is hereby deleted in its entirety and replaced with the following: (2) a termination payment in an amount equal to two times the One-Year Pay Equivalent, which amount shall be payable within thirty (30) days of the effective date of termination; provided, however, that if Executive has received a milestone bonus under the Prime Retail, Inc. 2002 Long-Term Incentive Plan the vesting of which was accelerated pursuant to Section 5.3(a) (iv) thereof but the amount of which was not reduced pursuant to the last sentence of Section 5.4 thereof (the "Change of Control Accelerated Award"), the termination payment described in this subpart (2) shall be reduced by the amount that such Change of Control Accelerated Award would have been reduced pursuant to the last sentence of Section 5.4 of the Prime Retail, Inc. 2002 Long-Term Incentive Plan had the termination payment been due and owing under this Section 4(d) at the time the Change of Control Accelerated Award was distributed to Executive; 9. This Amendment may be executed in one or more counterparts which taken together shall constitute one and the same instrument. EXECUTIVE: /s/ R. Kelvin Antill - ------------------------------ R. Kelvin Antill PRIME RETAIL, INC., a Maryland PRIME RETAIL, L.P., a Delaware corporation limited partnership By: /s/ Glenn D. Reschke By: Prime Retail, Inc. -------------------- Name: GLENN D. RESCHKE Its: Sole General Partner Title: PRESIDENT, CHIEF EXECUTIVE OFFICER By: /s/ Glenn D. Reschke -------------------- Name: GLENN D. RESCHKE Title: PRESIDENT, CHIEF EXECUTIVE OFFICER EX-10 7 hex1018.txt EXHIBIT 10.18 - 2ND AMENDMENT FOR D. PHILLIPS Execution Copy SECOND AMENDMENT TO EMPLOYMENT AGREEMENT The EMPLOYMENT AGREEMENT (the "Agreement"), dated as of January 10, 2002, by and between Prime Retail, Inc., a Maryland corporation ("Prime"), and the sole general partner of Prime Retail, L.P., a Delaware limited partnership (the "Operating Partnership"), and David G. Phillips (the "Executive"), as amended by the first Amendment thereto, effective June 6, 2002, is further amended by this Second Amendment, effective August 12, 2002 in the following respects: 1. Section 2 of the Agreement is hereby deleted in its entirety and replaced with the following: 2. Term. The term of this Agreement, unless earlier terminated in accordance with the terms of this Agreement, will extend to December 31, 2005 (the "Original Term"); provided, however, that if this Agreement is not affirmatively terminated by either party, or extended or renewed for a specific duration in writing by agreement of the parties, prior to the last day of the Original Term, this Agreement will continue on a month-to-month basis thereafter (the "Extended Term"). The parties agree to cooperate and discuss in good faith their intentions with regard to this Agreement's extension or renewal 12 months prior to the end of the Original Term. Notwithstanding the foregoing, the Company agrees to provide Executive with a minimum of six months' advance written notice of its intent to terminate this Agreement during the Original Term or the Extended Term for any reason other than Cause, in which case the Company shall comply with the notice requirements of Sections 4(a)(2) and (3) hereof, and Executive agrees to provide the Company with a minimum of 60 days' advance written notice of his intent to terminate this Agreement during the Original Term or the Extended Term for any reason other than Good Reason, in which case Executive shall comply with the notice requirements of Section 4(b)(1)(E) hereof. The Original Term and any Extended Term of this Agreement shall end only following termination by written notice by the Company or Executive in accordance with this Section. For purposes of this Agreement, the terms "Original Term" and "Extended Term" shall herein be collectively referred to as the "Term." 2. Subpart (B) of Section 4(a)(1) is hereby deleted in its entirety and replaced with the following: (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 (which term shall exclude awards received pursuant to the Prime Retail, Inc. 2002 Long-Term Incentive Plan) paid to Executive for the two prior calendar years, provided that for purposes of this calculation, Executive's annual bonus shall be deemed to have been $160,000 both for year 2000 and for year 2001, or, if greater, a bonus payment equal to 50% of his then current Base Salary (the sum of the amounts determined by adding clauses (i) and (ii) is in the aggregate hereinafter referred to as the "One-Year Pay Equivalent"), and the product of (x) and (y) shall be payable within thirty (30) days of the effective date of termination; Page (2) 3. The following subpart (E) is hereby added to Section 4(a)(1) of the Agreement: (E) all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan. 4. The following subpart (D) is hereby added to Section 4(a)(2) of the Agreement: (D) receive all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan. 5. The following subpart (E) is hereby added to Section 4(a)(4) of the Agreement: (E) all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan. 6. Subpart (B) of Section 4(b)(1) of the Agreement is hereby deleted in its entirety and replaced with the following: (B) any earned and unpaid bonus(es) otherwise payable to him in accordance with Section 3(b), and all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan; 7. The following sentence is hereby added at the end of Section 4(c), "Death": In addition, the Executive's estate shall be entitled to receive all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to the estate in accordance with the provisions of that plan. Page (3) 8. Subpart (2) of Section 4(d), "Termination Following a Change of Control," is hereby deleted in its entirety and replaced with the following: (2) a termination payment in an amount equal to two times the One-Year Pay Equivalent, which amount shall be payable within thirty (30) days of the effective date of termination; provided, however, that if Executive has received a Milestone Bonus under the Prime Retail, Inc. 2002 Long-Term Incentive Plan the vesting of which was accelerated pursuant to Section 5.3(a) (iv) thereof but the amount of which was not reduced pursuant to the last sentence of Section 5.4 thereof (the "Change of Control Accelerated Award"), the termination payment described in this subpart (2) shall be reduced by the amount that such Change of Control Accelerated Award would have been reduced pursuant to the last sentence of Section 5.4 of the Prime Retail, Inc. 2002 Long-Term Incentive Plan had the termination payment been due and owing under this Section 4(d) at the time the Change of Control Accelerated Award was distributed to Executive; 9. Nothing in this Amendmen or in the Amendment to Employment Agreement dated as of January 10, 2002, supersedes, modifies, or replaces any term or provision of the Agreement, except as explicitly stated in this Amendment or in the Amendment to Employment Agreement dated as of January 10, 2002. All provisions of the Agreement, as amended, shall remain in full force and effect, except as explicitly modified herein. 10. This Amendment may be executed in one or more counterparts which taken together shall constitute one and the same instrument. EXECUTIVE: /s/ David G. Phillips - ------------------------------ David G. Phillips PRIME RETAIL, INC., a Maryland PRIME RETAIL, L.P., a Delaware corporation limited partnership By: /s/ Glenn D. Reschke By: Prime Retail, Inc. -------------------- Name: GLENN D. RESCHKE Its: Sole General Partner Title: CHAIRMAN, CHIEF EXECUTIVE OFFICER By: /s/ Glenn D. Reschke -------------------- Name: GLENN D. RESCHKE Title: CHAIRMAN, CHIEF EXECUTIVE OFFICER EX-10 8 hex1020.txt EXHIBIT 10.20 - AMENDMENT FOR F. MENO Execution Copy AMENDMENT TO EMPLOYMENT AGREEMENT The EMPLOYMENT AGREEMENT (the "Agreement"), dated as of June 6, 2002, by and between Prime Retail, Inc., a Maryland corporation ("Prime"), and the sole general partner of Prime Retail, L.P., a Delaware limited partnership (the "Operating Partnership"), and Frederick J. Meno IV (the "Executive"), is hereby amended by this Amendment, effective August 12, 2002, in the following respects: 1. Subpart (B) of Section 4(a)(1) is hereby deleted in its entirety and replaced with the following: (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 (which term shall exclude awards received pursuant to the Prime Retail, Inc. 2002 Long-Term Incentive Plan) 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; 2. The following subpart (E) is hereby added to Section 4(a)(1) of the Agreement: (E) all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan. 3. The following subpart (D) is hereby added to Section 4(a)(2) of the Agreement: (D) receive all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan. 4. The following subpart (E) is added to Section 4(a)(4) of the Agreement: (E) all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan. Page (2) 5. Subpart (B) of Section 4(b)(1) is hereby deleted in its entirety and replaced with the following: (B) any earned and unpaid bonus(es) otherwise payable to him in accordance with Section 3(b), and all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to Executive in accordance with the provisions of that plan; 6. The following sentence is hereby added at the end of Section 4(c), "Death": In addition, the Executive's estate shall be entitled to receive all vested but undistributed awards under the Prime Retail, Inc. 2002 Long-Term Incentive Plan, payable to the estate in accordance with the provisions of that plan. 7. Subpart (2) of Section 4(d), "Termination Following a Change of Control," is hereby deleted in its entirety and replaced with the following: (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; provided, however, that if Executive has received a milestone bonus under the Prime Retail, Inc. 2002 Long-Term Incentive Plan the vesting of which was accelerated pursuant to Section 5.3(a) (iv) thereof but the amount of which was not reduced pursuant to the last sentence of Section 5.4 thereof (the "Change of Control Accelerated Award"), the termination payment described in this subpart (2) shall be reduced by the amount that such Change of Control Accelerated Award would have been reduced pursuant to the last sentence of Section 5.4 of the Prime Retail, Inc. 2002 Long-Term Incentive Plan had the termination payment been due and owing under this Section 4(d) at the time the Change of Control Accelerated Award was distributed to Executive; 8. This Amendment may be executed in one or more counterparts which taken together shall constitute one and the same instrument. EXECUTIVE: /s/ Frederick J. Meno, IV - ------------------------------ Frederick J. Meno IV PRIME RETAIL, INC., a Maryland PRIME RETAIL, L.P., a Delaware limited corporation partnership By: /s/ Glenn D. Reschke By: Prime Retail, Inc. -------------------- Name: GLENN D. RESCHKE Its: Sole General Partner Title: CHAIRMAN AND CEO By: /s/ Glenn D. Reschke ----------------------- Name: GLENN D. RESCHKE Title: CHAIRMAN AND CEO EX-10 9 hex1030.txt EXHIBIT 10.30 - RELEASE AGREEMENT FOR M. RESCHKE RELEASE AGREEMENT This Release Agreement ("Agreement") is made and entered into this 22nd day of January, 2001 (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 Michael W. Reschke, an individual domiciled in the State of Illinois (the "Executive"). On April 5, 2000, the Executive relinquished his responsibilities as an executive officer of the Company and became a non-executive Chairman of the Board of Directors of Prime. In connection therewith, the Executive now desires to enter into this Agreement in consideration for the benefits set forth herein. 1. Consideration. In consideration for executing this Agreement and within six (6) business days following the Revocation Period described in Paragraph 3 hereof (which shall be January 30, 2001 if this Agreement is signed January 22, 2001), the Executive shall receive from the Company the sum of $389,811.80 (the "Consideration"). 2. Covenant Not to Sue/Release and Waiver. In exchange for the Consideration, the Executive, on behalf of himself and his heirs, legatees, personal representatives and assigns, hereby waives, releases, discharges and covenants not to bring any actions, claims, charges, liabilities, obligations, fees, or suits of any kind against the Company or its subsidiaries or affiliates (including directors, officers, shareholders, employee benefit plans, trustees, fiduciaries and agents), which he has, has had or may have through the date of this Agreement, whether known or unknown, related solely to any claims arising out of or relating to his employment with the Company, or his executive position as Chairman of the Board, or his separation from such employment, including, but not limited to, all claims under Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. ss.ss. 2000e et seq.; the Age Discrimination in Employment Act of 1967, 29 U.S.C. ss.ss. 621 et seq.; the Fair Labor Standards Act, 29 U.S.C. ss.ss. 201 et seq.; the Americans with Disabilities Act of 1990, 42 U.S.C. ss.ss. 12101 et seq.; the Family and Medical Leave Act of 1993, 29 U.S.C. ss.ss. 2601 et seq.; the Employee Retirement Income Security Act of 1974, 29 U.S.C. ss.ss. 1001 et seq.; and any other federal, state, county or local statute, ordinance, regulation or order, and all claims under the common law in tort, contract or otherwise. This release expressly includes all claims relating to his employment with the Company, or his executive position as Chairman of the Board, that could have been raised in state or federal court or with a municipal, county, state or federal agency or entity of any kind or jurisdiction. This release also includes all claims for attorneys' fees and any other remedy that could have been sought in connection with any of the released claims. Excluded from this release are any claims that cannot be waived by law, including but not limited to the right to file a charge with, or participate in an investigation conducted by, certain government agencies. The Executive is waiving, however, the right to any monetary recovery relating solely to his employment with the Company should any agency (including, but not limited to, the Equal Employment Opportunity Commission) pursue any claims on his behalf. Page - (2) 3. Opportunity to Employ Counsel. Among the claims being released by the Executive in Paragraph 2 are claims under the Age Discrimination in Employment Act of 1967, as amended ("ADEA"), 29 U.S.C. ss. 621 et seq. Pursuant to and in compliance with the Older Workers Benefit Protection Act ("OWBPA"), 29 U.S.C. ss. 626(f)(1)(H), the Executive acknowledges that: he has had sufficient opportunity to secure the services of a privately-retained attorney of his free choice, who is an experienced lawyer familiar with the rights waived herein; that he understands the terms, obligations and rights being released under this Agreement; that he has had sufficient time to consider this Agreement before signing it; that he knows and understands the rights being waived and the terms and consequences of his signature on this Agreement; that this Agreement has been signed knowingly, voluntarily, in good faith, with a genuine intent to waive the rights identified herein; and that he has not been subjected to any duress, coercion, fraud, overreaching, exploitation or pressure to sign it. In addition, the Executive acknowledges that he has had 21 days within which to consult with an attorney prior to executing this Agreement, that he has been given 7 days following his execution of the Agreement (the "Revocation Period") to revoke this Agreement, and that this Agreement will not become final until the Revocation Period has expired. Lastly, the Executive acknowledges that he is not otherwise entitled to the Consideration. The Executive may revoke the Agreement during the Revocation Period only by delivering a written notice of revocation to: Prime Retail, Inc., 100 East Pratt Street, 19th Floor, Baltimore, Maryland 21202, Attention: C. Alan Schroeder, Esq., General Counsel. Such notice must be received by the Company within the Revocation Period. 4. Indemnification. The Company shall indemnify and hold harmless the Executive to the same extent and on the same terms and conditions provided for in the Company's articles of incorporation and bylaws in existence on the date hereof, and to the full extent such indemnification is required or permitted to be extended to directors, officers, employees and/or agents by Section 2418 of the Corporations and Associations Article, Annotated Code of Maryland. In addition, the Company shall ensure that the Executive is included as an insured under any and all Directors and Officers Liability Insurance policies, whether in effect now or in the future, applicable to the Company, Prime and/or the Operating Partnership. 5. No Waiver. No failure or delay by the Executive or the Company in enforcing or exercising any right or remedy hereunder will operate as a waiver hereof. No modification, amendment or waiver of this Agreement nor consent to any departure by the Executive or the Company from any of the terms or conditions hereof, will be effective unless in writing and signed by the Executive or an authorized officer of the Company, as appropriate. Any such waiver or consent will be effective only in the specific instance and for the purpose for which it was given. 6. Successors and Assigns. All provisions of this Agreement will inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators and heirs, and the successors and assigns of the Company. Page - (3) 7. Governing Law. This Agreement will be governed by, and construed, interpreted and enforced in accordance with the laws of the State of Maryland, exclusive of the conflicts of laws provisions. PRIME RETAIL, INC. /s/ Michael W. Reschke By: /s/ Glenn D. Reschke - ---------------------- -------------------- MICHAEL W. RESCHKE Name: GLENN D. RESCHKE Title: PRESIDENT AND CHIEF EXECUTIVE OFFICER PRIME RETAIL, L.P. By: Prime Retail, Inc., its general partner By: /s/ Glenn D. Reschke -------------------- Name: GLENN D. RESCHKE Title: PRESIDENT AND CHIEF EXECUTIVE OFFICER EX-10 10 hex1050.txt EXHIBIT 10.50 - AMENDED PROMISSORY NOTE AMENDED AND RESTATED PROMISSORY NOTE Date of Note: As of December 6, 2002 Note Amount: $264,090,845.98 RECITALS WHEREAS, The undersigned (collectively, the "Borrower Parties"), together with Castle rock factory shops partnership and Loveland Factory Shops Limited Partnership (collectively, "Defeasance Borrowers") are the current obligors under that certain Promissory Note dated as of October 31, 1996 in the original, principal amount of $391,500,000.00 (the "Original Note") in favor of Nomura Asset Capital Corporation, a Delaware corporation ("Original Lender"); WHEREAS, Payee (as hereinafter defined) is the current owner and holder of the Original Note pursuant to an allonge to the Original Note executed by Original Lender in favor of Payee; WHEREAS, concurrently herewith, the Defeasance Borrowers are selling certain real property and improvements owned by them and which secure in part the Original Note and the Defeasance Borrowers are defeasing a portion of the indebtedness evidenced by the Original Note (the "Partial Defeasance"); WHEREAS, in connection with the Partial Defeasance, Payee, the Borrower Parties, and the Defeasance Borrowers have agreed to sever the Original Note into two separate notes, the first being a Defeasance Promissory Note of even date herewith in the original principal amount of $74,848,811.77, executed by the Defeasance Borrowers and secured by certain securities (the "Defeasance Note"), and the second being this Amended and Restated Promissory Note (this "Note"), executed by the undersigned and secured by the Mortgages (as hereinafter defined); WHEREAS, the undersigned intend these recitals to be a material part of this Note; and WHEREAS, the undersigned hereby wish to amend and restate the Original Note in its entirety as follows: FOR VALUE RECEIVED, the undersigned having an address c/o Prime Retail, L.P., 100 East Pratt Street, Nineteenth Floor, Baltimore, Maryland 21202, as maker (hereinafter referred to as "Maker"), jointly and severally, do hereby covenant and promise to pay, in immediately available funds, to the order of LASALLE BANK NATIONAL ASSOCIATION (f/k/a LaSalle National Bank), as Trustee under that certain Pooling and Servicing Agreement dated as of December 17, 1996 for the Certificateholders of Asset Securitization Corporation Commercial Mortgage Pass-Through Certificates, Series 1996-MD VI having an address at c/o CapMark Loan Services, L.P., as Master Servicer, 245 Peachtree Center Avenue, Suite 1800, Atlanta, Georgia (hereinafter referred to as "Payee"), or at such other place as Payee may from time to time designate in writing, the principal sum of Two Hundred Sixty-Four Million Ninety Thousand Eight Hundred Forty-Five and 98/100 Dollars ($264,090,845.98) or so much thereof as may be advanced (the "Loan Amount") and all other amounts due or becoming due hereunder, with interest thereon from the date hereof at the Interest Rate (as hereinafter defined), to be paid in lawful money of the United States of America, as herein provided. Page - (2) Interest, as calculated herein, shall be computed for any Payment Date on the basis of a 360 day year for the actual number of days elapsed on so much of the Principal Amount as is outstanding as of the day preceding such Payment Date. Section 1. DEFINITIONS As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires. Defined terms in this Note shall include in the singular number the plural and in the plural number the singular. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Mortgages. "Additional Interest Rate" shall mean the difference between the Revised Interest Rate and the Interest Rate. "Amortization Schedule" shall have the meaning set forth in Section 2.01(b) hereof. "Due Date" shall have the meaning set forth in Section 2.01(c) hereof. "Interest Rate" shall mean 7.782%. "Maturity Date" shall have the meaning set forth in Section 2.01 (a) (iii) hereof. "Maximum Amount" shall have the meaning set forth in Section 4.07 hereof. "Payment" shall have the meaning set forth in Section 3.01 hereof. "Principal Payments" shall have the meaning set forth in Section 2.01(a)(i) hereof. "Principals" shall have the meaning set forth in Section 4.04 hereof. "Revised Interest Rate" shall mean the greater of (a) the interest Rate plus five hundred (500) basis points and (b) an interest rate equal to the Treasury Constant Maturity Yield Index for United states Treasury obligations having a maturity of seven (7) years plus six hundred forty-five (645) basis points determined as of the Optional Prepayment Date. "Treasury Constant Maturity Yield Index" shall mean the average yield for "This Week" as reported by the Federal Reserve Board in Federal Reserve Statistical Release H.15 (519). Section 2. INTEREST AND AMORTIZATION PAYMENTS Section 2.01. (a) Payments under this Note, calculated in accordance with the terms hereof, shall be due and payable as follows: Page - (3) (i) Commencing on the Payment Date occurring in December, 2002 and continuing on each Payment Date thereafter until the Maturity Date (as defined below), the principal and interest due under this Note shall be due and payable in equal monthly installments in the amount of $2,010,146.09 each (the "Monthly Payment Amount"). (ii) Commencing on the Optional Prepayment Date, in addition to the interest described in Section 2.01(a)(i), additional interest shall also accrue on the Principal. Amount at the Additional Interest Rate and on the Accrued Interest (hereinafter defined), if any, at the Revised Interest Rate. Commencing on the Payment Date after the Optional Prepayment Date, and on each and every Payment Date thereafter, in addition to the payments described in Section 2.01(a)(i), 100% of the amount of Excess Cash Flow for the calendar month preceding the calendar month in which such Payment Date occurs shall be due and shall be applied, first, to the Principal Amount until reduced to zero, second, to currently accruing interest described in the prior sentence of this Section 2.01(a)(ii), and third, to the Accrued Interest, if any. To the extent Excess Cash Flow is insufficient to pay the interest payments described in the first sentence of this Section 2.01(a) (ii) on any Payment Date, such interest shall be deferred and added to any interest previously deferred pursuant to this sentence and remaining unpaid (the "Accrued Interest"). Amounts payable pursuant to this Section 2.01(a)(ii) shall not be included in the determination of the Required Debt Service Payment, nor shall failure to pay interest or Accrued Interest pursuant to this Section 2.01(a)(ii) constitute a Default, an Event of Default or give rise to interest at the Default Rate or Late Charges. (iii) The entire outstanding Principal Amount, together with all accrued and unpaid interest and any other charges due hereon shall be due and payable on the Payment Date occurring in November, 2026 (the "Maturity Date"). (b) The calculation of the amount of each regularly scheduled monthly Principal Payment is as set forth on Schedule A annexed hereto (the "Amortization Schedule"). In addition to the required payments set forth in the Amortization Schedule, from and after the Optional Prepayment Date all sums in the Curtailment Reserve Fund Sub-Account shall be applied in reduction of the Principal Amount. (c) To the extent Payments are or become due and payable under this Note or any of the other Loan Documents on a day (the "Due Date") which is not a Business Day, such Payments are and shall be due and payable on the first Business Day immediately following the Due Date for such Payments and in such event, the interest which accrues on the Loan from the Due Date to the first Business Day immediately following the Due Date shall not be due and payable until the next succeeding Due Date. (d) INTENTIONALLY DELETED. (e) INTENTIONALLY DELETED. Section 2.02. Application of Payments. ----------------------- Page - (4) (a) Each and every payment (a "Payment") made by Maker to Payee in accordance with the terms of this Note and/or the terms of any of the other Loan Documents, including, without limitation, all payments of interest and principal shall be applied as follows: (i) Payments, other than Unscheduled Payments shall be applied (i) first, to all interest (other than Default Rate Interest) which shall be due and payable pursuant to the terms hereof as of the date the Payment is received; (ii) second, to the payment of Principal Amount; and (iii) third, to all Late Charges, Default Rate interest or premiums, if any, and other sums payable hereunder or under the other Loan Documents (other than those sums included in clauses (i) and (ii) of this Section 2.02(a)(i)) in such order and priority as determined by Payee in its sole discretion. (ii) Unscheduled Payments, other than Payments received pursuant to Section 2.01(a)(ii), shall be applied on the Payment Date received, and if any Unscheduled Payment is received on a day other than a Payment Date, at the end of the Interest Accrual Period in which such Unscheduled Payments are received (i) first, to the Principal Amount until the entire Principal Amount has been fully amortized, and (ii) second, the balance, if any, in the manner provided in section 2.02(a)(i) (to the extent applicable after giving effect to any payments previously made pursuant to this Section 2.02. (iii) Payments received pursuant to Section 2.01(a)(ii) shall be applied at the times and in the manner set forth therein. (b) To the extent that Maker makes a Payment or Payee receives any Payment or proceeds for Maker's benefit which are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver, custodian or any other party under any bankruptcy law, common law or equitable cause, then, to such extent, the obligators of Maker hereunder intended to be satisfied by such Payment or proceeds shall be revived and continue as if such Payment or proceeds had not been received by Payee. Section 2.03. Default Rate. Time is of the essence with respect to the times set forth herein for the repayment of the Principal Amount and the interest thereon. Should any amounts due hereunder or under any other Loan Document not be paid in full on the date when the same shall be due and payable (whether by acceleration, prepayment permitted hereunder or otherwise), then in such event, the rate of interest to be paid on the entire Principal Amount of this Note and all such other amounts shall be increased to the Default Rate and shall be computed from the Due Date through and including the date, if any, upon which such Default is fully cured. The foregoing provisions shall not be construed as a waiver by Payee of its right to pursue any other remedies available to it under the Mortgages or any other Loan Document, nor shall it be construed to limit in any way the application of the Default Rate. Section 2.04. Voluntary Prepayments and Defeasements. Maker shall be permitted to prepay or defease the Principal Amount of this Loan only on the terms and conditions and to the extent provided in Article XV of the Mortgages. All such prepayments and defeasements shall be applied in accordance with Section 2.02(a)(ii) hereof. Page - (5) Section 3. DEFAULTS Section 3.01. Defaults. This Note is secured, inter alia, by (i) certain mortgages, deeds of trust and deeds to secure debt, security agreements, assignments of rents and fixture filings (each herein referred to as a "Mortgage" and collectively as the "Mortgages") covering property, of Maker, as more particularly described in each Mortgage, and (ii) certain assignments of leases and rents and security deposits of even date herewith made by Maker. All terms, covenants, conditions and agreements of the Loan Documents, including without limitation, the mortgages, and the due on sale provision contained within the Mortgages, hereby constitute part of this Note, as if the same had been fully set forth herein. Each Event of Default under the Mortgages or any one or more of the other Loan Documents shall be an Event of Default hereunder. Section 3.02. Remedies. Upon the occurrence of an Event of Defualt, the entire Principal Amount, accrued interest and all other sums due and payable hereunder, under the Morgages or other Loan Documents shall become immediately due and payable at the option of Payee and immediately, and without notice to Maker, interest on the Principal Amount shall accrue at the Default Rate. In addtion, if, prior to the Optional Prepayment Date, the Loan has been accelerated based on an Event of Defualt, there shall also be due and payable to Payee on the accelerated maturity date an amount equal to the excess, if any, of (a) the amount of a Defeasance Deposit for the purchase of Federal Obligations necessary to meet the Scheduled Defeasance Payments described in clause (a) of the definition of "Scheduled Defeasance Payments" over (b) the Principal Amount. Failure to exercise this option shall not constitute a waiver of the right to exercise the same in the event of any subsequent Default or to exercise any other remedy available to Payee relating to such Default. If there is more than one Maker of this Note, subject to the provisions of Section 4.04 hereof, the undersigned Persons shall each be jointly and severally liable to pay the entire Loan Amount and all other sums becoming due hereunder or under the other Loan Documents. Section 4. MISCELLANEOUS Section 4.01. Waivers. (a) Maker acknowledges that the Loan evidenced by this Note is a commercial transaction and, to the fullest extent permitted by Legal Requirements, as to this Note, the Mortgages and any other Loan Documents securing this Note, Maker hereby waives all applicable exemption rights, whether under the constitution of the State of New York or otherwise and also waives valuation and appraisement, presentment, protest and demand, notice of protest, demand-and dishonor and nonpayment of this Note and, except as specifically provided herein or in the other Loan Documents, all other notices or demands to the fullest extent permitted pursuant to Legal Requirements, and hereby expressly agrees that the maturity of this Note or payment hereunder, may be extended from time to time without in any way affecting the liability of Maker or of any guarantor of this Note. No notice to, or demand on Maker shall entitle Maker to any other or future notice or demand in the same, similar or other circumstances. Maker further consents to the release of any person liable for this obligation without affecting the liability of any other party hereto or any guarantor hereof. The remedies of Payee provided herein, in the Mortgages and the other Loan Documents, are cumulative and concurrent, and may be pursued singly, successively, or together, at the sole discretion of Payee, and may be exercised as often as the occasion therefor shall occur. Any delay on the part of Payee in exercising any right hereunder shall not operate as a waiver of any right, and any waiver granted for one occasion shall not operate as a waiver in the event of a subsequent Default. Page - (6) (b) This Note cannot be modified, terminated, extended, amended or discharged orally. No requirement hereof may be waived at any time except by a writing signed by Payee, nor shall any waiver be operative upon other than a single occasion. All rights and remedies herein specified are intended to be cumulative and not in substitution for any right or remedy otherwise available. In any action or proceeding to recover any sum herein provided for, to the extent permitted by applicable Legal Requirements, no defense of adequacy of security, or that resort must first be had to any other Person, shall be asserted. All references herein to Maker and to Payee shall be deemed to include its successors and assigns. Section 4.02. Taxes. Maker agrees that if, at any time, the United States of America, or any State or Commonwealth thereof or any subdivision of any such State, shall require revenue or other stamps to be affixed to this Note or the Mortgages, or impose any other tax or charges on the same, Maker will pay the same, with interest and penalties thereon, if any. Section 4.03. Invalidity. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note is held to be invalid or unenforceable by a court of competent jurisdiction, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions of this Note, and the other provisions of this Note shall remain in full force and effect and shall be liberally construed in favor of Payee in order to effect the provisions of this Note. Section 4.04. Exculpation. Notwithstanding any provision herein or in any of the other Loan Documents to the contrary, except as set forth in this Section 4.04, Payee shall not enforce the liability and obligation of Maker to perform and observe the obligations contained in this Note, the Mortgages or the other Loan Documents by an action or proceeding wherein a money judgment shall be sought against Maker or any judgment shall be sought against any director, officer, employee, partner or stockholder of Maker, or its general partners (all of the foregoing, collectively, "Principals"). Payee, by accepting this Note, the Mortgages and the other Loan Documents, agrees that it shall not sue for, seek or demand any deficiency judgment against Maker or any judgment, including a judgment for specific performance, against its Principals or any one or more of them in any such action or proceeding, under or by reason of or under or in connection with this Note, the Mortgages or the other Loan Documents except to the extent necessary or appropriate to proceed against or execute or foreclose on any or all of the collateral granted to Payee under the Loan Documents. The provisions of this Section 4.04 shall not, however, (a) impair the validity of the indebtedness evidenced by this Note or in any way affect or impair the lien of the Mortgages or any of the other Loan Documents, or the right of Payee to foreclose the Mortgages or otherwise realize upon any collateral securing this Note following an Event of Default; (b) impair the right of Payee to name Maker or any other Person as a party defendant in any action or suit for judicial foreclosure and sale or otherwise under the Mortgages to the extent necessary to realize upon any collateral securing this Note; (c) impair the right of Payee to obtain the appointment of a receiver; (d) impair the enforcement of the Assignments; (e) impair the right of Payee to bring suit with respect to, or Maker's personal liability for, fraud or intentional misrepresentation by Maker or any other Person in connection with this Note, the Mortgages or any other Page - (7) Loan Document; (f) impair the right of Payee to bring suit with respect to, or Maker's personal liability for, Maker's misappropriation of tenant security deposits or Rents; (g) impair the right of Payee to obtain, or Maker's personal liability for Maker's misapplication or misappropriation of insurance proceeds or condemnation awards due to Payee under the Mortgages; (h) impair the right of Payee to enforce, or Maker's personal liability for, the provisions of Section 16.01 or Section 16.02 of the Mortgages whether before or after payment in full of the Principal Amount; (i) prevent or in any way hinder Payee from exercising, or constitute a defense, or counterclaim or or-her basis for relief in respect of the exercise of, any other remedy against the collateral securing the Note as provided in the Loan Documents or as prescribed by law or in equity in case of Defaults; (j) prevent or in any way hinder Payee from exercising, or constitute a defense, a counterclaim, or other basis for relief in respect of the exercise of its remedies in respect of any judgments or other sums due from Maker to Payee other than under the Loan Documents; (k) impair the aright of Payee to bring suit with respect to, or Maker's personal liability for, Maker's misappropriation, during the continuance of an Event of Default, from any Cross-collateralized Property of any items of personalty or any fixtures or any other misappropriation with respect to any Cross-collateralized Property during the continuance of an Event of Default or (1) impair the right of Payee to bring suit with respect to, or Maker's personal liability for, losses, damages or liabilities suffered by Payee arising from any acts or omissions by Maker that resulted in waste, provided, however, that waste shall not be deemed to include the non-payment of impositions, mechanics liens, materialmen's liens or any other liens arising from work performed on, or materials delivered to, the Cross collateralized Properties. Section 4.05. Governing Law. (a) This Note was negotiated in New York, and delivered by Maker and accepted by Payee in the State of New York, and the proceeds of this Note were disbursed from New York, which State Maker agrees has a substantial relationship to Payee and maker and to the transaction embodied hereby, in all respects, including, without limiting the generality of the foregoing, matters of construction, validity, enforceability and performance. This Note and the obligations arising hereunder shall be governed by, and construed in accordance with, the laws of the state of New York applicable to contracts made and performed in such State (without regard to the conflicts of law rules thereof) and any applicable law of the United States of America, except that at all times the provisions for the creation, perfection, and enforcement of the liens and security interests created pursuant to the Mortgages and pursuant to the other Loan Documents shall be governed by and construed according to the law of the State in which the applicable Cross-collateralized Property is located, and that the Uniform Commercial Code (or decisional law) of a jurisdiction other than New York may provide the method of perfection, the effect of perfection and non-perfection, or the priority of liens and security interests in personal property, created pursuant to the Mortgages and pursuant to the other Loan Documents, it being understood that, to the fullest extent permitted by law of such state, the law of the State of New York shall govern the validity and the enforceability of all Loan Documents, and the obligations arising hereunder or thereunder. To the fullest extent permitted by law, Maker hereby unconditionally and irrevocably waives any claim to assert that the law of any other jurisdiction governs this Note and this Note shall be governed by and construed in accordance with the laws of the State of New York pursuant to ss. 5-1401 of the New York General Obligations Law. Page - (8) (b) Any legal suit, action or proceeding against Maker or Payee arising out of or relating to this Note shall be instituted in any federal or state court in New York, New York, pursuant to 5-1402 of the New York General Obligations Law, and Maker waives any objection which it may now or hereafter have to the laying of venue of any such suit, action car proceeding, and Maker hereby irrevocably submits to the jurisdiction of any such court in any suit, action or proceeding. Maker does hereby designate and appoint C.T. Corporation, having an address at 1633 Broadway, New York, New York 10019, as its authorized agent to accept and acknowledge on its behalf service of any and all process which may be served in any such suit, action or proceeding in any federal or state court in New York, New York, and agrees that service of process upon said agent at said address and written notice of said service of Maker mailed or delivered to Maker in the manner provided in the Mortgages, shall be deemed in every respect effective service of process upon Maker, in any such suit, action or proceeding in the State of New York. Maker (i) shall give prompt notice to the payee of any changed address of its authorized agent hereunder, (ii) may at any time and from time to time designate a substitute authorized agent with an office in New York, New York (which office shall be designated as the address for service of process), and (iii) shall promptly designate such a substitute it its authorized agent ceases to have an office in New York, New York or is dissolved without leaving a successor. Section 4.06. [Intentionally Omitted] Section 4.07. Maximum Amount. It is the intention of Maker and Payee to conform strictly to the usury and similar laws relating to interest from time to time in force, and all agreements between Maker and Payee, whether now existing or hereafter arising and whether oral or written, are hereby expressly limited so that in no contingency or event whatsoever, whether by acceleration of maturity hereof or otherwise, shall the amount paid-or agreed to be paid in the aggregate to payee as interest hereunder or finder the other Loan Documents exceed the maximum permissible under applicable usury or such other laws (the "Maximum Amount"). In the event, for any reason whatsoever, any payment by or act of Maker pursuant to the terms hereof or pursuant to any requirements of any provision hereof or of the other Loan Documents shall result in payment of interest which would exceed the Maximum Amount, then ipso facto the obligation of Maker to pay interest or perform such act or requirement shall be reduced to the limit authorized under such Legal Requirements, so that in no event shall Maker be obligated to pay any interest, perform any act, or be bound by any requirement which would result in payment of interest in excess of a sum which is lawfully collectible, and all sums in excess of those lawfully collectible as interest shall, without further agreement or notice between or by any party hereto, be deemed applied upon principal immediately upon receipt of such moneys by payee, with the same force and effect as though Maker had specifically designated such sums to be applied to principal prepayment. Notwithstanding any provision herein to the contrary, however, no such application shall give rise to an obligation on the part of Maker to pay any prepayment premium, if any, payable pursuant to the Loan Documents. The provisions of this paragraph shall control every other provision of this Note Section 4.08. Costs of Collection. Maker agrees to pay all costs and expenses of collection incurred by Payee, in addition to principal, interest, and premiums, if any, and Late Charges, including, without limitation, reasonable attorneys, fees and disbursements, all costs and expenses incurred in connection with the pursuit by Payee of any of its rights or remedies hereunder, under the Mortgages or any of the other Loan Documents or the protection of or realization of collateral or in connection with Payee's collection efforts, whether or not suit on this Note, on any of the other Loan Documents or any foreclosure proceeding is filed, and all such costs and expenses shall be payable on demand with interest thereon to be calculated at the Default Rate and shall be secured by the Mortgages and all other collateral at any time held by Payee as security for Maker's obligations to Payee. Page - (9) Section 4.09. Waiver of Jury Trial. Maker, to the fullest extent it may lawfully do so, waives any right it may have to trial by jury in any action, including, without limitation, any tort action, to interpose any counterclaim in any action (other than a compulsory counterclaim), and to have the same consolidated with any other or separate action brought on or with respect to this Note, the Mortgages or any other Loan Document. Section 4.10. Headings. The section headings in this Note are included herein for convenience of reference only and shall not constitute apart of this Note for any other purpose. Section 4.11. Participation. Payee shall have the right to assign this Note in whole, but not in part, the Mortgages and/or any of the other Loan Documents, and to transfer, assign or sell participation and subparticipations (including blind or undisclosed participation and subparticipations) in the Mortgages and the other Loan Documents and the obligations hereunder to any Person; provided, however, that no participation shall increase, decrease or otherwise affect either Maker's or Payee's obligations hereunder, under the Mortgages or under any of the other Loan Documents. Section 4.12. Amended and Restated Note. This Note amends and restates the Original Note in its entirety, upon which all applicable mortgage taxes and documentary taxes have been paid and affixed to the applicable Mortgages. To the extent there are any conflicts between the terms of the Original Note and this Note, the terms of this Note shall control. Notwithstanding the foregoing, Maker and the Defeasance Borrowers hereby acknowledge and agree that, as between Payee and the Defeasance Borrowers, the provisions of Section 4.04 of the Original Note shall be deemed to survive with respect to the Defeasance Borrowers with respect to matters arising prior to the date hereof (the "Surviving Recourse Liability Provisions"), as though such provisions were fully set forth herein. The Defeasance Borrowers hereby join into this Note for the sole purpose of acknowledging their liability, on a joint and several basis, for the Surviving Recourse Liability Provisions. * * * * Page - (10) IN WITNESS WHEREOF, this Note has been duly executed by Maker, the day and year first above written. Witness: CORAL ISLE FACTORY SHOPS LIMITED PARTNERSHIP By: Prime Retail, L.P., a - -------------------------------------------- Delaware limited partnership, its managing general partner By: Prime Retail, Inc., a Maryland corporation, its general partner By: ________________________ Name: ______________________ Title: ______________________ Witness: GULF COAST FACTORY SHOPS LIMITED PARTNERSHIP By: Prime Retail, L.P., a - -------------------------------------------- Delaware limited partnership, its managing general partner By: Prime Retail, Inc., a Maryland corporation, its general partner By: ________________________ Name: ______________________ Title: ______________________ Witness: KANSAS CITY FACTORY SHOPS LIMITED PARTNERSHIP By: Prime Retail, L.P., a - -------------------------------------------- Delaware limited partnership, its managing general partner By: Prime Retail, Inc., a Maryland corporation, its general partner By: ________________________ Name: ______________________ Title: ______________________ Page - (11) Witness: OHIO FACTORY SHOPS PARTNERSHIP By: Prime Retail, L.P., a - -------------------------------------------- Delaware limited partnership, its managing general partner By: Prime Retail, Inc., a Maryland corporation, its general partner By: ________________________ Name: ______________________ Title: ______________________ Witness: SAN MARCOS FACTORY STORES, LTD. By: Prime Retail, L.P., a - -------------------------------------------- Delaware limited partnership, its managing general partner By: Prime Retail, Inc., a Maryland corporation, its general partner By: ________________________ Name: ______________________ Title: ______________________ TRIANGLE FACTORY STORES LIMITED PARTNERSHIP By: Prime Retail, L.P., a Delaware limited partnership, its managing general partner - -------------------------------------------- ATTEST: By: Prime Retail, Inc., a Maryland corporation, its general partner By: ----------------------------------- Name: Title: Secretary By: ________________________ Name: ______________________ Title: ______________________ Page - (12) Witness: GAINESVILLE FACTORY SHOPS LIMITED PARTNERSHIP By: Prime Retail, L.P., a - -------------------------------------------- Delaware limited partnership, its managing general partner By: Prime Retail, Inc., a Maryland corporation, its general partner By: ________________________ Name: ______________________ Title: ______________________ Witness: FLORIDA KEYS FACTORY SHOPS LIMITED PARTNERSHIP By: Prime Retail, L.P., a - -------------------------------------------- Delaware limited partnership, its managing general partner By: Prime Retail, Inc., a Maryland corporation, its general partner By: ________________________ Name: ______________________ Title: ______________________ Witness: THE PRIME OUTLETS AT LEBANON LIMITED PARTNERSHIP By: Prime Retail, L.P., a - -------------------------------------------- Delaware limited partnership, its managing general partner By: Prime Retail, Inc., a Maryland corporation, its general partner By: ________________________ Name: ______________________ Title: ______________________ Page - (13) Witness: MAGNOLIA BLUFF FACTORY SHOPS LIMITED PARTNERSHIP By: Prime Retail, L.P., a - -------------------------------------------- Delaware limited partnership, its managing general partner By: Prime Retail, Inc., a Maryland corporation, its general partner By: ________________________ Name: ______________________ Title: ______________________ Witness: HUNTLEY FACTORY SHOPS LIMITED PARTNERSHIP By: Prime Retail, L.P., a - -------------------------------------------- Delaware limited partnership, its managing general partner By: Prime Retail, Inc., a Maryland corporation, its general partner By: ________________________ Name: ______________________ Title: ______________________ Witness: GULFPORT FACTORY SHOPS LIMITED PARTNERSHIP By: Prime Retail, L.P., a - -------------------------------------------- Delaware limited partnership, its managing general partner By: Prime Retail, Inc., a Maryland corporation, its general partner By: ________________________ Name: ______________________ Title: ______________________ Page - (14) Witness: GROVE CITY FACTORY SHOPS PARTNERSHIP By: Prime Retail, L.P., a - -------------------------------------------- Delaware limited partnership, its managing general partner By: Prime Retail, Inc., a Maryland corporation, its general partner By: ________________________ Name: ______________________ Title: ______________________ Witness: DEFEASANCE BORROWERS, SOLELY FOR PURPOSES JOINING INTO SECTION - -------------------------------------------- 4.12 OF THIS NOTE: CASTLE ROCK FACTORY SHOPS PARTNERSHIP By: Prime Retail, L.P., a Delaware limited partnership, its managing general partner By: Prime Retail, Inc., a Maryland corporation, its general partner By: ________________________ Name: ______________________ Title: ______________________ Witness: LOVELAND FACTORY SHOPS LIMITED PARTNERSHIP By: Prime Retail, L.P., a - -------------------------------------------- Delaware limited partnership, its managing general partner By: Prime Retail, Inc., a Maryland corporation, its general partner By: ________________________ Name: ______________________ Title: ______________________ EX-10 11 hex1051.txt EXHIBIT 10.51 - DEFEASANCE PROMISSORY NOTE DEFEASANCE PROMISSORY NOTE Date of Note: December 6, 2002 - ------------ Note Amount: $74,848,811.77 - ------------ RECITALS WHEREAS, as of October 31, 1996, Maker (as hereinafter defined), together with certain other borrower parties executed and delivered that certain Promissory Note in the original, principal amount of $391,500,000.00 (the "Original Note") to Nomura Asset Capital Corporation, a Delaware corporation ("Original Lender"); WHEREAS, Payee (as hereinafter defined) is the current owner and holder of the Original Note pursuant to an allonge to the Original Note executed by Original Lender in favor of Payee; WHEREAS, the Original Note is secured by certain Deeds of Trust, Assignments of Rents, Security Agreements, and Fixture Filings and certain Mortgages, Assignments of Rents, Security Agreements, and Fixture Filings executed and delivered by Maker and the current obligors under the Original Note (the "Other Borrower Parties") to Original Lender (collectively, the "Mortgages"); WHEREAS, concurrently herewith, Maker is selling certain real property and improvements encumbered by two of the Mortgages and Maker is defeasing a portion of the indebtedness evidenced by the Original Note (the "Partial Defeasance"); WHEREAS, in connection with the Partial Defeasance, Payee, Maker, and the Other Borrower Parties have agreed to sever the Original Note into two separate notes, the first being an Amended and Restated Promissory Note of even date herewith in the original principal amount of $264,090,845.98, executed by the Other Borrower Parties and secured by the Mortgages, and the second being this Defeasance Promissory Note (this "Note"), executed by the undersigned and secured by certain securities; and WHEREAS, the undersigned intend these recitals to be a material part of this Note. FOR VALUE RECEIVED, the undersigned having an address c/o Prime Retail, L.P., 100 East Pratt Street, Nineteenth Floor, Baltimore, Maryland 21202, as maker (hereinafter referred to as "Maker"), jointly and severally, do hereby covenant and promise to pay, in immediately available funds, to the order of LaSalle Bank National Association (f/k/a LaSalle National Bank), as Trustee under that certain Pooling and Servicing Agreement dated as of December 17, 1996 for Certificateholders of the Asset Securitization Corporation Commercial Mortgage Pass-Through Certificates, Series 1996-MD VI (hereinafter referred to as "Payee"), at Payee's address c/o CapMark Services, L.P., as Master Servicer, 245 Peachtree Center Avenue, Suite 1800, Atlanta, Georgia, 30303 or at such other place as Payee may from time to time designate in writing, the principal sum of Seventy Four Million Eight Hundred Forty-Eight Thousand Eight Hundred Eleven and 77/l00 Dollars ($74,848,811.77) or so much thereof as may be advanced (the "Loan Amount") and all other amounts due or becoming due hereunder, with interest thereon from the date hereof at the Interest Rate (as hereinafter defined), to be paid in lawful money of the United States of America, as herein provided. Page - (2) Interest, as calculated herein, shall be computed for any Payment Date on the basis of a 360 day year for the actual number of days elapsed on so much of the Principal Amount as is outstanding as of the day preceding such Payment Date. SECTION 1. DEFINITIONS As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires. Defined terms in this Note shall include in the singular number the plural and in the plural number the singular. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Mortgages. "Business Day" shall have the meaning given such term on the Account Agreement (as defined below). "Default Rate" shall mean the lesser of (a) the highest rate allowable by law and (b) three percent above the Interest Rate. "Defeasance Documents" shall have the meaning ascribed to them in Section 3.01 hereof. "Due Date" shall have the meaning set forth in Section 2.01(c) hereof. "Interest Accrual Period" shall mean each one (1) month period, which shall begin on the eleventh (11th) day of each calendar month and run through and include the tenth (10th) day of the following calendar month; provided, however, no Interest Accrual Period shall extend beyond the Maturity Date. "Interest Rate" shall mean a rate per annum equal to 7.782%. "Late Charges" shall mean four percent (4%) of any delinquent payment hereunder. "Legal Requirement" shall mean as to any Person, the articles of incorporation, the certificate of incorporation, by-laws, certificate of limited partnership, agreement of limited partnership, agreement of partnership or other organization or governing documents of such Person, and any law, statute, order, ordinance, judgment, decree, injunction, treaty, rule or regulation (including, without limitation, Environmental Statutes, Development Laws and Use Requirements) or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Maturity Date" shall have the meaning set forth in Section 2.01 (a)(ii) hereof. "Maximum Amount" shall have the meaning set forth in Section 4.07 hereof. Page - (3) "Monthly Payment Amount" shall have the meaning set forth in Section 2.01(a)(i) hereof. "Payment" shall have the meaning set forth in Section 2.02(a) of this Note. "Payment Date" shall mean, with respect to each month, the eleventh (11th) calendar day in such month, or if such day is not a Business Day, the next following Business Day. "Principal Amount" shall mean the original, principal amount of this Note, as such amount may be reduced or increased from time to time. "Principals" shall have the meaning set forth in Section 4.04 hereof. "Treasury Constant Maturity Yield Index" shall mean the average yield for "This Week" as reported by the Federal Reserve Board in Federal Reserve Statistical Release H.15 (519). "Unscheduled Payments" shall mean any funds representing a voluntary or involuntary principal prepayment other than scheduled payments of principal made pursuant to the terms of this Note. SECTION 2. INTEREST AND AMORTIZATION PAYMENTS Section 2.01. (a) Payments under this Note, calculated in accordance with the terms hereof, shall be due and payable as follows: (i) Commencing on the Payment Date occurring in December, 2002 and continuing on each Payment Date thereafter until the Maturity Date (as defined below), the principal and interest due under this Note shall be due and payable in equal monthly installments in the amount of $569,717.01 each (the "Monthly Payment Amount"). (ii) The entire outstanding Principal Amount, together with all accrued and unpaid interest and any other charges due hereon, shall be due and payable on the Payment Date occurring in November, 2003 (the "Maturity Date"). (b) INTENTIONALLY DELETED. (c) To the extent Payments are or become due and payable under this Note or any of the other Defeasance Documents (as hereinafter defined) on a day (the "Due Date") which is not a Business Day, such Payments are and shall be due and payable on the first Business Day immediately following the Due Date for such Payments and in such event, the interest which accrues on the Loan from the Due Date to the first Business Day immediately following the Due Date shall not be due and payable until the next succeeding Due Date. Section 2.02. Application of Payments. (a) Each and every payment (a "Payment") made by Maker to Payee in accordance with the terms of this Note and/or the terms of any of the other Defeasance Documents, including, without limitation, all payments of interest and principal shall be applied as follows: Page - (4) (i) Payments shall be applied (i) first, to all interest (other than Default Rate Interest) which shall be due and payable pursuant to the terms hereof as of the date the Payment is received; (ii) second, to the payment of Principal Amount; and (iii) third, to all Late Charges, Default Rate interest or premiums, if any, and other sums payable hereunder or under the other Defeasance Documents (other than those sums included in clauses (i) and (ii) of this Section 2.02(a)(i)) in such order and priority as determined by Payee in its sole discretion. (ii) Unscheduled Payments, other than Payments received pursuant to Section 2.01(a)(ii), shall be applied on the Payment Date received, and if any Unscheduled Payment is received on a day other than a Payment Date, at the end of the Interest Accrual Period in which such unscheduled Payments are received (i) first, to the Principal Amount until the entire Principal Amount has been fully paid, and (ii) second, the balance, if any, in the manner provided in Section 2.02(a)(i) (to the extent applicable after giving effect to any payments previously made pursuant to this Section 2.02). (iii)Payments received pursuant to Section 2.01(a)(ii) shall be applied at the times and in the manner set forth therein. (b) To the extent that Maker makes a Payment or Payee receives any Payment or proceeds for Maker's benefit, which are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver, custodian or any other party under any bankruptcy law, common law or equitable cause, then, to such extent, the obligators of Maker hereunder intended to be satisfied by such Payment or proceeds shall be revived and continue as if such Payment or proceeds had not been received by Payee. Section 2.03. Default Rate. Time is of the essence with respect to the times set forth herein for the repayment of the Principal Amount and the interest thereon. Should any amounts due hereunder or under any other Defeasance Document not be paid in full on the date when the same shall be due and payable (whether by acceleration, prepayment permitted hereunder or otherwise), then in such event, the rate of interest to be paid on the entire Principal Amount of this Note and all such other amounts due and payable under this Note and the Defeasance Documents shall be increased to the Default Rate and shall be computed from the Due Date through and including the date, if any, upon which such payment default is fully cured. The foregoing provisions shall not be construed as a waiver by Payee of its right to pursue any other remedies available to it under the Security Agreement or any other Defeasance Document, nor shall it be construed to limit in any way the application of the Default Rate. Section 2.04. Voluntary Prepayments and Defeasements. Maker shall not be permitted to prepay the Principal Amount of this Note prior to the Maturity Date. Maker shall have no rights to defease the Principal Amount of this Note. Page - (5) SECTION 3. DEFAULTS Section 3.01. Defaults. This Note is secured, inter alia, by that certain Defeasance Pledge and Security Agreement of even date herewith (the "Security Agreement"). All terms, covenants, conditions and agreements of the Security Agreement hereby constitute part of this Note, as if the same had been fully set forth herein. Each Event of Default under the Security Agreement or any one or more of the other documents executed by Maker in connection with this Note or the Security Agreement, including, but not limited to, the Defeasance Account Agreement dated of even date herewith (the "Account Agreement"), the Defeasance Assignment and the Assumption and Release Agreement dated of even date herewith (collectively, the Security Agreement together with the Account Agreement and such other defeasance documents, the "Defeasance Documents") shall be an "Event of Default" hereunder. Section 3.02. Remedies. Upon the occurrence of an Event of Default, the entire Principal Amount, accrued and unpaid interest and all other sums due and payable hereunder, or under the Defeasance Documents shall become immediately due and payable at the option of Payee and immediately, and without notice to Maker, interest on the Principal Amount shall accrue at the Default Rate. If there is more than one Maker of this Note, subject to the provisions of Section 4.04 hereof, the undersigned Persons shall each be jointly and severally liable to pay the entire Principal Amount and all other sums becoming due hereunder or under the other Defeasance Documents. SECTION 4. MISCELLANEOUS Section 4.01. Waivers. (a) Maker acknowledges that the loan evidenced by this Note is a commercial transaction and, to the fullest extent permitted by Legal Requirements, as to this Note, the Security Agreement and any other Defeasance Documents securing this Note, Maker hereby waives all applicable exemption rights, whether under the constitution of the State of New York or otherwise and also waives valuation and appraisement, presentment, protest, and demand, notice of protest, demand and dishonor and nonpayment of this Note and, except as specifically provided herein or in the other Defeasance Documents, all other notices or demands to the fullest extent permitted pursuant to Legal Requirements, and hereby expressly agrees that the maturity of this Note or payment hereunder, may be extended from time to time without in any way affecting the liability of maker or of any guarantor of this Note. No notice to, or demand on Maker shall entitle Maker to any other or future notice or demand in the same, similar or other circumstances. Maker further consents to the release of any person liable for this obligation without affecting the liability of any other party hereto or any guarantor hereof. The remedies of Payee provided herein, in the Security Agreement and the other Defeasance Documents, are cumulative and concurrent, and may be pursued singly, successively, or together, at the sole discretion of Payee, and may be exercised as often as the occasion therefor shall occur. Any delay on the part of Payee in exercising any right hereunder shall not operate as a waiver of any right, and any waiver granted for one occasion shall not operate as a waiver in the event of a subsequent default. (b) This Note cannot be modified, terminated, extended, amended or discharged orally. No requirement hereof may be waived at any time except by a writing signed by Payee, nor shall any waiver be operative upon other than a single occasion. All rights and remedies herein specified are intended to be cumulative and not in substitution for any right or remedy otherwise available. In any action or proceeding to recover any sum herein provided for, to the extent permitted by applicable Legal Requirements, no defense of adequacy of security, or that resort must first be had to any other Person, shall be asserted. All references herein to Maker and to Payee shall be deemed to include its successors and assigns. Page - (6) Section 4.02. Taxes. Maker agrees that if, at any time, the United States of America, or any State or Commonwealth thereof or any subdivision of any such State, shall require revenue or other stamps to be affixed to this Note or the Security Agreement, or impose any other tax or charges on the same, Maker will pay the same, with interest and penalties thereon, if any. Section 4.03. Invalidity. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note is held to be invalid or unenforceable by a court of competent jurisdiction, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions of this Note, and the other provisions of this Note shall remain in full force and effect and shall be liberally construed in favor of Payee in order to effect the provisions of this Note. Section 4.04. Exculpation. Notwithstanding any provision herein or in any of the other Defeasance Documents to the contrary, except as set forth in this Section 4.04, Payee shall not enforce the liability and obligation of Maker to perform and observe the obligations contained in this Note, the Security Agreement or the other Defeasance Documents by an action or proceeding wherein a money judgment shall be sought against Maker or any judgment shall be sought against any director, officer, employee, partner or stockholder of Maker, or its general partners (all of the foregoing, collectively, "Principals"). Payee, by accepting this Note, the Security Agreement and the other Defeasance Documents, agrees that it shall not sue for, seek or demand any deficiency judgment against Maker or any judgment, including a judgment for specific performance, against its Principals or any one or more of them in any such action or proceeding, under or by reason of or under or in connection with this Note, the Security Agreement or the other Defeasance Documents except to the extent necessary or appropriate to proceed against or execute or foreclose on any or all of the collateral granted to Payee under the Defeasance Documents. The provisions of this Section 4.04 shall not, however, (a) impair the validity of the indebtedness evidenced by this Note or in any way affect or impair the lien of the Security Agreement or any of the other Defeasance Documents, or the right of Payee to enforce the Security Agreement or otherwise realize upon any collateral securing this Note following an Event of Default; (b) impair the right of Payee to name Maker or any other Person as a party defendant in any action or suit for enforcement under the Security Agreement to the extent necessary to realize upon any collateral securing this Note; (c) INTENTIONALLY DELETED; (d) impair the enforcement of the Defeasance Documents; (e) impair the right of Payee to bring suit with respect to, or Maker's personal liability for, fraud or intentional misrepresentation by Maker or any other Person in connection with this Note, the Security Agreement or any other Defeasance Document; (f) INTENTIONALLY DELETED; (g) INTENTIONALLY DELETED; (h) INTENTIONALLY DELETED; (i) prevent or in any way hinder Payee from exercising, or constitute a defense, or counterclaim or other basis for relief in respect of the exercise of, any other remedy against the collateral securing the Note as provided in the Defeasance Documents or as prescribed by law or in equity in case of Defaults or Events of Default; (j) prevent or in any way hinder Payee from exercising, or constitute a defense, a counterclaim, or other basis for relief in respect of the exercise of its remedies in respect of any judgments or other sums due from Maker to Payee other than under the Defeasance Documents; (k) INTENTIONALLY DELETED; or (l) impair the rights of Payee to bring an action with respect to Maker's obligations or liabilities under the Defeasance Documents if the Securities (as defined in the Security Agreement) pledged under the Defeasance Documents are insufficient (without taking into account (i) reinvestment income, or (ii) failure by any obligor to satisfy its obligations under the Securities) to make timely payments in accordance with this Note and the Defeasance Documents, including payment of this Note in full on the Maturity Date. Page - (7) Section 4.05. Governing Law. (a) This Note was negotiated in New York, and delivered by Maker and accepted by Payee in the State of New York, and the proceeds of this Note were disbursed from New York, which State Maker agrees has a substantial relationship to Payee and Maker and to the transaction embodied hereby, in all respects, including, without limiting the generality of the foregoing, matters of construction, validity, enforceability and performance. This Note and the obligations arising hereunder shall be governed by, and construed in accordance with, the laws of the state of New York applicable to contracts made and performed in such State (without regard to the conflicts of law rules thereof) and any applicable law of the United States of America. To the fullest extent permitted by law, Maker hereby unconditionally and irrevocably waives any claim to assert that the law of any other jurisdiction governs this Note and this Note shall be governed by and construed in accordance with the laws of the State of New York pursuant to ss.5-1401 of the New York General Obligations Law. (b) Any legal suit, action or proceeding against Maker or Payee arising out of or relating to this Note shall be instituted in any federal or state court in New York, New York, pursuant to 5-1402 of the New York General Obligations Law, and Maker waives any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding, and Maker hereby irrevocably submits to the jurisdiction of any such court in any suit, action or proceeding. Maker does hereby designate and appoint C.T. Corporation, having an address at 1633 Broadway, New York, New York 10019, as its authorized agent to accept and acknowledge on its behalf service of any and all process which may be served in any such suit, action or proceeding in any federal or state court in New York, New York, and agrees that service of process upon said agent at said address and written notice of said service of Maker mailed or delivered to Maker in the manner provided in the Security Agreement, shall be deemed in every respect effective service of process upon Maker, in any such suit, action or proceeding in the State of New York. Maker (i) shall give prompt notice to the payee of any changed address of its authorized agent hereunder, (ii) may at any time and from time to time designate a substitute authorized agent with an office in New York, New York (which office shall be designated as the address for service of process), and (iii) shall promptly designate such a substitute it its authorized agent ceases to have an office in New York, New York or is dissolved without leaving a successor. Section 4.06. [Intentionally Omitted] Page - (8) Section 4.07. Maximum Amount. It is the intention of Maker and Payee to conform strictly to the usury and similar laws relating to interest from time to time in force, and all agreements between Maker and Payee, whether now existing or hereafter arising and whether oral or written, are hereby expressly limited so that in no contingency or event whatsoever, whether by acceleration of maturity hereof or otherwise, shall the amount paid or agreed to be paid in the aggregate to payee as interest hereunder or under the other Defeasance Documents exceed the maximum permissible under applicable usury or such other laws (the "Maximum Amount"). In the event, for any reason whatsoever, any payment by or act of Maker pursuant to the terms hereof or pursuant to any requirements of any provision hereof or of the Defeasance Documents shall result in payment of interest which would exceed the Maximum Amount, then ipso facto the obligation of Maker to pay interest or perform such act or requirement shall be reduced to the limit authorized under such Legal Requirements, so that in no event shall Maker be obligated to pay any interest, perform any act, or be bound by any requirement which would result in payment of interest in excess of a sum which is lawfully collectible, and all sums in excess of those lawfully collectible as interest shall, without further agreement or notice between or by any party hereto, be deemed applied upon principal immediately upon receipt of such moneys by payee, with the same force and effect as though Maker had specifically designated such sums to be applied to principal prepayment. Notwithstanding any provision herein to the contrary, however, no such application shall give rise to an obligation on the part of Maker to pay any prepayment premium, if any, payable pursuant to the Defeasance Documents. The provisions of this paragraph shall control every other provision of this Note. Section 4.08. Costs of Collection. Subject to Section 4.04 hereof, Maker agrees to pay all costs and expenses of collection incurred by Payee, in addition to principal, interest, and premiums, if any, and Late Charges, including, without limitation, reasonable attorneys, fees and disbursements, all costs and expenses incurred in connection with the pursuit by Payee of any of its rights or remedies hereunder, under the Security Agreement or any of the other Defeasance Documents or the protection of or realization of collateral or in connection with Payee's collection efforts, whether or not suit on this Note, on any of the other Defeasance Documents or any foreclosure proceeding is filed, and all such costs and expenses shall be payable on demand with interest thereon to be calculated at the Default Rate and shall be secured by the Security Agreement and all other collateral at any time held by Payee as security for Maker's obligations to Payee. Section 4.09. Waiver of Jury Trial. Maker, to the fullest extent it may lawfully do so, waives any right it may have to trial by jury in any action, including, without limitation, any tort action, to interpose any counterclaim in any action (other than a compulsory counterclaim), and to have the same consolidated with any other or separate action brought on or with respect to this Note, the Security Agreement or any other Defeasance Document. Section 4.10. Headings. The section headings in this Note are included herein for convenience of reference only and shall not constitute a part of this Note for any other purpose. Section 4.11. Participation. Payee shall have the right to assign this Note in whole, but not in part, the Security Agreement and/or any of the other Defeasance Documents, and to transfer, assign or sell participation and subparticipations (including blind or undisclosed participation and subparticipations) in the Security Agreement and the other Defeasance Documents and the obligations hereunder to any Person; provided, however, that no participation shall increase, decrease or otherwise affect either Maker's or Payee's obligations hereunder, under the Security Agreement or under any of the other Defeasance Documents. **** Page - (9) IN WITNESS WHEREOF, this Note has been duly executed by Maker, the day and year first above written. CASTLE ROCK FACTORY SHOPS PARTNERSHIP By: Prime Retail, L.P., a Delaware limited partnership, its general partner By: Prime Retail, Inc., a Maryland corporation, its general partner By: /s/ R. Kelvin Antill -------------------- Name: R. Kelvin Antill Title: Executive Vice President - General Counsel and Secretary LOVELAND FACTORY SHOPS LIMITED PARTNERSHIP By: Prime Retail, L.P., a Delaware limited partnership, its general partner By: Prime Retail, Inc., a Maryland corporation, its general partner By: /s/ R. Kelvin Antill --------------------- Name: R. Kelvin Antill Title: Executive Vice President - General Counsel and Secretary EX-10 12 hex1052.txt EXHIBIT 10.52 - FORM OF MODIFICATION AGRMNT MODIFICATION AGREEMENT ---------------------- THIS MODIFICATION AGREEMENT ("Modification") is effective as of December 6, 2002 (the "Modification Date"), by and between GROVE CITY FACTORY SHOPS PARTNERSHIP, a Pennsylvania general partnership, having an address at c/o Prime Retail, L.P., 100 East Pratt Street, 19th Floor, Baltimore, Maryland 21202 (referred to herein as "Property Owner" or sometimes "Maker"), and LASALLE BANK NATIONAL ASSOCIATION, FORMERLY KNOWN AS LASALLE NATIONAL BANK, AS TRUSTEE FOR THE HOLDERS OF ASSET SECURITIZATION CORPORATION, COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1996-MD VI, c/o CapMark Services, L.P., 245 Peachtree Center Avenue, Suite 1800, Atlanta, Georgia (referred to herein as "Lender" or sometimes as "Payee".) WITNESSETH: ----------- WHEREAS, Cross-collateralized Borrowers (as defined in the Mortgage) executed and delivered to Nomura Asset Capital Corporation, a Delaware corporation (the "Original Lender") that certain Promissory Note in the original principal amount of THREE HUNDRED NINETY-ONE MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($391,500,000.00) dated October 31, 1996 (the "Note"), which Note and the indebtedness evidenced thereby or otherwise payable under the loan documents executed in connection therewith (the "Indebtedness"), is secured by, inter alia, (i) that certain Mortgage, Security Agreement, Assignment of Rents and Fixture Filing dated as of October 31, 1996, executed by Property Owner, as mortgagor to Original Lender, as mortgagee, and recorded on November 7, 1996 as Instrument No. 96MR16498 in Book 0224, Page 0831 in the Recorder of Deeds Office of Mercer County, Pennsylvania (the "Recorder's Office") (the "Mortgage") and (ii) those certain documents set forth on the attached Exhibit A which is incorporated herein by reference (the Mortgage and documents set forth on Exhibit A and all other documents evidencing, securing, guaranteeing, indemnifying or governing the Indebtedness are hereinafter collectively referred to as the "Loan Documents" and the loan evidenced thereby is hereinafter referred to as the "Loan".) WHEREAS, the Note is currently secured by mortgages on fifteen (15) properties (the "Cross-collateralized Properties") owned by the Cross-collateralized Borrowers and the Loan is cross-collateralized and cross-defaulted with such mortgages. This Modification is being entered into simultaneously with the defeasance of a portion of the Loan and as a result thereof, thirteen (13) of the Cross-collateralized Properties shall remain as security for the Loan. WHEREAS, Lender and Maker are simultaneously entering into that certain Amended and Restated Note dated of even date herewith (the "Amended and Restated Note"). WHEREAS, Original Lender assigned, sold and transferred its interest in the Loan and all Loan Documents to Lender pursuant to that certain Allonge to Note and an Assignment of Mortgage, Security Agreement, Assignment of Rents and Fixture Filing, dated as of December 16, 1996, and recorded on November 7, 1996 as Instrument No. 00MR11368 in Book 0230, Page 1146 in the Recorder of Deeds Office of Mercer County, Pennsylvania, and Lender is the current owner and holder of the Loan and Loan Documents. Page - (2) WHEREAS, the above-referenced Loan is a part of a mortgage pool known as Asset Securitization Corporation Commercial Mortgage Pass-Through Certificates, Series 1996-MD VI, for which, pursuant to a Pooling and Servicing Agreement dated December 17, 1996, LaSalle Bank National Association, formerly known as LaSalle National Bank, is Trustee. WHEREAS, Property Owner continues to be the owner of the real property and improvements thereon (the "Property") as described on the attached Exhibit B and more specifically described in and encumbered by the Mortgage and the other Loan Documents. WHEREAS, Borrower has requested that Lender agree to certain modifications and amendments to the Mortgage and Lender has agreed to modify and amend the terms and conditions of the Loan Documents as set forth herein. AGREEMENT --------- NOW, THEREFORE, for and in consideration of the matters described in the foregoing recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned hereby represent, warrant, covenant and agree as follows: 1. Recitals. The recitals set forth above are incorporated herein. 2. Representations, Warranties and Covenants of Borrower. (a) Maker hereby represents, warrants and covenants to Lender that: (i) the Mortgage, as amended by this Modification, constitutes a valid first lien on the Property, free and clear of all encumbrances and liens having priority over the lien of the Mortgage, as amended by this Modification, except for the items set forth in the title insurance policy insuring the lien of this Mortgage, as amended by this Modification, as amended by the endorsement to such title policy issued substantially of even date herewith; (ii) there are no defenses, set-offs or rights of defense, set-off or counterclaim, whether legal, equitable or otherwise, to the obligations evidenced by or set forth in the Loan Documents, as modified hereby; (iii) except as set forth in Exhibit C to be approved by Lender in its reasonable discretion, all provisions of the Loan Documents, as modified hereby, are in full force and effect and are hereby ratified and confirmed as true and complete in all material respects as of today's date; (iv) after giving effect to the modifications set forth herein, no Event of Default (as defined in the Mortgage) has occurred or is continuing under any of the Loan Documents; (v) the modifications set forth herein and all transactions contemplated by this Modification shall be completed in accordance with all applicable law; (vi) this Modification and all other Loan Documents are each the legal, valid and binding obligation of Maker, enforceable against Maker in accordance with its terms, except as such enforcement may be stayed or limited by bankruptcy laws, creditors rights laws and equitable principles and such ratification and enforceability shall not be affected in any manner by Lender's consent to this Modification; and (vii) there is no pending, or to the best of Maker's knowledge, threatened condemnation proceedings, lawsuits, claims or criminal proceedings against Property Owner or applicable to the Property which could have a material adverse effect on the Property or Property Owner's ability to perform its respective obligations under the Loan Documents. Page - (3) (b) Maker hereby ratifies, affirms and acknowledges the following covenants and agreements: (i) to pay when and as due all sums due under the Note as modified by the Amended and Restated Note and the other Loan Documents; and (ii) to perform and discharge all obligations imposed under the Note as modified by the Amended and Restated Note, the Mortgage as amended by this Modification, and all other Loan Documents, at the time, in the manner and otherwise in all respects as therein provided. (c) Without limiting the generality of the foregoing, Maker hereby represents, warrants and covenants to Lender that in addition to the Mortgage, this Modification, the Amended and Restated Note, the documents referenced on the attached Exhibit A are a complete and accurate list of all of the Loan Documents with respect to the Property, and each are in full force and effect and there is no Default or Event of Default existing thereunder by any party thereto and no event which, with the passage of time or the giving of notice, or both and the expiration of any grace or cure period, would constitute a Default or Event of Default and such ratification and enforceability shall not be affected in any manner by Lender's consent to this Modification. (d) Without limiting the generality of the foregoing, Maker hereby represents, warrants and covenants to Lender that the consent or approval of the other partners of Property Owner or any other third party is either (i) not required for the execution or delivery by Property Owner of this Modification or any other document or instrument required to consummate this Modification, or (ii) has been obtained. (e) Without limiting the generality of the foregoing, Maker hereby represents, warrants and covenants to Lender that the execution of this Modification by Property Owner will not result in the breach or violation of the terms of its organizational documents nor any agreement to which Property Owner is a party. (f) Maker hereby covenants and agrees to pay Lender an amendment fee in connection with this Modification ("Amendment Fee") in the aggregate amount of SEVEN HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($750,000.00) payable as follows: (i) FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00) due and payable on or before January 11, 2003; and (ii) TWO HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($250,000.00) due and payable on or before February 11, 2003; provided, however, in no event shall Maker pay any portion of the Amendment Fee prior to January 1, 2003. Maker's failure to pay such Amendment Fee on the dates herein provided shall constitute a Default under the Mortgage, as hereby amended. (g) No representation or warranty of Maker made in this Modification contains any untrue statement of material fact or omits to state a material fact necessary in order to make such representations and warranties not misleading in light of the circumstances under which they are made. Page - (4) (h) Maker understands and intends that Lender shall rely on the representations, warranties, affirmations, qualifications and covenants contained herein. None of the representations, warranties, covenants, affirmations, qualifications or agreements contained herein shall limit any representations, warranties, covenants, or obligations of Maker in any other Loan Document. 3. Ratification. Nothing herein contained shall in any manner impair the enforceability or validity of the Note as amended and modified by the Amended and Restated Note, the Mortgage as modified by this Modification, the Loan Documents or any other security for the Indebtedness held by Lender, or alter, waive, annul or affect any provision, condition, or covenant therein or any rights, powers or remedies thereunder, except as specifically provided in this Modification. It is the intent of the parties hereto that the terms and provisions of the Mortgage, as herein amended, shall continue in full force and effect except as specifically modified hereby, and that such terms and provisions, as so modified, are hereby ratified and confirmed. Nothing herein contained is intended as, or shall be construed as, a novation or alteration of the liens, security agreements, guarantees and assignments evidenced by the Mortgage, as modified by this Modification or any other Loan Document, all of which liens, security agreements, guarantees and assignments continue to reflect and retain, without diminution or alteration, their original enforceability, priority and rank. After the date hereof, references in the Note, the Mortgage or the other Loan Documents to the "Mortgage" shall mean the Mortgage, as modified by this Modification and by the Amended and Restated Note. 4. Modification of the Mortgage. The Mortgage is hereby amended and modified, and Borrower and Lender hereby agree as follows: (i) The following provisions are hereby added after the end of the second sentence in Section 5.01 of the Mortgage: On the Modification Date, the Cross-collateralized Borrowers have deposited ONE MILLION TWO HUNDRED FIFTY THOUSAND AND NO/l00 DOLLARS ($1,250,000.00) into the Cash Collateral Account. The Cross-collateralized Borrowers acknowledge and agree that on February 11, 2003 they shall deposit an additional TWO HUNDRED FIFTY THOUSAND AND NO/l00 DOLLARS ($250,000.00) into the Cash Collateral Account and an additional FIVE HUNDRED THOUSAND AND NO/l00 DOLLARS ($500,000.00), or the appropriate lesser amount, as determined by Lender, on the eleventh day of each month thereafter for seven (7) consecutive months (with the last such payment being on September 11, 2003), until such time as the aggregate amount in the Debt Service Payment Sub-Account shall equal FIVE MILLION AND NO/l00 DOLLARS ($5,000,000.00) pursuant to the terms and conditions of this sentence, which sums, promptly upon receipt, shall be disbursed to the Debt Service Payment Sub-Account pursuant to the terms of this Section 5.01. (ii) Section 15.02(a) of the Mortgage is hereby amended and restated in its entirety as follows: Page - (5) If such prepayment or defeasance is a prepayment or defeasance in part, but not in whole, Mortgagee shall have received on the date proposed for such prepayment an amount (the "Release Price") equal to the greater of (a) the respective release price as set forth on the attached Exhibit I which is incorporated herein by reference or (b) 90% or l00%, as indicated for each respective property on Exhibit I, of the Net Proceeds (as hereinafter defined) or Net Refinancing Proceeds (as hereinafter defined), as applicable, of the respective property. "Net Proceeds" shall mean the gross cash proceeds from the sale of all or a portion of the Trust Property or equity interests therein, to the extent such sale constitutes a "Transfer" under the Mortgage securing the Loan minus the actual expenses of the sale (including, without limitation, brokerage fees, actual costs, fees and expenses related to any defeasance of the applicable portion of the Loan, transfer taxes, mortgage taxes, title insurance premiums, recording fees and legal fees) which are paid to unaffiliated third parties and are incurred by Mortgagor in connection therewith, which expenses of sale shall in no event exceed 6% of the gross cash proceeds from the sale, or such other amount as approved by Mortgagee in its reasonable discretion. "Net Refinancing Proceeds" shall mean the gross cash proceeds from the refinancing of all or a portion of the entire Loan, minus reasonable and customary expenses of such refinancing which are paid either by Mortgagor or from the loan proceeds of the refinancing and which are paid in cash to unaffiliated third parties and all third party out-of-pocket costs incurred by Mortgagor in connection therewith, which expenses of such refinancing shall in no event exceed 5% of the gross cash proceeds from such refinancing of all or a portion of the entire Loan, as the case may be, or such other amount as approved by Mortgagee in its reasonable discretion. (iii) The following Exhibit I is hereby added to the Mortgage: EXHIBIT I --------- Release Price Release Price equals greater of amount shown below or 90% or 100% respectively of net proceeds of sale or refinance
Cross-collateralized Properties Release Price Percentage 1. Prime Outlets at Florida City $ 1,757,500 90% Dade County, Florida 2. Prime Outlets at Gainesville $ 6,700,000 100% Cooke County, Texas 3. Prime Outlets at Darien $ 6,500,000 100% McIntosh County, Georgia 4. Prime Outlets at Huntley $ 8,926,250 90% Kane County, Illinois 5. Prime Outlets at Gulfport $21,812,500 90% Harrison County, Mississippi
Page - (6)
6. Prime Outlets at Naples $ 8,500,000 100% Collier County, Florida 7. Prime Outlets at Ellenton $65,195,000 90% Manatee County, Florida 8. Prime Outlets at Jeffersonville I $51,616,000 90% Fayette County, Ohio 9. Prime Outlets at San Marcos I $58,350,000 90% Hays County, Texas 10. Prime Outlets at Morrisville $10,000,000 100% Wake County, North Carolina 11. Prime Outlets at Grove City $75,441,000 90% Mercer County, Pennsylvania 12. Prime Outlets at Odessa $ 6,000,000 100% Lafayette County, Missouri 13. Prime Outlets at Lebanon $23,755,000 90% Lebanon, Tennessee
5. Miscellaneous. The parties hereby further agree as follows: (a) Further Assurances and Conditions. Maker agrees to sign, execute and deliver and to do or make, upon the written request of Lender, any and all agreements, instruments, papers, deeds, acts or things, as may be reasonably required by Lender to effectuate the purpose of this Modification. Maker shall have paid Lender's reasonable legal fees and costs, including the cost of any title report update, in connection with reviewing and approving this Modification. (b) Completeness and Modification. This Modification, the Amended and Restated Note and the other modification agreements entered simultaneously between the Cross-collateralized Borrowers and Lender shall constitute the entire agreement between the parties hereto and thereto with respect to the transactions contemplated hereby and thereby and shall supersede all prior discussions, understandings, agreements and negotiations between the parties hereto. This Modification may be modified only by written instrument duly executed by all of the parties hereto. (c) Successors and Assigns. This Modification shall be binding on and inure to the benefit of the parties hereto and their respective successors, participants and assigns. Page - (7) (d) Governing Law. This Modification and all documents referred to herein shall be governed by and construed and interpreted in accordance with the Applicable Law provision set forth in Article XVIII of the Mortgage. (e) No Partnership. This Modification does not and shall not be construed to create a partnership, joint venture or any other relationship between the parties hereto except the relationship as debtor and creditor specifically established by the Loan Documents. (f) Headings. Paragraph or other headings contained in this Modification are for reference purposes only and are not intended to affect in any way the meaning or interpretation of this Modification. (g) Counterparts. This Modification may be executed in any number of counterparts and each such duplicate original shall be deemed to be an original. (h) Time of Essence. Time is of the essence with respect to this Modification and of each and every term, covenant and condition herein. (i) Definitions. All capitalized terms not defined herein shall have the same meaning as set forth in the Mortgage or the documents referenced on the attached Exhibit A, as the case may be. (j) Lender's Acknowledgment. This Modification is being entered into simultaneously with the defeasance of a portion of the Loan. Prime Retail Defeasance I, L.L.C., a Delaware limited liability company (the "Defeasance Borrower"), has assumed a Defeasance Promissory Note evidencing the partial defeasance of the Loan. The Property Owner is executing, at the request of Lender, the Maintenance Agreement and Guaranty of Non-Recourse Carve-out Matters (the "Maintenance Agreement and Guaranty") pursuant to which the Property Owner (i) agrees to cause the Defeasance Borrower to, or shall on behalf of the Defeasance Borrower, among other things, comply with certain legal formalities and maintain its existence in good standing and (ii) guarantees to the Payee performance by the Defeasance Borrower of certain liabilities and obligations of the Defeasance Borrower. Lender consents to Borrower's execution of the Maintenance Agreement and Guaranty and agrees that such execution shall not constitute a breach of the representations, warranties and covenants made by Borrower in connection with the Loan, and specifically, but not limited to, the representations, warranties and covenants set forth in Section 2.02(h) of the Mortgage. [SIGNATURES APPEAR ON FOLLOWING PAGE] Page - (8) IN WITNESS WHEREOF, Property Owner and Lender each has executed and delivered this Modification under seal as of the day and year first above written. WITNESSES: PROPERTY OWNER: --------------- /S/ GROVE CITY FACTORY SHOPS PARTNERSHIP, a - ------------------------------ Pennsylvania general partnership Print name: Dana C. Lewellen By: Prime Retail, L.P., a Delaware limited partnership, its managing general partner /S/ - ------------------------------ Print name: Mark Hertz By: Prime Retail, Inc., a Maryland corporation, its general partner By: /S/ (SEAL) --------------------------- Name: R. Kelvin Antill Title: Executive Vice President - General Counsel & Secretary Page - (9) WITNESSES: LENDER: ------- /S/ LASALLE BANK NATIONAL ASSOCIATION, - ------------------------------ FORMERLY KNOWN AS LASALLE NATIONAL BANK, Print name: Ada J. Stevenson AS TRUSTEE FOR THE HOLDERS OF ASSET SECURITIZATION CORPORATION, COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1996-MD VI By: GMAC Commercial Mortgage Corporation, a California corporation, Special Servicer By: /S/ (SEAL) -------------------------- Name: E. Anthony Lauerman III Title: Vice President Page - (10) Borrower: STATE OF MARYLAND ) ) ss.: CITY OF BALTIMORE ) On this 4th day of December, 2002, before me, the undersigned officer, personally appeared R. Kelvin Antill, who acknowledged himself to be the EVP, GC & Secretary of Prime Retail, Inc., a Maryland corporation, sole General Partner of Prime Retail, L.P., a Delaware limited partnership, the Managing Partner of Grove City Factory Shops Partnership, a Pennsylvania general partnership, and that he as such EVP, GC & Secretary being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation, as sole General Partner of the limited partnership as the Managing Partner of the general partnership, by himself as EVP, GC & Secretary. In witness whereof, I hereunto set my hand and official seal. /S/ ------------------------------------- Gail R. Steptoe Title of Officer Gail R. Steptoe Notary Public State of Maryland My Commission Expires December 13, 2005 Page - (11) Lender: STATE OF PENNSYLVANIA ) ) ss.: COUNTY OF MONTGOMERY ) I, Donna Lisa Bilinski, a Notary Public, do hereby certify that E. Anthony Lauerman III, personally known to me to be the Vice President of GMACCM, a corporation and personally known to me to be the same person whose name is subscribed to the foregoing document, appeared before me this day in person and acknowledged that as such he/she signed and delivered the said document as his/her free and voluntary act and deed and the free and voluntary act and deed of said entity, being authorized to do so, for the use and purposes therein set forth. Given under my hand and notarial seal this 3rd day of December, 2002. /S/ (SEAL) ----------------------------------- Donna Lisa Bilinski Notary Public My Commission Expires: NOTARIAL SEAL DONNA LISA BILINSKI, Notary Public Horsham Twp., Montgomery County My Commission Expires Jan. 26, 2004 EX-12 13 hex121.txt EXHIBIT 12.1 - STMNT RE: COMPUTATION OF RATIOS Exhibit 12.1 PRIME RETAIL, INC. EXHIBIT 12.1: STATEMENTS RE: COMPUTATION OF RATIOS (Amounts in thousands, except for ratio information) In accordance with the requirements of FAS No. 144, we have classified the operating results, including gains and losses related to disposition, for certain properties either disposed of or classified as assets held for sale during 2002 as discontinued operations for all periods presented. The computation of ratios presented below are based on results from continuing operations.
- ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Loss from continuing operations before minority interests $ (101,010) $ (99,945) (Gain) loss on sale of real estate (5,802) 1,063 Interest incurred 58,574 75,451 Provision for asset impairment 84,093 63,026 Amortization of deferred financing costs 5,272 6,341 ---------- --------- Earnings 20,060 51,573 ---------- --------- Interest incurred 58,574 75,451 Amortization of deferred financing costs 5,272 6,341 Preferred stock distributions and dividends 22,672 22,672 ---------- --------- Combined Fixed Charges and Preferred Stock Distributions and Dividends 86,518 104,464 ---------- --------- Excess of Combined Fixed Charges and Preferred Stock Distributions and Dividends over Earnings $ (45,391) $ (58,528) ========== ========= ====================================================================================================================================
EX-21 14 hex211.txt EXHIBIT 21.1 - SUBSIDIARIES OF PRIME RETAIL, INC. Exhibit 21.1 Page 1
Subsidiary State of Jurisdiction Owned(1) - -------------------------------------------------------------------------------------------------------------------------------- 1. Anderson Outlets, L.L.C. Delaware 20(5) 2. Arizona Factory Shops Partnership Arizona 50(8) 3. Arizona Factory Shops Limited Partnership Delaware 100 4. Arizona Outlets, L.L.C. Delaware 100 5. Bend Factory Outlets Limited Partnership Delaware 100 6. Birch Run Outlets II, L.L.C. Delaware 30(2) 7. Birch Run Outlets, L.L.C. Delaware 30(2) 8. BRWH, L.L.C. Delaware 100 9. Buckeye Factory Shops Limited Partnership Delaware 100 10 Calhoun Outlets, L.L.C. Delaware 20(5) 11. Carolina Factory Shops Limited Partnership Delaware 100 12. Castle Rock Factory Shops Partnership Colorado 100 13. Chesapeake Development Limited Partnership Delaware 100 14. Coral Isle Factory Shops Limited Partnership Delaware 100 15. DesignerConnection.com, Inc. Maryland 100(3) 16. E-Outlets Resolution Corp. Maryland 99(3) 17. Factory Outlets at Post Falls Limited Partnership Delaware 100 18. Fine Furniture Direct, Inc. Maryland 44.57(4) 19. Finger Lakes Outlet Center, L.L.C. Delaware 100 20. First HGI, Inc. Delaware 100 21. First Horizon Group Limited Partnership Delaware 100 22. Florida Keys Factory Shops Limited Partnership Illinois 100 23. FP Investment, L.L.C. Delaware 49(5) 24. Gaffney Outlets, L.L.C. Delaware 20(5) 25. Gainesville Factory Shops Limited Partnership Illinois 100 26. Grove City Factory Shops Partnership Pennsylvania 100 27. Gulf Coast Factory Shops Limited Partnership Illinois 100 28. Gulfport Factory Shops Limited Partnership Delaware 100 29. Hagerstown Outlets, L.L.C. Delaware 30(2) 30 Hagerstown Outlets Subsidiary, L.L.C. Delaware 30(2) 31. Huntley Factory Shops Limited Partnership Illinois 100 32. Kansas City Factory Shops Limited Partnership Delaware 100 33. Latham Factory Stores Limited Partnership Delaware 100 34. Latham Outlets, L.L.C. Delaware 20(5) 35. Lee Outlets, L.L.C. Delaware 20(5) 36. Lodi Outlets, L.L.C. Delaware 20(5) 37. Loveland Factory Shops Limited Partnership Delaware 100 38. Magnolia Bluff Factory Shops Limited Partnership Delaware 100 39. Market Street, Ltd. Tennessee 99(7) 40. MG Long Island Limited Partnership Virginia 95(10) 41. MG Patchogue II Limited Partnership Virginia 51(11) 42. MG Patchogue Limited Partnership D.C. 50(12) 43. Oak Creek Factory Outlets Limited Partnership Delaware 100 44. Ohio Factory Shops Partnership Ohio 100 45. Outlet Village of Hagerstown Limited Partnership Delaware 30(2) 46. Outlet Village of Kittery Limited Partnership Delaware 100 47. Outlet Village of Lebanon Limited Partnership Delaware 100 48. Outlet Village of Puerto Rico Limited Partnership, S.E. Delaware 100 49. Oxnard Factory Outlet Partners California 50(9) 50. Oxnard Factory Shops Limited Partnership Delaware 100 51. Oxnard Outlets, L.L.C. Delaware 100 52. PFP Venture, L.L.C. Delaware 20(5) 53. Prime Bellport Land, L.L.C. Delaware 100 54. Prime Bridge JV, L.L.C. Delaware 100 55. Prime Hagerstown Land, L.L.C. Delaware 100 56. Prime Lee Development Limited Partnership Delaware 100 57. Prime Outdoor, L.P. Delaware 100 58. Prime Outlets at Edinburgh Land, L.L.C. Delaware 100 59. Prime Outlets at Hagerstown Management, L.L.C. Delaware 100 60. Prime Outlets at Niagara Falls USA Limited Partnership Delaware 100 61. Prime Outlets at Perryville Limited Partnership Maryland 100 62. Prime Outlets at Perryville, Inc. Maryland 100 63. Prime Outlets at San Marcos II Limited Partnership, L.L.C. Delaware 100 64. Prime Outlets at Williamsburg II Limited Partnership Delaware 100 65. Prime Retail Capital I, L.L.C. Delaware 100
Exhibit 21.1 Page 2
Subsidiary State of Jurisdiction Owned(1) - -------------------------------------------------------------------------------------------------------------------------------- 66. Prime Retail Capital III, L.L.C. Delaware 100 67. Prime Retail Capital IV, L.L.C. Delaware 100 68 Prime Retail Defeasance I, Inc. Delaware 100 69 Prime Retail Defeasance I, L.L.C. Delaware 100 70. Prime Retail E-Commerce, Inc. Maryland 100(6) 71. Prime Retail Europe, L.L.C. Delaware 100 72. Prime Retail Europe, L.P. Delaware 100 73. Prime Retail Finance II, Inc. Maryland 100 74. Prime Retail Finance III, Inc. Maryland 100 75. Prime Retail Finance IV, Inc. Maryland 100 76. Prime Retail Finance IX, Inc. Maryland 100 77. Prime Retail Finance V, Inc. Maryland 100 78. Prime Retail Finance VI, L.L.C. Delaware 100 79. Prime Retail Finance VII, Inc. Maryland 100 80. Prime Retail Finance VIII, Inc. Maryland 100 81. Prime Retail Finance X, Inc. Maryland 100 82. Prime Retail Finance XI, Inc. Maryland 100(2) 83. Prime Retail Finance XII, Inc. Maryland 100 84. Prime Retail Finance, Inc. Maryland 100 85. Prime Retail Furniture, Inc. Maryland 100(6) 86. Prime Retail Management Limited Partnership Delaware 100 87. Prime Retail Puerto Rico Management Company Delaware 100 88. Prime Retail Services Limited Partnership Delaware 100 89. Prime Retail Services, Inc. Maryland 100(6) 90. Prime Retail Stores, Inc. Maryland 100(6) 91. Prime Warehouse Row Limited Partnership Illinois 100 92. Prime Williamsburg Development, L.L.C. Delaware 100 93. San Marcos Factory Stores, Ltd. Texas 100 94. Second HGI, Inc. Delaware 100 95. Second Horizon Group Limited Partnership Delaware 100 96. Shasta Outlet Center Limited Partnership Delaware 100 97. Sun Coast Factory Shops Limited Partnership Delaware 100 98. The Prime Outlets at Bellport I, L.L.C. Delaware 100 99. The Prime Outlets at Bellport II, L.L.C. Delaware 100 100. The Prime Outlets at Birch Run, L.L.C. Delaware 100 101. The Prime Outlets at Calhoun Limited Partnership Delaware 100 102. The Prime Outlets at Camarillo, L.L.C. Delaware 100 103. The Prime Outlets at Conroe Limited Partnership Delaware 100 104. The Prime Outlets at Edinburgh Limited Partnership Delaware 100 105. The Prime Outlets at Edinburgh, L.L.C. Delaware 100 106. The Prime Outlets at Gilroy Limited Partnership Delaware 100 107. The Prime Outlets at Jeffersonville, L.L.C. Delaware 100 108. The Prime Outlets at Lebanon Limited Partnership Illinois 100 109. The Prime Outlets at Lee Limited Partnership Delaware 100 110. The Prime Outlets at Michigan City Limited Partnership Delaware 100 111. The Prime Outlets at Vero Beach Limited Partnership Delaware 100 112. The Prime Outlets at Williamsburg, L.L.C. Delaware 100 113. The Prime Outlets at Woodbury, L.L.C. Delaware 100 114. Triangle Factory Stores Limited Partnership Illinois 100 115. Triple Outlet World Joint Venture Florida 30(2) 116. Warehouse Row, Ltd. Tennessee 99(7) 117. Williamsburg Outlets, L.L.C. Delaware 30(2)
- ---------------------- 1. Reflects collective ownership interests of Prime Retail, Inc. and Prime Retail, L.P. 2. Owned through Prime Retail, L.P.'s ownership of BRWH, L.L.C. 3. Owned by Prime Retail E-Commerce, Inc. 4. Owned by Prime Retail Furniture, Inc. 5. Owned through Prime Retail, L.P.'s ownership interest of Prime Bridge JV, L.L.C. 6. Ownership of 100% of Preferred Stock 7. Reflects percentage of economic interest owned 8. Owned by Arizona Factory Shops Limited Partnership 9. Owned by Oxnard Factory Shops Limited Partnership 10. Owned by Prime Bellport Land, L.L.C. 11. Owned by The Prime Outlets at Bellport II, L.L.C. 12. Owned by The Prime Outlets at Bellport, L.L.C. EX-23 15 hex231.txt EXHIBIT 23.1 - CONSENT OF ERNST & YOUNG Exhibit 21.3 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-19491) pertaining to the Prime Retail, Inc. Stock Incentive Plans of our report dated March 21, 2003, with respect to the consolidated financial statements and schedule of Prime Retail, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2002. /s/ Ernst & Young LLP Baltimore, Maryland March 28, 2003 EX-99 16 hex991.txt EXHIBIT 99.1 - CERTIFICATION BY CEO EXHIBIT 99.1 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 Annual Report on Form 10-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: March 28, 2003 /s/ Glenn D. Reschke -------------------- --------------------- Glenn D. Reschke Chairman and Chief Executive Officer EX-99 17 hex992.txt EXHIBIT 99.2 - CERTIFICATION BY CFO EXHIBIT 99.2 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 Annual Report on Form 10-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: March 28, 2003 /s/ Robert A. Brvenik -------------------- ---------------------- Robert A. Brvenik President, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----