SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (Fee Required)
For the fiscal year ended December 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (No Fee Required)
Commission file number: 001-13301
PRIME RETAIL, INC.
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(Exact name of Registrant as specified in its Charter)
Maryland 38-2559212
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(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
100 East Pratt Street
Baltimore, MD 21202 (410) 234-0782
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(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:
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None
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(Title of class)
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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
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the Common Stock held by non-affiliates of the
registrant was approximately $7,844,024 on March 25, 2002 (based on the closing
price per share as reported on the OTC Bulletin Board).
The number of outstanding shares of the registrant's Common Stock as of March
27, 2002 was 43,577,916.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents of the registrant are incorporated herein by
reference:
Part of Form 10-K
Into Which Document
Document Is Incorporated
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Proxy Statement for the 2002 annual meeting of Part III of Form 10-K
shareholders
PRIME RETAIL, INC.
Form 10-K
December 31, 2001
TABLE OF CONTENTS
Part I Page
Item 1. Business...................................................... 2
Item 2. Properties.................................................... 6
Item 3. Legal Proceedings............................................. 9
Item 4. Submission of Matters to a Vote of Security Holders........... 11
Part II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 12
Item 6. Selected Financial Data....................................... 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 15
Item 7A. Quantitative and Qualitative Disclosures About
Material Risk............................................... 36
Item 8. Financial Statements and Supplementary Data................... 36
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 36
Part III
Item 10. Directors and Executive Officers of the Registrant............ 37
Item 11. Executive Compensation........................................ 37
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 37
Item 13. Certain Relationships and Related Transactions................ 37
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................. 37
Signatures.................................................... 42
PART I
ITEM 1 -- BUSINESS
The Company
Prime Retail, Inc. (the "Company") was organized as a Maryland corporation
on July 16, 1993. We are a self-administered and self-managed real estate
investment trust ("REIT") that primarily owns and operates outlet centers. As of
December 31, 2001, our outlet center portfolio, including three properties owned
through joint venture partnerships, consists of 45 properties (the "Properties")
in 26 states (including Puerto Rico), which total 12,670,000 square feet of
gross leasable area ("GLA"). As a fully-integrated real estate firm, we provide
accounting, finance, leasing, marketing, and management services for the
Properties. Prime Retail, L.P. (the "Operating Partnership"), a Delaware limited
partnership, is the entity through which we conduct substantially all of our
business and operations and own (either directly or through subsidiaries)
substantially all of our assets including the Properties. We control the
Operating Partnership as its sole general partner and are dependent upon the
distributions or other payments from the Operating Partnership to meet our
financial obligations.
Unless the context otherwise requires, all references to "we," "us," "our"
or the "Company" herein mean Prime Retail, Inc. and those entities owned or
controlled by Prime Retail, Inc., including the Operating Partnership.
Our principal executive offices are located at 100 East Pratt Street, 19th
Floor, Baltimore, Maryland 21202 and our telephone number is 410-234-0782.
Tax Status
We have elected to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, we generally
are not subject to federal income tax at the corporate level on income we
distribute to our stockholders so long as we distribute at least 90% of our
taxable income (excluding any net capital gain) each year. Since our initial
public offering ("IPO") on March 22, 1994, we believe that we have complied with
the tax regulations to maintain our status as a REIT. If we fail to qualify as a
REIT in any taxable year, we will be subject to federal income tax (including
any applicable alternative minimum tax) on our taxable income at regular
corporate rates. Even if we qualify as a REIT, we may be subject to certain
state and local taxes on our income and property.
Business of the Company
We are engaged primarily in the ownership, leasing, marketing and
management of outlet centers. Outlet centers are an established segment of the
retail industry, enabling value-oriented shoppers to purchase designer and
brand-name products directly from manufacturers at discounts.
Since entering the outlet center business in 1988 (as the retail division
of The Prime Group, Inc. ("PGI"), from which we later acquired certain
Properties and simultaneously assumed management and development operations with
the completion of our IPO), we have become a significant owner, operator and
developer in the outlet center sector. Our outlet centers feature a diversified
mix of nationally recognized manufacturers of designer and brand name
merchandise with which we have long-standing relationships. As of December 31,
2001, our outlet center portfolio consisted of 45 properties in 26 states
(including Puerto Rico) totaling 12,670,000 square feet of GLA. The average
outlet center in our portfolio contained approximately 281,556 square feet of
GLA at December 31, 2001.
Business Strategy
Our current strategy is to use the cash flow from the Properties to fund
property level improvements and reduce debt levels over time. We will also
pursue, on a selective basis, the sale of properties, including (i) outlet
centers, (ii) community centers and (iii) land holdings, in order to reduce our
overall leverage. See Item 7 - "Management's Discussion of Financial Condition
and Results of Operations" contained herein for recent developments.
We actively manage the Properties in an effort to maintain and increase the
sales and profitability of our merchants and ultimately improve occupancy levels
and rental income. In this regard we have employed and will employ various
strategies, including the following:
o Tenant Mix. We will continue to evaluate the tenant mix at the Properties
and seek to enhance, if possible, the representation of those tenants
considered the biggest and best draws in the outlet industry. We believe
that an increase in the representation of such tenants positively affects
consumer traffic and leads to overall higher sales for all tenants.
Additionally, we will continue to explore the addition of new tenants to
the outlet sector to strengthen our competitive position.
o Marketing Strategies. We operate the majority of our current outlet center
portfolio under the "Prime Outlets" brand name. In addition to the "Prime
Outlets" brand name, we use on-site management teams to develop
individualized property specific marketing programs. In addition, we have
also augmented marketing dollars received from tenants with our own
contributions aggregating approximately $3.8 million during 2001. We have
and will continue to evaluate our marketing programs and make enhancements
as appropriate. Furthermore, we will continue to seek strategic marketing
alliances with companies who desire to utilize the customer base of our
outlet center portfolio.
o Operating Expenses. Generally, we manage and lease our properties with
in-house personnel, thereby reducing our reliance on third-party service
providers and enabling us to continually monitor and control the expenses
associated with these functions. We strive to minimize the occupancy cost
of our tenants through active management of operating expenses at the
property, regional and corporate levels. Whenever possible, we leverage the
size of our portfolio to obtain favorable rates from vendors and suppliers.
Competition
Our outlet centers compete for customers primarily with traditional
shopping malls, "off-price" retailers and other outlet centers. The tenants of
outlet centers usually attempt to avoid direct competition with major retailers
and their own full-price stores. They accomplish this by locating outlet stores
only in outlet centers at least 20 miles from the nearest regional mall. For
this reason, our outlet centers are often located in relatively undeveloped
areas and therefore compete only to a limited extent with traditional retail
malls in or near metropolitan areas. In addition to the traditional sources of
competition faced by our outlet centers, our outlet centers also compete with
web-based and catalogue retailers for customers.
Because a number of our outlet centers are located in relatively
undeveloped areas, there are often other potential sites for retail
opportunities near our outlet centers that may be developed by competitors. The
existence or development of other retail venues with a more convenient location
or the offer of lower rent may attract our tenants or cause them to seek more
favorable lease terms at or prior to renewal of their leases with us and,
accordingly, may affect adversely the business, revenues and sales volume of our
outlet centers.
In addition, the success of tenants in our outlet centers which are located
in relatively undeveloped areas, and thus the success of such outlet centers
themselves, depends on shoppers traveling significant distances to shop. If
shoppers should become less willing to travel the distances necessary to shop at
our remote outlet centers, the business of our tenants would likely decline.
Such a decline would likely cause the value, business, revenue and sales volume
of such outlet centers to decline.
Our community shopping centers compete with similar properties located in
the same geographic trade areas.
Environmental Matters
Under various federal, state and local laws and regulations, an owner of
real estate is liable for the costs of removal or remediation of certain
hazardous substances on their property. Such laws often impose liability without
regard to whether the owner knew of, or was responsible for, the presence of the
hazardous substances. The costs of remediation or removal may be substantial,
and the presence of the hazardous substances, or the failure to promptly
remediate them, may adversely affect the owner's ability to sell the real estate
or to borrow using the real estate as collateral. In connection with our
ownership and operation of the Properties, we may be potentially liable for the
costs of removal or remediation of hazardous substances.
We have no knowledge, nor have we been notified by any governmental
authority, of any material noncompliance, liability or claim relating to
hazardous substances in connection with any properties, in which we now have or
heretofore had an interest. However, no assurances can be given that (i) future
laws, ordinances or regulations will not impose any material environmental
liability or (ii) the current environmental condition of the Properties will not
be affected by merchants and occupants of the Properties, by the condition of
properties in the vicinity of the Properties (such as the presence of
underground storage tanks) or by third parties unrelated to the us.
Insurance
Recent events and the state of the insurance industry in general have
resulted in substantial increases to insurance costs, and in some cases, changes
in the economic viability of certain coverages. Nevertheless, we believe that
each of the Properties is covered by adequate fire, flood, earthquake and
property insurance provided by reputable companies and with commercially
reasonable deductibles and limits.
Employees
As of December 31, 2001, we had 772 employees. We believe that our
relations with employees are satisfactory.
Liquidity
Our liquidity depends on cash provided by operations and potential capital
raising activities such as funds obtained through borrowings, particularly
refinancings of existing debt, and cash generated through asset sales. Although
we believe that estimated cash flows from operations and potential capital
raising activities will be sufficient to satisfy our scheduled debt service
obligations and sustain our operations for the next year, there can be no
assurance that we will be successful in obtaining the required amount of funds
for these items or that the terms of the potential capital raising activities,
if they should occur, will be as favorable as we have experienced in prior
periods.
During 2002, we are required to make certain additional mandatory principal
pay-downs to a mezzanine loan (the "Mezzanine Loan") aggregating $25,367 from
net proceeds from asset dispositions or other capital transactions within
specified periods. Although we are in the process of seeking to generate
additional liquidity though new financings and the sale of assets, there can be
no assurance that we will be able to complete asset dispositions or other
capital transactions within the specified periods or that such asset
dispositions or other capital transactions, if they should occur, will generate
sufficient proceeds to make the additional mandatory pay-downs of the Mezzanine
Loan. Any failure to satisfy these mandatory principal prepayments within the
specified time periods indicated will constitute a default under the Mezzanine
Loan.
As of December 31, 2001, we were in compliance with all financial debt
covenants under our recourse loan agreements. However, there can be no assurance
that we will be in compliance with our financial debt covenants in future
periods since our future financial performance is subject to various risks and
uncertainties, including, but not limited to, the effects of increases in market
interest rates from current levels, the risk of potential increases in vacancy
rates and the resulting impact on our revenue, and risks associated with
refinancing our current debt obligations or obtaining new financing under terms
less favorable than we have experienced in prior periods.
See Item 7 - "Management's Discussion of Financial Condition and Results of
Operations" contained herein for additional information.
Executive Officers
The following table sets forth the name and position of the current
executive officers of the Company as of the date of this filing along with their
age as of December 31, 2001:
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Name Position Age
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Glenn D. Reschke President and Chief Executive Officer, 50
Chairman of the Board
R. Kelvin Antill Executive Vice President - General Counsel 42
and Secretary
Robert A. Brvenik Executive Vice President - Chief Financial 46
Officer and Treasurer
David G. Phillips Executive Vice President - Leasing, International 40
and New Business Development
Frederick J. Meno IV Senior Vice President - Operations & Marketing 44
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Glenn D. Reschke. Glenn D. Reschke is President, Chief Executive Officer
and Chairman of the Board of Directors. Reporting to the Board of Directors, Mr.
Reschke is responsible for all aspects of the Company, its outlet centers and
all its employees, including the leasing, operations, marketing, development,
finance and administrative functions. In addition, Mr. Reschke is responsible
for developing and implementing the long-term strategic goals and objectives of
the Company as approved by the Board of Directors. Mr. Reschke has been a member
of the Board of Directors since 1997. Mr. Reschke became President and Chief
Operating Officer of the Company on October 6, 1999; acting Chief Executive
Officer on February 25, 2000; and Chief Executive Officer and Chairman of the
Board of Directors of the Company on July 19, 2000. From the Company's IPO in
1994 through October 6, 1999, Mr. Reschke served as Executive Vice President -
Development and Acquisitions. Prior to his employment by the Company, Mr.
Reschke worked for The Prime Group, Inc. ("PGI") which he joined 1983 and, from
that time until the Company's IPO, served as Vice President, Senior Vice
President and Executive Vice President. Mr. Reschke was responsible for PGI's
multi-family, senior housing, single family and land development divisions. Mr.
Reschke received a Masters in Business Administration from Eastern Michigan
University with a specialization in finance after receiving a Bachelor of
Science degree with honors in Chemical Engineering from Rose Hulman Institute of
Technology in Terre Haute, Indiana.
R. Kelvin Antill. R. Kelvin Antill is Executive Vice President - General
Counsel and Secretary of the Company. Mr. Antill assumed his current position on
January 31, 2002. Mr. Antill joined the Company in 1995. Since joining the
Company, Mr. Antill served as Vice President - Assistant General Counsel and
Senior Vice President - Assistant General Counsel. Prior to joining the Company,
Mr. Antill was associated for three years with Ballard, Spahr, Andrews and
Ingersoll, and for four years prior to that with Frank, Bernstein, Conway &
Goldman, both based in Baltimore, Maryland. Mr. Antill received a Juris
Doctorate from the University of Virginia and a Bachelor of Arts in Economics
with an additional emphasis in Government and Politics from the University of
Maryland at College Park. Mr. Antill is licensed to practice law in the state of
Maryland.
Robert A. Brvenik. Robert A. Brvenik is Executive Vice President - Chief
Financial Officer and Treasurer of the Company. Mr. Brvenik joined the Company
and assumed his current position in 2000. Mr. Brvenik's responsibilities with
the Company include capital market activities, increasing revenue and occupancy,
corporate budgeting, financial reporting, investor relations, accounting,
taxation, treasury, and management information systems. Prior to joining the
Company, Mr. Brvenik was associated for 13 years with Pyramid Management Group,
Inc. where he served in several key capacities including Chief Financial
Officer, Chief Operating Officer, Director of Development and Senior Leasing
Representative, in addition to liaison with several large commercial and
investment banks. Mr. Brvenik has also held positions at Arthur Andersen & Co.
and Citicorp. He received his B.S. in Accounting from Utica College of Syracuse
University and is a Certified Public Accountant.
David G. Phillips. David G. Phillips is Executive Vice President - Leasing,
International and New Business Development of Prime Retail. Mr. Phillips assumed
his current position on January 10, 2002. In this capacity, he focuses on
increasing occupancy and revenue throughout the Company's outlet center
portfolio and oversees the Company's international interests. From the Company's
IPO in 1994 until January 9, 2002, Mr. Phillips held various management
positions, including Executive Vice President - Operations, Marketing and
Leasing, and Executive Vice President - International. Prior to his employment
with the Company, Mr. Phillips worked for PGI from 1989 to 1994 as a Vice
President and Senior Vice President of Leasing. Prior to joining PGI, Mr.
Phillips was a leasing representative at D.I. Realty, Inc., leasing a variety of
retail projects including outlet centers and traditional and specialty malls.
Mr. Phillips received a Masters of Science in Real Estate Development at Johns
Hopkins University and received a Bachelor of Science degree in Business
Administration from the University of Vermont. Mr. Phillips is a member of the
ICSC, with a CLS (Certified Leasing Specialist) designation, and the Urban Land
Institute.
Frederick J. Meno IV. Frederick J. Meno IV is Senior Vice President -
Operations of the Company, a position he has held since he joined the Company in
January of 1999. Mr meno is responsible for supervising the management,
operations, marketing and specialty leasing programs for the Company's
nationwide portfolio of outlet centers. Prior to joining the Company, Mr. Meno
was Executive Director of Insignia/ESG, Inc., where he was responsible for all
management, leasing, construction management, and business development
activities for Insignia/ESG's 10 million square foot national enclosed mall
portfolio, as well as Insignia/ESG's Dallas/Fort Worth office, industrial and
non-enclosed retail portfolio. For 10 years prior to joining Insignia/ESG, Inc.,
Mr. Meno was President of the Woodmont Property Management Company in Fort
Worth, Texas. A 1979 graduate of Ohio State University, having majored in Urban
Land Development and Economics with a degree in Business Administration, Mr.
Meno is a member of the Institute of Real Estate Management and the ICSC. Mr.
Meno has achieved the designations of Certified Property Manager, Real Property
Administrator and Certified Shopping Manager and is a licensed Real Estate
Salesman in the State of Texas. Mr. Meno is also on the Advisory Board of the
Shopping Center Management Insider Publication and he is the 2001 Dean for
ICSC's University of Shopping Centers School of Outlet Retailing, ValueOrientor
and Community Centers.
ITEM 2 -- PROPERTIES
General
As a fully-integrated real estate company, we provide finance, leasing,
accounting, marketing and management services for all of our Properties,
including those which we have an ownership interest through joint venture
partnerships. At December 31, 2001, our portfolio of Properties consisted of (i)
45 outlet centers aggregating 12,670,000 square feet of GLA (including 1,195,000
square feet of GLA at outlet centers owned through joint venture partnerships),
(ii) two community shopping centers aggregating 219,000 square feet of GLA and
(iii) 154,000 square feet of GLA of office space.
The table set forth below summarizes certain information with respect to
our outlet centers as of December 31, 2001 (see Note 6 -- "Bonds and Notes
Payable" of the Notes to the Consolidated Financial Statements contained herein
for information with respect to mortgage indebtedness on the our Properties).
Grand GLA Occupancy
Outlet Centers Opening Date (Sq. Ft.) Percentage (1)
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Prime Outlets at Fremont-- Fremont, Indiana October 1985 229,000 91%
Prime Outlets at Birch Run (2)-- Birch Run, Michigan September 1986 724,000 93
Prime Outlets at Latham-- Latham, New York August 1987 43,000 83
Prime Outlets at Williamsburg (2)-- Williamsburg, Virginia April 1988 274,000 98
Prime Outlets at Pleasant Prairie-- Kenosha, Wisconsin September 1988 269,000 94
Prime Outlets at Edinburgh-- Edinburgh, Indiana September 1989 298,000 99
Prime Outlets at Burlington-- Burlington, Washington May 1989 174,000 91
Prime Outlets at Queenstown-- Queenstown, Maryland June 1989 221,000 94
Prime Outlets at Hillsboro-- Hillsboro, Texas October 1989 359,000 94
Prime Outlets at Oshkosh-- Oshkosh, Wisconsin November 1989 260,000 93
Prime Outlets at Warehouse Row (3)-- Chattanooga, Tennessee November 1989 95,000 89
Prime Outlets at Perryville-- Perryville, Maryland June 1990 148,000 100
Prime Outlets at Sedona-- Sedona, Arizona August 1990 82,000 100
Prime Outlets at San Marcos-- San Marcos, Texas August 1990 549,000 98
Prime Outlets at Anderson-- Anderson, California August 1990 165,000 98
Prime Outlets at Post Falls-- Post Falls, Idaho July 1991 179,000 80
Prime Outlets at Ellenton-- Ellenton, Florida October 1991 481,000 97
Prime Outlets at Morrisville-- Raleigh - Durham, North Carolina October 1991 187,000 96
Prime Outlets at Naples-- Naples/Marco Island, Florida December 1991 146,000 85
Prime Outlets at Conroe (4)-- Conroe, Texas January 1992 282,000 92
Prime Outlets at Niagara Falls USA-- Niagara Falls, New York July 1992 534,000 96
Prime Outlets at Woodbury-- Woodbury, Minnesota July 1992 250,000 79
Prime Outlets at Calhoun-- Calhoun, Georgia October 1992 254,000 90
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Grand GLA Occupancy
Outlet Centers Opening Date (Sq. Ft.) Percentage (1)
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Prime Outlets at Castle Rock-- Castle Rock, Colorado November 1992 480,000 99%
Prime Outlets at Bend-- Bend, Oregon December 1992 132,000 98
Prime Outlets at Jeffersonville II (4)-- Jeffersonville, Ohio March 1993 314,000 43
Prime Outlets at Jeffersonville I-- Jeffersonville, Ohio July 1993 407,000 99
Prime Outlets at Gainesville-- Gainesville, Texas August 1993 316,000 81
Prime Outlets at Loveland-- Loveland, Colorado May 1994 328,000 100
Prime Outlets at Grove City-- Grove City, Pennsylvania August 1994 533,000 98
Prime Outlets at Huntley-- Huntley, Illinois August 1994 282,000 81
Prime Outlets at Florida City-- Florida City, Florida September 1994 208,000 78
Prime Outlets at Pismo Beach-- Pismo Beach, California November 1994 148,000 96
Prime Outlets at Tracy-- Tracy, California November 1994 153,000 94
Prime Outlets at Vero Beach-- Vero Beach, Florida November 1994 326,000 87
Prime Outlets at Odessa-- Odessa, Missouri July 1995 296,000 79
Prime Outlets at Darien (5)-- Darien, Georgia July 1995 307,000 75
Prime Outlets at Gulfport (6)-- Gulfport, Mississippi November 1995 306,000 85
Bellport Outlet Center (7)-- Bellport, New York-- Phases II/III November 1996 197,000 72
Prime Outlets at Lodi-- Burbank, Ohio November 1996 313,000 93
Prime Outlets at Gaffney (5)-- Gaffney, South Carolina November 1996 305,000 98
Prime Outlets at Lee-- Lee, Massachusetts June 1997 224,000 100
Prime Outlets at Lebanon-- Lebanon, Tennessee April 1998 229,000 98
Prime Outlets at Hagerstown (8)-- Hagerstown, Maryland August 1998 487,000 99
Prime Outlets of Puerto Rico-- Barceloneta, Puerto Rico July 2000 176,000 98
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Total Outlet Centers (9) 12,670,000 91%
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Notes:
(1) Percentage reflects occupied space as of December 31, 2001 as a percent
of available square feet of GLA.
(2) We, through affiliates, have a 30% ownership interest in the joint
venture partnership that owns this outlet center.
(3) We own a 2% partnership interest as the sole general partner in Phase I
of this property but are entitled to 99% of the property's operating cash
flow and net proceeds from a sale or refinancing. This mixed-use
development includes 154,000 square feet of office space, not included in
this table, which was 95% occupied as of December 31, 2001.
(4) Non-recourse mortgage loans on Prime Outlets at Conroe and Prime Outlets
at Jeffersonville II are cross-collateralized. Effective January 1, 2002,
the lender foreclosed on Prime Outlets at Conroe. The lender and we
remain in discussions regarding the transfer of our ownership interest in
Prime Outlets at Jeffersonville II.
(5) We operate this outlet center pursuant to a long-term ground lease under
which we receive the economic benefit of a 100% ownership interest.
(6) The real property on which this outlet center is located is subject to a
long-term ground lease.
(7) We, through affiliates, have a 51% ownership interest in the joint
venture partnership that owns Phases II and III of the Bellport Outlet
Center.
(8) On January 11, 2002, we sold this outlet center to a joint venture
partnership in which we, through affiliates, have a 30% ownership
interest. See Note 3 - "Property Dispositions" for additional
information.
(9) We own two community centers, not included in this table, containing
approximately 219,000 square feet in the aggregate that were 81% occupied
as of December 31, 2001.
Lease Terms
In general, the leases relating to our outlet centers have terms of three
to five years. The majority of leases provide for the payment of percentage
rents for annual sales in excess of certain thresholds. In addition, the typical
lease agreement generally provides for (i) the recovery of a merchant's
proportionate share of actual costs of common area maintenance ("CAM"), refuse
removal, insurance, and real estate taxes, (ii) a contribution for advertising
and promotion, and (iii) an administrative fee. CAM includes items such as
utilities, security, parking lot cleaning, maintenance and repair of common
areas, capital replacement reserves, landscaping, seasonal decorations, public
restroom maintenance and certain administrative expenses. We continually
evaluate our lease provisions in light of current and expected economic
conditions and other factors. In this regard, we are exploring alternative lease
provisions including fixed CAM where appropriate.
The following table sets forth, as of December 31, 2001, tenant lease
expirations, assuming that none of the tenants exercise any renewal option, over
the next 10 years for our outlet center portfolio, including outlet centers we
own through joint venture partnerships but excluding Prime Outlets at Conroe and
Prime Outlets at Jeffersonville II (see "Defaults on Certain Non-recourse
Mortgage Indebtedness" of Note 6 - "Bonds and Notes Payable" of the Notes to
Consolidated Financial Statements contained herein for additional information):
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Lease Expirations - Outlet Center
% of Total
Number of Approximate Annualized Annualized
Leases GLA Minimum Rent Minimum Rent
Year Expiring (Sq. Ft.) of Expiring Leases of Expiring Leases
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2002 739 2,597,274 $ 28,829,741 18.79%
2003 597 2,540,282 33,557,125 21.87%
2004 443 1,720,286 25,443,030 16.58%
2005 374 1,558,512 23,736,138 15.47%
2006 254 1,062,460 16,914,363 11.02%
2007 155 616,334 7,802,788 5.09%
2008 48 260,396 4,262,683 2.78%
2009 22 138,448 2,082,258 1.36%
2010 48 251,935 4,277,856 2.79%
2011 42 220,293 3,859,533 2.52%
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Tenants
In management's view, tenant mix is an important factor in determining an
outlet center's success. Our outlet centers are managed to attract and retain,
if possible, a diverse mix of nationally and internationally recognized
manufacturers of moderate to upscale designer and brand name products. Crucial
to the success of an outlet center is the presence of lead tenants. Lead tenants
are manufacturers that may potentially attract a large number of qualified
consumers to the outlet center due to the strength of their brand name and the
value offered to the consumer. Lead tenants generally are placed in strategic
locations designed to draw customers into the outlet center and to encourage
them to shop at more than one store. We continually examine the placement of
tenants within each center and, in collaboration with our tenants, adjust the
size and location of their space within each center in an effort to improve
sales per square foot.
During the year ended December 31, 2001, no group of tenants under common
control accounted for more than 4.4% of our gross revenues or leased more than
5.3% of our total GLA. During the years ended December 31, 2001 and 2000, total
bad debt expense was approximately $13.4 million, or 5.9%, and $7.4 million, or
2.6%, of total revenues, respectively. The majority of bad debt expense is
attributable to tenant bankruptcies, disputes, abandonments and store closings.
ITEM 3 -- LEGAL PROCEEDINGS
Except as described below, neither we nor any of our properties are
currently subject to any material litigation nor, to our knowledge, is any
material or other litigation threatened against us, other than routine
litigation arising in the ordinary course of business, some of which is expected
to be covered by liability insurance and all of which collectively is not
expected to have a material adverse effect on our consolidated financial
statements.
Dinnerware Plus Holdings, Inc., which operates under the trade name Mikasa,
and affiliates (collectively, the "Mikasa Plaintiffs") filed a lawsuit against
the Company and various affiliates in Superior Court of New Jersey on March 29,
2001. The Mikasa Plaintiffs assert a number of causes of action in which they
allege that the Company and its affiliates breached various provisions in the
Mikasa Plaintiffs' leases and, as a result, overcharged the Mikasa Plaintiffs
for common area maintenance and similar charges ("CAM") and promotion fund
charges at various centers where the Mikasa Plaintiffs are tenants. The Company
filed a motion to dismiss the complaint on behalf of the Company's affiliates
who entered into leases with the Mikasa Plaintiffs, based on lack of
jurisdiction. The motion was granted, but the Mikasa Plaintiffs filed a motion
for reconsideration, upon which the court has not ruled. The remaining
defendants, Prime Retail, Inc. and Prime Retail, L.P., have answered the
complaint. The outcome of this lawsuit, and the ultimate liability of the
defendants, if any, cannot be predicted at this time.
On July 6, 2001, affiliates of the Company brought an action in the Circuit
Court for Washington County, Maryland against Melru Corporation, which operates
under the trade name Jones New York, alleging that Melru Corporation owed past
due rent in connection with 43 leases. Melru Corporation, in response to the
collection action filed by certain affiliates of the Company, filed on October
15, 2001 several counterclaims against the Company and its affiliates in which
it alleges that the Company and its affiliates overcharged Melru Corporation for
CAM and promotion fund charges. In addition, Melru Corporation alleges that an
affiliate of the Company fraudulently induced Melru Corporation to enter into a
lease and that another affiliate violated its lease with Melru Corporation by
failing to maintain required occupancy levels at the shopping center it owns.
The Company and its affiliates have not filed their response to the Melru
Corporation counterclaims. The outcome of the Melru Corporation counterclaims,
and the ultimate liability of the Company and its affiliates, if any, cannot be
predicted at this time.
In addition to the Mikasa Plaintiffs and Melru Corporation, other tenants,
including Design's Inc. and Brown Group Retail, Inc., in the Company's
affiliates' outlet centers have made or may make allegations concerning
overcharging for CAM and promotion fund charges similar to those made by the
Mikasa Plaintiffs and Melru Corporation. No other such tenant, however, has
filed a suit. It is too early to make any predictions as to whether the Company
or its affiliates may be found liable with respect to such other tenants, or to
predict damages should liability be found.
The Company and its affiliates were defendants in a lawsuit filed by
Accrued Financial Services ("AFS") on August 10, 1999 in the Circuit Court for
Baltimore City. The lawsuit was removed to United States District Court for the
District of Maryland (the "U.S. District Court") on August 20, 1999. AFS claimed
that certain tenants had assigned to AFS their rights to make claims under
leases such tenants had with affiliates of the Company and alleged that the
Company and its affiliates overcharged such tenants for common area maintenance
charges and promotion fund charges. The U.S. District Court dismissed the
lawsuit on June 19, 2000. AFS appealed the U.S. District Court's decision to the
United States Court of Appeals for the Fourth Circuit. Briefs were submitted and
oral argument before a panel of judges of the United States Court of Appeals for
the Fourth Circuit was held on October 30, 2001, during which the panel of
judges requested further briefing of certain issues. The Fourth Circuit received
the briefs, but has not yet ruled. The Company believes that it has acted
properly and will continue to defend this lawsuit vigorously. The outcome of
this lawsuit, and the ultimate liability of the defendants, if any, cannot be
predicted at this time.
Affiliates of the Company routinely file lawsuits to collect past due rent
from, and to evict, tenants which have defaulted under their leases. There are
currently dozens of such actions pending. In addition to defending against the
Company's affiliates' claims and eviction actions, some tenants file
counterclaims against the Company's affiliates. A tenant who files such a
counterclaim typically claims that the Company's affiliate which owns the outlet
center in question has defaulted under the tenant's lease, has overcharged the
tenant for CAM and promotion fund charges, or has failed to maintain or market
the outlet center in question as required by the lease. Usually such
counterclaims are without merit. In response to such counterclaims the Company's
affiliates usually continue to pursue their collection or eviction actions and
defend against the counterclaims. Despite the fact that the Company and its
affiliates believe such counterclaims are without merit and defend against them
vigorously, the outcome of all such counterclaims, and thus the liability, if
any, of the Company and its affiliates, cannot be predicted at this time.
Since October 13, 2000 there have been eight complaints filed in the United
States District Court for the District of Maryland against the Company and five
individual defendants. The five individual defendants are Glenn D. Reschke, the
President, Chief Executive Officer and Chairman of the Board of Directors of the
Company; William H. Carpenter, Jr., the former President and Chief Operating
Officer and a former director of the Company; Abraham Rosenthal, the former
Chief Executive Officer and a former director of the Company; Michael W.
Reschke, the former Chairman of the Board and a current director of the Company;
and Robert P. Mulreaney, the former Executive Vice President - Chief Financial
Officer and Treasurer of the Company. The complaints have been brought by
alleged stockholders of the Company, individually and purportedly as class
actions on behalf of all other stockholders of the Company. The complaints
allege that the individual defendants made statements about the Company that
were in violation of the federal securities laws. The complaints seek
unspecified damages and other relief. Lead plaintiffs and lead counsel were
subsequently appointed. A consolidated amended complaint captioned The Marsh
Group, et al. v. Prime Retail, Inc., et al. dated May 21, 2001 was filed. The
Company and the individual defendants filed a motion to dismiss the complaint,
which was granted on November 8, 2001. The plaintiffs appealed the matter to the
Fourth Circuit. The appeal is now pending. The Company believes that the claims
are without merit and will defend vigorously against the appeal. The outcome of
this lawsuit, and the ultimate liability of the defendants, if any, cannot be
predicted at this time.
Several entities (the "eOutlets Plaintiffs") have filed or stated an
intention to file lawsuits (collectively, the "eOutlets Lawsuits") against the
Company and its affiliates. The eOutlets Plaintiffs seek to hold the Company and
its affiliates responsible under various legal theories for liabilities incurred
by primeoutlets.com, inc., also known as eOutlets, including the theories that
the Company guaranteed the obligations of eOutlets and that the Company was the
"alter-ego" of eOutlets. primeoutlets.com inc. is also a defendant in some, but
not all, of the eOutlets Lawsuits. The Company believes that it is not liable to
the eOutlets Plaintiffs as there was no privity of contract between it and the
various eOutlets Plaintiffs. The Company will continue to defend all eOutlets
Lawsuits vigorously. primeoutlets.com inc. filed for protection under Chapter 7
of the United States Bankruptcy Code during November 2000 under the name
E-Outlets Resolution Corp. The trustee for E-Outlets Resolution Corp. has
notified the Company that he is contemplating an action against the Company and
the Operating Partnership in which he may assert that E-Outlets Resolution Corp.
was the "alter-ego" of the Company and the Operating Partnership and that, as a
result, the Company and the Operating Partnership are liable for the debts of
E-Outlets Resolution Corp. If the trustee pursues such an action, the Company
and the Operating Partnership will defend themselves vigorously. In the case
captioned Convergys Customer Management Group, Inc. v. Prime Retail, Inc. and
primeoutlets.com inc. in the Court of Common Pleas for Hamilton County (Ohio),
the Company prevailed in a motion to dismiss the plaintiff's claim that the
Company was liable for primeoutlets.com inc.'s breach of contract based on the
doctrine of piercing the corporate veil. The outcome of the eOutlets Lawsuits,
and the ultimate liability of the Company in connection with the eOutlets
Lawsuits and related claims, if any, cannot be predicted at this time.
In May, 2001, the Company, through affiliates, filed suit against Fru-Con
Construction, Inc. ("FCC"), the lender on Prime Outlets at New River ("New
River") as a result of FCC's foreclosure of New River due to the maturation of
the loan. The Company and its affiliates allege that they have been damaged due
to FCC's failure to dispose of the collateral in a commercially reasonable
manner. The Company, through affiliates, has also filed suit against The Fru-Con
Projects, Inc. ("Fru-Con"), a partner in Arizona Factory Shops Partnership and
an affiliate of FCC. The Company and its affiliates allege that Fru-Con failed
to use reasonable efforts to assist in obtaining refinancing. Fru-Con has claims
pending against the Company and its affiliates, as part of the same suit,
alleging that the Company and its affiliates breached their contract with
Fru-Con by not allowing Fru-Con to participate in an outlet project in Sedona,
Arizona (the "Sedona Project") and breached a management and leasing agreement
by managing and leasing the Sedona Project. The Company believes its affiliates
and it acted properly and FCC did not act properly. The Company and its
affiliates will vigorously defend the claims filed against them and prosecute
the claims they filed. However, the ultimate outcome of the suit, including the
liability, if any, of the Company and its affiliates, cannot be predicted at
this time.
The New York Stock Exchange ("NYSE") and the Securities and Exchange
Commission have notified the Company that they are reviewing transactions in the
stock of the Company prior to the Company's January 18, 2000 press release
concerning financial matters. The initial notice of such review was received by
the Company on March 13, 2000.
ITEM 4 -- SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Our Amended and Restated Articles of Incorporation state, "whenever
dividends payable on the Preferred Stock shall be in arrears for six or more
consecutive quarterly periods, then the holders of Preferred Stock, voting
together as a single class, shall be entitled at the next meeting of
stockholders or at any special meeting called for such purpose, to elect two
additional directors to the Company's Board of Directors until the full
dividends accumulated on all outstanding shares of the Preferred Stock have been
paid in full or declared and a sum of money sufficient for the prepayment
thereof set aside for payment."
On December 6, 2001, a meeting (the "Special Meeting") of the holders of
shares our 10.5% Series A Senior Cumulative Preferred Stock (the "Series A
Senior Preferred Stock") and 8.5% Series B Cumulative Participating Convertible
Preferred Stock (the "Series B Convertible Preferred Stock", and, together the
"Preferred Stock") was held for the purpose of electing two additional directors
to our Board of Directors. The Special Meeting was adjourned to allow sufficient
time to tabulate the votes. On December 11, 2001, the Special Meeting was
reconvened. Howard Amster and Robert H. Kanner were elected to serve as members
of the Board of Directors.
PART II
ITEM 5-- MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Our common stock trades on the OTC Bulletin Board under the trading symbol
"PRME". Our common stock previously traded through September 26, 2001 on the New
York Stock Exchange under the trading symbol "PRT".
The following table sets forth the quarterly high, low and end of period
closing sales prices per share of our common stock as reported on the OTC
Bulletin Board and NYSE:
Market Price of Common Stock and Cash Dividends Paid per Share
- ------------------------------------------------------------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------- ----------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Market price per
common share:
High $ 0.20 $ 0.30 $ 0.42 $ 0.70 $ 0.69 $ 1.63 $ 2.13 $ 6.63
Low 0.09 0.16 0.26 0.36 0.25 0.22 0.94 1.94
End of period close 0.10 0.17 0.27 0.39 0.47 0.34 1.27 2.19
Cash dividends paid
per common share $ - $ - $ - $ - $ - $ - $ - $ -
====================================================================================================================================
To qualify as a REIT for federal income tax purposes, we are required to
pay distributions to our common and preferred shareholders of at least 90% of
our REIT taxable income in addition to satisfying other requirements. Although
we intend to make the necessary distributions to remain qualified as a REIT
under the Code, we also intend to retain such amounts as we consider necessary
from time to time for our capital and liquidity needs.
Our current policy is to pay distributions only to the extent necessary to
maintain our status as a REIT for federal income tax purposes. Based on our
current federal income tax projections for 2002, we do not expect to pay any
distributions on our Series A Senior Preferred Stock, Series B Convertible
Preferred Stock, common stock or common units of limited partnership interest in
the Operating Partnership during 2002. We are currently in arrears on nine
quarters of preferred stock distributions due February 15, 2000 through February
15, 2002, respectively.
We are prohibited from paying dividends or distributions except to the
extent necessary to maintain our REIT status under the terms of a mezzanine loan
(see "Dividends and Distributions" of Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 6 - "Bonds
and Notes Payable" of the Notes to Consolidated Financial Statements contained
herein for additional information). In addition, we may not make distributions
to our common shareholders or our holders of common units of limited partnership
interests in the Operating Partnership unless we are current with respect to
distributions to our preferred shareholders. As of December 31, 2001, unpaid
dividends for the period beginning on November 16, 1999 through December 31,
2001 on the Series A Senior Preferred Stock and Series B Convertible Preferred
Stock aggregated $12.8 million and $35.3 million, respectively. The annualized
dividends on our 2,300,000 shares of Series A Senior Preferred Stock and
7,828,125 shares of Series B Convertible Preferred Stock outstanding as of
December 31, 2001 are $6.0 million ($2.625 per share) and $16.6 million ($2.125
per share), respectively.
The approximate number of holders of record of our common stock was 536
including participants in security position listings as of March 19, 2002.
ITEM 6 -- SELECTED FINANCIAL DATA
(Amounts in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Base rents $ 141,116 $ 178,830 $ 193,979 $ 148,376 $ 78,046
Percentage rents 4,220 6,369 8,085 6,384 3,277
Tenant reimbursements 67,323 83,350 90,063 67,152 37,519
Interest and other 13,421 14,801 13,829 9,897 10,288
----------- ----------- ----------- ----------- ---------
Total revenues 226,080 283,350 305,956 231,809 129,130
Expenses
Property operating 54,451 68,537 70,862 52,684 29,492
Real estate taxes 19,283 21,776 22,405 16,705 9,417
Depreciation and amortization 56,918 67,556 73,640 52,727 26,715
Corporate general and administrative 14,290 20,847 12,687 7,980 5,603
Interest 92,859 98,234 93,934 60,704 36,122
Other charges 22,646 17,555 6,918 4,495 3,234
Provision for asset impairment 63,026 68,663 15,842 - -
Provision for abandoned projects - - 16,039 - -
Loss on eOutlets.com - 14,703 - - -
Loss on Designer Connection - 1,815 6,561 1,067 -
----------- ----------- ----------- ----------- ---------
Total expenses 323,473 379,686 318,888 196,362 110,583
----------- ----------- ----------- ----------- ---------
Income (Loss) before loss on sale of real estate,
extraordinary loss and minority interests (97,393) (96,336) (12,932) 35,447 18,547
Loss on sale of real estate (1,063) (42,648) (15,153) (15,461) -
----------- ----------- ----------- ----------- ---------
Income (Loss) before minority interests and
extraordinary loss (98,456) (138,984) (28,085) 19,986 18,547
Loss (Income) allocated to minority interests 408 738 (3,226) (2,456) (10,581)
----------- ----------- ----------- ----------- ---------
Income (Loss) before minority interests (98,048) (138,246) (31,311) 17,530 7,966
Extraordinary loss on early extinguishment of debt - (4,206) (3,518) - (2,061)
----------- ----------- ----------- ----------- ----------
Net income (loss) (98,048) (142,452) (34,829) 17,530 5,905
Income allocated to preferred shareholders (22,672) (22,672) (9,962) (24,604) (12,726)
----------- ----------- ----------- ----------- ----------
Net loss applicable to common shares $ (120,720) $ (165,124) $ (44,791) $ (7,074) $ (6,821)
=========== =========== =========== =========== ==========
Basic loss per common share: $ (2.77) $ (3.79) $ (1.04) $ (0.20) $ (0.36)
=========== =========== =========== =========== ==========
Diluted loss per common share: $ (2.77) $ (3.79) $ (1.30) $ (0.20) $ (0.36)
=========== =========== =========== =========== ==========
Other Data:
Funds from operations (1) $ 25,256 $ 57,967 $ 84,163 $ 90,020 $ 46,718
Net cash provided by operating activities 32,911 32,450 97,815 59,182 49,856
Net cash provided by (used in) investing activities 5,595 1,095 (56,666) (145,596) (229,956)
Net cash provided by (used in) financing activities (39,875) (31,982) (39,571) 85,806 182,549
Distributions declared per common share (2) $ - $ - $ 0.885 $ 1.680 $ 1.180
Reported merchant sales 2,473,830 2,745,923 3,286,917 3,169,268 1,434,163
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Rental property before accumulated depreciation $ 1,375,608 $ 1,493,107 $ 1,826,551 $ 2,015,722 $ 904,782
Net investment in rental property 1,117,484 1,275,538 1,642,597 1,887,975 822,749
Total assets 1,262,508 1,462,021 1,856,058 1,976,464 904,183
Bonds and notes payable 957,467 1,030,153 1,260,670 1,217,507 515,265
Total liabilities and minority interests 1,006,068 1,107,533 1,359,371 1,332,730 559,655
Stockholders' equity 256,440 354,488 496,687 643,734 344,528
Other Data:
Total outlet center GLA at end of period (3) 12,670 13,497 14,699 14,348 7,217
Number of outlet centers at end of period (3) 45 48 51 50 28
====================================================================================================================================
Notes:
(1) We believe that to facilitate a clear understanding of our operating
results, funds from operations ("FFO") should be considered in conjunction
with net income (loss) as presented in accordance with generally accepted
accounting principles ("GAAP"). FFO, pursuant to guidelines established by
the National Association of Real Estate Investment Trusts ("NAREIT"),
represents net income (loss) (determined in accordance with GAAP) excluding
provisions for asset impairment, gains (or losses) from debt restructuring,
sales of property and discontinued operations, plus real estate
depreciation and amortization after adjustments for unconsolidated joint
venture partnerships. We believe that FFO is an important and widely used
measure of the operating performance of equity real estate investment
trusts ("REITs") which provides a relevant basis for comparison to other
REITs. Therefore, FFO is presented to assist investors in analyzing our
performance. Our FFO is not comparable to FFO reported by other REITs that
do not define the term using the NAREIT definition or that interpret the
NAREIT definition differently than we do. Therefore, we caution that the
calculation of FFO may vary from entity to entity and as such the
presentation of our FFO may not be comparable to other similarly titled
measures of other reporting companies. FFO does not represent cash
generated from operating activities in accordance with GAAP and should not
be considered as an alternative to net income as an indication of our
performance or to cash flows as a measure of liquidity or ability to make
distributions. A reconciliation of income (loss) before allocations to
minority interests and preferred shareholders to FFO is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) before minority interests and
extraordinary loss $ (98,456) $ (138,984) $ (28,085) $ 19,986 $ 18,547
FFO adjustments:
Loss on sale of real estate 1,063 42,648 15,153 15,461 -
Depreciation and amortization 56,918 67,556 73,640 52,727 26,715
Non-real estate depreciation and amortization (2,251) (1,703) (587) (432) (302)
Joint venture adjustments 3,074 3,269 1,639 1,211 1,758
Non-cash joint venture interest subsidy 1,882 - - - -
Discontinued operations - eOutlets.com - 14,703 - - -
Discontinued operations - Designer Connection - 1,815 6,561 1,067 -
--------- ---------- --------- -------- --------
FFO before adjustment for asset impairment (37,770) (10,696) 68,321 90,020 46,718
DProvisioneforpassetoimpairmentets.com 63,026 68,663 15,842 - -
--------- ---------- --------- -------- --------
FFO before allocations to minority interests
and preferred shareholders $ 25,256 $ 57,967 $ 84,163 $ 90,020 $ 46,718
========= ========== ========= ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
(2) Includes special cash distribution during 1998 of $0.50 per common share
relating to our merger with Horizon Group, Inc. completed in June, 1998.
(3) Includes outlet centers we operate under joint venture partnerships with
unrelated third parties as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Aggregate GLA 1,195 1,764 1,494 595 595
Number of outlet centers 3 5 4 3 3
====================================================================================================================================
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands, except per share, per unit, and per square foot
information)
Introduction
The following discussion and analysis of our consolidated financial
condition and results of operations should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Annual Report on Form 10-K. Our operations are conducted through the Operating
Partnership. We control the Operating Partnership as its sole general partner
and are dependent upon the distributions or other payments from the Operating
Partnership to meet our financial obligations. Historical results and percentage
relationships set forth herein are not necessarily indicative of future
operations.
Cautionary Statements
The following discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other sections of this Form
10-K contain certain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, which reflect management's
current views with respect to future events and financial performance. These
statements are subject to potential risks and uncertainties and, therefore,
actual results may differ materially. Such forward-looking statements are
subject to certain risks and uncertainties, including, but not limited to, the
risk associated with our high level of leverage and our ability to refinance
such indebtedness as it becomes due; the risk that we or one or more of our
subsidiaries are not able to satisfy scheduled debt service obligations or will
not remain in compliance with existing loan covenants; the risk of material
adverse effects of future events, including tenant bankruptcies or abandonments,
on our financial performance; the risk related to the retail industry in which
our outlet centers compete, including the potential adverse impact of external
factors, such as inflation, consumer confidence, unemployment rates and consumer
tastes and preferences; the risk associated with tenant bankruptcies, store
closings and the non-payment by tenants of contractual rents and additional
rents; the risk associated with our potential asset sales; the risk of potential
increases in market interest rates from current levels; the risk associated with
real estate ownership, such as the potential adverse impact of changes in local
economic climate on the revenues and the value of our properties; the risk
associated with litigation; and the risk associated with competition from
web-based and catalogue retailers.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Annual Report on Form 10-K. These
Consolidated Financial Statements and Notes thereto have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of such statements requires us to make certain estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and the related disclosure of contingent liabilities. We evaluate our
estimates on an on-going basis; including those related to (i) revenue
recognition, (ii) provisions for bad debt on accounts receivable, (iii)
potential impairment of the carrying value of rental properties held for use,
(iv) capitalization and depreciation of significant renovations and improvements
and (v) contingencies for debt guarantees and litigation. We base our estimates
on historical trends and certain other assumptions that we believe are
reasonable under the particular circumstances. These estimates ultimately form
the basis for making judgments about the carrying values of our assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
To assist you in understanding our financial condition and results from
operations, we have identified our critical accounting policies and discussed
them below. These accounting policies are most important to the portrayal of our
financial condition and results from operations, either because of the
significance of the financial statement items to which they relate or because
they require our management's most difficult, subjective or complex judgments.
Bad Debt
We regularly reviews our accounts receivable in order to determine an
appropriate range for the allowance for doubtful accounts based upon the impact
of economic conditions on ours tenants' ability to pay, past collection
experience and such other factors which, in our judgment deserve current
recognition. In turn, a provision for bad debt is charged against the allowance
to maintain the allowance level within this range. If the financial condition of
our tenants were to deteriorate, resulting in impairment in their ability to
make payments due under their leases, additional allowances may be required.
Impairment of Rental Property
We monitor our Properties for indicators of impairment on an on-going
basis. We record a provision for impairment when we believe certain events and
circumstances have occurred which indicate that the carrying value of our
Property might have experienced a decline in value that is other than temporary.
Impairment losses are measured as the difference between the carrying value and
the estimated fair value for assets held in the portfolio. For assets held for
sale, impairment is measured as the difference between the carrying value and
fair value, less costs to dispose. Fair value is based on estimated cash flows
discounted at a risk-adjusted rate of return. Adverse changes in market
conditions or deterioration in the operating results of our outlet centers and
other rental properties could result in losses or an inability to recover the
current carrying value of such assets. Such potential losses or the inability to
recover the current carrying value may not be reflected in our Properties'
current carrying value, thereby possibly requiring an impairment charge in the
future.
Contingencies
We are subject to proceedings, lawsuits, and other claims related to
various matters (see Note 13 - "Legal Proceedings" of the Notes to the
Consolidated Financial Statements for additional information). Additionally, we
have guaranteed certain indebtedness of others (see Note 6 - "Bonds and Notes
Payable" for additional information). With respect to these contingencies, we
assess the likelihood of any adverse judgments or outcomes to these matters and,
if appropriate potential ranges of probable losses. A determination of the
amount of reserves required, if any, for these contingencies are made after
careful analysis of each individual issue. Future reserves may be required due
to (i) new developments or changes to the approach in which we deal with each
matter or (ii) if unasserted claims arise.
Outlet Center Portfolio
Portfolio GLA and Occupancy
Our outlet center portfolio grew to its present size through the
development and acquisition of outlet centers and through expansions to existing
outlet centers. Our outlet portfolio consisted of 45 properties totaling
12,670,000 square feet of GLA at December 31, 2001, compared to 48 properties
totaling 13,497,000 square feet of GLA at December 31, 2000 and 51 properties
totaling 14,699,000 square feet of GLA at December 31, 1999. The changes in our
outlet center GLA are due to certain (i) sales transactions during 2001 and
2000, (ii) development activities during 2000 and (iii) the foreclosure sale of
an outlet center during 2001. Such changes are discussed below and are
collectively referred to as the "Portfolio GLA Activity". Our outlet center
portfolio was 91.2% and 92.7% occupied as of December 31, 2001 and 2000,
respectively. The weighted average occupancy of our outlet center portfolio
during the years ended December 31, 2001 and 2000 was 90.3% and 91.6%,
respectively.
2001 Sales Transactions
On February 2, 2001, we sold Northgate Plaza, a community center located in
Lombard, Illinois to Arbor Northgate, Inc. for aggregate consideration of
$7,050. After the repayment of mortgage indebtedness of $5,966 and closing
costs, the net cash proceeds from the Northgate Plaza sale were $510. On March
16, 2001, we sold Prime Outlets at Silverthorne, an outlet center located in
Silverthorne, Colorado consisting of 257,000 square feet of GLA, to Silverthorne
Factory Stores, LLC for aggregate consideration of $29,000. The net cash
proceeds from the sale of Prime Outlets at Silverthorne were $8,993, after the
repayment of certain mortgage indebtedness of $18,078 on Prime Outlets at
Lebanon (see below) and closing costs and fees. The net proceeds from these
sales of were used to prepay an aggregate $9,137 of principal outstanding under
our mezzanine loan (the "Mezzanine Loan") in accordance with the terms of such
loan agreement. In connection with these sales, we recorded an aggregate gain on
the sale of real estate of $732 during the first quarter of 2001. The operating
results of these properties are included in our results of operations through
the respective dates of disposition. At December 31, 2000, these properties were
classified as assets held for sale in the Consolidated Balance Sheet with an
aggregate carrying value of $34,770.
On November 27, 2001, we sold certain land located in Camarillo, California
for aggregate consideration of $7,150. The net cash proceeds from the sale,
including the release of certain funds held in escrow, were $1,859, after the
repayment of certain mortgage indebtedness of $6,227 and closing costs and fees.
The net proceeds from this sale were used to prepay $1,787 of the Mezzanine
Loan. In connection with this sale, we recorded a loss on the sale of real
estate of $1,615 during the fourth quarter of 2001. At December 31, 2000, the
land was classified as assets held for sale in the Consolidated Balance Sheet
with a carrying value of $8,460.
Prior to the sale of Prime Outlets at Silverthorne, it was one of fifteen
properties securing our first mortgage and expansion loan (the "First Mortgage
and Expansion Loan"), which had an outstanding principal balance of $342,629 at
December 31, 2001. In conjunction with the sale of Prime Outlets at
Silverthorne, we substituted Prime Outlets at Lebanon for Prime Outlets at
Silverthorne in the cross-collateralized asset pool securing the First Mortgage
and Expansion Loan pursuant to the collateral substitution provisions contained
in the loan agreement. In conjunction with adding Prime Outlets at Lebanon as
security for the First Mortgage and Expansion Loan, we repaid, as discussed
above, certain mortgage indebtedness on Prime Outlets at Lebanon of $18,078.
2001 Foreclosure Sale
On May 8, 2001, Prime Outlets at New River, an outlet center located in New
River, Arizona, was sold through foreclosure. Affiliates of the Company and
Fru-Con Development Corporation ("Fru-Con") each own 50% of the partnership,
which owned the project. We have accounted for our ownership interest in the
partnership that owned the project in accordance with the equity method of
accounting through the date of foreclosure sale. In connection with the
foreclosure sale, we recorded a loss on the sale of real estate of $180 during
the second quarter of 2001.
2000 Sales Transactions
On February 23, 2000, we sold Prime Outlets at Williamsburg, an outlet
center located in Williamsburg, Virginia which contains 274,000 square feet of
GLA, to a joint venture partnership (the "Prime/Estein Venture"). We, indirectly
through affiliates, have a 30% ownership interest in the Prime/Estein Venture.
Commencing on the date of disposition, we have accounted for the operating
results of this outlet center in accordance with the equity method of
accounting.
On December 22, 2000, we completed the sale of four outlet centers
aggregating 1,592,000 square feet of GLA to a joint venture partnership
comprised of Chelsea Property Group, Inc. and Fortress Investment Group, L.L.C.
The four outlet centers that were sold are located in Gilroy, California;
Michigan City, Indiana; Waterloo, New York; and Kittery, Maine. In connection
with this sale, we recorded a loss on the sale of real estate of $42,648 during
the fourth quarter of 2000. The operating results of these properties are
included in our results of operations through the date of disposition.
Development Activities
During 2000 we engaged in development activities related to 390,000 square
feet of GLA consisting of the opening of (i) Prime Outlets of Puerto Rico, the
first outlet center in Puerto Rico, which contains 176,000 square feet of GLA,
and (ii) four expansions to outlet centers totaling 214,000 square feet of GLA.
During 2001, we did not engage in any further development activities other than
post-opening work related to the 2000 development activities and certain
consulting activities in Europe.
Results of Operations
Table 1--Consolidated Statements of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Base rents $ 141,116 $ 178,830 $ 193,979
Percentage rents 4,220 6,369 8,085
Tenant reimbursements 67,323 83,350 90,063
Interest and other 13,421 14,801 13,829
---------- ---------- ---------
Total revenues 226,080 283,350 305,956
Expenses
Property operating 54,451 68,537 70,862
Real estate taxes 19,283 21,776 22,405
Depreciation and amortization 56,918 67,556 73,640
Corporate general and administrative 14,290 20,847 12,687
Interest 92,859 98,234 93,934
Other charges 22,646 17,555 6,918
Provision for asset impairment 63,026 68,663 15,842
Provision for abandoned projects - - 16,039
Loss on eOutlets.com - 14,703 -
Loss on Designer Connection - 1,815 6,561
---------- ---------- ---------
Total expenses 323,473 379,686 318,888
---------- ---------- ---------
Loss before loss on sale of real estate,
minority interests and extraordinary loss (97,393) (96,336) (12,932)
Loss on sale of real estate (1,063) (42,648) (15,153)
---------- ---------- ---------
Loss before minority interests and
extraordinary loss (98,456) (138,984) (28,085)
Loss (Income) allocated to minority interests 408 738 (3,226)
---------- ---------- ---------
Loss before extraordinary loss (98,048) (138,246) (31,311)
Extraordinary loss on early extinguishment of debt - (4,206) (3,518)
---------- ---------- ---------
Net loss (98,048) (142,452) (34,829)
Income allocated to preferred shareholders (22,672) (22,672) (9,962)
---------- ---------- ---------
Net loss applicable to common shares $ (120,720) $ (165,124) $ (44,791)
========== ========== =========
Basic loss per common share:
Loss before extraordinary loss $ (2.77) $ (3.69) $ (0.96)
Extraordinary loss - (0.10) (0.08)
---------- ---------- ---------
Net loss $ (2.77) $ (3.79) $ (1.04)
========== ========== =========
Diluted loss per common share:
Loss before extraordinary loss $ (2.77) $ (3.69) $ (1.22)
Extraordinary loss - (0.10) (0.08)
---------- ---------- ---------
Net loss $ (2.77) $ (3.79) $ (1.30)
========== ========== =========
Weighted-average common shares
outstanding - basic 43,578 43,517 43,196
========== ========== =========
Weighted-average common shares
outstanding - diluted 43,578 43,517 44,260
========== ========== =========
====================================================================================================================================
Table 2--Statements of Operations on a Weighted Average per Square Foot Basis
A summary of the operating results for the years ended December 31, 2001,
2000 and 1999 is presented in the following table, expressed in amounts
calculated on a weighted average occupied GLA basis.
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
GLA at end of period (1) 11,864 12,322 13,787
Portfolio weighted average occupied GLA (1) 10,741 12,483 13,599
Factory outlet weighted average occupied GLA (1) 10,401 11,992 13,099
Outlet centers in operation at end of period (2) 45 48 51
New outlet centers opened (2) - 1 1
Outlet centers expanded (2) - 2 2
Community centers in operation at end of period 2 3 3
States (including Puerto Rico) operated in at end of period 26 26 26
Portfolio weighted average per square foot (3):
Revenues
Base rents $ 13.14 $ 14.33 $ 14.26
Percentage rents 0.39 0.51 0.59
Tenant reimbursements 6.27 6.68 6.62
Interest and other 1.25 1.19 1.02
------- ------- -------
Total revenues 21.05 22.71 22.49
Expenses (4)
Property operating 5.07 5.49 5.21
Real estate taxes 1.80 1.74 1.65
Depreciation and amortization 5.30 5.41 5.42
Corporate general and administrative (5) 1.33 1.36 0.93
Interest 8.65 7.87 6.91
Other charges (6) 2.11 1.32 0.51
------- ------- -------
Total expenses 24.26 23.19 20.63
------- ------- -------
Income (Loss) from continuing operations $ (3.21) $ (0.48) $ 1.86
======= ======= =======
Outlet center weighted average per square foot (3):
Revenues
Base rents $ 13.27 $ 14.61 $ 14.51
Percentage rents 0.40 0.53 0.62
Tenant reimbursements 6.41 6.85 6.76
Interest and other 1.14 1.07 0.85
------- ------- -------
Total revenues 21.22 23.06 22.74
Expenses (4)
Property operating 5.16 5.60 5.31
Real estate taxes 1.90 1.75 1.65
Depreciation and amortization 5.22 5.45 5.53
Interest 7.19 6.92 6.42
Other charges 1.72 1.13 0.26
------- ------- -------
Total expenses 21.19 20.85 19.17
------- ------- -------
Income from continuing operations $ 0.03 $ 2.21 $ 3.57
======= ======= =======
====================================================================================================================================
Notes:
(1) Includes total GLA in which we receive substantially all of the economic
benefit.
(2) Includes outlet centers operated under unconsolidated joint venture
partnerships.
(3) Based on occupied GLA weighted by months of operation. The occupied GLA on
a weighted average basis for the Portfolio Activity have been included in
the weighted average GLA through the date of disposition.
(4) Excludes the following non-recurring items:
---------------------------------------------------------------------------
Years ended December 31, 2001 2000 1999
---------------------------------------------------------------------------
Provision for asset impairment $63,026 $68,663 $15,842
Provision for abandoned projects - - 16,039
Loss on eOutlets.com - 14,703 -
Loss on Designer Connection - 1,815 6,561
---------------------------------------------------------------------------
(5) 2000 excludes non-recurring corporate general and administrative costs
aggregating $3,876, including (i) severance and other compensation costs
totaling $2,421 and (ii) professional fees of $1,455 relating to
refinancing activities.
(6) Excludes non-recurring other charges aggregating $2,918 and $1,100 in 2001
and 2000, respectively. The 2001 non-recurring costs include (i) a charge
of $1,882 related to an interest rate subsidy agreement and (ii) a loss of
$1,036 incurred in connection with the refinancing of first mortgage loans
on Prime Outlets at Birch Run. The 2000 non-recurring resulted from the
termination of the sale of a joint venture interest in Prime Outlets at
Hagerstown and an expansion to Prime Outlets at Williamsburg, which was not
constructed.
Comparison of the Year Ended December 31, 2001 to the Year Ended December 31,
2000
Summary
We reported net losses of $98,048 and $142,452 for the years ended December
31, 2001 and 2000, respectively. For the year ended December 31, 2001, the net
loss applicable to our common shareholders was $120,720, or $2.77 per common
share on a basic and diluted basis. For the year ended December 31, 2000, the
net loss applicable to our common shareholders was $165,124, or $3.79 per common
share on a basic and diluted basis.
The 2001 results include (i) a provision for asset impairment of $63,026,
(ii) a non-recurring charge of $1,882 related to an interest rate subsidy
agreement, (iii) a non-recurring loss of $1,036 related to the refinancing of
first mortgage loans on Prime Outlets at Birch Run and (iv) a net loss on the
sale of real estate of $1,063. The 2000 results reflect certain non-recurring
items, including (i) a loss on the sale of real estate of $42,648, (ii) a
provision for asset impairment of $68,663, (iii) a loss on eOutlets.com of
$14,703, (iv) general and administrative expenses consisting of severance and
other compensation costs aggregating $2,421 and professional fees of $1,455
related to refinancing activities, (v) a gain on the sale of outparcel land of
$2,472 included in interest and other income, (vi) a loss on Designer Connection
of $1,815, (vii) other charges of $1,100 incurred in connection with the
termination of the sale of joint venture interests in certain properties and
(viii) an extraordinary loss of $4,206 related to the prepayment and
modification to the terms of certain long-term debt.
Revenues
Total revenues were $226,080 for the year ended December 31, 2001, compared
to $283,350 for the year ended December 31, 2000, a decrease of $57,270, or
20.2%. Base rents decreased $37,714, or 21.1%, in 2001 compared to 2000. These
decreases are primarily due to the Portfolio GLA Activity and the reduction in
outlet center occupancy during the 2001 period. Straight-line rent expense,
included in base rent was $434 and $94 for the years ended December 31, 2001 and
2000, respectively.
Percentage rents, which represent rents based on a percentage of sales
volume above a specified threshold, decreased $2,149, or 33.7%, to $4,220 during
the year ended December 31, 2001 compared to $6,369 for the same period in 2000.
This decline was primarily attributable to the Portfolio GLA Activity.
As summarized in TABLE 3, merchant sales reported for centers remaining in
our outlet center portfolio at period-end were $2,474 million and $2,746 million
for the years ended December 31, 2001 and 2000, respectively. The weighted
average reported merchant sales per square foot decreased to $241 per square
foot in 2001 from $245 per square foot in 2000. Total merchant occupancy cost
per square foot decreased from $22.03 in 2000 to $20.68 in 2001 and as a
percentage of reported sales from 8.99% to 8.65% respectively.
Table 3 - Summary of Reported Merchant Sales
A summary of reported outlet merchant sales and related data for 2001, 2000
and 1999 follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Total reported merchant sales (in millions) (1) $ 2,474 $ 2,746 $ 3,287
======= ======= ========
Weighted average reported merchant sale per square foot (2):
All store sales $ 241 $ 245 $ 257
======= ======= ========
Same-space sales $ 247 $ 251 $ 249
======= ======= ========
Change in same-store sales versus prior year 2.2%
=======
Change in same-space sales versus prior year -2.0%
=======
Total merchant occupancy costs per square foot (3) $ 20.68 $ 22.03 $ 21.90
======= ======= ========
Cost of merchant occupancy to reported sales (4) 8.65% 8.99% 8.54%
======= ======= ========
Cost of merchant occupancy, excluding marketing
contributions, to reported sales (5) 7.99% 8.26% 7.84%
======= ======= ========
====================================================================================================================================
Notes:
(1) Total reported merchant sales summarizes gross sales generated by merchants
and includes changes in merchant mix and the effect of new space created
from the acquisition and opening of new and expanded outlet centers.
Several of our outlet centers were constructed or expanded during the time
periods presented and therefore, reported sales are included only for the
partial period and were not annualized.
(2) Weighted average reported sales per square foot is based on reported sales
divided by the weighted average square footage occupied by the merchants
reporting those sales. Same-space sales is defined as the weighted average
reported merchant sales per square foot for space open since the beginning
of the prior year.
(3) Total merchant occupancy cost per square foot includes base rents,
percentage rents and tenant reimbursements which includes tenant marketing
contributions.
(4) Computed as follows: total merchant occupancy cost per square foot divided
by total weighted average reported merchant sales per square foot.
(5) Computed as follows: total merchant occupancy cost per square foot
(excluding marketing contributions paid by merchants) divided by total
weighted average reported merchant sales per square foot.
Tenant reimbursements, which represent the contractual recovery from
tenants of certain operating expenses, decreased by $16,027, or 19.2%, to
$67,323 in 2001 compared to $83,350 in 2000. This decline is primarily due to
the Portfolio GLA Activity and the reduction in outlet center occupancy during
the 2001 period. As shown in TABLE 4, tenant reimbursements as a percentage of
recoverable property operating expenses and real estate taxes was 91.3% in 2001
compared to 92.3% in 2000.
Table 4--Tenant Recoveries as a Percentage of Total Recoverable Expenses
- --------------------------------------------------------------------------------
Expenses Recovered
Year from Tenants (1)
- --------------------------------------------------------------------------------
2001 91.3%
2000 92.3%
1999 96.6%
================================================================================
Note:
(1) Total recoverable expenses include property operating expenses and real
estate taxes.
Interest and other income decreased by $1,380, or 9.3%, to $13,421 during
the year ended December 31, 2001 as compared to $14,801 for the year ended
December 31, 2000. The decrease was primarily attributable to (i) a
non-recurring gain on the sale of outparcel land of $2,472 during the 2000
period, (ii) a reduction in amortization of deferred income of $782 and (iii)
lower miscellaneous income of $24. Partially offsetting these items was (i) a
reduction in equity losses from investment in partnerships of $957 and (ii)
increased leasing commission income of $941.
Expenses
Property operating expenses decreased by $14,086, or 20.6%, to $54,451 in
2001 compared to $68,537 in 2000. Real estate taxes expense decreased by $2,493,
or 11.4%, to $19,283 in 2001 from $21,776 in 2000. These decreases are primarily
due to the Portfolio GLA Activity.
As shown in TABLE 5, depreciation and amortization expense decreased by
$10,638, or 15.7%, to $56,918 in 2001, compared to $67,556 in 2000. This
decrease was primarily attributable to the depreciation and amortization of
assets associated with the Portfolio GLA Activity.
Table 5--Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense for 2001, 2000 and
1999 are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Building and improvements $ 28,201 $ 35,536 $ 40,184
Land improvements 6,119 6,197 5,779
Tenant improvements 18,789 22,134 25,374
Furniture and fixtures 3,275 2,988 1,540
Leasing commissions 534 701 763
-------- -------- --------
Total $ 56,918 $ 67,556 $ 73,640
======== ======== ========
====================================================================================================================================
As shown in TABLE 6, interest expense decreased by $5,375, or 5.5%, to
$92,859 in 2001 compared to $98,234 in 2000. This decrease reflects lower
interest incurred of $12,622 partially offset by (i) an increase in amortization
of deferred financing costs of $3,769, (ii) a decrease in the amount of interest
capitalized in connection with development activities of $3,412 and (iii) a
reduction in amortization of debt premiums of $66.
The decrease in interest incurred is primarily attributable to a reduction
of $221,976 in our weighted average debt outstanding, excluding debt premiums,
during the year ended December 31, 2001 compared to the same period in 2000. The
effect of the reduction in weighted average debt outstanding was partially
offset by an increase in the weighted average contractual interest rate on
long-term debt for the year ended December 31, 2001 compared to the same period
in 2000. The weighted average contractual interest rates for 2001 and 2000 were
9.09% and 8.46%, respectively.
Table 6--Components of Interest Expense
The components of interest expense for 2001, 2000 and 1999 are summarized
as follows:
- -------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
Interest incurred $ 88,927 $ 101,549 $ 98,607
Amortization of deferred financing costs 7,025 3,256 4,379
Amortization of debt premiums (3,093) (3,159) (4,406)
Interest capitalized to development projects - (3,412) (4,646)
-------- --------- --------
Total $ 92,859 $ 98,234 $ 93,934
======== ========= ========
==============================================================================================================================
Other charges increased by $5,091, or 29.0%, to $22,646 for the year ended
December 31, 2001 compared to $17,555 for the same period in 2000. The increase
was primarily attributable to (i) a higher provision for uncollectible accounts
receivable of $5,925 in part from certain tenant bankruptcies, disputes,
abandonments and store closings during the 2001 period, (ii) a non-recurring
charge of $1,882 related to an interest rate subsidy agreement and (iii) a
non-recurring loss of $1,036 related to the refinancing of first mortgage loans
on Prime Outlets at Birch Run. Partially offsetting these items were (i) costs
of $1,100 incurred in the third quarter of 2000 in connection with the
discontinuance of the proposed sale of a 70% joint venture interest in Prime
Outlets at Hagerstown and a proposed expansion to Prime Outlets at Williamsburg
which was not constructed, (ii) a decrease in ground lease expense of $1,172,
(iii) lower marketing expenses of $1,256 and (v) a decrease in all other
expenses of $224.
Special Charges
During the third quarter of 2001, we determined that certain events and
circumstances had occurred, including reduced occupancy and limited leasing
success, that indicated that four of our wholly owned properties were
permanently impaired. As a result, we recorded a third quarter provision for
asset impairment aggregating $63,026, representing the write-down of the
carrying value of these properties to their estimated fair value in accordance
with the requirements of Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of".
During 2000, we established a formal plan to sell three of our wholly owned
properties and, accordingly, reclassified their respective carrying values to
assets held for sale. In accordance with the requirements of SFAS No. 121, we
incurred a provision for asset impairment of $28,047 to reduce the carrying
value of these properties classified as held for sale to their estimated sales
value, less cost to dispose. The aggregate carrying value of these properties as
of December 31, 2000 was $43,230. Total revenues and expenses for the operating
properties classified as held for sale were $6,354 and $6,697, respectively, for
the year ended December 31, 2000. See "Liquidity and Capital Resources - 2001
Sales Transactions" within Management's Discussion of Financial Condition and
Results of Operations for additional information.
Additionally, we also determined that certain events and circumstances had
occurred during 2000, including reduced occupancy and limited leasing success,
which indicated that four wholly owned properties and two joint venture
properties were permanently impaired. Furthermore, our results of operations for
2000 include a provision for asset impairment aggregating $40,616 representing
the write-down of the carrying values of these permanently impaired properties
to their estimated fair value in accordance with SFAS No. 121.
On April 12, 2000, we announced that we had been unable to conclude an
agreement to transfer ownership of our wholly-owned e-commerce subsidiary,
primeoutlets.com inc., also known as eOutlets.com, to a management-led investor
group comprised of eOutlets.com management and outside investors. Effective
April 12, 2000, eOutlets.com ceased all operations and on November 6, 2000 filed
for bankruptcy under Chapter 7. In connection with the discontinuance of
eOutlets.com, we incurred a non-recurring loss of $14,703 which includes (i) the
write-off of $3,497 of costs capitalized during 1999 and (ii) $11,206 of costs
incurred during the year ended December 31, 2000. In addition, during 1999 we
incurred expenses of $3,500 related to organizational and start-up expenditures
of eOutlets.com which are reflected in corporate general and administrative
expenses in the Consolidated Statements of Operations.
The operating results for our Designer Connection outlet stores are
reflected in loss on Desinger Connection in the Consolidated Statements of
Operations. We ceased operations of our Designer Connection outlet stores in
2000.
Table 7--Capital Expenditures
The components of capital expenditures for 2001, 2000 and 1999 are
summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
New development $ 3,336 $ 17,715 $ 37,553
Expansions and renovations 4,404 26,068 49,934
Re-leasing tenant allowances 8,273 8,050 2,482
------- -------- ---------
Total $16,013 $ 51,833 $ 89,969
======= ======== =========
====================================================================================================================================
Table 8--Consolidated Quarterly Summary of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------------------------------ ------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues (1) $ 56,099 $ 54,760 $ 57,104 $ 58,117 $ 70,517 $ 71,408 $ 68,584 $ 72,841
Total expenses (2)(3)(4)(5)(6) 66,814 128,012 64,167 64,480 135,056 75,759 84,343 84,528
--------- -------- -------- -------- --------- -------- --------- ---------
Loss before gain (loss)
on sale of real estate,
minority interests and
extraordinary loss (10,715) (73,252) (7,063) (6,363) (64,539) (4,351) (15,759) (11,687)
Gain (Loss) on sale
of real estate (1,615) - (180) 732 (42,648) - - -
--------- -------- -------- -------- --------- -------- --------- ---------
Loss before minority
interests and
extraordinary loss (12,330) (73,252) (7,243) (5,631) (107,187) (4,351) (15,759) (11,687)
(Income) Loss allocated
to minority interests 7 - 400 1 3 767 - (32)
--------- -------- -------- -------- --------- -------- --------- ---------
Loss before extraordinary
loss (12,323) (73,252) (6,843) (5,630) (107,184) (3,584) (15,759) (11,719)
Extraordinary loss - - - - (4,206) - - -
--------- -------- -------- -------- --------- -------- --------- ---------
Net loss (12,323) (73,252) (6,843) (5,630) (111,390) (3,584) (15,759) (11,719)
Income allocated to
preferred shareholders (5,668) (5,668) (5,668) (5,668) (5,668) (5,668) (5,668) (5,668)
--------- -------- -------- -------- --------- -------- --------- ---------
Net loss applicable to
common shares $ (17,991) $(78,920) $(12,511) $(11,298) $(117,058) $ (9,252) $ (21,427) $ (17,387)
========= ======== ======== ======== ========= ======== ========= =========
Basic and diluted loss
per common share:
Loss before extraordinary
loss $ (0.41) $ (1.81) $ (0.29) $ (0.26) $ (2.59) $ (0.21) $ (0.49) $ (0.40)
Extraordinary loss - - - - (0.10) - - -
--------- -------- -------- -------- --------- -------- --------- --------
Net loss $ (0.41) $ (1.81) $ (0.29) $ (0.26) $ (2.69) $ (0.21) $ (0.49) $ (0.40)
========= ======== ======== ======== ========= ======== ========= =========
Weighted-average
common shares
outstanding -
basic and diluted 43,578 43,578 43,578 43,578 43,578 43,578 43,532 43,357
========= ======== ======== ======== ========= ======== ========= =========
====================================================================================================================================
Notes:
(1) The first quarter of 2000 revenues reflect a non-recurring gain on the sale
of outparcel land of $2,472.
(2) The third quarter of 2001 expenses reflect non-recurring charges and
expenses aggregating $65,944 including (i) a provision for asset impairment
of $63,026, (ii) a charge of $1,882 related to an interest rate subsidy and
(iii) a loss of $1,036 incurred in connection with the refinancing of first
mortgage loans on Prime Outlets at Birch Run.
(3) The first quarter of 2000 expenses reflect non-recurring charges and
expenses aggregating $14,714 including (i) a loss of $12,964 associated
with the discontinuance of our eOutlets.com subsidiary and (ii) severance
and other compensation costs totaling $1,750.
(4) The second quarter of 2000 expenses reflect non-recurring charges and
expenses aggregating $11,979 including (i) a provision for asset impairment
of $8,538, (ii) a loss of $1,315 associated with the discontinuance of our
eOutlets.com subsidiary, (iii) professional fees related to refinancing
activities of $1,455 and (iv) severance and other compensation costs
totaling $671.
(5) The third quarter of 2000 expenses reflect non-recurring charges and
expenses aggregating $1,524 including (i) costs of $1,100 related to the
termination of the sale of a joint venture interest in Prime Outlets at
Hagerstown and an expansion to Prime Outlets at Williamsburg, which was not
constructed, and (ii) a loss of $424 related to the discontinuance of our
eOutlets.com subsidiary.
(6) The fourth quarter of 2000 expenses reflect a non-recurring provision for
asset impairment of $60,125. Included is $20,547 related to the Company's
decision to reclassify three properties to assets held for sale and $39,578
related to five properties where significant tenants filed for bankruptcy
in late 2000 and early 2001 and we have limited releasing opportunities.
Comparison of the Year Ended December 31, 2000 to the Year Ended December 31,
1999
Summary
We reported net losses of $142,452 and $34,829 for the years ended December
31, 2000 and 1999, respectively. For the year ended December 31, 2000, the net
loss applicable to our common shareholders was $165,124, or $3.79 per common
share on a basic and diluted basis. For the year ended December 31, 1999, the
net loss applicable to our common shareholders was $44,791, or $1.04 and $1.30
per common share on a basic and diluted basis, respectively.
The 2000 results reflect certain non-recurring items, including (i) a loss
on the sale of real estate of $42,648, (ii) a provision for asset impairment of
$68,663, (iii) a loss on eOutlets.com of $14,703, (iv) general and
administrative expenses consisting of severance and other compensation costs
aggregating $2,421 and professional fees of $1,455 related to refinancing
activities, (v) a gain on the sale of outparcel land of $2,472 included in
interest and other income, (vi) a loss on Designer Connection of $1,815, (vii)
other charges of $1,100 incurred in connection with the termination of the sale
of joint venture interests in certain properties and (viii) an extraordinary
loss of $4,206 related to the prepayment and modification to the terms of
certain long-term debt.
The 1999 results reflect certain non-recurring items, including (i) a
provision for abandoned projects of $16,039, (ii) a provision for asset
impairment of $15,842, (iii) a loss on the sale of real estate of $15,153, (iv)
a loss on Designer Connection of $6,561 and (v) an extraordinary loss of $3,518
(net of minority interests of $887) relating to the early extinguishment of
certain long-term debt.
Revenues
Total revenues were $283,350 for the year ended December 31, 2000, compared
to $305,956 for the year ended December 31, 1999, a decrease of $22,606, or
7.4%. Base rents decreased $15,149, or 7.8%, in 2000 compared to 1999. These
decreases are primarily due to the Prime/Estein Transaction and reduced
portfolio occupancy, partially offset by the Portfolio Expansion. Straight-line
rent income (expense), included in base rent were $(94) and $1,181 for the years
ended December 31, 2000 and 1999, respectively.
Percentage rents, which represent rents based on a percentage of sales
volume above a specified threshold, decreased $1,716, or 21.2%, to $6,369 during
the year ended December 31, 2000 compared to $8,085 for the same period in 1999.
This decline was primarily attributable to the Prime/Estein Transaction.
As summarized in TABLE 3, merchant sales reported for centers remaining in
our outlet center portfolio at period-end were $2,746 million and $3,287 million
for the years ended December 31, 2000 and 1999, respectively. The decrease in
total reported merchant sales is primarily due to the sale of the Permanent Loan
Properties on December 22, 2000. The reported merchant sales data for the
Permanent Loan Properties are excluded from the 2000 sales data presented in
TABLE 3. The weighted average reported merchant sales per square foot decreased
to $245 per square foot in 2000 from $257 per square foot in 1999. Total
merchant occupancy cost per square foot increased slightly from $21.90 in 1999
to $22.03 in 2000 and as a percentage of reported sales from 8.54% to 8.99%,
respectively.
Tenant reimbursements, which represent the contractual recovery from
tenants of certain operating expenses, decreased by $6,713, or 7.5%, to $83,350
in 2000 compared to $90,063 in 1999. This decrease is primarily due to the
Prime/Estein Transaction and reduced occupancy in 2000, partially offset by the
Portfolio Expansion.
Interest and other income increased by $972, or 7.0%, to $14,801 during the
year ended December 31, 2000 as compared to $13,829 for the year ended December
31, 1999. This increase reflects (i) a nonrecurring first quarter 2000 gain on
sale of outparcel land of $2,472, (ii) an increase in amortization of deferred
income of $809, (iii) higher lease termination income of $721, (iv) higher
property management fee income of $694 and (v) higher interest income of $434.
These were partially offset by (i) a reduction in equity earnings from
investment in partnerships of $2,036, (ii) lower temporary tenant income of
$1,269, (iii) reduced municipal assistance income of $313 and (iv) decreases in
all other miscellaneous income of $540.
Expenses
Property operating expenses decreased by $2,325, or 3.3%, to $68,537 in
2000 compared to $70,862 in 1999. Real estate taxes expense decreased by $629,
or 2.8%, to $21,776 in 2000 from $22,405 in 1999. The decrease in property
operating expenses is primarily due to the Prime/Estein Transaction, partially
offset by the Portfolio Expansion. As shown in TABLE 5, depreciation and
amortization expense decreased by $6,084, or 8.3%, to $67,556 in 2000, compared
to $73,640 in 1999. This decrease results from the Prime/Estein Transaction,
partially offset by the depreciation and amortization of assets associated with
the Portfolio Expansion.
As shown in TABLE 6, interest expense increased by $4,300, or 4.6%, to
$98,234 in 2000 compared to $93,934 in 1999. This increase reflects (i) higher
interest incurred of $2,942, (ii) a reduction in amortization of debt premiums
of $1,247 and (iii) a decrease in the amount of interest capitalized in
connection with development projects of $1,234. Partially offsetting these items
was a decrease in amortization of deferred financing costs of $1,123.
The increase in interest incurred is primarily attributable to an increase
in our weighted average contractual interest rate on long-term debt for the year
ended December 31, 2000 compared to the same period in 1999. The weighted
average contractual interest rates for 2000 and 1999 were 8.46% and 7.90%,
respectively. Partially offsetting the impact of the interest rate increase was
a reduction of $48,209 in our weighted average debt outstanding, excluding debt
premiums, during 2000 compared to 1999.
Other charges increased by $10,637, or 153.8%, to $17,555 for the year
ended December 31, 2000 compared to $6,918 for the same period in 1999. The 2000
results reflect costs of $1,100 incurred in the third quarter in connection with
the discontinuance of the proposed sale of a 70% joint venture interest in Prime
Outlets at Hagerstown and a future expansion to Prime Outlets at Williamsburg.
The 1999 results reflect the write-off of $3,100 of capitalized costs associated
with our expired option to purchase our joint venture partner's 50.0% ownership
interest in Prime Outlets at New River. Excluding these items, other charges
increased $12,637 due to (i) a higher provision for uncollectible accounts
receivable of $6,664 resulting in part from certain tenant bankruptcies and
abandonments, (ii) higher marketing expenses of $4,263, (iii) increased
non-capitalized pre-development costs of $791, (iv) an increase in all other
miscellaneous charges of $596 and (v) an increase in ground lease expense of
$323.
Special Charges
During 2000, we established a formal plan to sell three of our wholly owned
properties and, accordingly, reclassified their respective carrying values to
assets held for sale. Total revenues and expenses for the operating properties
classified as held for sale were $6,354 and $6,697, respectively, for the year
ended December 31, 2000. In accordance with the requirements of SFAS No. 121, we
incurred a provision for asset impairment of $28,047 to reduce the carrying
value of these properties classified as held for sale to their estimated sales
value, less cost to dispose. The aggregate carrying value of these properties as
of December 31, 2000 was $43,230.
Additionally, we also determined that certain events and circumstances had
occurred during 2000, including reduced occupancy and limited leasing success,
which indicated that four wholly owned properties and two joint venture
properties were permanently impaired. Furthermore, our results of operations for
2000 include a provision for asset impairment aggregating $40,616 representing
the write-down of the carrying values of these permanently impaired properties
to their estimated fair value in accordance with SFAS No. 121.
On April 12, 2000, we announced that we had been unable to conclude an
agreement to transfer ownership of our wholly-owned e-commerce subsidiary,
primeoutlets.com inc., also known as eOutlets.com, to a management-led investor
group comprised of eOutlets.com management and outside investors. Effective
April 12, 2000, eOutlets.com ceased all operations and on November 6, 2000 filed
for bankruptcy under Chapter 7. In connection with the discontinuance of
eOutlets.com, we incurred a non-recurring loss of $14,703 which includes (i) the
write-off of $3,497 of costs capitalized during 1999 and (ii) $11,206 of costs
incurred during the year ended December 31, 2000. In addition, during 1999 we
incurred expenses of $3,500 related to organizational and start-up expenditures
of eOutlets.com which are reflected in corporate general and administrative
expenses in the Consolidated Statements of Operations.
When accounting for 1999, we determined that certain events and
circumstances had occurred during 1999, including, limited leasing success and
revised occupancy estimates, which indicated one wholly-owned property and one
joint venture property were permanently impaired. Accordingly, the results of
operations for 1999 include a provision for asset impairment of $15,842
representing the write-down of the carrying values of these assets to their
estimated fair value in accordance with SFAS No. 121. Additionally, when
accounting for 1999, we recorded a provision for abandoned projects of $16,039
based on our determination that as of December 31, 1999, our pre-development
efforts associated with certain projects were no longer viable.
The operating results for our Designer Connection outlet stores are
reflected in loss on Designer Connection in the Consolidated Statements of
Operations. When accounting for 1999, because we decided to discontinue the
operations of its Designer Connection outlet stores, we recorded non-recurring
charges aggregating $3,659, including (i) $1,659 related to the write-off of
costs associated with a web-site for Designer Connection and (ii) $2,000 of
costs to cover the expected cash and non-cash costs of the closure. The cash and
non-cash costs of the closure primarily consisted of (i) employee termination
costs, (ii) lease obligations, and (iii) the write-down of assets to their net
realizable value. We ceased operations of our Designer Connection outlet stores
in 2000.
Liquidity and Capital Resources
Sources and Uses of Cash
For the year ended December 31, 2001, net cash provided by operating
activities was $32,911, net cash provided by investing activities was $5,595 and
net cash used in financing activities was $39,875.
The gross cash provided by investing activities during the year ended
December 31, 2001 was $25,885 which consisted of (i) $8,993 of net proceeds from
the sale of Prime Outlets at Silverthorne on March 16, 2001, (ii) $510 of net
proceeds from the February 2, 2001 sale of Northgate Plaza, (iii) $8,286 of net
proceeds from the August 21, 2001 Birch Run Outlet Center refinancing
transaction and (iv) $6,237 of net proceeds from the October 19, 2001
Williamsburg Outlet Center refinancing transaction. Partially offsetting theses
sources were gross uses of cash totaling $20,290 comprised of (i) $15,170 of
additions to rental property, (ii) $2,950 of equity contributions to
unconsolidated partnerships and (iii) $2,170 of payments related to
eOutlets.com. The additions to rental property are primarily attributable to (i)
the payment of remaining construction costs for Prime Outlets of Puerto Rico
which opened on July 27, 2000, (ii) costs incurred in connection with re-leasing
space to new merchants and (iii) capital expenditures associated with the
renovation and rehabilitation of existing outlet centers.
The gross uses of cash for financing activities of $57,174 during the year
ended December 31, 2001 consisted of (i) scheduled principal amortization on
notes payable of $22,971, (ii) repayment in full of certain mortgage
indebtedness on Prime Outlets at Edinburgh of $16,330, (iii) principal
prepayments totaling $16,921 on our Mezzanine Loan and (iv) deferred costs of
$952. Partially offsetting these items were proceeds from (i) the Edinburgh
First Mortgage Loan of $16,700, (ii) other new borrowings of $199 and (iii)
contributions from minority interests of $400.
The following tables summarize our contractual obligations and other
commitments as of December 31, 2001:
- ------------------------------------------------------------------------------------------------------------------------------------
Payments Due by Period
-------------------------------------------------------------------------------
Less than After
Contractual Obligations (1) Total 1 year 1 to 3 years 4 to 5 years 5 years
- ------------------------------------------------------------------------------------------------------------------------------------
Bonds and notes payable, excluding debt premiums $ 855,102 $ 48,479 $ 523,667 $ 173,078 $ 109,878
Operating lease payments 9,188 1,668 1,642 502 5,376
--------- -------- --------- --------- ---------
Total $ 864,290 $ 50,147 $ 525,309 $ 173,580 $ 115,254
========= ======== ========= ========= =========
====================================================================================================================================
- --------------------------------------------------------------------------------
Annualized
In Arrears as Dividend
Preferred Stock Dividend (2) of 12/31/01 Requirement
- --------------------------------------------------------------------------------
Series A Senior Preferred Stock $ 12,830 $ 6,037
Series B Convertible Preferred Stock 35,349 16,635
-------- --------
Total $ 48,179 $ 22,672
======== ========
================================================================================
- --------------------------------------------------------------------------------
Amount of Debt
Guarantee as Maturity
Guarantees of Indebtedness of Others (3) of 12/31/01 Date
- --------------------------------------------------------------------------------
HGP Secured Credit Facility $ 10,000 July, 2002
HGP office and equipment debt 2,435 December, 2002
--------
Total $ 12,435
========
================================================================================
Notes:
(1) Amounts excludes contractual obligations related to (i) Prime Outlets at
Hagerstown (see "2002 Sales Transaction") and (ii) Prime Outlets at Conroe
and Prime Outlets at Jeffersonville II (see "Defaults on Certain
Non-recourse Mortgage Indebtedness. We sold Prime Outlets at Hagerstown to
the Prime/Estein Venture") on January 11, 2002 and commencing on that date
we account for our remaining 30% ownership interest in accordance with the
equity method of accounting. Additionally, non-recourse mortgage loans on
Prime Outlets at Conroe and Prime Outlets at Jeffersonville II are
cross-collateralized. Effective January 1, 2002, the lender foreclosed on
Prime Outlets at Conroe. The lender and we remain in discussions regarding
the transfer of our ownership interest in Prime Outlets at Jeffersonville
II.
(2) See "Dividends and Distributions" for additional information.
(3) See "Guarantees of Indebtedness of Others" for additional information.
Going Concern
Our liquidity depends on cash provided by operations and potential capital
raising activities such as funds obtained through borrowings, particularly
refinancings of existing debt, and cash generated through asset sales. Although
we believe that estimated cash flows from operations and potential capital
raising activities will be sufficient to satisfy our scheduled debt service
obligations and sustain our operations for the next year, there can be no
assurance that we will be successful in obtaining the required amount of funds
for these items or that the terms of the potential capital raising activities,
if they should occur, will be as favorable as we have experienced in prior
periods.
During 2002, we are required to make certain additional mandatory principal
pay-downs to our Mezzanine Loan aggregating $25,367 from net proceeds from asset
dispositions or other capital transactions within specified periods pursuant to
the terms of a modification to the original terms of the Mezzanine Loan (see
"Mezzanine Loan Modification" for additional information). Although we are in
the process of seeking to generate additional liquidity though new financings
and the sale of assets, there can be no assurance that we will be able to
complete asset dispositions or other capital transactions within the specified
periods or that such asset dispositions or other capital transactions, if they
should occur, will generate sufficient proceeds to make the additional mandatory
pay-downs of the Mezzanine Loan. Any failure to satisfy these mandatory
principal prepayments within the specified time periods indicated will
constitute a default under the Mezzanine Loan.
As of December 31, 2001, we were in compliance with all financial debt
covenants under our recourse loan agreements. However, there can be no assurance
that we will be in compliance with our financial debt covenants in future
periods since our future financial performance is subject to various risks and
uncertainties, including, but not limited to, the effects of increases in market
interest rates from current levels, the risk of potential increases in vacancy
rates and the resulting impact on our revenue, and risks associated with
refinancing our current debt obligations or obtaining new financing under terms
less favorable than we have experienced in prior periods. See "Defaults on
Certain Non-recourse Mortgage Indebtedness" and "Defaults on Certain
Non-recourse Mortgage Indebtedness of Unconsolidated Partnerships" for
additional information.
Based on our current financial projections, we believe we will not be in
compliance with respect to debt service coverage ratios under certain debt
facilities during 2002. The debt facilities are fixed rate tax-exempt revenue
bonds (the "Affected Fixed Rate Bonds") in the amount of $18,390 and a recourse
bridge loan (the "Bridge Loan") in the amount of $111,375. In the event of
non-compliance, the holders of the Affected Fixed Rate Bonds may elect to put
such obligations to us at a price equal to par plus accrued interest and the
Bridge Loan lender may elect to accelerate its maturity. Additionally,
noncompliance or defaults with respect to debt service coverage ratios under
these debt facilities may trigger certain cross-default provisions with respect
to other debt facilities, including our Mezzanine Loan.
We intend to meet with the affected lenders to discuss potential
resolutions including waiver or amendment with respect to such non-compliance
provisions. If we are unable to reach satisfactory resolution with the affected
lenders, we will look to (i) obtain alternative financing from other financial
institutions, (ii) sell the project or projects where non-compliance is likely
to occur or (iii) explore other possible capital transactions in order to
generate cash to repay the amounts outstanding under such debt facilities. There
can be no assurance that we will obtain a satisfactory resolution with our
affected lenders or that we will be able to complete asset sales or other
capital raising activities sufficient to repay the amounts outstanding under
such debt facilities.
These conditions raise substantial doubt about our ability to continue as a
going concern. The financial statements contained herein do not include any
adjustment to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
2001 Debt Transactions
In connection with the sales of Northgate Plaza, Prime Outlets at
Silverthorne and certain land located in Camarillo, CA during 2001, we repaid
mortgage indebtedness of $5,966, $18,078 and $6,227, respectively. In addition,
net cash proceeds from these property sales were used to prepay an aggregate of
$10,124 of principal outstanding under our Mezzanine Loan. See "2001 Sales
Transactions" for additional information.
On June 8, 2001, we, through affiliates, obtained a two-month extension
through August 10, 2001 to the terms and maturity date of a $16,330 first
mortgage loan secured by Prime Outlets at Edinburgh (the "Edinburgh Outlet
Center") located in Edinburgh, Indiana. On June 29, 2001, we, through
affiliates, completed a refinancing of this first mortgage loan. The new first
mortgage loan (the "Edinburgh First Mortgage Loan") provides for an aggregate
commitment up to $18,000 and is non-recourse to us. The Edinburgh First Mortgage
Loan, which is secured by the Edinburgh Outlet Center, has a term of three
years, requires monthly principal payments based upon a 15-year amortization
schedule and is pre-payable at any time subject to certain prepayment and exit
fees. The Edinburgh First Mortgage Loan bears interest at a floating rate based
on six-month LIBOR plus 350 basis points, subject to an 8.00% minimum, and may
be adjusted semi-annually with a maximum 1.0% increase or decrease per
adjustment. As of December 31, 2001, the Edinburgh First Mortgage Loan bore
interest at the minimum rate. At closing, $16,700 of the Edinburgh First
Mortgage Loan was funded, resulting in net proceeds of $88 after repayment of
the old first mortgage loan and closing costs. As of December 31, 2001, the
remaining commitment provides for the funding of up to an additional $1,300 for
leasing related capital expenditures at the Edinburgh Outlet Center.
Prime/Estein Venture Refinancing Transactions
On August 7, 2001, we, through affiliates, obtained an additional one-month
extension to September 10, 2001 to the terms and maturity date of a $10,003
first mortgage loan secured by Prime Outlets at Birch Run (the "Birch Run Outlet
Center") located in Birch Run, Michigan. The terms and maturity date of the
$10,003 first mortgage loan had previously been extended to August 10, 2001. We
and Estein, through affiliates, have 30% and 70% ownership interests,
respectively, in the Prime/Estein Venture that indirectly owns the Birch Run
Outlet Center. We completed a refinancing of first mortgage loans aggregating
$63,000 on the Birch Run Outlet Center on August 21, 2001. These loans which
were refinanced were included in a "wrap-around" loan provided by us to the
Prime/Estein Venture in connection with the November 19, 1999 sale of the Birch
Run Project.
The new first mortgage loan (the "Birch Run First Mortgage Loan") is in the
amount of $63,000, is secured by the Birch Run Outlet Center, has a term of ten
years, and requires monthly principal amortization based upon a 25-year
schedule. The Birch Run First Mortgage Loan bears interest at an effective
fixed-rate of 8.12%. Greenwich Capital Financial Products, Inc. provided the
financing. The Prime/Estein Venture used the net proceeds from the Birch Run
First Mortgage Loan to repay in full first mortgage loans and the "wrap-around"
loan of $10,731 due to us, aggregating $63,000. Net proceeds to us, after
payment of closing and other transaction costs, were $8,286. In connection with
the refinancing transaction, we recorded a non-recurring loss of $1,036 during
the third quarter of 2001.
Pursuant to Prime/Estein Venture-related documents to which affiliates of
ours are parties, we are obligated to provide to, or obtain for, the
Prime/Estein Venture fixed rate financing at an annual rate of 7.75%. As a
result, each month during the term of the Birch Run First Mortgage Loan, we will
be obligated to pay to the Prime/Estein Venture the difference between the cost
of the financing at an annual effective rate of 8.12% and the cost of the
financing at an annual rate of 7.75% (the "Interest Rate Subsidy"). The total of
the payments to be made by us to the Prime/Estein Venture over the term of the
Birch Run First Mortgage Loan will be $2,723. During the third quarter of 2001,
we recorded a non-recurring loss of $1,882 in other charges representing the net
present value of the Interest Rate Subsidy.
On October 19, 2001, we, through affiliates, completed the refinancing of a
$32,500 first mortgage loan secured by Prime Outlets at Williamsburg (the
"Williamsburg Outlet Center"), an outlet center located in Williamsburg,
Virginia. The new first mortgage loan (the "Williamsburg Mortgage Loan") has a
principal amount of $32,500, is secured by the Williamsburg Outlet Center, and
has a term of ten years. The Williamsburg Mortgage Loan requires monthly
principal amortization based upon a 25-year schedule and bears interest at a
fixed rate of 7.69%. Prudential Mortgage Capital Company, LLC provided the
financing.
We and Estein, through affiliates, own 30% and 70% interests, respectively,
in the Prime/Estein Venture that indirectly owns the Williamsburg Outlet Center.
In connection with the refinancing transaction, the Prime/Estein Venture paid in
full a $10,000 promissory note (of which Estein's obligation was $7,000 and ours
was $3,000) to us. Our proceeds after payment of closing and other transaction
costs were $6,237. The net proceeds from this refinancing transaction were used
to prepay $5,997 of the Mezzanine Loan.
Pursuant to Prime/Estein Venture-related agreements to which affiliates of
ours are parties, we are obligated to provide to, or obtain for, the
Prime/Estein Venture fixed rate financing at an annual rate of 7.75%. As a
result, each month during the term of the Williamsburg Mortgage Loan, the
Prime/Estein Venture will be obligated to pay to us the difference between the
cost of such financing at an assumed annual rate of 7.75% and the actual cost of
such financing at an annual rate of 7.69%.
Mezzanine Loan Modification
Effective January 31, 2002, we entered into a modification to the original
terms of our Mezzanine Loan (see Note 6 - "Bonds and Notes Payable" of the Notes
to Consolidated Financial Statements for additional information) previously
obtained from Fortress Investment Fund LLC and Greenwich Capital Financial
Products, Inc. (collectively, the "Lender") in December 2000.
The Mezzanine Loan amendment (the "Amendment"), among other things, (i)
reduces required monthly principal amortization for the period February 1, 2002
through January 1, 2003 ("Year 2") from $1,667 to $800, which may be further
reduced to a minimum of $500 per month under certain limited circumstances,
provided no defaults exist under the Mezzanine Loan and certain other conditions
have been satisfied at the Lender's sole discretion, (ii) requires certain
mandatory principal prepayments from net proceeds from asset dispositions or
other capital transactions pursuant to the schedule set forth below and (iii)
reduces the threshold level at which excess cash flow from operations must be
applied to principal pay-downs, primarily resulting from a reduction in the
available working capital reserves. Additionally, the Amendment (i) increased
the interest rate from LIBOR plus 9.50% to LIBOR plus 9.75% (rounded up to
nearest 0.125% with a minimum rate of 14.75%), (ii) changed the Mezzanine Loan
maturity date from December 31, 2003 to September 30, 2003 and (iii) required a
0.25% fee, which was paid at the time of the modification, on the outstanding
principal balance.
The Amendment also requires additional Year 2 monthly payments of $250 (the
"Escrowed Funds") into an escrow account controlled by the Lender. Provided
certain conditions are satisfied in the Lender's sole discretion, the Escrowed
Funds may be available to us for certain limited purposes. The Escrowed Funds
not used at the end of each quarter, subject to certain exceptions, will be
applied by the Lender to amortize the Mezzanine Loan. The required monthly
principal amortization of $2,333 commencing on February 1, 2003, through the new
maturity date of September 30, 2003, remains unchanged.
The Amendment also requires, in lieu of the original requirements,
additional mandatory principal prepayments with net proceeds from asset
dispositions, excluding the January 2002 sale of a 70% interest in Prime Outlets
at Hagerstown (see "2002 Sales Transactions" for additional information), or
other capital transactions of not less than (i) $8,906 by May 1, 2002, (ii)
$24,406, inclusive of the $8,906, by July 1, 2002 (subject to extension to
October 31, 2002 provided certain conditions are met to the Lender's
satisfaction) and (iii) $25,367, inclusive of the $24,406, by November 1, 2002.
In addition to each principal prepayment, we must also pay any interest,
including deferred interest, accrued thereon and the additional fees provided
for in the Mezzanine Loan. Any failure to satisfy these mandatory principal
prepayments or other payments within the specified time periods indicated will
constitute a default under the Mezzanine Loan.
The Mezzanine Loan was also amended on January 11, 2002 to, among other
things, (i) release the partnership interests in Outlet Village of Hagerstown
Limited Partnership ("Hagerstown LP") as collateral under the Mezzanine Loan,
(ii) release Hagerstown LP of all obligations under the Mezzanine Loan and (iii)
add Hagerstown Land, L.L.C., a Delaware limited liability company, as a
guarantor under the Mezzanine Loan.
Debt Service Obligations
Our aggregate indebtedness, as adjusted for the Amendment to the Mezzanine
Loan and excluding (i) unamortized debt premiums of $11,051, (ii) mortgage
indebtedness aggregating $58,079 on Prime Outlets at Hagerstown and (iii)
non-recourse mortgage indebtedness aggregating $33,235 on Prime Outlets at
Conroe and Prime Outlets at Jeffersonville II was $855,102 (the "Adjusted
Indebtedness") at December 31, 2001. See "2002 Sales Transactions" and "Defaults
on Certain Non-recourse Mortgage Indebtedness" for additional information.
At December 31, 2001, the Adjusted Indebtedness had a weighted-average
maturity of 3.3 years and bore contractual interest at a weighted-average rate
of 9.05% per annum. At December 31, 2001, $756,751, or 88.5%, of the Adjusted
Indebtedness bore interest at fixed rates and $98,351 or 11.5%, of the Adjusted
Indebtedness bore interest at variable rates. We utilize derivative financial
instruments to manage our interest rate risk associated with variable rate debt.
As of December 31, 2001, our scheduled principal payments during 2002 for
the Adjusted Indebtedness aggregated $48,479. The 2002 scheduled principal
payments include (i) a recourse first mortgage loan of $2,972 on Western Plaza
(the "Western Plaza First Mortgage Loan"), a community center located in
Knoxville, Tennessee, which currently matures on April 30, 2002 but may be
extended, subject to an additional principal pay-down of $350, an additional six
months to October 31, 2002 and (ii) additional mandatory principal pay-downs on
the Mezzanine Loan aggregating $25,367 (see "Mezzanine Loan Modification" for
additional information). Certain of our debt obligations, including the
Mezzanine Loan and fixed-rate bonds aggregating $7,000 secured by a second
mortgage on Western Plaza, contain cross-default provisions that would be
triggered in the event of a default under the Western Plaza First Mortgage Loan.
In the event such cross-default provisions were triggered, the holders of the
Mezzanine Loan could elect to accelerate such debt and the holders of the bonds
could elect to put such obligations to us at a price equal to par plus accrued
interest.
Guarantees of Indebtedness of Others
We are a guarantor or otherwise obligated with respect to an aggregate of
$12,435 of the indebtedness of Horizon Group Properties, Inc. and its affiliates
("HGP"), including $10,000 of obligations under a secured credit facility (the
"HGP Secured Credit Facility"). HGP is a publicly traded company that was formed
in connection with our merger with Horizon Group, Inc. in June, 1998.
The HGP Secured Credit Facility bore interest at a rate of 30-day LIBOR
plus 1.90%, was collateralized by five properties located throughout the United
States and matured on July 11, 2001. On August 2, 2001, HGP announced it had
refinanced one of the properties in the HGP Secured Credit Facility and used the
proceeds from the new first mortgage loan to reduce the principal balance of the
HGP Secured Credit Facility. Simultaneously, HGP obtained an extension to the
remaining principal balance of approximately $33,500, including a 2% extension
fee, on the HGP Secured Credit Facility through July 11, 2002. Commencing on the
extension date, the HGP Secured Credit Facility bears interest at a rate of
30-day LIBOR (but not less than 4.10%) plus 3.95%, requires monthly principal
amortization of $225, and is collateralized by four properties located
throughout the United States. We confirmed our obligations as guarantor with
respect to the HGP Secured Credit Facility in connection with the extension and
partial pay-down. No claims have been made against the Company's guaranty by the
HGP Secured Credit Facility lender. On October 11, 2001, HGP announced that it
was in default under two loans with an aggregate principal balance of $45,500
secured by six of its other outlet centers. Such defaults are not defaults under
the HGP Secured Credit Facility or any other facility guaranteed by us.
We, through affiliates, hold a 51% interest in the owner of Phases II and
III of an outlet center located in Bellport, New York (the "Bellport Outlet
Center"). We account for our interest in Phases II and III of the Bellport
Outlet Center in accordance with the equity method of accounting. On May 1,
2001, the recourse first mortgage loan on Phases II and III of the Bellport
Outlet Center of $7,795 matured. On May 21, 2001, we, on behalf of the owner,
made a principal payment of $2,295 to the lender in exchange for a modification
to the terms and a one-year extension of the maturity of this mortgage
indebtedness. The outstanding balance of the first mortgage loan was $5,500 as
of December 31, 2001. We plan to sell this property to repay the outstanding
balance in full. If we are unable to consummate a sale of the property, we will
attempt to either refinance or extend the maturity of such indebtedness on terms
acceptable to us. There can be no assurance that we will be successful in
obtaining the required amount of funds for the maturing indebtedness or that the
terms of any potential sale, refinancing or extension of the maturity will be as
favorable as we have experienced in prior periods or otherwise acceptable to us.
As of December 31, 2001, the carrying value of our investment in Phases II and
III of the Bellport Outlet Center was $1,689, which is included in investments
in unconsolidated partnerships in the Consolidated Balance Sheet.
Defaults on Certain Non-recourse Mortgage Indebtedness
During 2001, certain of our subsidiaries suspended regularly scheduled
monthly debt service payments on two non-recourse mortgage loans aggregating
$33,235 as of December 31, 2001. These non-recourse mortgage loans which are
held by New York Life Investment LLC ("New York Life") are cross-collateralized
by Prime Outlets at Jeffersonville II, located in Jeffersonville, Ohio, and
Prime Outlets at Conroe, located in Conroe, Texas.
Effective January 1, 2002, New York Life foreclosed on Prime Outlets at
Conroe. We remain in discussions with New York Life regarding the transfer of
our ownership interest in Prime Outlets at Jeffersonville II. During 2001, all
excess cash flow from the operations of these centers was utilized for debt
service on the two non-recourse mortgage loans. Accordingly, we believe the
foreclosure sale of Prime Outlets at Conroe and the potential transfer of our
ownership interest in Prime Outlets at Jeffersonville II will not have a
material impact on our results of operations or financial condition.
Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated
Partnerships
Two mortgage loans related to projects in which we, through subsidiaries,
indirectly own joint venture interests have matured and are in default. The
loans, at the time of default, were (i) a $10,389 first mortgage loan on Phase I
of the Bellport Outlet Center, held by Union Labor Life Insurance Company
("Union Labor"); and (ii) a $13,338 first mortgage loan on Oxnard Factory
Outlet, an outlet center located in Oxnard, California, held by Fru-Con. An
affiliate of ours has a 50% ownership interest in the partnership which owns
Phase I of the Bellport Outlet Center. Fru-Con and us are each a 50% partner in
the partnership that owns Oxnard Factory Outlet.
Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center
and a receiver was appointed March 27, 2001 by the court involved in the
foreclosure action. Effective May 1, 2001, a manager hired by the receiver began
managing and leasing Phase I of the Bellport Outlet Center. We continue to
negotiate the terms of a transfer of our ownership interest in Oxnard Factory
Outlet to Fru-Con. We do not manage or lease Oxnard Factory Outlet.
We believe neither of these mortgage loans is recourse to us. It is
possible, however, that either or both of the respective lenders will, after
completing its foreclosure action, file a lawsuit seeking to collect from us the
difference between the value of the mortgaged property and the amount due under
the loan. If such an action is brought, the outcome and ultimate liability, if
any, cannot be predicted at this time. In addition, we are currently not
receiving any cash flow from Oxnard Factory Outlet and were not receiving,
directly or indirectly any cash flow from Phase I of the Bellport Outlet Center
prior to the loss of control of such project. We account for our interests in
(i) Phases I of the Bellport Outlet Center and (ii) the Oxnard Factory Outlet in
accordance with the equity method of accounting. As of December 31, 2001, the
carrying value of our investment in these properties was $0. Therefore, we do
not believe the existing defaults under these loans or any related foreclosures
on the mortgaged properties will have a material impact on our results of
operations or financial condition.
2002 Sales Transaction
On January 11, 2002, we completed the sale of Prime Outlets at Hagerstown
(the "Hagerstown Center") to an existing joint venture partnership (the
"Prime/Estein Venture") between one of our affiliates and an affiliate of Estein
& Associates USA, Ltd. ("Estein"), a real estate investment company, for
$80,500. Our affiliate and the Estein affiliate have 30% and 70% ownership
interests, respectively, in the Prime/Estein Venture. In connection with the
sale transaction, the Prime/Estein Venture assumed first mortgage indebtedness
of $46,862 on the Hagerstown Center (the "Assumed Mortgage Indebtedness"). In
connection with the lender's consent to the Prime/Estein Venture assuming the
Assumed Mortgage Indebtedness, our guarantee of the Assumed Mortgage
Indebtedness remained in place.
The net cash proceeds from the sale, including the release of certain funds
held in escrow, were $12,113 after a pay-down of $11,066 of existing mortgage
indebtedness on the Hagerstown Center and closing costs. The net proceeds from
this sale were used to prepay $11,647 of principal outstanding under our
Mezzanine Loan. At December 31, 2001, the carrying value of the Hagerstown
Outlet Center of $54,628 was classified as assets held for sale in the
Consolidated Balance Sheet.
We are obligated to refinance the Assumed Mortgage Indebtedness on behalf
of the Prime/Estein Venture on or before June 1, 2004, its maturity date.
Additionally, pursuant to certain Prime/Estein Venture-related documents to
which affiliates of ours are parties, the Prime/Estein Venture's cost of the
Assumed Mortgage Indebtedness and any refinancing of it are fixed at an annual
rate of 7.75% for a period of 10 years. If the actual cost of such indebtedness
should exceed 7.75% at any time during the ten-year period, we will be obligated
to pay the difference to the Prime/Estein Venture. However, if the actual cost
of such indebtedness is less than 7.75% at any time during the ten-year period,
the Prime/Estein Venture will be obligated to pay the difference to us. The
actual cost of the Assumed Mortgage Indebtedness is currently 30-day LIBOR plus
1.50%.
2001 Sales Transactions
On February 2, 2001, we sold Northgate Plaza, a community center located in
Lombard, Illinois to Arbor Northgate, Inc. for aggregate consideration of
$7,050. After the repayment of mortgage indebtedness of $5,966 and closing
costs, the net cash proceeds from the Northgate Plaza sale were $510. On March
16, 2001, we sold Prime Outlets at Silverthorne, an outlet center located in
Silverthorne, Colorado consisting of 257,000 square feet of GLA, to Silverthorne
Factory Stores, LLC for aggregate consideration of $29,000. The net cash
proceeds from the sale of Prime Outlets at Silverthorne were $8,993, after the
repayment of certain mortgage indebtedness of $18,078 on Prime Outlets at
Lebanon (see below) and closing costs and fees. The net proceeds from these
sales were used to prepay an aggregate $9,137 of principal outstanding under our
Mezzanine Loan in accordance with the terms of such loan agreement. In
connection with these sales, we recorded an aggregate gain on the sale of real
estate of $732 during the first quarter of 2001. The operating results of these
properties are included in our results of operations through the respective
dates of disposition. At December 31, 2000, these properties were classified as
assets held for sale in the Consolidated Balance Sheet with an aggregate
carrying value of $34,770.
On November 27, 2001, we sold certain land located in Camarillo, California
for aggregate consideration of $7,150. The net cash proceeds from the sale,
including the release of certain funds held in escrow, were $1,859, after the
repayment of certain mortgage indebtedness of $6,227 and closing costs and fees.
The net proceeds from this sale were used to prepay $1,787 of the Mezzanine
Loan. In connection with this sale, we recorded a loss on the sale of real
estate of $1,615 during the fourth quarter of 2001. At December 31, 2000, the
land was classified as assets held for sale in the Consolidated Balance Sheet
with a carrying value of $8,460.
Prior to the sale of Prime Outlets at Silverthorne, it was one of fifteen
properties securing our First Mortgage and Expansion Loan, which had an
outstanding principal balance of $342,629 at December 31, 2001. In conjunction
with the sale of Prime Outlets at Silverthorne, we substituted Prime Outlets at
Lebanon for Prime Outlets at Silverthorne in the cross-collateralized asset pool
securing the First Mortgage and Expansion Loan pursuant to the collateral
substitution provisions contained in the loan agreement. In conjunction with
adding Prime Outlets at Lebanon as security for the First Mortgage and Expansion
Loan, we repaid, as discussed above, certain mortgage indebtedness on Prime
Outlets at Lebanon of $18,078.
2001 Foreclosure Sale
On May 8, 2001, Prime Outlets at New River, an outlet center located in New
River, Arizona, was sold through foreclosure. Affiliates of the Company and
Fru-Con Development Corporation ("Fru-Con") each own 50% of the partnership,
which owned the project. We accounted for our ownership interest in the
partnership that owned the project in accordance with the equity method of
accounting through the date of foreclosure sale. In connection with the
foreclosure sale, we recorded a loss on the sale of real estate of $180 during
the second quarter of 2001.
Development Activities
During 2000 we engaged in development activities related to 390,000 square
feet of GLA consisting of the opening of (i) Prime Outlets of Puerto Rico, the
first outlet center in Puerto Rico, which contains 176,000 square feet of GLA,
and (ii) four expansions to outlet centers totaling 214,000 square feet of GLA.
During 2001, we did not engage in any further development activities other than
post-opening work related to the 2000 development activities and certain
consulting activities in Europe.
As of December 31, 2001, we had $825 held in a lender escrow to fund the
remaining expected development costs for Prime Outlets of Puerto Rico, which
opened on July 27, 2000.
Interest Rate Risk
In the ordinary course of business, we are exposed to the impact of
interest rate changes and, therefore, employ established policies and procedures
to manage our exposure to interest rate changes. We use a mix of fixed and
variable rate debt to (i) limit the impact of interest rate changes on our
results from operations and cash flows and (ii) lower our overall borrowing
costs.
In certain circumstances, we use derivative financial instruments to manage
interest rate risk associated with our variable rate debt. In such cases, we
purchase interest rate protection agreements, such as caps, which are designated
as hedges for underlying variable rate debt obligations. We do not hold
derivative financial instruments for trading purposes.
The interest rate caps specifically limit our interest costs with an upper
limit on the underlying interest rate index. The cost of such contracts are
included in deferred charges and are being amortized as a component of interest
expense over the life of the contracts. Amounts earned from interest rate
protection contracts, if any, are recorded as a reduction of interest expense.
We are exposed to credit losses in the event of counterparty nonperformance, but
do not anticipate any such losses based on the creditworthiness of the
counterparties.
On December 22, 2000, we purchased an interest rate cap with a notional
amount of $90,000 to hedge our Mezzanine Loan that was funded on the same date.
The interest rate cap has a three-year term with a strike price of 8.00% based
on 30-day LIBOR. The notional amount of this interest rate cap amortizes monthly
based on estimated principal repayments on the Mezzanine Loan. Additionally, on
December 22, 200 0we also purchased an interest rate cap with a notional amount
of $20,000 to hedge our $20,000 Puerto Rico First Mortgage Loan that was funded
on the same date. The interest rate cap has a three-year term with a strike
price of 8.00% based on 30-day LIBOR. See Note 2 -- "Summary of Significant
Accounting Policies" and Note 6 -- "Bonds and Notes Payable" of the Notes to
Consolidated Financial Statements for additional information.
Although derivative financial instruments are an important component of our
interest rate management program, their incremental effect on interest expense
for the years ended December 31, 2001, 2000 and 1999 was not material.
Dividends and Distributions
To qualify as a REIT for federal income tax purposes, we are required to
pay distributions to our common and preferred shareholders of at least 90% of
our REIT taxable income in addition to satisfying other requirements. Although
we intend to make necessary distributions to remain qualified as a REIT under
the Code, we also intend to retain such amounts as we consider necessary from
time to time for our capital and liquidity needs.
Our current policy is to pay distributions only to the extent necessary to
maintain our status as a REIT for federal income tax purposes. Based on our
current federal income tax projections for 2002, we do not expect to pay any
distributions on our Series A Senior Preferred Stock, Series B Convertible
Preferred Stock, common stock or common units of limited partnership interest in
the Operating Partnership during 2002. We are currently in arrears on nine
quarters of preferred stock distributions due February 15, 2000 through February
15, 2002, respectively.
We are prohibited from paying dividends or distributions except to the
extent necessary to maintain our REIT status under the terms of the Mezzanine
Loan. In addition, we may not make distributions to our common shareholders or
our holders of common units of limited partnership interest in the Operating
Partnership unless we are current with respect to distributions to our preferred
shareholders. As of December 31, 2001, unpaid dividends for the period
commencing November 16, 1999 through December 31, 2001 on the Series A Senior
Preferred Stock and Series B Convertible Preferred Stock aggregated $12,829 and
$35,349, respectively. The annualized dividends on our 2,300,000 shares of
Series A Senior Preferred Stock and 7,828,125 shares of Series B Convertible
Preferred Stock outstanding as of December 31, 2001 are $6,037 ($2.625 per
share) and $16,635 ($2.125 per share), respectively.
Economic Conditions
Most of our tenants' leases contain provisions that somewhat mitigate the
impact of inflation. Such provisions include clauses providing for increases in
base rent and clauses enabling us to receive percentage rentals based on
merchants' gross sales. Most of the leases require tenants to pay their
proportionate share of all operating expenses, including common area
maintenance, real estate taxes and promotion, thereby reducing our exposure to
increased costs and operating expenses resulting from inflation.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137 and SFAS No. 138, which established new accounting and
reporting standards for derivative instruments. These rules require that all
derivative instruments be reported in the consolidated financial statements at
fair value. The fair value for all derivative contracts is included in other
assets or other liabilities and changes in fair value will be recorded each
period in earnings or other comprehensive income, depending on whether the
derivative is designated and effective as part of a hedged transaction, and on
the type of hedge transaction. Gains or losses on derivative instruments
reported in other comprehensive income must be reclassified into earnings in the
period in which earnings are affected by the underlying hedged item, and the
ineffective portion of all hedges is recognized in other income (expense) in the
statements of operations in the current period. These new standards may result
in additional volatility in reported earnings, other comprehensive income (loss)
and accumulated other comprehensive income (loss). These rules became effective
for us on January 1, 2001 and did not have a significant effect on our
consolidated results of operations or financial position upon adoption.
We are exposed to market risk from changes in interest rates. We manage our
exposure to these market risks through our operating, financing and investing
activities and, when deemed appropriate, through the use of interest rate
protection agreements.
We report changes in fair value of our interest rate protection agreements
in other income or expense. Our interest rate protection agreements are
marked-to-market and unrealized gains and losses are included in current period
net income (loss) as a component of other income (expense). When the terms of
the related financing are modified, or in the event of early extinguishment of
the related financing, all changes in the fair value of the instrument are
marked-to-market with changes in fair value included in net income each period
until the instrument matures.
We believe we have limited exposure to the extent of non-performance by the
counterparties of each agreement since each counterparty is a major financial
institution and we do not anticipate their non-performance.
In October, 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
of Disposal of Long-lived Assets." SFAS No. 144 supercedes SFAS No. 121, however
it retains the fundamental provisions of that statement related to the
recognition and measurement of the impairment of long-lived assets to be "held
and used." In addition, SFAS No. 144 provides more guidance on estimating cash
flows when performing a recoverability test, requires that a long-lived asset to
be disposed of other than by sale (e.g., abandoned) be classified as "held and
used" until it is disposed of, and established more restrictive criteria to
classify an asset as "held for sale." SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. We will adopt SFAS No. 144 effective January
1, 2002 and do not expect the adoption to have a material impact on our results
of operations or financial position.
Taxability of Distributions
We did not make any distributions during the years ended December 31, 2001
and 2000. TABLE 9 summarizes the taxability of distributions paid during the
year ended December 31, 1999.
Table 9--Taxability of Distributions
- --------------------------------------------------------------------------------
Amount
Year Ended December 31, 1999 per Share Percentage
- --------------------------------------------------------------------------------
Series A Senior Preferred Stock
Ordinary income $ 2.625 100.0%
======= ======
Series B Convertible Preferred Stock
Ordinary income $ 2.125 100.0%
======= ======
Series C Preferred Stock
Ordinary income $ 0.885 100.0%
======= ======
Common Stock
Ordinary income $ 0.271 23.0%
Return of capital 0.909 77.0%
------- ------
$ 1.180 100.0%
======= ======
================================================================================
Funds from Operations
Industry analysts generally consider funds from operations ("FFO"), as
defined by the National Association of Real Estate Investment Trusts ("NAREIT"),
an alternative measure of performance of an equity REIT. In October 1999, NAREIT
issued a new white paper statement and redefined how FFO is calculated,
effective January 1, 2000. FFO is now defined by NAREIT as net income (loss)
determined in accordance with GAAP, excluding gains or losses from provisions
for impairment and sales of depreciable operating property, plus depreciation
and amortization (other than amortization of deferred financing costs and
depreciation of non-real estate assets) and after adjustment for unconsolidated
partnership and joint ventures.
We believe that FFO is an important and widely-used measure of the
operating performance of REITs, which provides a relevant basis for comparison
to other REITs. Therefore, FFO is presented to assist investors in analyzing our
performance. Our FFO is not comparable to FFO reported by other REITs that do
not define the term using the current NAREIT definition or that interpret the
current NAREIT definition differently than we do. Therefore, we caution that the
calculation of FFO may vary from entity to entity and as such the presentation
of FFO by us may not be comparable to other similarly titled measures of other
reporting companies. We believe that in order to facilitate a clear
understanding of our operating results, FFO should be examined in conjunction
with net income determined in accordance with GAAP. FFO does not represent cash
generated from operating activities in accordance with GAAP and should not be
considered as an alternative to net income as an indication of our performance
or to cash flows as a measure of liquidity or ability to make distributions.
TABLE 10 provides a reconciliation of income before allocations to minority
interests and preferred shareholders to FFO for the years ended December 31,
2001, 2000 and 1999. FFO decreased $32,711, or 56.4%, to $25,256 for the year
ended December 31, 2001 from $57,967 for the year ended December 31, 2000. The
FFO results for the year ended December 31, 2001 include a non-recurring loss of
$1,036 related to the refinancing of first mortgage loans on Prime Outlets at
Birch Run. The FFO results for the year ended December 31, 2000 included net
non-recurring items totaling ($2,504). Such non-recurring items included (i)
severance and other compensation costs aggregating $2,421, (ii) professional
fees of $1,455 related to refinancing activities, and (iii) $1,100 of
transaction and construction termination costs; partially offset by a gain on
the sale of outparcel land of $2,472. Excluding the net impact of these
non-recurring items, FFO was $26,292 and $60,471 for the years ended December
31, 2001 and 2000, respectively.
The decrease in FFO and FFO per diluted share for the year ended December
31, 2001 compared to the same period in 2000 is primarily due to (i) a loss in
net operating income, partially offset by interest expense savings, resulting
from sales of certain properties during the comparable periods; (ii) higher
interest expense resulting from an increase in borrowing costs and reduced
capitalization of interest on development projects; (iii) an increase in the
provision for uncollectible accounts receivable of $5,925 resulting in part from
certain tenant bankruptcies, disputes, abandonments and store-closings and (iv)
a reduction in average occupancy in the our outlet center portfolio during the
comparable periods (90.3% and 91.6% during 2001 and 2000 respectively). We sold
four outlet centers on December 22, 2000 and two additional properties were sold
during the first quarter of 2001. In addition to these property sales, we also
sold a 70% joint venture interest in Prime Outlets at Williamsburg during
February, 2000.
Table 10--Funds from Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Loss before minority interests and
extraordinary loss $ (98,456) $ (138,984) $ (28,085)
FFO adjustments:
Loss on sale of real estate 1,063 42,648 15,153
Depreciation and amortization 56,918 67,556 73,640
Non-real estate depreciation and amortization (2,251) (1,703) (587)
Joint venture adjustments 3,074 3,269 1,639
Non-cash joint venture interest subsidy 1,882 - -
Discontinued operations - eOutlets.com - 14,703 -
Discontinued operations - Designer Connection - 1,815 6,561
--------- ---------- ---------
FFO before adjustment for asset impairment (37,770) (10,696) 68,321
Provision for asset impairment 63,026 68,663 15,842
--------- ---------- ---------
FFO before allocations to minority interests
and preferred shareholders $ 25,256 $ 57,967 $ 84,163
========= ========== =========
Other Data:
Net cash provided by operating activities $ 32,911 $ 32,450 $ 97,815
Net cash provided by (used in)
investing activities 5,595 1,095 (56,666)
Net cash used in financing activities (39,875) (31,982) (39,571)
====================================================================================================================================
The pay-out ratio based on distributions made by us divided by FFO for 1999
was 97.4%.
Table 11--Consolidated Quarterly Summary of Funds from Operations
- ------------------------------------------------------------------------------------------------------------------------------------
2001 2000
-------------------------------------------------- --------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Loss before minority
interests and extraordinary loss $(12,330) $ (73,252) $ (7,243) $ (5,631) $(107,187) $ (4,351) $ (15,759) $(11,687)
FFO adjustments:
(Gain) Loss on sale of real estate 1,615 - 180 (732) 42,648 - - -
Depreciation and amortization 15,754 13,766 13,723 13,675 17,857 17,679 15,783 16,237
Non-real estate depreciation
and amortization (558) (563) (562) (568) (635) (500) (383) (185)
Joint venture adjustments 866 620 1,033 555 640 915 1,128 586
Non-cash joint venture interest
subsidy - 1,882 - - - - - -
Discontinued operations -
eOutlets.com - - - - - 424 1,315 12,964
Discontinued operations -
Designer Connection - - - - 4 (274) 1,006 1,079
-------- --------- -------- -------- --------- -------- --------- ---------
FFO before adjustment for
asset impairment 5,347 (57,547) 7,131 7,299 (46,673) 13,893 3,090 18,994
Provision for asset impairment - 63,026 - - 60,125 - 8,538 -
-------- --------- -------- -------- --------- -------- --------- ---------
FFO before allocations to
minority interests and
preferred shareholders $ 5,347 $ 5,479 $ 7,131 $ 7,299 $ 13,452 $ 13,893 $ 11,628 $ 18,994
======== ========= ======== ======== ========= ======== ========= =========
Other Data:
Net cash provided by (used in)
operating activities $ 12,588 $ 2,163 $ 10,200 $ 7,960 $ (15,708) $ 16,184 $ 22,990 $ 8,984
Net cash provided by (used in)
investing activities 5,529 4,586 (7,022) 2,502 38,465 (11,070) (13,265) (13,035)
Net cash used in
financing activities (15,402) (6,000) (4,795) (13,678) (19,838) (5,732) (3,896) (2,516)
====================================================================================================================================
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MATERIAL RISK
Market Risk Sensitivity
Interest Rate Risk
In the ordinary course of business, we are exposed to the impact of
interest rate changes. We employ established policies and procedures to manage
our exposure to interest rate changes. See "Interest Rate Risk" and "New
Accounting Pronouncements" of Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations for additional information. We use
a mix of fixed and variable rate debt to (i) limit the impact of interest rate
changes on our results from operations and cash flows and (ii) to lower our
overall borrowing costs. The following table provides a summary of principal
cash flows, adjusted for the Amendment to the Mezzanine Loan and excluding (i)
unamortized debt premiums of $11,051, (ii) mortgage indebtedness aggregating
$58,079 on Prime Outlets at Hagerstown and (iii) non-recourse mortgage
indebtedness aggregating $33,235 on Prime Outlets at Conroe and Prime Outlets at
Jeffersonville II (see "Mezzanine Loan Modification", "2002 Sales Transaction"
and "Defaults on Certain Non-recourse Mortgage Indebtedness" within "Liquidity
and Capital Resources" of Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations for additional information), and
related contractual interest rates by fiscal year of maturity. Variable interest
rates are based on the weighted average rates of the portfolio at December 31,
2001. See Note 6 - "Bonds and Notes Payable" of the Notes to Consolidated
Financial Statements contained herein for additional information with respect to
the terms of our fixed and variable rate debt instruments.
- ------------------------------------------------------------------------------------------------------------------------------------
Year of Maturity
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter Total
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed Rate:
Principal $ 12,296 $454,478 $ 7,022 $ 51,147 $ 121,931 $ 109,877 $ 756,751
Average interest rate 7.79% 9.05% 7.20% 7.92% 8.76% 7.50% 8.69%
Variable Rate:
Principal $ 36,183 $ 46,966 $ 15,202 $ 98,351
Average interest rate 14.48% 10.93% 8.00% 11.79%
====================================================================================================================================
ITEM 8-- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item is set forth at the pages indicated in
Item 14(a) below.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information required by Items 10, 11, 12 and 13 (except that
information regarding executive officers called for by Item 10 that is contained
in Part I) is incorporated herein by reference from the definitive proxy
statement that the Company intends to file pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, on or before April 30, 2001.
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheets as of December 31,
2001 and 2000 F-2
Consolidated Statements of Operations for the
years ended December 31, 2001, 2000 and 1999 F-3
Consolidated Statements of Cash Flows for the
years ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2001, 2000
and 1999 F-6
Notes to Consolidated Financial Statements F-7
2. Financial Statement Schedules
The following financial statement schedule is
included in Item 14 (d):
Report of Independent Auditors on Schedule (included
with consent filed as Exhibit 23)
Schedule III--Real Estate and Accumulated Depreciation F-29
Notes to Schedule III F-31
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
3. Exhibits
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation of Prime
Retail, Inc. [Incorporated by reference to the same titled
exhibit in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, as amended (File No.
0-23616).]
3.2 Articles Supplementary of Prime Retail, Inc. relating to
Series B Preferred Stock. [Incorporated by reference to the
same titled exhibit in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998, as amended
(File No. 0-23616).]
3.3 Second Amended and Restated By-Laws of Prime Retail, Inc.
[Incorporated by reference to the same titled exhibit in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 (File No. 0-23616).]
4.1 Form of Series A Preferred Stock Certificate [Incorporated by
reference to the same titled exhibit in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1996 (File No. 0-23616).]
4.2 Form of Series B Preferred Stock Certificate [Incorporated by
reference to the same titled exhibit in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1996 (File No. 0-23616).]
4.3 Form of Common Stock Certificate [Incorporated by reference
to the same titled exhibit in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 (File
No. 0-23616).]
4.4 Warrant to Purchase Common Stock of the Company dated
December 22, 2000 issued to FRIT PRT Lending LLC
[Incorporated by reference to the same titled exhibit in
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000 (File No. 0-23616).]
4.5 Warrant to Purchase Common Stock of the Company dated
December 22, 2000 issued to Greenwich Capital Financial
Products, Inc. [Incorporated by reference to the same
titled exhibit in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000 (File No.
0-23616).]
10.1 Third Amended and Restated Agreement of Limited Partnership
of Prime Retail, L.P. dated as of October 15, 1998 and
effective as of June 15, 1998. [Incorporated by reference
to the same titled exhibit in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998, as
amended (File No. 0-23616).]
10.1A Amendment No. 1 to Third Amended and Restated Agreement of
Limited Partnership of Prime Retail, L.P. dated as of
September 28, 1999. [Incorporated by reference to the same
titled exhibit in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999 (File No.
0-23616).]
10.2 1994 Stock Incentive Plan [Incorporated by reference to the
same titled exhibit in the Company's registration statement
on Form S-11 (Registration No. 33-68536).]
# 10.3 1995 Stock Incentive Plan [Incorporated by reference to the
same titled exhibit in the Company's registration statement
on Form S-11 (Registration No. 333-1666).]
# 10.5 Separation Agreement dated February 23, 2000 by and between
Prime Retail, Inc. and Abraham Rosenthal. [Incorporated by
reference to the same titled exhibit in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1999 (File No. 0-23616).]
# 10.6 Employment Agreement dated October 6, 1999 by and among
primeoutlets.com inc, Prime Retail, L.P., Prime Retail, Inc.
and William H. Carpenter, Jr. [Incorporated by reference to
the same titled exhibit in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 (File
No. 0-23616).]
# 10.7 Form of Executive Employment Agreement (David G. Phillips)
[Incorporated by reference to the same titled exhibit in the
Company's registration statement on Form S-11 (Registration
No. 33-68536).]
# 10.8 Employment Agreement dated June 11, 2000 between Prime
Retail, Inc. and Robert A. Brvenik. [Incorporated by
reference to the same titled exhibit in the Company's
Quarterly Report on Form 10-Q/A for the quarterly period
ended September 30, 2000 (File No. 001-13301).]
# 10.9 Employment Agreement dated May 3, 2000 between Prime Retail,
Inc. and C. Alan Schroeder. [Incorporated by reference to
the same titled exhibit in the Company's Quarterly Report on
Form 10-Q/A for the quarterly period ended September 30,
2000 (File No. 001-13301).]
# 10.10 Employment Agreement dated May 3, 2000 between Prime Retail,
Inc. and Steven S. Gothelf [Incorporated by reference to the
same titled exhibit in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000 (File No.
0-23616).]
# 10.11 Employment Agreement dated May 3, 2000 between Prime Retail,
Inc. and John S. Mastin. [Incorporated by reference to the
same titled exhibit in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000 (File No.
0-23616).]
# 10.12 Separation Agreement dated August 24, 2000 by and between
Prime Retail, Inc., Prime Retail, L.P. and William H.
Carpenter, Jr. [Incorporated by reference to the same
titled exhibit in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000 (File No.
0-23616).]
10.15 Registration Rights Agreement dated June 15, 1998 by and
between Prime Retail, Inc. and Prime Retail, L.P. for the
benefit of holders of common units of Prime Retail, L.P.
and certain stockholders of Prime Retail, Inc. [Incorporated
by reference to the same titled exhibit in the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, as amended (File No. 0-23616).]
10.16 Form of Property Level General Partnership Agreement
[Incorporated by reference to the same titled exhibit in the
Company's registration statement on Form S-11 (Registration
No. 33-68536).]
10.17 Form of Property Level Limited Partnership Agreement
[Incorporated by reference to the same titled exhibit in the
Company's registration statement on Form S-11 (Registration
No. 33-68536).]
10.18 Noncompetition and Restriction Agreement with Michael W.
Reschke of PGI [Incorporated by reference to the same titled
exhibit in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, as amended (File No.
0-23616).]
# 10.21 Consulting Agreement between the Company and Marvin Traub
Associates, Inc. [Incorporated by reference to the same
titled exhibit in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996 (File No.
0-23616).]
10.28 Waiver, Recontribution and Indemnity Agreement by the
Limited Partners [Incorporated by reference to the same
titled exhibit in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, as amended
(File No. 0-23616).]
10.29 Indemnity Agreement made by the Company in favor of The Prime
Group, Inc. and Prime Group Limited Partnership
[Incorporated by reference to the same titled exhibit in the
Company's registration statement on Form S-11 (Registration
No. 333-1666).]
10.30 Promissory Note dated October 31, 1996 by and between Prime
Retail, L.P. and Nomura Asset Capital Corporation
[Incorporated by reference to the same titled exhibit in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 (File No. 0-233616).]
10.30A Form of Deed of Trust, Security Agreement, Assignment of
Rents and Fixture Filings with Nomura Asset Capital
Corporation [Incorporated by reference to the same titled
exhibit in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No. 0-23616).]
10.32 Consulting Agreement between the Company and Financo, Inc.
[Incorporated by reference to the same titled exhibit in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 (File No. 0-23616).]
10.33 Amended and Restated Agreement and Plan of Merger among Prime
Retail, Inc., Prime Retail, L.P., Horizon Group, Inc.,
Sky Merger Corp., Horizon Group Properties, Inc., Horizon
Group Properties, L.P., and Horizon/Glen Outlet Centers
Limited Partnership dated as of February 1, 1998
[Incorporated by reference to the same titled exhibit in the
Company's Current Report on Form 8-K dated February 1, 1998
(File No. 0-23616).]
10.34 Agreement among Prime Retail, Inc., Horizon Group, Inc.,
Mr. David H. Murdock, Castle & Cooke Properties, Inc., and
Pacific Holding Company dated as of February 1, 1998
[Incorporated by reference to the same titled exhibit in
the Company's Current Report on Form 8-K dated February 1,
1998 (File No. 0-23616).]
# 10.35 Letter Agreement with David G. Phillips regarding the
purchase of units in Prime Retail, L.P. dated August 6,
1996. [Incorporated by reference to the same titled exhibit
in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 (File No. 0-23616).]
# 10.36 Non-employee Director Stock Plan [Incorporated by reference
to Appendix I in the Company's registration statement on
Form S-4 (File No. 333-51285).]
# 10.37 1998 Long-Term Stock Incentive Plan [Incorporated by
reference to Appendix J in the Company's registration
statement on Form S-4 (File No. 333-51285).]
# 10.38 Description of the 1999 Long-Term Incentive Program.
[Incorporated by reference to the same titled exhibit in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, as amended (File No. 0-23616).]
# 10.39 Master Modification Agreement dated as of December 22, 2000
between Buckeye Factory Shops Limited Partnership, Latham
Factory Stores Limited Partnership, Carolina Factory Shops
Limited Partnership, Shasta Outlet Center Limited
Partnership, The Prime Outlets at Calhoun Limited
Partnership and The Prime Outlets at Lee Limited
Partnership, Nomura Asset Capital Corporation, Prime Retail,
Inc. and Prime Retail, L.P. [Incorporated by reference to
the same titled exhibit in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000 (File
No. 0-23616).]
# 10.40 The Agreement for Purchase and Sale, dated December 22, 2000,
by and between Finger Lakes Outlet Center, L.L.C., The
Prime Outlets at Michigan City Limited Partnership, The
Prime Outlets at Gilroy Limited Partnership and Outlet
Village of Kittery Limited Partnership as seller and
F/C Waterloo Development LLC, F/C Michigan City Development
LLC, F/C Gilroy Development LLC, F/C Kittery Development LLC
and F/C Michigan Parking LLC as buyer. [Incorporated by
reference to the same titled exhibit in the Company's
Amended Current Report on Form 8-K/A dated December 22, 2000
(File No. 001-13301).]
# 10.41 Amended and Restated Guaranty and Indemnity Agreement dated
as of July 31, 2001 by and among Horizon Group Properties,
Inc., Horizon Group Properties, L.P., Prime Retail, Inc.
and Prime Retail, L.P. [Incorporated by reference to
Exhibit 10.44 in the Company's Quarterly Report on Form
10-Q dated September 30, 2001 (File No. 0-23616).]
# 10.42 Contribution Agreement dated as of June 15, 1998 by and among
Horizon Group, Inc., Sky Merger Corp., Horizon/Glen Outlet
Centers Limited Partnership, Horizon Group Properties, Inc.,
and Horizon Group Properties, L.P. [Incorporated by
reference to Exhibit 10.7 in the Company's Current Report on
Form 8-K dated June 15, 1998 (File No. 001-13301).]
10.43 Series C Preferred Share Repurchase Agreement dated as of
March 31, 1999 among Security Capital Preferred Growth
Incorporated, Prime Retail, Inc., and Prime Retail, L.P.
[Incorporated by reference to Exhibit 10.1 in the Company's
Current Report on Form 8-K dated March 31, 1999 (File No.
0-23616).]
# 10.44 Purchase and Sale Agreement, dated as of August 6, 1999,
among The Prime Outlets at Birch Run, L.L.C., The Prime
Outlets at Williamsburg, L.L.C., and Outlet Village of
Hagerstown Limited Partnership and Welp Triple Outlet, L.C.
[Incorporated by reference to Exhibit 10.1 in the Company's
Current Report on Form 8-K dated August 11, 1999 (File No.
001-13301)].
# 10.45 Loan Agreement dated as of December 22, 2000 between FRIT PRT
Lending LLC and Prime Retail, L.P. [Incorporated by
reference to Exhibit 10.48 in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000
(File No. 0-23616).]
# 10.46 First Amendment dated as of January 11, 2002 to Loan
Agreement between FRIT PRT Lending LLC and Prime Retail,
L.P.
# 10.47 Second Amendment dated as of January 31, 2002 to Loan
Agreement between FRIT PRT Lending LLC and Prime Retail,
L.P.
# 10.48 Employment Agreement dated March 21, 2002 between Prime
Retail, Inc. and R. Kelvin Antill.
# 10.49 Employment Agreement dated July 24, 2000 between Prime
Retail, Inc. and Glenn D. Reschke.
# 10.50 Amendment to Employment Agreement dated April 2, 2001 between
Prime Retail, Inc. and Robert A. Brvenik.
# 10.51 Employment Agreement dated January 10, 2002 between Prime
Retail, Inc. and David G. Phillips.
# 10.52 Employment Letter dated December 7, 1998 between Prime
Retail, Inc. and Frederick J. Meno IV.
# 10.53 Seventh Amendment dated December 4, 2001 to Purchase and Sale
Agreement, dated as of August 6, 1999, among The Prime
Outlets at Birch Run, L.L.C., The Prime Outlets at
Williamsburg, L.L.C., and Outlet Village of Hagerstown
Limited Partnership and Welp Triple Outlet L.C.
# 10.54 Letter Agreement dated April 24, 2001 between Prime Retail,
Inc., Prime Retail, L.P. and Abraham Rosenthal amending
Separation Agreement dated February 23, 2000.
# 10.55 Letter Agreement dated April 24, 2001 between Prime Retail,
Inc., Prime Retail, L.P. and William H. Carpenter, Jr.
amending Separation Agreement dated August 24, 2000.
12 Ratio of Earnings to Fixed Charges
21 Subsidiaries of Prime Retail, Inc.
23 Consent of Ernst & Young LLP
Note:
# Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c).
(b) Reports on Form 8-K
None
(c) Exhibits
The list of exhibits filed with this report is set forth in response to
Item 14 (a)(3). The required exhibits have been filed as indicated in the
Exhibit Index. The Company agrees to furnish a copy of any long-term debt
instrument wherein the securities authorized do not exceed 10 percent of the
registrant's total assets on a consolidated basis upon the request of the
Securities and Exchange Commission.
(d) Financial Statements and Schedules
Schedule III -- Real Estate and Accumulated Depreciation attached hereto is
hereby incorporated by reference to this Item.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 28, 2002.
PRIME RETAIL, INC.
/s/ Robert A. Brvenik
---------------------------
Robert A. Brvenik
Executive Vice President, Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ Glenn D. Reschke March 28, 2002
- --------------------------------------
Glenn D. Reschke
Chairman of the Board
President and Chief Executive Officer
/s/ Howard Amster March 28, 2002
- --------------------------------------
Howard Amster
Director
/s/ Robert H. Kanner March 28, 2002
- --------------------------------------
Robert H. Kanner
Director
/s/ Kenneth A. Randall March 28, 2002
- --------------------------------------
Kenneth A. Randall
Director
/s/ Michael W. Reschke March 28, 2002
- --------------------------------------
Michael W. Reschke
Director
/s/ Sharon Sharp March 28, 2002
- --------------------------------------
Sharon Sharp
Director
/s/ James R. Thompson March 28, 2002
- --------------------------------------
James R. Thompson
Director
/s/ Marvin S. Traub March 28, 2002
- --------------------------------------
Marvin S. Traub
Director
Report of Independent Auditors
To the Board of Directors and Shareholders
Prime Retail, Inc.
We have audited the accompanying consolidated balance sheets of Prime Retail,
Inc. (the "Company") as of December 31, 2001 and 2000, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 2001 and 2000, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 6, the
Company's ability to meet debt service requirements is dependent upon completing
future asset sales by specific dates and maintaining its results of operations
at current levels. If the Company is unable to complete future asset sales by
the specified dates and or maintain its results of operations at current levels,
it may not be able to maintain compliance with the performance provisions and or
financial covenants contained in certain of its debt facilities. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 6. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
Baltimore, Maryland
March 13, 2002
PRIME RETAIL, INC.
Consolidated Balance Sheets
(Amounts in thousands, except share information)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Investment in rental property:
Land $ 148,463 $ 151,941
Buildings and improvements 1,208,568 1,322,368
Property under development 3,352 3,573
Furniture and equipment 15,225 15,225
----------- -----------
1,375,608 1,493,107
Accumulated depreciation (258,124) (217,569)
----------- -----------
1,117,484 1,275,538
Cash and cash equivalents 7,537 8,906
Restricted cash 37,885 54,920
Accounts receivable, net 5,017 13,480
Deferred charges, net 11,789 19,533
Assets held for sale 54,628 43,230
Investment in partnerships 24,539 21,610
Other assets 3,629 24,804
----------- -----------
Total assets $ 1,262,508 $ 1,462,021
=========== ===========
Liabilities and Shareholders' Equity
Bonds payable $ 31,975 $ 32,455
Notes payable 925,492 997,698
Accrued interest 7,643 5,267
Real estate taxes payable 8,091 8,555
Accounts payable and other liabilities 31,380 62,063
----------- -----------
Total liabilities 1,004,581 1,106,038
Minority interests 1,487 1,495
Shareholders' equity:
Shares of preferred stock, 24,315,000 shares authorized:
10.5% Series A Senior Cumulative Preferred Stock,
$0.01 par value (liquidation preference of $70,330),
2,300,000 shares issued and outstanding 23 23
8.5% Series B Cumulative Participating Convertible Preferred
Preferred Stock, $0.01 par value (liquidation preference
of $231,052), 7,828,125 shares issued and outstanding 78 78
Shares of common stock, 150,000,000 shares authorized:
Common stock, $0.01 par value, 43,577,916 shares
issued and outstanding 436 436
Additional paid-in capital 709,373 709,373
Distributions in excess of earnings (453,470) (355,422)
----------- -----------
Total shareholders' equity 256,440 354,488
----------- -----------
Total liabilities and shareholders' equity $ 1,262,508 $ 1,462,021
=========== ===========
====================================================================================================================================
See accompanying notes to financial statements.
PRIME RETAIL, INC.
Consolidated Statements of Operations
(Amounts in thousands, except per share information)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Base rents $ 141,116 $ 178,830 $ 193,979
Percentage rents 4,220 6,369 8,085
Tenant reimbursements 67,323 83,350 90,063
Interest and other 13,421 14,801 13,829
---------- --------- ---------
Total revenues 226,080 283,350 305,956
Expenses
Property operating 54,451 68,537 70,862
Real estate taxes 19,283 21,776 22,405
Depreciation and amortization 56,918 67,556 73,640
Corporate general and administrative 14,290 20,847 12,687
Interest 92,859 98,234 93,934
Other charges 22,646 17,555 6,918
Provision for asset impairment 63,026 68,663 15,842
Provision for abandoned projects - - 16,039
Loss on eOutlets.com - 14,703 -
Loss on Designer Connection - 1,815 6,561
---------- --------- --------
Total expenses 323,473 379,686 318,888
---------- --------- ---------
Loss before loss on sale of real estate,
minority interests and extraordinary loss (97,393) (96,336) (12,932)
Loss on sale of real estate (1,063) (42,648) (15,153)
---------- --------- --------
Loss before minority interests and
extraordinary loss (98,456) (138,984) (28,085)
Loss (Income) allocated to minority interests 408 738 (3,226)
---------- --------- ---------
Loss before extraordinary loss (98,048) (138,246) (31,311)
Extraordinary loss on early extinguishment of debt - (4,206) (3,518)
---------- --------- ---------
Net loss (98,048) (142,452) (34,829)
Income allocated to preferred shareholders (22,672) (22,672) (9,962)
---------- --------- ---------
Net loss applicable to common shares $ (120,720) $(165,124) $ (44,791)
========== ========= =========
Basic loss per common share:
Loss before extraordinary loss $ (2.77) $ (3.69) $ (0.96)
Extraordinary loss - (0.10) (0.08)
---------- --------- ---------
Net loss $ (2.77) $ (3.79) $ (1.04)
========== ========= =========
Diluted loss per common share:
Loss before extraordinary loss $ (2.77) $ (3.69) $ (1.22)
Extraordinary loss - (0.10) (0.08)
---------- --------- --------
Net loss $ (2.77) $ (3.79) $ (1.30)
========== ========= =========
Weighted-average common shares
outstanding - basic 43,578 43,517 43,196
========== ========= =========
Weighted-average common shares
outstanding - diluted 43,578 43,517 44,260
========== ========= =========
====================================================================================================================================
See accompanying notes to financial statements.
PRIME RETAIL, INC.
Consolidated Statements of Cash Flows
(Amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net loss $ (98,048) $ (142,452) $ (34,829)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss (Income) allocated to minority interests (408) (738) 3,226
Loss on sale of real estate 1,063 42,648 15,153
Extraordinary loss on early extinguishment of debt - 4,206 3,518
Depreciation and amortization 56,918 67,556 73,640
Amortization of deferred financing costs 7,025 3,256 4,379
Amortization of debt premiums (3,092) (3,159) (4,406)
Provision for uncollectible accounts receivable 13,368 7,443 779
Provision for asset impairment 63,026 68,663 15,842
Provision for abandoned projects - - 16,039
Loss on eOutlets.com - 14,703 -
Loss on Designer Connection - 1,815 3,659
Gain on sale of land - (2,472) (72)
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable (5,092) (4,903) 2,155
(Increase) Decrease in restricted cash 15,477 (28,151) 7,044
(Increase) Decrease in other assets 3,307 3,285 (669)
Increase (Decrease) in accounts payable and
other liabilities (23,151) 4,272 (7,285)
Increase (Decrease) in real estate taxes payable 142 (2,145) (513)
Increase (Decrease) in accrued interest 2,376 (1,377) 155
--------- ---------- ---------
Net cash provided by operating activities 32,911 32,450 97,815
--------- ---------- ---------
Investing Activities
Additions to investment in rental property (15,170) (51,833) (85,977)
Payments made for eOutlets.com (2,170) (11,161) (3,992)
Proceeds from repayment of notes receivable, net 14,523 - -
Contributions to joint venture partnerships (2,950) (3,000) -
Proceeds from sales of operating properties and land 11,362 67,089 33,303
--------- ---------- ---------
Net cash provided by (used in)
investing activities 5,595 1,095 (56,666)
--------- ---------- ---------
Financing Activities
Proceeds from notes payable 16,899 134,497 304,342
Principal repayments on notes payable (56,222) (155,120) (200,026)
Redemption of Series C preferred stock - - (45,054)
Dividends and distributions paid - - (75,536)
Minority interests contributions (distributions) 400 - (12,976)
Deferred costs (952) (11,359) (10,321)
--------- ---------- ---------
Net cash used in financing activities (39,875) (31,982) (39,571)
--------- ---------- ---------
Increase (Decrease) in cash and cash equivalents (1,369) 1,563 1,578
Cash and cash equivalents at beginning of period 8,906 7,343 5,765
--------- ---------- ----------
Cash and cash equivalents at end of period $ 7,537 $ 8,906 $ 7,343
========= ========== ==========
====================================================================================================================================
See accompanying notes to financial statements.
PRIME RETAIL, INC.
Consolidated Statements of Cash Flows (continued)
(Amounts in thousands)
Supplemental Disclosure of Non-cash Investing and Financing Activities
The following assets and liabilities were disposed in connection with the
sale of properties during the periods indicated:
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Book value of net assets disposed $ 42,696 $ 321,849 $ 96,384
Notes payable assumed by buyer - (206,735) (53,755)
Notes payable paid (30,271) - -
Promissory note received from buyer - (10,000) -
Loss on sale of real estate (1,063) (42,648) (9,326)
-------- --------- ----------
Cash received $ 11,362 $ 62,466 $ 33,303
======== ========= ==========
====================================================================================================================================
See accompanying notes to financial statements
PRIME RETAIL, INC.
Consolidated Statements of Shareholders' Equity
(Amounts in thousands, except share information)
- ------------------------------------------------------------------------------------------------------------------------------------
Series A Series B
Senior Convertible Series C Additional Distributions Total
Preferred Preferred Preferred Common Paid-in in Excess of Shareholders'
Stock Stock Stock Stock Capital Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1999 $ 23 $ 78 $ 44 $ 427 $ 759,105 $ (115,943) $ 643,734
Issuance of 160,585 restricted
shares of common stock - - - 2 1,380 - 1,382
Exchange of 471,293 common
units for common stock - - - 5 6,985 - 6,990
Redemption of 4,363,636 shares
of Series C preferred stock - - (44) - (58,348) 13,338 (45,054)
Net loss - - - - - (34,829) (34,829)
Common dividends/distributions
($1.180 per share) - - - - - (50,948) (50,948)
Preferred dividends/distributions:
Series A preferred stock
($2.625 per share) - - - - - (6,038) (6,038)
Series B preferred stock
($2.125 per share) - - - - - (16,635) (16,635)
Series C preferred stock
($0.885 per share) - - (1,915) (1,915)
---- ---- ---- ----- --------- ---------- ---------
Balance, December 31, 1999 23 78 - 434 709,122 (212,970) 496,687
Issuance of 180,000 restricted
shares of common stock - - - 2 251 - 253
Exchange of 29,296 common
units for common stock - - - - - - -
Net loss - - - - - (142,452) (142,452)
---- ---- ---- ----- --------- ---------- ---------
Balance, December 31, 2000 23 78 - 436 709,373 (355,422) 354,488
Net loss - - - - - (98,048) (98,048)
---- ---- ---- ----- --------- ---------- ---------
Balance, December 31, 2001 $ 23 $ 78 $ - $ 436 $ 709,373 $ (453,470) $ 256,440
==== ==== ==== ===== ========= ========== =========
====================================================================================================================================
See accompanying notes to financial statements.
PRIME RETAIL, INC.
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and unit information)
Note 1 -- Organization and Basis of Presentation
Organization
Prime Retail, Inc. (the "Company") was organized as a Maryland corporation
on July 16, 1993. We are a self-administered and self-managed real estate
investment trust ("REIT") that primarily develops, acquires, owns and operates
outlet centers. As of December 31, 2001, the Company's outlet center portfolio,
including three properties owned through joint venture partnerships, consists of
45 properties (the "Properties") in 26 states (including Puerto Rico), which
total 12,670,000 square feet of gross leasable area ("GLA"). As a fully
integrated real estate firm, we provide development, construction, accounting,
finance, leasing, marketing, and management services for the Properties. Prime
Retail, L.P. (the "Operating Partnership"), a Delaware limited partnership, is
the entity through which we conduct substantially all of our business and
operations and own (either directly or through subsidiaries) substantially all
of assets including the Properties. We control the Operating Partnership as its
sole general partner and are dependent upon the distributions or other payments
from the Operating Partnership to meet our financial obligations.
Unless the context otherwise requires, all references to "we," "us," "our"
or the "Company" herein mean Prime Retail, Inc. and those entities owned or
controlled by Prime Retail, Inc., including the Operating Partnership.
At December 31, 2001, the Company owned 2,300,000 Series A Senior Preferred
Units of the Operating Partnership (the "Senior Preferred Units"), 7,828,125
Series B Convertible Preferred Units of the Operating Partnership (the "Series B
Convertible Preferred Units"), and 43,577,916 Common Units of partnership
interest in the Operating Partnership (the "Common Units"). Each Senior
Preferred Unit, and Series B Convertible Preferred Unit, (collectively, the
"Preferred Units") entitles us to receive distributions from the Operating
Partnership in an amount equal to the dividend declared or paid with respect to
a share of our Series A Senior Cumulative Preferred Stock ("Series A Senior
Preferred Stock") and Series B Cumulative Convertible Participating Preferred
Stock ("Series B Convertible Preferred Stock"), respectively, prior to the
payment by the Operating Partnership of distributions with respect to the Common
Units. Series B Convertible Preferred Units will be automatically converted into
Common Units to the extent of any conversion of Series B Convertible Preferred
Stock into Common Stock. The Preferred Units will be redeemed by the Operating
Partnership to the extent of any redemption of Senior Preferred Stock or Series
B Convertible Preferred Stock.
A summary of the holders of units in the Operating Partnership as of
December 31, 2001 is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Units
------------------------------------------------------
Holder Series A Series B Common
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Retail, Inc. 2,300,000 7,828,125 43,577,916
Affiliates of the Prime Group, management and others (1) - - 10,810,912
--------- --------- ----------
2,300,000 7,828,125 54,388,828
========= ========= ==========
====================================================================================================================================
Note:
(1) Includes 251,300 units beneficially owned directly by an executive officer.
As of December 31, 2001, we had an 80% general partnership interest in the
Operating Partnership with full and complete control over the management of the
Operating Partnership as the sole general partner not subject to removal by the
limited partners.
Basis of Presentation
The consolidated financial statements include the accounts of us, the
Operating Partnership and the partnerships in which we have operational control.
Profits and losses are allocated in accordance with the terms of the Operating
Partnership agreement. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States ("GAAP")
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Investments in partnerships in which we do not have operational control are
accounted for on the equity method of accounting. Income (loss) applicable to
minority interests of the Operating Partnership and common shares as presented
in the consolidated statements of operations is allocated based on income (loss)
before minority interests after income allocated to preferred shareholders.
Significant intercompany accounts and transactions have been eliminated in
consolidation. Certain amounts in prior years have been reclassified to the
current year presentation.
Note 2 -- Summary of Significant Accounting Policies
Rental Property
Depreciation is calculated on the straight-line basis over the estimated
useful lives of the assets, which are as follows:
Land improvements 20 years
Buildings and improvements Principally 40 years
Tenant improvements Term of related lease
Furniture and equipment 5 years
Rental property is generally carried at historical cost net of accumulated
depreciation. Development costs, which include fees and costs incurred in
developing new properties, are capitalized as incurred. Upon completion of
construction, development costs are amortized over the useful lives of the
respective properties on a straight-line basis. Expenditures for ordinary
maintenance and repairs are expensed to operations as incurred. Significant
renovations and improvements, which improve and/or extend the useful life of
assets are capitalized and depreciated over their estimated useful lives.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," we record impairment losses on long-lived assets used
in operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. Impairment losses are
measured as the difference between carrying value and fair value for assets to
be held in portfolio. For assets to be sold, impairment is measured as the
difference between carrying value and fair value, less costs to dispose. Fair
value is based on estimated cash flows discounted at a risk-adjusted rate of
interest.
Cash and Cash Equivalents and Restricted Cash
We consider highly liquid investments with a maturity of three months or
less when purchased to be cash equivalents. The carrying value of cash and cash
equivalents and restricted cash as reported in the Consolidated Balance Sheets
approximates their fair value.
We maintain our cash and cash equivalents and restricted cash in accounts
at various financial institutions. The majority of such accounts are interest
bearing. Although, the combined account balances at each institution
periodically may exceed FDIC insurance coverage, and as a result, there is a
concentration of credit risk related to amounts on deposit in excess of FDIC
insurance coverage, we believe that the risk is not significant. During the
years ended December 31, 2001, 2000 and 1999, we earned interest income of
$1,980, $2,027 and $1,592, respectively (included in interest and other income
in the Consolidated Statements of Operations).
Accounts Receivable
We regularly review accounts receivable and determine an appropriate range
for the allowance for doubtful accounts based upon the impact of economic
conditions on the tenants' ability to pay, past collection experience and such
other factors which, in our judgment, deserve current recognition. In turn, a
provision is charged against earnings in order to maintain the allowance level
within this range. The allowances for doubtful accounts at December 31, 2001 and
2000 were $12,515 and $7,383, respectively. During the years ended December 31,
2001, 2000 and 1999, we recorded provisions for uncollectible accounts
receivable, of $13,368, $7,443 and $772, respectively (included in other charges
in the Consolidated Statements of Operations).
Accounts receivable, net due after one year representing straight-line
rents were $4,524 and $6,837 at December 31, 2001 and 2000, respectively.
Deferred Charges
Deferred charges consist of leasing commissions and financing costs.
Deferred leasing commissions representing costs incurred to originate and renew
operating leases are deferred and amortized on a straight-line basis over the
term of the related lease. Fees and costs incurred to obtain financing are
deferred and are being amortized as a component of interest expense over the
terms of the respective loans on a basis that approximates the effective
interest method.
Revenue Recognition
Leases with tenants are accounted for as operating leases. Minimum rental
income is recognized on a straight-line basis over the term of the lease and
unpaid rents are included in accounts receivable, net in the accompanying
Consolidated Balance Sheets. Certain lease agreements contain provisions, which
provide for rents based on a percentage of sales or based on a percentage of
sales volume above a specified threshold. These contingent rents are not
recognized until the required thresholds are exceeded. In addition, the lease
agreements generally provide for the reimbursement of real estate taxes,
insurance, advertising and certain common area maintenance costs. These
additional rents and tenant reimbursements are accounted for on the accrual
basis.
Interest Rate Protection Contracts
We use interest rate protection contracts, such as interest rate caps to
manage interest rate risk associated with floating rate debt. These contracts
generally involve limiting our interest costs with an upper limit or specified
range on the underlying interest rate index. The cost of such contracts are
included in deferred charges and are being amortized on a straight-line basis as
a component of interest expense over the life of the contracts. Amounts earned
from interest rate protection contracts are recorded as a reduction of interest
expense. We are exposed to credit losses in the event of counterparty
nonperformance, but do not anticipate any such losses based on the
creditworthiness of the counterparties.
Earnings per Share
Basic earnings per share ("EPS") is calculated by dividing net income
available to common shareholders by the weighted average number of shares
outstanding during the period. Diluted EPS includes the potentially dilutive
effect, if any, which would occur if outstanding (i) options to purchase Common
Stock were exercised, (ii) Common Units were converted into shares of Common
Stock, (iii) shares of Series C Preferred Stock were converted into shares of
Common Stock, and (iv) shares of Series B Convertible Preferred Stock were
converted into shares of Common Stock. For the years ended December 31, 2001 and
2000, respectively, the effect of all exercises and conversions was
anti-dilutive and, therefore, dilutive EPS is equivalent to basic EPS. For the
year ended December 31, 1999, (i) a redemption discount and dividends
aggregating $12,710 related to our repurchase of our Series C Preferred Stock
were excluded from the numerator and (ii) incremental shares of 1,064, related
to the assumed conversion of Series C Preferred Stock, were included in the
denominator of the computation of diluted EPS. For the year ended December 31,
1999, the effect of all other exercises and conversions was anti-dilutive and,
therefore, was excluded from the computation of diluted EPS.
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Numerator:
Loss before minority interests and extraordinary loss $ (98,456) $ (138,984) $ (28,085)
Loss (Income) allocated to minority interests 408 738 (3,226)
--------- ---------- ---------
Net loss before extraordinary loss (98,048) (138,246) (31,311)
Income allocated to preferred shareholders (22,672) (22,672) (9,962)
--------- ---------- ---------
Numerator for basic earnings per share before extraordinary loss (120,720) (160,918) (41,273)
Effect of Dilutive Securities:
Series C preferred stock dividends - - 628
Series C preferred stock redemption discount - - (13,338)
--------- ---------- ---------
Numerator for diluted earnings per share before extraordinary loss $(120,720) $ (160,918) $ (53,983)
========= ========== =========
Denominator:
Denominator for basic earnings per share -
weighted-average common shares outstanding 43,578 43,517 43,196
Effect of Dilutive Securities:
Series C preferred shares - - 1,064
--------- ---------- ---------
Denominator for diluted earnings per share -
weighted-average common shares outstanding 43,578 43,517 44,260
========= ========== =========
Basic earnings before extraordinay loss per common share $ (2.77) $ (3.69) $ (0.96)
========= ========== =========
Diluted earnings before extraordinay loss per common share $ (2.77) $ (3.69) $ (1.22)
========= ========== =========
====================================================================================================================================
Stock Based Compensation
We account for stock option grants in accordance with Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and,
accordingly, recognizes no compensation expense for employee stock option
grants. We have elected to adopt only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation."
Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended. As a REIT, we generally are not
subject to federal income tax at the corporate level on income we distribute to
our shareholders so long as we distribute at least 90% of our taxable income
(excluding any net capital gain) each year. If we fail to qualify as a REIT in
any taxable year, we will be subject to federal income tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate
rates. Even if we qualify as a REIT, we may be subject to certain state and
local taxes on our income and property. We incurred $201, $197, and $234 of
state and local taxes for the years ended December 31, 2001, 2000 and 1999,
respectively. We paid $417, $235, and $68 of state and local taxes during the
years ended December 31, 2001, 2000, and 1999, respectively.
We did not make any distributions during the years ended December 31, 2001
and 2000, respectively. The following table summarizes the taxability of
dividends and distributions paid during the year ended December 31, 1999:
- --------------------------------------------------------------------------------
Amount
Year Ended December 31, 1999 per Share Percentage
- --------------------------------------------------------------------------------
Series A Senior Preferred Stock
Ordinary income $ 2.625 100.0%
======= =====
Series B Convertible Preferred Stock
Ordinary income $ 2.125 100.0%
======= =====
Series C Preferred Stock
Ordinary income $ 0.885 100.0%
======= =====
Common Stock
Ordinary income $ 0.271 23.0%
Return of capital 0.909 77.0%
------- -----
$ 1.180 100.0%
======= =====
================================================================================
Risks and Uncertainties
Our results of operations are dependent on the overall health of the retail
industry. Our tenant base is comprised almost exclusively of merchants in the
retail industry. The retail industry is subject to external factors such as
inflation, consumer confidence, unemployment rates and consumer tastes and
preferences. A decline in the retail industry could reduce merchant sales, which
could adversely affect our operating results.
Our outlet centers compete for customers primarily with traditional
shopping malls, "off-price" retailers and other outlet centers. The tenants of
outlet centers usually attempt to avoid direct competition with major retailers
and their own full-price stores. They accomplish this by locating outlet stores
only in outlet centers at least 20 miles from the nearest regional mall. For
this reason, our outlet centers are often located in relatively undeveloped
areas and therefore compete only to a limited extent with traditional retail
malls in or near metropolitan areas. In addition to the traditional sources of
competition faced by our outlet centers, our outlet centers also compete with
web-based and catalogue retailers for customers.
Because a number of our outlet centers are located in relatively
undeveloped areas, there are often other potential sites for retail
opportunities near our outlet centers that may be developed by competitors. The
existence of development of other retail venues with a more convenient location
or the offer of lower rent may attract our tenants or cause them to seek more
favorable lease terms at or prior to renewal of their leases with us and,
accordingly, may affect adversely the business, revenues and sales volume of our
outlet centers.
In addition, the success of tenants in our outlet centers which are located
in relatively undeveloped areas, and thus the success of such outlet centers
themselves, depends on shoppers traveling significant distances to shop. If
shoppers should become less willing to travel the distances necessary to shop at
our remote outlet centers, the business of our tenants would likely decline.
Such a decline would likely cause the value, business, revenue and sales volume
of such outlet centers to decline.
Our community shopping centers compete with similar properties located in
the same geographic trade areas.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137 and SFAS No. 138, which established new accounting and
reporting standards for derivative instruments. These rules require that all
derivative instruments be reported in the consolidated financial statements at
fair value. The fair value for all derivative contracts is included in other
assets or other liabilities and changes in fair value will be recorded each
period in earnings or other comprehensive income, depending on whether the
derivative is designated and effective as part of a hedged transaction, and on
the type of hedge transaction. Gains or losses on derivative instruments
reported in other comprehensive income must be reclassified into earnings in the
period in which earnings are affected by the underlying hedged item, and the
ineffective portion of all hedges is recognized in other income (expense) in the
statements of operations in the current period. These new standards may result
in additional volatility in reported earnings, other comprehensive income (loss)
and accumulated other comprehensive income (loss). These rules became effective
for us on January 1, 2001 and did not have a significant effect on our
consolidated results of operations or financial position upon adoption.
We are exposed to market risk from changes in interest rates. We manage our
exposure to these market risks through our operating, financing and investing
activities and, when deemed appropriate, through the use of interest rate
protection agreements.
We report changes in fair value of our interest rate protection agreements
in other income or expense. Our interest rate protection agreements are
marked-to-market and unrealized gains and losses are included in current period
net income (loss) as a component of other income (expense). When the terms of
the related financing are modified, or in the event of early extinguishment of
the related financing, all changes in the fair value of the instrument are
marked-to-market with changes in fair value included in net income each period
until the instrument matures.
We believe we have limited exposure to the extent of non-performance by the
counterparties of each agreement since each counterparty is a major financial
institution and we do not anticipate their non-performance.
In October, 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
of Disposal of Long-lived Assets." SFAS No. 144 supercedes SFAS No. 121, however
it retains the fundamental provisions of that statement related to the
recognition and measurement of the impairment of long-lived assets to be "held
and used." In addition, SFAS No. 144 provides more guidance on estimating cash
flows when performing a recoverability test, requires that a long-lived asset to
be disposed of other than by sale (e.g., abandoned) be classified as "held and
used" until it is disposed of, and established more restrictive criteria to
classify an asset as "held for sale." SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. We will adopt SFAS No. 144 effective January
1, 2002 and do not expect the adoption to have a material impact on our results
of operations or financial position.
Note 3 --Property Dispositions
2002 Sales Transaction
On January 11, 2002, we completed the sale of Prime Outlets at Hagerstown
(the "Hagerstown Center") to an existing joint venture partnership (the
"Prime/Estein Venture") between one of our affiliates and an affiliate of Estein
& Associates USA, Ltd. ("Estein"), a real estate investment company, for
$80,500. Our affiliate and the Estein affiliate have 30% and 70% ownership
interests, respectively, in the Prime/Estein Venture. In connection with the
sale transaction, the Prime/Estein Venture assumed first mortgage indebtedness
of $46,862 on the Hagerstown Center (the "Assumed Mortgage Indebtedness"). In
connection with the lender's consent to the Prime/Estein Venture assuming the
Assumed Mortgage Indebtedness, our guarantee of the Assumed Mortgage
Indebtedness remained in place.
The net cash proceeds from the sale, including the release of certain funds
held in escrow, were $12,113 after a pay-down of $11,066 of existing mortgage
indebtedness on the Hagerstown Center and closing costs. The net proceeds from
this sale were used to prepay $11,647 of principal outstanding under a mezzanine
loan (the "Mezzanine Loan"). At December 31, 2001, the carrying value of the
Hagerstown Outlet Center of $54,628 was classified as assets held for sale in
the Consolidated Balance Sheet. See Note 6 - "Bonds and Notes Payable" for
additional information.
We are obligated to refinance the Assumed Mortgage Indebtedness on behalf
of the Prime/Estein Venture on or before June 1, 2004, its maturity date.
Additionally, pursuant to certain Prime/Estein Venture-related documents to
which affiliates of ours are parties, the Prime/Estein Venture's cost of the
Assumed Mortgage Indebtedness and any refinancing of it are fixed at an annual
rate of 7.75% for a period of 10 years. If the actual cost of such indebtedness
should exceed 7.75% at any time during the ten-year period, we will be obligated
to pay the difference to the Prime/Estein Venture. However, if the actual cost
of such indebtedness is less than 7.75% at any time during the ten-year period,
the Prime/Estein Venture will be obligated to pay the differnce to us. The
actual cost of the Assumed Mortgage Indebtedness is currently 30-day LIBOR plus
1.50%.
2001 Sales Transactions
On February 2, 2001, we sold Northgate Plaza, a community center located in
Lombard, Illinois to Arbor Northgate, Inc. for aggregate consideration of
$7,050. After the repayment of mortgage indebtedness of $5,966 and closing
costs, the net cash proceeds from the Northgate Plaza sale were $510. On March
16, 2001, we sold Prime Outlets at Silverthorne, an outlet center located in
Silverthorne, Colorado consisting of 257,000 square feet of GLA, to Silverthorne
Factory Stores, LLC for aggregate consideration of $29,000. The net cash
proceeds from the sale of Prime Outlets at Silverthorne were $8,993, after the
repayment of certain mortgage indebtedness of $18,078 on Prime Outlets at
Lebanon (see below) and closing costs and fees. The net proceeds from these
sales were used to prepay an aggregate of $9,137 of principal outstanding under
our Mezzanine Loan in accordance with the terms of such loan agreement. In
connection with these sales, we recorded an aggregate gain on the sale of real
estate of $732 during the first quarter of 2001. The operating results of these
properties are included in our results of operations through the respective
dates of disposition. At December 31, 2000, these properties were classified as
assets held for sale in the Consolidated Balance Sheet with an aggregate
carrying value of $34,770.
On November 27, 2001, we sold certain land located in Camarillo, California
for aggregate consideration of $7,150. The net cash proceeds from the sale,
including the release of certain funds held in escrow, were $1,859, after the
repayment of certain mortgage indebtedness of $6,227 and closing costs and fees.
The net proceeds from this sale were used to prepay $1,787 of principal
outstanding under our Mezzanine Loan. In connection with this sale, we recorded
a loss on the sale of real estate of $1,615 during the fourth quarter of 2001.
At December 31, 2000, the land was classified as assets held for sale in the
Consolidated Balance Sheet with a carrying value of $8,460.
Prior to the sale of Prime Outlets at Silverthorne, it was one of fifteen
properties securing our first mortgage and expansion loan (the "First Mortgage
and Expansion Loan"), which had an outstanding principal balance of $342,629 at
December 31, 2001. In conjunction with the sale of Prime Outlets at
Silverthorne, we substituted Prime Outlets at Lebanon for Prime Outlets at
Silverthorne in the cross-collateralized asset pool securing the First Mortgage
and Expansion Loan pursuant to the collateral substitution provisions contained
in the loan agreement. In conjunction with adding Prime Outlets at Lebanon as
security for the First Mortgage and Expansion Loan, we repaid, as discussed
above, certain mortgage indebtedness on Prime Outlets at Lebanon of $18,078.
Sale of Permanent Loan Properties
On December 22, 2000, we completed the sale of four outlet centers
aggregating 1,592,000 square feet of GLA to a joint venture partnership
comprised of Fortress Investment Fund LLC ("Fortress") and Chelsea GCA Realty,
Inc. ("Chelsea") for aggregate consideration of $239,500, including the
assumption of first mortgage debt of $174,235. The four outlet centers
(collectively, the "Permanent Loan Properties") that were sold are located in
Gilroy, California; Michigan City, Indiana; Waterloo, New York; and Kittery,
Maine. In connection with the sale of the Permanent Loan Properties, we incurred
a loss on sale of real estate of $42,648 in the fourth quarter of 2000. The net
proceeds from the sale, after closing costs and fees and the required purchase
of land in the amount of $7,325 related to the outlet center in Gilroy,
California, was $51,403. Net proceeds from the sale were used for the prepayment
of certain long-term debt. The operating results of the Permanent Loan
Properties are included in our results of operations through the date of
disposition.
Prime/Estein Joint Venture Transaction
On August 6, 1999, we entered into an agreement (the "Prime/Estein Joint
Venture Agreement") to sell three factory outlet centers, including two future
expansions, to a joint venture (the "Prime/Estein Venture") between an affiliate
of Estein & Associates USA, Ltd. ("Estein"), a real estate investment company,
and us. The Prime/Estein Joint Venture Agreement provided for a total purchase
price of $274,000, including (i) the assumption of approximately $151,500 of
first mortgage indebtedness, (ii) an $8,000 payment to us for a ten-year
covenant-not-to-compete (the "Covenant-not-to-Compete") and (iii) a $6,000
payment to us for a ten-year licensing agreement (the "Licensing Agreement")
with the Venture to continue the use of the "Prime Outlets" brand name. The
Covenant-not-to-Compete and the Licensing Agreement are collectively referred to
as the "Deferred Income".
On November 19, 1999, we completed the initial installment of the
Prime/Estein Joint Venture Agreement consisting of the sale of Prime Outlets at
Birch Run to the Prime/Estein Venture for aggregate consideration of $117,000,
including a $64,500 "wrap-around" first mortgage provided by us. In connection
with the sale of Prime Outlets at Birch Run, we received cash proceeds of
$33,303, net of transaction costs, and recorded a loss on the sale of real
estate of $9,326. Effective November 19, 1999, we commenced accounting for our
30.0% ownership interest in Prime Outlets at Birch Run in accordance with the
equity method of accounting. The "wrap-around" first mortgage provided by us to
the Prime/Estein Venture had a ten-year term at a fixed interest rate of 7.75%
requiring monthly payments of principal and interest pursuant to a 25-year
amortization schedule. Our net investment in the "wrap-around" first mortgage as
of December 31, 2000 was $10,731, which is included in other assets in the
Consolidated Balance Sheet. Additionally, the Venture assumed $53,755 of
outstanding mortgage indebtedness. Included in the aggregate consideration was
$8,500 of Deferred Income. The Deferred Income was initially included in
accounts payable and other liabilities in the Consolidated Balance Sheet and was
being amortized into other income over its ten-year life. Effective on the date
of disposition, we account for our ownership interest in Prime Outlets at Birch
Run in accordance with the equity method of accounting. See Note 6 - "Bonds and
Notes Payable" for additional information.
During the fourth quarter of 1999, we recorded a loss on the sale of real
estate of $5,827 related to the write-down of the carrying value of Prime
Outlets at Williamsburg based on the terms of the Prime/Estein Joint Venture
Agreement. On February 23, 2000, we completed the second installment of the
Prime/Estein Joint Venture Agreement consisting of the sale of Prime Outlets at
Williamsburg to the Venture for aggregate consideration of $59,000, including
(i) the assumption of mortgage indebtedness of $32,500 and (ii) $2,750 of
Deferred Income. In connection with the sale of Prime Outlets at Williamsburg,
we received (i) cash proceeds of $11,063, net of transaction costs, and (ii) a
promissory note in the amount of $10,000 from the Prime/Estein Venture (of which
Estein's obligation was $7,000). The promissory note required the monthly
payment of interest in arrears at an annual rate of 7.75% and the outstanding
principal amount was payable on or before December 15, 2000, subject to
satisfaction of certain conditions. As a result of our inability to refinance or
convert the Prime/Estein Venture's mortgage indebtedness of $32,500 to a
permanent loan at a fixed rate of interest by December 15, 2000, the maturity
date of the promissory note was extended until the refinancing was completed. In
addition, since the refinancing or conversion did not occur on or before
December 15, 2000, we were obligated to pay Estein $250 and we were not entitled
to receive operating distributions arising out of Prime Outlets at Williamsburg
until the refinancing occurred. Effective on the date of disposition, we have
accounted for our ownership interest in Prime Outlets at Williamsburg in
accordance with the equity method of accounting. See Note 6 - "Bonds and Notes
Payable" for additional information.
Under the Prime/Estein Joint Venture Agreement, as amended, the outside
closing date for a contemplated sale of the Hagerstown Center, including an
expansion which opened during 2000, was August 31, 2000. Estein terminated the
Prime/Estein Joint Venture Agreement as it applied to the contemplated sale of
the Hagerstown Center when the closing did not occur by the specified closing
date.
In connection with this discontinuance of the sales of a 70% joint venture
interest in (i) the Hagerstown Center and (ii) a proposed expansion to Prime
Outlets at Williamsburg (the "Williamsburg Expansion"), we reduced the carrying
value of the Deferred Income by $9,550 and incurred other charges aggregating
$1,100 during the third quarter of 2000. The reduction in the Deferred Income
was attributable to the remaining proceeds that were not received as a result of
the termination of the Prime/Estein Joint Venture Agreement. The $1,100 of other
charges included (i) a $600 fee payable to Estein resulting from inability to
close the sale of the Hagerstown Center on or before August 31, 2000 in
accordance with the terms of the Prime/Estein Joint Venture Agreement and (ii) a
$500 fee payable to Estein for non-completion of the Williamsburg Expansion by
December 15, 2000.
During 2000, we reclassified $61,908 representing the aggregate carrying
value of the Hagerstown Center from assets held for sale to investment in rental
property in the Consolidated Balance Sheet. In connection with the
reclassification, we recorded $1,967 of depreciation and amortization expense
related to the Hagerstown Center comprising the period from January 1 through
September 30, 2000, the date of the reclassification.
The following unaudited pro forma information presents a summary of the our
consolidated results of operations as if the sale of the Permanent Loan
Properties and the Prime/Estein Joint Venture Transaction had occurred on
January 1, 1999:
- --------------------------------------------------------------------------------
Years Ended December 31, 2000 1999
- --------------------------------------------------------------------------------
Total revenues $ 240,991 $ 244,693
========= =========
Net loss from continuing operations $ (96,091) $ (20,205)
========= =========
Net loss applicable to common shareholders $(118,763) $ (30,167)
========= =========
Basic and diluted loss per common share $ (2.73) $ (0.70)
========= =========
Weighted-average common shares outstanding 43,517 43,196
========= =========
================================================================================
These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the indicated transactions been in effect
on January 1, 1999 or of our future results of operations.
Note 4 -- Restricted Cash
As of December 31, 2001 and 2000, $37,885 and $54,920, respectively, of
cash was placed in various escrows and, therefore, classified as restricted cash
in the Consolidated Balance Sheet. Restricted cash generally consists of (i)
lender escrows for the payment of debt service, real estate taxes, insurance,
capital expenditures and certain operating expenses and (ii) escrows for tenant
marketing contributions. Restricted cash also includes amounts relating to
future development costs and a cash collateral account for fixed rate tax-exempt
bonds. The cash collateral account was $2,825 (10% of the original issuance
amount) as of December 31, 2001 and 2000, respectively. At December 31, 2001 and
2000, $825 and $5,142, respectively, were held in escrow for the completion of
Prime Outlets of Puerto Rico.
Note 5 -- Deferred Charges
Deferred charges were as follows:
- --------------------------------------------------------------------------------
December 31, 2001 2000
- --------------------------------------------------------------------------------
Leasing commissions $ 9,590 $ 10,046
Financing costs 27,489 28,062
--------- --------
37,079 38,108
Accumulated amortization (25,290) (18,575)
--------- --------
$ 11,789 $ 19,533
========= ========
================================================================================
Note 6 -- Bonds and Notes Payable
Bonds payable consisted of the following:
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed rate tax-exempt revenue bonds (the "Fixed Rate Bonds"), interest rates
ranging form 6.88% to 7.00%, monthly interest and sinking fund payments, due
2012 to 2014, collateralized by properties in Chattanooga, TN and Knoxville, TN $ 27,325 $ 27,805
Urban development action grant loans, 6%, monthly principal and interest payments,
due 2016 to 2019, collateralized by properties in Chattanooga, TN 4,650 4,650
-------- ---------
$ 31,975 $ 32,455
======== =========
====================================================================================================================================
During October, 1999, we refinanced $28,250 of variable-rate, tax-exempt
revenue bonds by issuing $28,250 of fixed rate tax-exempt revenue bonds (the
"Fixed Rate Bonds"). The Fixed Rate Bonds bear interest ranging from 6.875% to
7.0%, require semi-annual interest payments and mature from December 15, 2012
through December 1, 2014. The Fixed Rate Bonds are redeemable by us commencing
in December, 2006 at 102% of the outstanding principal balance. The redemption
price decreases incrementally each year thereafter through December, 2008, at
which date the redemption price is fixed at 100% of the outstanding principal
balance.
The Fixed Rate Bonds contain certain financial covenants, including minimum
debt service coverage ratios and cross-default provisions with respect to
certain of our other credit agreements. In the event of non-compliance or
default, the holders of the Fixed Rate Bonds may elect to put such obligations
to us at a price equal to par plus accrued interest. See "Going Concern" for
additional information.
Certain of the Fixed Rate Bonds require mandatory sinking fund payments
follows:
- --------------------------------------------------------------------------------
Years ended December 31,
- --------------------------------------------------------------------------------
2002 $ 505
2003 540
2004 575
2005 615
2006 650
Thereafter 17,440
--------
$ 20,325
========
================================================================================
During the years ended December 31, 2001 and 2000, $480 and $445,
respectively, of the Fixed Rate Bonds were redeemed from the sinking fund.
Notes payable consisted of the following:
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
First Mortgage and Expansion Loan, 7.782%, monthly principal and interest of $2,580, due
November 11, 2003, collateralized by 15 properties located throughout the United States $ 342,629 $ 346,392
Bridge Loan, 13%, monthly interest plus principal of the greater of $50 or 50% of excess cash flow,
due December 31, 2003, collateralized by six properties located throughout the United States 111,375 112,000
Mortgage, 6.927% effective rate, monthly principal and interest of $565, due October 11, 2006,
collateralized by four properties located throughout the United States 72,954 74,481
Mortgage, 6.927% effective rate, monthly principal and interest of $527, due March 11, 2006,
collateralized by four properties located throughout the United States 63,521 65,293
Mezzanine Loan, LIBOR plus 9.50% (minimum of 14.50%) through December 31, 2001
(14.50% at December 31, 2001), LIBOR plus 9.75% (minimum of 14.75%) thereafter, monthly
principal and interest payments, due September 30, 2003, collateralized by pledges of equity
interests in certain properties 62,079 90,000
Mortgage, 7.60%, monthly principal and interest of $450, due May 10, 2009, collateralized by
property located in Niagara Falls, NY 61,488 62,120
Construction Mortgage Loan, LIBOR plus 1.50% (3.62% at December 31, 2001), monthly
interest-only payments through May 31, 2002, monthly principal and interest thereafter, due
June 1, 2004, collateralized by property located in Hagerstown, MD 49,062 48,863
Mortgage, 6.95% effective rate, monthly principal and interest of $351, due November 1, 2005,
collateralized by properties located in Vero Beach, FL and Woodbury, MN 42,652 43,859
Mortgage, 6.915% effective rate, monthly principal and interest of $357, due June 10, 2002,
collateralized by properties located in Conroe, TX and Jeffersonville, OH 33,559 34,890
Mortgage, 8.35%, monthly principal and interest of $215, due June 11, 2007, collateralized by
three properties located throughout the United States 25,327 25,740
Puerto Rico First Mortgage Loan, LIBOR plus 3.50% (5.64% at December 31, 2001), monthly
interest plus (i) principal based on a 25-year amortization schedule at 9% through January 1, 2002
and (ii) principal based on a 15-year amortization schedule at 9% thereafter, due December 31, 2003,
collateralized by property located in Barceloneta, Puerto Rico 19,817 20,000
Edinburgh First Mortgage Loan, LIBOR plus 3.50% (minimum of 8.00%) (8.00% at December 31, 2001),
monthly principal and interest of $159, due July 1, 2004, collateralized by property located in
Edinburgh, IN 16,456 -
Mortgage, 6.95% effective rate, monthly principal and interest of $81, due November 1, 2005,
collateralized by property located in Perryville, MD 9,593 9,893
Hagerstown Second Mortgage Loan, LIBOR plus 2.50% (4.62% at December 31, 2001), monthly
interest-only payments through June 30, 2001, monthly principal of $164 plus interest thereafter,
due June 1, 2004, collateralized by property located in Hagerstown, MD 9,016 10,000
Mortgage, 7.50%, monthly principal and interest of $29, due April 30, 2002, collateralized by
property located in Knoxville, TN 2,972 3,521
Other Notes Payable 2,992 3,070
Lebanon First Mortgage Loan, LIBOR plus 3.00% (8.56% at December 31, 2000), monthly principal
of $100 plus interest, due June 30, 2001, collateralized by property located in Lebanon, TN - 18,378
Mortgage, 6.91% effective rate, monthly principal and interest of $154, due June 1, 2001,
collateralized by property located in Edinburgh, IN - 16,681
Note Payable, 13.50%, monthly interest-only payments, due November 1, 2001, collateralized by
land located in Camarillo, CA - 6,527
Mortgage, 9.375%, monthly principal and interest of $71, due March 1, 2004, collateralized by
property located in Lombard, IL - 5,990
---------- ---------
$ 925,492 $ 997,698
========== =========
====================================================================================================================================
Notes payable includes unamortized debt premiums of $11,051 and $14,144 in
the aggregate at December 31, 2001 and 2000, respectively. Debt premiums are
being amortized over the terms of the related debt instruments in accordance
with the effective interest method. Additionally, interest incurred reflects
amortization of debt premiums of $3,093, $3,159 and $4,406 for the years ended
December 31, 2001, 2000 and 1999, respectively. The aggregate carrying amount of
bonds and notes payable at December 31, 2001 approximated its fair value. At
December 31, 2001, substantially all of our assets were pledged as collateral
for bonds and notes payable.
Interest costs are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Interest incurred $ 88,927 $ 101,549 $ 98,607
Amortization of deferred financing costs 7,025 3,256 4,379
Amortization of debt premiums (3,093) (3,159) (4,406)
Interest capitalized to development projects - (3,412) (4,646)
-------- --------- --------
Total $ 92,859 $ 98,234 $ 93,934
======== ========= ========
Interest paid $ 86,551 $ 99,611 $ 94,046
======== ========= ========
====================================================================================================================================
2000 Debt Transactions
On December 22, 2000, we closed a major refinancing on our assets and the
sale of four of our outlet centers through a series of transactions
(collectively, the "December 22, 2000 Transactions"). The principal lenders
involved in the December 22, 2000 Transactions were an affiliate of Fortress;
Greenwich Capital Financial Products, Inc. ("Greenwich"); and Mercantile-Safe
Deposit and Trust Company ("Mercantile"). The sale of the outlet centers was to
a joint venture partnership comprised of Fortress and Chelsea (see "Note 3 -
"Property Dispositions" for additional information). Fortress and Greenwich
(collectively, the "Lending Group") provided a mezzanine loan in the initial
amount of $90,000 (the "Mezzanine Loan"). Greenwich funded a $20,000 first
mortgage loan (the "Puerto Rico First Mortgage Loan") on our outlet center that
opened in Puerto Rico during July of 2000 and Mercantile provided a $10,000
second mortgage loan (the "Hagerstown Second Mortgage Loan") on an outlet center
in Hagerstown, Maryland. We executed agreements to extend the maturity date of
two of our existing loans, a $112,000 first mortgage loan (the "Bridge Loan")
from Nomura Asset Capital Corporation ("Nomura") and a $19,378 first mortgage
loan (the "Lebanon First Mortgage Loan") from KeyBank National Association.
The Mezzanine Loan is secured by pledges of equity interests in certain
outlet centers. The Mezzanine Loan was originally for a term of three-years and
required fixed monthly principal amortization commencing on February 1, 2001 of
$1,000 during the first year, $1,667 during the second year and $2,333 during
the third year. Additionally, the Mezzanine Loan (i) requires the payment of
certain exit fees, (ii) is pre-payable at any time after one year and (iii)
requires that our excess cash flow from operations and assets sales above
certain thresholds be applied to principal reductions. The interest rate was
originally a floating rate based on 30-day LIBOR plus 9.50%, but not less than
14.50%. The Mezzanine Loan contains financial and other covenants that restrict,
among other things, the ability of us to incur additional indebtedness or pay
dividends (other than dividends to maintain our status as a REIT). In addition,
in connection with the financing we issued warrants (recorded at fair value at
the date of the transaction) to the Lending Group to purchase one million shares
of our common stock at an exercise price of $1.00 per share. The terms of the
Mezzanine Loan were modified in January, 2002 (see "Mezzanine Loan Modification"
for additional information).
The Puerto Rico First Mortgage Loan is secured by our outlet center in
Puerto Rico. The Puerto Rico First Mortgage Loan is for a term of three-years,
requires monthly amortization of $15 based upon a 25-year schedule for the first
year and $51 based upon a 15-year schedule thereafter. The Puerto Rico First
Mortgage Loan is non-recourse and is pre-payable at any time subject to certain
prepayment and exit fees. The interest rate is a floating rate based on 30-day
LIBOR plus 3.50%.
The Hagerstown Second Mortgage Loan was secured by our outlet center in
Hagerstown, Maryland and had a term of 30-months that was co-terminus with
Mercantile's existing first mortgage loan on the same center. The Second
Mortgage Loan required monthly amortization starting in the seventh month of
$164 per month and was pre-payable at any time without penalty or fee. The
interest rate was a floating rate based on 30-day LIBOR plus 2.50%. The
Hagerstown Second Mortgage was repaid in full in January 2002 (see Note 3 -
"Property Dispositions" for additional information).
On December 22, 2000, the term of the Bridge Loan, which was due to mature
on June 11, 2001, was extended until December 31, 2003. In consideration for the
extension, the interest rate was converted from 30-day LIBOR plus 1.35% to a
fixed-rate of 13.00%; the monthly interest-only payments were converted to
monthly interest and principal payments, (principal amortization of the greater
of (i) 50% of excess cash flow from the properties collateralizing the Bridge
Loan or (ii) $50) and a loan extension fee of $1,120 was paid. In connection
with the modification of the terms of the Bridge Loan, we incurred an
extraordinary loss of $1,345 during 2000. The extraordinary loss consisted of
(i) the $1,120 extension fee and (ii) the write-off of unamortized deferred
financing costs and expenses aggregating $225.
On December 22, 2000, the term of the Lebanon First Mortgage Loan, secured
by our outlet center in Lebanon, Tennessee, which was due to mature on December
31, 2000, was extended for a period of six months until June 30, 2001, with an
additional three-month extension available if certain conditions were met. In
consideration for the extension, the interest rate was increased by 1.25% to
30-day LIBOR plus 3.00% and the loan balance was reduced to $18,378 through a
$1,000 principal payment. The Lebanon First Mortgage Loan was pre-payable at any
time. The Lebanon First Mortgage Loan was repaid in full in March 2001 (see
"2001 Sales Transactions" for additional information).
The net proceeds from the December 22, 2000 Transactions were used to (i)
pay off $125,000 of short-term indebtedness as described below; (ii) pay-down
$3,500 of other indebtedness (the $1,000 principal reduction on the Lebanon
First Mortgage Loan and a $2,500 principal reduction on a first mortgage loan on
Phases II and III of the outlet center located in Bellport, New York), and (iii)
pay the $1,120 extension fee on the Bridge Loan. The remainder of the proceeds
was used (i) for general corporate purposes, including marketing and capital
improvements programs and (ii) to fund development costs for Prime Outlets of
Puerto Rico.
We used $125,000 of the net proceeds from the December 22, 2000
Transactions for the repayment of (i) a $20,000 subordinated loan (the
"Subordinated Loan") made by FBR Asset Investment Corporation that matured
August 14, 2000, (ii) a $25,000 unsecured corporate line of credit from
Mercantile which was due to mature on December 31, 2000, (iii) a $37,000
unsecured revolving loan (the "Unsecured Revolving Loan") from Nomura which was
scheduled to mature on September 11, 2001 and (iv) the prepayment of a $43,000
term loan (the "Term Loan") from Greenwich which was scheduled to mature on
December 10, 2001. In connection with the prepayment of the Unsecured Revolving
Loan and the Term Loan, we incurred an extraordinary loss on the early
extinguishment of debt aggregating $2,861 during 2000. The extraordinary loss
consisted of (i) a $1,700 prepayment penalty and (ii) the write-off of
unamortized deferred financing costs and expenses aggregating $1,161.
We had been in default of the Subordinated Loan and such default had
triggered certain cross-default provisions with respect to other of our debt
facilities. In addition, we previously were not in compliance with financial
covenants contained in certain of our debt facilities. As a result of the debt
repayments and the various restructuring and extension agreements completed on
December 22, 2000, we had cured or eliminated all financial covenant defaults
under our recourse loan agreements as of December 31, 2000. See "Going Concern"
for additional information.
During 1999, we incurred an extraordinary loss on the early extinguishment
of debt of $3,518, net of minority interests of $887.
2001 Debt Transactions
In connection with the sales of Northgate Plaza, Prime Outlets at
Silverthorne and certain land located in Camarillo, CA during 2001, we repaid
mortgage indebtedness of $5,966, $18,078 and $6,227, respectively. In addition,
net cash proceeds from these property sales were used to prepay an aggregate
$10,924 of principal outstanding under our Mezzanine Loan. See Note 3 -
"Property Dispositions" for additional information.
On June 8, 2001, we, through affiliates, obtained a two-month extension
through August 10, 2001 to the terms and maturity date of a $16,330 first
mortgage loan secured by Prime Outlets at Edinburgh (the "Edinburgh Outlet
Center") located in Edinburgh, Indiana. On June 29, 2001, we, through
affiliates, completed a refinancing of this first mortgage loan. The new first
mortgage loan (the "Edinburgh First Mortgage Loan") provides for an aggregate
commitment up to $18,000 and is non-recourse to us. The Edinburgh First Mortgage
Loan, which is secured by the Edinburgh Outlet Center, has a term of three
years, requires monthly principal payments based upon a 15-year amortization
schedule and is pre-payable at any time subject to certain prepayment and exit
fees. The Edinburgh First Mortgage Loan bears interest at a floating rate based
on six-month LIBOR plus 350 basis points, subject to an 8.00% minimum, and may
be adjusted semi-annually with a maximum 1.0% increase or decrease per
adjustment. As of December 31, 2001, the Edinburgh First Mortgage Loan bore
interest at the minimum rate. At closing, $16,700 of the Edinburgh First
Mortgage Loan was funded, resulting in net proceeds of $88 after repayment of
the old first mortgage loan and closing costs. As of December 31, 2001, the
remaining commitment provides for the funding of up to an additional $1,300 for
leasing related capital expenditures at the Edinburgh Outlet Center.
Prime/Estein Venture Refinancing Transactions
On August 7, 2001, we, through affiliates, obtained an additional one-month
extension to September 10, 2001 to the terms and maturity date of a $10,003
first mortgage loan secured by Prime Outlets at Birch Run (the "Birch Run Outlet
Center") located in Birch Run, Michigan. The terms and maturity date of the
$10,003 first mortgage loan had previously been extended to August 10, 2001. We
and Estein, through affiliates, have 30% and 70% ownership interests,
respectively, in the Prime/Estein Venture that indirectly owns the Birch Run
Outlet Center. We completed a refinancing of loans aggregating $63,000 on the
Birch Run Outlet Center on August 21, 2001. These loans which were refinanced
were included in a "wrap-around" loan provided by us to the Prime/Estein Venture
in connection with the November 19, 1999 sale of the Birch Run Project.
The new first mortgage loan (the "Birch Run First Mortgage Loan") is in the
amount of $63,000, is secured by the Birch Run Outlet Center, has a term of ten
years, and requires monthly principal amortization based upon a 25-year
schedule. The Birch Run First Mortgage Loan bears interest at an effective
fixed-rate of 8.12%. Greenwich Capital Financial Products, Inc. provided the
financing. The Prime/Estein Venture used the net proceeds from the Birch Run
First Mortgage Loan to repay in full first mortgage loans and the "wrap-around"
loan of $10,731 due to us, aggregating $63,000. Net proceeds to us, after
payment of closing and other transaction costs, were $8,286. In connection with
the refinancing transaction, we recorded a nonrecurring loss of $1,036 during
the third quarter of 2001.
Pursuant to Prime/Estein Venture-related documents to which affiliates of
ours are parties, we are obligated to provide to, or obtain for, the
Prime/Estein Venture fixed rate financing at an annual rate of 7.75%. As a
result, each month during the term of the Birch Run First Mortgage Loan, we will
be obligated to pay to the Prime/Estein Venture the difference between the cost
of the financing at an annual effective rate of 8.12% and the cost of the
financing at an annual rate of 7.75% (the "Interest Rate Subsidy"). The total of
the payments to be made by us to the Prime/Estein Venture over the term of the
Birch Run First Mortgage Loan will be $2,723. During the third quarter of 2001,
we recorded a non-recurring loss of $1,882 in other charges representing the net
present value of the Interest Rate Subsidy.
On October 19, 2001, we, through affiliates, completed the refinancing of a
$32,500 first mortgage loan secured by Prime Outlets at Williamsburg (the
"Williamsburg Outlet Center"), an outlet center located in Williamsburg,
Virginia. The new first mortgage loan (the "Williamsburg Mortgage Loan") has a
principal amount of $32,500, is secured by the Williamsburg Outlet Center, and
has a term of ten years. The Williamsburg Mortgage Loan requires monthly
principal amortization based upon a 25-year schedule and bears interest at a
fixed rate of 7.69%. Prudential Mortgage Capital Company, LLC provided the
financing.
We and Estein, through affiliates, own 30% and 70% interests, respectively,
in the Prime/Estein Venture that indirectly owns the Williamsburg Outlet Center.
In connection with the refinancing transaction, the Prime/Estein Venture paid in
full a $10,000 promissory note (of which Estein's obligation was $7,000 and ours
was $3,000) to us. Net proceeds to us after payment of closing and other
transaction costs were $6,237. The net proceeds from this refinancing
transaction were used to prepay $5,997 of the Mezzanine Loan.
Pursuant to Prime/Estein Venture-related agreements to which affiliates of
ours are parties, we are obligated to provide to, or obtain for, the
Prime/Estein Venture fixed rate financing at an annual rate of 7.75%. As a
result, each month during the term of the Williamsburg Mortgage Loan, the
Prime/Estein Venture will be obligated to pay to us the difference between the
cost of such financing at an assumed annual rate of 7.75% and the actual cost of
such financing at an annual rate of 7.69%.
Going Concern
Our liquidity depends on cash provided by operations and potential capital
raising activities such as funds obtained through borrowings, particularly
refinancings of existing debt, and cash generated through asset sales. Although
we believe that estimated cash flows from operations and potential capital
raising activities will be sufficient to satisfy our scheduled debt service
obligations and sustain our operations for the next year, there can be no
assurance that we will be successful in obtaining the required amount of funds
for these items or that the terms of the potential capital raising activities,
if they should occur, will be as favorable as we have experienced in prior
periods.
During 2002, we are required to make certain additional mandatory principal
pay-downs to our Mezzanine Loan aggregating $25,367 from net proceeds from asset
dispositions or other capital transactions within specified periods pursuant to
the terms of a modification to the original terms of the Mezzanine Loan (see
"Mezzanine Loan Modification" for additional information). Although we are in
the process of seeking to generate additional liquidity though new financings
and the sale of assets, there can be no assurance that we will be able to
complete asset dispositions or other capital transactions within the specified
periods or that such asset dispositions or other capital transactions, if they
should occur, will generate sufficient proceeds to make the additional mandatory
pay-downs of the Mezzanine Loan. Any failure to satisfy these mandatory
principal prepayments within the specified time periods indicated will
constitute a default under the Mezzanine Loan.
As of December 31, 2001, we were in compliance with all financial debt
covenants under our recourse loan agreements. However, there can be no assurance
that we will be in compliance with our financial debt covenants in future
periods since our future financial performance is subject to various risks and
uncertainties, including, but not limited to, the effects of increases in market
interest rates from current levels, the risk of potential increases in vacancy
rates and the resulting impact on our revenue, and risks associated with
refinancing our current debt obligations or obtaining new financing under terms
less favorable than we have experienced in prior periods. See "Defaults on
Certain Non-recourse Mortgage Indebtedness" and "Defaults on Certain
Non-recourse Mortgage Indebtedness of Unconsolidated Partnerships" for
additional information.
Based on our current financial projections, we believe we will not be in
compliance with respect to debt service coverage ratios under certain debt
facilities during 2002. The debt facilities are fixed rate tax-exempt revenue
bonds (the "Affected Fixed Rate Bonds") in the amount of $18,390 and a recourse
bridge loan (the "Bridge Loan") in the amount of $111,375. In the event of
non-compliance, the holders of the Affected Fixed Rate Bonds may elect to put
such obligations to us at a price equal to par plus accrued interest and the
Bridge Loan lender may elect to accelerate its maturity. Additionally,
noncompliance or defaults with respect to debt service coverage ratios under
these debt facilities may trigger certain cross-default provisions with respect
to other debt facilities, including our Mezzanine Loan.
We intend to meet with the affected lenders to discuss potential
resolutions including waiver or amendment with respect to such non-compliance
provisions. If we are unable to reach satisfactory resolution with the affected
lenders, we will look to (i) obtain alternative financing from other financial
institutions, (ii) sell the project or projects where non-compliance is likely
to occur or (iii) explore other possible capital transactions in order to
generate cash to repay the amounts outstanding under such debt facilities. There
can be no assurance that we will obtain a satisfactory resolution with our
affected lenders or that we will be able to complete asset sales or other
capital raising activities sufficient to repay the amounts outstanding under
such debt facilities.
These conditions raise substantial doubt about our ability to continue as a
going concern. The financial statements contained herein do not include any
adjustment to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
Mezzanine Loan Modification
Effective January 31, 2002, we entered into a modification to the original
terms of our Mezzanine Loan previously obtained in December 2000. The Mezzanine
Loan amendment (the "Amendment"), among other things, (i) reduces required
monthly principal amortization for the period February 1, 2002 through January
1, 2003 ("Year 2") from $1,667 to $800, which may be further reduced to a
minimum of $500 per month under certain limited circumstances, provided no
defaults exist under the Mezzanine Loan and certain other conditions have been
satisfied at the Lender's sole discretion, (ii) requires certain mandatory
principal prepayments from net proceeds from asset dispositions or other capital
transactions pursuant to the schedule set forth below and (iii) reduces the
threshold level at which excess cash flow from operations must be applied to
principal pay-downs, primarily resulting from a reduction in the available
working capital reserves. Additionally, the Amendment (i) increased the interest
rate from LIBOR plus 9.50% to LIBOR plus 9.75% (rounded up to nearest 0.125%
with a minimum rate of 14.75%), (ii) changed the Mezzanine Loan maturity date
from December 31, 2003 to September 30, 2003 and (iii) required a 0.25% fee,
which was paid at the time of the modification, on the outstanding principal
balance.
The Amendment also requires additional Year 2 monthly payments of $250 (the
"Escrowed Funds") into an escrow account controlled by the Lender. Provided
certain conditions are satisfied in the Lender's sole discretion, the Escrowed
Funds may be available to us for certain limited purposes. The Escrowed Funds
not used at the end of each quarter, subject to certain exceptions, will be
applied by the Lender to amortize the Mezzanine Loan. The required monthly
principal amortization of $2,333 commencing on February 1, 2003, through the new
maturity date of September 30, 2003, remains unchanged.
The Amendment also requires, in lieu of the original requirements,
additional mandatory principal prepayments with net proceeds from asset
dispositions, excluding the January 2002 sale of a 70% interest in Prime Outlets
at Hagerstown (see "2002 Sales Transactions" for additional information), or
other capital transactions of not less than (i) $8,906 by May 1, 2002, (ii)
$24,406, inclusive of the $8,906, by July 1, 2002 (subject to extension to
October 31, 2002 provided certain conditions are met to the Lender's
satisfaction) and (iii) $25,367, inclusive of the $24,406, by November 1, 2002.
In addition to each principal prepayment, we must also pay any interest,
including deferred interest, accrued thereon and the additional fees provided
for in the Mezzanine Loan. Any failure to satisfy these mandatory principal
prepayments or other payments within the specified time periods indicated will
constitute a default under the Mezzanine Loan.
The Mezzanine Loan was also amended on January 11, 2002 to, among other
things, (i) release the partnership interests in Outlet Village of Hagerstown
Limited Partnership ("Hagerstown LP") as collateral under the Mezzanine Loan,
(ii) release Hagerstown LP of all obligations under the Mezzanine Loan and (iii)
add Hagerstown Land, L.L.C., a Delaware limited liability company, as a
guarantor under the Mezzanine Loan.
Debt Service Obligations
Our aggregate indebtedness, as adjusted for the Amendment to the Mezzanine
Loan and excluding (i) unamortized debt premiums of $11,051, (ii) mortgage
indebtedness aggregating $58,079 on Prime Outlets at Hagerstown and (iii)
non-recourse mortgage indebtedness aggregating $33,235 on Prime Outlets at
Conroe and Prime Outlets at Jeffersonville II was $855,102 (the "Adjusted
Indebtedness") at December 31, 2001. See Note 3 - "Property Dispositions" and
"Defaults on Certain Non-recourse Mortgage Indebtedness" for additional
information.
At December 31, 2001, the Adjusted Indebtedness had a weighted-average
maturity of 3.3 years and bore contractual interest at a weighted-average rate
of 9.05% per annum. At December 31, 2001, $756,751, or 88.5%, of the Adjusted
Indebtedness bore interest at fixed rates and $98,351 or 11.5%, of the Adjusted
Indebtedness bore interest at variable rates. We utilize derivative financial
instruments to manage our interest rate risk associated with variable rate debt.
As of December 31, 2001, our scheduled principal payments during 2002 for
the Adjusted Indebtedness aggregated $48,479. The 2002 scheduled principal
payments include (i) a recourse first mortgage loan of $2,972 on Western Plaza
(the "Western Plaza First Mortgage Loan"), a community center located in
Knoxville, Tennessee, which currently matures on April 30, 2002 but may be
extended, subject to an additional principal pay-down of $350, an additional six
months to October 31, 2002 and (ii) additional mandatory principal pay-downs on
the Mezzanine Loan aggregating $25,367 (see "Mezzanine Loan Modification" for
additional information). Certain of our debt obligations, including the
Mezzanine Loan and fixed-rate bonds aggregating $7,000 secured by a second
mortgage on Western Plaza, contain cross-default provisions that would be
triggered in the event of a default under the Western Plaza First Mortgage Loan.
In the event such cross-default provisions were triggered, the holders of the
Mezzanine Loan could elect to accelerate such debt and the holders of the bonds
could elect to put such obligations to us at a price equal to par plus accrued
interest. See "Going Concern" for additional information.
The scheduled principal maturities of the Adjusted Indebtedness and related
average interest rates by year of maturity as of December 31, 2001 were as
follows:
- --------------------------------------------------------------------------------
Average
Interest Principal
Years Ended December 31, Rate Maturities
- --------------------------------------------------------------------------------
2002 12.78% $ 48,479
2003 9.22% 501,444
2004 7.75% 22,223
2005 7.92% 51,147
2006 8.76% 121,931
Thereafter 7.74% 109,878
----- ---------
9.05% $ 855,102
===== =========
================================================================================
Guarantees of Indebtedness of Others
We are a guarantor or otherwise obligated with respect to an aggregate of
$12,435 of the indebtedness of Horizon Group Properties, Inc. and its affiliates
("HGP"), including $10,000 of obligations under a secured credit facility (the
"HGP Secured Credit Facility"). HGP is a publicly traded company that was formed
in connection with our merger with Horizon Group, Inc. in June, 1998.
The HGP Secured Credit Facility bore interest at a rate of 30-day LIBOR
plus 1.90%, was collateralized by five properties located throughout the United
States and matured on July 11, 2001. On August 2, 2001, HGP announced it had
refinanced one of the properties in the HGP Secured Credit Facility and used the
proceeds from the new first mortgage loan to reduce the principal balance of the
HGP Secured Credit Facility. Simultaneously, HGP obtained an extension to the
remaining principal balance of approximately $33,500, including a 2% extension
fee, on the HGP Secured Credit Facility through July 11, 2002. Commencing on the
extension date, the HGP Secured Credit Facility bears interest at a rate of
30-day LIBOR (but not less than 4.10%) plus 3.95%, requires monthly principal
amortization of $225, and is collateralized by four properties located
throughout the United States. We confirmed our obligations as guarantor with
respect to the HGP Secured Credit Facility in connection with the extension and
partial pay-down. No claims have been made against our guaranty by the HGP
Secured Credit Facility lender. On October 11, 2001, HGP announced that it was
in default under two loans with an aggregate principal balance of $45,500
secured by six of its other outlet centers. Such defaults are not defaults under
the HGP Secured Credit Facility or any other facility guaranteed by us.
We, through affiliates, hold a 51% interest in the owner of Phases II and
III of an outlet center located in Bellport, New York (the "Bellport Outlet
Center"). We account for our interest in Phases II and III of the Bellport
Outlet Center in accordance with the equity method of accounting. On May 1,
2001, the recourse first mortgage loan on Phases II and III of the Bellport
Outlet Center of $7,795 matured. On May 21, 2001, we, on behalf of the owner,
made a principal payment of $2,295 to the lender in exchange for a modification
to the terms and a one-year extension of the maturity of this mortgage
indebtedness. The outstanding balance of the first mortgage loan was $5,500 as
of December 31, 2001. We plan to sell this property to repay the outstanding
balance in full. If we are unable to consummate a sale of the property, we will
attempt to either refinance or extend the maturity of such indebtedness on terms
acceptable to us. There can be no assurance that we will be successful in
obtaining the required amount of funds for the maturing indebtedness or that the
terms of any potential sale, refinancing or extension of the maturity will be as
favorable as we have experienced in prior periods or otherwise acceptable to us.
As of December 31, 2001, the carrying value of our investment in Phases II and
III of the Bellport Outlet Center was $1,689, which is included in investments
in unconsolidated partnerships in the Consolidated Balance Sheet.
On April 1, 1998, Horizon consummated an agreement with Castle & Cooke
Properties, Inc. which released Horizon from its future obligations under its
long-term lease of the Dole Cannery outlet center in Honolulu, Hawaii, in
connection with the formation of a joint venture with certain affiliates of
Castle & Cooke, Inc. ("Castle & Cooke") to operate such property. Under the
terms of the agreement, Castle & Cooke Properties, Inc., the landlord of the
project and an affiliate of Castle & Cooke, released Horizon from any continuing
obligations under the lease, which expires in 2045, in exchange for Horizon's
conveyance to the joint venture of its rights and obligations under such lease.
The agreement also provided that Horizon transfer to such joint venture
substantially all of Horizon's economic interest in its outlet center in Lake
Elsinore, California together with legal title to vacant property located
adjacent to the center. We held a small minority interest in the joint venture
but had no obligation or commitment with respect to the post-closing operations
of the Dole Cannery project. On August 15, 2000, we exercised our option under
the operating agreement of the joint venture and transferred our entire interest
in the joint venture to a Castle & Cooke subsidiary.
Defaults on Certain Non-recourse Mortgage Indebtedness
During 2001, certain of our subsidiaries suspended regularly scheduled
monthly debt service payments on two non-recourse mortgage loans aggregating
$33,235 as of December 31, 2001. These non-recourse mortgage loans which are
held by New York Life Investment LLC ("New York Life") are cross-collateralized
by Prime Outlets at Jeffersonville II, located in Jeffersonville, Ohio, and
Prime Outlets at Conroe, located in Conroe, Texas.
Effective January 1, 2002, New York Life foreclosed on Prime Outlets at
Conroe. We remain in discussions with New York Life regarding the transfer of
our ownership interest in Prime Outlets at Jeffersonville II. During 2001,
excess cash flow from the operations of these centers was utilized for debt
service on the two non-recourse loans. Accordingly, we believe the foreclosure
sale of Prime Outlets at Conroe and the potential transfer of our ownership
interest in Prime Outlets at Jeffersonville II will not have a material impact
on our results of operations or financial condition.
Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated
Partnerships
Two mortgage loans related to projects in which we, through subsidiaries,
indirectly own joint venture interests have matured and are in default. The
mortgage loans, at the time of default, were (i) a $10,389 first mortgage loan
on Phase I of the Bellport Outlet Center, held by Union Labor Life Insurance
Company ("Union Labor"); and (ii) a $13,338 first mortgage loan on Oxnard
Factory Outlet, an outlet center located in Oxnard, California, held by Fru-Con.
An affiliate of ours has a 50% ownership interest in the partnership which owns
Phase I of the Bellport Outlet Center. Fru-Con and us are each a 50% partner in
the partnership that owns the Oxnard Factory Outlet.
Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center
and a receiver was appointed March 27, 2001 by the court involved in the
foreclosure action. Effective May 1, 2001, a manager hired by the receiver began
managing and leasing Phase I of the Bellport Outlet Center. We continue to
negotiate the terms of a transfer of our ownership interest in Oxnard Factory
Outlet to Fru-Con. We do not manage or lease Oxnard Factory Outlet.
We believe neither of these mortgage loans is recourse to us. It is
possible, however, that either or both of the respective lenders will, after
completing its foreclosure action, file a lawsuit seeking to collect from us the
difference between the value of the mortgaged property and the amount due under
the loan. If such an action is brought, the outcome, and our ultimate liability,
if any, cannot be predicted at this time. In addition, we are currently not
receiving, directly or indirectly, any cash flow from Oxnard Factory Outlet and
were not receiving any cash flow from Phase I of the Bellport Outlet Center
prior to the loss of control of such project. We account for our interests in
(i) Phases I of the Bellport Outlet Center and (ii) the Oxnard Factory Outlet in
accordance with the equity method of accounting. As of December 31, 2001, the
carrying value of our investment in these properties was $0. Therefore, we do
not believe the existing defaults under these loans or any related foreclosures
on the mortgaged prperties will have a material impact on our results of
operations or financial condition.
Note 7 -- Minority Interests
In conjunction with the formation of the Operating Partnership and us, the
predecessor owners contributed interests in certain properties to the Operating
Partnership and, in exchange, received 8,505,472 limited partnership interests
in the Operating Partnership ("Common Units"). Additionally, 3,782,121 Common
Units were issued in June 1998 in connection with our merger with Horizon Group,
Inc.. Subject to certain conditions, each Common Unit held by a Limited Partner
may be exchanged for one share of Common Stock or, at our option, cash equal to
the fair market value of a share of Common Stock at the time of exchange.
During 2001, no Common Units were exchanged for shares of Common Stock.
During 2000 and 1999, 29,296 and 471,923 Common Units, respectively, were
exchanged for shares of Common Stock. As of December 31, 2001, 10,810,912 Common
Units were issued and outstanding. Minority interests also includes interests in
two property partnerships that are not wholly owned by the Company. During the
years ended December 31, 2001, 2000, and 1999, expenses totaling $1,981, $2,928,
and $11,752, respectively, related solely to our operation were allocated only
to the common shareholders. Such allocation is consistent with the federal and
state tax treatment of these expenses.
During the years ended December 31, 2001 and 2000, the loss allocated to
minority interests totaled $408 and $738, respectively. During the year ended
December 31, 1999, income allocated to minority interests totaled $2,339, net of
an $887 allocation of extraordinary losses. In addition, during 1999 cash
distributions and losses allocated to minority interests reduced the minority
interests' balance related to Common Units to zero. After reducing the minority
interests' balance to zero, cash distributions, if any, related to Common Units
are treated as income allocated to minority interests.
Note 8 -- Shareholders' Equity
We are authorized to issue up to (i) 150,000,000 shares of common stock and
(ii) 24,315,000 shares of preferred stock in one or more series. At December 31,
2001, 43,577,916 shares of common stock, 2,300,000 shares of Series A Senior
Preferred Stock and 7,828,125 shares of Series B Convertible Preferred Stock
were issued and outstanding.
The Series A Senior Preferred Stock and Series B Convertible Preferred
Stock have a liquidation preference equivalent to $25.00 per share plus the
amount equal to any accrued and unpaid dividends thereon.
Dividends, if declared, on the Series A Senior Preferred Stock are payable
quarterly in the amount of $2.625 per share per annum. Dividends, if declared,
on the Series B Convertible Preferred Stock are payable quarterly at the greater
of (i) $2.125 per share per annum or (ii) the dividends on the number of shares
of Common Stock into which a share of Series B Convertible Preferred Stock will
be convertible at the conversion price of $20.90 per share of Common Stock. At
December 31, 2001, there were 9,363,786 shares of Common Stock reserved for
future issuance upon conversion of the Series B Convertible Preferred Stock.
We have the right to redeem the Series A Senior Preferred Stock and the
Series B Convertible Preferred Stock beginning on and after March 31, 1999 at
$26.75 and $27.125 per share, respectively, plus the amount equal to any accrued
and unpaid dividends thereon. The redemption price decreases incrementally each
year thereafter through March 31, 2004, at which date the redemption price is
fixed at $25.00 per share plus the amount equal to any accrued and unpaid
dividends thereon.
On March 31, 1999, we entered into an agreement providing for the
repurchase of all of our outstanding shares of Series C Preferred Stock for
$43,636 or $10.00 per share. The agreement provided for the repurchase to occur
in two stages. In the first stage, on March 31, 1999, we repurchased 3,300,000
shares of the Series C Preferred Stock in exchange for the issuance of a 12.0%
fixed rate $33,000 unsecured promissory note which was repaid on September 29,
1999. In the second stage, we repurchased the remaining 1,063,636 outstanding
shares of our Series C Preferred Stock for an aggregate purchase price of
$10,636 on September 29, 1999.
During the year ended December 31, 1999, a redemption discount of $13,388
representing the excess of the carrying amount of the Series C Preferred Stock
over its redemption amount is reflected in the Consolidated Statements of
Operations as a loss allocated to preferred shareholders.
To qualify as a REIT for federal income tax purposes, we are required to
pay distributions to our common and preferred shareholders of at least 90% of
our REIT taxable income in addition to satisfying other requirements. Although
we intend to make necessary distributions to remain qualified as a REIT under
the Code, we also intend to retain such amounts as we consider necessary from
time to time for our capital and liquidity needs.
Our current policy is to pay distributions only to the extent necessary to
maintain our status as a REIT for federal income tax purposes. Based on our
current federal income tax projections for 2002, we do not expect to pay any
distributions on our Senior Preferred Stock, Series B Convertible Preferred
Stock, common stock or common units of limited partnership interest in the
Operating Partnership during 2002. We are currently in arrears on nine quarters
of preferred stock distributions due February 15, 2000 through February 15,
2002, respectively.
We are prohibited from paying dividends or distributions except to the
extent necessary to maintain our REIT status under the terms of our Mezzanine
Loan (see Note 6 - "Bonds and Notes Payable" for additional information). In
addition, we may not make distributions to our common shareholders or our
holders of common units of limited partnership interests in the Operating
Partnership unless we are current with respect to distributions to our preferred
shareholders. As of December 31, 2001, unpaid dividends for the period beginning
on November 16, 1999 through December 31, 2001 on the Series A Senior Preferred
Stock and Series B Convertible Preferred Stock aggregated $12,830 and $35,349,
respectively. The annualized dividends on our 2,300,000 shares of Series A
Senior Preferred Stock and 7,828,125 shares of Series B Convertible Preferred
Stock outstanding as of December 31, 2001 are $6,037 ($2.625 per share) and
$16,635 ($2.125 per share), respectively.
Our Amended and Restated Articles of Incorporation state, "whenever
dividends payable on the Preferred Stock shall be in arrears for six or more
consecutive quarterly periods, then the holders of Preferred Stock, voting
together as a single class, shall be entitled at the next meeting of
stockholders or at any special meeting called for such purpose, to elect two
additional directors to the Company's Board of Directors until the full
dividends accumulated on all outstanding shares of the Preferred Stock have been
paid in full or declared and a sum of money sufficient for the prepayment
thereof set aside for payment."
On December 6, 2001, a meeting (the "Special Meeting") of the holders of
shares of our Series A Senior Preferred Stock and Series B Convertible Preferred
Stock, (together, the "Preferred Stock") was held for the purpose of electing
two additional directors to our Board of Directors. The Special Meeting was
adjourned to allow sufficient time to tabulate the votes. On December 11, 2001,
the Special Meeting was reconvened and Howard Amster and Robert H. Kanner were
elected to serve as members of the Board of Directors.
Note 9 -- Stock Incentive Plans
Under various plans, we may grant stock options and other awards to
executive officers, other key employees, outside directors and consultants. The
exercise price for stock options granted is no less than the fair market value
of our common stock on the date of grant. In general, stock options are fully
vested on the date of grant and have a term of 10 years. In certain cases stock
options granted become exercisable over periods up to six years.
During 2001, we granted options to an executive officer to purchase 300,000
shares of common stock at $2.00 per share. These options, which have a term of
10 years, were fully vested on the date of grant. During 2000, we granted
options to executive officers and other key employees to purchase 1,087,600
shares of common stock at $2.00 per share. These options, which have a term of
10 years, were 50% vested as of December 31, 2000 and fully vested on June 30,
2001. Additionally, during 2000, we awarded 180,000 shares of restricted common
stock and granted options to outside directors to purchase 420,0000 shares of
common stock at $1.69 per share. The restricted common stock was fully vested as
of September 1, 2000. The options, which have a term of 10 years, vested
pro-ratably on a monthly basis from May 1, 2000 through February 1, 2001.
During 1999, we awarded 135,955 shares of restricted common stock to
certain executive officers. These awards were 25% vested on the date of grant.
The restricted shares vest an additional 25% annually until fully vested. In
1999, we also awarded 24,000 shares of restricted common stock and granted
options to outside directors to purchase 85,000 shares of common stock at $9.85
per share. These awards were fully vested at the grant date. The options have a
term of 10 years.
We have adopted the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock Based Compensation." Accordingly, no compensation expense has been
recognized for employee stock option grants. If we had elected to recognize
compensation based on the fair value of the options granted at grant date as
prescribed by SFAS No. 123, unaudited pro forma net income (loss) and earnings
per share would have been as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Loss before extraordinary loss $ (98,209) $ (139,910) $ (31,376)
Extraordinary loss - (4,206) (3,518)
---------- ---------- ---------
Net loss $ (98,209) $ (144,116) $ (34,894)
========== ========== =========
Net loss applicable to common shares $ (120,881) $ (166,788) $ (44,856)
========== ========== =========
Basic loss per common share:
Loss before extraordinary loss $ (2.77) $ (3.73) $ (0.96)
Extraordinary loss - (0.10) (0.08)
---------- ---------- ---------
Net loss $ (2.77) $ (3.83) $ (1.04)
========== ========== =========
Diluted loss per common share:
Loss before extraordinary loss $ (2.77) $ (3.73) $ (1.22)
Extraordinary loss - (0.10) (0.08)
---------- ---------- ---------
Net loss $ (2.77) $ (3.83) $ (1.30)
========== ========== =========
====================================================================================================================================
The fair value for these options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted average
assumptions:
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Risk-free interest rate 5.0% 5.0% 6.4%
Dividend yield 0.0% 0.0% 21.0%
Volatility factor 0.37 0.87 0.37
Weighted average life (in years) 10.0 10.0 10.0
====================================================================================================================================
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because our stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
A summary of our stock option plans for the years ended December 31 are as
follows:
- ------------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------ ------------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of year 4,131,056 $ 11.84 3,280,317 $ 14.12 3,811,067 $ 14.90
Granted 300,000 2.00 1,507,600 1.91 85,000 9.85
Cancelled (42,300) 4.09 (656,861) 12.13 (615,750) 18.37
--------- ------- --------- ------- --------- --------
End of year 4,388,756 $ 9.49 4,131,056 $ 9.98 3,280,317 $ 14.12
========= ======= ========= ======= ========= ========
Exercisable - end of year 3,998,756 $ 10.10 3,276,987 $ 11.84 2,900,314 $ 14.22
========= ======= ========= ======= ========= ========
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------ ---------------------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of Exercise Price Shares Life in Years Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------------
$1.69 to $2.00 1,725,250 6.1 $ 1.92 1,375,250 $ 1.90
$8.50 60,000 7.6 8.50 60,000 8.50
$11.15 to $13.09 1,962,606 3.8 12.50 1,962,606 12.50
$13.60 to $14.19 262,490 5.8 13.91 222,490 13.85
$19.00 30,000 2.2 19.00 30,000 19.00
$23.53 13,788 4.3 23.53 13,788 23.53
$24.55 to $26.57 334,622 0.3 26.11 334,622 26.11
--------- --- ------ --------- -------
Total 4,388,756 4.6 $ 9.49 3,998,756 $ 10.10
========= === ====== ========= =======
====================================================================================================================================
The weighted fair value of options granted during the years ended December
31, 2001, 2000 and 1999 was $0 per share, $0 per share and $0.96 per share,
respectively. Under our various plans there were 1,170,986 and 1,428,686 shares
reserved for future grants at December 31, 2001 and 2000, respectively.
Note 10 -- Lease Agreements
We sold Prime Outlets at Hagerstown to the Prime/Estein Venture on January
11, 2002 and commencing on that date account for our remaining 30% ownership
interest in accordance with the equity method of accounting (see "Note 3 -
"Property Dispositions" for additional information). Non-recourse mortgage loans
on Prime Outlets at Conroe and Prime Outlets at Jeffersonville II are
cross-collateralized. Effective January 1, 2002, the lender foreclosed on Prime
Outlets at Conroe. The lender and we remain in discussions regarding the
transfer of our ownership interest in Prime Outlets at Jeffersonville II. See
Note 6 - "Bonds and Notes Payable" for additional information. Accordingly, the
following disclosures exclude the lease agreements related to these properties.
We are the lessors of retail and office space under operating leases with
lease terms that expire from 2002 to 2026. Most leases are renewable for five
years at the lessee's option. Future minimum base rent to be received under
noncancelable operating leases as of December 31, 2001 were as follows:
- --------------------------------------------------------------------------------
Years Ended December 31,
- --------------------------------------------------------------------------------
2002 $ 117,910
2003 90,904
2004 66,624
2005 45,196
2006 28,445
Thereafter 65,434
---------
$ 414,513
=========
================================================================================
We lease certain land, buildings, and equipment under various noncancelable
operating lease agreements. Rental expense for operating leases was $1,782,
$2,988, and $3,699 for the years ended December 31, 2001, 2000, and 1999,
respectively. Future minimum rental payments by year and in the aggregate,
payable under these noncancelable operating leases with initial or remaining
terms of one year or more as of December 31, 2001 consisted of the following:
- --------------------------------------------------------------------------------
Years Ended December 31,
- --------------------------------------------------------------------------------
2002 $ 1,668
2003 1,250
2004 392
2005 286
2006 216
Thereafter 5,376
--------
$ 9,188
========
================================================================================
Note 11-- Special Charges
During the third quarter of 2001, we determined that certain events and
circumstances had occurred, including reduced occupancy and limited leasing
success, that indicated that four of our wholly owned properties were
permanently impaired. As a result, we recorded a third quarter provision for
asset impairment aggregating $63,026, representing the write-down of the
carrying value of these properties to their estimated fair value in accordance
with the requirements of SFAS No. 121.
During 2000, we established a formal plan to sell three of our wholly-owned
properties and, accordingly, reclassified their respective carrying values to
assets held for sale. In accordance with the requirements of SFAS No. 121, we
incurred a provision for asset impairment of $28,047 to reduce the carrying
value of these properties classified as held for sale to their estimated sales
value, less cost to dispose. The aggregate carrying value of these properties as
of December 31, 2000 was $43,230. Total revenues and expenses for the operating
properties classified as held for sale were $6,354 and $6,697, respectively, for
the year ended December 31, 2000.
Additionally, we also determined that certain events and circumstances had
occurred during 2000, including reduced occupancy and limited leasing success,
which indicated that four wholly owned properties and two joint venture
properties were permanently impaired. Furthermore, our results of operations for
2000 include a provision for asset impairment aggregating $40,616 representing
the write-down of the carrying values of these permanently impaired properties
to their estimated fair value in accordance with SFAS No. 121.
The operating results for our Designer Connection outlet stores are
reflected in loss on Designer Connection in the Consolidated Statements of
Operations. We ceased operations of our Designer Connection outlet stores in
2000.
On April 12, 2000, we announced that we had been unable to conclude an
agreement to transfer ownership of ours wholly-owned e-commerce subsidiary,
primeoutlets.com inc., also known as eOutlets.com, to a management-led investor
group comprised of eOutlets.com management and outside investors. Effective
April 12, 2000, eOutlets.com ceased all operations and on November 6, 2000 filed
for bankruptcy under Chapter 7. In connection with the discontinuance of
eOutlets.com, we incurred a non-recurring loss of $14,703 which includes (i) the
write-off of $3,497 of costs capitalized during 1999 and (ii) $11,206 of costs
incurred during the year ended December 31, 2000. In addition, during 1999 we
incurred expenses of $3,500 related to organizational and start-up expenditures
of eOutlets.com which are reflected in corporate general and administrative
expenses in the Consolidated Statements of Operations.
When accounting for 1999, we determined that certain events and
circumstances had occurred during 1999, including limited leasing success and
revised occupancy estimates, which indicated two of our outlet centers (Prime
Outlets at Jeffersonville II and Prime Outlets at Oxnard) were permanently
impaired. Accordingly, the results of operations for 1999 include a provision
for asset impairment of $15,842 representing the write-down of the carrying
values of these assets to their estimated fair value in accordance with SFAS No.
121. Additionally, when accounting for 1999, we recorded a provision for
abandoned projects of $16,039 based on management's determination that as of
December 31, 1999, our pre-development efforts associated with certain projects
were no longer viable.
The operating results for our Designer Connection outlet stores are
reflected in loss on Designer Connection in the Consolidated Statements of
Operations for all periods presented. When accounting for 1999, because we
decided to discontinue the operations of our Designer Connection outlet stores,
we recorded non-recurring charges aggregating $3,659 including (i) $1,659
related to the write-off of costs associated with a web-site for Designer
Connection and (ii) $2,000 of costs to cover the expected cash and non-cash
costs of the closure. The cash and non-cash costs of the closure primarily
consisted of (i) employee termination costs, (ii) lease obligations, and (iii)
the write-down of assets to their net realizable value. The operations of
Designer Connection outlet stores ceased in 2000.
Note 12 -- Risk Management Activities
Interest Rate Risk
In the ordinary course of business, we are exposed to the impact of
interest rate changes and, therefore, employ established policies and procedures
to manage our exposure to interest rate changes. We use a mix of fixed and
variable rate debt to (i) limit the impact of interest rate changes on our
results from operations and cash flows and (ii) lower our overall borrowing
costs.
In certain circumstances, we use derivative financial instruments to manage
interest rate risk associated with our variable rate debt. In such cases, we
purchase interest rate protection agreements, such as caps, which are designated
as hedges for underlying variable rate debt obligations. We do not hold
derivative financial instruments for trading purposes.
The interest rate caps specifically limit our interest costs with an upper
limit on the underlying interest rate index. The cost of such contracts are
included in deferred charges and are being amortized as a component of interest
expense over the life of the contracts. Amounts earned from interest rate
protection contracts, if any, are recorded as a reduction of interest expense.
We are exposed to credit losses in the event of counterparty nonperformance, but
do not anticipate any such losses based on the creditworthiness of the
counterparties.
On December 22, 2000, we purchased an interest rate cap with a notional
amount of $90,000 to hedge our Mezzanine Loan that was funded on the same date.
The interest rate cap has a three-year term with a strike price of 8.00% based
on 30-day LIBOR. The notional amount of this interest rate cap amortizes monthly
based on estimated principal repayments on the Mezzanine Loan. Additionally, on
December 22, 2000, we also purchased an interest rate cap with a notional amount
of $20,000 to hedge our $20,000 Puerto Rico First Mortgage Loan that was funded
on the same date. The interest rate cap has a three-year term with a strike
price of 8.00% based on 30-day LIBOR. See Note 6 - "Bonds and Notes Payable" for
additional information.
Although derivative financial instruments are an important component of our
interest rate management program, their incremental effect on interest expense
for the years ended December 31, 2001, 2000 and 1999 was not material.
Economic Conditions
Most of our tenants' leases contain provisions that somewhat mitigate the
impact of inflation. Such provisions include clauses providing for increases in
base rent and clauses enabling us to receive percentage rentals based on
merchants' gross sales. Most of the leases require tenants to pay their
proportionate share of all operating expenses, including common area
maintenance, real estate taxes and promotion, thereby reducing our exposure to
increased costs and operating expenses resulting from inflation.
Note 13 -- Legal Proceedings
Except as described below, neither we nor any of our properties are
currently subject to any material litigation nor, to our knowledge, is any
material or other litigation threatened against us, other than routine
litigation arising in the ordinary course of business, some of which is expected
to be covered by liability insurance and all of which collectively is not
expected to have a material adverse effect on our consolidated financial
statements.
Dinnerware Plus Holdings, Inc., which operates under the trade name Mikasa,
and affiliates (collectively, the "Mikasa Plaintiffs") filed a lawsuit against
the Company and various affiliates in Superior Court of New Jersey on March 29,
2001. The Mikasa Plaintiffs assert a number of causes of action in which they
allege that the Company and its affiliates breached various provisions in the
Mikasa Plaintiffs' leases and, as a result, overcharged the Mikasa Plaintiffs
for common area maintenance and similar charges ("CAM") and promotion fund
charges at various centers where the Mikasa Plaintiffs are tenants. The Company
filed a motion to dismiss the complaint on behalf of the Company's affiliates
who entered into leases with the Mikasa Plaintiffs, based on lack of
jurisdiction. The motion was granted, but the Mikasa Plaintiffs filed a motion
for reconsideration, upon which the court has not ruled. The remaining
defendants, Prime Retail, Inc. and Prime Retail, L.P., have answered the
complaint. The outcome of this lawsuit, and the ultimate liability of the
defendants, if any, cannot be predicted at this time.
On July 6, 2001, affiliates of the Company brought an action in the Circuit
Court for Washington County, Maryland against Melru Corporation, which operates
under the trade name Jones New York, alleging that Melru Corporation owed past
due rent in connection with 43 leases. Melru Corporation, in response to the
collection action filed by certain affiliates of the Company, filed on October
15, 2001 several counterclaims against the Company and its affiliates in which
it alleges that the Company and its affiliates overcharged Melru Corporation for
CAM and promotion fund charges. In addition, Melru Corporation alleges that an
affiliate of the Company fraudulently induced Melru Corporation to enter into a
lease and that another affiliate violated its lease with Melru Corporation by
failing to maintain required occupancy levels at the shopping center it owns.
The Company and its affiliates have not filed their response to the Melru
Corporation counterclaims. The outcome of the Melru Corporation counterclaims,
and the ultimate liability of the Company and its affiliates, if any, cannot be
predicted at this time.
In addition to the Mikasa Plaintiffs and Melru Corporation, other tenants,
including Design's Inc. and Brown Group Retail, Inc., in the Company's
affiliates' outlet centers have made or may make allegations concerning
overcharging for CAM and promotion fund charges similar to those made by the
Mikasa Plaintiffs and Melru Corporation. No other such tenant, however, has
filed a suit. It is too early to make any predictions as to whether the Company
or its affiliates may be found liable with respect to such other tenants, or to
predict damages should liability be found.
The Company and its affiliates were defendants in a lawsuit filed by
Accrued Financial Services ("AFS") on August 10, 1999 in the Circuit Court for
Baltimore City. The lawsuit was removed to United States District Court for the
District of Maryland (the "U.S. District Court") on August 20, 1999. AFS claimed
that certain tenants had assigned to AFS their rights to make claims under
leases such tenants had with affiliates of the Company and alleged that the
Company and its affiliates overcharged such tenants for common area maintenance
charges and promotion fund charges. The U.S. District Court dismissed the
lawsuit on June 19, 2000. AFS appealed the U.S. District Court's decision to the
United States Court of Appeals for the Fourth Circuit. Briefs were submitted and
oral argument before a panel of judges of the United States Court of Appeals for
the Fourth Circuit was held on October 30, 2001, during which the panel of
judges requested further briefing of certain issues. The Fourth Circuit received
the briefs, but has not yet ruled. The Company believes that it has acted
properly and will continue to defend this lawsuit vigorously. The outcome of
this lawsuit, and the ultimate liability of the defendants, if any, cannot be
predicted at this time.
Affiliates of the Company routinely file lawsuits to collect past due rent
from, and to evict, tenants which have defaulted under their leases. There are
currently dozens of such actions pending. In addition to defending against the
Company's affiliates' claims and eviction actions, some tenants file
counterclaims against the Company's affiliates. A tenant who files such a
counterclaim typically claims that the Company's affiliate which owns the outlet
center in question has defaulted under the tenant's lease, has overcharged the
tenant for CAM and promotion fund charges, or has failed to maintain or market
the outlet center in question as required by the lease. Usually such
counterclaims are without merit. In response to such counterclaims the Company's
affiliates usually continue to pursue their collection or eviction actions and
defend against the counterclaims. Despite the fact that the Company and its
affiliates believe such counterclaims are without merit and defend against them
vigorously, the outcome of all such counterclaims, and thus the liability, if
any, of the Company and its affiliates, cannot be predicted at this time.
Since October 13, 2000 there have been eight complaints filed in the United
States District Court for the District of Maryland against the Company and five
individual defendants. The five individual defendants are Glenn D. Reschke, the
President, Chief Executive Officer and Chairman of the Board of Directors of the
Company; William H. Carpenter, Jr., the former President and Chief Operating
Officer and a former director of the Company; Abraham Rosenthal, the former
Chief Executive Officer and a former director of the Company; Michael W.
Reschke, the former Chairman of the Board and a current director of the Company;
and Robert P. Mulreaney, the former Executive Vice President - Chief Financial
Officer and Treasurer of the Company. The complaints have been brought by
alleged stockholders of the Company, individually and purportedly as class
actions on behalf of all other stockholders of the Company. The complaints
allege that the individual defendants made statements about the Company that
were in violation of the federal securities laws. The complaints seek
unspecified damages and other relief. Lead plaintiffs and lead counsel were
subsequently appointed. A consolidated amended complaint captioned The Marsh
Group, et al. v. Prime Retail, Inc., et al. dated May 21, 2001 was filed. The
Company and the individual defendants filed a motion to dismiss the complaint,
which was granted on November 8, 2001. The plaintiffs appealed the matter to the
Fourth Circuit. The appeal is now pending. The Company believes that the claims
are without merit and will defend vigorously against the appeal. The outcome of
this lawsuit, and the ultimate liability of the defendants, if any, cannot be
predicted at this time.
Several entities (the "eOutlets Plaintiffs") have filed or stated an
intention to file lawsuits (collectively, the "eOutlets Lawsuits") against the
Company and its affiliates. The eOutlets Plaintiffs seek to hold the Company and
its affiliates responsible under various legal theories for liabilities incurred
by primeoutlets.com, inc., also known as eOutlets, including the theories that
the Company guaranteed the obligations of eOutlets and that the Company was the
"alter-ego" of eOutlets. primeoutlets.com inc. is also a defendant in some, but
not all, of the eOutlets Lawsuits. The Company believes that it is not liable to
the eOutlets Plaintiffs as there was no privity of contract between it and the
various eOutlets Plaintiffs. The Company will continue to defend all eOutlets
Lawsuits vigorously. primeoutlets.com inc. filed for protection under Chapter 7
of the United States Bankruptcy Code during November 2000 under the name
E-Outlets Resolution Corp. The trustee for E-Outlets Resolution Corp. has
notified the Company that he is contemplating an action against the Company and
the Operating Partnership in which he may assert that E-Outlets Resolution Corp.
was the "alter-ego" of the Company and the Operating Partnership and that, as a
result, the Company and the Operating Partnership are liable for the debts of
E-Outlets Resolution Corp. If the trustee pursues such an action, the Company
and the Operating Partnership will defend themselves vigorously. In the case
captioned Convergys Customer Management Group, Inc. v. Prime Retail, Inc. and
primeoutlets.com inc. in the Court of Common Pleas for Hamilton County (Ohio),
the Company prevailed in a motion to dismiss the plaintiff's claim that the
Company was liable for primeoutlets.com inc.'s breach of contract based on the
doctrine of piercing the corporate veil. The outcome of the eOutlets Lawsuits,
and the ultimate liability of the Company in connection with the eOutlets
Lawsuits and related claims, if any, cannot be predicted at this time.
In May, 2001, the Company, through affiliates, filed suit against Fru-Con
Construction, Inc. ("FCC"), the lender on Prime Outlets at New River ("New
River") as a result of FCC's foreclosure of New River due to the maturation of
the loan. The Company and its affiliates allege that they have been damaged due
to FCC's failure to dispose of the collateral in a commercially reasonable
manner. The Company, through affiliates, has also filed suit against The Fru-Con
Projects, Inc. ("Fru-Con"), a partner in Arizona Factory Shops Partnership and
an affiliate of FCC. The Company and its affiliates allege that Fru-Con failed
to use reasonable efforts to assist in obtaining refinancing. Fru-Con has claims
pending against the Company and its affiliates, as part of the same suit,
alleging that the Company and its affiliates breached their contract with
Fru-Con by not allowing Fru-Con to participate in an outlet project in Sedona,
Arizona (the "Sedona Project") and breached a management and leasing agreement
by managing and leasing the Sedona Project. The Company believes its affiliates
and it acted properly and FCC did not act properly. The Company and its
affiliates will vigorously defend the claims filed against them and prosecute
the claims they filed. However, the ultimate outcome of the suit, including the
liability, if any, of the Company and its affiliates, cannot be predicted at
this time.
The New York Stock Exchange ("NYSE") and the Securities and Exchange
Commission have notified the Company that they are reviewing transactions in the
stock of the Company prior to the Company's January 18, 2000 press release
concerning financial matters. The initial notice of such review was received by
the Company on March 13, 2000.
PRIME RETAIL, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(in thousands)
Costs Capitalized
Initial Cost Subsequent to Gross Amount at Which
to Company Acquisition Carried at Close of Period
---------------- ---------------- ----------------------------
Bldgs & Bldgs & Bldgs & Accumulated Constructed (C)
Description Encumbrances Land Improve Land Improve Land Improve Total Depreciation Acquired (A)
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Outlets at
Anderson $ 8,755 $ 1,125 $ 11,036 $ - $ 468 $ 1,125 $ 11,504 $ 12,629 $ 1,272 Dec. 1997 (A)
Prime Outlets at
Bend 7,504 2,560 8,476 1,101 4,722 3,661 13,198 16,859 1,830 Feb. 1997 (A)
Prime Outlets at
Burlington 13,828 3,694 21,370 - 61 3,694 21,431 25,125 2,888 Jun. 1998 (A)
Prime Outlets at
Calhoun 17,816 3,839 24,551 - 245 3,839 24,796 28,635 3,832 Jun. 1998 (A)
Prime Outlets at
Castle Rock 34,593 4,424 47,200 2,717 15,309 7,141 62,509 69,650 15,324 Mar. 1994 (A)
Prime Outlets at
Conroe 15,621 405 18,714 - 197 405 18,911 19,316 2,999 Jun. 1998 (A)
Prime Outlets at
Darien 24,380 - - 3,015 13,319 3,015 13,319 16,334 7,917 Jul. 1995 (C)
Prime Outlets at
Edinburgh 16,456 2,726 37,952 - 1,275 2,726 39,227 41,953 5,585 Jun. 1998 (A)
Prime Outlets at
Ellenton 28,333 - - 5,457 49,469 5,457 49,469 54,926 13,196 Oct. 1991 (C)
Prime Outlets at
Florida City 15,045 - - 4,275 8,460 4,275 8,460 12,735 6,058 Sept. 1994 (C)
Prime Outlets at
Fremont 13,291 3,250 24,096 - 146 3,250 24,242 27,492 3,185 Jun. 1998 (A)
Prime Outlets at
Gaffney 31,209 - - 1,886 33,075 1,886 33,075 34,961 7,841 Nov. 1996 (C)
Prime Outlets at
Gainesville 20,042 - - 1,100 15,302 1,100 15,302 16,402 9,188 Aug. 1993 (C)
Prime Outlets at
Grove City 39,754 1,123 58,630 791 2,539 1,914 61,169 63,083 10,488 Nov. 1996 (A)
Prime Outlets at
Gulfport 19,218 - - - 35,460 - 35,460 35,460 8,746 Oct. 1995 (C)
Prime Outlets at
Hillsboro 29,563 7,121 50,894 - 588 7,121 51,482 58,603 6,462 Jun. 1998 (A)
Prime Outlets at
Huntley 17,132 - - 1,970 17,826 1,970 17,826 19,796 8,845 Sept. 1994 (C)
Prime Outlets at
Jeffersonville I 25,533 843 31,084 196 14,990 1,039 46,074 47,113 11,679 Mar. 1994 (A)
Prime Outlets at
Jeffersonville II 17,938 174 21,058 - (14,137) 174 6,921 7,095 3,007 Jun. 1998 (A)
Prime Outlets at
Kenosha 22,721 6,995 39,558 106 4,646 7,101 44,204 51,305 5,772 Jun. 1998 (A)
Prime Outlets at
Latham 1,453 507 1,476 - (975) 507 501 1,008 117 Oct. 1997 (A)
Prime Outlets at
Lebanon 25,039 - - 2,689 31,820 2,689 31,820 34,509 5,979 Apr. 1998 (C)
Prime Outlets at
Lee 26,855 8,035 31,656 - 1,364 8,035 33,020 41,055 6,721 Jun. 1998 (A)
Prime Outlets at
Lodi 25,287 1,013 21,455 706 14,022 1,719 35,477 37,196 7,242 Sept. 1997 (A)
Prime Outlets at
Loveland 21,951 6,400 33,244 - 323 6,400 33,567 39,967 8,189 Nov. 1996 (A)
Melrose Place 1,935 - - 499 1,828 499 1,828 2,327 846 Aug. 1987 (C)
Costs Capitalized
Initial Cost Subsequent to Gross Amount at Which
to Company Acquisition Carried at Close of Period
---------------- ---------------- ----------------------------
Bldgs & Bldgs & Bldgs & Accumulated Constructed (C)
Description Encumbrances Land Improve Land Improve Land Improve Total Depreciation Acquired (A)
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Outlets at
Morrisville 9,067 - - 2,502 21,181 2,502 21,181 23,683 6,400 Oct. 1991 (C)
Prime Outlets at
Naples 10,433 2,753 15,602 5 2,919 2,758 18,521 21,279 3,683 Mar. 1994 (A)
Prime Outlets at
Niagara Falls USA 61,488 7,247 82,842 - 1,736 7,247 84,578 91,825 9,100 Dec. 1997 (A)
Prime Outlets at
Odessa 14,057 815 31,311 - (12,488) 815 18,823 19,638 6,421 Nov. 1996 (A)
Prime Outlets at
Oshkosh 13,681 2,160 26,895 - 364 2,160 27,259 29,419 4,081 Jun. 1998 (A)
Prime Outlets at
Perryville 9,593 3,089 16,287 - 1,640 3,089 17,927 21,016 1,914 Jun. 1998 (A)
Prime Outlets at
Pismo Beach 12,481 9,048 17,617 - 72 9,048 17,689 26,737 2,539 Jun. 1998 (A)
Prime Outlets at
Post Falls 11,163 3,100 12,163 - (7,637) 3,100 4,526 7,626 1,732 Feb. 1997 (A)
Prime Outlets at
Puerto Rico 19,816 - - 4,748 45,651 4,748 45,651 50,399 1,917 Jul. 2000 (C)
Prime Outlets at
Queenstown 18,190 4,422 35,592 - 693 4,422 36,285 40,707 4,001 Jun. 1998 (A)
Prime Outlets at
San Marcos 38,052 - - 1,995 46,341 1,995 46,341 48,336 15,729 Aug. 1990 (C)
Prime Outlets at
San Marcos 2,992 - - 4,468 17,691 4,468 17,691 22,159 1,475 Nov. 1999 (C)
Prime Outlets at
Sedona 6,660 1,924 9,099 750 481 2,674 9,580 12,254 1,250 Feb. 1997 (A)
Prime Outlets at
Tracy 12,721 6,170 16,715 - 336 6,170 17,051 23,221 2,698 Jun. 1998 (A)
Prime Outlets at
Vero Beach 25,591 4,530 41,878 - 1,678 4,530 43,556 48,086 5,952 Jun. 1998 (A)
Prime Outlets at
Warehouse Row 23,040 - - 1,174 33,317 1,174 33,317 34,491 14,274 Nov. 1989 (C)
Western Plaza 9,972 - - 2,000 7,138 2,000 7,138 9,138 1,759 Jun. 1993 (A)
Prime Outlets at
Woodbury 17,061 2,528 27,645 - (14,477) 2,528 13,168 15,696 3,032 Jun. 1998 (A)
- Under
Property Under
Development - - - 2,293 2,468 2,293 2,468 4,761 - Construction
Mar. 1994-
Other Property 62,079 - 1,588 - 8,015 - 9,603 9,603 4,959 Dec. 1999 (A)
-------- -------- -------- -------- -------- -------- ---------- ---------- --------
$899,389 $102,020 $817,684 $ 46,443 $409,461 $148,463 $1,227,145 $1,375,608 $258,124
======== ======== ======== ======== ======== ======== ========== ========== ========
At December 31, 2001, the Company had transferred Prime Outlets at
Hagerstown (encumbrance of $58,078) to assets held for sale (carrying value of
$54,628).
PRIME RETAIL, INC.
Notes to Schedule III - Real Estate and Accumulated Depreciation
December 31, 2001
(in thousands)
Depreciation is calculated on the straight-line basis over the estimated useful
lives of the assets, which are as follows:
Land improvements 20 years
Buildings and improvements Principally 40 years
Tenant improvements Term of related lease
Furniture and equipment 5 years
The aggregate cost for federal income tax purposes was $1,306,123 at December
31, 2001.
- ------------------------------------------------------------------------------------------------------------------------------------
Investment in Rental Property
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 1,493,107 $ 1,826,551 $ 2,015,722
Retirements (7,406) (6,281) (4,727)
Improvements 16,013 51,833 89,969
Dispositions (416) (309,942) (138,321)
Transfer (to) from assets held for sale, net (62,664) (4,513) (108,968)
Provision for asset impairment (63,026) (64,541) (13,572)
Provision for abandoned projects - - (13,552)
----------- ----------- -----------
Balance, end of year $ 1,375,608 $ 1,493,107 $ 1,826,551
=========== =========== ===========
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated Depreciation
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 217,569 $ 183,954 $ 127,747
Retirements (7,406) (6,281) (4,727)
Other - (818) 346
Dispositions - (23,469) (6,787)
Transfer (to) from assets held for sale, net (8,036) (2,672) (5,502)
Depreciation expense 55,997 66,855 72,877
--------- --------- ---------
Balance, end of year $ 258,124 $ 217,569 $ 183,954
========= ========= =========
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