United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended June 30, 2002
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the Transition Period From ------- to-------
Commission file number 001-13301
----------------------
PRIME RETAIL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 38-2559212
- ------------------------------------ -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 East Pratt Street
Nineteenth Floor
Baltimore, Maryland 21202
- ---------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
(410) 234-0782
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address, or former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of August 14, 2002, the issuer had outstanding 43,577,916 shares of Common
Stock, $.01 par value per share.
Prime Retail, Inc.
Form 10-Q
INDEX
PART I: FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001............................................... 1
Consolidated Statements of Operations for the three and six
months ended June 30, 2002 and 2001............................. 2
Consolidated Statements of Cash Flows for the six
months ended June 30, 2002 and 2001............................. 3
Notes to the Consolidated Financial Statements.................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 20
Item 3. Quantitative and Qualitative Disclosures of Market Risk....... 43
PART II: OTHER INFORMATION
Item 1. Legal Proceedings............................................. 44
Item 2. Changes in Securities......................................... 47
Item 3. Defaults Upon Senior Securities............................... 48
Item 4. Submission of Matters to a Vote of Security Holders........... 48
Item 5. Other Information............................................. 48
Item 6. Exhibits and Reports on Form 8-K.............................. 48
Signatures............................................................. 50
PRIME RETAIL, INC.
Unaudited Consolidated Balance Sheets
(Amounts in thousands, except share information)
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Investment in rental property:
Land $ 126,267 $ 148,463
Buildings and improvements 994,835 1,208,568
Property under development 3,400 3,352
Furniture and equipment 14,461 15,225
----------- -----------
1,138,963 1,375,608
Accumulated depreciation (239,645) (258,124)
----------- -----------
899,318 1,117,484
Cash and cash equivalents 5,201 7,537
Restricted cash 36,145 37,885
Accounts receivable, net 3,056 5,017
Deferred charges, net 7,233 11,789
Assets held for sale 115,924 54,628
Investment in partnerships 26,129 24,539
Other assets 4,274 3,629
----------- -----------
Total assets $ 1,097,280 $ 1,262,508
=========== ===========
Liabilities and Shareholders' Equity
Bonds payable $ 24,975 $ 31,975
Notes payable 799,877 925,492
Accrued interest 6,997 7,643
Real estate taxes payable 8,757 8,091
Accounts payable and other liabilities 27,252 31,380
----------- -----------
Total liabilities 867,858 1,004,581
Minority interests 1,487 1,487
Shareholders' equity:
Shares of preferred stock, 24,315,000 shares authorized:
10.5% Series A Senior Cumulative Preferred Stock,
$0.01 par value (liquidation preference of $73,348),
2,300,000 shares issued and outstanding 23 23
8.5% Series B Cumulative Participating Convertible Preferred
Preferred Stock, $0.01 par value (liquidation preference
of $239,369), 7,828,125 shares issued and outstanding 78 78
Shares of common stock, 150,000,000 shares authorized:
Common stock, $0.01 par value, 43,577,916 shares
issued and outstanding 436 436
Additional paid-in capital 709,373 709,373
Distributions in excess of earnings (478,975) (453,470)
----------- -----------
Total shareholders' equity 227,935 256,440
----------- -----------
Total liabilities and shareholders' equity $ 1,097,280 $ 1,262,508
=========== ===========
====================================================================================================================================
See accompanying notes to financial statements.
PRIME RETAIL, INC.
Unaudited Consolidated Statements of Operations
(Amounts in thousands, except per share information)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Base rents $ 24,943 $ 27,813 $ 51,031 $ 57,170
Percentage rents 431 614 1,720 1,184
Tenant reimbursements 12,430 13,993 24,804 27,940
Interest and other 2,076 2,443 4,510 4,616
--------- --------- --------- ---------
Total revenues 39,880 44,863 82,065 90,910
Expenses
Property operating 11,063 10,702 21,557 21,865
Real estate taxes 3,962 3,994 7,846 8,078
Depreciation and amortization 9,531 10,480 19,710 21,001
Corporate general and administrative 2,877 3,352 6,296 6,653
Interest 15,867 17,839 32,193 36,926
Other charges 4,207 4,363 6,541 7,345
Provision for asset impairment 12,200 - 12,200 -
--------- --------- --------- ---------
Total expenses 59,707 50,730 106,343 101,868
--------- --------- --------- ---------
Loss before gain (loss) on sale of real
estate and minority interests (19,827) (5,867) (24,278) (10,958)
Gain (loss) on sale of real estate, net (703) (180) (703) 552
--------- --------- --------- ---------
Loss from continuing operations
before minority interests (20,530) (6,047) (24,981) (10,406)
Loss allocated to minority interests - 400 - 401
--------- --------- --------- ---------
Loss from continuing operations (20,530) (5,647) (24,981) (10,005)
Discontinued operations, including loss of $8,167
and $997 on dispositions in 2002 periods, respectively (9,656) (1,196) (3,524) (2,468)
--------- --------- --------- ---------
Net loss (30,186) (6,843) (28,505) (12,473)
Income allocated to preferred shareholders (5,668) (5,668) (11,336) (11,336)
--------- --------- --------- ---------
Net loss applicable to common shares $ (35,854) $ (12,511) $ (39,841) $ (23,809)
========= ========= ========= =========
Basic and diluted earnings per common share:
Loss from continuing operations $ (0.60) $ (0.26) $ (0.83) $ (0.49)
Discontinued operations (0.22) (0.03) (0.08) (0.06)
--------- --------- --------- ---------
Net loss $ (0.82) $ (0.29) $ (0.91) $ (0.55)
========= ========= ========= =========
Weighted-average common shares
outstanding - basic and diluted 43,578 43,578 43,578 43,578
========= ========= ========= =========
====================================================================================================================================
See accompanying notes to financial statements.
PRIME RETAIL, INC.
Unaudited Consolidated Statements of Cash Flows
(Amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Loss from continuing operations $ (24,981) $ (10,005)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss allocated to minority interests - (401)
(Gain) loss on sale of real estate, net 703 (552)
Depreciation and amortization 19,710 21,001
Amortization of deferred financing costs 3,273 3,613
Amortization of debt premiums (1,088) (1,246)
Provision for uncollectible accounts receivable 2,672 5,658
Provision for asset impairment 12,200 -
Discontinued operations 1,519 4,802
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 957 (4,566)
Decrease in restricted cash 57 17,061
Increase in other assets (427) (2,814)
Decrease in accounts payable and other liabilities (5,316) (19,112)
Increase in real estate taxes payable 1,101 2,022
Increase (decrease) in accrued interest (444) 2,699
--------- ---------
Net cash provided by operating activities 9,936 18,160
--------- ---------
Investing Activities
Additions to investment in rental property (2,649) (14,023)
Proceeds from sales of operating properties and land 22,320 9,503
--------- ---------
Net cash provided by (used in) investing activities 19,671 (4,520)
--------- ---------
Financing Activities
Proceeds from notes payable - 16,899
Principal repayments on notes payable (31,943) (35,447)
Contributions from minority interests - 400
Deferred costs - (325)
--------- ---------
Net cash used in financing activities (31,943) (18,473)
--------- ---------
Decrease in cash and cash equivalents (2,336) (4,833)
Cash and cash equivalents at beginning of period 7,537 8,906
--------- ---------
Cash and cash equivalents at end of period $ 5,201 $ 4,073
========= =========
====================================================================================================================================
See accompanying notes to financial statements.
PRIME RETAIL, INC.
Unaudited Consolidated Statements of Cash Flows (continued)
(Amounts in thousands)
Supplemental Disclosure of Non-cash Investing and Financing Activities
The following assets and liabilities were disposed in connection with the sale
of properties during the periods indicated:
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Book value of net assets disposed $ 119,940 $ 32,815
Notes payable paid (36,991) (24,044)
Notes payable assumed by joint venture (46,862) -
Notes payable transferred to lender (15,467) -
Discontinued operations, loss on disposal 997 -
Loss on sale of real estate 703 732
--------- --------
Cash received, net $ 22,320 $ 9,503
========= ========
====================================================================================================================================
See accompanying notes to financial statements.
Prime Retail, Inc.
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands, except share and unit information)
Note 1 -- Interim Financial Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
("GAAP") for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments consisting only of recurring accruals
considered necessary for a fair presentation have been included. Operating
results for such interim periods are not necessarily indicative of the results
that may be expected for a full fiscal year. For further information, refer to
the consolidated financial statements and footnotes included in Prime Retail,
Inc.'s (the "Company") Annual Report on Form 10-K for the year ended December
31, 2001.
Unless the context otherwise requires, all references to "we," "us," "our" or
the Company herein mean Prime Retail, Inc. and those entities owned or
controlled by Prime Retail, Inc., including Prime Retail, L.P. (the "Operating
Partnership").
The consolidated financial statements include the accounts of the Company, the
Operating Partnership and the partnerships in which we have operational control.
Profits and losses are allocated in accordance with the terms of the agreement
of limited partnership of the Operating Partnership. The preparation of
financial statements in conformity with GAAP requires us to make estimates and
assumptions that affect the (i) reported amounts of assets and liabilities (ii)
disclosure of contingent liabilities at the date of the financial statements and
(iii) the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Investments in partnerships in which we do not have operational control are
accounted for under the equity method of accounting. Income (loss) applicable to
minority interests and common shares as presented in the consolidated statements
of operations is allocated based on income (loss) before minority interests
after income allocated to preferred shareholders.
Significant inter-company accounts and transactions have been eliminated in
consolidation. Certain prior period financial information has been reclassified
to conform to the current period presentation.
Note 2 - New Accounting Pronouncements
In October, 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("FAS") No. 144, "Accounting for Impairment of
Disposal of Long-lived Assets." FAS No. 144 supercedes FAS No. 121, however it
retains the fundamental provisions of that statement related to the recognition
and measurement of the impairment of long-lived assets to be "held and used." In
addition, FAS No. 144 provides more guidance on estimating cash flows when
performing a recoverability test, requires that a long-lived asset to be
disposed of other than by sale (e.g., abandoned) be classified as "held and
used" until it is disposed of, and established more restrictive criteria to
classify an asset as "held for sale." FAS No. 144 is effective for fiscal years
beginning after December 15, 2001.
Effective January 1, 2002 we adopted FAS No. 144. In accordance with the
requirements of FAS No. 144, we have classified the operating results, including
gains and losses related to disposition, for those properties either disposed of
or classified as assets held for sale during 2002 as discontinued operations in
the accompanying Consolidated Statements of Operations for all periods
presented. See "2002 Sales Transactions" in Note 3 - "Property Dispositions" for
additional information. Below is a summary of the results of operations of these
properties through their date of disposition:
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- ----------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Base rents $ 3,786 $ 7,492 $ 8,896 $ 15,067
Percentage rents 288 122 659 269
Tenant reimbursements 2,034 4,012 4,394 7,789
Interest and other 491 615 1,115 1,186
-------- -------- -------- --------
Total revenues 6,599 12,241 15,064 24,311
Expenses
Property operating 1,797 2,944 3,708 5,914
Real estate taxes 666 1,146 1,421 2,288
Depreciation and amortization 1,416 3,243 3,460 6,397
Interest 4,007 5,495 8,342 10,851
Other charges 202 609 660 1,329
-------- -------- -------- --------
Total expenses 8,088 13,437 17,591 26,779
-------- -------- -------- --------
Loss before loss on sale of real estate, net (1,489) (1,196) (2,527) (2,468)
Loss on sale of real estate, net (8,167) - (997) -
-------- -------- -------- --------
Discontinued operations $ (9,656) $ (1,196) $ (3,524) $ (2,468)
======== ======== ======== ========
====================================================================================================================================
Note 3 - Property Dispositions
2002 Sales Transactions
On January 11, 2002, we completed the sale of Prime Outlets at Hagerstown (the
"Hagerstown Center"), an outlet center located in Hagerstown, Maryland
consisting of approximately 487,000 square feet of gross leasable area ("GLA"),
for $80,500 to an existing joint venture partnership (the "Prime/Estein
Venture") between one of our affiliates and an affiliate of Estein & Associates
USA, Ltd. ("Estein"), a real estate investment company. Estein and we have 70%
and 30% ownership interests, respectively, in the Prime/Estein Venture. In
connection with the sale transaction, the Prime/Estein Venture assumed first
mortgage indebtedness of $46,862 on the Hagerstown Center (the "Assumed Mortgage
Indebtedness"); however, our guarantee of the Assumed Mortgage Indebtedness
remains in place.
The net cash proceeds from the sale, including the release of certain funds held
in escrow, were $12,113 after (i) a pay-down of $11,052 of mortgage indebtedness
on the Hagerstown Center and (ii) closing costs. The net proceeds from this sale
were used to prepay $11,647 of principal outstanding under a mezzanine loan (the
"Mezzanine Loan") obtained in December 2000 from FRIT PRT Lending LLC (the
"Mezzanine Lender") in the original amount of $90,000. See Note 4 - Bonds and
Notes Payable" for additional information.
The operating results of the Hagerstown Center through the date of disposition
are classified as discontinued operations in the accompanying Consolidated
Statements of Operations for all periods presented in accordance with the
requirements of FAS No. 144. In connection with the sale of the Hagerstown
Center, we recorded a gain on the sale of real estate of $16,795, also included
in discontinued operations, during the first quarter of 2002. At December 31,
2001, the carrying value of the Hagerstown Center of $54,628 was classified as
assets held for sale in the Consolidated Balance Sheet. Effective on the date of
disposition, we have accounted for our 30% ownership interest in the Hagerstown
Center in accordance with the equity method of accounting.
We are obligated to refinance the Assumed Mortgage Indebtedness on behalf of the
Prime/Estein Venture on or before June 1, 2004, the date on which such
indebtedness matures. Additionally, the Prime/Estein Venture's cost of the
Assumed Mortgage Indebtedness and any refinancing of it are fixed at an annual
rate of 7.75% for a period of 10 years. If the actual cost of such indebtedness
should exceed 7.75% at any time during the ten-year period, we will be obligated
to pay the difference to the Prime/Estein Venture. However, if the actual cost
of such indebtedness is less than 7.75% at any time during the ten-year period,
the Prime/Estein Venture will be obligated to pay the difference to us. The
actual cost of the Assumed Mortgage Indebtedness is currently 30-day LIBOR plus
1.50%, or 3.34% as of June 30, 2002.
On April 1, 2002, we completed the sale of Prime Outlets at Edinburgh (the
"Edinburgh Center"), an outlet center located in Edinburgh, Indiana consisting
of approximately 305,000 square feet of GLA and additional undeveloped land. The
Edinburgh Center was sold to CPG Partners, L.P. for cash consideration of
$27,000.
The net cash proceeds from the sale were $9,551, after (i) repayment in full of
$16,317 of existing first mortgage indebtedness on the Edinburgh Center and (ii)
closing costs and fees. We used these net proceeds to make a mandatory principal
payment of $9,178 on the Mezzanine Loan.
The operating results of the Edinburgh Center through the date of disposition
are classified as discontinued operations in the accompanying Consolidated
Statements of Operations for all periods presented in accordance with the
requirements of FAS No. 144. During the first quarter of 2002, we recorded a
loss on the sale of real estate of $9,625, also included in discontinued
operations, related to the write-down of the carrying value of the Edinburgh
Center to its net realizable value based on the terms of the sale agreement.
On April 19, 2002, we completed the sale of Phases II and III of the Bellport
Outlet Center (the "Bellport Outlet Center"), an outlet center located in
Bellport, New York consisting of approximately 197,000 square feet of GLA. We
had a 51% ownership interest in the joint venture partnership that owned the
Bellport Outlet Center. The Bellport Outlet Center was sold to Sunrise Station,
L.L.C., an affiliate of one of our joint venture partners, for cash
consideration of $6,500. At closing, recourse first mortgage indebtedness of
$5,500, which was scheduled to mature on May 1, 2002, was repaid in full. To
date we have received $522 of cash proceeds from the sale, which were used to
make a mandatory principal payment of $502 on the Mezzanine Loan.
We accounted for our ownership interest in the Bellport Outlet Center in
accordance with the equity method of accounting through the date of disposition.
In connection with the sale of the Bellport Outlet Center, we recorded a loss on
the sale of real estate of $703 during the second quarter of 2002.
On June 17, 2002, we completed the sale of the Shops at Western Plaza ("Western
Plaza"), a community center located in Knoxville, Tennessee, consisting of
205,000 square feet of GLA. Western Plaza was sold to WP General Partnership for
cash consideration of $9,500. The net cash proceeds from the sale were $688,
after (i) repayment of $9,467 (of which $2,467 was scheduled to mature on
October 31, 2002) of existing recourse mortgage indebtedness on Western Plaza,
(ii) payment of closing costs and fees and (iii) release of certain escrowed
funds. We used these net proceeds to make a mandatory principal payment of $661
on the Mezzanine Loan.
The operating results of Western Plaza through the date of disposition are
classified as discontinued operations in the accompanying Consolidated
Statements of Operations for all periods presented in accordance with the
requirements of FAS No. 144. In connection with the sale of Western Plaza, we
recorded a gain on the sale of real estate of $2,122, also included in
discontinued operations, during the second quarter of 2002.
On July 26, 2002, we completed the sale of six outlet centers for aggregate
consideration of $118,650 to wholly-owned affiliates of PFP Venture LLC, a joint
venture (the "PFP Venture") (i) 29.8% owned by PWG Prime Holdings LLC ("PWG")
and (ii) 70.2% owned by FP Investment LLC ("FP"). FP is a joint venture between
FRIT PRT Bridge Acquisition LLC ("FRIT"), a Delaware limited liability company,
and us. Through FP, FRIT and we indirectly have ownership interests of 50.4% and
19.8%, respectively, in the PFP Venture.
The six outlet centers (collectively, the "Bridge Loan Properties") that were
sold are located in Anderson, California; Calhoun, Georgia; Gaffney, South
Carolina; Latham, New York; Lee, Massachusetts and Lodi, Ohio and contain an
aggregate of 1,304,000 square feet of GLA. Under the terms of the transaction,
for a five-year period, we will continue to manage, market and lease the Bridge
Loan Properties for a fee on behalf of the PFP Venture.
In connection with the sale, $111,009 of recourse mortgage indebtedness (the
"Bridge Loan") on the Bridge Loan Properties was repaid in full. Our net cash
proceeds of $6,762 from the sale were contributed to FP. FP used these proceeds
along with a $17,236 capital contribution from FRIT to purchase a 70.2%
ownership interest in the PFP Venture. Financing for the PFP Venture's purchase
of the Bridge Loan Properties was provided by GMAC Mortgage in the form of a
$90,000, four-year, non-recourse mortgage loan, of which $74,000 bears interest
at LIBOR plus 4.25% (minimum of 7.00% for the first three years and 7.25%
thereafter) and $16,000 bears interest at LIBOR plus 4.50% (minimum of 7.75%).
Furthermore, subject to satisfaction of certain conditions, the PFP Venture may
extend the maturity of the $74,000 portion of the loan for one additional year
with the minimum interest rate continuing at 7.25%.
Pursuant to certain venture-related documents, we have guaranteed FRIT (i) a 13%
return on its $17,236 of invested capital, and (ii) the full return of its
invested capital (the "Mandatory Redemption Obligation") by December 31, 2003.
Our guarantee is secured by junior security interests in collateral similar to
that pledged to the Mezzanine Lender. FP will be entitled to receive a 15%
preferred return on its invested capital of $23,998 (approximately $3,600 on an
annual basis) in the PFP Venture. Then PWG will be entitled to receive a 15%
preferred return on its invested capital of $10,200. From FP's preferred return,
FRIT will first receive its 13% return on its invested capital with the
remainder applied towards the payment of the Mandatory Redemption Obligation.
Upon satisfaction of the Mandatory Redemption Obligation, we will be entitled to
FP's preferred return until such time as we have been repaid in full our
invested capital, together with a 13% return on our invested capital.
Thereafter, FRIT and we will share any cash flow due to FP on an approximate
equal basis.
FRIT, indirectly through affiliates, was the owner of the Bridge Loan that was
repaid in full in connection with the sale of the Bridge Loan Properties and is
a 50% participant in the Mezzanine Loan, which had an outstanding principal
balance of $35,431 as of June 30, 2002.
Effective June 30, 2002, the aggregate carrying value of the Bridge Loan
Properties of $115,924 was classified as assets held for sale in the
Consolidated Balance Sheet. The operating results of the Bridge Loan Properties
are classified as discontinued operations in the accompanying Consolidated
Statements of Operations for all periods presented in accordance with the
requirements of FAS No. 144. During the second quarter of 2002, we recorded a
loss on the sale of real estate of $10,289, also included in discontinued
operations, related to the write-down of the carrying value of the Bridge Loan
Properties to their net realizable value based on the terms of the sale
agreement.
2002 Foreclosure Sale
During 2001, certain of our subsidiaries suspended regularly scheduled monthly
debt service payments on two non-recourse mortgage loans held by New York Life
Insurance Company ("New York Life") at the time of the suspension. These
non-recourse mortgage loans were cross-defaulted and cross-collateralized by
Prime Outlets at Jeffersonville II (the "Jeffersonville II Center"), located in
Jeffersonville, Ohio and Prime Outlets at Conroe (the "Conroe Center"), located
in Conroe, Texas. Effective January 1, 2002, New York Life foreclosed on the
Conroe Center. Effective July 18, 2002, New York Life sold its remaining
interest in the loan still encumbering the Jeffersonville II Center to a
successor lender. On August 13, 2002, we transferred our ownership interest in
the Jeffersonville II Center to New York Life's successor lender. See Note 4 -
"Bonds and Notes Payable" of the Notes to Consolidated Financial Statements for
additional information.
2001 Sales Transactions
On February 2, 2001, we sold Northgate Plaza, a community center located in
Lombard, Illinois to Arbor Northgate, Inc. for aggregate consideration of
$7,050. After the repayment of mortgage indebtedness of $5,966 and closing
costs, the net cash proceeds from the Northgate Plaza sale were $510. On March
16, 2001, we sold Prime Outlets at Silverthorne (the "Silverthorne Center"), an
outlet center located in Silverthorne, Colorado consisting of approximately
257,000 square feet of GLA, to Silverthorne Factory Stores, LLC for aggregate
consideration of $29,000. The net cash proceeds from the sale of the
Silverthorne Center were $8,993, after the repayment of certain mortgage
indebtedness of $18,078 on Prime Outlets at Lebanon (see below) and closing
costs and fees. The net proceeds from these sales were used to prepay an
aggregate $9,137 of principal outstanding under the Mezzanine Loan in accordance
with the terms of such loan agreement. In connection with these sales, we
recorded an aggregate gain on the sale of real estate of $732 during the first
quarter of 2001. The operating results of these properties are included in our
results of operations through the respective dates of disposition.
Prior to its sale, the Silverthorne Center, was one of fifteen properties
securing a first mortgage and expansion loan (the "First Mortgage and Expansion
Loan"). In conjunction with the sale of the Silverthorne Center, we substituted
Prime Outlets at Lebanon for the Silverthorne Center in the cross-collateralized
asset pool securing the First Mortgage and Expansion Loan pursuant to the
collateral substitution provisions contained in the loan agreement. In
conjunction with adding Prime Outlets at Lebanon as security for the First
Mortgage and Expansion Loan, we repaid, as discussed above, certain mortgage
indebtedness on Prime Outlets at Lebanon of $18,078.
On November 27, 2001, we sold certain land located in Camarillo, California for
aggregate consideration of $7,150. The net cash proceeds from the sale,
including the release of certain funds held in escrow, were $1,859, after the
repayment of certain mortgage indebtedness of $6,227 and closing costs and fees.
The net proceeds from this sale were used to prepay $1,787 of principal
outstanding under the Mezzanine Loan. In connection with this sale, we recorded
a loss on the sale of real estate of $1,615 during the fourth quarter of 2001.
2001 Foreclosure Sale
On May 8, 2001, Prime Outlets at New River (the "New River Center"), an outlet
center located in New River, Arizona, was sold through foreclosure. Affiliates
of the Company and Fru-Con Development Corporation each own 50% of the
partnership, which owned the New River Center. We accounted for our ownership
interest in the partnership that owned the New River Center in accordance with
the equity method of accounting through the date of foreclosure sale. In
connection with the foreclosure sale of the New River Center, we recorded a loss
on the sale of real estate of $180 during the second quarter of 2001.
Note 4 - Bonds and Notes Payable
Going Concern
During 2002, we are required to make, in addition to scheduled monthly
amortization, certain mandatory principal payments on the Mezzanine Loan
aggregating $25,367 with net proceeds from asset sales, excluding our January
11, 2002 sale of a 70% joint venture partnership interest in the Hagerstown
Center, or other capital transactions within specified periods (see "Mezzanine
Loan Modification" for additional information). Through June 30, 2002, we have
made mandatory principal payments aggregating $10,341. Although we continue to
seek to generate additional liquidity through new financings and the sale of
assets, there can be no assurance that we will be able to complete asset sales
or other capital transactions within the specified periods or that such asset
sales or other capital transactions, if they should occur, will generate
sufficient proceeds to make the remaining mandatory payments of $15,026 due in
2002 under the Mezzanine Loan. Any failure to satisfy these mandatory principal
payments within the specified time periods will constitute a default under the
Mezzanine Loan.
Based on our results for the three months ended June 30, 2002, we are not in
compliance with respect to the debt service coverage ratio under our fixed rate
tax-exempt revenue bonds (the "Affected Fixed Rate Bonds") in the amount of
$18,390. As a result of our noncompliance, the holders of the Affected Fixed
Rate Bonds may elect to put such obligations to us at a price equal to par plus
accrued interest. If the holders of the Affected Fixed Rate Bonds make such an
election and we are unable to repay such obligations, certain cross-default
provisions with respect to other debt facilities, including the Mezzanine Loan
may be triggered.
We are working with holders of the Affected Fixed Rate Bonds regarding potential
resolution, including waiver or amendment with respect to the applicable
provisions. If we are unable to reach satisfactory resolution, we will look to
(i) obtain alternative financing from other financial institutions, (ii) sell
the projects subject to the affected debt or (iii) explore other possible
capital transactions to generate cash to repay the amounts outstanding under
such debt. There can be no assurance that we will obtain satisfactory resolution
with the holders of the Affected Fixed Rate Bonds or that we will be able to
complete asset sales or other capital raising activities sufficient to repay the
amount outstanding under the affected Fixed Rate Bonds.
As of June 30, 2002, we were in compliance with all financial debt covenants
under our recourse loan agreements other than the Affected Fixed Rate Bonds.
Nevertheless, there can be no assurance that we will remain in compliance with
our financial debt covenants in future periods because our future financial
performance is subject to various risks and uncertainties, including, but not
limited to, the effects of current and future economic conditions, and the
resulting impact on our revenue; the effects of increases in market interest
rates from current levels; the risks associated with existing vacancy rates or
potential increases in vacancy rates because of, among other factors, tenant
bankruptcies and store closures, and the resulting impact on our revenue; risks
associated with litigation, including pending and potential tenant claims with
respect to lease provisions related to their pass-through charges, and
promotional fund charges; and risks associated with refinancing our current debt
obligations or obtaining new financing under terms less favorable than we have
experienced in prior periods. See "Defaults on Certain Non-recourse Mortgage
Indebtedness" and "Defaults on Certain Non-recourse Mortgage Indebtedness of
Unconsolidated Partnerships" for additional information.
These above listed conditions raise substantial doubt about our ability to
continue as a going concern. The financial statements contained herein do not
include any adjustment to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.
Mezzanine Loan Modification
Effective January 31, 2002, we entered into a modification to the original terms
of the Mezzanine Loan obtained in December 2000. The Mezzanine Loan amendment
(the "Amendment"), among other things, (i) reduces required monthly principal
amortization for the period February 1, 2002 through January 1, 2003 ("Year 2")
from $1,667 to $800, which may be further reduced to a minimum of $500 per month
under certain limited circumstances, provided no defaults exist under the
Mezzanine Loan and certain other conditions have been satisfied at the Mezzanine
Lender's sole discretion, (ii) requires certain mandatory principal payments
from net proceeds from asset sales or other capital transactions pursuant to the
schedule set forth below and (iii) reduces the threshold level at which excess
cash flow from operations must be applied to principal pay-downs, primarily
resulting from a reduction in the available working capital reserves.
Additionally, the Amendment (i) increases the interest rate from LIBOR plus
9.50% to LIBOR plus 9.75% (rounded up to nearest 0.125% with a minimum rate of
14.75%), (ii) changes the Mezzanine Loan maturity date from December 31, 2003 to
September 30, 2003 and (iii) required a 0.25% fee, which was paid at the time of
the modification, on the outstanding principal balance. Pursuant to the terms of
the Amendment, the Mezzanine Loan monthly principal payments for May and June of
2002, were reduced to $611 and $649, respectively.
The Amendment also requires additional Year 2 monthly payments of $250 (the
"Escrowed Funds") into an escrow account controlled by the Lender. Provided
certain conditions are satisfied, at the Mezzanine Lender's sole discretion, the
Escrowed Funds may be released to us for limited purposes. The Escrowed Funds
not used at the end of each quarter, subject to certain exceptions, will be
applied by the Mezzanine Lender to amortize the Mezzanine Loan. The required
monthly principal amortization of $2,333 commencing on February 1, 2003, through
the new maturity date of September 30, 2003, remains unchanged.
The Amendment also requires mandatory principal payments with net proceeds from
asset sales, excluding our January 11, 2002 sale of a 70% joint venture
partnership interest in the Hagerstown Center (see Note 3 - "Property
Dispositions" for additional information), or other capital transactions of not
less than (i) $8,906 by May 1, 2002, (ii) $24,406, inclusive of the $8,906, by
July 1, 2002 (subject to extension to October 31, 2002 provided certain
conditions are met to the Lender's satisfaction) and (iii) $25,367, inclusive of
the $24,406, by November 1, 2002. In addition to each mandatory principal
payment, we must also pay any interest, including deferred interest, accrued
thereon and the additional fees provided for in the Mezzanine Loan. Any failure
to satisfy these mandatory principal payments or other payments within the
specified time periods will constitute a default under the Mezzanine Loan.
On July 1, 2002, the Mezzanine Lender elected to extend the July 1, 2002
mandatory principal payment due date to the earlier of (i) August 15, 2002 (the
"Extended Date") or (ii) the occurrence of an event of default under the
Mezzanine Loan. Additionally, upon satisfaction of certain conditions, the
Extended Date can be automatically extended again to the earlier of (i) October
31, 2002, (ii) the occurrence of an event of default under the Mezzanine Loan,
or (iii) the closing or termination of certain asset sales, with such date
hereafter referred to as the "Second Mandatory Principal Payment Due Date."
There can be no assurance that these conditions will be met.
On April 1, 2002, we sold our Edinburgh Center and used the net proceeds to make
a $9,178 mandatory payment on the Mezzanine Loan. Additionally, on April 19,
2002, we sold our ownership interest in the Bellport Outlet Center and used the
net proceeds to make a $502 mandatory payment on the Mezzanine Loan. (See Note 3
- - "Property Dispositions" for additional information.) As a result, we satisfied
the May 1, 2002 mandatory principal payment requirement.
On June 17, 2002, we sold Western Plaza and used the net proceeds to make a
mandatory principal payment of $661 on the Mezzanine Loan. (See Note 3 -
"Property Dispositions" for additional information.) We are now required to
complete additional asset sales or other capital transactions generating net
proceeds aggregating $14,065 by the Second Mandatory Principal Payment Due Date
and $15,026 (inclusive of the $14,065) by November 1, 2002.
The Mezzanine Loan was also amended on January 11, 2002 to, among other things,
(i) release the partnership interests in Outlet Village of Hagerstown Limited
Partnership ("Hagerstown LP") as collateral under the Mezzanine Loan, (ii)
release Hagerstown LP of all obligations under the Mezzanine Loan and (iii) add
Hagerstown Land, L.L.C., a Delaware limited liability company, as a guarantor
under the Mezzanine Loan. Hagerstown Land, L.L.C. is the owner of three parcels
of land adjacent to the Hagerstown Center.
Debt Service Obligations
Our aggregate indebtedness excluding (i) unamortized debt premiums of $9,639,
(ii) mortgage indebtedness of $111,059 on the Bridge Loan Properties and (iii)
non-recourse mortgage indebtedness of $17,768 on Prime Outlets at Jeffersonville
II was $686,216 (the "Adjusted Indebtedness") at June 30, 2002. The mortgage
indebtedness on the Bridge Loan Properties was repaid in full in connection with
the sale of such properties on July 26, 2002. The non-recourse mortgage
indebtedness on the Jeffersonville II Center was relieved in connection with the
transfer of our ownership interest in such property to New York Life's successor
on August 13, 2002. See Note 3 - "Property Dispositions" and "Defaults on
Certain Non-recourse Mortgage Indebtedness" for additional information.
At June 30, 2002 the Adjusted Indebtedness had a weighted-average maturity of
3.0 years and bore contractual interest at a weighted-average rate of 8.24% per
annum. At June 30, 2002, $631,254, or 92.0%, of the Adjusted Indebtedness bore
interest at fixed rates and $54,962 or 8.0%, of the Adjusted Indebtedness bore
interest at variable rates. In certain cases, we utilize derivative financial
instruments to manage our interest rate risk associated with variable rate debt.
As of June 30, 2002, our scheduled principal payments for the remainder of 2002
and 2003 for the Adjusted Indebtedness aggregated $24,775 and $378,465,
respectively. The remaining scheduled principal payments for 2002 include (i)
principal amortization aggregating $9,749 (including an aggregate of $4,800 of
scheduled monthly principal payments on the Mezzanine Loan, which may be further
reduced subject to the terms of its Amendment specified above) and (ii)
mandatory principal payments on the Mezzanine Loan aggregating $15,026 (see
"Mezzanine Loan Modification" for additional information). The outstanding
principal balance of the Mezzanine Loan as of June 30, 2002 was $35,431. The
scheduled principal payment for 2003 include (i) obligations of $338,558 due in
respect of a mortgage loan that is secured by 15 of our properties and matures
in November 2003 and (ii) $15,605 of principal payments under the Mezzanine
Loan.
Guarantees of Indebtedness of Others
On July 15, 2002, Horizon Group Properties, Inc. and its affiliates ("HGP")
announced they had refinanced a secured credit facility (the "HGP Secured Credit
Facility") through a series of new loans aggregating $32,500. Prior to the
refinancing, we were a guarantor under the HGP Credit Facility in the amount of
$10,000. In connection with the refinancing, our guarantee was reduced to a
maximum of $4,000 as security for a $3,000 mortgage loan and a $4,000 mortgage
loan (collectively, the "HGP Monroe Mortgage Loan") secured by HGP's outlet
shopping center located in Monroe, Michigan. The HGP Monroe Mortgage Loan has a
3-year term, bears interest at the prime lending rate plus 2.50% (with a minimum
of 9.90%) and requires monthly interest-only payments. The HGP Monroe Mortgage
Loan may be prepaid without penalty after two years. Our guarantee with respect
to the HGP Monroe Mortgage Loan will be extinguished if the principal amount of
such obligation is reduced to $5,000 or less through repayments.
Additionally, we are a guarantor with respect to certain mortgage indebtedness
(the "HGP Office Building Mortgage") in the amount of $2,352 on HGP's corporate
office building and related equipment located in Norton Shores, Michigan. The
HGP Office Building Mortgage matures in December 2002, bears interest at LIBOR
plus 2.50%, and requires monthly debt service payments of approximately $23.
On October 11, 2001, HGP announced that it was in default under two loans with
an aggregate principal balance of $45,500 secured by six of its other outlet
centers. Such defaults do not constitute defaults under the HGP Monroe Mortgage
Loan or the HGP Office Building Mortgage nor did they constitute a default under
the HGP Secured Credit Facility. No claims have been made under our guarantees
with respect to the HGP Monroe Mortgage Loan or the HGP Office Building
Mortgage. HGP is a publicly traded company that was formed in connection with
our merger with Horizon Group, Inc. in June 1998.
On January 11, 2002, we sold the Hagerstown Center to the Prime/Estein Venture.
In connection with the sale, the Prime/Estein Venture assumed $46,862 of
mortgage indebtedness; however, our guarantee of such indebtedness remains in
place. See Note 3 - "Property Dispositions" for additional information.
On July 26, 2002, we sold the Bridge Properties to the PFP Venture. In
connection with the sale, we guaranteed FRIT (i) a 13% return on its $17,236 of
invested capital and (ii) the full return of its invested capital by December
31, 2003. See Note 3 - "Property Dispositions" for additional information.
Defaults on Certain Non-recourse Mortgage Indebtedness
During 2001, certain of our subsidiaries suspended regularly scheduled
monthly debt service payments on two non-recourse mortgage loans which were
cross-collateralized by the Jeffersonville II Center and the Conroe Center. At
the time of suspension, these non-recourse mortgage loans were held by New York
Life.
Effective January 1, 2002, New York Life foreclosed on the Conroe Center and its
related assets and liabilities, including $554 of cash and $15,467 of principal
outstanding under the non-recourse mortgage loan, were transferred from our
subsidiary that owned the Conroe Center to New York Life. No gain or loss was
recorded in connection with the foreclosure action. The foreclosure of the
Conroe Center did not have a material impact on our results of operations or
financial condition because during 2001 all excess cash flow from the operations
of the Conroe Center was utilized for debt service on its non-recourse mortgage
loan.
Effective July 18, 2002, New York Life sold its interest in the Jeffersonville
II Center loan. On August 13, 2002, we transferred our ownership interest in the
Jeffersonville II Center to New York Life's successor. As of June 30, 2002, the
carrying value of the Jeffersonville II Center was $3,719 and the balance of the
non-recourse mortgage indebtedness was $17,768 and unpaid accrued interest was
$2,492. As a result of the transfer of our ownership interest in the
Jeffersonville II Center, we expect to record a non-recurring gain for the
difference between the carrying value of the Jeffersonville II Center and its
related net assets and the outstanding loan balance, including accrued interest,
during the third quarter of 2002. The transfer of our ownership interest in the
Jeffersonville II Center did not have a material impact on our results of
operations or financial condition because during 2001 and through the transfer
date in 2002, all excess cash flow from the operations of the Jeffersonville II
Center was utilized for debt service on its non-recourse mortgage loan.
During August of 2002, certain of our subsidiaries suspended regularly scheduled
monthly debt service payments on two non-recourse mortgage loans aggregating
$40,829 as of June 30, 2002. These non-recourse mortgage loans which are held by
John Hancock Life Insurance Company ("John Hancock") are cross-collateralized by
Prime Outlets at Vero Beach (the "Vero Beach Center"), located in Vero Beach,
Florida, and Prime Outlets at Woodbury (the "Woodbury Center"), located in
Woodbury, Minnesota (collectively, the "John Hancock Properties"). John Hancock
has commenced foreclosure proceedings with regard to the Vero Beach Center.
Additionally, we are currently negotiating a transfer of our ownership interest
in the Woodbury Center to John Hancock.
During the second quarter of 2002, we incurred a provision for asset impairment
of $12,200 to adjust the carrying values of the John Hancock Properties to their
estimated fair value in accordance with the provisions of FAS No. 144.
Foreclosure on the Vero Beach Center and transfer of our ownership interest in
the Woodbury Center are not expected to have a material impact on our results of
operations or financial condition because during 2002, all excess cash flow from
the operations of the John Hancock Properties has been utilized for debt service
on their non-recourse mortgage loans.
Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated
Partnerships
Two mortgage loans related to projects in which we, through subsidiaries,
indirectly own joint venture interests have matured and are in default. The
mortgage loans, at the time of default, were (i) a $10,389 first mortgage loan
on Phase I of the Bellport Outlet Center, held by Union Labor Life Insurance
Company ("Union Labor"); and (ii) a $13,338 first mortgage loan on Oxnard
Factory Outlet, an outlet center located in Oxnard, California, held by Fru-Con.
Through an affiliate we hold a 50% ownership interest in the partnership that
owns Phase I of the Bellport Outlet Center. Fru-Con and we are each 50% partners
in the partnership that owns the Oxnard Factory Outlet.
Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center and a
receiver was appointed March 27, 2001 by the court involved in the foreclosure
action. Effective May 1, 2001, a manager hired by the receiver began managing
and leasing Phase I of the Bellport Outlet Center. We continue to negotiate the
terms of a transfer of our ownership interest in Oxnard Factory Outlet to
Fru-Con. We do not manage or lease Oxnard Factory Outlet.
We do not believe either of these mortgage loans is recourse to us. It is
possible, however, that either or both of the respective lenders will file a
lawsuit seeking to collect amounts due under the loan. If such an action is
brought, the outcome, and our ultimate liability, if any, cannot be predicted at
this time.
We are currently not receiving, directly or indirectly, any cash flow from
Oxnard Factory Outlet and were not receiving any cash flow from Phase I of the
Bellport Outlet Center prior to the loss of control of such project. We account
for our ownership interests in Phase I of the Bellport Outlet Center and the
Oxnard Factory Outlet in accordance with the equity method of accounting. As of
June 30, 2002, the carrying value of our investment in these properties was $0.
Note 5 - Shareholders' Equity
Dividends and Distributions
To qualify as a REIT for federal income tax purposes, we are required to pay
distributions to our common and preferred shareholders of at least 90% of our
REIT taxable income in addition to satisfying other requirements. Although we
intend to make necessary distributions to remain qualified as a REIT under the
Code, we also intend to retain such amounts as we consider necessary from time
to time for our capital and liquidity needs.
Our current policy is to pay distributions only to the extent necessary to
maintain our status as a REIT for federal income tax purposes. Based on our
current federal income tax projections for 2002, we do not expect to pay any
distributions on our Senior Preferred Stock, Series B Convertible Preferred
Stock, common stock or common units of limited partnership interest in the
Operating Partnership during 2002. As of August 15, 2002, we will be eleven
quarters in arrears with respect to preferred stock distributions.
Under the terms of the Mezzanine Loan, we are prohibited from paying dividends
or distributions except to the extent necessary to maintain our status as a
REIT. In addition, we may not make distributions to our common shareholders or
our holders of common units of limited partnership interests in the Operating
Partnership unless we are current with respect to distributions to our preferred
shareholders. As of June 30, 2002, unpaid dividends for the period beginning on
November 16, 1999 through June 30, 2002 on the Series A Senior Preferred Stock
and Series B Convertible Preferred Stock aggregated $15,848 and $43,666,
respectively. The annualized dividends on our 2,300,000 shares of Series A
Senior Preferred Stock and 7,828,125 shares of Series B Convertible Preferred
Stock outstanding as of June 30, 2002 are $6,037 ($2.625 per share) and $16,635
($2.125 per share), respectively.
Note 6 - Legal Proceedings
Except as described below, neither we nor any of our properties are currently
subject to any material litigation nor, to our knowledge, is any material or
other litigation threatened against us, other than routine litigation arising in
the ordinary course of business, some of which is expected to be covered by
liability insurance and all of which collectively is not expected to have a
material adverse effect on our consolidated financial statements.
Dinnerware Plus Holdings, Inc., which operates under the trade name Mikasa, and
affiliates (collectively, the "Mikasa Plaintiffs") filed a lawsuit against the
Company and various affiliates in Superior Court of New Jersey on March 29,
2001. The Mikasa Plaintiffs assert a number of causes of action in which they
allege that the Company and its affiliates breached various provisions in the
Mikasa Plaintiffs' leases and, as a result, overcharged the Mikasa Plaintiffs
for common area maintenance and similar charges ("CAM") and promotion fund
charges at various centers where the Mikasa Plaintiffs are tenants. The Company
filed a motion to dismiss the complaint on behalf of the Company's affiliates
who entered into leases with the Mikasa Plaintiffs, based on lack of
jurisdiction. The motion was granted and the Mikasa Plaintiffs filed a motion
for reconsideration, which was denied. The remaining defendants, Prime Retail,
Inc. and Prime Retail, L.P., answered the complaint.
Subsequent efforts in the litigation were deferred while the parties attempted
to resolve their claims through negotiation. As a result of these efforts, the
parties entered into a settlement agreement on August 7, 2002 pursuant to which
the lawsuit is to be dismissed with prejudice, and all potential claims,
including claims and potential counterclaims for overpayments and underpayments
of various pass-through charges, arising from the litigation are to be released,
with all parties expressly denying liability. Pursuant to the settlement
agreement, the Company will make payments to Mikasa over the next two months
totaling $2,100, and various leases between Mikasa and its affiliates and the
Company will be amended to, among other things, remove the specific provisions
that were the primary basis of the dispute and modify remaining provisions
concerning the collection of pass-through charges. This settlement, including
the related lease modifications, is not expected to have a material impact on
the Company's financial condition or results of operations. The Company
previously accrued a reserve of $2,000 for this matter during the fourth quarter
of 2001, which is included in accounts payable and other liabilities in its
Consolidated Balance Sheet as of June 30, 2002. See "Mikasa Settlement"
contained in "Liquidity and Capital Resources" of Item 2 - "Management's
Discussion of Financial Condition and Results of Operations" for additional
information.
On July 6, 2001, affiliates of the Company brought an action in the Circuit
Court for Washington County, Maryland against Melru Corporation, which operates
under the trade name Jones New York, alleging that Melru Corporation owed past
due rent in connection with 43 leases. Melru Corporation, in response to the
collection action filed by certain affiliates of the Company, filed on October
15, 2001 several counterclaims against the Company and its affiliates in which
it alleges that the Company and its affiliates overcharged Melru Corporation for
CAM and promotion fund charges. In addition, Melru Corporation alleges that an
affiliate of the Company fraudulently induced Melru Corporation to enter into a
lease and that another affiliate violated its lease with Melru Corporation by
failing to maintain required occupancy levels at the shopping center it owns.
The Company and its affiliates have not filed their response to the Melru
Corporation counterclaims.
Subsequent efforts in the litigation were deferred while the parties attempted
to resolve their claims through negotiation. As a result of these efforts, the
parties have entered into a settlement agreement on August 13, 2002 pursuant to
which the lawsuit and any related litigation matters are to be dismissed, or in
one instance satisfied, all potential claims and counterclaims are to be
released, including claims for overpayments and underpayments of various
pass-through charges, and with all parties expressly denying liability. Pursuant
to the settlement agreement, no payments will be made to Melru Corporation by
the Company, Melru Corporation will satisfy a prior judgment against it, and the
leases between Melru Corporation and the Company will be modified, including to
provide for extensions of the terms of a limited number of existing leases and
the early termination of occupancy at one center. The Company does not expect
this settlement, including the related lease modifications, will have a material
impact on the Company's financial condition or results of operations.
Additionally, numerous other tenants in the Company's portfolio have clauses in
their leases pursuant to which they may claim under various circumstances that
they were not required to pay some or all of the pass-through charges. Such
claims, if asserted and found meritorious, could have a material effect upon the
Company's financial condition. Determination of whether liability would exist to
the Company from these claims would depend on interpretation of various lease
clauses within a tenant's lease and all of the other leases at each center
collectively at any given point in time. To date, Designs Inc., Brown Group
Retail, Inc. and The Gap, Inc. have made allegations or have indicated to the
Company that they are considering making allegations that their leases do not
require them to pay some or all of the pass-through charges. The Company is in
discussion with these tenants and is working to resolve any disputes with them,
including wherever possible, satisfactorily modifying or eliminating clauses
that are the source of the continuing disputes. During the second quarter of
2002, the Company recorded a non-recurring charge to establish a reserve in the
amount of $3,000 for resolution of these matters, in addition to the Mikasa
matter discussed above. This reserve, which is included in accounts payable and
other liabilities in the Company's Consolidated Balance Sheet as of June 30,
2002, was estimated in accordance with the Company's established policies and
procedures with respect to loss contingencies (see "Critical Accounting Policies
and Estimates" of Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional information.) Based on
presently available information, the Company believes it is probable this
reserve will be utilized over the next several years in connection with the
resolution of claims relating to the pass-through and promotional fund
provisions contained in its leases. The Company cautions, however, that given
the inherent uncertainties of litigation and the complexities associated with a
large number of leases and other factual questions at issue, actual costs may
vary from this estimate.
The Company and its affiliates were defendants in a lawsuit filed by Accrued
Financial Services ("AFS") on August 10, 1999 in the Circuit Court for Baltimore
City. The lawsuit was removed to United States District Court for the District
of Maryland (the "U.S. District Court") on August 20, 1999. AFS claimed that
certain tenants had assigned to AFS their rights to make claims under leases
such tenants had with affiliates of the Company and alleged that the Company and
its affiliates overcharged such tenants for common area maintenance charges and
promotion fund charges. The U.S. District Court dismissed the lawsuit on June
19, 2000. AFS appealed the U.S. District Court's decision to the United States
Court of Appeals for the Fourth Circuit. Briefs were submitted and oral argument
before a panel of judges of the United States Court of Appeals for the Fourth
Circuit was held on October 30, 2001, during which the panel of judges requested
further briefing of certain issues. On July 29, 2002, the Fourth Circuit denied
the appeal of AFS. The Company believes that it has acted properly and will
continue to defend this lawsuit vigorously if AFS continues with additional
appeal efforts. The outcome of this lawsuit if additional appeal efforts of AFS
are successful, and the ultimate liability of the defendants, if any, cannot be
predicted at this time.
Affiliates of the Company routinely file lawsuits to collect past due rent from,
and to evict, tenants which have defaulted under their leases. There are
currently dozens of such actions pending. In addition to defending against the
Company's affiliates' claims and eviction actions, some tenants file
counterclaims against the Company's affiliates. A tenant who files such a
counterclaim typically claims that the Company's affiliate which owns the outlet
center in question has defaulted under the tenant's lease, has overcharged the
tenant for CAM and promotion fund charges, or has failed to maintain or market
the outlet center in question as required by the lease. In spite of such
counterclaims, the Company's affiliates usually elect to continue to pursue
their collection or eviction actions. Although the Company and its affiliates
believe that such counterclaims are typically without merit and defend against
them vigorously, the outcome of all such counterclaims, and thus the liability,
if any, of the Company and its affiliates, cannot be predicted at this time.
Since October 13, 2000 there have been eight complaints filed in the United
States District Court for the District of Maryland against the Company and five
individual defendants. The five individual defendants are Glenn D. Reschke, the
President, Chief Executive Officer and Chairman of the Board of Directors of the
Company; William H. Carpenter, Jr., the former President and Chief Operating
Officer and a former director of the Company; Abraham Rosenthal, the former
Chief Executive Officer and a former director of the Company; Michael W.
Reschke, the former Chairman of the Board and a current director of the Company;
and Robert P. Mulreaney, the former Executive Vice President - Chief Financial
Officer and Treasurer of the Company. The complaints have been brought by
alleged stockholders of the Company, individually and purportedly as class
actions on behalf of all other stockholders of the Company. The complaints
allege that the individual defendants made statements about the Company that
were in violation of the federal securities laws. The complaints seek
unspecified damages and other relief. Lead plaintiffs and lead counsel were
subsequently appointed. A consolidated amended complaint captioned The Marsh
Group, et al. v. Prime Retail, Inc., et al. dated May 21, 2001 was filed. The
Company and the individual defendants filed a motion to dismiss the complaint,
which was granted on November 8, 2001. The plaintiffs appealed the matter to the
Fourth Circuit. Briefs were filed and oral arguments were held on June 4, 2002
but a decision has not yet been issued by the Fourth Circuit. The Company
believes that the claims are without merit and will defend vigorously against
the appeal. The outcome of this lawsuit, and the ultimate liability of the
defendants, if any, cannot be predicted at this time.
Several entities (the "eOutlets Plaintiffs") have filed or stated an intention
to file lawsuits (collectively, the "eOutlets Lawsuits") against the Company and
its affiliates. The eOutlets Plaintiffs seek to hold the Company and its
affiliates responsible under various legal theories for liabilities incurred by
primeoutlets.com, inc., also known as eOutlets, including the theories that the
Company guaranteed the obligations of eOutlets and that the Company was the
"alter-ego" of eOutlets. primeoutlets.com inc. is also a defendant in some, but
not all, of the eOutlets Lawsuits. The Company believes that it is not liable to
the eOutlets Plaintiffs as there was no privity of contract between it and the
various eOutlets Plaintiffs. The Company will continue to defend all eOutlets
Lawsuits vigorously. primeoutlets.com inc. filed for protection under Chapter 7
of the United States Bankruptcy Code during November 2000 under the name
E-Outlets Resolution Corp. The trustee for E-Outlets Resolution Corp. has
notified the Company that he is contemplating an action against the Company and
the Operating Partnership in which he may assert that E-Outlets Resolution Corp.
was the "alter-ego" of the Company and the Operating Partnership and that, as a
result, the Company and the Operating Partnership are liable for the debts of
E-Outlets Resolution Corp. If the trustee pursues such an action, the Company
and the Operating Partnership will defend themselves vigorously. In the case
captioned Convergys Customer Management Group, Inc. v. Prime Retail, Inc. and
primeoutlets.com inc. in the Court of Common Pleas for Hamilton County (Ohio),
the Company prevailed in a motion to dismiss the plaintiff's claim that the
Company was liable for primeoutlets.com inc.'s breach of contract based on the
doctrine of piercing the corporate veil. The outcome of the eOutlets Lawsuits,
and the ultimate liability of the Company in connection with the eOutlets
Lawsuits and related claims, if any, cannot be predicted at this time.
In May, 2001, the Company, through affiliates, filed suit against Fru-Con
Construction, Inc. ("FCC"), the lender on Prime Outlets at New River ("New
River") as a result of FCC's foreclosure of New River due to the maturation of
the loan. The Company and its affiliates allege that they have been damaged due
to FCC's failure to dispose of the collateral in a commercially reasonable
manner. The Company, through affiliates, has also filed suit against The Fru-Con
Projects, Inc. ("Fru-Con"), a partner in Arizona Factory Shops Partnership and
an affiliate of FCC. The Company and its affiliates allege that Fru-Con failed
to use reasonable efforts to assist in obtaining refinancing. Fru-Con has claims
pending against the Company and its affiliates, as part of the same suit,
alleging that the Company and its affiliates breached their contract with
Fru-Con by not allowing Fru-Con to participate in an outlet project in Sedona,
Arizona (the "Sedona Project") and breached a management and leasing agreement
by managing and leasing the Sedona Project. The Company and its affiliates will
vigorously defend the claims filed against them and prosecute the claims they
filed. However, the ultimate outcome of the suit, including the liability, if
any, of the Company and its affiliates, cannot be predicted at this time.
The New York Stock Exchange ("NYSE") and the Securities and Exchange Commission
have notified the Company that they are reviewing transactions in the stock of
the Company prior to the Company's January 18, 2000 press release concerning
financial matters. The initial notice of such review was received by the Company
on March 13, 2000.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Amounts in thousands, except share, unit and square foot information)
Introduction
The following discussion and analysis of the consolidated financial condition
and results of operations of the Company should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Quarterly Report on Form 10-Q. The Company's operations are conducted through
the Operating Partnership. The Company controls the Operating Partnership as its
sole general partner and is dependent upon the distributions or other payments
from the Operating Partnership to meet its financial obligations. Historical
results and percentage relationships set forth herein are not necessarily
indicative of future operations.
Cautionary Statements
The following discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other sections of this Quarterly Report
on Form 10-Q contain certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, which reflect management's
current views with respect to future events and financial performance. These
statements are subject to potential risks and uncertainties and, therefore,
actual results may differ materially. Such forward-looking statements are
subject to certain risks and uncertainties, including, but not limited to, the
following:
o the risk associated with our high level of leverage and our ability to
refinance such indebtedness as it becomes due;
o the risks associated with our current non-compliance with respect to
the debt service coverage ratio on fixed rate tax-exempt bonds in the
amount of $18,390 and the resulting ability of the affected bondholders
to elect to put such obligations to us, as well as the risk that
cross-default provisions under other indebtedness may be triggered,
including a mezzanine loan (the "Mezzanine Loan") in the amount of
$35,431;
o the risk that we or one or more of our subsidiaries are not able to
satisfy scheduled debt service obligations or will not remain in
compliance with respect to loan covenants under other indebtedness;
including obligations to make mandatory principal payments as required
under the terms of a modification to the Mezzanine Loan;
o the risk of material adverse effects of future events, including tenant
bankruptcies or abandonments, on our financial performance;
o the risk related to the retail industry in which our outlet centers
compete, including the potential adverse impact of external factors,
such as inflation, consumer confidence, unemployment rates and consumer
tastes and preferences;
o the risk associated with tenant bankruptcies, store closings and the
non-payment by tenants of contractual rents and additional rents;
o the risk associated with our potential asset sales;
o the risk of potential increases in market interest rates from current
levels;
o the risk associated with real estate ownership, such as the potential
adverse impact of changes in local economic climate on the revenues and
the value of our properties;
o the risk associated with litigation, including pending and potential
tenant claims with regard to various lease provisions related to their
pass-through charges and promotion fund charges; and
o the risk associated with competition from web-based and catalogue
retailers.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Quarterly Report on Form 10-Q. These Consolidated Financial
Statements and Notes thereto have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of such
statements requires us to make certain estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and the related
disclosure of contingent liabilities. We evaluate our estimates on an on-going
basis; including those related to (i) revenue recognition, (ii) provisions for
bad debt on accounts receivable, (iii) potential impairment of the carrying
value of rental properties held for use, (iv) capitalization and depreciation of
significant renovations and improvements and (v) contingencies for debt
guarantees and litigation. We base our estimates on historical trends and
certain other assumptions that we believe are reasonable under the particular
circumstances. These estimates ultimately form the basis for making judgments
about the carrying values of our assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
To assist you in understanding our financial condition and results from
operations, we have identified our critical accounting policies and discussed
them below. These accounting policies are most important to the portrayal of our
financial condition and results from operations, either because of the
significance of the financial statement items to which they relate or because
they require our management's most difficult, subjective or complex judgments.
Bad Debt
We regularly review our accounts receivable to determine an appropriate range
for the allowance for doubtful accounts based upon the impact of economic
conditions on ours tenants' ability to pay, past collection experience and such
other factors, including tenant disputes, which, in our judgment, deserve
current recognition. In turn, a provision for bad debt is charged against the
allowance to maintain the allowance level within this range. If the financial
condition of our tenants were to deteriorate, resulting in impairment in their
ability to make payments due under their leases, additional allowances may be
required.
Impairment of Rental Property
We monitor our portfolio of properties (the "Properties") for indicators of
impairment on an on-going basis. We record a provision for impairment when we
believe certain events and circumstances have occurred which indicate that the
carrying value of our Properties might have experienced a decline in value that
is other than temporary. Impairment losses are measured as the difference
between the carrying value and the estimated fair value for assets held in the
portfolio. For assets held for sale, impairment is measured as the difference
between the carrying value and fair value, less costs to dispose. Fair value is
based on either actual sales price, when available, or estimated cash flows
discounted at a risk-adjusted rate of return. Adverse changes in market
conditions or deterioration in the operating results of our outlet centers and
other rental properties could result in losses or an inability to recover the
current carrying value of such assets. Such potential losses or the inability to
recover the current carrying value may not be reflected in our Properties'
current carrying value, thereby possibly requiring an impairment charge in the
future.
Contingencies
We are subject to proceedings, lawsuits, and other claims related to various
matters (see Note 6 - "Legal Proceedings" of the Notes to the Consolidated
Financial Statements for additional information). Additionally, we have
guaranteed certain indebtedness of others (see Note 4 - "Bonds and Notes
Payable" for additional information). With respect to these contingencies, we
assess the likelihood of any adverse judgments or outcomes to these matters and,
if appropriate, potential ranges of probable losses. A determination of the
amount of reserves required, if any, for these contingencies are made after
careful analysis of each individual issue. Future reserves may be required due
to (i) new developments or changes to the approach in which we deal with each
matter or (ii) if unasserted claims arise.
Outlet Center Portfolio
Portfolio GLA and Occupancy
As a fully integrated real estate company, we provide finance, leasing,
accounting, marketing and management services for all of our Properties,
including those in which we have an ownership interest through joint venture
partnerships. At June 30, 2002, our portfolio of properties consisted of (i) 42
outlet centers aggregating 11,893,000 square feet of gross leasable area ("GLA")
(including 1,682,000 square feet of GLA at outlet centers owned through joint
venture partnerships), (ii) one community shopping center totaling 27,000 square
feet of GLA and (iii) 154,000 square feet of GLA of office space. This compares
to 45 properties totaling 12,670,000 square feet of GLA at December 31, 2001 and
June 30, 2001. The changes in our outlet center GLA are due to certain sales
transactions during 2002 and 2001, including the loss of two outlet centers
(Prime Outlets at New River and Prime Outlets at Conroe) through foreclosure
sale. See Note 3 - "Property Dispositions" of the Notes to Consolidated
Financial Statements for additional information.
Our outlet center portfolio was 86.8% and 89.5% occupied as of June 30, 2002 and
2001, respectively. For the three and six months ended June 30, 2002, weighted
average occupancy in our outlet center portfolio was 87.1% and 87.5%,
respectively, compared to 89.5% and 89.8%, respectively, for the same periods in
2001. The decline in the 2002 weighted average and period-end occupancies was
primarily attributable to certain tenant bankruptcies, abandonments and store
closings.
The table set forth below summarizes certain information with respect to our
outlet centers as of June 30, 2002:
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Occupancy
Outlet Centers Opening Date (Sq. Ft.) Percentage (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Outlets at Fremont-- Fremont, Indiana October 1985 229,000 88%
Prime Outlets at Birch Run (2)-- Birch Run, Michigan September 1986 724,000 90
Prime Outlets at Latham (3)-- Latham, New York August 1987 43,000 83
Prime Outlets at Williamsburg (2)-- Williamsburg, Virginia April 1988 274,000 94
Prime Outlets at Pleasant Prairie-- Kenosha, Wisconsin September 1988 269,000 92
Prime Outlets at Burlington-- Burlington, Washington May 1989 174,000 90
Prime Outlets at Queenstown-- Queenstown, Maryland June 1989 221,000 90
Prime Outlets at Hillsboro-- Hillsboro, Texas October 1989 359,000 86
Prime Outlets at Oshkosh-- Oshkosh, Wisconsin November 1989 260,000 93
Prime Outlets at Warehouse Row (4)-- Chattanooga, Tennessee November 1989 95,000 79
Prime Outlets at Perryville-- Perryville, Maryland June 1990 148,000 97
Prime Outlets at Sedona-- Sedona, Arizona August 1990 82,000 88
Prime Outlets at San Marcos-- San Marcos, Texas August 1990 549,000 94
Prime Outlets at Anderson (3)-- Anderson, California August 1990 165,000 82
Prime Outlets at Post Falls-- Post Falls, Idaho July 1991 179,000 70
Prime Outlets at Ellenton-- Ellenton, Florida October 1991 481,000 94
Prime Outlets at Morrisville-- Raleigh/Durham, North Carolina October 1991 187,000 74
Prime Outlets at Naples-- Naples/Marco Island, Florida December 1991 146,000 82
Prime Outlets at Niagara Falls USA-- Niagara Falls, New York July 1992 534,000 89
Prime Outlets at Woodbury (5)-- Woodbury, Minnesota July 1992 250,000 71
Prime Outlets at Calhoun (3)-- Calhoun, Georgia October 1992 254,000 85
Prime Outlets at Castle Rock-- Castle Rock, Colorado November 1992 480,000 97
Prime Outlets at Bend-- Bend, Oregon December 1992 132,000 98
Prime Outlets at Jeffersonville II (6)-- Jeffersonville, Ohio March 1993 314,000 42
Prime Outlets at Jeffersonville I-- Jeffersonville, Ohio July 1993 407,000 88
Prime Outlets at Gainesville-- Gainesville, Texas August 1993 316,000 68
Prime Outlets at Loveland-- Loveland, Colorado May 1994 328,000 91
Prime Outlets at Grove City-- Grove City, Pennsylvania August 1994 533,000 95
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Occupancy
Outlet Centers Opening Date (Sq. Ft.) Percentage (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Outlets at Huntley-- Huntley, Illinois August 1994 282,000 68%
Prime Outlets at Florida City-- Florida City, Florida September 1994 208,000 65
Prime Outlets at Pismo Beach-- Pismo Beach, California November 1994 148,000 98
Prime Outlets at Tracy-- Tracy, California November 1994 153,000 91
Prime Outlets at Vero Beach (5)-- Vero Beach, Florida November 1994 326,000 88
Prime Outlets at Odessa-- Odessa, Missouri July 1995 296,000 74
Prime Outlets at Darien (7)-- Darien, Georgia July 1995 307,000 67
Prime Outlets at Gulfport (8)-- Gulfport, Mississippi November 1995 306,000 88
Prime Outlets at Lodi (3)-- Burbank, Ohio November 1996 313,000 87
Prime Outlets at Gaffney (3) (7)-- Gaffney, South Carolina November 1996 305,000 94
Prime Outlets at Lee (3)-- Lee, Massachusetts June 1997 224,000 96
Prime Outlets at Lebanon-- Lebanon, Tennessee April 1998 229,000 97
Prime Outlets at Hagerstown (9)-- Hagerstown, Maryland August 1998 487,000 98
Prime Outlets of Puerto Rico-- Barceloneta, Puerto Rico July 2000 176,000 97
---------- --
Total Outlet Centers (10) 11,893,000 86%
========== ==
====================================================================================================================================
Notes:
(1) Percentage reflects occupied space as of June 30, 2002 as a percent of
available square feet of GLA.
(2) We, through affiliates, have a 30% ownership interest in the joint
venture partnership that owns this outlet center.
(3) On July 26, 2002, we sold this outlet center to a joint venture
partnership in which we, through affiliates, have a 19.8% ownership
interest.
(4) We own a 2% partnership interest as the sole general partner in Phase I
of this property but are entitled to 99% of the property's operating
cash flow and net proceeds from a sale or refinancing. This mixed-use
development includes 154,000 square feet of office space, not included
in this table, which was 95% occupied as of June 30, 2002.
(5) Non-recourse mortgage loans on Prime Outlets at Vero Beach and Prime
Outlets at Woodbury are cross-collateralized. The lender has commenced
foreclosure proceedings on Prime Outlets at Vero Beach. We are currently
negotiating a transfer of our ownership interest in Prime Outlets at
Woodbury to the lender.
(6) On August 13, 2002, we transferred our ownership interest in Prime
Outlets at Jeffersonville II to a successor of the lender.
(7) We operate this outlet center pursuant to a long-term ground lease under
which we receive the economic benefit of a 100% ownership interest.
(8) The real property on which this outlet center is located is subject to a
long-term ground lease.
(9) On January 11, 2002, we sold this outlet center to a joint venture
partnership in which we, through affiliates, have a 30% ownership
interest.
(10) We also own one community shopping center, not included in this table,
containing approximately 27,000 square feet that was 82% occupied as of
June 30, 2002.
Results of Operations
Comparison of the three months ended June 30, 2002 to the three months ended
June 30, 2001
Summary
We reported losses from continuing operations of $20,530 and $5,647 for the
three months ended June 30, 2002 and 2001, respectively. For the three months
ended June 30, 2002, the net loss applicable to our common shareholders was
$35,854, or $0.82 per common share on a basic and diluted basis. For the three
months ended June 30, 2001, the net loss applicable to our common shareholders
was $12,511, or $0.29 per common share on a basic and diluted basis.
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards ("FAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." In accordance with the requirements of FAS No. 144, we have
classified the operating results, including gains and losses related to
disposition, for those properties either disposed of or classified as assets
held for sale during 2002 as discontinued operations in the accompanying
statements of operations for all periods presented.
During the three months ended June 30, 2002, we reported a loss from
discontinued operations of $9,656, or $0.22 per basic and diluted share. The
loss from discontinued operations includes losses related to dispositions of
$8,167. During the three months ended June 30, 2001, we reported a loss on
discontinued operations of $1,196, or $0.03 per basic and diluted share.
The 2002 results also reflect (i) a loss on the sale of real estate of $703, or
$0.02 per basic and diluted share, attributable to the sale of our ownership
interest in a joint venture partnership, (ii) a non-recurring charge of $3,000,
or $0.07 per basic and diluted share, for pending and potential tenant claims
with respect to lease provisions related to pass-through charges and promotional
fund charges and (iii) a provision for asset impairment of $12,200, or $0.28 per
basic and diluted share, for two outlet centers. The 2001 results reflect a loss
on the sale of real estate of $180 for those properties sold during 2001.
The following discussion regarding operating results for the comparable periods
are reflective of the classification requirements under FAS No. 144. The
operating results for properties disposed of during 2001 are not classified as
discontinued operations. Their operating results through the dates of their
respective disposition are collectively referred to as the "2001 Property
Dispositions".
Revenues
Total revenues were $39,880 for the three months ended June 30, 2002, compared
to $44,863 for the same period in 2001, a decrease of $4,983, or 11.1%. Base
rents decreased $2,870, or 10.3%, to $24,943 during the three months ended June
30, 2002 compared to $27,813 for the same period in 2001. These decreases are
primarily due to (i) the 2001 Property Dispositions, (ii) changes in economic
rental rates and (iii) the reduction in outlet center occupancy during the 2002
period. Straight-line rent income (expense), included in base rent was $21 and
$(198) for the three months ended June 30, 2002 and 2001, respectively.
Tenant reimbursements, which represent the contractual recovery from tenants of
various operating expenses, decreased by $1,563, or 11.1%, to $12,430 during the
three months ended June 30, 2002 compared to $13,993 in the same period in 2001.
This decrease was primarily due to (i) the 2001 Property Dispositions; (ii)
changes in economic rental rates and (iii) the reduction in outlet center
occupancy during the 2002 period. Tenant reimbursements as a percentage of
recoverable property operating expenses and real estate taxes was 82.7% in 2002
compared to 95.2% in 2001. The decline in tenant reimbursements as a percentage
of recoverable property operating expenses and real estate taxes was primarily
attributable to changes in economic rental rates and the reduction in outlet
center occupancy during the 2002 period.
Interest and other income decreased by $367, or 15.0%, to $2,076 during the
three months ended June 30, 2002 compared to $2,443 for same period in 2001. The
decrease was primarily attributable to reductions in (i) lease termination
income of $467 and (ii) all other income of $97. These items were partially
offset by an increase in equity earnings from investment in partnerships of
$197.
Expenses
Property operating expenses increased by $361, or 3.4%, to $11,063 during the
three months ended June 30, 2002 compared to $10,702 for the same period in
2001. This increase was primarily attributable to higher utilities and insurance
costs partially offset by the 2001 Property Dispositions. Real estate taxes
expense decreased by $32, or 0.8%, to $3,962 during the three months ended June
30, 2002 compared to $3,994 for the same period in 2001. This decrease was
primarily attributable to the 2001 Property Dispositions.
As shown in TABLE 1, depreciation and amortization expense decreased by $949, or
9.1%, to $9,531 during the three months ended June 30, 2002, compared to $10,480
for the same period in 2001. This decrease was primarily attributable to (i) the
2001 Property Dispositions and (ii) reduced depreciation and amortization
associated with a provision for impairment losses of $63,026 recorded during the
third quarter of 2001.
Table 1--Components of Depreciation and Amortization Expense
- --------------------------------------------------------------------------------
Three Months ended June 30, 2002 2001
- --------------------------------------------------------------------------------
Building and improvements $ 4,459 $ 5,429
Land improvements 1,215 1,222
Tenant improvements 3,162 3,084
Furniture and fixtures 629 669
Leasing commissions 66 76
------- --------
Total $ 9,531 $ 10,480
======= ========
================================================================================
As shown in TABLE 2, interest expense decreased by $1,972, or 11.1%, to $15,867
during the three months ended June 30, 2002 compared to $17,839 for the same
period in 2001. This decrease reflects (i) lower interest incurred of $1,990 and
(ii) a decrease in amortization of deferred financing costs of $166, partially
offset by a reduction in amortization of debt premiums of $184.
The decrease in interest incurred is primarily attributable to a reduction of
$68,077 in our weighted-average debt outstanding, excluding debt premiums,
during the three months ended June 30, 2002 compared to the same period in 2001.
Also contributing to the decrease in interest incurred were lower
weighted-average interest rates during the three months ended June 30, 2002
compared to the same period in 2001. The significant reduction in
weighted-average debt outstanding was primarily attributable to debt prepayments
on the Mezzanine Loan with net proceeds from (i) the sales of properties and
(ii) the 2001 Property Dispositions. The weighted-average contractual interest
rates for the three months ended June 30, 2002 and 2001 were 8.38% and 8.82%,
respectively. The Mezzanine Loan was obtained in December 2000 from FRIT Lending
LLC (the "Mezzanine Lender") in the original amount of $90,000. See Note 4 -
"Bonds and Notes Payable" of the Notes to Consolidated Financial Statements for
additional information.
Table 2--Components of Interest Expense
- --------------------------------------------------------------------------------
Three Months ended June 30, 2002 2001
- --------------------------------------------------------------------------------
Interest incurred $ 14,856 $ 16,846
Amortization of deferred financing costs 1,455 1,621
Amortization of debt premiums (444) (628)
-------- --------
Total $ 15,867 $ 17,839
======== ========
================================================================================
During the second quarter of 2002, we recorded a non-recurring charge of $3,000
for pending and potential tenant claims with respect to lease provisions related
to their pass-through charges and promotional fund charges (see Note 6 - "Legal
Proceedings" of the Notes to Consolidated Financial Statements for additional
information). This non-recurring charge was estimated in accordance with our
aforementioned "Critical Accounting Policies and Estimates" with respect to loss
contingencies and is based on our current assessment of the likelihood of any
adverse judgments or outcomes to these matters.
Excluding this non-recurring charge, other charges decreased by $3,156, or
72.3%, to $1,207 for the three months ended June 30, 2002 compared to $4,363 for
the same period in 2001. This decrease reflects (i) a lower provision for
uncollectible accounts receivable of $2,652, a decrease in corporate marketing
costs of $494 and (iii) a reduction in all other expenses of $10.
During the second quarter of 2002, we incurred a provision for asset impairment
of $12,200 to adjust the carrying values of two of our properties (Prime Outlets
at Vero Beach and Prime Outlets at Woodbury) to their estimated fair values in
accordance with the provisions of FAS No. 144. These properties are
cross-collateralized by non-recourse mortgage indebtedness on which we suspended
payment of regularly scheduled monthly debt service payment during August of
2002. See "Defaults on Certain Non-recourse Mortgage Indebtedness" contained
within Note 4 - "Bonds and Notes Payable" of the Notes to Consolidated Financial
Statements for additional information.
Comparison of the six months ended June 30, 2002 to the six months ended June
30, 2001
Summary
We reported losses from continuing operations of $24,981 and $10,005 for the six
months ended June 30, 2002 and 2001, respectively. For the six months ended June
30, 2002, the net loss applicable to our common shareholders was $39,841, or
$0.91 per common share on a basic and diluted basis. For the six months ended
June 30, 2001, the net loss applicable to our common shareholders was 23,809, or
$0.55 per common share on a basic and diluted basis.
Effective January 1, 2002, we adopted FAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." In accordance with the
requirements of FAS No. 144, we have classified the operating results, including
gains and losses related to disposition, for those properties either disposed of
or classified as assets held for sale during 2002 as discontinued operations in
the accompanying statements of operations for all periods presented.
During the six months ended June 30, 2002, we reported a loss from discontinued
operations of $3,524, or $0.08 per basic and diluted share. The loss from
discontinued operations includes losses related to disposition of $997. During
the six months ended June 30, 2001, we reported a loss on discontinued
operations of $2,468, or $0.06 per basic and diluted share.
The 2002 results also reflect (i) a loss on the sale of real estate of $703, or
$0.02 per basic and diluted share, attributable to the sale of our ownership
interest in a joint venture partnership (ii) a non-recurring charge of $3,000,
or $0.07 per basic and diluted share, for pending and potential tenant claims
related to pass-through charges and promotional fund charges and (iii) a
provision for asset impairment of $12,200, or $0.28 per basic and diluted share,
for two outlet centers. The 2001 results reflect a gain on the sale of real
estate of $552 for those properties sold during 2001.
The following discussion regarding operating results for the comparable periods
are reflective of the classification requirements under FAS No. 144. The
operating results for properties disposed of during 2001 are not classified as
discontinued operations. Their operating results through the dates of their
respective disposition are collectively referred to as the "2001 Property
Dispositions".
Revenues
Total revenues were $82,065 for the six months ended June 30, 2002, compared to
$90,910 for the same period in 2001, a decrease of $8,845, or 9.7%. Base rents
decreased $6,139, or 10.7%, to $51,031 during the six months ended June 30, 2002
compared to $57,170 for the same period in 2001. These decreases are primarily
due to (i) the 2001 Property Dispositions, (ii) changes in economic rental rates
and (iii) the reduction in outlet center occupancy during the 2002 period.
Straight-line rent expense, included in base rent was $0 and $321 for the six
months ended June 30, 2002 and 2001, respectively.
Tenant reimbursements, which represent the contractual recovery from tenants of
certain operating expenses, decreased by $3,136, or 11.2%, to $24,804 during the
six months ended June 30, 2002 compared to $27,940 in the same period in 2001.
These decreases are primarily due to (i) the 2001 Property Dispositions; (ii)
changes in economic rental rates and (iii) the reduction in outlet center
occupancy during the 2002 period. Tenant reimbursements as a percentage of
recoverable property operating expenses and real estate taxes was 84.4% in 2002
compared to 93.3% in 2001. The decline in tenant reimbursements as a percentage
of recoverable property operating expenses and real estate taxes was primarily
attributable to changes in economic rental rates and the reduction in outlet
center occupancy during the 2002 period.
Interest and other income decreased by $106, or 2.3%, to $4,510 during the six
months ended June 30, 2002 compared to $4,616 for same period in 2001. The
decrease reflects reductions in (i) lease termination income of $730 and (ii)
all other income of $390 partially offset by an increase in our equity earnings
from investment in partnerships of $1,014.
Expenses
Property operating expenses decreased by $308, or 1.4%, to $21,557 during the
six months ended June 30, 2002 compared to $21,865 for the same period in 2001.
This decrease was primarily attributable to the 2001 Property Dispositions
partially offset by higher utilities and insurance costs. Real estate taxes
expense decreased by $232, or 2.9%, to $7,846 during the six months ended June
30, 2002 compared to $8,078 for the same period in 2001. This decrease was
primarily attributable to the 2001 Property Dispositions.
As shown in TABLE 3, depreciation and amortization expense decreased by $1,291,
or 6.1%, to $19,710 during the six months ended June 30, 2002, compared to
$21,001 for the same period in 2001. This decrease was primarily attributable to
(i) the 2001 Property Dispositions and (ii) reduced depreciation and
amortization associated with a provision for impairment losses of $63,026
recorded during the third quarter of 2001.
Table 3--Components of Depreciation and Amortization Expense
- --------------------------------------------------------------------------------
Six Months ended June 30, 2002 2001
- --------------------------------------------------------------------------------
Building and improvements $ 10,154 $ 10,872
Land improvements 2,438 2,440
Tenant improvements 5,702 6,160
Furniture and fixtures 1,280 1,375
Leasing commissions 136 154
-------- --------
Total $ 19,710 $ 21,001
======== ========
================================================================================
As shown in TABLE 4, interest expense decreased by $4,733, or 12.8%, to $32,193
during the six months ended June 30, 2002 compared to $36,926 for the same
period in 2001. This decrease reflects (i) lower interest incurred of $4,551 and
(ii) a decrease in amortization of deferred financing costs of $340, partially
offset by a reduction in amortization of debt premiums of $158.
The decrease in interest incurred is primarily attributable to a reduction of
$62,518 in our weighted-average debt outstanding, excluding debt premiums,
during the six months ended June 30, 2002 compared to the same period in 2001.
Also contributing to the decrease in interest incurred were lower
weighted-average interest rates during the six months ended June 30, 2002
compared to the same period in 2001. The significant reduction in
weighted-average debt outstanding was primarily attributable to debt prepayments
on the Mezzanine Loan with net proceeds from (i) the sales of properties and
(ii) the 2001 Property Dispositions. The weighted-average contractual interest
rates for the six months ended June 30, 2002 and 2001 were 8.41% and 8.86%,
respectively.
Table 4--Components of Interest Expense
- --------------------------------------------------------------------------------
Six Months ended June 30, 2002 2001
- --------------------------------------------------------------------------------
Interest incurred $ 30,008 $ 34,559
Amortization of deferred financing costs 3,273 3,613
Amortization of debt premiums (1,088) (1,246)
-------- --------
Total $ 32,193 $ 36,926
======== ========
================================================================================
During the second quarter of 2002, we recorded a non-recurring charge of $3,000
for pending and potential tenant claims with respect to lease provisions related
to their pass-through charges and promotional fund charges (see Note 6 - "Legal
Proceedings' of the Notes to Consolidated Financial Statements for additional
information). This non-recurring charge was estimated in accordance with our
aforementioned "Critical Accounting Policies and Estimates" with respect to loss
contingencies and is based on our current assessment of the likelihood of any
adverse judgments or outcomes to these matters.
Excluding this non-recurring charge, other charges decreased by $3,804, or
51.8%, to $3,541 for the six months ended June 30, 2002 compared to $7,345 for
the same period in 2001. The decrease was primarily attributable to (i) a lower
provision for uncollectible accounts receivable of $2,986, (ii) a decrease in
corporate marketing costs of $494 and (iii) a reduction in all other expenses of
$324.
During the second quarter of 2002, we incurred a provision for asset impairment
of $12,200 to adjust the carrying values of two of our properties (Prime Outlets
at Vero Beach and Prime Outlets at Woodbury) to their estimated fair values in
accordance with the provisions of FAS No. 144. These properties are
cross-collateralized by non-recourse mortgage indebtedness on which we suspended
payment of regularly scheduled monthly debt service payment during August of
2002. See "Defaults on Certain Non-recourse Mortgage Indebtedness" contained
within Note 4 - "Bonds and Notes Payable" of the Notes to Consolidated Financial
Statements for additional information.
Merchant Sales
For the three and six months ended June 30, 2002, same-store sales in the
Company's outlet center portfolio decreased 3.6% and 2.7%, respectively,
compared to the same periods in 2001. "Same-store sales" is defined as the
weighted-average sales per square foot reported by merchants for stores open
since January 1, 2001. The weighted-average sales per square foot reported by
all merchants were $241 for the year ended December 31, 2001.
Liquidity and Capital Resources
Sources and Uses of Cash
For the six months ended June 30, 2002, net cash provided by operating
activities was $9,936, net cash provided by investing activities was $19,671 and
net cash used in financing activities was $31,943.
The net cash provided by investing activities during the six months ended June
30, 2002 consisted of $22,320 of aggregate net proceeds from the disposition of
assets, partially offset by $2,649 of additions to rental property. The net
proceeds from asset sales consisted of (i) $12,113 from the January 11, 2002
sale of a 70% ownership interest in the Hagerstown Center, (ii) $9,551 from the
April 1, 2002 sale of the Edinburgh Center, (iii) $522 from the April 19, 2002
sale of our 51% ownership interest in the Bellport Outlet Center and (iv) $688
from the June 17, 2002 sale of Western Plaza, partially offset by cash of $574
assumed by the lender in connection with the January 1, 2002 foreclosure sale of
the Conroe Center. The additions to rental property were primarily costs
incurred in connection with re-leasing space to new merchants.
The gross uses of cash for financing activities of $31,943 during the six months
ended June 30, 2002 consisted of (i) scheduled principal amortization on notes
payable of $9,955 and (ii) a principal prepayments on the Mezzanine Loan
aggregating $21,988, including $10,341 of mandatory prepayments, with net
proceeds from the sales of properties.
2002 Sales Transactions
On January 11, 2002, we completed the sale of Prime Outlets at Hagerstown (the
"Hagerstown Center"), an outlet center located in Hagerstown, Maryland
consisting of approximately 487,000 square feet of GLA, for $80,500 to an
existing joint venture partnership (the "Prime/Estein Venture") between one of
our affiliates and an affiliate of Estein & Associates USA, Ltd. ("Estein"), a
real estate investment company. Estein and we have 70% and 30% ownership
interests, respectively, in the Prime/Estein Venture. In connection with the
sale transaction, the Prime/Estein Venture assumed first mortgage indebtedness
of $46,862 on the Hagerstown Center (the "Assumed Mortgage Indebtedness");
however, our guarantee of the Assumed Mortgage Indebtedness remains in place.
The net cash proceeds from the sale, including the release of certain funds held
in escrow, were $12,113 after (i) a pay-down of $11,052 of mortgage indebtedness
on the Hagerstown Center and (ii) closing costs. The net proceeds from this sale
were used to prepay $11,647 of principal outstanding under the Mezzanine Loan.
The operating results of the Hagerstown Center through the date of disposition
are classified as discontinued operations in the accompanying Consolidated
Statements of Operations for all periods presented in accordance with the
requirements of FAS No. 144. In connection with the sale of the Hagerstown
Center, we recorded a gain on the sale of real estate of $16,795, also included
in discontinued operations, during the first quarter of 2002. At December 31,
2001, the carrying value of the Hagerstown Center of $54,628 was classified as
assets held for sale in the Consolidated Balance Sheet. Effective on the date of
disposition, we have accounted for our 30% ownership interest in the Hagerstown
Center in accordance with the equity method of accounting.
We are obligated to refinance the Assumed Mortgage Indebtedness on behalf of the
Prime/Estein Venture on or before June 1, 2004, the date on which such
indebtedness matures. Additionally, the Prime/Estein Venture's cost of the
Assumed Mortgage Indebtedness and any refinancing of it are fixed at an annual
rate of 7.75% for a period of 10 years. If the actual cost of such indebtedness
should exceed 7.75% at any time during the ten-year period, we will be obligated
to pay the difference to the Prime/Estein Venture. However, if the actual cost
of such indebtedness is less than 7.75% at any time during the ten-year period,
the Prime/Estein Venture will be obligated to pay the difference to us. The
actual cost of the Assumed Mortgage Indebtedness is currently 30-day LIBOR plus
1.50%, or 3.34% as of June 30, 2002.
On April 1, 2002, we completed the sale of Prime Outlets at Edinburgh (the
"Edinburgh Center"), an outlet center located in Edinburgh, Indiana consisting
of approximately 305,000 square feet of GLA and additional undeveloped land. The
Edinburgh Center was sold to CPG Partners, L.P. for cash consideration of
$27,000.
The net cash proceeds from the sale were $9,551, after (i) repayment in full of
$16,317 of existing first mortgage indebtedness on the Edinburgh Center and (ii)
closing costs and fees. We used these net proceeds to make a mandatory principal
payment of $9,178 on the Mezzanine Loan.
The operating results of the Edinburgh Center through the date of disposition
are classified as discontinued operations in the accompanying Consolidated
Statements of Operations for all periods presented in accordance with the
requirements of FAS No. 144. During the first quarter of 2002, we recorded a
loss on the sale of real estate of $9,625, also included in discontinued
operations, related to the write-down of the carrying value of the Edinburgh
Center to its net realizable value based on the terms of the sale agreement.
On April 19, 2002, we completed the sale of Phases II and III of the Bellport
Outlet Center (the "Bellport Outlet Center"), an outlet center located in
Bellport, New York consisting of approximately 197,000 square feet of GLA. We
had a 51% ownership interest in the joint venture partnership that owned the
Bellport Outlet Center. The Bellport Outlet Center was sold to Sunrise Station,
L.L.C., an affiliate of one of our joint venture partners, for cash
consideration of $6,500. At closing, recourse first mortgage indebtedness of
$5,500, which was scheduled to mature on May 1, 2002, was repaid in full. To
date we have received $522 of cash proceeds from the sale, which were used to
make a mandatory principal payment of $502 on the Mezzanine Loan.
We accounted for our ownership interest in the Bellport Outlet Center in
accordance with the equity method of accounting through the date of disposition.
In connection with the sale of the Bellport Outlet Center, we recorded a loss on
the sale of real estate of $703 during the second quarter of 2002.
On June 17, 2002, we completed the sale of the Shops at Western Plaza ("Western
Plaza"), a community center located in Knoxville, Tennessee, consisting of
205,000 square feet of GLA. Western Plaza was sold to WP General Partnership for
cash consideration of $9,500. The net cash proceeds from the sale were $688,
after (i) repayment of $9,467 (of which $2,467 was scheduled to mature on
October 31, 2002) of existing recourse mortgage indebtedness on Western Plaza,
(ii) payment of closing costs and fees and (iii) release of certain escrowed
funds. We used these net proceeds to make a mandatory principal payment of $661
on the Mezzanine Loan.
The operating results of Western Plaza through the date of disposition are
classified as discontinued operations in the accompanying Consolidated
Statements of Operations for all periods presented in accordance with the
requirements of FAS No. 144. In connection with the sale of Western Plaza, we
recorded a gain on the sale of real estate of $2,122, also included in
discontinued operations, during the second quarter of 2002.
On July 26, 2002, we completed the sale of six outlet centers for aggregate
consideration of $118,650 to wholly-owned affiliates of PFP Venture LLC, a joint
venture (the "PFP Venture") (i) 29.8% owned by PWG Prime Holdings LLC ("PWG")
and (ii) 70.2% owned by FP Investment LLC ("FP"). FP is a joint venture between
FRIT PRT Bridge Acquisition LLC ("FRIT"), a Delaware limited liability company,
and us. Through FP, FRIT and we indirectly have ownership interests of 50.4% and
19.8%, respectively, in the PFP Venture.
The six outlet centers (collectively, the "Bridge Loan Properties") that were
sold are located in Anderson, California; Calhoun, Georgia; Gaffney, South
Carolina; Latham, New York; Lee, Massachusetts and Lodi, Ohio and contain an
aggregate of 1,304,000 square feet of GLA. Under the terms of the transaction,
for a five-year period, we will continue to manage, market and lease the Bridge
Loan Properties for a fee on behalf of the PFP Venture.
In connection with the sale, $111,009 of recourse mortgage indebtedness (the
"Bridge Loan") on the Bridge Loan Properties was repaid in full. Our net cash
proceeds of $6,762 from the sale were contributed to FP. FP used these proceeds
along with a $17,236 capital contribution from FRIT to purchase a 70.2%
ownership interest in the PFP Venture. Financing for the PFP Venture's purchase
of the Bridge Loan Properties was provided by GMAC Mortgage in the form of a
$90,000, four-year, non-recourse mortgage loan, of which $74,000 bears interest
at LIBOR plus 4.25% (minimum of 7.00% for the first three years and 7.25%
thereafter) and $16,000 bears interest at LIBOR plus 4.50% (minimum of 7.75%).
Furthermore, subject to satisfaction of certain conditions, the PFP Venture may
extend the maturity of the $74,000 portion of the loan for one additional year
with the minimum interest rate continuing at 7.25%.
Pursuant to certain venture-related documents, we have guaranteed FRIT (i) a 13%
return on its $17,236 of invested capital, and (ii) the full return of its
invested capital (the "Mandatory Redemption Obligation") by December 31, 2003.
Our guarantee is secured by junior security interests in collateral similar to
that pledged to the Mezzanine Lender. FP will be entitled to receive a 15%
preferred return on its invested capital of $23,998 (approximately $3,600 on an
annual basis) in the PFP Venture. Then PWG will be entitled to receive a 15%
return on its invested capital of $10,200. From FP's preferred return, FRIT will
first receive its 13% return on its invested capital with the remainder applied
towards the payment of the Mandatory Redemption Obligation. Upon satisfaction of
the Mandatory Redemption Obligation, we will be entitled to FP's preferred
return until such time as we have been repaid in full our invested capital,
together with a 13% return on our invested capital. Thereafter, FRIT and us
will share any cash flow due to FP on an approximate equal basis.
FRIT, indirectly through affiliates, was the owner of Bridge Loan that was
repaid in full in connection with the sale of the Bridge Loan Properties and is
a 50% participant in the Mezzanine Loan, which had an outstanding principal
balance of $35,431 as of June 30, 2002.
Effective June 30, 2002, the aggregate carrying value of the Bridge Loan
Properties of $115,924 was classified as assets held for sale in the
Consolidated Balance Sheet. The operating results of the Bridge Loan Properties
are classified as discontinued operations in the accompanying Consolidated
Statements of Operations for all periods presented in accordance with the
requirements of FAS No. 144. During the second quarter of 2002, we recorded a
loss on the sale of real estate of $10,289, also included in discontinued
operations, related to the write-down of the carrying value of the Bridge Loan
Properties to their net realizable value based on the terms of the sale
agreement.
2002 Foreclosure Sale
During 2001, certain of our subsidiaries suspended regularly scheduled monthly
debt service payments on two non-recourse mortgage loans held by New York Life
Insurance Company ("New York Life") at the time of the suspension. These
non-recourse mortgage loans were cross-defaulted and cross-collateralized by
Prime Outlets at Jeffersonville II (the "Jeffersonville II Center"), located in
Jeffersonville, Ohio and Prime Outlets at Conroe (the "Conroe Center"), located
in Conroe, Texas. Effective January 1, 2002, New York Life foreclosed on the
Conroe Center. Effective July 18, 2002, New York Life sold its remaining
interest in the loan still encumbering the Jeffersonville II Center to a
successor lender. On August 13, 2002, we transferred our ownership interest in
the Jeffersonville II Center to New York Life's successor lender. See Note 4 -
"Bonds and Notes Payable" of the Notes to Consolidated Financial Statements for
additional information.
Going Concern
During 2002, we are required to make, in addition to scheduled monthly
amortization, certain mandatory principal payments on the Mezzanine Loan
aggregating $25,367 with net proceeds from asset sales, excluding our January
11, 2002 sale of a 70% joint venture partnership interest in the Hagerstown
Center, or other capital transactions within specified periods (see "Mezzanine
Loan Modification" for additional information). Through June 30, 2002, we have
made mandatory principal payments aggregating $10,341. Although we continue to
seek to generate additional liquidity through new financings and the sale of
assets, there can be no assurance that we will be able to complete asset sales
or other capital transactions within the specified periods or that such asset
sales or other capital transactions, if they should occur, will generate
sufficient proceeds to make the remaining mandatory payments of $15,026 due in
2002 under the Mezzanine Loan. Any failure to satisfy these mandatory principal
payments within the specified time periods will constitute a default under the
Mezzanine Loan.
Based on our results for the three months ended June 30, 2002, we are not in
compliance with respect to the debt service coverage ratio under our fixed rate
tax-exempt revenue bonds (the "Affected Fixed Rate Bonds") in the amount of
$18,390. As a result of our noncompliance, the holders of the Affected Fixed
Rate Bonds may elect to put such obligations to us at a price equal to par plus
accrued interest. If the holders of the Affected Fixed Rate Bonds make such an
election and we are unable to repay such obligations, certain cross-default
provisions with respect to other debt facilities, including the Mezzanine Loan
may be triggered.
We are working with holders of the Affected Fixed Rate Bonds regarding potential
resolutions, including waiver or amendment with respect to the applicable
provisions. If we are unable to reach satisfactory resolution, we will look to
(i) obtain alternative financing from other financial institutions, (ii) sell
the projects subject to the affected debt or (iii) explore other possible
capital transactions to generate cash to repay the amounts outstanding under
such debt. There can be no assurance that we will obtain satisfactory
resolutions with the holders of the Affected Fixed Rate Bonds or that we will be
able to complete asset sales or other capital raising activities sufficient to
repay the amount outstanding under the affected Fixed Rate Bonds.
As of June 30, 2002, we were in compliance with all financial debt covenants
under our recourse loan agreements other than the Affected Fixed Rate Bonds.
Nevertheless, there can be no assurance that we will remain in compliance with
our financial debt covenants in future periods because our future financial
performance is subject to various risks and uncertainties, including, but not
limited to, the effects of current and future economic conditions, and the
resulting impact on our revenue; the effects of increases in market interest
rates from current levels; the risks associated with existing vacancy rates or
potential increases in vacancy rates because of, among other factors, tenant
bankruptcies and store closures, and the resulting impact on our revenue; risks
associated with litigation, including pending and potential tenant claims with
respect to lease provisions related to their pass-through charges and
promotional fund charges; and risks associated with refinancing our current debt
obligations or obtaining new financing under terms less favorable than we have
experienced in prior periods. See "Defaults on Certain Non-recourse Mortgage
Indebtedness" and "Defaults on Certain Non-recourse Mortgage Indebtedness of
Unconsolidated Partnerships" for additional information.
These above listed conditions raise substantial doubt about our ability to
continue as a going concern. The financial statements contained herein do not
include any adjustment to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.
Strategic Alternatives
We have engaged Houlihan Lokey Howard & Zurkin Capital to assist us in exploring
recapitalization, restructuring, financing and other strategic alternatives
designed to strengthen our financial position and address our long-term capital
requirements. There can be no assurance as to the timing, terms or completion of
any transaction.
Mezzanine Loan Modification
Effective January 31, 2002, we entered into a modification to the original terms
of the Mezzanine Loan obtained in December 2000. The Mezzanine Loan amendment
(the "Amendment"), among other things, (i) reduces required monthly principal
amortization for the period February 1, 2002 through January 1, 2003 ("Year 2")
from $1,667 to $800, which may be further reduced to a minimum of $500 per month
under certain limited circumstances, provided no defaults exist under the
Mezzanine Loan and certain other conditions have been satisfied at the Mezzanine
Lender's sole discretion, (ii) requires certain mandatory principal payments
from net proceeds from asset sales or other capital transactions pursuant to the
schedule set forth below and (iii) reduces the threshold level at which excess
cash flow from operations must be applied to principal pay-downs, primarily
resulting from a reduction in the available working capital reserves.
Additionally, the Amendment (i) increases the interest rate from LIBOR plus
9.50% to LIBOR plus 9.75% (rounded up to nearest 0.125% with a minimum rate of
14.75%), (ii) changes the Mezzanine Loan maturity date from December 31, 2003 to
September 30, 2003 and (iii) required a 0.25% fee, which was paid at the time of
the modification, on the outstanding principal balance. Pursuant to the terms of
the Amendment, the Mezzanine Loan monthly principal payments for May and June of
2002, were reduced to $611 and $649, respectively.
The Amendment also requires additional Year 2 monthly payments of $250 (the
"Escrowed Funds") into an escrow account controlled by the Lender. Provided
certain conditions are satisfied, at the Mezzanine Lender's sole discretion, the
Escrowed Funds may be released to us for limited purposes. The Escrowed Funds
not used at the end of each quarter, subject to certain exceptions, will be
applied by the Mezzanine Lender to amortize the Mezzanine Loan. The required
monthly principal amortization of $2,333 commencing on February 1, 2003, through
the new maturity date of September 30, 2003, remains unchanged.
The Amendment also requires mandatory principal payments with net proceeds from
asset sales, excluding our January 11, 2002 sale of a 70% joint venture
partnership interest in the Hagerstown Center (see Note 3 - "Property
Dispositions" for additional information), or other capital transactions of not
less than (i) $8,906 by May 1, 2002, (ii) $24,406, inclusive of the $8,906, by
July 1, 2002 (subject to extension to October 31, 2002 provided certain
conditions are met to the Lender's satisfaction) and (iii) $25,367, inclusive of
the $24,406, by November 1, 2002. In addition to each mandatory principal
payment, we must also pay any interest, including deferred interest, accrued
thereon and the additional fees provided for in the Mezzanine Loan. Any failure
to satisfy these mandatory principal payments or other payments within the
specified time periods will constitute a default under the Mezzanine Loan.
On July 1, 2002, the Mezzanine Lender elected to extend the July 1, 2002
mandatory principal payment due date to the earlier of (i) August 15, 2002 (the
"Extended Date") or (ii) the occurrence of an event of default under the
Mezzanine Loan. Additionally, upon satisfaction of certain conditions, the
Extended Date can be automatically extended again to the earlier of (i) October
31, 2002, (ii) the occurrence of an event of default under the Mezzanine Loan,
or (iii) the closing or termination of certain asset sales, with such date
hereafter referred to as the "Second Mandatory Principal Payment Due Date."
There can be no assurance that these conditions will be met.
On April 1, 2002, we sold our Edinburgh Center and used the net proceeds to make
a $9,178 mandatory payment on the Mezzanine Loan. Additionally, on April 19,
2002, we sold our ownership interest in the Bellport Outlet Center and used the
net proceeds to make a $502 mandatory payment on the Mezzanine Loan. (See Note 3
- - "Property Dispositions" of Notes to Consolidated Financial Statements for
additional information.) As a result, we satisfied the May 1, 2002 mandatory
principal payment requirement.
On June 17, 2002, we sold Western Plaza and used the net proceeds to make a
mandatory principal payment of $661 on the Mezzanine Loan. (See Note 3 -
"Property Dispositions" of Notes to Consolidated Financial Statements for
additional information.) We are now required to complete additional asset sales
or other capital transactions generating net proceeds aggregating $14,065 by the
Second Mandatory Principal Payment Due Date and $15,026 (inclusive of the
$14,065) by November 1, 2002.
The Mezzanine Loan was also amended on January 11, 2002 to, among other things,
(i) release the partnership interests in Outlet Village of Hagerstown Limited
Partnership ("Hagerstown LP") as collateral under the Mezzanine Loan, (ii)
release Hagerstown LP of all obligations under the Mezzanine Loan and (iii) add
Hagerstown Land, L.L.C., a Delaware limited liability company, as a guarantor
under the Mezzanine Loan. Hagerstown Land, L.L.C. is the owner of three parcels
of land adjacent to the Hagerstown Center.
Debt Service Obligations
Our aggregate indebtedness excluding (i) unamortized debt premiums of $9,639,
(ii) mortgage indebtedness of $111,059 on the Bridge Loan Properties and (iii)
non-recourse mortgage indebtedness of $17,768 on Prime Outlets at Jeffersonville
II was $686,216 (the "Adjusted Indebtedness") at June 30, 2002. The mortgage
indebtedness on the Bridge Loan Properties was repaid in full in connection with
the sale of such properties on July 26, 2002. The non-recourse mortgage
indebtedness on the Jeffersonville II Center was relieved in connection with the
transfer of our ownership interest in such property to New York Life's successor
on August 13, 2002. See Note 3 - "Property Dispositions" and "Defaults on
Certain Non-recourse Mortgage Indebtedness" of Notes to Consolidated Financial
Statements for additional information.
At June 30, 2002 the Adjusted Indebtedness had a weighted-average maturity of
3.0 years and bore contractual interest at a weighted-average rate of 8.24% per
annum. At June 30, 2002, $631,254, or 92.0%, of the Adjusted Indebtedness bore
interest at fixed rates and $54,962 or 8.0%, of the Adjusted Indebtedness bore
interest at variable rates. In certain cases, we utilize derivative financial
instruments to manage our interest rate risk associated with variable rate debt.
As of June 30, 2002, our scheduled principal payments for the remainder of 2002
and 2003 for the Adjusted Indebtedness aggregated $24,775 and $378,465,
respectively. The remaining scheduled principal payments for 2002 include (i)
principal amortization aggregating $9,749 (including an aggregate of $4,800 of
scheduled monthly principal payments on the Mezzanine Loan, which may be further
reduced subject to the terms of its Amendment specified above) and (ii)
mandatory principal payments on the Mezzanine Loan aggregating $15,026 (see
"Mezzanine Loan Modification" for additional information). The outstanding
principal balance of the Mezzanine Loan as of June 30, 2002 was $35,431. The
scheduled principal payment for 2003 include (i) obligations of $338,558 due in
respect of a mortgage loan that is secured by 15 of our properties and matures
in November 2003 and (ii) $15,605 of principal payments under the Mezzanine
Loan.
Mikasa Settlement
On August 7, 2002, we entered into a settlement agreement (the "Mikasa
Settlement") with Dinnerware Plus Holdings, Inc., which operates under the trade
name Mikasa. Pursuant to the Mikasa Settlement, we are obligated to make
aggregate payments of $2,100 to Mikasa and various lease terms between both our
affiliates and Mikasa's affiliates will be amended to reflect the terms of the
Mikasa Settlement, including modifications of the provisions concerning the
collection of pass though charges over the remaining terms of the respective
leases. On August 9, 2002, we made an initial payment of $1,750 to Mikasa using
Escrowed Funds (see "Mezzanine Loan Modification for additional information)
released by the Mezzanine Lender. We are obligated to make additional payments
to Mikasa in September and October of 2002 in the amount of $250 and $100,
respectively. We expect to make these additional payments using the Escrowed
Funds. See Note 6 - "Legal Proceedings" for additional information.
The Mikasa Settlement did not have a material impact on our financial condition
or our results from operations. We previously accrued a reserve of $2,000 for
the Mikasa Settlement during the fourth quarter of 2001. This reserve is
included in accounts payable and other liabilities in our Consolidated Balance
Sheet as of June 30, 2002.
Guarantees of Indebtedness of Others
On July 15, 2002, Horizon Group Properties, Inc. and its affiliates ("HGP")
announced they had refinanced a secured credit facility (the "HGP Secured Credit
Facility") through a series of new loans aggregating $32,500. Prior to the
refinancing, we were a guarantor under the HGP Credit Facility in the amount of
$10,000. In connection with the refinancing, our guarantee was reduced to a
maximum of $4,000 as security for a $3,000 mortgage loan and a $4,000 mortgage
loan (collectively, the "HGP Monroe Mortgage Loan") secured by HGP's outlet
shopping center located in Monroe, Michigan. The HGP Monroe Mortgage Loan has a
3-year term, bears interest at the prime lending rate plus 2.50% (with a minimum
of 9.90%) and requires monthly interest-only payments. The HGP Monroe Mortgage
Loan may be prepaid without penalty after two years. Our guarantee with respect
to the HGP Monroe Mortgage Loan will be extinguished if the principal amount of
such obligation is reduced to $5,000 or less through repayments.
Additionally, we are a guarantor with respect to certain mortgage indebtedness
(the "HGP Office Building Mortgage") in the amount of $2,352 on HGP's corporate
office building and related equipment located in Norton Shores, Michigan. The
HGP Office Building Mortgage matures in December 2002, bears interest at LIBOR
plus 2.50%, and requires monthly debt service payments of approximately $23.
On October 11, 2001, HGP announced that it was in default under two loans with
an aggregate principal balance of $45,500 secured by six of its other outlet
centers. Such defaults do not constitute defaults under the HGP Monroe Mortgage
Loan or the HGP Office Building Mortgage nor did they constitute a default under
the HGP Secured Credit Facility. No claims have been made under our guarantees
with respect to the HGP Monroe Mortgage Loan or the HGP Office Building
Mortgage. HGP is a publicly traded company that was formed in connection with
our merger with Horizon Group, Inc. in June 1998.
On January 11, 2002, we sold the Hagerstown Center to the Prime/Estein Venture.
In connection with the sale, the Prime/Estein Venture assumed $46,862 of
mortgage indebtedness; however, our guarantee of such indebtedness remains in
place. See Note 3 - "Property Dispositions" of Notes to Consolidated Financial
Statements for additional information.
On July 26, 2002, we sold the Bridge Properties to the PFP Venture. In
connection with the sale, we guaranteed FRIT (i) a 13% return on its $17,236 of
invested capital and (ii) the full return of its invested capital by December
31, 2003. See Note 3 - "Property Dispositions" of Notes to Consolidated
Financial Statements for additional information.
Defaults on Certain Non-recourse Mortgage Indebtedness
During 2001, certain of our subsidiaries suspended regularly scheduled monthly
debt service payments on two non-recourse mortgage loans which were
cross-collateralized by the Jeffersonville II Center and the Conroe Center. At
the time of suspension, these non-recourse mortgage loans were held by New York
Life.
Effective January 1, 2002, New York Life foreclosed on the Conroe Center and its
related assets and liabilities, including $554 of cash and $15,467 of principal
outstanding under the non-recourse mortgage loan, were transferred from our
subsidiary that owned the Conroe Center to New York Life. No gain or loss was
recorded in connection with the foreclosure action. The foreclosure of the
Conroe Center did not have a material impact on our results of operations or
financial condition because during 2001 all excess cash flow from the operations
of the Conroe Center was utilized for debt service on its non-recourse mortgage
loan.
Effective July 18, 2002, New York Life sold its interest in the Jeffersonville
II Center loan. On August 13, 2002, we transferred our ownership interest in the
Jeffersonville II Center to New York Life's successor. As of June 30, 2002, the
carrying value of the Jeffersonville II Center was $3,719 and the balance of the
non-recourse mortgage indebtedness was $17,768 and unpaid accrued interest was
$2,492. As a result of the transfer of our ownership interest in the
Jeffersonville II Center, we expect to record a non-recurring gain for the
difference between the carrying value of the Jeffersonville II Center and its
related net assets and the outstanding loan balance, including accrued interest,
during the third quarter of 2002. The transfer of our ownership interest in the
Jeffersonville II Center did not have a material impact on our results of
operations or financial condition because during 2001 and through the transfer
date in 2002, all excess cash flow from the operations of the Jeffersonville II
Center was utilized for debt service on its non-recourse mortgage loan.
During August of 2002, certain of our subsidiaries suspended regularly scheduled
monthly debt service payments on two non-recourse mortgage loans aggregating
$40,829 as of June 30, 2002. These non-recourse mortgage loans which are held by
John Hancock Life Insurance Company ("John Hancock") are cross-collateralized by
Prime Outlets at Vero Beach (the "Vero Beach Center"), located in Vero Beach,
Florida, and Prime Outlets at Woodbury (the "Woodbury Center"), located in
Woodbury, Minnesota (collectively, the "John Hancock Properties"). John Hancock
has commenced foreclosure proceedings with regard to the Vero Beach Center.
Additionally, we are currently negotiating a transfer of our ownership interest
in the Woodbury Center to John Hancock.
During the second quarter of 2002, we incurred a provision for asset impairment
of $12,200 to adjust the carrying values of the John Hancock Properties to their
estimated fair value in accordance with the provisions of FAS No. 144.
Foreclosure on the Vero Beach Center and transfer of our ownership interest in
the Woodbury Center are not expected to have a material impact on our results of
operations or financial condition because during 2002, all excess cash flow from
the operations of the John Hancock Properties has been utilized for debt service
on their non-recourse mortgage loans.
Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated
Partnerships
Two mortgage loans related to projects in which we, through subsidiaries,
indirectly own joint venture interests have matured and are in default. The
mortgage loans, at the time of default, were (i) a $10,389 first mortgage loan
on Phase I of the Bellport Outlet Center, held by Union Labor Life Insurance
Company ("Union Labor"); and (ii) a $13,338 first mortgage loan on Oxnard
Factory Outlet, an outlet center located in Oxnard, California, held by Fru-Con.
Through an affiliate we hold a 50% ownership interest in the partnership that
owns Phase I of the Bellport Outlet Center. Fru-Con and we are each 50% partners
in the partnership that owns the Oxnard Factory Outlet.
Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center and a
receiver was appointed March 27, 2001 by the court involved in the foreclosure
action. Effective May 1, 2001, a manager hired by the receiver began managing
and leasing Phase I of the Bellport Outlet Center. We continue to negotiate the
terms of a transfer of our ownership interest in Oxnard Factory Outlet to
Fru-Con. We do not manage or lease Oxnard Factory Outlet.
We do not believe either of these mortgage loans is recourse to us. It is
possible, however, that either or both of the respective lenders will file a
lawsuit seeking to collect amounts due under the loan. If such an action is
brought, the outcome, and our ultimate liability, if any, cannot be predicted at
this time.
We are currently not receiving, directly or indirectly, any cash flow from
Oxnard Factory Outlet and were not receiving any cash flow from Phase I of the
Bellport Outlet Center prior to the loss of control of such project. We account
for our ownership interests in Phase I of the Bellport Outlet Center and the
Oxnard Factory Outlet in accordance with the equity method of accounting. As of
June 30, 2002, the carrying value of our investment in these properties was $0.
Interest Rate Risk
In the ordinary course of business, we are exposed to the impact of interest
rate changes and, therefore, employ established policies and procedures to
manage our exposure to interest rate changes. We use a mix of fixed and variable
rate debt to (i) limit the impact of interest rate changes on our results from
operations and cash flows and (ii) lower our overall borrowing costs.
In certain circumstances, we use derivative financial instruments to manage
interest rate risk associated with our variable rate debt. In such cases, we
purchase interest rate protection agreements, such as caps, which are designated
as hedges for underlying variable rate debt obligations. We do not hold
derivative financial instruments for trading purposes.
The interest rate caps specifically limit our interest costs with an upper limit
on the underlying interest rate index. The cost of such contracts are included
in deferred charges and are being amortized as a component of interest expense
over the life of the contracts. Amounts earned from interest rate protection
contracts, if any, are recorded as a reduction of interest expense. We are
exposed to credit losses in the event of counterparty nonperformance, but do not
anticipate any such losses based on the creditworthiness of the counterparties.
Although derivative financial instruments are an important component of our
interest rate management program, their incremental effect on interest expense
for the three and six months ended June 30, 2002 and 2001 was not material.
Dividends and Distributions
To qualify as a REIT for federal income tax purposes, we are required to pay
distributions to our common and preferred shareholders of at least 90% of our
REIT taxable income in addition to satisfying other requirements. Although we
intend to make necessary distributions to remain qualified as a REIT under the
Code, we also intend to retain such amounts as we consider necessary from time
to time for our capital and liquidity needs.
Our current policy is to pay distributions only to the extent necessary to
maintain our status as a REIT for federal income tax purposes. Based on our
current federal income tax projections for 2002, we do not expect to pay any
distributions on our Senior Preferred Stock, Series B Convertible Preferred
Stock, common stock or common units of limited partnership interest in the
Operating Partnership during 2002. As of August 15, 2002, we will be eleven
quarters in arrears with respect to preferred stock distributions.
Under the terms of the Mezzanine Loan, we are prohibited from paying dividends
or distributions except to the extent necessary to maintain our status as a
REIT. In addition, we may not make distributions to our common shareholders or
our holders of common units of limited partnership interests in the Operating
Partnership unless we are current with respect to distributions to our preferred
shareholders. As of June 30, 2002, unpaid dividends for the period beginning on
November 16, 1999 through June 30, 2002 on the Series A Senior Preferred Stock
and Series B Convertible Preferred Stock aggregated $15,848 and $43,666,
respectively. The annualized dividends on our 2,300,000 shares of Series A
Senior Preferred Stock and 7,828,125 shares of Series B Convertible Preferred
Stock outstanding as of June 30, 2002 are $6,037 ($2.625 per share) and $16,635
($2.125 per share), respectively.
Development Activities
During the six months ended June 30, 2002, we did not engage in any development
activities other than (i) post-opening work related to Prime Outlets of Puerto
Rico, which opened in July, 2000, and (ii) certain consulting activities in
Europe.
New Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board issued FAS No. 144.
FAS No. 144 supercedes FAS No. 121, however it retains the fundamental
provisions of that statement related to the recognition and measurement of the
impairment of long-lived assets to be "held and used." In addition, FAS No. 144
provides more guidance on estimating cash flows when performing a recoverability
test, requires that a long-lived asset to be disposed of other than by sale
(e.g., abandoned) be classified as "held and used" until it is disposed of, and
established more restrictive criteria to classify an asset as "held for sale."
FAS No. 144 is effective for fiscal years beginning after December 15, 2001.
Effective January 1, 2002 we adopted FAS No. 144. In accordance with the
requirements of FAS No. 144, we have classified the operating results, including
gains and losses related to disposition, for those properties either disposed of
or classified as assets held for sale during 2002 as discontinued operations in
the accompanying Consolidated Statements of Operations for all periods
presented. See Note 2 - "New Accounting Pronouncements" and "2002 Sales
Transactions" and "2002 Foreclosure Sale" in Note 3 - "Property Dispositions" of
Notes to Consolidated Financial Statements for additional information.
Funds from Operations
Industry analysts generally consider funds from operations ("FFO"), as defined
by the National Association of Real Estate Investment Trusts ("NAREIT"), an
alternative measure of performance of an equity REIT. In 1991, NAREIT adopted
its definition of FFO. This definition was clarified in 1995, 1999 and 2002. FFO
is currently defined by NAREIT as net income or loss (computed in accordance
with GAAP), excluding gains or losses from provisions for asset impairment and
sales of depreciable operating property, plus depreciation and amortization
(other than amortization of deferred financing costs and depreciation of
non-real estate assets) and after adjustment for unconsolidated partnerships and
joint ventures and discontinued operations. FFO includes non-recurring events,
except for those that are defined as "extraordinary items" in accordance with
GAAP. FFO excludes the earnings impact of "cumulative effects of accounting
changes" as defined by GAAP. Effective January 1, 2002, FFO related to assets
held for sale, sold or otherwise transferred and included in results of
discontinued operations (in accordance with the requirements of FAS No. 144)
should continue to be included in FFO.
We believe that FFO is an important and widely used measure of the operating
performance of REITs, which provides a relevant basis for comparison to other
REITs. Therefore, FFO is presented to assist investors in analyzing our
performance. Our FFO is not comparable to FFO reported by other REITs that do
not define the term using the current NAREIT definition or that interpret the
current NAREIT definition differently than we do. Therefore, we caution that the
calculation of FFO may vary from entity to entity and, as such the presentation
of FFO by us may not be comparable to other similarly titled measures of other
reporting companies. We believe that to facilitate a clear understanding of our
operating results, FFO should be examined in conjunction with net income
determined in accordance with GAAP. FFO does not represent cash generated from
operating activities in accordance with GAAP and should not be considered as an
alternative to net income as an indication of our performance or to cash flows
as a measure of liquidity or ability to make distributions.
TABLE 5 provides a reconciliation of income (loss) from continuing operations
before allocations to minority interests and preferred shareholders to FFO for
the three and six months ended June 30, 2002 and 2001. FFO decreased $4,875, or
68.4%, to $2,256 for the three months ended June 30, 2002 from $7,131 for the
same period in 2001. FFO decreased $5,211, or 36.1%, to $9,219 for the six
months ended June 30, 2002 from $14,430 for the same period in 2001.
The decrease in FFO for the three and six months ended June 30, 2002 compared to
the same periods in 2001 is primarily due to (i) a loss in net operating income,
partially offset by interest expense savings, resulting from dispositions of
certain properties during the comparable periods, (ii) reduced occupancy in our
portfolio during the 2002 periods, (iii) economic changes in rental rates and
(iv) the aforementioned non-recurring charge of $3,000 recorded during the
second quarter of 2002.
The following operating properties were disposed of during 2001 and through June
30, 2002:
Property Name Date of Disposition
------------- -------------------
Northgate Plaza February 2, 2001
Silverthorne Center March 16, 2001
New River Center (i) May 8, 2001
Conroe Center January 1, 2002
Hagerstown Center (ii) January 11, 2002
Edinburgh Center April 1, 2002
Bellport Outlet Center (iii) April 19, 2002
Western Plaza June 17, 2002
Notes:
(i) Prior to its disposition, we owned 50% of this property through
a joint venture partnership and accounted for our ownership
interest in accordance with the equity method of accounting.
(ii) We sold a 70% ownership interest in this property and now own
30% of this property through a joint venture partnership.
Commencing on the date of disposition, we account for our
remaining ownership interest in accordance with the equity
method of accounting.
(iii) Prior to its disposition, we owned 51% of this property through
a joint venture partnership and accounted for our ownership
interest in accordance with the equity method of accounting.
Table 5--Funds from Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ----------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations
before minority interests $ (20,530) $ (6,047) $ (24,981) $(10,406)
Adjustments:
Loss (gain) on sale of real estate 703 180 703 (552)
Provision for asset impairment 12,200 - 12,200 -
Depreciation and amortization 9,531 10,480 19,710 21,001
Non-real estate depreciation and amortization (538) (562) (1,092) (1,130)
Other items:
Unconsolidated joint venture adjustments 963 1,033 1,746 1,588
Discontinued operations (9,656) (1,196) (3,524) (2,468)
Discontinued operations - loss on disposition 8,167 - 997 -
Discontinued operations - depreciation
and amortization 1,416 3,243 3,460 6,397
--------- -------- --------- --------
FFO before allocations to minority interests
and preferred shareholders $ 2,256 $ 7,131 $ 9,219 $ 14,430
========= ======== ========= ========
Other Data:
Net cash provided by operating activities $ 5,268 $ 11,575 $ 9,936 $ 18,160
Net cash provided by (used in) investing activities 9,095 (8,397) 19,671 (4,520)
Net cash used in financing activities (15,252) (4,794) (31,943) (18,473)
====================================================================================================================================
Item 3. Quantitative and Qualitative Disclosures of Market Risk
Market Risk Sensitivity
We are subject to various market risks and uncertainties, including, but not
limited to, the effects of current and future economic conditions, and the
resulting impact on our revenue; the effects of increases in market interest
rates from current levels (see below); the risks associated with existing
vacancy rates or potential increases in vacancy rates because of, among other
factors, tenant bankruptcies and store closures, and the resulting impact on our
revenue; and risks associated with refinancing our current debt obligations or
obtaining new financing under terms less favorable than we have experienced in
prior periods.
Interest Rate Risk
In the ordinary course of business, we are exposed to the impact of interest
rate changes. We employs established policies and procedures to manage our
exposure to interest rate changes. See "Interest Rate Risk" of Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations for additional information. We use a mix of fixed and variable rate
debt to (i) limit the impact of interest rate changes on our results from
operations and cash flows and (ii) to manage our overall borrowing costs.
The following table provides a summary of principal cash flows, excluding (i)
unamortized debt premiums of $9,639, (ii) mortgage indebtedness of $111,059 on
the Bridge Loan Properties and (iii) non-recourse mortgage indebtedness of
$17,768 on Prime Outlets at Jeffersonville II (see "2002 Sales Transactions" and
"Defaults on Certain Non-recourse Mortgage Indebtedness" of Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations for additional information), and related contractual interest rates
by fiscal year of maturity. Variable interest rates are based on the
weighted-average rates of the portfolio at June 30, 2002.
- ------------------------------------------------------------------------------------------------------------------------------------
Year of Maturity
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter Total
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed Rate:
Principal $ 4,574 $ 343,704 $ 7,022 $ 51,147 $ 121,931 $ 102,876 $ 631,254
Average interest rate 7.14% 7.77% 7.20% 7.92% 8.76% 7.54% 7.96%
Variable Rate:
Principal $ 20,201 $ 34,761 $ 54,962
Average interest rate 14.58% 9.56% 11.41%
====================================================================================================================================
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Except as described below, neither we nor any of our properties are currently
subject to any material litigation nor, to our knowledge, is any material or
other litigation threatened against us, other than routine litigation arising in
the ordinary course of business, some of which is expected to be covered by
liability insurance and all of which collectively is not expected to have a
material adverse effect on our consolidated financial statements.
Dinnerware Plus Holdings, Inc., which operates under the trade name Mikasa, and
affiliates (collectively, the "Mikasa Plaintiffs") filed a lawsuit against the
Company and various affiliates in Superior Court of New Jersey on March 29,
2001. The Mikasa Plaintiffs assert a number of causes of action in which they
allege that the Company and its affiliates breached various provisions in the
Mikasa Plaintiffs' leases and, as a result, overcharged the Mikasa Plaintiffs
for common area maintenance and similar charges ("CAM") and promotion fund
charges at various centers where the Mikasa Plaintiffs are tenants. The Company
filed a motion to dismiss the complaint on behalf of the Company's affiliates
who entered into leases with the Mikasa Plaintiffs, based on lack of
jurisdiction. The motion was granted and the Mikasa Plaintiffs filed a motion
for reconsideration, which was denied. The remaining defendants, Prime Retail,
Inc. and Prime Retail, L.P., answered the complaint.
Subsequent efforts in the litigation were deferred while the parties attempted
to resolve their claims through negotiation. As a result of these efforts, the
parties entered into a settlement agreement on August 7, 2002 pursuant to which
the lawsuit is to be dismissed with prejudice, and all potential claims,
including claims and potential counterclaims for overpayments and underpayments
of various pass-through charges, arising from the litigation are to be released,
with all parties expressly denying liability. Pursuant to the settlement
agreement, the Company will make payments to Mikasa over the next two months
totaling $2,100, and various leases between Mikasa and its affiliates and the
Company will be amended to, among other things, remove the specific provisions
that were the primary basis of the dispute and modify remaining provisions
concerning the collection of pass-through charges. This settlement, including
the related lease modifications, is not expected to have a material impact on
the Company's financial condition or results of operations. The Company
previously accrued a reserve of $2,000 for this matter during the fourth quarter
of 2001, which is included in accounts payable and other liabilities in its
Consolidated Balance Sheet as of June 30, 2002. See "Mikasa Settlement"
contained in "Liquidity and Capital Resources" of Item 2 - "Management's
Discussion of Financial Condition and Results of Operations" for additional
information.
On July 6, 2001, affiliates of the Company brought an action in the Circuit
Court for Washington County, Maryland against Melru Corporation, which operates
under the trade name Jones New York, alleging that Melru Corporation owed past
due rent in connection with 43 leases. Melru Corporation, in response to the
collection action filed by certain affiliates of the Company, filed on October
15, 2001 several counterclaims against the Company and its affiliates in which
it alleges that the Company and its affiliates overcharged Melru Corporation for
CAM and promotion fund charges. In addition, Melru Corporation alleges that an
affiliate of the Company fraudulently induced Melru Corporation to enter into a
lease and that another affiliate violated its lease with Melru Corporation by
failing to maintain required occupancy levels at the shopping center it owns.
The Company and its affiliates have not filed their response to the Melru
Corporation counterclaims.
Subsequent efforts in the litigation were deferred while the parties attempted
to resolve their claims through negotiation. As a result of these efforts, the
parties have entered into a settlement agreement on August 13, 2002 pursuant to
which the lawsuit and any related litigation matters are to be dismissed, or in
one instance satisfied, all potential claims and counterclaims are to be
released, including claims for overpayments and underpayments of various
pass-through charges, and with all parties expressly denying liability. Pursuant
to the settlement agreement, no payments will be made to Melru Corporation by
the Company, Melru Corporation will satisfy a prior judgment against it, and the
leases between Melru Corporation and the Company will be modified, including to
provide for extensions of the terms of a limited number of existing leases and
the early termination of occupancy at one center. The Company does not expect
this settlement, including the related lease modifications, will have a material
impact on the Company's financial condition or results of operations.
Additionally, numerous other tenants in the Company's portfolio have clauses in
their leases pursuant to which they may claim under various circumstances that
they were not required to pay some or all of the pass-through charges. Such
claims, if asserted and found meritorious, could have a material effect upon the
Company's financial condition. Determination of whether liability would exist to
the Company from these claims would depend on interpretation of various lease
clauses within a tenant's lease and all of the other leases at each center
collectively at any given point in time. To date, Designs Inc., Brown Group
Retail, Inc. and The Gap, Inc. have made allegations or have indicated to the
Company that they are considering making allegations that their leases do not
require them to pay some or all of the pass-through charges. The Company is in
discussion with these tenants and is working to resolve any disputes with them,
including wherever possible, satisfactorily modifying or eliminating clauses
that are the source of the continuing disputes. During the second quarter of
2002, the Company recorded a non-recurring charge to establish a reserve in the
amount of $3,000 for resolution of these matters, in addition to the Mikasa
matter discussed above. This reserve, which is included in accounts payable and
other liabilities in the Company's Consolidated Balance Sheet as of June 30,
2002, was estimated in accordance with the Company's established policies and
procedures with respect to loss contingencies (see "Critical Accounting Policies
and Estimates" of Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional information.) Based on
presently available information, the Company believes it is probable this
reserve will be utilized over the next several years in connection with the
resolution of claims relating to the pass-through and promotional fund
provisions contained in its leases. The Company cautions, however, that given
the inherent uncertainties of litigation and the complexities associated with a
large number of leases and other factual questions at issue, actual costs may
vary from its estimate.
The Company and its affiliates were defendants in a lawsuit filed by Accrued
Financial Services ("AFS") on August 10, 1999 in the Circuit Court for Baltimore
City. The lawsuit was removed to United States District Court for the District
of Maryland (the "U.S. District Court") on August 20, 1999. AFS claimed that
certain tenants had assigned to AFS their rights to make claims under leases
such tenants had with affiliates of the Company and alleged that the Company and
its affiliates overcharged such tenants for common area maintenance charges and
promotion fund charges. The U.S. District Court dismissed the lawsuit on June
19, 2000. AFS appealed the U.S. District Court's decision to the United States
Court of Appeals for the Fourth Circuit. Briefs were submitted and oral argument
before a panel of judges of the United States Court of Appeals for the Fourth
Circuit was held on October 30, 2001, during which the panel of judges requested
further briefing of certain issues. On July 29, 2002, the Fourth Circuit denied
the appeal of AFS. The Company believes that it has acted properly and will
continue to defend this lawsuit vigorously if AFS continues with additional
appeal efforts. The outcome of this lawsuit if additional appeal efforts of AFS
are successful, and the ultimate liability of the defendants, if any, cannot be
predicted in that case at this time.
Affiliates of the Company routinely file lawsuits to collect past due rent from,
and to evict, tenants which have defaulted under their leases. There are
currently dozens of such actions pending. In addition to defending against the
Company's affiliates' claims and eviction actions, some tenants file
counterclaims against the Company's affiliates. A tenant who files such a
counterclaim typically claims that the Company's affiliate which owns the outlet
center in question has defaulted under the tenant's lease, has overcharged the
tenant for CAM and promotion fund charges, or has failed to maintain or market
the outlet center in question as required by the lease. In spite of such
counterclaims, the Company's affiliates usually elect to continue to pursue
their collection or eviction actions. Although the Company and its affiliates
believe that such counterclaims are typically without merit and defend against
them vigorously, the outcome of all such counterclaims, and thus the liability,
if any, of the Company and its affiliates, cannot be predicted at this time.
Since October 13, 2000 there have been eight complaints filed in the United
States District Court for the District of Maryland against the Company and five
individual defendants. The five individual defendants are Glenn D. Reschke, the
President, Chief Executive Officer and Chairman of the Board of Directors of the
Company; William H. Carpenter, Jr., the former President and Chief Operating
Officer and a former director of the Company; Abraham Rosenthal, the former
Chief Executive Officer and a former director of the Company; Michael W.
Reschke, the former Chairman of the Board and a current director of the Company;
and Robert P. Mulreaney, the former Executive Vice President - Chief Financial
Officer and Treasurer of the Company. The complaints have been brought by
alleged stockholders of the Company, individually and purportedly as class
actions on behalf of all other stockholders of the Company. The complaints
allege that the individual defendants made statements about the Company that
were in violation of the federal securities laws. The complaints seek
unspecified damages and other relief. Lead plaintiffs and lead counsel were
subsequently appointed. A consolidated amended complaint captioned The Marsh
Group, et al. v. Prime Retail, Inc., et al. dated May 21, 2001 was filed. The
Company and the individual defendants filed a motion to dismiss the complaint,
which was granted on November 8, 2001. The plaintiffs appealed the matter to the
Fourth Circuit. Briefs were filed and oral arguments were held on June 4, 2002
but a decision has not yet been issued by the Fourth Circuit. The Company
believes that the claims are without merit and will defend vigorously against
the appeal. The outcome of this lawsuit, and the ultimate liability of the
defendants, if any, cannot be predicted at this time.
Several entities (the "eOutlets Plaintiffs") have filed or stated an intention
to file lawsuits (collectively, the "eOutlets Lawsuits") against the Company and
its affiliates. The eOutlets Plaintiffs seek to hold the Company and its
affiliates responsible under various legal theories for liabilities incurred by
primeoutlets.com, inc., also known as eOutlets, including the theories that the
Company guaranteed the obligations of eOutlets and that the Company was the
"alter-ego" of eOutlets. primeoutlets.com inc. is also a defendant in some, but
not all, of the eOutlets Lawsuits. The Company believes that it is not liable to
the eOutlets Plaintiffs as there was no privity of contract between it and the
various eOutlets Plaintiffs. The Company will continue to defend all eOutlets
Lawsuits vigorously. primeoutlets.com inc. filed for protection under Chapter 7
of the United States Bankruptcy Code during November 2000 under the name
E-Outlets Resolution Corp. The trustee for E-Outlets Resolution Corp. has
notified the Company that he is contemplating an action against the Company and
the Operating Partnership in which he may assert that E-Outlets Resolution Corp.
was the "alter-ego" of the Company and the Operating Partnership and that, as a
result, the Company and the Operating Partnership are liable for the debts of
E-Outlets Resolution Corp. If the trustee pursues such an action, the Company
and the Operating Partnership will defend themselves vigorously. In the case
captioned Convergys Customer Management Group, Inc. v. Prime Retail, Inc. and
primeoutlets.com inc. in the Court of Common Pleas for Hamilton County (Ohio),
the Company prevailed in a motion to dismiss the plaintiff's claim that the
Company was liable for primeoutlets.com inc.'s breach of contract based on the
doctrine of piercing the corporate veil. The outcome of the eOutlets Lawsuits,
and the ultimate liability of the Company in connection with the eOutlets
Lawsuits and related claims, if any, cannot be predicted at this time.
In May, 2001, the Company, through affiliates, filed suit against Fru-Con
Construction, Inc. ("FCC"), the lender on Prime Outlets at New River ("New
River") as a result of FCC's foreclosure of New River due to the maturation of
the loan. The Company and its affiliates allege that they have been damaged due
to FCC's failure to dispose of the collateral in a commercially reasonable
manner. The Company, through affiliates, has also filed suit against The Fru-Con
Projects, Inc. ("Fru-Con"), a partner in Arizona Factory Shops Partnership and
an affiliate of FCC. The Company and its affiliates allege that Fru-Con failed
to use reasonable efforts to assist in obtaining refinancing. Fru-Con has claims
pending against the Company and its affiliates, as part of the same suit,
alleging that the Company and its affiliates breached their contract with
Fru-Con by not allowing Fru-Con to participate in an outlet project in Sedona,
Arizona (the "Sedona Project") and breached a management and leasing agreement
by managing and leasing the Sedona Project. The Company and its affiliates will
vigorously defend the claims filed against them and prosecute the claims they
filed. However, the ultimate outcome of the suit, including the liability, if
any, of the Company and its affiliates, cannot be predicted at this time.
The New York Stock Exchange ("NYSE") and the Securities and Exchange Commission
have notified the Company that they are reviewing transactions in the stock of
the Company prior to the Company's January 18, 2000 press release concerning
financial matters. The initial notice of such review was received by the Company
on March 13, 2000.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
The Company is currently in arrears in the payment of distributions on its 10.5%
Series A Senior Cumulative Preferred Stock ("Series A Senior Preferred Stock")
and 8.5% Series B Cumulative Participating Convertible Preferred Stock ("Series
B Convertible Preferred Stock"). As of June 30, 2002, the aggregate arrearage on
the Series A Senior Preferred Stock and the Series B Convertible Preferred Stock
was $15,848 and $43,666, respectively.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Shareholders' Meeting held on June 11, 2002, certain
matters were submitted to the vote of the holders of the Company's Common Stock.
The following summarizes these matters and the results of the voting.
(a) The two nominees proposed for Director by the Company were
elected. The votes cast for the nominees were as follows:
Name For Against
---- --- -------
Governor James R. Thompson 40,032,248 1,307,130
Marvin S. Traub 40,032,248 1,307,130
(b) The proposal to ratify the selection of Ernst & Young LLP as
the independent auditors of the Company for the year ending
December 31, 2002 was approved. The votes cast with respect to
the proposal were as follows:
For Against Abstain
--- ------- -------
41,150,383 158,058 30,937
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included in this Form 10-Q:
Exhibit 10.1 Second Amended and Restated Guaranty and Indemnity
Agreement dated July 10, 2002 by and among Horizon
Group Properties, Inc., Horizon Group Properties,
L.P., Prime Retail, Inc. and Prime Retail, L.P.
Exhibit 10.2 Guaranty Agreement dated July 10, 2002 by Horizon
Group Properties, Inc., Horizon Group Properties,
L.P. and Prime Retail, L.P., collectively, as
guarantors, in favor of Beal Bank, S.S.B.
Exhibit 10.3 Real Estate Sale Agreement, dated January 9, 2002, by
and between (i) Shasta Outlet Center Limited
Partnership, The Prime Outlets at Calhoun Limited
Partnership, Carolina Factory Shops Limited
Partnership, Latham Factory Stores Limited
Partnership, The Prime Outlets at Lee Limited
Partnership, Prime Lee Development Limited
Partnership and Buckeye Factory Shops Limited
Partnership, collectively, as sellers and (ii) PWG
Capital, LLC, as purchaser (incorporated by reference
to the Exhibit 10.1 to the Company's Current Report
on Form 8-K dated August 8, 2002).
Exhibit 10.4 First Amendment to Real Estate Sale Agreement dated
March 27, 2002 (incorporated by reference to the
Exhibit 10.2 to the Company's Current Report on Form
8-K dated August 8, 2002).
Exhibit 10.5 Second Amendment to Real Estate Sale Agreement dated
April 5, 2002 (incorporated by reference to the
Exhibit 10.3 to the Company's Current Report on Form
8-K dated August 8, 2002).
Exhibit 10.6 Amendment to Employment Agreement, dated June 6,
2002, by and between Prime Retail, Inc. and R. Kelvin
Antill.
Exhibit 10.7 Second Amendment to Employment Agreement, dated June
6, 2002, by and between Prime Retail, Inc. and Robert
A. Brvenik.
Exhibit 10.8 Amendment to Employment Agreement, dated June 6,
2002, by and between Prime Retail, Inc. and David G.
Phillips.
Exhibit 10.9 Amendment to Employment Agreement, dated June 6,
2002, by and between Prime Retail, Inc. and Glenn D.
Reschke.
Exhibit 99.1 Certification by Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification by Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K:
On August 8, 2002, we filed a Current Report on Form 8-K relating to
our sale of six outlet centers (collectively, the "Bridge Loan
Properties") on July 26, 2002. The filing included unaudited pro forma
financial information pursuant to Article 11 of Regulation S-X and
certain exhibits, including (i) the real estate sale agreement related
to the Bridge L oan Properties and the first and second amendments to
the real estate sale agreement and (ii) the Press Release issued July
31, 2002 regarding completion of the sale of the Bridge Loan
Properties.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIME RETAIL, INC.
Registrant
Date: August 14, 2002 /s/ Robert A. Brvenik
--------------- -------------------------------------
Robert A. Brvenik
Executive Vice President,
Chief Financial Officer and Treasurer