United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended September 30, 2002
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the Transition Period From ----------- to
------------
Commission file number 001-13301
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PRIME RETAIL, INC.
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(Exact name of registrant as specified in its charter)
Maryland 38-2559212
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 East Pratt Street
Nineteenth Floor
Baltimore, Maryland 21202
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(Address of principal executive offices) (Zip Code)
(410) 234-0782
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address, or former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of November 14, 2002, the issuer had outstanding 43,577,916 shares of Common
Stock, $.01 par value per share.
Prime Retail, Inc.
Form 10-Q
INDEX
PART I: FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2001................................................ 1
Consolidated Statements of Operations for the three and nine
months ended September 30, 2002 and 2001......................... 2
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 and 2001......................... 3
Notes to the Consolidated Financial Statements..................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 20
Item 3. Quantitative and Qualitative Disclosures of Market Risk........ 44
Item 4. Controls and Procedures........................................ 45
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 46
Item 2. Changes in Securities.......................................... 47
Item 3. Defaults Upon Senior Securities................................ 48
Item 4. Submission of Matters to a Vote of Security Holders............ 48
Item 5. Other Information.............................................. 48
Item 6. Exhibits and Reports on Form 8-K............................... 48
Signatures.............................................................. 49
Certifications of Chief Executive Officer and Chief Financial Officer... 50
PRIME RETAIL, INC.
Unaudited Consolidated Balance Sheets
(Amounts in thousands, except share information)
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September 30, December 31,
2002 2001
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Assets
Investment in rental property:
Land $ 115,087 $ 148,463
Buildings and improvements 829,614 1,208,568
Property under development 3,450 3,352
Furniture and equipment 14,006 15,225
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962,157 1,375,608
Accumulated depreciation (233,787) (258,124)
--------- -----------
728,370 1,117,484
Cash and cash equivalents 6,039 7,537
Restricted cash 36,764 37,885
Accounts receivable, net 2,916 5,017
Deferred charges, net 5,571 11,789
Assets held for sale 33,022 54,628
Investment in partnerships 33,151 24,539
Other assets 5,276 3,629
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Total assets $ 851,109 $ 1,262,508
========= ===========
Liabilities and Shareholders' Equity
Bonds payable $ 23,008 $ 31,975
Notes payable 621,748 867,414
Mortgage debt on assets held for sale 21,306 58,078
Accrued interest 4,449 7,643
Real estate taxes payable 8,777 8,091
Accounts payable and other liabilities 25,905 31,380
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Total liabilities 705,193 1,004,581
Minority interests 1,487 1,487
Shareholders' equity:
Shares of preferred stock, 24,315,000 shares authorized:
10.5% Series A Senior Cumulative Preferred Stock,
$0.01 par value (liquidation preference of $74,858),
2,300,000 shares issued and outstanding 23 23
8.5% Series B Cumulative Participating Convertible
Preferred Stock, $0.01 par value (liquidation preference
of $243,528), 7,828,125 shares issued and outstanding 78 78
Shares of common stock, 150,000,000 shares authorized:
Common stock, $0.01 par value, 43,577,916 shares
issued and outstanding 436 436
Additional paid-in capital 709,373 709,373
Distributions in excess of earnings (565,481) (453,470)
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Total shareholders' equity 144,429 256,440
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Total liabilities and shareholders' equity $ 851,109 $ 1,262,508
========= ===========
====================================================================================================================================
See accompanying notes to financial statements.
PRIME RETAIL, INC.
Unaudited Consolidated Statements of Operations
(Amounts in thousands, except per share information)
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Three Months Ended September 30, Nine Months Ended September 30,
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2002 2001 2002 2001
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Revenues
Base rents $ 22,645 $ 25,246 $ 69,480 $ 78,297
Percentage rents 1,036 1,014 2,624 2,137
Tenant reimbursements 11,486 11,085 34,443 36,854
Interest and other 3,684 2,120 8,005 6,535
--------- --------- ---------- ----------
Total revenues 38,851 39,465 114,552 123,823
Expenses
Property operating 10,579 8,744 30,476 28,706
Real estate taxes 3,607 3,429 10,979 10,912
Depreciation and amortization 9,129 9,601 27,067 28,836
Corporate general and administrative 3,366 4,192 9,662 10,845
Interest 14,155 16,377 43,871 50,699
Other charges 1,477 6,230 7,803 12,775
Provision for asset impairment 81,619 63,026 81,619 63,026
--------- --------- ---------- ----------
Total expenses 123,932 111,599 211,477 205,799
--------- --------- ---------- ----------
Loss before gain (loss) on sale of real
estate and minority interests (85,081) (72,134) (96,925) (81,976)
Gain (loss) on sale of real estate, net - - (703) 552
--------- --------- ---------- ----------
Loss from continuing operations
before minority interests (85,081) (72,134) (97,628) (81,424)
Loss allocated to minority interests - - - 401
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Loss from continuing operations (85,081) (72,134) (97,628) (81,023)
Discontinued operations, including net gains of $17,120
and $16,123 on dispositions in 2002 periods, respectively 1,575 (1,118) (14,383) (4,702)
--------- --------- ---------- ----------
Net loss (83,506) (73,252) (112,011) (85,725)
Income allocated to preferred shareholders (5,668) (5,668) (17,004) (17,004)
--------- --------- ---------- ----------
Net loss applicable to common shares $ (89,174) $ (78,920) $ (129,015) $ (102,729)
========= ========= ========== ==========
Basic and diluted earnings per common share:
Loss from continuing operations $ (2.09) $ (1.78) $ (2.63) $ (2.25)
Discontinued operations 0.04 (0.03) (0.33) (0.11)
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Net loss $ (2.05) $ (1.81) $ (2.96) $ (2.36)
========= ========= ========== ==========
Weighted-average common shares
outstanding - basic and diluted 43,578 43,578 43,578 43,578
========= ========= ========== ==========
====================================================================================================================================
See accompanying notes to financial statements.
PRIME RETAIL, INC.
Unaudited Consolidated Statements of Cash Flows
(Amounts in thousands)
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Nine Months Ended September 30, 2002 2001
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Operating Activities
Loss from continuing operations $ (97,628) $ (81,023)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss allocated to minority interests - (401)
(Gain) loss on sale of real estate, net 703 (552)
Depreciation and amortization 27,067 28,836
Amortization of deferred financing costs 4,188 5,020
Amortization of debt premiums (1,506) (1,438)
Provision for uncollectible accounts receivable 2,235 6,650
Provision for asset impairment 81,619 63,026
Discontinued operations 4,135 9,931
Changes in operating assets and liabilities:
Increase in accounts receivable (585) (4,992)
(Increase) decrease in restricted cash (3,851) 11,260
(Increase) decrease in other assets (2,048) 14
Decrease in accounts payable and other liabilities (764) (19,315)
Increase in real estate taxes payable 2,628 762
Increase in accrued interest 233 2,545
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Net cash provided by operating activities 16,426 20,323
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Investing Activities
Additions to investment in rental property (4,127) (17,723)
Proceeds from repayment of notes receivable, net - 8,286
Proceeds from sales of operating properties and land 22,320 9,503
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Net cash provided by investing activities 18,193 66
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Financing Activities
Proceeds from notes payable - 16,899
Principal repayments on notes payable (36,117) (41,187)
Contributions from minority interests - 400
Deferred costs - (585)
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Net cash used in financing activities (36,117) (24,473)
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Decrease in cash and cash equivalents (1,498) (4,084)
Cash and cash equivalents at beginning of period 7,537 8,906
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Cash and cash equivalents at end of period $ 6,039 $ 4,822
========= =========
====================================================================================================================================
See accompanying notes to financial statements.
PRIME RETAIL, INC.
Unaudited Consolidated Statements of Cash Flows (continued)
(Amounts in thousands)
Supplemental Disclosure of Non-cash Investing and Financing Activities
The following assets and liabilities were disposed in connection with the
disposition of properties during the periods indicated:
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Nine Months Ended September 30, 2002 2001
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Book value of net assets disposed $ 271,891 $ 32,815
Notes payable paid (147,845) (24,044)
Notes payable assumed by joint venture (46,862) -
Notes payable transferred to lender (58,410) -
Discontinued operations - net gain on disposals (16,123) -
Discontinued operations - provision for impairment 12,200 -
Investment in unconsolidated partnerships 6,766 -
Loss on sale of real estate 703 732
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Cash received, net $ 22,320 $ 9,503
========= ========
====================================================================================================================================
See accompanying notes to financial statements.
Prime Retail, Inc.
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands, except share and unit information)
Note 1 -- Interim Financial Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
("GAAP") for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments, consisting only of recurring
accruals, considered necessary for a fair presentation have been included.
Operating results for such interim periods are not necessarily indicative of the
results that may be expected for a full fiscal year. For further information,
refer to the consolidated financial statements and footnotes included in Prime
Retail, Inc.'s (the "Company") Annual Report on Form 10-K for the year ended
December 31, 2001.
Unless the context otherwise requires, all references to "we," "us," "our" or
the Company herein mean Prime Retail, Inc. and those entities owned or
controlled by Prime Retail, Inc., including Prime Retail, L.P. (the "Operating
Partnership").
The consolidated financial statements include the accounts of the Company, the
Operating Partnership and the partnerships in which we have operational control.
Profits and losses are allocated in accordance with the terms of the agreement
of limited partnership of the Operating Partnership. The preparation of
financial statements in conformity with GAAP requires us to make estimates and
assumptions that affect the (i) reported amounts of assets and liabilities, (ii)
disclosure of contingent liabilities at the date of the financial statements and
(iii) reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Investments in partnerships in which we do not have operational control are
accounted for under the equity method of accounting. Income (loss) applicable to
minority interests and common shares as presented in the consolidated statements
of operations is allocated based on income (loss) before minority interests
after income allocated to preferred shareholders.
Significant inter-company accounts and transactions have been eliminated in
consolidation. Certain prior period financial information has been reclassified
to conform to the current period presentation.
Note 2 - New Accounting Pronouncements
In October, 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("FAS") No. 144, "Accounting for Impairment or
Disposal of Long-lived Assets." FAS No. 144 supercedes FAS No. 121, however it
retains the fundamental provisions of that statement related to the recognition
and measurement of the impairment of long-lived assets to be "held and used." In
addition, FAS No. 144 provides more guidance on estimating cash flows when
performing a recoverability test, requires that a long-lived asset to be
disposed of other than by sale (e.g., abandoned) be classified as "held and
used" until it is disposed of, and established more restrictive criteria to
classify an asset as "held for sale." FAS No. 144 is effective for fiscal years
beginning after December 15, 2001.
Effective January 1, 2002 we adopted FAS No. 144. In accordance with the
requirements of FAS No. 144, we have classified the operating results, including
gains and losses related to disposition, for those properties either disposed of
or classified as assets held for sale during 2002 as discontinued operations in
the accompanying Consolidated Statements of Operations for all periods
presented. See Note 3 - "Property Dispositions" for additional information.
Below is a summary of the results of operations of these properties through
their dates of disposition:
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Three Months Ended September 30, Nine Months Ended September 30,
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2002 2001 2002 2001
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Revenues
Base rents $ 2,438 $ 9,956 $ 15,530 $ 29,142
Percentage rents 62 269 853 599
Tenant reimbursements 1,666 4,181 7,907 14,141
Interest and other 172 889 1,476 2,276
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Total revenues 4,338 15,295 25,766 46,158
Expenses
Property operating 1,441 3,273 6,809 11,090
Real estate taxes 293 1,364 2,188 4,247
Depreciation and amortization 661 4,165 5,893 12,328
Interest 1,901 6,464 12,720 19,919
Provision for impairment 15,557 - 27,757 -
Other charges 30 1,147 905 3,276
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Total expenses 19,883 16,413 56,272 50,860
------- ------- -------- --------
Loss before loss on sale of real estate, net (15,545) (1,118) (30,506) (4,702)
Gain on sale of real estate, net 17,120 - 16,123 -
------- ------- -------- --------
Discontinued operations $ 1,575 $(1,118) $(14,383) $ (4,702)
======= ======= ======== ========
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Note 3 - Property Dispositions
2002 Sales Transactions
On January 11, 2002, we completed the sale of Prime Outlets at Hagerstown (the
"Hagerstown Center"), an outlet center located in Hagerstown, Maryland
consisting of approximately 487,000 square feet of gross leasable area ("GLA"),
for $80,500 to an existing joint venture partnership (the "Prime/Estein
Venture") between one of our affiliates and an affiliate of Estein & Associates
USA, Ltd. ("Estein"), a real estate investment company. Estein and we have 70%
and 30% ownership interests, respectively, in the Prime/Estein Venture. In
connection with the sale transaction, the Prime/Estein Venture assumed first
mortgage indebtedness of $46,862 on the Hagerstown Center (the "Assumed Mortgage
Indebtedness"); however, our guarantee of the Assumed Mortgage Indebtedness
remains in place.
The net cash proceeds from the sale, including the release of certain funds held
in escrow, were $12,113 after (i) a pay-down of $11,052 of mortgage indebtedness
on the Hagerstown Center and (ii) closing costs. The net proceeds from this sale
were used to prepay $11,647 of principal outstanding under a mezzanine loan (the
"Mezzanine Loan") obtained in December 2000 from FRIT PRT Lending LLC and
Greenwich Capital Financial Products, Inc. (collectively, the "Mezzanine
Lender") in the original amount of $90,000. See Note 4 - "Bonds and Notes
Payable" for additional information.
The operating results of the Hagerstown Center through the date of disposition
are classified as discontinued operations in the accompanying Consolidated
Statements of Operations for all periods presented in accordance with the
requirements of FAS No. 144. In connection with the sale of the Hagerstown
Center, we recorded a gain on the sale of real estate of $16,795, also included
in discontinued operations, during the first quarter of 2002. At December 31,
2001, the carrying value of the Hagerstown Center of $54,628 was classified as
assets held for sale in the accompanying Consolidated Balance Sheet. Effective
on the date of disposition, we have accounted for our 30% ownership interest in
the Hagerstown Center in accordance with the equity method of accounting.
We are obligated to refinance the Assumed Mortgage Indebtedness on behalf of the
Prime/Estein Venture on or before June 1, 2004, the date on which such
indebtedness matures. Additionally, the Prime/Estein Venture's cost of the
Assumed Mortgage Indebtedness and any refinancing of it are fixed at an annual
rate of 7.75% for a period of 10 years. If the actual cost of such indebtedness
should exceed 7.75% at any time during the ten-year period, we will be obligated
to pay the difference to the Prime/Estein Venture. However, if the actual cost
of such indebtedness is less than 7.75% at any time during the ten-year period,
the Prime/Estein Venture will be obligated to pay the difference to us. The
actual cost of the Assumed Mortgage Indebtedness is currently 30-day LIBOR plus
1.50%, or 3.32% as of September 30, 2002.
On April 1, 2002, we completed the sale of Prime Outlets at Edinburgh (the
"Edinburgh Center"), an outlet center located in Edinburgh, Indiana consisting
of approximately 305,000 square feet of GLA and additional undeveloped land. The
Edinburgh Center was sold to CPG Partners, L.P. for cash consideration of
$27,000.
The net cash proceeds from the sale were $9,551, after (i) repayment in full of
$16,317 of existing first mortgage indebtedness on the Edinburgh Center and (ii)
closing costs and fees. We used these net proceeds to make a mandatory principal
payment of $9,178 on the Mezzanine Loan.
The operating results of the Edinburgh Center through the date of disposition
are classified as discontinued operations in the accompanying Consolidated
Statements of Operations for all periods presented in accordance with the
requirements of FAS No. 144. During the first quarter of 2002, we recorded a
loss on the sale of real estate of $9,625, also included in discontinued
operations, related to the write-down of the carrying value of the Edinburgh
Center to its net realizable value based on the terms of the sale agreement.
On April 19, 2002, we completed the sale of Phases II and III of the Bellport
Outlet Center (the "Bellport Outlet Center"), an outlet center located in
Bellport, New York consisting of approximately 197,000 square feet of GLA. We
had a 51% ownership interest in the joint venture partnership that owned the
Bellport Outlet Center. The Bellport Outlet Center was sold to Sunrise Station,
L.L.C., an affiliate of one of our joint venture partners, for cash
consideration of $6,500. At closing, recourse first mortgage indebtedness of
$5,500, which was scheduled to mature on May 1, 2002, was repaid in full. To
date we have received $522 of cash proceeds from the sale, which were used to
make a mandatory principal payment of $502 on the Mezzanine Loan.
We accounted for our ownership interest in the Bellport Outlet Center in
accordance with the equity method of accounting through the date of disposition.
In connection with the sale of the Bellport Outlet Center, we recorded a loss on
the sale of real estate of $703 during the second quarter of 2002.
On June 17, 2002, we completed the sale of the Shops at Western Plaza ("Western
Plaza"), a community center located in Knoxville, Tennessee, consisting of
205,000 square feet of GLA. Western Plaza was sold to WP General Partnership for
cash consideration of $9,500. The net cash proceeds from the sale were $688,
after (i) repayment of $9,467 (of which $2,467 was scheduled to mature on
October 31, 2002) of existing recourse mortgage indebtedness on Western Plaza,
(ii) payment of closing costs and fees and (iii) release of certain escrowed
funds. We used these net proceeds to make a mandatory principal payment of $661
on the Mezzanine Loan.
The operating results of Western Plaza through the date of disposition are
classified as discontinued operations in the accompanying Consolidated
Statements of Operations for all periods presented in accordance with the
requirements of FAS No. 144. In connection with the sale of Western Plaza, we
recorded a gain on the sale of real estate of $2,122, also included in
discontinued operations, during the second quarter of 2002.
On July 26, 2002, we completed the sale of six outlet centers for aggregate
consideration of $118,650 to wholly-owned affiliates of PFP Venture LLC, a joint
venture (the "PFP Venture") (i) 29.8% owned by PWG Prime Holdings LLC ("PWG")
and (ii) 70.2% owned by FP Investment LLC ("FP"). FP is a joint venture between
FRIT PRT Bridge Acquisition LLC ("FRIT"), a Delaware limited liability company,
and us. Through FP, FRIT and we indirectly have ownership interests of 50.4% and
19.8%, respectively, in the PFP Venture.
The six outlet centers (collectively, the "Bridge Loan Properties") that were
sold are located in Anderson, California; Calhoun, Georgia; Gaffney, South
Carolina; Latham, New York; Lee, Massachusetts and Lodi, Ohio and contain an
aggregate of 1,304,000 square feet of GLA. Under the terms of the transaction,
for a five-year period, we will continue to manage, market and lease the Bridge
Loan Properties for a fee on behalf of the PFP Venture.
In connection with the sale, $111,009 of recourse mortgage indebtedness (the
"Bridge Loan") on the Bridge Loan Properties was repaid in full. Our net cash
proceeds of $6,762 from the sale were contributed to FP. FP used these proceeds
along with a $17,236 capital contribution from FRIT to purchase a 70.2%
ownership interest in the PFP Venture. Financing for the PFP Venture's purchase
of the Bridge Loan Properties was provided by GMAC Mortgage in the form of a
$90,000, four-year, non-recourse mortgage loan, of which $74,000 bears interest
at LIBOR plus 4.25% (minimum of 7.00% for the first three years and 7.25%
thereafter) and $16,000 bears interest at LIBOR plus 4.50% (minimum of 7.75%).
Furthermore, subject to satisfaction of certain conditions, the PFP Venture may
extend the maturity of the $74,000 portion of the loan for one additional year
with the minimum interest rate continuing at 7.25%.
Pursuant to certain venture-related documents, we have guaranteed FRIT (i) a 13%
return on its $17,236 of invested capital, and (ii) the full return of its
invested capital (the "Mandatory Redemption Obligation") by December 31, 2003.
Our guarantee is secured by junior security interests in collateral similar to
that pledged to the Mezzanine Lender. FP is entitled to receive a 15% preferred
return on its invested capital of $23,998 (approximately $3,600 on an annual
basis) in the PFP Venture. Then PWG is entitled to receive a 15% preferred
return on its invested capital of $10,200. From FP's preferred return, FRIT
first receives its 13% return on its invested capital with the remainder applied
towards the payment of the Mandatory Redemption Obligation. Upon satisfaction of
the Mandatory Redemption Obligation, we will be entitled to FP's preferred
return until such time as we have been repaid in full our invested capital,
together with a 13% return on our invested capital. Thereafter, FRIT and we will
share any cash flow due to FP on an approximate equal basis. As of September 30,
2002, the Mandatory Redemption Obligation was $17,005.
FRIT, indirectly through affiliates, was the owner of the Bridge Loan that was
repaid in full in connection with the sale of the Bridge Loan Properties and is
a 50% participant in the Mezzanine Loan, which had an outstanding principal
balance of $33,195 as of September 30, 2002.
The operating results of the Bridge Loan Properties through the date of
disposition are classified as discontinued operations in the accompanying
Consolidated Statements of Operations for all periods presented in accordance
with the requirements of FAS No. 144. During the second quarter of 2002, we
recorded a loss on the sale of real estate of $10,289, also included in
discontinued operations, related to the write-down of the carrying value of the
Bridge Loan Properties to their net realizable value based on the terms of the
sale agreement.
Assets Held for Sale
On October 30, 2002, we completed the sale of Melrose Place, a community center
located in Knoxville, Tennessee, consisting of 27,000 square feet of GLA.
Melrose Place was sold to Melrose Place Tennessee General Partnership for cash
consideration of $2,500. The net cash proceeds from the sale were $555, after
(i) repayment of $1,935 of existing recourse mortgage indebtedness on Melrose
Place, (ii) payment of closing costs and fees and (iii) release of certain
escrowed funds. We used these net proceeds to make a mandatory principal payment
of $533 on the Mezzanine Loan.
The operating results of Melrose Place are classified as discontinued operations
in the accompanying Consolidated Statements of Operations for all periods
presented in accordance with the requirements of FAS No. 144. As of September
30, 2002, the carrying value of Melrose Place of $1,527 was classified as assets
held for sale and its related indebtedness of $1,935 was classified as mortgage
debt on assets held for sale in the accompanying Consolidated Balance Sheet.
We have entered into an agreement to sell (i) Prime Outlets of Puerto Rico, an
outlet center located in Barceloneta, Puerto Rico, consisting of 176,000 square
feet of GLA and (ii) certain adjacent parcels of land being developed for
non-outlet retail use (collectively, the "Puerto Rico Property"). Although we
expect to close on the sale of the Puerto Rico Property during the fourth
quarter of 2002, there can be no assurance that the transaction will be
consummated.
As a result, the operating results of the Puerto Rico Property are classified as
discontinued operations in the accompanying Consolidated Statements of
Operations for all periods presented in accordance with the requirements of FAS
No. 144. During the third quarter of 2002, we recorded an impairment loss of
$15,557, also included in discontinued operations, related to the write-down of
the carrying value of the Puerto Rico Property to its estimated net realizable
value based on the terms of the sale agreement. As of September 30, 2002, the
carrying value of the Puerto Rico Property of $31,495 was classified as assets
held for sale and its related indebtedness of $19,371 was classified as mortgage
debt on assets held for sale in the accompanying Consolidated Balance Sheet.
2002 Foreclosure Sales
During 2001, certain of our subsidiaries suspended regularly scheduled monthly
debt service payments on two non-recourse mortgage loans held by New York Life
Insurance Company ("New York Life") at the time of the suspension. These
non-recourse mortgage loans were cross-defaulted and cross-collateralized by
Prime Outlets at Jeffersonville II (the "Jeffersonville II Center"), located in
Jeffersonville, Ohio and Prime Outlets at Conroe (the "Conroe Center"), located
in Conroe, Texas.
Effective January 1, 2002, New York Life foreclosed on the Conroe Center and its
related assets and liabilities, including $554 of cash and $15,467 of principal
outstanding under the non-recourse mortgage loan, were transferred from our
subsidiary that owned the Conroe Center to New York Life. The foreclosure of the
Conroe Center did not have a material impact on our results of operations or
financial condition because during 2001 all excess cash flow from the operations
of the Conroe Center was utilized for debt service on its non-recourse mortgage
loan.
Effective July 18, 2002, New York Life sold its interest in the Jeffersonville
II Center loan. On August 13, 2002, we transferred our ownership interest in the
Jeffersonville II Center to New York Life's successor. As a result of the
transfer of our ownership interest in the Jeffersonville II Center, we recorded
a non-recurring gain of $17,120 during the third quarter of 2002, representing
the difference between our carrying value of the Jeffersonville II Center and
its related net assets and the outstanding loan balance, including accrued
interest, as of the date of transfer. The transfer of our ownership interest in
the Jeffersonville II Center did not have a material impact on our results of
operations or financial condition because during 2001 and through the transfer
date in 2002, all excess cash flow from the operations of the Jeffersonville II
Center was utilized for debt service on its non-recourse mortgage loan.
The operating results, including related gains or losses on disposition, of the
Conroe Center and the Jeffersonville II Center are classified as discontinued
operations in the accompanying Consolidated Statements of Operations through
their respective disposition dates for all periods presented in accordance with
the requirements of FAS No. 144. No gain or loss was recorded in connection with
the foreclosure of the Conroe Center. See Note 4 - "Bonds and Notes Payable" for
additional information.
During August of 2002, certain of our subsidiaries suspended regularly scheduled
monthly debt service payments on two non-recourse mortgage loans which were
cross-collateralized by Prime Outlets at Vero Beach (the "Vero Beach Center"),
located in Vero Beach, Florida, and Prime Outlets at Woodbury (the "Woodbury
Center"), located in Woodbury, Minnesota (collectively, the "John Hancock
Properties"). These non-recourse mortgage loans were held by John Hancock Life
Insurance Company ("John Hancock").
During the second quarter of 2002, we incurred a provision for asset impairment
of $12,200 to adjust the carrying values of the Vero Beach Center to its
estimated fair value in accordance with the provisions of FAS No. 144. Effective
September 9, 2002, John Hancock foreclosed on the Vero Beach Center and its
related assets and liabilities, including $24,497 of principal outstanding under
the non-recourse mortgage loan, were transferred to John Hancock. Additionally,
we are currently negotiating a transfer of our ownership interest in the
Woodbury Center to John Hancock. Foreclosure on the Vero Beach Center and the
expected transfer of our ownership interest in the Woodbury Center are not
expected to have a material impact on our results of operations or financial
condition because during 2002, all excess cash flow from the operations of the
John Hancock Properties has been utilized for debt service on their non-recourse
mortgage loans. The carrying value of the Woodbury Center approximates $12,346
as of September 30, 2002. Such value is exceeded by the balance of the
associated non-recourse mortgage indebtedness of $16,331 as of September 30,
2002. If we were to transfer our ownership interest in the Woodbury Center to
John Hancock, we would record a non-recurring gain for the difference between
the carrying value of the Woodbury Center and its related net assets and the
outstanding loan balance.
The operating results of the Vero Beach Center are classified as discontinued
operations in the accompanying Consolidated Statements of Operations through the
disposition date for all periods presented in accordance with the requirements
of FAS No. 144. No gain or loss was recorded in connection with the foreclosure
of the Vero Beach Center. See Note 4 - "Bonds and Notes Payable" for additional
information.
2001 Sales Transactions
On February 2, 2001, we sold Northgate Plaza, a community center located in
Lombard, Illinois to Arbor Northgate, Inc. for aggregate consideration of
$7,050. After the repayment of mortgage indebtedness of $5,966 and closing
costs, the net cash proceeds from the Northgate Plaza sale were $510. On March
16, 2001, we sold Prime Outlets at Silverthorne (the "Silverthorne Center"), an
outlet center located in Silverthorne, Colorado consisting of approximately
257,000 square feet of GLA, to Silverthorne Factory Stores, LLC for aggregate
consideration of $29,000. The net cash proceeds from the sale of the
Silverthorne Center were $8,993, after the repayment of certain mortgage
indebtedness of $18,078 on Prime Outlets at Lebanon (see below) and closing
costs and fees. The net proceeds from these sales were used to prepay an
aggregate $9,137 of principal outstanding under the Mezzanine Loan in accordance
with the terms of such loan agreement. In connection with these sales, we
recorded an aggregate gain on the sale of real estate of $732 during the first
quarter of 2001. The operating results of these properties are included in our
results of operations through the respective dates of disposition.
Prior to its sale, the Silverthorne Center, was one of fifteen properties
securing a first mortgage and expansion loan (the "First Mortgage and Expansion
Loan"). In conjunction with the sale of the Silverthorne Center, we substituted
Prime Outlets at Lebanon for the Silverthorne Center in the cross-collateralized
asset pool securing the First Mortgage and Expansion Loan pursuant to the
collateral substitution provisions contained in the loan agreement. In
conjunction with adding Prime Outlets at Lebanon as security for the First
Mortgage and Expansion Loan, we repaid, as discussed above, certain mortgage
indebtedness on Prime Outlets at Lebanon of $18,078.
On November 27, 2001, we sold certain land located in Camarillo, California for
aggregate consideration of $7,150. The net cash proceeds from the sale,
including the release of certain funds held in escrow, were $1,859, after the
repayment of certain mortgage indebtedness of $6,227 and closing costs and fees.
The net proceeds from this sale were used to prepay $1,787 of principal
outstanding under the Mezzanine Loan. In connection with this sale, we recorded
a loss on the sale of real estate of $1,615 during the fourth quarter of 2001.
2001 Foreclosure Sale
On May 8, 2001, Prime Outlets at New River (the "New River Center"), an outlet
center located in New River, Arizona, was sold through foreclosure. Affiliates
of Fru-Con Development Corporation and us each own 50% of the partnership, which
owned the New River Center. We accounted for our ownership interest in the New
River Center in accordance with the equity method of accounting through the date
of foreclosure sale. In connection with the foreclosure sale of the New River
Center, we recorded a loss on the sale of real estate of $180 during the second
quarter of 2001.
Note 4 - Bonds and Notes Payable
Going Concern
We are required to make, in addition to scheduled monthly amortization,
mandatory principal payments on our Mezzanine Loan in an aggregate amount of at
least $12,000 with net proceeds from asset dispositions or other capital
transactions by December 31, 2002 (see "Mezzanine Loan Modifications" for
additional information).
We have entered into an agreement for the sale of the Puerto Rico Property,
which we currently expect to close during the fourth quarter of 2002, and
therefore, have classified its net carrying value to assets held for sale in the
accompanying Consolidated Balance Sheet as of September 30, 2002 and have
included its results from operations in discontinued operations in the
accompanying Consolidated Statements of Operations for all periods presented
pursuant to the requirements of FAS No. 144 (see Note 3 - "Property
Dispositions" for additional information). The sale of the Puerto Rico Property
is expected to generate estimated net proceeds of approximately $12,000, after
repayment of existing mortgage indebtedness and closing costs, sufficient to
satisfy the required December 2002 mandatory principal repayment amount under
the Mezzanine Loan. However, the sale of the Puerto Rico Property remains
subject to customary closing conditions and, accordingly, there can be no
assurance as to the timing, terms or completion of the proposed sale.
In addition to the proposed sale of the Puerto Rico Property discussed above, we
continue to seek to generate additional liquidity through other asset sales,
financings and other capital raising activities, however, there can be no
assurance that we will be able to complete such transactions within the
specified period or that such transactions, if they should occur, will generate
sufficient proceeds to make required payments under the Mezzanine Loan. Any
failure to satisfy the required mandatory principal payments within the
specified time period or the scheduled monthly principal payments under the
terms of the Mezzanine Loan will constitute a default.
Based on our results for the three months ended June 30, 2002 and September 30,
2002, we are not in compliance with respect to the debt service coverage ratio
under our fixed rate tax-exempt revenue bonds (the "Affected Fixed Rate Bonds")
in the amount of $18,390. As a result of our noncompliance, the holders of the
Affected Fixed Rate Bonds may elect to put such obligations to us at a price
equal to par plus accrued interest. If the holders of the Affected Fixed Rate
Bonds make such an election and we are unable to repay such obligations, certain
cross-default provisions with respect to other debt facilities, including the
Mezzanine Loan may be triggered.
We continue to work with holders of the Affected Fixed Rate Bonds regarding
potential resolution, including forbearance, waiver or amendment with respect to
the applicable provisions. If we are unable to reach satisfactory resolution, we
will look to (i) obtain alternative financing from other financial institutions,
(ii) sell the projects subject to the affected debt or (iii) explore other
possible capital transactions to generate cash to repay the amounts outstanding
under such debt. There can be no assurance that we will obtain satisfactory
resolution with the holders of the Affected Fixed Rate Bonds or that we will be
able to complete asset sales or other capital raising activities sufficient to
repay the amount outstanding under the Affected Fixed Rate Bonds.
As of September 30, 2002, we were in compliance with all financial debt
covenants under our recourse loan agreements other than the Affected Fixed Rate
Bonds. Nevertheless, there can be no assurance that we will remain in compliance
with our financial debt covenants in future periods because our future financial
performance is subject to various risks and uncertainties, including, but not
limited to, the effects of current and future economic conditions, and the
resulting impact on our revenue; the effects of increases in market interest
rates from current levels; the risks associated with existing vacancy rates or
potential increases in vacancy rates because of, among other factors, tenant
bankruptcies and store closures, and the resulting impact on our revenue; risks
associated with litigation, including pending and potential tenant claims with
respect to lease provisions related to their pass-through charges and
promotional fund charges; and risks associated with refinancing our current debt
obligations or obtaining new financing under terms less favorable than we have
experienced in prior periods. See "Defaults on Certain Non-recourse Mortgage
Indebtedness" and "Defaults on Certain Non-recourse Mortgage Indebtedness of
Unconsolidated Partnerships" for additional information.
These above listed conditions raise substantial doubt about our ability to
continue as a going concern. The financial statements contained herein do not
include any adjustment to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.
Mezzanine Loan Modifications
Effective January 31, 2002, we entered into a modification to the original terms
of the Mezzanine Loan obtained in December 2000. The Mezzanine Loan amendment
(the "First Amendment"), among other things, (i) reduced required monthly
principal amortization for the period February 1, 2002 through January 1, 2003
("Year 2") from $1,667 to $800, which could be further reduced to a minimum of
$500 per month under certain limited circumstances, provided no defaults existed
under the Mezzanine Loan and certain other conditions had been satisfied at the
Mezzanine Lender's sole discretion, (ii) required certain mandatory principal
payments from net proceeds from asset sales or other capital transactions
pursuant to the schedule set forth in the second paragraph below and (iii)
reduced the threshold level at which excess cash flow from operations must be
applied to principal pay-downs, primarily resulting from a reduction in the
available working capital reserves. Additionally, the First Amendment (i)
increased the interest rate from LIBOR plus 9.50% to the greater of LIBOR plus
9.75% (rounded up to nearest 0.125%) or 14.75%), (ii) changed the Mezzanine Loan
maturity date from December 31, 2003 to September 30, 2003 and (iii) required a
0.25% fee, which was paid at the time of the modification, on the outstanding
principal balance.
The First Amendment also required additional Year 2 monthly payments of $250
(the "Escrowed Funds") into an escrow account controlled by the Lender. Provided
certain conditions are satisfied, at the Mezzanine Lender's sole discretion, the
Escrowed Funds could be released to us for limited purposes. The Escrowed Funds
not used at the end of each quarter, subject to certain exceptions, may be
applied by the Mezzanine Lender to amortize the Mezzanine Loan. The required
monthly principal amortization of $2,333, at the time commencing on February 1,
2003 through the new maturity date of September 30, 2003 ("Year 3"), was
unchanged.
The First Amendment also required mandatory principal payments with net proceeds
from asset sales, excluding our January 11, 2002 sale of a 70% joint venture
partnership interest in the Hagerstown Center (see Note 3 - "Property
Dispositions" for additional information), or other capital transactions of not
less than (i) $8,906 by May 1, 2002, (ii) $24,406, inclusive of the $8,906, by
July 1, 2002 (subject to extension to October 31, 2002 provided certain
conditions were met to the Lender's satisfaction) and (iii) $25,367, inclusive
of the $24,406, by November 1, 2002. In addition to each mandatory principal
payment, we were also required to pay any interest, including deferred interest,
accrued thereon and the additional fees provided for in the Mezzanine Loan.
On July 1, 2002, the Mezzanine Lender further amended the Mezzanine Loan (the
"Second Amendment") to extend the July 1, 2002 mandatory principal payment due
date to the earlier of (i) August 15, 2002 (the "Extended Date") or (ii) the
occurrence of an event of default under the Mezzanine Loan. Additionally, upon
satisfaction of certain conditions, the Extended Date was automatically extended
again to the earlier of (i) October 31, 2002, (ii) the occurrence of an event of
default under the Mezzanine Loan, or (iii) the closing or termination of certain
asset sales.
Effective November 1, 2002, we entered into an additional modification (the
"Third Amendment") to the terms of the Mezzanine Loan. The Third Amendment (i)
terminated our obligation to make mandatory principal payments with net proceeds
from asset dispositions or other capital transactions on or prior to October 31,
2002 and November 1, 2002, respectively, (ii) requires mandatory principal
payments in an aggregate amount of not less than $12,000 from net proceeds from
asset dispositions or other capital transactions on or before December 31, 2002
and (iii) increases the required monthly principal amortization payment due on
January 1, 2003 from $800 to $2,333. Additionally, the Third Amendment (i)
increases the interest rate from the greater of LIBOR plus 9.50% (rounded up to
nearest 0.125%) or 14.75% to a fixed-rate of 19.75% and (ii) requires a 2%
amendment fee on the outstanding principal balance of the Mezzanine Loan as of
November 1, 2002. Half of the amendment fee was paid at the time of the
modification and half will be payable on December 31, 2002 provided the
Mezzanine Loan has not been repaid in full. If the Mezzanine Loan is repaid in
full by December 31, 2002, the payment of the second half of the amendment fee
will be waived. Any failure to satisfy the mandatory principal payments
requirement or other payments pursuant to the terms of the Mezzanine Loan will
constitute a default.
Debt Service Obligations
Our aggregate indebtedness as adjusted for the terms of the Third Amendment to
the Mezzanine Loan and excluding (i) unamortized debt premiums of $8,468, (ii)
mortgage indebtedness of $1,935 on Melrose Place and (iii) non-recourse mortgage
indebtedness of $16,331 on the Woodbury Center was $639,328 (the "Adjusted
Indebtedness") as of September 30, 2002. The mortgage indebtedness on Melrose
Place was repaid in full in connection with the sale of such property on October
30, 2002. Additionally, we are currently negotiating a transfer of our ownership
interest in the Woodbury Center to John Hancock. See Note 3 - "Property
Dispositions" and "Defaults on Certain Non-recourse Mortgage Indebtedness" for
additional information.
At September 30, 2002 the Adjusted Indebtedness had a weighted-average maturity
of 2.7 years and bore contractual interest at a weighted-average rate of 8.50%
per annum. At September 30, 2002, $619,957, or 97.0%, of the Adjusted
Indebtedness bore interest at fixed rates and $19,371 or 3.0%, of the Adjusted
Indebtedness bore interest at variable rates. In certain cases, we utilize
derivative financial instruments to manage our interest rate risk associated
with variable rate debt.
As of September 30, 2002, our scheduled principal payments for the remainder of
2002 and 2003 for the Adjusted Indebtedness aggregated $17,002 and $380,544,
respectively. The remaining scheduled principal payments for 2002 include (i)
principal amortization aggregating $5,002 (including an aggregate of $2,400 of
scheduled monthly principal payments on the Mezzanine Loan, which may be further
reduced subject to the terms of its modification specified above) and (ii)
mandatory principal payments on the Mezzanine Loan in an aggregate amount of not
less than $12,000 (see "Mezzanine Loan Modifications" for additional
information). The outstanding principal balance of the Mezzanine Loan as of
September 30, 2002 was $33,195. The scheduled principal payments for 2003
include (i) obligations of $338,558 due in respect of a mortgage loan that is
secured by 15 of our properties and matures in November 2003, (ii) $18,795 of
principal payments under the Mezzanine Loan and (iii) an obligation of $19,156
due in respect to a mortgage loan secured by the Puerto Rico Property. We have
entered into an agreement to sell the Puerto Rico Property. See "Assets Held for
Sale" in Note 3 - "Property Dispositions" for additional information.
Guarantees of Indebtedness of Others
On July 15, 2002, Horizon Group Properties, Inc. and its affiliates ("HGP")
announced they had refinanced a secured credit facility (the "HGP Secured Credit
Facility") through a series of new loans aggregating $32,500. Prior to the
refinancing, we were a guarantor under the HGP Credit Facility in the amount of
$10,000. In connection with the refinancing, our guarantee was reduced to a
maximum of $4,000 as security for a $3,000 mortgage loan and a $4,000 mortgage
loan (collectively, the "HGP Monroe Mortgage Loan") secured by HGP's outlet
shopping center located in Monroe, Michigan. The HGP Monroe Mortgage Loan has a
3-year term, bears interest at the prime lending rate plus 2.50% (with a minimum
of 9.90%) and requires monthly interest-only payments. The HGP Monroe Mortgage
Loan may be prepaid without penalty after two years. Our guarantee with respect
to the HGP Monroe Mortgage Loan will be extinguished if the principal amount of
such obligation is reduced to $5,000 or less through repayments.
Additionally, we are a guarantor with respect to certain mortgage indebtedness
(the "HGP Office Building Mortgage") in the amount of $2,311 on HGP's corporate
office building and related equipment located in Norton Shores, Michigan. The
HGP Office Building Mortgage matures in December 2002, bears interest at LIBOR
plus 2.50%, and requires monthly debt service payments of approximately $23.
On October 11, 2001, HGP announced that it was in default under two loans with
an aggregate principal balance of $45,500 secured by six of its other outlet
centers. Such defaults do not constitute defaults under the HGP Monroe Mortgage
Loan or the HGP Office Building Mortgage nor did they constitute a default under
the HGP Secured Credit Facility. No claims have been made under our guarantees
with respect to the HGP Monroe Mortgage Loan or the HGP Office Building
Mortgage. HGP is a publicly traded company that was formed in connection with
our merger with Horizon Group, Inc. in June 1998.
On January 11, 2002, we sold the Hagerstown Center to the Prime/Estein Venture.
In connection with the sale, the Prime/Estein Venture assumed $46,862 of
mortgage indebtedness; however, our guarantee of such indebtedness remains in
place. See Note 3 - "Property Dispositions" for additional information.
On July 26, 2002, we sold the Bridge Properties to the PFP Venture. In
connection with the sale, we guaranteed FRIT (i) a 13% return on its $17,236 of
invested capital and (ii) the full return of its invested capital by December
31, 2003. See Note 3 - "Property Dispositions" for additional information. As of
September 30, 2002, our Mandatory Redemption Obligation with respect to the full
return of FRIT's invested capital was $17,005.
Defaults on Certain Non-recourse Mortgage Indebtedness
During 2001, certain of our subsidiaries suspended regularly scheduled monthly
debt service payments on two non-recourse mortgage loans which were
cross-collateralized by the Jeffersonville II Center and the Conroe Center. At
the time of suspension, these non-recourse mortgage loans were held by New York
Life. Effective January 1, 2002, New York Life foreclosed on the Conroe Center.
Effective July 18, 2002, New York Life sold its interest in the Jeffersonville
II Center loan. On August 13, 2002, we transferred our ownership interest in the
Jeffersonville II Center to New York Life's successor. See "2002 Foreclosure
Sales" of Note 3 - "Property Dispositions" for additional information.
During August of 2002, certain of our subsidiaries suspended regularly scheduled
monthly debt service payments on two non-recourse mortgage loans which were
cross-collateralized by the Vero Beach Center and the Woodbury Center. These
non-recourse mortgage loans were held by John Hancock. Effective September 9,
2002, John Hancock foreclosed on the Vero Beach Center. Additionally, we are
currently negotiating a transfer of our ownership interest in the Woodbury
Center to John Hancock. See "2002 Foreclosure Sales" of Note 3 - "Property
Dispositions" for additional information.
Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated
Partnerships
Two mortgage loans related to projects in which we, through subsidiaries,
indirectly own joint venture interests have matured and are in default. The
mortgage loans, at the time of default, were (i) a $10,389 first mortgage loan
on Phase I of the Bellport Outlet Center, held by Union Labor Life Insurance
Company ("Union Labor"); and (ii) a $13,338 first mortgage loan on Oxnard
Factory Outlet, an outlet center located in Oxnard, California, held by Fru-Con.
Through an affiliate we hold a 50% ownership interest in the partnership that
owns Phase I of the Bellport Outlet Center. Fru-Con and we are each a 50%
partner in the partnership that owns the Oxnard Factory Outlet.
Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center and a
receiver was appointed March 27, 2001 by the court involved in the foreclosure
action. Effective May 1, 2001, a manager hired by the receiver began managing
and leasing Phase I of the Bellport Outlet Center. We continue to negotiate the
terms of a transfer of our ownership interest in Oxnard Factory Outlet to
Fru-Con. We do not manage or lease Oxnard Factory Outlet.
We do not believe either of these mortgage loans is recourse to us. It is
possible, however, that either or both of the respective lenders will file a
lawsuit seeking to collect amounts due under the loan. If such an action is
brought, the outcome, and our ultimate liability, if any, cannot be predicted at
this time.
We are currently not receiving, directly or indirectly, any cash flow from
Oxnard Factory Outlet and were not receiving any cash flow from Phase I of the
Bellport Outlet Center prior to the loss of control of such project. We account
for our ownership interests in Phase I of the Bellport Outlet Center and the
Oxnard Factory Outlet in accordance with the equity method of accounting. As of
September 30, 2002, the carrying value of our investment in these properties was
$0.
Note 5 - Shareholders' Equity
To qualify as a REIT for federal income tax purposes, we are required to pay
distributions to our common and preferred shareholders of at least 90% of our
REIT taxable income in addition to satisfying other requirements. Although we
intend to make necessary distributions to remain qualified as a REIT under the
Code, we also intend to retain such amounts as we consider necessary from time
to time for our capital and liquidity needs.
Our current policy is to pay distributions only to the extent necessary to
maintain our status as a REIT for federal income tax purposes. Based on our
current federal income tax projections for 2002, we do not expect to pay any
distributions on our Senior Preferred Stock, Series B Convertible Preferred
Stock, common stock or common units of limited partnership interest in the
Operating Partnership during 2002. As of September 30, 2002, we were eleven
quarters in arrears with respect to preferred stock distributions.
Under the terms of the Mezzanine Loan, we are prohibited from paying dividends
or distributions except to the extent necessary to maintain our status as a
REIT. In addition, we may not make distributions to our common shareholders or
our holders of common units of limited partnership interests in the Operating
Partnership unless we are current with respect to distributions to our preferred
shareholders. As of September 30, 2002, unpaid dividends for the period
beginning on November 16, 1999 through September 30, 2002 on the Series A Senior
Preferred Stock and Series B Convertible Preferred Stock aggregated $17,358 and
$47,825, respectively. The annualized dividends on our 2,300,000 shares of
Series A Senior Preferred Stock and 7,828,125 shares of Series B Convertible
Preferred Stock outstanding as of September 30, 2002 are $6,037 ($2.625 per
share) and $16,635 ($2.125 per share), respectively.
Note 6 - Special Charges
Provision for Asset Impairment
During the third quarter of 2002, certain events and circumstances occurred,
including changes to our anticipated holding periods, reduced occupancy and
limited leasing success, that indicated that certain of our properties were
impaired on an other than temporary basis. Accordingly, we recorded a provision
for asset impairment aggregating $81,619, representing the write-down of the
carrying value of these properties to their estimated fair values in accordance
with the requirements of FAS 144. As a result, the balance of associated
non-recourse mortgage debt exceeds the carrying value of certain properties by
an aggregate of $25,364 as of September 30, 2002.
Non-Recurring Other Charges
During the second quarter of 2002, we recorded a non-recurring charge in the
amount of $3,000 to establish a reserve for pending and potential tenant claims
with respect to lease provisions related to their pass-through charges and
promotional fund charges. We had previously recorded a non-recurring charge in
the amount of $2,000 to establish a reserve for similar matters during the
fourth quarter of 2001. To date, we have entered into settlement agreements
providing for payments aggregating $2,560, of which $2,000 had been paid as of
September 30, 2002. The remaining reserve of $3,000 is included in accounts
payable and other liabilities in the accompanying Consolidated Balance Sheet as
of September 30, 2002. See Note 7 - "Legal Proceedings" for additional
information.
These reserves were estimated in accordance with our established policies and
procedures with respect to loss contingencies (see "Critical Accounting Policies
and Estimates" of Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional information.) Based on
presently available information, we believe it is probable the remaining reserve
will be utilized over the next several years in connection with the resolution
of further claims relating to the pass-through and promotional fund provisions
contained in our leases. We caution, however, that given the inherent
uncertainties of litigation and the complexities associated with a large number
of leases and other factual questions at issue, actual costs may vary from this
estimate.
Note 7 - Legal Proceedings
Except as described below or previously disclosed by the Company in its
Quarterly Report on Form 10-Q for the period ended June 30, 2002, neither we nor
any of our properties are currently subject to any material litigation nor, to
our knowledge, is any material or other litigation threatened against us, other
than routine litigation arising in the ordinary course of business, some of
which is expected to be covered by liability insurance and all of which
collectively is not expected to have a material adverse effect on our
consolidated financial statements.
On October 3, 2002, the Company entered into a settlement agreement with Brown
Group Retail, Inc., which operates under the trade names Famous Footwear,
Factory Brand Shoes and Naturalizer. The Company does not believe the settlement
will have a material impact on the Company's financial condition or results of
operations. See "Settlement of Tenant Matters" contained in "Liquidity and
Capital Resources" of Item 2 - "Management's Discussion of Financial Condition
and Results of Operations" and Note 6 - "Special Charges" for additional
information.
The Company and its affiliates were defendants in a lawsuit filed by Accrued
Financial Services ("AFS") on August 10, 1999 in the Circuit Court for Baltimore
City. The lawsuit was removed to United States District Court for the District
of Maryland (the "U.S. District Court") on August 20, 1999. AFS claimed that
certain tenants had assigned to AFS their rights to make claims under leases
such tenants had with affiliates of the Company and alleged that the Company and
its affiliates overcharged such tenants for common area maintenance charges and
promotion fund charges. The U.S. District Court dismissed the lawsuit on June
19, 2000. AFS appealed the U.S. District Court's decision to the United States
Court of Appeals for the Fourth Circuit (the "Fourth Circuit"). Argument before
a Fourth Circuit panel of judges was held on October 30, 2001, during which the
panel of judges requested further briefing of certain issues. On July 29, 2002,
the Fourth Circuit denied the appeal of AFS. AFS requested further review by the
same panel of judges as well as all judges of the Fourth Circuit. This request
was denied on October 21, 2002. The Company believes that it has acted properly
and will continue to defend this lawsuit vigorously if AFS petitions the United
States Supreme Court for a writ of certiorari. The outcome of this lawsuit if
additional appeal efforts of AFS are successful, and the ultimate liability of
the defendants, if any, cannot be predicted at this time.
Since October 13, 2000 there have been eight complaints filed in the United
States District Court for the District of Maryland against the Company and five
individual defendants. The five individual defendants are Glenn D. Reschke, the
Chief Executive Officer and Chairman of the Board of Directors of the Company;
William H. Carpenter, Jr., the former President and Chief Operating Officer and
a former director of the Company; Abraham Rosenthal, the former Chief Executive
Officer and a former director of the Company; Michael W. Reschke, the former
Chairman of the Board and a current director of the Company; and Robert P.
Mulreaney, the former Executive Vice President - Chief Financial Officer and
Treasurer of the Company. The complaints were brought by alleged stockholders of
the Company, individually and purportedly as class actions on behalf of other
stockholders of the Company. The complaints alleged that the individual
defendants made statements about the Company that were in violation of the
federal securities laws. The complaints sought unspecified damages and other
relief. Lead plaintiffs and lead counsel were subsequently appointed. A
consolidated amended complaint captioned The Marsh Group, et al. v. Prime
Retail, Inc., et al. dated May 21, 2001 was filed. The Company and the
individual defendants filed a motion to dismiss the complaint, which was granted
on November 8, 2001. The plaintiffs appealed the matter to the Fourth Circuit.
Briefs were filed and oral arguments were held on June 4, 2002. On September 3,
2002 the Fourth Circuit affirmed the dismissal. Plaintiffs have agreed not to
seek further review of the dismissal.
Several entities (the "eOutlets Plaintiffs") have filed or stated an intention
to file lawsuits (collectively, the "eOutlets Lawsuits") against the Company and
its affiliates. The eOutlets Plaintiffs seek to hold the Company and its
affiliates responsible under various legal theories for liabilities incurred by
primeoutlets.com, inc., also known as eOutlets, including the theories that the
Company guaranteed the obligations of eOutlets and that the Company was the
"alter-ego" of eOutlets. primeoutlets.com inc. is also a defendant in some, but
not all, of the eOutlets Lawsuits. The Company believes that it is not liable to
the eOutlets Plaintiffs as there was no privity of contract between it and the
various eOutlets Plaintiffs. The Company will continue to defend all eOutlets
Lawsuits vigorously. primeoutlets.com inc. filed for protection under Chapter 7
of the United States Bankruptcy Code during November 2000 under the name
E-Outlets Resolution Corp. On November 5, 2002 the Chapter 7 Bankruptcy trustee
of E-Outlets Resolution Corp. filed suit against the Company, an affiliate, and
eOutlets' directors. The claims include alter ego, piercing the corporate veil,
improper preference payments, and other claims against the entities, and breach
of fiduciary duty and similar claims against the individual defendants. The
Company, on its own behalf and on behalf of its affiliates and the individual
defendants, intend to defend themselves vigorously. In the case captioned
Convergys Customer Management Group, Inc. v. Prime Retail, Inc. and
primeoutlets.com inc. in the Court of Common Pleas for Hamilton County (Ohio),
the Company prevailed in a motion to dismiss the plaintiff's claim that the
Company was liable for primeoutlets.com inc.'s breach of contract based on the
doctrine of piercing the corporate veil. In the case captioned J. Walter
Thompson v. Prime Retail, Inc. et al., in the Circuit Court for Wayne County
(Michigan) the plaintiff alleged that the Company and Operating Partnership were
the alter ego of primeoutlets.com inc., that the corporate veil should be
pierced, that it had a direct contract with the Company and Operating
Partnership, and that the Company and Operating Partnership committed "silent
fraud". The court dismissed the alter ego and piercing the corporate veil
claims. Trial for the remaining claims is scheduled for February of 2003. The
outcome of the eOutlets Lawsuits, and the ultimate liability of the Company in
connection with the eOutlets Lawsuits and related claims, if any, cannot be
predicted at this time.
In May, 2001, the Company, through affiliates, filed suit against Fru-Con
Construction, Inc. ("FCC"), the lender on Prime Outlets at New River ("New
River") as a result of FCC's foreclosure of New River due to the maturation of
the loan. The Company and its affiliates allege that they have been damaged
because of FCC's failure to dispose of the collateral in a commercially
reasonable manner and that FCC's use of the mark "Prime Outlets" violated United
States trademark law. The Company, through affiliates, has also filed suit
against The Fru-Con Projects, Inc. ("Fru-Con"), a partner in Arizona Factory
Shops Partnership and an affiliate of FCC. The Company and its affiliates allege
that Fru-Con failed to use reasonable efforts to assist in obtaining
refinancing. In addition, as part of the same action, Fru-Con filed suit against
the Company and affiliates. On October 25, 2002, following a motion for summary
judgment, the court dismissed several claims made by Fru-Con, limiting Fru-Con's
counter suit to the following claims: the Company and affiliates are improperly
withholding partnership funds; prospective tenants at New River were improperly
diverted to an outlet project in Sedona, Arizona (the "Sedona Project"); and the
Company and affiliates breached its contract with Fru-Con by not allowing it to
participate in the Sedona Project. The Company and its affiliates will
vigorously defend the claims filed against them and prosecute the claims they
filed. However, the ultimate outcome of the suit, including the liability, if
any, of the Company and its affiliates, cannot be predicted at this time.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Amounts in thousands, except share, unit and square foot information)
Introduction
The following discussion and analysis of the consolidated financial condition
and results of operations of the Company should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Quarterly Report on Form 10-Q. The operations of Prime Retail, Inc. (the
"Company") are conducted through Prime Retail, L.P. (the "Operating
Partnership"). The Company controls the Operating Partnership as its sole
general partner and is dependent upon the distributions or other payments from
the Operating Partnership to meet its financial obligations. Historical results
and percentage relationships set forth herein are not necessarily indicative of
future operations.
Cautionary Statements
The following discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other sections of this Quarterly Report
on Form 10-Q contain certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, which reflect management's
current views with respect to future events and financial performance. These
statements are subject to potential risks and uncertainties and, therefore,
actual results may differ materially. Such forward-looking statements are
subject to certain risks and uncertainties, including, but not limited to, the
following:
o the risk associated with our high level of leverage and our ability to
refinance such indebtedness as it becomes due;
o the risks associated with our current non-compliance with respect to the
debt service coverage ratio on fixed rate tax-exempt bonds in the amount
of $18,390 and the resulting ability of the affected bondholders to
elect to put such obligations to us, as well as the risk that
cross-default provisions under other indebtedness may be triggered,
including our mezzanine loan (the "Mezzanine Loan") in the amount of
$33,195 as of September 30, 2002;
o the risk that we or one or more of our subsidiaries are not able to
satisfy scheduled debt service obligations or will not remain in
compliance with respect to loan covenants under other indebtedness;
including obligations to make mandatory principal payments or monthly
debt service payments as required under the terms of the Mezzanine Loan;
o the risk of material adverse effects of future events, including tenant
bankruptcies or abandonments, on our financial performance;
o the risk related to the retail industry in which our outlet centers
compete, including the potential adverse impact of external factors,
such as inflation, consumer confidence, unemployment rates and consumer
tastes and preferences;
o the risk associated with tenant bankruptcies, store closings and the
non-payment by tenants of contractual rents and additional rents;
o the risk associated with our potential asset sales;
o the risk of potential increases in market interest rates from current
levels;
o the risk associated with real estate ownership, such as the potential
adverse impact of changes in local economic climate on the revenues and
the value of our properties;
o the risk associated with litigation, including pending and potential
tenant claims with regard to various lease provisions related to their
pass-through charges and promotion fund charges;
o the risk associated with competition from other outlet centers and value
discount centers, including existing or those that could be built in the
future; and
o The risks associated with changes in the distribution channels of outlet
center merchandise.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Quarterly Report on Form 10-Q. These Consolidated Financial
Statements and Notes thereto have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of such
statements requires us to make certain estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and the related
disclosure of contingent liabilities. We evaluate our estimates on an on-going
basis; including those related to (i) revenue recognition, (ii) provisions for
bad debt on accounts receivable, (iii) potential impairment of the carrying
value of rental properties held for use, (iv) capitalization and depreciation of
significant renovations and improvements and (v) contingencies for debt
guarantees and litigation. We base our estimates on historical trends and
certain other assumptions that we believe are reasonable under the particular
circumstances. These estimates ultimately form the basis for making judgments
about the carrying values of our assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
To assist you in understanding our financial condition and results from
operations, we have identified our critical accounting policies and discussed
them below. These accounting policies are most important to the portrayal of our
financial condition and results from operations, either because of the
significance of the financial statement items to which they relate or because
they require our management's most difficult, subjective or complex judgments.
Bad Debt
We regularly review our accounts receivable to determine an appropriate range
for the allowance for doubtful accounts based upon the impact of economic
conditions on ours tenants' ability to pay, past collection experience and such
other factors, including tenant disputes, which, in our judgment, deserve
current recognition. In turn, a provision for bad debt is charged against the
allowance to maintain the allowance level within this range. If the financial
condition of our tenants were to deteriorate, resulting in impairment in their
ability to make payments due under their leases, additional allowances may be
required.
Impairment of Rental Property
We monitor our portfolio of properties (the "Properties") for indicators of
impairment on an on-going basis. We record a provision for impairment when we
believe certain events and circumstances have occurred which indicate that the
carrying value of our Properties might have experienced a decline in value that
is other than temporary. Impairment losses are measured as the difference
between the carrying value and the estimated fair value for assets held in the
portfolio. For assets held for sale, impairment is measured as the difference
between the carrying value and fair value, less costs to dispose. Fair value is
based on either actual sales price, when available, or estimated cash flows
discounted at a risk-adjusted rate of return. Adverse changes in market
conditions or deterioration in the operating results of our outlet centers and
other rental properties could result in losses or an inability to recover the
current carrying value of such assets. Such potential losses or the inability to
recover the current carrying value may not be reflected in our Properties'
current carrying value, thereby possibly requiring an impairment charge in the
future.
Contingencies
We are subject to proceedings, lawsuits, and other claims related to various
matters (see Note 7 - "Legal Proceedings" for additional information).
Additionally, we have guaranteed certain indebtedness of others (see Note 4 -
"Bonds and Notes Payable" for additional information). With respect to these
contingencies, we assess the likelihood of any adverse judgments or outcomes to
these matters and, if appropriate, potential ranges of probable losses. A
determination of the amount of reserves required, if any, for these
contingencies are made after careful analysis of each individual issue. Future
reserves may be required due to (i) new developments or changes to the approach
in which we deal with each matter or (ii) if unasserted claims arise.
Outlet Center Portfolio
Portfolio GLA and Occupancy
As a fully integrated real estate company, we provide finance, leasing,
accounting, marketing and management services for all of our Properties,
including those in which we have an ownership interest through joint venture
partnerships. At September 30, 2002, our portfolio of properties consisted of
(i) 40 outlet centers aggregating 11,253,000 square feet of gross leasable area
("GLA") (including 2,789,000 square feet of GLA at nine outlet centers owned
through joint venture partnerships). This compares to 45 properties totaling
12,670,000 square feet of GLA at December 31, 2001 and September 30, 2001. The
changes in our outlet center GLA are due to certain sales transactions during
2002 and 2001, including the loss of four outlet centers through foreclosure
sale or transfer of our ownership interest. See Note 3 - "Property Dispositions"
for additional information.
Our outlet center portfolio was 89.1% and 89.4% occupied as of September 30,
2002 and 2001, respectively. For the three and nine months ended September 30,
2002, weighted-average occupancy in our outlet center portfolio was 88.1% and
87.4%, respectively, compared to 89.6% and 89.7%, respectively, for the same
periods in 2001. The decline in the 2002 weighted-average and period-end
occupancies was primarily attributable to certain tenant bankruptcies,
abandonments and store closings.
The table set forth below summarizes certain information with respect to our
outlet centers as of September 30, 2002:
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Occupancy
Outlet Centers Opening Date (Sq. Ft.) Percentage (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Outlets at Fremont-- Fremont, Indiana October 1985 229,000 89%
Prime Outlets at Birch Run (2)-- Birch Run, Michigan September 1986 724,000 91
Prime Outlets at Latham (3)-- Latham, New York August 1987 43,000 83
Prime Outlets at Williamsburg (2)-- Williamsburg, Virginia April 1988 274,000 99
Prime Outlets at Pleasant Prairie-- Kenosha, Wisconsin September 1988 269,000 94
Prime Outlets at Burlington-- Burlington, Washington May 1989 174,000 94
Prime Outlets at Queenstown-- Queenstown, Maryland June 1989 221,000 98
Prime Outlets at Hillsboro-- Hillsboro, Texas October 1989 359,000 92
Prime Outlets at Oshkosh-- Oshkosh, Wisconsin November 1989 260,000 91
Prime Outlets at Warehouse Row (4)-- Chattanooga, Tennessee November 1989 95,000 81
Prime Outlets at Perryville-- Perryville, Maryland June 1990 148,000 87
Prime Outlets at Sedona-- Sedona, Arizona August 1990 82,000 91
Prime Outlets at San Marcos-- San Marcos, Texas August 1990 549,000 94
Prime Outlets at Anderson (3)-- Anderson, California August 1990 165,000 80
Prime Outlets at Post Falls-- Post Falls, Idaho July 1991 179,000 74
Prime Outlets at Ellenton-- Ellenton, Florida October 1991 481,000 94
Prime Outlets at Morrisville-- Raleigh/Durham, North Carolina October 1991 187,000 73
Prime Outlets at Naples-- Naples/Marco Island, Florida December 1991 146,000 82
Prime Outlets at Niagara Falls USA-- Niagara Falls, New York July 1992 534,000 91
Prime Outlets at Woodbury (5)-- Woodbury, Minnesota July 1992 250,000 76
Prime Outlets at Calhoun (3)-- Calhoun, Georgia October 1992 254,000 84
Prime Outlets at Castle Rock-- Castle Rock, Colorado November 1992 480,000 97
Prime Outlets at Bend-- Bend, Oregon December 1992 132,000 98
Prime Outlets at Jeffersonville I-- Jeffersonville, Ohio July 1993 407,000 91
Prime Outlets at Gainesville-- Gainesville, Texas August 1993 316,000 73
Prime Outlets at Loveland-- Loveland, Colorado May 1994 328,000 95
Prime Outlets at Grove City-- Grove City, Pennsylvania August 1994 533,000 97
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Occupancy
Outlet Centers Opening Date (Sq. Ft.) Percentage (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Outlets at Huntley-- Huntley, Illinois August 1994 282,000 70%
Prime Outlets at Florida City-- Florida City, Florida September 1994 208,000 63
Prime Outlets at Pismo Beach-- Pismo Beach, California November 1994 148,000 98
Prime Outlets at Tracy-- Tracy, California November 1994 153,000 91
Prime Outlets at Odessa-- Odessa, Missouri July 1995 296,000 73
Prime Outlets at Darien (6)-- Darien, Georgia July 1995 307,000 67
Prime Outlets at Gulfport (7)-- Gulfport, Mississippi November 1995 306,000 88
Prime Outlets at Lodi (3)-- Burbank, Ohio November 1996 313,000 86
Prime Outlets at Gaffney (3) (6)-- Gaffney, South Carolina November 1996 305,000 95
Prime Outlets at Lee (3)-- Lee, Massachusetts June 1997 224,000 100
Prime Outlets at Lebanon-- Lebanon, Tennessee April 1998 229,000 99
Prime Outlets at Hagerstown (8)-- Hagerstown, Maryland August 1998 487,000 99
Prime Outlets of Puerto Rico-- Barceloneta, Puerto Rico July 2000 176,000 95
---------- ---
Total Outlet Centers (9) 11,253,000 89%
========== ===
====================================================================================================================================
Notes:
(1) Percentage reflects occupied space as of September 30, 2002 as a percent
of available square feet of GLA.
(2) We, through affiliates, have a 30% ownership interest in the joint
venture partnership that owns this outlet center.
(3) On July 26, 2002, we sold this outlet center to a joint venture
partnership in which we, through affiliates, have a 19.8% ownership
interest.
(4) We own a 2% partnership interest as the sole general partner in Phase I
of this property but are entitled to 99% of the property's operating
cash flow and net proceeds from a sale or refinancing. This mixed-use
development includes 154,000 square feet of office space, not included
in this table, which was 95% occupied as of September 30, 2002.
(5) Non-recourse mortgage loans on Prime Outlets at Vero Beach and Prime
Outlets at Woodbury were cross-collateralized. The lender foreclosed on
Prime Outlets at Vero Beach on September 9, 2002. We are currently
negotiating a transfer of our ownership interest in Prime Outlets at
Woodbury to the lender.
(6) We operate this outlet center pursuant to a long-term ground lease under
which we receive the economic benefit of a 100% ownership interest.
(7) The real property on which this outlet center is located is subject to a
long-term ground lease.
(8) On January 11, 2002, we sold this outlet center to a joint venture
partnership in which we, through affiliates, have a 30% ownership
interest.
(9) Excludes Oxnard Factory Outlet. We, through affiliates, have a 50% legal
ownership interest in the joint venture partnership that owns this
outlet center. However, we currently receive no economic benefit from
the Oxnard Factory Outlet.
Results of Operations
Comparison of the three months ended September 30, 2002 to the three months
ended September 30, 2001
Summary
We reported losses from continuing operations of $85,081 and $72,134 for the
three months ended September 30, 2002 and 2001, respectively. For the three
months ended September 30, 2002, the net loss applicable to our common
shareholders was $89,174, or $2.05 per common share on a basic and diluted
basis. For the three months ended September 30, 2001, the net loss applicable to
our common shareholders was $78,920, or $1.81 per common share on a basic and
diluted basis.
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards ("FAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." In accordance with the requirements of FAS No. 144, we have
classified the operating results, including gains and losses related to
disposition, for those properties either disposed of or classified as assets
held for sale during 2002 as discontinued operations in the accompanying
statements of operations for all periods presented.
During the three months ended September 30, 2002, we reported a gain from
discontinued operations of $1,575, or $0.04 per basic and diluted share. This
gain from discontinued operations also reflects (i) a net gain related to
dispositions of $17,120 and (ii) a provision for asset impairment of $15,557.
During the three months ended September 30, 2001, we reported a loss on
discontinued operations of $1,118, or $0.03 per basic and diluted share.
The 2002 results from continuing operations also include a non-recurring
provision for asset impairment of $81,619, or $1.87 per basic and diluted share.
The 2001 results from continuing operations also reflect (i) a non-recurring
provision for asset impairment of $63,026, or $1.45 per basic and diluted share,
(ii) a non-recurring loss charge of $1,882, or $0.04 per basic and diluted
share, related to an interest rate subsidy agreement and (iii) a non-recurring
loss of $1,036, or $0.02 per basic and diluted share, related to the refinancing
of first mortgage loans on Prime Outlets at Birch Run.
The following discussion regarding operating results for the comparable periods
are reflective of the classification requirements under FAS No. 144. The
operating results for properties disposed of during 2001 are not classified as
discontinued operations. Their operating results through the dates of their
respective disposition are collectively referred to as the "2001 Property
Dispositions".
Revenues
Total revenues were $38,851 for the three months ended September 30, 2002,
compared to $39,465, for the same period in 2001, a decrease of $614, or 1.6%.
Base rents decreased $2,601, or 10.3%, to $22,645 during the three months ended
September 30, 2002 compared to $25,246 for the same period in 2001. These
decreases are primarily due to (i) the 2001 Property Dispositions, (ii) changes
in economic rental rates and (iii) the reduction in outlet center occupancy
during the 2002 period. Straight-line rent expense, included in base rent was
$269 and $42 for the three months ended September 30, 2002 and 2001,
respectively.
Tenant reimbursements, which represent the contractual recovery from tenants of
various operating expenses, increased by $401, or 3.6%, to $11,486 during the
three months ended September 30, 2002 compared to $11,085 in the same period in
2001. This increase was primarily attributable to higher recoverable property
operating expenses and real estate taxes expense during the three months ended
September 30, 2002 compared to the same period in 2001. Tenant reimbursements as
a percentage of recoverable property operating expenses and real estate taxes
were 81.0% in 2002 compared to 91.1% in 2001. The decline in tenant
reimbursements as a percentage of recoverable property operating expenses and
real estate taxes was primarily attributable to changes in economic rental rates
and the reduction in outlet center occupancy during the 2002 period.
Interest and other income increased by $1,564, or 73.8%, to $3,684 during the
three months ended September 30, 2002 compared to $2,120 for same period in
2001. The increase was primarily attributable to higher (i) equity earnings from
investment in partnerships of $609, (ii) temporary tenant income of $298, (iii)
property management fees of $286, (iv) lease termination income of $200 and (v)
all other income of $171.
Expenses
Property operating expenses increased by $1,835, or 21.0%, to $10,579 during the
three months ended September 30, 2002 compared to $8,744 for the same period in
2001. This increase was primarily attributable to increases in marketing,
utilities and insurance costs during the three months ended September 30, 2002
compared to the same period in 2001. Real estate taxes expense increased by
$178, or 5.2%, to $3,607 during the three months ended September 30, 2002
compared to $3,429 for the same period in 2001. This increase was primarily
attributable to higher assessments for certain properties.
As shown in TABLE 1, depreciation and amortization expense decreased by $472, or
4.9%, to $9,129 during the three months ended September 30, 2002, compared to
$9,601 for the same period in 2001. This decrease was primarily attributable to
reduced depreciation and amortization associated with the provision for asset
impairment of $63,026 recorded during the third quarter of 2001.
Table 1--Components of Depreciation and Amortization Expense
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months ended September 30, 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Building and improvements $ 5,249 $ 4,995
Land improvements 1,040 1,099
Tenant improvements 2,169 2,762
Furniture and fixtures 610 660
Leasing commissions 61 85
------- -------
Total $ 9,129 $ 9,601
======= =======
====================================================================================================================================
As shown in TABLE 2, interest expense decreased by $2,222, or 13.6%, to $14,155
during the three months ended September 30, 2002 compared to $16,377 for the
same period in 2001. This decrease reflects (i) lower interest incurred of
$1,753, (ii) a decrease in amortization of deferred financing costs of $446 and
(iii) an increase in amortization of debt premiums of $23.
The decrease in interest incurred is primarily attributable to a reduction of
$53,393 in our weighted-average debt outstanding, excluding debt premiums,
during the three months ended September 30, 2002 compared to the same period in
2001. Also contributing to the decrease in interest incurred were lower
weighted-average interest rates during the three months ended September 30, 2002
compared to the same period in 2001. The significant reduction in
weighted-average debt outstanding was primarily attributable to debt prepayments
on the Mezzanine Loan with net proceeds from (i) the sales of properties and
(ii) the 2001 Property Dispositions. The weighted-average contractual interest
rates for the three months ended September 30, 2002 and 2001 were 8.54% and
8.90%, respectively. The Mezzanine Loan was obtained in December 2000 from FRIT
Lending LLC and Greenwich Capital Financial Products, Inc. (collectively, the
"Mezzanine Lender") in the original amount of $90,000. See Note 4 - "Bonds and
Notes Payable" for additional information.
Table 2--Components of Interest Expense
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months ended September 30, 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Interest incurred $ 13,578 $ 15,331
Amortization of deferred financing costs 1,085 1,531
Amortization of debt premiums (508) (485)
-------- --------
Total $ 14,155 $ 16,377
======== ========
====================================================================================================================================
Other charges decreased by $4,753, or 76.3%, to $1,477 for the three months
ended September 30, 2002 compared to $6,230 for the same period in 2001. During
the third quarter of 2001, we recorded (i) a non-recurring charge of $1,882
related to an interest rate subsidy agreement and (ii) a non-recurring loss of
$1,036 related to the refinancing of first mortgage loans on Prime Outlets at
Birch Run.
Excluding the effect of the 2001 non-recurring items, other charges decreased by
$1,835, or 55.4%, to $1,477 for the three months ended September 30, 2002
compared to $3,312 for the same period in 2001. This decrease is primarily
attributable to a lower provision for uncollectible accounts receivable of
$1,845 partially offset by an increase all other expenses of $10.
During the third quarter of 2002, certain events and circumstances occurred,
including changes to our anticipated holding periods, reduced occupancy and
limited leasing success, that indicated that certain of our properties were
impaired on an other than temporary basis. As a result, we recorded a provision
for asset impairment aggregating $81,619, representing the write-down of the
carrying value of these properties to their estimated fair values in accordance
with the requirements of FAS 144.
During the third quarter of 2001, we determined that certain events and
circumstances had occurred, including reduced occupancy and limited leasing
success, that indicated that certain of our properties were permanently
impaired. As a result, we recorded a provision for asset impairment aggregating
$63,026, representing the write-down of the carrying value of these properties
to their estimated fair values in accordance with the requirements of FAS No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of."
Comparison of the nine months ended September 30, 2002 to the nine months ended
September 30, 2001
Summary
We reported losses from continuing operations of $97,628 and $81,023 for the
nine months ended September 30, 2002 and 2001, respectively. For the nine months
ended September 30, 2002, the net loss applicable to our common shareholders was
$129,015, or $2.96 per common share on a basic and diluted basis. For the nine
months ended September 30, 2001, the net loss applicable to our common
shareholders was $102,729, or $2.36 per common share on a basic and diluted
basis.
Effective January 1, 2002, we adopted FAS No. 144. In accordance with the
requirements of FAS No. 144, we have classified the operating results, including
gains and losses related to disposition, for those properties either disposed of
or classified as assets held for sale during 2002 as discontinued operations in
the accompanying statements of operations for all periods presented.
During the nine months ended September 30, 2002, we reported a loss from
discontinued operations of $14,383, or $0.33 per basic and diluted share. This
loss from discontinued operations reflects (i) a net gain related to
dispositions of $16,123 and (ii) a provision for asset impairment of $27,525.
During the nine months ended September 30, 2001, we reported a loss on
discontinued operations of $4,702, or $0.11 per basic and diluted share.
The 2002 results from continuing operations reflect (i) a non-recurring
provision for asset impairment of $81,619, or $1.89 per basic and diluted share,
(ii) a loss on the sale of real estate of $703, or $0.02 per basic and diluted
share, attributable to the sale of our ownership interest in a joint venture
partnership and (iii) a non-recurring charge of $3,000, or $0.07 per basic and
diluted share, for pending and potential tenant claims with respect to lease
provisions related to pass-through charges and promotional fund charges.
The 2001 results from continuing operations reflect (i) a non-recurring
provision for asset impairment of $63,026, or $1.45 per basic and diluted share,
(ii) a non-recurring loss charge of $1,882, or $0.04 per basic and diluted
share, related to an interest rate subsidy agreement, (iii) a non-recurring loss
of $1,036, or $0.02 per basic and diluted share, related to the refinancing of
first mortgage loans on Prime Outlets at Birch Run and (iv) a gain on the sale
of real estate of $552, or $0.01 per basic and diluted share, for the 2001
Property Dispositions.
The following discussion regarding operating results for the comparable periods
are reflective of the classification requirements under FAS No. 144. The
operating results for properties disposed of during 2001 are not classified as
discontinued operations. Their operating results through the dates of their
respective disposition are collectively referred to as the "2001 Property
Dispositions".
Revenues
Total revenues were $114,552 for the nine months ended September 30, 2002,
compared to $123,823 for the same period in 2001, a decrease of $9,271, or 7.5%.
Base rents decreased $8,817, or 11.3%, to $69,480 during the nine months ended
September 30, 2002 compared to $78,297 for the same period in 2001. These
decreases are primarily due to (i) the 2001 Property Dispositions, (ii) changes
in economic rental rates and (iii) the reduction in outlet center occupancy
during the 2002 period. Straight-line rent expense, included in base rent was
$344 and $404 for the nine months ended September 30, 2002 and 2001,
respectively.
Tenant reimbursements, which represent the contractual recovery from tenants of
certain operating expenses, decreased by $2,411, or 6.5%, to $34,443 during the
nine months ended September 30, 2002 compared to $36,854 in the same period in
2001. These decreases are primarily due to (i) the 2001 Property Dispositions;
(ii) changes in economic rental rates and (iii) the reduction in outlet center
occupancy during the 2002 period. Tenant reimbursements as a percentage of
recoverable property operating expenses and real estate taxes was 83.1% in 2002
compared to 93.0% in 2001. The decline in tenant reimbursements as a percentage
of recoverable property operating expenses and real estate taxes was primarily
attributable to changes in economic rental rates and the reduction in outlet
center occupancy during the 2002 period.
Interest and other income increased by $1,470, or 22.5%, to $8,005 during the
nine months ended September 30, 2002 compared to $6,535 for same period in 2001.
The increase was primarily attributable to higher (i) equity earnings from
investment in partnerships of $1,623, (ii) temporary tenant income of $496 and
(iii) property management fees of $437, partially offset by reductions in (i)
lease termination income of $895 and (ii) all other income of $191.
Expenses
Property operating expenses increased by $1,770, or 6.2%, to $30,476 during the
nine months ended September 30, 2002 compared to $28,706 for the same period in
2001. This increase was primarily attributable to higher marketing, utilities
and insurance costs partially offset by the 2001 Property Dispositions. Real
estate taxes expense increased by $67, or 0.6%, to $10,979 during the nine
months ended September 30, 2002 compared to $10,912 for the same period in 2001.
This increase was primarily attributable to higher assessments for certain
properties partially offset by the 2001 Property Dispositions.
As shown in TABLE 3, depreciation and amortization expense decreased by $1,769,
or 6.1%, to $27,067 during the nine months ended September 30, 2002, compared to
$28,836 for the same period in 2001. This decrease was primarily attributable to
(i) the 2001 Property Dispositions and (ii) reduced depreciation and
amortization associated with the provision for asset impairment of $63,026
recorded during the third quarter of 2001.
Table 3--Components of Depreciation and Amortization Expense
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months ended September 30, 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Building and improvements $ 14,358 $ 14,974
Land improvements 3,097 3,163
Tenant improvements 7,567 8,433
Furniture and fixtures 1,851 2,033
Leasing commissions 194 233
-------- --------
Total $ 27,067 $ 28,836
======== ========
====================================================================================================================================
As shown in TABLE 4, interest expense decreased by $6,828, or 13.5%, to $43,871
during the nine months ended September 30, 2002 compared to $50,699 for the same
period in 2001. This decrease reflects (i) lower interest incurred of $5,928,
(ii) a decrease in amortization of deferred financing costs of $832 and (iii) an
increase in amortization of debt premiums of $68.
The decrease in interest incurred is primarily attributable to a reduction of
$59,090 in our weighted-average debt outstanding, excluding debt premiums,
during the nine months ended September 30, 2002 compared to the same period in
2001. Also contributing to the decrease in interest incurred were lower
weighted-average interest rates during the nine months ended September 30, 2002
compared to the same period in 2001. The significant reduction in
weighted-average debt outstanding was primarily attributable to debt prepayments
on the Mezzanine Loan with net proceeds from (i) the sales of properties and
(ii) the 2001 Property Dispositions. The weighted-average contractual interest
rates for the nine months ended September 30, 2002 and 2001 were 8.50% and
8.91%, respectively.
Table 4--Components of Interest Expense
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months ended September 30, 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Interest incurred $ 41,189 $ 47,117
Amortization of deferred financing costs 4,188 5,020
Amortization of debt premiums (1,506) (1,438)
-------- --------
Total $ 43,871 $ 50,699
======== ========
====================================================================================================================================
Other charges decreased by $4,972, or 38.9%, to $7,803 for the nine months ended
September 30, 2002 compared to $12,775 for the same period in 2001. During the
second quarter of 2002, we recorded a non-recurring charge of $3,000 for pending
and potential tenant claims with respect to lease provisions related to their
pass-through charges and promotional fund charges (see Note 7 - "Legal
Proceedings" for additional information). This non-recurring charge was
estimated in accordance with our aforementioned "Critical Accounting Policies
and Estimates" with respect to loss contingencies and is based on our current
assessment of the likelihood of any adverse judgments or outcomes to these
matters. During the third quarter of 2001, we recorded a non-recurring charge of
$1,882 related to an interest rate subsidy agreement and a non-recurring loss of
$1,036 related to the refinancing of first mortgage loans on Prime Outlets at
Birch Run.
Excluding the above-noted non-recurring items, other charges decreased by
$5,054, or 51.3%, to $4,803 for the nine months ended September 30, 2002
compared to $9,857 for the same period in 2001. The decrease was primarily
attributable to (i) a lower provision for uncollectible accounts receivable of
$4,416 and (ii) a decrease in corporate marketing costs of $645 partially offset
by an increase in all other expenses of $7.
During the third quarter of 2002, certain events and circumstances occurred,
including changes to our anticipated holding periods, reduced occupancy and
limited leasing success, that indicated that certain of our properties were
impaired on an other than temporary basis. As a result, we recorded a provision
for asset impairment aggregating $81,619, representing the write-down of the
carrying value of these properties to their estimated fair values in accordance
with the requirements of FAS 144.
During the third quarter of 2001, we determined that certain events and
circumstances had occurred, including reduced occupancy and limited leasing
success, that indicated that certain of our properties were permanently
impaired. As a result, we recorded a provision for asset impairment aggregating
$63,026, representing the write-down of the carrying value of these properties
to their estimated fair values in accordance with the requirements of FAS No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of."
Merchant Sales
For the three and nine months ended September 30, 2002, same-store sales in our
outlet center portfolio decreased 5.6% and 4.1%, respectively, compared to the
same periods in 2001. "Same-store sales" is defined as the weighted-average
sales per square foot reported by merchants for stores open since January 1,
2001. The weighted-average sales per square foot reported by all merchants were
$241 for the year ended December 31, 2001.
Liquidity and Capital Resources
Sources and Uses of Cash
For the nine months ended September 30, 2002, net cash provided by operating
activities was $16,426, net cash provided by investing activities was $18,193
and net cash used in financing activities was $36,117.
The net cash provided by investing activities during the nine months ended
September 30, 2002 consisted of $22,320 of aggregate net proceeds from the
disposition of assets, partially offset by $4,127 of additions to rental
property. The net proceeds from asset sales consisted of (i) $12,113 from the
January 11, 2002 sale of a 70% ownership interest in the Hagerstown Center, (ii)
$9,551 from the April 1, 2002 sale of the Edinburgh Center, (iii) $522 from the
April 19, 2002 sale of our 51% ownership interest in the Bellport Outlet Center
and (iv) $688 from the June 17, 2002 sale of Western Plaza, partially offset by
aggregate cash of $554 assumed by the lender in connection with the January 1,
2002 foreclosure sale of the Conroe. The additions to rental property were
primarily costs incurred in connection with re-leasing space to new merchants.
The gross uses of cash for financing activities of $36,117 during the nine
months ended September 30, 2002 consisted of (i) scheduled principal
amortization on notes payable of $14,129 and (ii) principal prepayments on the
Mezzanine Loan aggregating $21,988 including $10,341 of mandatory prepayments,
with net proceeds from the sales of properties.
2002 Sales Transactions
On January 11, 2002, we completed the sale of Prime Outlets at Hagerstown (the
"Hagerstown Center"), an outlet center located in Hagerstown, Maryland
consisting of approximately 487,000 square feet of gross leasable area ("GLA"),
for $80,500 to an existing joint venture partnership (the "Prime/Estein
Venture") between one of our affiliates and an affiliate of Estein & Associates
USA, Ltd. ("Estein"), a real estate investment company. Estein and we have 70%
and 30% ownership interests, respectively, in the Prime/Estein Venture. In
connection with the sale transaction, the Prime/Estein Venture assumed first
mortgage indebtedness of $46,862 on the Hagerstown Center (the "Assumed Mortgage
Indebtedness"); however, our guarantee of the Assumed Mortgage Indebtedness
remains in place.
The net cash proceeds from the sale, including the release of certain funds held
in escrow, were $12,113 after (i) a pay-down of $11,052 of mortgage indebtedness
on the Hagerstown Center and (ii) closing costs. The net proceeds from this sale
were used to prepay $11,647 of principal outstanding under a mezzanine loan (the
"Mezzanine Loan") obtained in December 2000 from FRIT PRT Lending LLC and
Greenwich Capital Financial Products, Inc. (collectively, the "Mezzanine
Lender") in the original amount of $90,000. See Note 4 - "Bonds and Notes
Payable" for additional information.
The operating results of the Hagerstown Center through the date of disposition
are classified as discontinued operations in the accompanying Consolidated
Statements of Operations for all periods presented in accordance with the
requirements of FAS No. 144. In connection with the sale of the Hagerstown
Center, we recorded a gain on the sale of real estate of $16,795, also included
in discontinued operations, during the first quarter of 2002. At December 31,
2001, the carrying value of the Hagerstown Center of $54,628 was classified as
assets held for sale in the accompanying Consolidated Balance Sheet. Effective
on the date of disposition, we have accounted for our 30% ownership interest in
the Hagerstown Center in accordance with the equity method of accounting.
We are obligated to refinance the Assumed Mortgage Indebtedness on behalf of the
Prime/Estein Venture on or before June 1, 2004, the date on which such
indebtedness matures. Additionally, the Prime/Estein Venture's cost of the
Assumed Mortgage Indebtedness and any refinancing of it are fixed at an annual
rate of 7.75% for a period of 10 years. If the actual cost of such indebtedness
should exceed 7.75% at any time during the ten-year period, we will be obligated
to pay the difference to the Prime/Estein Venture. However, if the actual cost
of such indebtedness is less than 7.75% at any time during the ten-year period,
the Prime/Estein Venture will be obligated to pay the difference to us. The
actual cost of the Assumed Mortgage Indebtedness is currently 30-day LIBOR plus
1.50%, or 3.32% as of September 30, 2002.
On April 1, 2002, we completed the sale of Prime Outlets at Edinburgh (the
"Edinburgh Center"), an outlet center located in Edinburgh, Indiana consisting
of approximately 305,000 square feet of GLA and additional undeveloped land. The
Edinburgh Center was sold to CPG Partners, L.P. for cash consideration of
$27,000.
The net cash proceeds from the sale were $9,551, after (i) repayment in full of
$16,317 of existing first mortgage indebtedness on the Edinburgh Center and (ii)
closing costs and fees. We used these net proceeds to make a mandatory principal
payment of $9,178 on the Mezzanine Loan.
The operating results of the Edinburgh Center through the date of disposition
are classified as discontinued operations in the accompanying Consolidated
Statements of Operations for all periods presented in accordance with the
requirements of FAS No. 144. During the first quarter of 2002, we recorded a
loss on the sale of real estate of $9,625, also included in discontinued
operations, related to the write-down of the carrying value of the Edinburgh
Center to its net realizable value based on the terms of the sale agreement.
On April 19, 2002, we completed the sale of Phases II and III of the Bellport
Outlet Center (the "Bellport Outlet Center"), an outlet center located in
Bellport, New York consisting of approximately 197,000 square feet of GLA. We
had a 51% ownership interest in the joint venture partnership that owned the
Bellport Outlet Center. The Bellport Outlet Center was sold to Sunrise Station,
L.L.C., an affiliate of one of our joint venture partners, for cash
consideration of $6,500. At closing, recourse first mortgage indebtedness of
$5,500, which was scheduled to mature on May 1, 2002, was repaid in full. To
date we have received $522 of cash proceeds from the sale, which were used to
make a mandatory principal payment of $502 on the Mezzanine Loan.
We accounted for our ownership interest in the Bellport Outlet Center in
accordance with the equity method of accounting through the date of disposition.
In connection with the sale of the Bellport Outlet Center, we recorded a loss on
the sale of real estate of $703 during the second quarter of 2002.
On June 17, 2002, we completed the sale of the Shops at Western Plaza ("Western
Plaza"), a community center located in Knoxville, Tennessee, consisting of
205,000 square feet of GLA. Western Plaza was sold to WP General Partnership for
cash consideration of $9,500. The net cash proceeds from the sale were $688,
after (i) repayment of $9,467 (of which $2,467 was scheduled to mature on
October 31, 2002) of existing recourse mortgage indebtedness on Western Plaza,
(ii) payment of closing costs and fees and (iii) release of certain escrowed
funds. We used these net proceeds to make a mandatory principal payment of $661
on the Mezzanine Loan.
The operating results of Western Plaza through the date of disposition are
classified as discontinued operations in the accompanying Consolidated
Statements of Operations for all periods presented in accordance with the
requirements of FAS No. 144. In connection with the sale of Western Plaza, we
recorded a gain on the sale of real estate of $2,122, also included in
discontinued operations, during the second quarter of 2002.
On July 26, 2002, we completed the sale of six outlet centers for aggregate
consideration of $118,650 to wholly-owned affiliates of PFP Venture LLC, a joint
venture (the "PFP Venture") (i) 29.8% owned by PWG Prime Holdings LLC ("PWG")
and (ii) 70.2% owned by FP Investment LLC ("FP"). FP is a joint venture between
FRIT PRT Bridge Acquisition LLC ("FRIT"), a Delaware limited liability company,
and us. Through FP, FRIT and we indirectly have ownership interests of 50.4% and
19.8%, respectively, in the PFP Venture.
The six outlet centers (collectively, the "Bridge Loan Properties") that were
sold are located in Anderson, California; Calhoun, Georgia; Gaffney, South
Carolina; Latham, New York; Lee, Massachusetts and Lodi, Ohio and contain an
aggregate of 1,304,000 square feet of GLA. Under the terms of the transaction,
for a five-year period, we will continue to manage, market and lease the Bridge
Loan Properties for a fee on behalf of the PFP Venture.
In connection with the sale, $111,009 of recourse mortgage indebtedness (the
"Bridge Loan") on the Bridge Loan Properties was repaid in full. Our net cash
proceeds of $6,762 from the sale were contributed to FP. FP used these proceeds
along with a $17,236 capital contribution from FRIT to purchase a 70.2%
ownership interest in the PFP Venture. Financing for the PFP Venture's purchase
of the Bridge Loan Properties was provided by GMAC Mortgage in the form of a
$90,000, four-year, non-recourse mortgage loan, of which $74,000 bears interest
at LIBOR plus 4.25% (minimum of 7.00% for the first three years and 7.25%
thereafter) and $16,000 bears interest at LIBOR plus 4.50% (minimum of 7.75%).
Furthermore, subject to satisfaction of certain conditions, the PFP Venture may
extend the maturity of the $74,000 portion of the loan for one additional year
with the minimum interest rate continuing at 7.25%.
Pursuant to certain venture-related documents, we have guaranteed FRIT (i) a 13%
return on its $17,236 of invested capital, and (ii) the full return of its
invested capital (the "Mandatory Redemption Obligation") by December 31, 2003.
Our guarantee is secured by junior security interests in collateral similar to
that pledged to the Mezzanine Lender. FP is entitled to receive a 15% preferred
return on its invested capital of $23,998 (approximately $3,600 on an annual
basis) in the PFP Venture. Then PWG is entitled to receive a 15% preferred
return on its invested capital of $10,200. From FP's preferred return, FRIT
first receives its 13% return on its invested capital with the remainder applied
towards the payment of the Mandatory Redemption Obligation. Upon satisfaction of
the Mandatory Redemption Obligation, we will be entitled to FP's preferred
return until such time as we have been repaid in full our invested capital,
together with a 13% return on our invested capital. Thereafter, FRIT and we will
share any cash flow due to FP on an approximate equal basis. As of September 30,
2002, the Mandatory Redemption Obligation was $17,005.
FRIT, indirectly through affiliates, was the owner of the Bridge Loan that was
repaid in full in connection with the sale of the Bridge Loan Properties and is
a 50% participant in the Mezzanine Loan, which had an outstanding principal
balance of $33,195 as of September 30, 2002.
The operating results of the Bridge Loan Properties through the date of
disposition are classified as discontinued operations in the accompanying
Consolidated Statements of Operations for all periods presented in accordance
with the requirements of FAS No. 144. During the second quarter of 2002, we
recorded a loss on the sale of real estate of $10,289, also included in
discontinued operations, related to the write-down of the carrying value of the
Bridge Loan Properties to their net realizable value based on the terms of the
sale agreement.
Assets Held for Sale
On October 30, 2002, we completed the sale of Melrose Place, a community center
located in Knoxville, Tennessee, consisting of 27,000 square feet of GLA.
Melrose Place was sold to Melrose Place Tennessee General Partnership for cash
consideration of $2,500. The net cash proceeds from the sale were $555, after
(i) repayment of $1,935 of existing recourse mortgage indebtedness on Melrose
Place, (ii) payment of closing costs and fees and (iii) release of certain
escrowed funds. We used these net proceeds to make a mandatory principal payment
of $533 on the Mezzanine Loan.
The operating results of Melrose Place are classified as discontinued operations
in the accompanying Consolidated Statements of Operations for all periods
presented in accordance with the requirements of FAS No. 144. As of September
30, 2002, the carrying value of Melrose Place of $1,527 was classified as assets
held for sale and its related indebtedness of $1,935 was classified as mortgage
debt on assets held for sale in the accompanying Consolidated Balance Sheet.
We have entered into an agreement to sell (i) Prime Outlets of Puerto Rico, an
outlet center located in Barceloneta, Puerto Rico consisting of 176,000 square
feet of GLA, and (ii) certain adjacent parcels of land being developed for
non-outlet retail use (collectively, the "Puerto Rico Property"). Although we
expect to close on the sale of the Puerto Rico Property during the fourth
quarter of 2002, there can be no assurance that the transaction will be
consummated.
As a result, the operating results of the Puerto Rico Property are classified as
discontinued operations in the accompanying Consolidated Statements of
Operations for all periods presented in accordance with the requirements of FAS
No. 144. During the third quarter of 2002, we recorded an impairment loss of
$15,557, also included in discontinued operations, related to the write-down of
the carrying value of the Puerto Rico Property to its estimated net realizable
value based on the terms of the sale agreement. As of September 30, 2002, the
carrying value of the Puerto Rico Property of $31,495 was classified as assets
held for sale and its related indebtedness of $19,371 was classified as mortgage
debt on assets held for sale in the accompanying Consolidated Balance Sheet.
2002 Foreclosure Sales
During 2001, certain of our subsidiaries suspended regularly scheduled monthly
debt service payments on two non-recourse mortgage loans held by New York Life
Insurance Company ("New York Life") at the time of the suspension. These
non-recourse mortgage loans were cross-defaulted and cross-collateralized by
Prime Outlets at Jeffersonville II (the "Jeffersonville II Center"), located in
Jeffersonville, Ohio and Prime Outlets at Conroe (the "Conroe Center"), located
in Conroe, Texas.
Effective January 1, 2002, New York Life foreclosed on the Conroe Center and its
related assets and liabilities, including $554 of cash and $15,467 of principal
outstanding under the non-recourse mortgage loan, were transferred from our
subsidiary that owned the Conroe Center to New York Life. The foreclosure of the
Conroe Center did not have a material impact on our results of operations or
financial condition because during 2001 all excess cash flow from the operations
of the Conroe Center was utilized for debt service on its non-recourse mortgage
loan.
Effective July 18, 2002, New York Life sold its interest in the Jeffersonville
II Center loan. On August 13, 2002, we transferred our ownership interest in the
Jeffersonville II Center to New York Life's successor. As a result of the
transfer of our ownership interest in the Jeffersonville II Center, we recorded
a non-recurring gain of $17,120 during the third quarter of 2002, representing
the difference between our carrying value of the Jeffersonville II Center and
its related net assets and the outstanding loan balance, including accrued
interest, as of the date of transfer. The transfer of our ownership interest in
the Jeffersonville II Center did not have a material impact on our results of
operations or financial condition because during 2001 and through the transfer
date in 2002, all excess cash flow from the operations of the Jeffersonville II
Center was utilized for debt service on its non-recourse mortgage loan.
The operating results, including related gains or losses on disposition, of the
Conroe Center and the Jeffersonville II Center are classified as discontinued
operations in the accompanying Consolidated Statements of Operations through
their respective disposition dates for all periods presented in accordance with
the requirements of FAS No. 144. No gain or loss was recorded in connection with
the foreclosure of the Conroe Center. See Note 4 - "Bonds and Notes Payable" for
additional information.
During the second quarter of 2002, we incurred a provision for asset impairment
of $12,200 to adjust the carrying values of the Vero Beach Center to its
estimated fair value in accordance with the provisions of FAS No. 144. Effective
September 9, 2002, John Hancock foreclosed on the Vero Beach Center and its
related assets and liabilities, including $24,497 of principal outstanding under
the non-recourse mortgage loan, were transferred to John Hancock. Additionally,
we are currently negotiating a transfer of our ownership interest in the
Woodbury Center to John Hancock. Foreclosure on the Vero Beach Center and the
expected transfer of our ownership interest in the Woodbury Center are not
expected to have a material impact on our results of operations or financial
condition because during 2002, all excess cash flow from the operations of the
John Hancock Properties has been utilized for debt service on their non-recourse
mortgage loans. The carrying value of the Woodbury Center approximates $12,346
as of September 30, 2002. Such value is exceeded by the balance of the
associated non-recourse mortgage indebtedness of $16,331 as of September 30,
2002. If we were to transfer our ownership interest in the Woodbury Center to
John Hancock, we would record a non-recurring gain for the difference between
the carrying value of the Woodbury Center and its related net assets and the
outstanding loan balance.
The operating results of the Vero Beach Center are classified as discontinued
operations in the accompanying Consolidated Statements of Operations through the
disposition date for all periods presented in accordance with the requirements
of FAS No. 144. No gain or loss was recorded in connection with the foreclosure
of the Vero Beach Center. See Note 4 - "Bonds and Notes Payable" for additional
information.
Going Concern
We are required to make, in addition to scheduled monthly amortization,
mandatory principal payments on our Mezzanine Loan in an aggregate amount of at
least $12,000 with net proceeds from asset dispositions or other capital
transactions by December 31, 2002 (see "Mezzanine Loan Modifications" for
additional information).
We have entered into an agreement for the sale of the Puerto Rico Property,
which we currently expect to close during the fourth quarter of 2002, and
therefore, have classified its net carrying value to assets held for sale in the
accompanying Consolidated Balance Sheet as of September 30, 2002 and have
included its results from operations in discontinued operations in the
accompanying Consolidated Statements of Operations for all periods presented
pursuant to the requirements of FAS No. 144 (see Note 3 - "Property
Dispositions" for additional information). The sale of the Puerto Rico Property
is expected to generate estimated net proceeds of approximately $12,000, after
repayment of existing mortgage indebtedness and closing costs, sufficient to
satisfy the required December 2002 mandatory principal repayment amount under
the Mezzanine Loan. However, the sale of the Puerto Rico Property remains
subject to customary closing conditions and, accordingly, there can be no
assurance as to the timing, terms or completion of the proposed sale.
In addition to the proposed sale of the Puerto Rico Property discussed above, we
continue to seek to generate additional liquidity through other asset sales,
financings and other capital raising activities, however, there can be no
assurance that we will be able to complete such transactions within the
specified period or that such transactions, if they should occur, will generate
sufficient proceeds to make required payments under the Mezzanine Loan. Any
failure to satisfy the required mandatory principal payments within the
specified time period or the scheduled monthly principal payments under the
terms of the Mezzanine Loan will constitute a default.
Based on our results for the three months ended June 30, 2002 and September 30,
2002, we are not in compliance with respect to the debt service coverage ratio
under our fixed rate tax-exempt revenue bonds (the "Affected Fixed Rate Bonds")
in the amount of $18,390. As a result of our noncompliance, the holders of the
Affected Fixed Rate Bonds may elect to put such obligations to us at a price
equal to par plus accrued interest. If the holders of the Affected Fixed Rate
Bonds make such an election and we are unable to repay such obligations, certain
cross-default provisions with respect to other debt facilities, including the
Mezzanine Loan may be triggered.
We continue to work with holders of the Affected Fixed Rate Bonds regarding
potential resolution, including forbearance, waiver or amendment with respect to
the applicable provisions. If we are unable to reach satisfactory resolution, we
will look to (i) obtain alternative financing from other financial institutions,
(ii) sell the projects subject to the affected debt or (iii) explore other
possible capital transactions to generate cash to repay the amounts outstanding
under such debt. There can be no assurance that we will obtain satisfactory
resolution with the holders of the Affected Fixed Rate Bonds or that we will be
able to complete asset sales or other capital raising activities sufficient to
repay the amount outstanding under the Affected Fixed Rate Bonds.
As of September 30, 2002, we were in compliance with all financial debt
covenants under our recourse loan agreements other than the Affected Fixed Rate
Bonds. Nevertheless, there can be no assurance that we will remain in compliance
with our financial debt covenants in future periods because our future financial
performance is subject to various risks and uncertainties, including, but not
limited to, the effects of current and future economic conditions, and the
resulting impact on our revenue; the effects of increases in market interest
rates from current levels; the risks associated with existing vacancy rates or
potential increases in vacancy rates because of, among other factors, tenant
bankruptcies and store closures, and the resulting impact on our revenue; risks
associated with litigation, including pending and potential tenant claims with
respect to lease provisions related to their pass-through charges and
promotional fund charges; and risks associated with refinancing our current debt
obligations or obtaining new financing under terms less favorable than we have
experienced in prior periods. See "Defaults on Certain Non-recourse Mortgage
Indebtedness" and "Defaults on Certain Non-recourse Mortgage Indebtedness of
Unconsolidated Partnerships" for additional information.
These above listed conditions raise substantial doubt about our ability to
continue as a going concern. The financial statements contained herein do not
include any adjustment to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.
Mezzanine Loan Modifications
Effective January 31, 2002, we entered into a modification to the original terms
of the Mezzanine Loan obtained in December 2000. The Mezzanine Loan amendment
(the "First Amendment"), among other things, (i) reduced required monthly
principal amortization for the period February 1, 2002 through January 1, 2003
("Year 2") from $1,667 to $800, which could be further reduced to a minimum of
$500 per month under certain limited circumstances, provided no defaults existed
under the Mezzanine Loan and certain other conditions had been satisfied at the
Mezzanine Lender's sole discretion, (ii) required certain mandatory principal
payments from net proceeds from asset sales or other capital transactions
pursuant to the schedule set forth in the second paragraph below and (iii)
reduced the threshold level at which excess cash flow from operations must be
applied to principal pay-downs, primarily resulting from a reduction in the
available working capital reserves. Additionally, the First Amendment (i)
increased the interest rate from LIBOR plus 9.50% to the greater of LIBOR plus
9.50% (rounded up to nearest 0.125%) or 14.75%), (ii) changed the Mezzanine Loan
maturity date from December 31, 2003 to September 30, 2003 and (iii) required a
0.25% fee, which was paid at the time of the modification, on the outstanding
principal balance.
The First Amendment also required additional Year 2 monthly payments of $250
(the "Escrowed Funds") into an escrow account controlled by the Lender. Provided
certain conditions are satisfied, at the Mezzanine Lender's sole discretion, the
Escrowed Funds could be released to us for limited purposes. The Escrowed Funds
not used at the end of each quarter, subject to certain exceptions, may be
applied by the Mezzanine Lender to amortize the Mezzanine Loan. The required
monthly principal amortization of $2,333, at the time commencing on February 1,
2003 through the new maturity date of September 30, 2003 ("Year 3"), was
unchanged.
The First Amendment also required mandatory principal payments with net proceeds
from asset sales, excluding our January 11, 2002 sale of a 70% joint venture
partnership interest in the Hagerstown Center (see Note 3 - "Property
Dispositions" for additional information), or other capital transactions of not
less than (i) $8,906 by May 1, 2002, (ii) $24,406, inclusive of the $8,906, by
July 1, 2002 (subject to extension to October 31, 2002 provided certain
conditions were met to the Lender's satisfaction) and (iii) $25,367, inclusive
of the $24,406, by November 1, 2002. In addition to each mandatory principal
payment, we were also required to pay any interest, including deferred interest,
accrued thereon and the additional fees provided for in the Mezzanine Loan.
On July 1, 2002, the Mezzanine Lender further amended the Mezzanine Loan (the
"Second Amendment") to extend the July 1, 2002 mandatory principal payment due
date to the earlier of (i) August 15, 2002 (the "Extended Date") or (ii) the
occurrence of an event of default under the Mezzanine Loan. Additionally, upon
satisfaction of certain conditions, the Extended Date was automatically extended
again to the earlier of (i) October 31, 2002, (ii) the occurrence of an event of
default under the Mezzanine Loan, or (iii) the closing or termination of certain
asset sales.
Effective November 1, 2002, we entered into an additional modification (the
"Third Amendment") to the terms of the Mezzanine Loan. The Third Amendment (i)
terminated our obligation to make mandatory principal payments with net proceeds
from asset dispositions or other capital transactions on or prior to October 31,
2002 and November 1, 2002, respectively, (ii) requires mandatory principal
payments in an aggregate amount of not less than $12,000 from net proceeds from
asset dispositions or other capital transactions on or before December 31, 2002
and (iii) increases the required monthly principal amortization payment due on
January 1, 2003 from $800 to $2,333. Additionally, the Third Amendment (i)
increases the interest rate from the greater of LIBOR plus 9.50% (rounded up to
nearest 0.125%) or 14.75% to a fixed-rate of 19.75% and (ii) requires a 2%
amendment fee on the outstanding principal balance of the Mezzanine Loan as of
November 1, 2002. Half of the amendment fee was paid at the time of the
modification and half will be payable on December 31, 2002 provided the
Mezzanine Loan has not been repaid in full. If the Mezzanine Loan is repaid in
full by December 31, 2002, the payment of the second half of the amendment fee
will be waived. Any failure to satisfy the mandatory principal payments
requirement or other payments pursuant to the terms of the Mezzanine Loan will
constitute a default.
Debt Service Obligations
Our aggregate indebtedness as adjusted for the terms of the Third Amendment to
the Mezzanine Loan and excluding (i) unamortized debt premiums of $8,468, (ii)
mortgage indebtedness of $1,935 on Melrose Place and (iii) non-recourse mortgage
indebtedness of $16,331 on the Woodbury Center was $639,328 (the "Adjusted
Indebtedness") as of September 30, 2002. The mortgage indebtedness on Melrose
Place was repaid in full in connection with the sale of such property on October
30, 2002. Additionally, we are currently negotiating a transfer of our ownership
interest in the Woodbury Center to John Hancock. See Note 3 - "Property
Dispositions" and "Defaults on Certain Non-recourse Mortgage Indebtedness" for
additional information.
At September 30, 2002 the Adjusted Indebtedness had a weighted-average maturity
of 2.7 years and bore contractual interest at a weighted-average rate of 8.50%
per annum. At September 30, 2002, $619,957, or 97.0%, of the Adjusted
Indebtedness bore interest at fixed rates and $19,371 or 3.0%, of the Adjusted
Indebtedness bore interest at variable rates. In certain cases, we utilize
derivative financial instruments to manage our interest rate risk associated
with variable rate debt.
As of September 30, 2002, our scheduled principal payments for the remainder of
2002 and 2003 for the Adjusted Indebtedness aggregated $17,002 and $380,544,
respectively. The remaining scheduled principal payments for 2002 include (i)
principal amortization aggregating $5,002 (including an aggregate of $2,400 of
scheduled monthly principal payments on the Mezzanine Loan, which may be further
reduced subject to the terms of its modification specified above) and (ii)
mandatory principal payments on the Mezzanine Loan in an aggregate amount of not
less than $12,000 (see "Mezzanine Loan Modifications" for additional
information). The outstanding principal balance of the Mezzanine Loan as of
September 30, 2002 was $33,195. The scheduled principal payments for 2003
include (i) obligations of $338,558 due in respect of a mortgage loan that is
secured by 15 of our properties and matures in November 2003, (ii) $18,795 of
principal payments under the Mezzanine Loan and (iii) an obligation of $19,156
due in respect to a mortgage loan secured by the Puerto Rico Property. We have
entered into an agreement to sell the Puerto Rico Property. See "Assets Held for
Sale" in Note 3 - "Property Dispositions" for additional information.
Guarantees of Indebtedness of Others
On July 15, 2002, Horizon Group Properties, Inc. and its affiliates ("HGP")
announced they had refinanced a secured credit facility (the "HGP Secured Credit
Facility") through a series of new loans aggregating $32,500. Prior to the
refinancing, we were a guarantor under the HGP Credit Facility in the amount of
$10,000. In connection with the refinancing, our guarantee was reduced to a
maximum of $4,000 as security for a $3,000 mortgage loan and a $4,000 mortgage
loan (collectively, the "HGP Monroe Mortgage Loan") secured by HGP's outlet
shopping center located in Monroe, Michigan. The HGP Monroe Mortgage Loan has a
3-year term, bears interest at the prime lending rate plus 2.50% (with a minimum
of 9.90%) and requires monthly interest-only payments. The HGP Monroe Mortgage
Loan may be prepaid without penalty after two years. Our guarantee with respect
to the HGP Monroe Mortgage Loan will be extinguished if the principal amount of
such obligation is reduced to $5,000 or less through repayments.
Additionally, we are a guarantor with respect to certain mortgage indebtedness
(the "HGP Office Building Mortgage") in the amount of $2,311 on HGP's corporate
office building and related equipment located in Norton Shores, Michigan. The
HGP Office Building Mortgage matures in December 2002, bears interest at LIBOR
plus 2.50%, and requires monthly debt service payments of approximately $23.
On October 11, 2001, HGP announced that it was in default under two loans with
an aggregate principal balance of $45,500 secured by six of its other outlet
centers. Such defaults do not constitute defaults under the HGP Monroe Mortgage
Loan or the HGP Office Building Mortgage nor did they constitute a default under
the HGP Secured Credit Facility. No claims have been made under our guarantees
with respect to the HGP Monroe Mortgage Loan or the HGP Office Building
Mortgage. HGP is a publicly traded company that was formed in connection with
our merger with Horizon Group, Inc. in June 1998.
On January 11, 2002, we sold the Hagerstown Center to the Prime/Estein Venture.
In connection with the sale, the Prime/Estein Venture assumed $46,862 of
mortgage indebtedness; however, our guarantee of such indebtedness remains in
place. See Note 3 - "Property Dispositions" for additional information.
On July 26, 2002, we sold the Bridge Properties to the PFP Venture. In
connection with the sale, we guaranteed FRIT (i) a 13% return on its $17,236 of
invested capital and (ii) the full return of its invested capital by December
31, 2003. See Note 3 - "Property Dispositions" for additional information. As of
September 30, 2002, our Mandatory Redemption Obligation with respect to the full
return of FRIT's invested capital was $17,005.
Defaults on Certain Non-recourse Mortgage Indebtedness
During 2001, certain of our subsidiaries suspended regularly scheduled monthly
debt service payments on two non-recourse mortgage loans which were
cross-collateralized by the Jeffersonville II Center and the Conroe Center. At
the time of suspension, these non-recourse mortgage loans were held by New York
Life. Effective January 1, 2002, New York Life foreclosed on the Conroe Center.
Effective July 18, 2002, New York Life sold its interest in the Jeffersonville
II Center loan. On August 13, 2002, we transferred our ownership interest in the
Jeffersonville II Center to New York Life's successor. See "2002 Foreclosure
Sales" of Note 3 - "Property Dispositions" for additional information.
During August of 2002, certain of our subsidiaries suspended regularly scheduled
monthly debt service payments on two non-recourse mortgage loans which were
cross-collateralized by the Vero Beach Center and the Woodbury Center. These
non-recourse mortgage loans were held by John Hancock. Effective September 9,
2002, John Hancock foreclosed on the Vero Beach Center. Additionally, we are
currently negotiating a transfer of our ownership interest in the Woodbury
Center to John Hancock. See "2002 Foreclosure Sales" of Note 3 - "Property
Dispositions" for additional information.
Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated
Partnerships
Two mortgage loans related to projects in which we, through subsidiaries,
indirectly own joint venture interests have matured and are in default. The
mortgage loans, at the time of default, were (i) a $10,389 first mortgage loan
on Phase I of the Bellport Outlet Center, held by Union Labor Life Insurance
Company ("Union Labor"); and (ii) a $13,338 first mortgage loan on Oxnard
Factory Outlet, an outlet center located in Oxnard, California, held by Fru-Con.
Through an affiliate we hold a 50% ownership interest in the partnership that
owns Phase I of the Bellport Outlet Center. Fru-Con and we are each a 50%
partner in the partnership that owns the Oxnard Factory Outlet.
Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center and a
receiver was appointed March 27, 2001 by the court involved in the foreclosure
action. Effective May 1, 2001, a manager hired by the receiver began managing
and leasing Phase I of the Bellport Outlet Center. We continue to negotiate the
terms of a transfer of our ownership interest in Oxnard Factory Outlet to
Fru-Con. We do not manage or lease Oxnard Factory Outlet.
We do not believe either of these mortgage loans is recourse to us. It is
possible, however, that either or both of the respective lenders will file a
lawsuit seeking to collect amounts due under the loan. If such an action is
brought, the outcome, and our ultimate liability, if any, cannot be predicted at
this time.
We are currently not receiving, directly or indirectly, any cash flow from
Oxnard Factory Outlet and were not receiving any cash flow from Phase I of the
Bellport Outlet Center prior to the loss of control of such project. We account
for our ownership interests in Phase I of the Bellport Outlet Center and the
Oxnard Factory Outlet in accordance with the equity method of accounting. As of
September 30, 2002, the carrying value of our investment in these properties was
$0.
Strategic Alternatives
We have engaged Houlihan Lokey Howard & Zukin Capital to assist us in exploring
recapitalization, restructuring, financing and other strategic alternatives
designed to strengthen our financial position and address our long-term capital
requirements. There can be no assurance as to the timing, terms or completion of
any transaction.
Settlement of Tenant Matters
To date, we have entered into settlement agreements with respect to certain
tenant matters providing for aggregate payments of $2,560. Through November 14,
2002, we have made approximately $2,253 of such required payments using certain
Escrowed Funds (see "Mezzanine Loan Modifications" for additional information)
released by the Mezzanine Lender. We expect to make the remaining required
payments of approximately $307 from the Escrowed Funds by December 31, 2002.
These settlement agreements did not have a material impact on our financial
condition or our results from operations. We had previously established reserves
aggregating $5,000 for the settlement of such matters. See Note 6 - "Special
Charges" and Note 7 - "Legal Proceedings" for additional information.
Dividends and Distributions
To qualify as a REIT for federal income tax purposes, we are required to pay
distributions to our common and preferred shareholders of at least 90% of our
REIT taxable income in addition to satisfying other requirements. Although we
intend to make necessary distributions to remain qualified as a REIT under the
Code, we also intend to retain such amounts as we consider necessary from time
to time for our capital and liquidity needs.
Our current policy is to pay distributions only to the extent necessary to
maintain our status as a REIT for federal income tax purposes. Based on our
current federal income tax projections for 2002, we do not expect to pay any
distributions on our Senior Preferred Stock, Series B Convertible Preferred
Stock, common stock or common units of limited partnership interest in the
Operating Partnership during 2002. As of September 30, 2002, we were eleven
quarters in arrears with respect to preferred stock distributions.
Under the terms of the Mezzanine Loan, we are prohibited from paying dividends
or distributions except to the extent necessary to maintain our status as a
REIT. In addition, we may not make distributions to our common shareholders or
our holders of common units of limited partnership interests in the Operating
Partnership unless we are current with respect to distributions to our preferred
shareholders. As of September 30, 2002, unpaid dividends for the period
beginning on November 16, 1999 through September 30, 2002 on the Series A Senior
Preferred Stock and Series B Convertible Preferred Stock aggregated $17,358 and
$47,825, respectively. The annualized dividends on our 2,300,000 shares of
Series A Senior Preferred Stock and 7,828,125 shares of Series B Convertible
Preferred Stock outstanding as of September 30, 2002 are $6,037 ($2.625 per
share) and $16,635 ($2.125 per share), respectively.
Development Activities
During the nine months ended September 30, 2002, we did not engage in any
development activities other than (i) post-opening work related to Prime Outlets
of Puerto Rico, which opened in July 2000, and (ii) certain consulting
activities in Europe.
New Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board issued FAS No. 144.
FAS No. 144 supercedes FAS No. 121, however it retains the fundamental
provisions of that statement related to the recognition and measurement of the
impairment of long-lived assets to be "held and used." In addition, FAS No. 144
provides more guidance on estimating cash flows when performing a recoverability
test, requires that a long-lived asset to be disposed of other than by sale
(e.g., abandoned) be classified as "held and used" until it is disposed of, and
established more restrictive criteria to classify an asset as "held for sale."
FAS No. 144 is effective for fiscal years beginning after December 15, 2001.
Effective January 1, 2002 we adopted FAS No. 144. In accordance with the
requirements of FAS No. 144, we have classified the operating results, including
gains and losses related to disposition, for those properties either disposed of
or classified as assets held for sale during 2002 as discontinued operations in
the accompanying Consolidated Statements of Operations for all periods
presented. See Note 2 - "New Accounting Pronouncements" and Note 3 - "Property
Dispositions" for additional information.
Funds from Operations
Industry analysts generally consider funds from operations ("FFO"), as defined
by the National Association of Real Estate Investment Trusts ("NAREIT"), an
alternative measure of performance of an equity REIT. In 1991, NAREIT adopted
its definition of FFO. This definition was clarified in 1995, 1999 and 2002. FFO
is currently defined by NAREIT as net income or loss (computed in accordance
with GAAP), excluding gains or losses from provisions for asset impairment and
sales of depreciable operating property, plus depreciation and amortization
(other than amortization of deferred financing costs and depreciation of
non-real estate assets) and after adjustment for unconsolidated partnerships and
joint ventures and discontinued operations. FFO includes non-recurring events,
except for those that are defined as "extraordinary items" in accordance with
GAAP. FFO excludes the earnings impact of "cumulative effects of accounting
changes" as defined by GAAP. Effective January 1, 2002, FFO related to assets
held for sale, sold or otherwise transferred and included in results of
discontinued operations (in accordance with the requirements of FAS No. 144)
should continue to be included in FFO.
We believe that FFO is an important and widely used measure of the operating
performance of REITs, which provides a relevant basis for comparison to other
REITs. Therefore, FFO is presented to assist investors in analyzing our
performance. Our FFO is not comparable to FFO reported by other REITs that do
not define the term using the current NAREIT definition or that interpret the
current NAREIT definition differently than we do. Therefore, we caution that the
calculation of FFO may vary from entity to entity and, as such the presentation
of FFO by us may not be comparable to other similarly titled measures of other
reporting companies. We believe that to facilitate a clear understanding of our
operating results, FFO should be examined in conjunction with net income
determined in accordance with GAAP. FFO does not represent cash generated from
operating activities in accordance with GAAP and should not be considered as an
alternative to net income as an indication of our performance or to cash flows
as a measure of liquidity or ability to make distributions.
TABLE 5 provides a reconciliation of income (loss) from continuing operations
before allocations to minority interests and preferred shareholders to FFO for
the three and nine months ended September 30, 2002 and 2001. FFO increased
$1,411, or 25.6%, to $6,890 for the three months ended September 30, 2002 from
$5,479 for the same period in 2001. FFO decreased $3,800, or 19.1%, to $16,109
for the nine months ended September 30, 2002 from $19,909 for the same period in
2001.
The increase in FFO for the three months ended September 30, 2002 compared to
the same period in 2001 reflects (i) lower interest expense during the 2002
period primarily resulting from principal payments on our Mezzanine Loan and
(ii) the reduction in our provision for uncollectible accounts receivable during
the 2002 period. Additionally, the FFO results for 2001 include a third quarter
non-recurring loss of $1,036 related to the refinancing of Prime Outlets at
Birch Run. These items were partially offset by the reduced occupancy in our
portfolio during the 2002 period as well as the impact of economic changes in
rental rates.
The decrease in FFO for the nine months ended September 30, 2002 compared to the
same period in 2001 is primarily due to (i) the aforementioned second quarter
non-recurring charge of $3,000 recorded during 2002, (ii) the reduced occupancy
in our portfolio during the 2002 period and (iii) the impact of economic changes
in rental rates. These items have been partially offset by (i) lower interest
expense in the 2002 period primarily resulting from principal payments on our
Mezzanine Loan, (ii) a reduction in our provision for uncollectible accounts
receivable during the 2002 period. Additionally, the FFO results for the 2001
period include a third quarter non-recurring loss of $1,036 related to the
refinancing of Prime Outlets at Birch Run.
Table 5--Funds from Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ----------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations
before minority interests $ (85,081) $ (72,134) $ (97,628) $ (81,424)
Adjustments:
Loss (gain) on sale of real estate - - 703 (552)
Provision for asset impairment 81,619 63,026 81,619 63,026
Depreciation and amortization 9,129 9,601 27,067 28,836
Non-real estate depreciation and amortization (601) (563) (1,693) (1,693)
Other items:
Unconsolidated joint venture adjustments 1,151 620 2,897 2,208
Non-cash joint venture interest subsidy - 1,882 - 1,882
Discontinued operations 1,575 (1,118) (14,383) (4,702)
Discontinued operations - (gain) loss on disposition (17,120) - (16,123) -
Discontinued operations - provision for impairment 15,557 - 27,757 -
Discontinued operations - depreciation
and amortization 661 4,165 5,893 12,328
--------- --------- --------- ---------
FFO before allocations to minority interests
and preferred shareholders $ 6,890 $ 5,479 $ 16,109 $ 19,909
========= ========= ========= =========
Other Data:
Net cash provided by operating activities $ 6,490 $ 2,163 $ 16,426 $ 20,323
Net cash provided by (used in) investing activities (1,478) 4,586 18,193 66
Net cash used in financing activities (4,174) (6,000) (36,117) (24,473)
====================================================================================================================================
Item 3. Quantitative and Qualitative Disclosures of Market Risk
Market Risk Sensitivity
We are subject to various market risks and uncertainties, including, but not
limited to, the effects of current and future economic conditions, and the
resulting impact on our revenue; the effects of increases in market interest
rates from current levels (see below); the risks associated with existing
vacancy rates or potential increases in vacancy rates because of, among other
factors, tenant bankruptcies and store closures, and the resulting impact on our
revenue; and risks associated with refinancing our current debt obligations or
obtaining new financing under terms less favorable than we have experienced in
prior periods.
Interest Rate Risk
In the ordinary course of business, we are exposed to the impact of interest
rate changes. We employ established policies and procedures to manage our
exposure to interest rate changes. We use a mix of fixed and variable rate debt
to (i) limit the impact of interest rate changes on our results from operations
and cash flows and (ii) to manage our overall borrowing costs.
The following table provides a summary of principal cash flows, excluding (i)
unamortized debt premiums of $8,468, (ii) mortgage indebtedness of $1,935 on
Melrose Place and (iii) non-recourse mortgage indebtedness of $16,331 on the
Woodbury Outlet Center, and related contractual interest rates by fiscal year of
maturity. Variable interest rates are based on the weighted-average rates of the
portfolio at September 30, 2002. The mortgage indebtedness on Melrose Place has
been excluded since it was repaid in full in connection with the sale of such
property on October 30, 2002. Additionally, we are currently negotiating a
transfer of our ownership interest in the Woodbury Center to John Hancock and
therefore, have excluded such non-recourse mortgage indebtedness since we do not
intend to pay it. See Note 3 - "Property Dispositions" and Note 4 - "Bonds and
Notes Payable" for additional information.
- ------------------------------------------------------------------------------------------------------------------------------------
Year of Maturity
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter Total
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed Rate:
Principal $ 16,787 $ 361,388 $ 5,823 $ 12,925 $ 121,886 $ 101,148 $ 619,957
Average interest rate 17.85% 8.40% 7.12% 8.08% 8.76% 7.55% 8.60%
Variable Rate:
Principal $ 215 $ 19,156 $ 19,371
Average interest rate 5.32% 5.32% 5.32%
====================================================================================================================================
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this Form 10-Q, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
Chairman and Chief Executive Officer along with the Company's
President, Chief Financial Officer and Treasurer, of the effectiveness
of the design and operation of the Company's disclosure controls and
procedures. Based upon that evaluation, the Company's Chairman and
Chief Executive Officer along with the Company's President, Chief
Financial Officer and Treasurer concluded that the Company's disclosure
controls and procedures are effective.
(b) Changes in Internal Controls
There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect internal
controls subsequent to the date the Company carried out its evaluation.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
For a description of legal proceedings involving the Company and its properties,
please see Part II, Item 1 of the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 2002. The following information updates such
disclosure.
As previously disclosed by the Company, Brown Group Retail, Inc. had alleged
that its leases did not require the payment of some or all of pass-through
charges. The parties have since reached a settlement on the issue. The Company
does not believe the settlement will have a material impact on its financial
condition or results of operations. See Note 6 - "Special Charges" and Note 7 -
"Legal Proceedings" for additional information.
The Company and its affiliates were defendants in a lawsuit filed by Accrued
Financial Services ("AFS") on August 10, 1999 in the Circuit Court for Baltimore
City. The lawsuit was removed to United States District Court for the District
of Maryland (the "U.S. District Court") on August 20, 1999. AFS claimed that
certain tenants had assigned to AFS their rights to make claims under leases
such tenants had with affiliates of the Company and alleged that the Company and
its affiliates overcharged such tenants for common area maintenance charges and
promotion fund charges. The U.S. District Court dismissed the lawsuit on June
19, 2000. AFS appealed the U.S. District Court's decision to the United States
Court of Appeals for the Fourth Circuit (the "Fourth Circuit"). Argument before
a Fourth Circuit panel of judges was held on October 30, 2001, during which the
panel of judges requested further briefing of certain issues. On July 29, 2002,
the Fourth Circuit denied the appeal of AFS. AFS requested further review by the
same panel of judges as well as all judges of the Fourth Circuit. This request
was denied on October 21, 2002. The Company believes that it has acted properly
and will continue to defend this lawsuit vigorously if AFS petitions the United
States Supreme Court for a writ of certiorari. The outcome of this lawsuit if
additional appeal efforts of AFS are successful, and the ultimate liability of
the defendants, if any, cannot be predicted at this time.
Since October 13, 2000 there have been eight complaints filed in the United
States District Court for the District of Maryland against the Company and five
individual defendants. The five individual defendants are Glenn D. Reschke, the
Chief Executive Officer and Chairman of the Board of Directors of the Company;
William H. Carpenter, Jr., the former President and Chief Operating Officer and
a former director of the Company; Abraham Rosenthal, the former Chief Executive
Officer and a former director of the Company; Michael W. Reschke, the former
Chairman of the Board and a current director of the Company; and Robert P.
Mulreaney, the former Executive Vice President - Chief Financial Officer and
Treasurer of the Company. The complaints were brought by alleged stockholders of
the Company, individually and purportedly as class actions on behalf of other
stockholders of the Company. The complaints alleged that the individual
defendants made statements about the Company that were in violation of the
federal securities laws. The complaints sought unspecified damages and other
relief. Lead plaintiffs and lead counsel were subsequently appointed. A
consolidated amended complaint captioned The Marsh Group, et al. v. Prime
Retail, Inc., et al. dated May 21, 2001 was filed. The Company and the
individual defendants filed a motion to dismiss the complaint, which was granted
on November 8, 2001. The plaintiffs appealed the matter to the Fourth Circuit.
Briefs were filed and oral arguments were held on June 4, 2002. On September 3,
2002 the Fourth Circuit affirmed the dismissal. Plaintiffs have agreed not to
seek further review of the dismissal.
Several entities (the "eOutlets Plaintiffs") have filed or stated an intention
to file lawsuits (collectively, the "eOutlets Lawsuits") against the Company and
its affiliates. The eOutlets Plaintiffs seek to hold the Company and its
affiliates responsible under various legal theories for liabilities incurred by
primeoutlets.com, inc., also known as eOutlets, including the theories that the
Company guaranteed the obligations of eOutlets and that the Company was the
"alter-ego" of eOutlets. primeoutlets.com inc. is also a defendant in some, but
not all, of the eOutlets Lawsuits. The Company believes that it is not liable to
the eOutlets Plaintiffs as there was no privity of contract between it and the
various eOutlets Plaintiffs. The Company will continue to defend all eOutlets
Lawsuits vigorously. primeoutlets.com inc. filed for protection under Chapter 7
of the United States Bankruptcy Code during November 2000 under the name
E-Outlets Resolution Corp. On November 5, 2002 the Chapter 7 Bankruptcy trustee
of E-Outlets Resolution Corp. filed suit against the Company, an affiliate, and
eOutlets' directors. The claims include alter ego, piercing the corporate veil,
improper preference payments, and other claims against the entities, and breach
of fiduciary duty and similar claims against the individual defendants. The
Company, on its own behalf and on behalf of its affiliates and the individual
defendants, intend to defend themselves vigorously. In the case captioned
Convergys Customer Management Group, Inc. v. Prime Retail, Inc. and
primeoutlets.com inc. in the Court of Common Pleas for Hamilton County (Ohio),
the Company prevailed in a motion to dismiss the plaintiff's claim that the
Company was liable for primeoutlets.com inc.'s breach of contract based on the
doctrine of piercing the corporate veil. In the case captioned J. Walter
Thompson v. Prime Retail, Inc. et al., in the Circuit Court for Wayne County
(Michigan) the plaintiff alleged that the Company and Operating Partnership were
the alter ego of primeoutlets.com inc., that the corporate veil should be
pierced, that it had a direct contract with the Company and Operating
Partnership, and that the Company and Operating Partnership committed "silent
fraud". The court dismissed the alter ego and piercing the corporate veil
claims. Trial for the remaining claims is scheduled for February of 2003. The
outcome of the eOutlets Lawsuits, and the ultimate liability of the Company in
connection with the eOutlets Lawsuits and related claims, if any, cannot be
predicted at this time.
In May, 2001, the Company, through affiliates, filed suit against Fru-Con
Construction, Inc. ("FCC"), the lender on Prime Outlets at New River ("New
River") as a result of FCC's foreclosure of New River due to the maturation of
the loan. The Company and its affiliates allege that they have been damaged
because of FCC's failure to dispose of the collateral in a commercially
reasonable manner and that FCC's use of the mark "Prime Outlets" violated United
States trademark law. The Company, through affiliates, has also filed suit
against The Fru-Con Projects, Inc. ("Fru-Con"), a partner in Arizona Factory
Shops Partnership and an affiliate of FCC. The Company and its affiliates allege
that Fru-Con failed to use reasonable efforts to assist in obtaining
refinancing. In addition, as part of the same action, Fru-Con filed suit against
the Company and affiliates. On October 25, 2002, following a motion for summary
judgment, the court dismissed several claims made by Fru-Con, limiting Fru-Con's
counter suit to the following claims: the Company and affiliates are improperly
withholding partnership funds; prospective tenants at New River were improperly
diverted to an outlet project in Sedona, Arizona (the "Sedona Project"); and the
Company and affiliates breached its contract with Fru-Con by not allowing it to
participate in the Sedona Project. The Company and its affiliates will
vigorously defend the claims filed against them and prosecute the claims they
filed. However, the ultimate outcome of the suit, including the liability, if
any, of the Company and its affiliates, cannot be predicted at this time.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
The Company is currently in arrears in the payment of distributions on its 10.5%
Series A Senior Cumulative Preferred Stock ("Series A Senior Preferred Stock")
and 8.5% Series B Cumulative Participating Convertible Preferred Stock ("Series
B Convertible Preferred Stock"). As of September 30, 2002, the aggregate
arrearage on the Series A Senior Preferred Stock and the Series B Convertible
Preferred Stock was $17,358 and $47,825, respectively.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On August 13, 2002, the board of directors of the Company approved a long-term
incentive plan, a summary of which is attached as Exhibit 99.3 to this Quarterly
Report on Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included in this Quarterly Report on Form 10-Q:
Exhibit 99.1 Certification by Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification by Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.3 Summary of Prime Retail, Inc. 2002 Long-Term
Incentive Plan.
Exhibit 99.4 Employment Agreement, dated June 6, 2002, by and
between Prime Retail, Inc, and Frederick J. Meno, IV.
Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIME RETAIL, INC.
Registrant
Date: November 14, 2002 /s/ Robert A. Brvenik
----------------------------------
Robert A. Brvenik
President, Chief Financial Officer and
Treasurer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Glenn D. Reschke, Chairman and Chief Executive Officer of Prime Retail, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Prime Retail,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Glenn D. Reschke
--------------------
Glenn D. Reschke
Chairman and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Robert A. Brvenik, President, Chief Financial Officer and Treasurer of Prime
Retail, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Prime Retail,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Robert A. Brvenik
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Robert A. Brvenik
President, Chief Financial Officer
and Treasurer