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 March 31, 2003
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the Transition Period From ------- to -------
Commission file number 001-13301
------------------------
PRIME RETAIL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 38-2559212
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 East Pratt Street
Nineteenth Floor
Baltimore, Maryland 21202
- -------------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
(410) 234-0782
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address, or former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of May 14, 2003, the issuer had outstanding 43,577,916 shares of Common
Stock, $.01 par value per share.
Page - (2)
Prime Retail, Inc.
Form 10-Q
INDEX
PART I: FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002............................................... 1
Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2002............................ 2
Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2002............................ 3
Notes to the Consolidated Financial Statements.................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 23
Item 3. Quantitative and Qualitative Disclosures of Market Risk....... 43
Item 4. Controls and Procedures....................................... 44
PART II: OTHER INFORMATION
Item 1. Legal Proceedings............................................. 45
Item 2. Changes in Securities......................................... 46
Item 3. Defaults Upon Senior Securities............................... 46
Item 4. Submission of Matters to a Vote of Security Holders........... 46
Item 5. Other Information............................................. 46
Item 6. Exhibits and Reports on Form 8-K.............................. 46
Signatures............................................................. 47
Certifications of Chief Executive Officer and Chief Financial Officer.. 48
Page - (3)
PRIME RETAIL, INC.
Unaudited Consolidated Balance Sheets
(Amounts in thousands, except share information)
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Investment in rental property:
Land $ 100,246 $ 101,546
Buildings and improvements 739,972 740,024
Furniture and equipment 13,514 13,292
---------- ---------
853,732 854,862
Accumulated depreciation (220,230) (213,604)
---------- ---------
633,502 641,258
Cash and cash equivalents 8,236 6,908
Restricted cash 105,674 107,037
Accounts receivable, net 1,024 3,049
Deferred charges, net 3,256 3,766
Investment in unconsolidated joint ventures 50,664 49,889
Other assets 6,183 6,181
---------- ---------
Total assets $ 808,539 $ 818,088
========== =========
Liabilities and Shareholders' Equity
Bonds payable $ 22,451 $ 22,495
Notes payable, including $41,601 in default in 2003 509,273 511,443
Defeased notes payable 74,509 74,764
Accrued interest 4,107 3,984
Real estate taxes payable 3,398 3,484
Accounts payable and other liabilities 38,231 43,059
---------- ---------
Total liabilities 651,969 659,229
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 $77,877),
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 $251,845), 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 (554,827) (552,538)
---------- ---------
Total shareholders' equity 155,083 157,372
---------- ---------
Total liabilities and shareholders' equity $ 808,539 $ 818,088
========== =========
====================================================================================================================================
See accompanying notes to consolidated financial statements.
Page - (4)
PRIME RETAIL, INC.
Unaudited Consolidated Statements of Operations
(Amounts in thousands, except per share information)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Base rents $ 18,993 $ 24,309
Percentage rents 977 1,320
Tenant reimbursements 10,958 12,834
Interest and other 4,012 2,860
-------- --------
Total revenues 34,940 41,323
Expenses
Property operating 9,955 10,211
Real estate taxes 2,984 3,666
Depreciation and amortization 7,280 10,208
Corporate general and administrative 4,466 3,419
Interest 11,856 17,729
Other charges 688 2,472
-------- --------
Total expenses 37,229 47,705
-------- --------
Loss before gain on sale of real estate (2,289) (6,382)
Gain on sale of real estate - 16,793
-------- --------
Income (loss) from continuing operations (2,289) 10,411
Discontinued operations, including loss of $9,623
on dispositions in 2002 - (8,730)
-------- --------
Net income (loss) (2,289) 1,681
Allocations to preferred shareholders (5,668) (5,668)
-------- --------
Net loss applicable to common shares $ (7,957) $ (3,987)
======== ========
Basic and diluted earnings per common share:
Income (loss) from continuing operations $ (0.18) $ 0.11
Discontinued operations - (0.20)
-------- --------
Net loss $ (0.18) $ (0.09)
======== ========
Weighted-average common shares
outstanding - basic and diluted 43,578 43,578
======== ========
====================================================================================================================================
See accompanying notes to consolidated financial statements.
Page - (5)
PRIME RETAIL, INC.
Unaudited Consolidated Statements of Cash Flows
(Amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Income (loss) from continuing operations $ (2,289) $ 10,411
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities:
Gain on sale of real estate - (16,793)
Equity in earnings of unconsolidated joint ventures (1,126) (153)
Depreciation and amortization 7,280 10,208
Amortization of deferred financing costs 426 1,683
Amortization of debt premiums (519) (496)
Bad debt expense 536 2,344
Discontinued operations - 3,299
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,489 432
Decrease in restricted cash 1,363 3,275
Decrease in other assets 282 334
Decrease in accounts payable and other liabilities (4,828) (8,155)
Decrease in real estate taxes payable (86) (2,277)
Increase in accrued interest 123 556
-------- --------
Net cash provided by operating activities 2,651 4,668
-------- --------
Investing Activities
Additions to investment in rental property (769) (983)
Distributions from unconsolidated joint ventures 311 -
Proceeds from sales of operating properties and land 1,085 11,559
-------- --------
Net cash provided by investing activities 627 10,576
-------- --------
Financing Activities
Principal repayments on notes payable (1,950) (16,691)
-------- --------
Cash used in financing activities (1,950) (16,691)
-------- --------
Increase (decrease) in cash and cash equivalents 1,328 (1,447)
Cash and cash equivalents at beginning of period 6,908 7,537
-------- --------
Cash and cash equivalents at end of period $ 8,236 $ 6,090
======== ========
====================================================================================================================================
See accompanying notes to consolidated financial statements.
Page - (6)
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:
- --------------------------------------------------------------------------------
Three Months Ended March 31, 2002
- --------------------------------------------------------------------------------
Book value of net assets disposed $ 71,276
Notes payable paid (11,052)
Notes payable assumed by buyer (46,862)
Notes payable transferred to lender (15,621)
Investment in unconsolidated joint ventures (2,975)
Gain on sale of real estate 16,793
---------
Cash received, net $ 11,559
=========
================================================================================
See accompanying notes to consolidated financial statements.
Page - (7)
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 notes 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 notes thereto included in
Prime Retail, Inc.'s (the "Company") Annual Report on Form 10-K for the year
ended December 31, 2002.
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 it has a controlling
financial interest. 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 unconsolidated joint ventures 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, which did not have an impact on
our results of operations or financial position.
Note 2 - Recent Accounting Pronouncements
In October, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 144, "Accounting for
Impairment of Disposal of Long-lived Assets." FAS No. 144 supercedes FAS No.
121, however it retains the fundamental provisions of that statement as related
to the recognition and measurement of the impairment of long-lived assets to be
"held and used." In addition, FAS No. 144 (i) provides further guidance
regarding the estimation of cash flows in the performance of a recoverability
test, (ii) requires that a long-lived asset to be disposed of other than by sale
(e.g., abandoned) be classified as "held and used" until it is disposed of, and
(iii) established more restrictive criteria to classify an asset as "held for
sale." Effective January 1, 2002, we adopted FAS No. 144. Our adoption of FAS
No. 144 effective January 1, 2002 did not have a material impact on our results
of operations or financial position.
Page - (8)
In accordance with the requirements of FAS No. 144, we have classified the
operating results, including gains and losses related to disposition, for
certain properties either disposed of or classified as assets held for sale
during 2002 as discontinued operations in the Consolidated Statements of
Operations for all periods presented. See Note 3 - "Property Dispositions" for
additional information.
In December 2002, the FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the
disclosures to be made by a guarantor in interim and annual financial statements
about the obligations under certain guarantees. FIN No. 45 also clarifies that a
guarantor is required to recognize, at the inception of the guarantee, an
initial liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN No. 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. We
adopted the disclosure provisions of FIN No. 45 effective December 31, 2002. The
initial recognition and initial measurement provisions of FIN No. 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. We did not issue or modify any guarantees during the three
months ended March 31, 2003. See "Guarantees and Guarantees of Indebtedness of
Others" contained in Note 4 - "Debt" for additional information.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 clarifies the application of existing accounting
pronouncements to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The provisions of FIN No. 46
were immediately effective for all variable interests in variable interest
entities created after January 31, 2003, and we will need to apply the
provisions of FIN No. 46 to any existing variable interests in variable interest
entities by no later than July 1, 2003. We did not create any variable interest
entities during the three months ended March 31, 2003 and we do not believe that
FIN No. 46 will have a significant impact on our financial statements.
Note 3 - Property Dispositions
We disposed of certain properties through various transactions (including
sale, joint venture arrangements, foreclosure and transfer of ownership to the
respective lender) during 2002. The following table summarizes these
dispositions:
- ------------------------------------------------------------------------------------------------------------------------------------
Gain/ Provision
(Loss) for
Date of Property Sales Reduction Net on Sale/ Asset
Disposition Type GLA Price of Debt Proceeds Disposition Impairment
- ------------------------------------------------------------------------------------------------------------------------------------
Year 2002
Continuing Operations:
Hagerstown Center January 2002 Outlet Center 487,000 $ 80,500 $ (57,914) $12,113 $ 16,793 $ -
Bellport Outlet Center
- Phases II/III April 2002 Outlet Center 197,000 6,500 - 522 (703) -
Bridge Properties July 2002 Outlet Centers 1,304,000 118,650 (111,009) - (10,288) -
--------- -------- --------- -------- ------- -------
Subtotal 1,988,000 205,650 (168,923) 12,635 5,802 -
--------- -------- --------- -------- ------- -------
Discontinued Operations:
Conroe Center January 2002 Outlet Center 282,000 - (15,621) (554) - -
Edinburgh Center April 2002 Outlet Center 305,000 27,000 (16,317) 9,551 (9,623) -
Western Plaza June 2002 Community Center 205,000 9,500 (9,467) 688 2,121 -
Jeffersonville II August 2002 Outlet Center 314,000 - (17,938) - 17,121 -
Vero Beach September 2002 Outlet Center 326,000 - (25,126) - - 12,200
Melrose Place October 2002 Community Center 27,000 2,500 (1,935) 555 990 -
Puerto Rico Center December 2002 Outlet Center 176,000 36,500 (19,202) 13,958 - 15,557
Colorado Properties December 2002 Outlet Center 808,000 96,000 (74,849) 12,628 15,543 -
--------- -------- --------- -------- ------- -------
Subtotal 2,443,000 171,500 (180,455) 36,826 26,152 27,757
--------- -------- --------- -------- ------- -------
Total 4,431,000 $377,150 $(349,378) $49,461 $ 31,954 $27,757
========= ======== ========= ======= ======== =======
====================================================================================================================================
Page - (9)
2002 Dispositions - Continuing Operations
The operating results for certain properties that were sold to joint
venture partnerships during 2002 and in which we still have a significant
continuing involvement are not classified as discontinued operations in the
Consolidated Statements of Operations. Such properties and/or their operating
results through the dates of their respective disposition are collectively
referred to as the "2002 Joint Venture Properties". The 2002 Joint Venture
Properties consist of our sales of (i) Prime Outlets at Hagerstown (the
"Hagerstown Center") and six outlet centers (collectively, the "Bridge
Properties"). The following discussion summarizes the terms of such
dispositions.
Hagerstown Center
On January 11, 2002, we completed the sale of the Hagerstown Center, an
outlet center located in Hagerstown, Maryland, for aggregate consideration of
$80,500 to an existing joint venture partnership (the "Prime/Estein Venture")
between one of our affiliates and an affiliate of Estein & Associates USA, Ltd.
("Estein"), a real estate investment company. Our affiliate and Estein have 30%
and 70% ownership interests, respectively, in the Prime/Estein Venture. In
connection with the sale transaction, the Prime/Estein Venture assumed first
mortgage indebtedness of $46,862 on the Hagerstown Center (the "Hagerstown First
Mortgage"); however, our guarantee of the Hagerstown First Mortgage remains in
place.
Under the terms of the transaction, we manage, market and lease the
Hagerstown Center for a fee on behalf of the Prime/Estein Venture.
The operating results of the Hagerstown Center are reflected in our results
from continuing operations through the date of disposition. In connection with
the sale of the Hagerstown Center, we recorded a gain on the sale of real estate
of $16,793 during the first quarter of 2002. 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.
Bellport Center II/III
On April 19, 2002, we completed the sale of Phases II and III of the
Bellport Outlet Center (the "Bellport Outlet Center"), an outlet center located
in Bellport, New York. We had a 51% ownership interest in the joint venture
partnership that owned the Bellport Outlet Center and accounted for our
ownership interest in accordance with the equity method of accounting. The
Bellport Outlet Center was sold to Sunrise Station, L.L.C., an affiliate of one
of our joint venture partners, for cash consideration of $6,500. At closing,
recourse first mortgage indebtedness of $5,500, which was scheduled to mature on
May 1, 2002, was repaid in full. In connection with the sale of the Bellport
Outlet Center, we recorded a loss on the sale of real estate of $703 during the
second quarter of 2002.
Bridge Properties
On July 26, 2002, we completed the sale the Bridge Properties for aggregate
consideration of $118,650 to affiliates of PFP Venture LLC, a new joint venture
(the "PFP Venture") (i) 30.4% owned by PWG Prime Holdings LLC ("PWG"), a third
party, and (ii) 69.6% owned by FP Investment LLC ("FPI"). FPI is a new joint
venture between (i) FRIT PRT Bridge Acquisition LLC ("FRIT"), a third party, and
(ii) an affiliate of ours. Through FPI, FRIT and we indirectly had initial
ownership interests of 51.4% and 18.2%, respectively, in the PFP Venture. PWG is
the managing member of the PFP Venture. FPI and PWG have certain protective
rights over the operations of the Bridge Properties, which are pari passu. The
Bridge Properties are located in Anderson, California; Calhoun, Georgia;
Gaffney, South Carolina; Latham, New York; Lee, Massachusetts and Lodi, Ohio.
Page - (10)
Under the terms of the transaction, we manage, market and lease the Bridge
Properties for a fee on behalf of the PFP Venture.
The operating results of the Bridge Properties are reflected in our results
from continuing operations through the date of disposition. In connection with
the sale of the Bridge Properties, we recorded a loss on the sale of real estate
of $10,288 during the second quarter of 2002. This loss represented the
write-down of our carrying value of the Bridge Properties to their fair value
less estimated costs to dispose, based on the terms of the sale agreement.
Because PWG is the managing member of the PFP Venture and because of the pari
passu nature of the protective rights of FPI and PWG, we are not deemed in
control of the PFP Venture. Accordingly, we commenced accounting for our
indirect ownership interest in the PFP Venture in accordance with the equity
method of accounting effective on the date of disposition. We record our share
of the operations of the Bridge Properties using an assumed book value
liquidation model because both FPI and the PFP Venture have specific allocations
for distribution.
For the three months ended March 31, 2002 combined revenues were $6,694 and
combined expenses were $7,902 for the Hagerstown Center and the Bridge
Properties as reflected in our results from continuing operations through their
respective dates of disposition. For the three months ended March 31, 2002, our
equity in losses (included in interest and other income in the Consolidated
Statements of Operations) for the Bellport Outlet Center was $218.
2002 Dispositions - Discontinued Operations
We have classified the operating results, including gains and losses
related to disposition, for certain properties either disposed of or classified
as assets held for sale during 2002 as discontinued operations in the
Consolidated Statements of Operations for the 2002 period. The following
discussion summarizes the terms of such dispositions.
Conroe Center
During 2001, certain of our subsidiaries suspended regularly scheduled
monthly debt service payments on two non-recourse mortgage loans held by New
York Life Insurance Company ("New York Life") at the time of the suspension.
These non-recourse mortgage loans were cross-defaulted and cross-collateralized
by Prime Outlets at Conroe (the "Conroe Center"), located in Conroe, Texas, and
Prime Outlets at Jeffersonville II (the "Jeffersonville II Center"), located in
Jeffersonville, Ohio.
Effective January 1, 2002, New York Life foreclosed on the Conroe Center
and its related assets and liabilities, including $554 of cash and our carrying
value of the indebtedness of $15,621 (principal outstanding of $15,467 and
unamortized debt premium of $154), were transferred from our subsidiary that
owned the Conroe Center to New York Life. The foreclosure of the Conroe Center
did not have a material impact on our results of operations or financial
condition. See "Jeffersonville II Center" below for additional information.
The operating results of the Conroe Center are classified as discontinued
operations in the Consolidated Statements of Operations through the date of
disposition for the 2002 period. No gain or loss was recorded in connection with
the foreclosure of the Conroe Center.
Edinburgh Center
On April 1, 2002, we completed the sale of Prime Outlets at Edinburgh (the
"Edinburgh Center"), an outlet center located in Edinburgh, Indiana and
additional undeveloped land. The Edinburgh Center was sold to CPG Partners, L.P.
for cash consideration of $27,000. The net cash proceeds from the sale were
$9,551, after (i) repayment in full of $16,317 of existing first mortgage
indebtedness on the Edinburgh Center and (ii) prorations, closing costs and
fees.
Page - (11)
The operating results of the Edinburgh Center through the date of
disposition are classified as discontinued operations in the Consolidated
Statements of Operations for the 2002 period. During the first quarter of 2002,
we recorded a loss on the sale of real estate of $9,623 representing the
write-down of our carrying value of the Edinburgh Center to its estimated fair
value less estimated costs to dispose, based on the terms of the sale agreement.
Western Plaza
On June 17, 2002, we completed the sale of the Shops at Western Plaza
("Western Plaza"), a community center located in Knoxville, Tennessee. Western
Plaza was sold to WP General Partnership for cash consideration of $9,500. The
net proceeds from the sale were $688, after (i) repayment of $9,467 (of which
$2,467 was scheduled to mature on October 31, 2002) of existing recourse
mortgage indebtedness on Western Plaza, (ii) prorations, closing costs and fees
and (iii) release of certain escrowed funds.
The operating results of Western Plaza through the date of disposition are
classified as discontinued operations in the Consolidated Statements of
Operations for the 2002 period. In connection with the sale of Western Plaza, we
recorded a gain on the sale of real estate of $2,121 during the second quarter
of 2002.
Jeffersonville II Center
Effective July 18, 2002, New York Life sold its interest in the
Jeffersonville II Center loan. On August 13, 2002, we transferred our ownership
interest in the Jeffersonville II Center to New York Life's successor. As a
result of the transfer of our ownership interest in the Jeffersonville II
Center, we recorded a non-recurring gain of $17,121 (included in discontinued
operations) during the third quarter of 2002, representing the difference
between our carrying value of the Jeffersonville II Center and its related
assets and liabilities, including our carrying value of the indebtedness of
$17,938 (principal outstanding of $17,768 and unamortized debt premium of $170),
as of the date of transfer. The transfer of our ownership interest in the
Jeffersonville II Center did not have a material impact on our results of
operations or financial condition.
The operating results of the Jeffersonville II Center are classified as
discontinued operations in the Consolidated Statements of Operations through the
date of disposition for the 2002 period. See "Conroe Center" above for
additional information.
Vero Beach Center
During August of 2002, certain of our subsidiaries suspended regularly
scheduled monthly debt service payments on two non-recourse mortgage loans which
were cross-collateralized by Prime Outlets at Vero Beach (the "Vero Beach
Center"), located in Vero Beach, Florida, and Prime Outlets at Woodbury (the
"Woodbury Center"), located in Woodbury, Minnesota (collectively, the "John
Hancock Properties"). These non-recourse mortgage loans were held by John
Hancock Life Insurance Company ("John Hancock").
Page - (12)
During the second quarter of 2002, we incurred a provision for asset
impairment of $12,200 to adjust our carrying value of the Vero Beach Center to
its estimated fair value in accordance with the provisions of FAS No. 144.
Effective September 9, 2002, John Hancock foreclosed on the Vero Beach Center
and its related assets and liabilities, including our carrying value of the
indebtedness of $25,126 (principal outstanding of $24,497 and unamortized debt
premium of $629), were transferred to John Hancock. Additionally, we are
currently negotiating a transfer of our ownership interest in the Woodbury
Center to John Hancock. Foreclosure on the Vero Beach Center did not, and the
expected transfer of our ownership interest in the Woodbury Center is not,
expected to have a material impact on our results of operations or financial
condition. The carrying value of the Woodbury Center was $15,615 as of March 31,
2003. Such value is exceeded by our carrying value of the associated
indebtedness of $16,682_ (principal outstanding of $16,331 and unamortized debt
premium of $351) as of March 31, 2003. If we were to transfer our ownership
interest in the Woodbury Center to John Hancock, we would record a non-recurring
gain for the difference between the carrying value of the Woodbury Center and
its related net assets and the carrying value of the indebtedness as of the date
of transfer.
The operating results of the Vero Beach Center are classified as
discontinued operations in the Consolidated Statements of Operations through the
date of disposition for the 2002 period. No gain or loss was recorded in
connection with the foreclosure of the Vero Beach Center. See Note 4 - "Debt"
for additional information.
Melrose Place
On October 30, 2002, we completed the sale of Melrose Place, a community
center located in Knoxville, Tennessee. Melrose Place was sold to Melrose Place
Tennessee General Partnership for cash consideration of $2,500. The net proceeds
from the sale were $555, after (i) repayment of $1,935 of existing recourse
mortgage indebtedness on Melrose Place, (ii) prorations, closing costs and fees
and (iii) release of certain escrowed funds.
The operating results of Melrose Place are classified as discontinued
operations in the Consolidated Statements of Operations for the 2002 period. In
connection with the sale of Melrose, we recorded a gain on the sale of real
estate of $990 during the fourth quarter of 2002.
Puerto Rico Center
On December 6, 2002, we completed the sale of (i) Prime Outlets of Puerto
Rico, an outlet center located in Barceloneta, Puerto Rico and (ii) certain
adjacent parcels of land being developed for non-outlet retail use
(collectively, the "Puerto Rico Center"). The Puerto Rico Center was sold to PR
Barceloneta, LLC for cash consideration of $36,500. The net proceeds from the
sale were $13,958, after (i) repayment of $19,202 of existing first mortgage
indebtedness on the Puerto Rico Center, (ii) pro-rations, closing costs and
fees, (iii) establishment of certain escrows at closing and (iv) release of
certain escrowed funds. At the closing of the sale of the Puerto Rico Center, we
were required to fund $2,800 into an escrow account which will be returned to us
only upon satisfaction of certain conditions no later than December 31, 2004.
The escrow account is included in restricted cash and an offsetting deferred
liability is included in accounts payable and other liabilities in the
Consolidated Balance Sheet as of March 31, 2003. Under the terms of the
transaction, we will continue to manage, market and lease the Puerto Rico Center
for a fee on behalf of PR Barceloneta, LLC.
The operating results of the Puerto Rico Center through the date of
disposition are classified as discontinued operations in the Consolidated
Statements of Operations for the 2002 period. During the third quarter of 2002,
we recorded an impairment loss of $15,557 representing the write-down of our
carrying value of the Puerto Rico Center to its fair value less estimated costs
to sell, based on the terms of the sale agreement.
Page - (13)
Colorado Properties
On December 6, 2002, we completed the sale of two outlet centers (together,
the "Colorado Properties") to TGS (U.S.) Realty, Inc. for aggregate cash
consideration of $96,000. The Colorado Properties are located in Castle Rock,
Colorado and Loveland, Colorado. The net proceeds from the sale of the Colorado
Properties were $12,628, after (i) required defeasance of $74,849 of mortgage
indebtedness and the costs related to such defeasance (see Note 4 - "Debt for
additional information), (ii) prorations, closing costs and fees and (iii) the
release of certain escrowed funds.
The operating results of the Colorado Properties through the date of
disposition are classified as discontinued operations in the Consolidated
Statements of Operations for the 2002 period. In connection with the sale of the
Colorado Properties, we recorded a gain on the sale of real estate of $15,543
(also included in discontinued operations) during the fourth quarter of 2002.
The following summary presents the operating results of those properties
disposed of during 2002 whose results are classified as discontinued operations
in the Consolidated Statements of Operations:
- --------------------------------------------------------------------------------
Three Months Ended March 31, 2002
- --------------------------------------------------------------------------------
Revenues
Base rents $ 6,097
Percentage rents 215
Tenant reimbursements 2,817
Interest and other 198
--------
Total revenues 9,327
Expenses
Property operating 2,194
Real estate taxes 973
Depreciation and amortization 2,015
Interest 2,932
Other charges 320
--------
Total expenses 8,434
--------
Income before loss on
sale of real estate 893
Loss on sale of real estate (9,623)
--------
Discontinued operations $ (8,730)
========
================================================================================
2003 Disposition
On March 31, 2003, the PFP Venture completed the sale of Prime Outlets at
Latham (the "Latham Center"), an outlet center located in Latham, New York. The
Latham Center, which was one of the Bridge Properties, was sold to 400 Old
Loudon Road Realty, LLC for cash consideration of $2,200. The net cash proceeds
from the sale were $184, after (i) repayment of $1,870 of existing mortgage
indebtedness on the Bridge Properties and (ii) prorations, closing costs and
fees. In connection with the sale of the Latham Center, the PFP Venture recorded
a gain on the sale of real estate of $117 during the first quarter of 2003. As
previously discussed, the Company accounts for its investment in the Bridge
Properties in accordance with the equity method of accounting.
Page - (14)
Note 4 - Debt
We have fixed rate tax-exempt revenue bonds collateralized by properties
located in Chattanooga, Tennessee (the "Chattanooga Bonds") which contain (i)
certain covenants, including a minimum debt-service coverage ratio financial
covenant (the "Financial Covenant") and (ii) cross-default provisions with
respect to certain of our other credit agreements. Based on the operations of
the collateral properties, we were not in compliance with the Financial Covenant
for the quarters ended June 30, September 30 and December 31, 2002. In the event
of non-compliance with the Financial Covenant or default, the holders of the
Chattanooga Bonds (the "Bondholders") had the ability to put such obligations to
us at a price equal to par plus accrued interest. On January 31, 2003, we
entered into an agreement (the "Forbearance Agreement") with the Bondholders.
The Forbearance Agreement provides amendments to the underlying loan and other
agreements that enable us to be in compliance with various financial covenants,
including the Financial Covenant. So long as we continue to comply with the
provisions of the Forbearance Agreement and are not otherwise in default of the
underlying loan and other documents through December 31, 2004, the revised
financial covenants will govern. Additionally, certain quarterly tested
financial covenants and other covenants become effective June 30, 2004. Pursuant
to the terms of the Forbearance Agreement, we were required to fund $1,000 into
an escrow account to be used for conversion of certain of the retail space in
the collateral properties to office space and agreed that an event of default
with respect to the other debt obligations related to the property would also
constitute a default under the Chattanooga Bonds. We funded this required escrow
in February 2003.
Notes payable included unamortized debt premiums of $7,355 in the aggregate
at March 31, 2003. Our debt premiums are being amortized over the terms of the
related debt instruments in accordance with the effective interest method.
Amortization of debt premiums (included in interest expense in the Consolidated
Statements of Operations) was $519 and $496 for the three months ended March 31,
2003 and 2002, respectively.
Defaults on Certain Non-recourse Mortgage Indebtedness
During 2001, certain of our subsidiaries suspended regularly scheduled
monthly debt service payments on non-recourse mortgage loans which were
cross-collateralized by the Jeffersonville II Center and the Conroe Center. At
the time of suspension, these non-recourse mortgage loans were held by New York
Life. Effective January 1, 2002, New York Life foreclosed on the Conroe Center.
Effective July 18, 2002, New York Life sold its interest in the Jeffersonville
II Center loan. On August 13, 2002, we transferred our ownership interest in the
Jeffersonville II Center to New York Life's successor. See Note 3 - "Property
Dispositions" for additional information.
During August 2002, certain of our subsidiaries suspended regularly
scheduled monthly debt service payments on non-recourse mortgage loans which
were cross-collateralized by the Vero Beach Center and the Woodbury Center.
These non-recourse mortgage loans were held by John Hancock. Effective September
9, 2002, John Hancock foreclosed on the Vero Beach Center. Additionally, we are
currently negotiating a transfer of our ownership interest in the Woodbury
Center to John Hancock. The aggregate carrying value of the Woodbury Center was
$15,615 as of March 31, 2003. Such amount is exceeded by the aggregate carrying
value of the non-recourse mortgage loan of $16,682 as of March 31, 2003. Upon
the transfer of the Woodbury Center to John Hancock, we expect to record a
non-recurring gain for the difference between the carrying value of the property
and its related net assets and the outstanding loan balance and related
liabilities. See Note 3 - "Property Dispositions" for additional information.
Page - (15)
In December 2002, we notified the servicer of certain non-recourse mortgage
loans (cross-collateralized by Prime Outlets at Bend, Prime Outlets at Post
Falls and Prime Outlets at Sedona) totaling $24,919 as of March 31, 2003 that
the net cash flow from the properties securing the loans was insufficient to
fully pay the required monthly debt service. At that time, certain of our
subsidiaries suspended the regularly scheduled monthly debt service payments.
Subsequent to our notification to the servicer, we have been remitting on a
monthly basis all available cash flow from the properties, after a reserve for
monthly operating expenses, as partial payment of the debt service. The failure
to pay the full amount due constitutes a default under the loan agreements which
allows the lender to accelerate the loan and to exercise various remedies
contained in the loan agreements, including application of escrow balances to
delinquent payments and, ultimately, foreclosure on the properties which
collateralize the loans. The lender has notified us that it has accelerated the
loans. Since that time we have initiated discussions with the servicer of the
loans regarding restructuring of the loans. There can be no assurance that such
discussions will result in any modification to the terms of the loans. However,
any action by the lender with respect to these properties is not expected to
have a material impact on our results of operations or financial condition
because we are currently only remitting available cash flow. These non-recourse
mortgage loans require the monthly funding of escrow accounts for the payment of
real estate taxes, insurance and capital improvements. Such escrow accounts
totaled $364 as of March 31, 2003, which is included in restricted cash in the
Consolidated Balance Sheet. The aggregate carrying value of these properties was
$21,719 as of March 31, 2003. Such amount is exceeded by the aggregate
outstanding balance of the non-recourse mortgage loans of $24,919 as of March
31, 2003. If the lender were to foreclose on the collateral properties or we
were to transfer our ownership interest in the collateral properties to the
lender, we would record a non-recurring gain for the difference between the
carrying value of the properties and their related net assets and the
outstanding loan balances and related liabilities.
Defeased Notes Payable
On December 6, 2002, we completed the sale of our Colorado Properties,
which were part of the 15 properties contained in the collateral pool securing a
first mortgage and expansion loan (the "Mega Deal Loan"), which had a then
outstanding balance of $338,940. In connection with the release of the Colorado
Properties from the collateral pool, we were required to partially defease the
Mega Deal Loan. Therefore, the Mega Deal Loan was bifurcated into (i) a defeased
portion in the amount of $74,849 (the "Defeased Notes Payable") and (ii) an
undefeased portion in the amount of $264,091, which is still referred to as the
Mega Deal Loan. Both the Defeased Notes Payable and the Mega Deal Loan (i) bear
interest at a fixed-rate of 7.782%, (ii) require monthly payments of principal
and interest pursuant to a 30-year amortization schedule and (iii) mature on
November 11, 2003. The Mega Deal Loan is now secured by the remaining 13
properties contained in the collateral pool. We used $79,257 of the gross
proceeds from the sale of the Colorado Properties to purchase US Treasury
Securities, which were placed into a trustee escrow (the "Trustee Escrow"). The
Trustee Escrow is used to make the scheduled monthly debt service payments,
including the payment of the then outstanding principal amount, together with
all accrued and unpaid interest on the maturity date of November 11, 2003, under
the Defeased Notes Payable. As of March 31, 2003, the outstanding balance of the
Defeased Notes Payable was $74,509 and the balance of the Trustee Escrow was
$77,365 (included in restricted cash in the Consolidated Balance Sheet). See
Note 3 - "Property Dispositions" for additional information. Furthermore, in
connection with the partial defeasance of the Mega Deal Loan we amended the Mega
Deal Loan so that (i) we are required to fund 10 monthly payments of $500 into a
lender escrow to be used as additional cash collateral and (ii) release prices
for the remaining 13 properties in the collateral pool were amended to provide
for a more orderly refinancing of the Mega Deal Loan.
Page - (16)
Debt Service Obligations
The scheduled principal maturities of our debt, excluding (i) unamortized
debt premiums of $7,435 and (ii) $41,250 of aggregate non-recourse mortgage
indebtedness in default (see "Defaults on Certain Non-recourse Mortgage
Indebtedness" above), and related average contractual interest rates by year of
maturity as of March 31, 2003 are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Bonds Payable
(including sinking Defeased
fund payments) Notes Payable Notes Payable Total Debt
-------------------------- ----------------------- ----------------------- ------------------------
Average Average Average Average
Interest Principal Interest Principal Interest Principal Interest Principal
Years Ended December 31, Rates Maturities Rates Maturities Rates Maturities Rates Maturities
- ------------------------------------------------------------------------------------------------------------------------------------
2003 6.46% $ 636 7.79% $ 265,009 7.78% $ 74,509 7.78% $ 340,154
2004 6.34% 726 7.97% 4,571 7.75% 5,297
2005 6.34% 773 8.58% 11,574 8.44% 12,347
2006 6.34% 820 8.83% 120,437 8.81% 121,257
2007 6.34% 878 7.60% 1,002 7.02% 1,880
Thereafter 6.52% 18,618 7.59% 57,995 7.33% 76,613
---- -------- ---- --------- ---- -------- ---- ---------
6.49% $ 22,451 8.06% $ 460,588 7.78% $ 74,509 7.96% $ 557,548
==== ======== ==== ========= ==== ======== ==== =========
====================================================================================================================================
Such indebtedness in the amount of $557,548 had a weighted-average maturity
of 2.3 years and bore contractual interest at a weighted-average rate of 7.96%
per annum. At March 31, 2003, all of such indebtedness bore interest at fixed
rates. Our remaining scheduled principal payments during 2003 for such
indebtedness aggregated $340,154. In addition to regularly scheduled principal
payments, the remaining 2003 scheduled principal payments also reflect balloon
payments of (i) $260,681 for the Mega Deal Loan and (ii) $73,882 due for the
Defeased Notes Payable. Both the Mega Deal Loan and the Defeased Notes Payable
are scheduled to mature on November 11, 2003. All debt service due under the
Defeased Notes Payable, including the balloon payment due at maturity, will be
made from the Trustee Escrow. See "Going Concern" for additional information.
Interest Expense
Interest costs are summarized as follows:
- --------------------------------------------------------------------------------
Three Months Ended March 31, 2003 2002
- --------------------------------------------------------------------------------
Interest incurred $ 10,460 $ 16,542
Amortization of deferred financing costs 426 1,683
Amortization of debt premiums (519) (496)
Interest expense - defeased debt 1,489 -
-------- --------
Total $ 11,856 $ 17,729
======== ========
================================================================================
Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated
Partnerships
Two mortgage loans related to projects in which we, through subsidiaries,
indirectly own joint venture interests have matured and are in default. The
mortgage loans, at the time of default, were (i) a $10,389 first mortgage loan
on Phase I of the Bellport Outlet Center, held by Union Labor Life Insurance
Company ("Union Labor"); and (ii) a $13,338 first mortgage loan on Oxnard
Factory Outlet, an outlet center located in Oxnard, California, held by Fru-Con.
An affiliate of ours has a 50% ownership interest in the partnership, which owns
Phase I of the Bellport Outlet Center. Fru-Con and us are each a 50% partner in
the partnership that owns the Oxnard Factory Outlet.
Page - (17)
Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center
and a receiver was appointed March 27, 2001 by the court involved in the
foreclosure action. Effective May 1, 2001, a manager hired by the receiver began
managing and leasing Phase I of the Bellport Outlet Center. A judgment for
foreclosure was entered on January 25, 2003 in the amount of $12,711. The
foreclosure occurred on March 17, 2003 with Union Labor acquiring the property
for $5,100. We continue to negotiate the terms of a transfer of our ownership
interest in Oxnard Factory Outlet to Fru-Con. We do not manage or lease Oxnard
Factory Outlet.
We believe neither of these mortgage loans is recourse to us. It is
possible, however, that either or both of the respective lenders will, after
completing its foreclosure action, file a lawsuit seeking to collect from us the
difference between the value of the mortgaged property and the amount due under
the loan. If such an action is brought, the outcome, and our ultimate liability,
if any, cannot be predicted at this time.
In addition, we are currently not receiving, directly or indirectly, any
cash flow from Oxnard Factory Outlet and were not receiving any cash flow from
Phase I of the Bellport Outlet Center prior to the loss of control of such
project. We account for our interests in (i) Phases I of the Bellport Outlet
Center and (ii) the Oxnard Factory Outlet in accordance with the equity method
of accounting. As of March 31, 2003, we had no carrying value for our investment
in these properties.
2002 Debt Transactions
We disposed of certain properties through various transactions, including
sale, joint venture arrangements, foreclosure and transfer to lender, during the
year ended December 31, 2002. In connection with these dispositions, we reduced
our indebtedness by $349,378, including the partial defeasance of $74,849 of the
Mega Deal Loan. This reduction also included (i) the repayment of associated
mortgage indebtedness aggregating $168,982, (ii) debt assumed by the purchaser
of $46,862 and (iii) debt associated with foreclosure or transfer of properties
aggregating $58,685. See Note 3 - "Property Dispositions" for additional
information.
At the beginning of 2002, our mezzanine loan (the "Mezzanine Loan") had an
outstanding balance of $62,079. During 2002 we repaid the Mezzanine Loan in full
through (i) regularly scheduled monthly principal payments aggregating $9,295,
(ii) additional principal payments aggregating $45,467 made with excess proceeds
from our asset sales (see Note 3 - "Property Dispositions" for additional
information) and (iii) a payoff of $7,317 with cash from escrows and operating
cash. In connection with the early extinguishment of the Mezzanine Loan, we
incurred a non-recurring loss of $525 in the fourth quarter of 2002 representing
the write-off of remaining unamortized deferred financing costs. The Mezzanine
Loan was obtained in December 2000 in the original amount of $90,000 and was
scheduled to mature on September 30, 2003. Through a series of amendments and
modifications to its terms, the Mezzanine Loan bore interest at a fixed-rate of
19.75% at the time of the retirement.
Page - (18)
Guarantees and Guarantees of Indebtedness of Others
HGP Guarantees
On July 15, 2002, Horizon Group Properties, Inc. and its affiliates ("HGP")
announced they had refinanced a secured credit facility (the "HGP Secured Credit
Facility") through a series of new loans aggregating $32,500. Prior to the
refinancing, we were a guarantor under the HGP Secured Credit Facility in the
amount of $10,000. In connection with the refinancing, our guarantee was reduced
to a maximum of $4,000 as security for a $3,000 mortgage loan and a $4,000
mortgage loan (collectively, the "HGP Monroe Mortgage Loan") secured by HGP's
outlet shopping center located in Monroe, Michigan. The HGP Monroe Mortgage Loan
has a 3-year term, bears interest at the prime lending rate plus 2.50% (with a
minimum of 9.90%) and requires monthly interest-only payments. The HGP Monroe
Mortgage Loan may be prepaid without penalty after two years. Our guarantee with
respect to the HGP Monroe Mortgage Loan will be extinguished if the principal
amount of such obligation is reduced to $5,000 or less through repayments.
Additionally, we are a guarantor with respect to certain mortgage
indebtedness (the "HGP Office Building Mortgage") in the amount of $2,129 on
HGP's corporate office building and related equipment located in Norton Shores,
Michigan. The HGP Office Building Mortgage matures on May 31, 2003, bears
interest at LIBOR plus 5.50%, and requires monthly debt service payments.
On October 11, 2001, HGP announced that it was in default under two loans
with an aggregate principal balance of approximately $45.5 million secured by
six of its other outlet centers. Such defaults do not constitute defaults under
the HGP Monroe Mortgage Loan or the HGP Office Building Mortgage nor did they
constitute a default under the HGP Secured Credit Facility. We have not recorded
any liability related to these guarantees and no claims have been made under our
guarantees with respect to the HGP Monroe Mortgage Loan or the HGP Office
Building Mortgage. HGP is a publicly traded company that was formed in
connection with our merger with Horizon Group, Inc. ("Horizon") in June 1998.
Prime/Estein Venture Guarantees
Pursuant to Prime/Estein Venture-related documents to which affiliates of
ours are parties, we are obligated to provide to, or obtain for, the
Prime/Estein Venture fixed-rate financing at an annual rate of 7.75% (the
"Interest Rate Subsidy Agreement") for Prime Outlets at Birch Run (the "Birch
Run Center"), Prime Outlets at Williamsburg (the "Williamsburg Center") and the
Hagerstown Center.
In August 2001, we, through affiliates, completed a refinancing of $63,000
of first mortgage loans secured by the Birch Run Center. The refinanced loan
(the "Birch Run First Mortgage") (i) has a term of 10-years, (ii) bears interest
at an effective rate of 8.12% and (iii) requires monthly payments of principal
and interest pursuant to a 25-year amortization schedule. Pursuant to the
Interest Rate Subsidy Agreement, we are required to pay to the Prime/Estein
Venture the difference between the cost of the financing at an assumed rate of
7.75% and the actual cost of such financing at the annual rate of 8.12% (the
"Interest Rate Subsidy Obligation"). The net present value of the Interest Rate
Subsidy Obligation (included in accounts payable and other liabilities in the
Consolidated Balance Sheet) was $1,437 as of March 31, 2003.
Page - (19)
In October 2001, we, through affiliates, completed the refinancing of a
$32,500 first mortgage loan secured by the Williamsburg Center. The new first
mortgage loan (the "Williamsburg First Mortgage") (i) has a term of 10-years,
(ii) bears interest at a fixed-rate of 7.69% and (iii) requires monthly payments
of principal and interest pursuant to a 25-year amortization schedule. Pursuant
to the Interest Rate Subsidy Agreement, the Prime/Estein Venture is required to
pay to us the difference between the cost of the financing at an assumed rate of
7.75% and the actual cost of such financing at the annual rate of 7.69%.
On January 11, 2002, we sold the Hagerstown Center to the Prime/Estein
Venture. In connection with the sale, the Prime/Estein Venture assumed the
Hagerstown First Mortgage in the amount of $46,862; however, our guarantee of
such indebtedness remains in place. Additionally, we are obligated to refinance
the Hagerstown First Mortgage on behalf of the Prime/Estein Venture on or before
June 1, 2004, the date on which such indebtedness matures. Additionally, the
Prime/Estein Venture's cost of the Hagerstown First Mortgage and any refinancing
of it are fixed at an annual rate of 7.75% for a period of 10 years. If the
actual cost of such indebtedness should exceed 7.75% at any time during the
10-year period, we will be obligated to pay the difference to the Prime/Estein
Venture. If the actual cost of such indebtedness is less than 7.75% at any time
during the 10-year period, however, the Prime/Estein Venture will be obligated
to pay the difference to us. The actual cost of the Hagerstown First Mortgage is
30-day LIBOR plus 1.50%, or 2.84% as of March 31, 2003. Because the Hagerstown
First Mortgage bears interest at a variable rate, we are exposed to the impact
of interest rate changes. We have not recorded any liability related to our
guarantee of the Hagerstown First Mortgage; however, in connection with the sale
of the Hagerstown Center, we established a reserve for estimated refinancing
costs in the amount of $937, which is included in accounts payable and other
liabilities in the Consolidated Balance Sheet as of March 31, 2003. See Note 3 -
"Property Dispositions" of the Notes to Consolidated Financial Statements for
additional information.
Mandatory Redemption Obligation
On July 26, 2002, we sold the Bridge Properties to the PFP Venture. In
connection with the sale, we guaranteed FRIT (i) a 13% return on its $17,236 of
invested capital and (ii) the full return of its invested capital by December
31, 2003. As of March 31, 2003, our Mandatory Redemption Obligation with respect
to the full return of FRIT's invested capital was $16,356 (included in accounts
payable and other liabilities in the Consolidated Balance Sheet). On April 4,
2003, we made an additional payment with respect to the Mandatory Redemption
Obligation of $1,085 with the net proceeds from the March 31, 2003 sale of
certain excess land. See Note 3 - "Property Dispositions" for additional
information with respect to the sale of the Bridge Properties.
Going Concern
Our liquidity depends on cash provided by operations and potential capital
raising activities such as funds obtained through borrowings, particularly
refinancing of existing debt, and cash generated through asset sales. Although
we believe that estimated cash flows from operations and potential capital
raising activities will be sufficient to satisfy our scheduled debt service and
other obligations and sustain our operations for the next year, there can be no
assurance that we will be successful in obtaining the required amount of funds
for these items or that the terms of the potential capital raising activities,
if they should occur, will be as favorable as we have experienced in prior
periods.
Page - (20)
During 2003, our Mega Deal Loan matures on November 11, 2003. The Mega Deal
Loan, which is secured by a 13 property collateral pool, had an outstanding
principal balance of $262,890 as of March 31, 2003 and will require a balloon
payment of $260,681 at maturity. Based on our initial discussions with various
prospective lenders, we are currently projecting a potential shortfall with
respect to refinancing the Mega Deal Loan. Nevertheless, we believe this
shortfall may be alleviated through potential asset sales and/or other capital
raising activities, including the placement of mezzanine level debt. We caution
that our assumptions are based on current market conditions and, therefore, are
subject to various risks and uncertainties, including changes in economic
conditions which may adversely impact our ability to refinance the Mega Deal
Loan at favorable rates or in a timely and orderly fashion and which may
adversely impact our ability to consummate various asset sales or other capital
raising activities.
In connection with the completion of the sale of the Bridge Properties in
July 2002, we guaranteed to FRIT (i) a 13% return on its $17,236 of invested
capital, and (ii) the full return of the Mandatory Redemption Obligation by
December 31, 2003. As of March 31, 2003, the Mandatory Redemption Obligation
(included in accounts payable and other liabilities in the Consolidated Balance
Sheet) was $16,356. See Note 3 - "Property Dispositions" for additional
information. On April 4, 2003, we made an additional payment of $1,085 with net
proceeds from the March 31, 2003 sale of certain excess land which reduced the
balance of the Mandatory Redemption Obligation to $15,271. Although we continue
to seek to generate additional liquidity to repay the Mandatory Redemption
Obligation through (i) the sale of FRIT's ownership interest in the Bridge
Properties and/or (ii) the placement of additional indebtedness on the Bridge
Properties, there can be no assurance that we will be able to complete such
capital raising activities by December 31, 2003 or that such capital raising
activities, if they should occur, will generate sufficient proceeds to repay the
Mandatory Redemption Obligation in full. Failure to repay the Mandatory
Redemption Obligation by December 31, 2003 would constitute a default, which
would enable FRIT to exercise its rights with respect to the collateral pledged
as security to the guarantee, including some of our partnership interests in the
13 property collateral pool under the aforementioned Mega Deal Loan. Because the
Mandatory Redemption Obligation is secured by some of our partnership interests
in the 13 property collateral pool under the Mega Deal Loan, we may be required
to repay the Mandatory Redemption Obligation before, or in connection with, the
refinancing of the Mega Deal Loan.
These conditions raise substantial doubt about our ability to continue as a
going concern. The financial statements contained herein do not include any
adjustment to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
Note 5 - Shareholders' Equity
To qualify as a real estate investment trust ("REIT") for federal income
tax purposes, we are required to pay distributions to our common and preferred
shareholders of at least 90% of our REIT taxable income in addition to
satisfying other requirements. Although we intend to make distributions, if
necessary, to remain qualified as a REIT under the Code, we also intend to
retain such amounts as we consider necessary from time to time for our capital
and liquidity needs.
Our policy remains to pay distributions only to the extent necessary to
maintain our status as a REIT for federal income tax purposes. During 2002, we
were not required to pay any distributions in order to maintain our status as a
REIT and based on our current federal income tax projections, we do not expect
to pay any distributions during 2003. We are currently in arrears on 14 quarters
of preferred stock distributions due February 15, 2000 through May 15, 2003,
respectively.
Page - (21)
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 March 31, 2003, unpaid dividends for the period beginning on
November 16, 1999 through March 31, 2003 on our Series A Senior Cumulative
Preferred Stock ("Series A Senior Preferred Stock") and Series B Cumulative
Convertible Participating Preferred Stock ("Series B Convertible Preferred
Stock") aggregated $20,377 and $56,142, 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 March 31, 2003 are
$6,037 ($2.625 per share) and $16,635 ($2.125 per share), respectively.
Note 6 - Legal Proceedings
Except as described below, neither we nor any of our properties are
currently subject to any material litigation, nor to our knowledge, is any
material or other litigation threatened against us, other than routine
litigation arising in the ordinary course of business, some of which is expected
to be covered by liability insurance and all of which collectively is not
expected to have an adverse effect on our consolidated financial statements.
The Company and its affiliates were defendants in a lawsuit filed by
Accrued Financial Services ("AFS") on August 10, 1999 in the Circuit Court for
Baltimore City. The lawsuit was removed to United States District Court for the
District of Maryland (the "U.S. District Court") on August 20, 1999. AFS claimed
that certain tenants had assigned to AFS their rights to make claims under
leases such tenants had with affiliates of the Company and alleged that the
Company and its affiliates overcharged such tenants for common area maintenance
("CAM") charges and promotion fund charges. The U.S. District Court dismissed
the lawsuit on June 19, 2000. AFS appealed the U.S. District Court's decision to
the United States Court of Appeals for the Fourth Circuit. Briefs were submitted
and oral argument before a panel of judges of the United States Court of Appeals
for the Fourth Circuit was held on October 30, 2001, during which the panel of
judges requested further briefing of certain issues. On July 29, 2002, the
Fourth Circuit affirmed the dismissal. AFS filed a request for further review by
the Fourth Circuit which request was denied. In January 2003, AFS filed a
petition for a writ of certiorari by the United States Supreme Court (the
"Supreme Court") and the Company filed its opposition on February 24, 2003. The
Supreme Court subsequently denied the writ of certiorari and the parties have
agreed to dismiss any remaining claims, thereby terminating the AFS lawsuit.
In addition, certain tenants in the Company's and its affiliates' outlet
centers have made or may make allegations concerning overcharging for CAM and
promotion fund charges because of varying clauses in their leases pursuant to
which they claim under various circumstances that they were not required to pay
some or all of the pass-through charges. Such claims if asserted and found
meritorious, could have a material affect on the Company's financial condition.
Determination of whether liability would exist to the Company would depend on
interpretation of various lease clauses within a tenant's lease and all of the
other leases at each center collectively. To date such issues have been raised
and resolved with Dinnerware Plus Holdings, Inc. ("Mikasa"), Melru Corporation,
Designs, Inc. and Brown Group Retail, Inc., all of which at one time or another
were in litigation, or threatened litigation with the Company. Additionally,
during the first quarter of 2003, Gap Inc. notified the Company that it believes
it is entitled to a refund of certain pass-through charges as a result of
certain clauses in its leases.
Page - (22)
In the second quarter of 2002, the Company recorded a non-recurring charge
to establish a reserve in the amount of $3,000 for resolution of these matters,
in addition to the Mikasa matter referred to above. This reserve was estimated
in accordance with our established policies and procedures concerning loss
contingencies for additional information). The balance of the unused reserve
(which is included in the accounts payable and other liabilities in the
Consolidated Balance Sheet) is $2,240 as of March 31, 2003. Based on presently
available information, the Company believes it is probable the remaining reserve
will be utilized over the next several years in resolving claims relating to the
pass-through and promotional fund provisions contained in its leases, inclusive
of amounts that may be owed, if any, to the Gap Inc. The Company cautions,
however, that given the inherent uncertainties of litigation and the
complexities associated with a large number of leases and other factual
questions at issue, actual costs may vary from this estimate. No other such
tenant, however, has filed a suit or indicated to the Company that it intends to
file a suit. Nevertheless, it is too early to make any predictions as to whether
the Company or its affiliates may be found liable with respect to other tenants,
or to predict damages should liability be found.
Affiliates of the Company routinely file lawsuits to collect past rent due
from, and to evict, tenants which have defaulted under their leases. There are
currently dozens of such actions pending. In addition to defending against the
Company's affiliates' claims and eviction actions, some tenants file
counterclaims against the Company's affiliates. A tenant who files such a
counterclaim typically claims that the Company's affiliate which owns the outlet
center in question defaulted under the tenant's lease, overcharged the tenant
for CAM and promotion fund charges, made misrepresentations during the leasing
process, or failed to maintain or market the outlet center in question as
required by the lease. One such case involves a collections and eviction action
in Puerto Rico captioned Outlet Village of Puerto Rico Limited Partnership, S.E.
v. WEPA, Inc., and another, for instance, involves a collection case in San
Marcos, Texas, captioned, San Marcos Factory Stores, Ltd. v. SM Collectibles,
Inc. d/b/a Country Clutter. Usually such counterclaims are without merit. In
response to such counterclaims the Company's affiliates usually continue to
pursue their collection or eviction actions and defend against the
counterclaims. Despite the fact that the Company and its affiliates believe such
counterclaims are without merit and defend against them vigorously, the outcome
of all such counterclaims, and, thus, the liability, if any, of the Company and
its affiliates, cannot be predicted at this time.
Page - (23)
Several entities (the "eOutlets Plaintiffs") filed or stated an intention
to file lawsuits (collectively, the "eOutlets Lawsuits") against the Company and
its affiliates arising out of the Company's on-line venture, primeoutlets.com.
inc., also known as eOutlets, an affiliate of the Company. The eOutlets
Plaintiffs seek to hold the Company and its affiliates responsible under various
legal theories for liabilities incurred by primeoutlets.com, inc., including the
theories that the Company guaranteed the obligations of eOutlets and that the
Company was the "alter-ego" of eOutlets. The Company believes that it is not
liable to eOutlets Plaintiffs as there was no privity of contract between it and
the various eOutlets Plaintiffs. In the case captioned Convergys Customer
Management Group, Inc. v. Prime Retail, Inc. and primeoutlets.com inc. in the
Court of Common Pleas for Hamilton County (Ohio), the Company prevailed in a
motion to dismiss the plaintiff's claim that the Company was liable for
primeoutlets.com inc.'s breach of contract based on the doctrine of piercing the
corporate veil. In another matter, J. Walter Thompson, USA, Inc. v. Prime
Retail, L.P. and Prime Retail, Inc. the Company succeeded in having the
corporate veil piercing and alter ego claims dismissed and settled the remaining
claims in February 2003. primeoutelts.com, inc. filed for protection under
Chapter 7 of the United States Bankruptcy Code in November of 2000 under the
name E-Outlets Resolution Corp. (the "Debtor"). On November 5, 2002, the
bankruptcy trustee for the Debtor brought suit against Prime Retail, L.P., Prime
Retail, Inc., and Prime Retail E-Commerce, Inc. (the "Entity Defendants") and
certain former directors of the Debtor (the "Individual Defendants"). The
Trustee has asserted claims of alter ego, promissory estoppel, breach of
contract, breach of fiduciary duty, tortious interference with prospective
business advantage, unjust enrichment and quantum meruit against the Entity
Defendants and breach of fiduciary duty and gross negligence against the
individual defendants. The Company has tendered the suit, both as to the Entity
Defendants and Individual Defendants, to its Directors' and Officers' ("D&O")
insurance carrier. Motions to dismiss the suit have been filed by all
Defendants. All Defendants believe the suit is without merit and plan on
defending it vigorously. Nevertheless, the outcome of this lawsuit, and the
ultimate liability of the Company, if any, cannot be predicted at this time.
In May 2001, the Company, through affiliates, filed suit against Fru-Con
Construction, Inc. ("FCC"), the lender on Prime Outlets at New River ("New
River") as a result of FCC's foreclosure of New River upon the maturation of the
loan. The Company and its affiliates allege that they have been damaged because
of FCC's failure to dispose of the collateral in a commercially reasonable
manner and as a result of a violation of federal trademark laws. The Company,
through affiliates, has also filed suit against The Fru-Con Projects, Inc.
("Fru-Con"), a partner in Arizona Factory Shops Partnership and an affiliate of
FCC. The Company and its affiliates allege that Fru-Con failed to use reasonable
efforts to assist in obtaining refinancing. Fru-Con has claims pending against
the Company and its affiliates, as part of the same suit, alleging that the
Company and its affiliates breached their contract with Fru-Con by not allowing
Fru-Con to participate in an outlet project in Sedona, Arizona (the "Sedona
Project") and breached a management and leasing agreement by managing and
leasing the Sedona Project. The Company believes its affiliates and it acted
property and FCC did not act properly. The Company and its affiliates will
vigorously defend the claims filed against them and prosecute the claims they
filed. Nevertheless, the ultimate outcome of the suit, including the liability,
if any, of the Company and its affiliates, cannot be predicted at this time.
Page - (24)
Note 7 - Investment in Unconsolidated Partnerships
We account for our investment in unconsolidated joint ventures in
accordance with the equity method of accounting as we exercise significant
influence, but do not control these entities. In all of our joint venture
arrangements, the rights of the investors are both protective as well as
participating. Therefore, these participating rights preclude us from
consolidating our investments. Our investments are recorded initially at our
cost and subsequently adjusted for equity in earnings (losses) and cash
contributions and distributions.
As of March 31, 2003 our interests in joint venture partnerships included
(i) three outlet centers owned by the Prime/Estein Venture and (ii) five
properties owned by the PFP Venture. The Prime/Estein Venture owns the Birch Run
Center, the Williamsburg Center and the Hagerstown Center which contain an
aggregate 1,485,000 square feet of GLA. The PFP Venture owns the Bridge
Properties (Prime Outlets at Anderson, Prime Outlets at Calhoun, Prime Outlets
at Gaffney, Prime Outlets at Lee and Prime Outlets at Lodi) which contain an
aggregate 1,261,000 square feet of GLA.
During the three months ended March 31, 2003 and 2002, respectively, our
equity in earnings (loss) of unconsolidated joint venture partnerships was
$1,126 and $153, respectively, which is included in interest and other income in
the Consolidated Statements of Operations.
The following summarizes unaudited condensed financial information for our
investment in unconsolidated joint venture partnerships:
- --------------------------------------------------------------------------------
Three Months Ended March 31, 2003 2002
- --------------------------------------------------------------------------------
Total revenues $ 15,510 $ 8,749
Total expenses 13,925 8,764
-------- -------
Net income (loss) $ 1,585 $ (15)
======== =======
================================================================================
Page - (25)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Amounts in thousands, except share, unit and square foot information)
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. In addition, we may make forward-looking statements in future
filings with the Securities and Exchange Commission and in written material,
press releases and oral statements issued by us or on our behalf.
Forward-looking statements include statements regarding the intent, belief, or
current expectations of us or our officers, including statements preceded by,
followed by, or including forward-looking terminology such as "may," "will,"
"should," believe," "expect," "anticipate," "estimate," "continue," "predict,"
or similar expressions with respect to various matters.
These statements are subject to potential risks and uncertainties and,
therefore, actual results may differ materially. Such forward-looking statements
are subject to certain risks and uncertainties, including, but not limited to,
the risk associated with our high level of leverage and our ability to refinance
such indebtedness as it becomes due; the risk that we or one or more of our
subsidiaries are not able to satisfy scheduled debt service obligations or will
not remain in compliance with existing loan covenants; the risk of material
adverse affects of future events, including tenant bankruptcies, abandonments
and the non-payment by tenants of contractual rents and additional rents, on our
financial performance; the risk related to the retail industry in which our
outlet centers compete, including the potential adverse impact of external
factors, such as inflation, consumer confidence, unemployment rates and consumer
tastes and preferences; the risk associated with our potential asset sales; the
risk of potential increases in market interest rates from current levels; the
risk associated with real estate ownership, such as the potential adverse impact
of changes in local economic climate on the revenues and the value of our
properties; the risk associated with litigation; and the risk associated with
competition from web-based and catalogue retailers.
All forward-looking statements in this report are based on information
available to us on the date of this report. We do not undertake to update any
forward-looking statements that may be made by us or on our behalf in this
report or otherwise.
Introduction
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 following discussion and analysis of our consolidated financial
condition and results of operations should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Quarterly Report on Form 10-Q. Our operations are substantially conducted
through the Operating Partnership. As of March 31, 2003, we had an 80% general
partnership interest in the Operating Partnership with full and complete control
over its management, not subject to removal by the limited partners. We are
dependent upon the distributions or other payments from the Operating
Partnership to meet our financial obligations. Historical results and percentage
relationships set forth herein are not necessarily indicative of future
operations.
Page - (26)
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.
Revenue Recognition
Leases with tenants are accounted for as operating leases. Minimum rental
income is recognized on a straight-line basis over the term of the lease and
unpaid rents are included in accounts receivable, net in the accompanying
Consolidated Balance Sheets. Certain lease agreements contain provisions, which
provide for rents based on a percentage of sales or based on a percentage of
sales volume above a specified threshold. These contingent rents are not
recognized until the required thresholds are exceeded. In addition, the lease
agreements generally provide for the reimbursement of real estate taxes,
insurance, advertising and certain common area maintenance costs. These
additional rents and tenant reimbursements are accounted for on the accrual
basis.
Bad Debt Expense
We regularly review our accounts receivable to determine an appropriate
amount for the allowance for doubtful accounts based upon the impact of economic
conditions on ours tenants' ability to pay, past collection experience and such
other factors which, in our judgment, deserve current recognition. In turn, a
provision for uncollectible accounts receivable ("bad debt expense") is charged
against the allowance to maintain the allowance level within this range. If the
financial condition of our tenants were to deteriorate, resulting in impairment
in their ability to make payments due under their leases, additional allowances
may be required.
Page - (27)
Impairment of Rental Property
We monitor our Properties for indicators of impairment on an on-going
basis. We record a provision for impairment when we believe certain events and
circumstances have occurred which indicate that the carrying value of our
Properties might have experienced a decline in value that is other than
temporary and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. Impairment losses are
measured as the difference between the carrying value and the estimated fair
value for assets held in the portfolio. For assets held for sale, impairment is
measured as the difference between the carrying value and fair value, less
estimated costs to dispose. Fair value is based on estimated cash flows
discounted at a risk-adjusted rate of return. Adverse changes in market
conditions or deterioration in the operating results of our outlet centers and
other rental properties could result in losses or an inability to recover the
current carrying value of such assets. Such potential losses or the inability to
recover the current carrying value may not be reflected in our Properties'
current carrying value, thereby possibly requiring an impairment charge in the
future.
Capitalization and Depreciation of Significant Renovations and Improvements
Depreciation is calculated on the straight-line basis over the estimated
useful lives of the assets, based upon management's estimates. Significant
renovations and improvements, which improve and/or extend the useful life of
assets are capitalized and depreciated over their estimated useful lives, based
upon management's estimates.
Contingencies
We are subject to proceedings, lawsuits, and other claims related to
various matters (see Note 6 - "Legal Proceedings" of the Notes to the
Consolidated Financial Statements for additional information). Additionally, we
have guaranteed certain indebtedness of others (see Note 4 - "Debt" of the Notes
to Consolidated Financial Statements for additional information). With respect
to these contingencies, we assess the likelihood of any adverse judgments or
outcomes to these matters and, if appropriate, potential ranges of probable
losses. A determination of the amount of reserves required, if any, for these
contingencies are made after careful analysis of each individual issue. Future
reserves may be required because of (i) new developments or changes to the
approach in which we deal with each matter or (ii) if unasserted claims arise.
Outlet Center Portfolio
Portfolio GLA and Occupancy
Our outlet center portfolio size reflects (i) our past development (both
new outlet centers and expansions to outlet centers) and acquisition activities
and (ii) our more recent disposition activities. Our outlet portfolio (including
properties owned through joint venture partnerships) consisted of 36 properties
totaling 10,226,000 square feet of gross leasable area ("GLA") at March 31, 2003
compared to 44 properties totaling 12,388,000 square feet of GLA at March 31,
2002. The change in our outlet center GLA is because of certain property
dispositions, which are discussed below. Our outlet center portfolio was 86.7%
and 87.2% occupied as of March 31, 2003 and 2002, respectively. Additionally,
our outlet center portfolio was 87.8% leased as of March 31, 2003. The
weighted-average occupancy of our outlet center portfolio (excluding those
properties disposed of whose results are included in discontinued operations)
during the three months ended March 31, 2003 and 2002 was 87.5% and 87.7%,
respectively.
We disposed of certain properties through various transactions (including
sale, joint venture arrangements, foreclosure and transfer of ownership to the
applicable lender). These transactions have had a significant impact on the size
of our portfolio for the periods presented and are summarized below.
Page - (28)
During 2002, we completed transactions involving 17 properties aggregating
4,431,000 square feet of GLA. These transactions included (i) the sale of seven
outlet centers aggregating 1,791,000 square feet of GLA into joint venture
arrangements, (ii) the sale of five (including one consisting of 197,000 square
feet of GLA that we owned 51% through an unconsolidated joint venture) outlet
centers aggregating 1,486,000 square feet of GLA to unrelated third parties,
(iii) the foreclosure sale and/or transfer of three outlet centers aggregating
922,000 square feet of GLA to the applicable lender and (iv) the sale of two
community centers aggregating 232,000 square feet of GLA to unrelated third
parties.
The seven centers sold into joint venture arrangements consisted of two
separate transactions involving (i) Prime Outlets at Hagerstown (the "Hagerstown
Center"), which was sold to an existing joint venture partnership (the
"Prime/Estein Venture"), and (ii) six outlet centers (collectively, the Bridge
Properties"). Such properties are collectively referred to as the "2002 Joint
Venture Properties". Commencing on the date of disposition, we account for our
ownership interest in the 2002 Joint Venture Properties in accordance with the
equity method of accounting. The operating results of the 2002 Joint Venture
Properties are reflected in our results from continuing operations for all
periods presented through their respective dates of disposition. Their operating
results have not been classified to discontinued operations because we have a
significant continuing involvement in these properties. Additionally, we sold
Phases II and III of the Bellport Outlet Center. We accounted for our ownership
interest in the Bellport Outlet Center in accordance with the equity method of
accounting through its date of disposition.
The operating results of the remaining disposed properties have been
classified as discontinued operations in the accompanying Consolidated
Statements of Operations for all periods presented.
On March 31, 2003, we completed the sale of Prime Outlets at Latham
consisting of 43,000 square feet of GLA. This property was owned through a joint
venture partnership. See Note 3 - "Property Dispositions" to the Notes to
Consolidated Financial Statements.
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards ("FAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." In accordance with the requirements of FAS No. 144, we have
classified the operating results, including gains and losses related to
disposition, for certain properties either disposed of or classified as assets
held for sale during 2002 as discontinued operations in the accompanying
Consolidated Statements of Operations for all periods presented. The operating
results for properties that were sold into joint venture partnerships during
2002 have not been classified to discontinued operations in the accompanying
Consolidated Statements of Operations because we still retain a significant
continuing involvement in their operations. Such properties and/or their
operating results through the dates of their respective disposition are
collectively referred to as the "2002 Joint Venture Properties". The following
discussion and tables regarding operating results for the comparable periods are
reflective of the classification requirements under FAS No. 144 and relate to
operating results from continuing operations unless otherwise indicated.
Page - (29)
The table set forth below summarizes certain information with respect to
our outlet centers as of March 31, 2003 (see Note 4 - "Debt" of the Notes to
Consolidated Financial Statements contained herein for additional information
with respect to indebtedness on our Properties):
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Occupancy
Outlet Centers Opening Date (Sq. Ft.) Percentage (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Outlets at Fremont-- Fremont, Indiana October 1985 229,000 86%
Prime Outlets at Birch Run (2)-- Birch Run, Michigan September 1986 724,000 91
Prime Outlets at Williamsburg (2)-- Williamsburg, Virginia April 1988 274,000 97
Prime Outlets at Pleasant Prairie-- Kenosha, Wisconsin September 1988 269,000 95
Prime Outlets at Burlington-- Burlington, Washington May 1989 174,000 89
Prime Outlets at Queenstown-- Queenstown, Maryland June 1989 221,000 96
Prime Outlets at Hillsboro-- Hillsboro, Texas October 1989 359,000 88
Prime Outlets at Oshkosh-- Oshkosh, Wisconsin November 1989 260,000 97
Prime Outlets at Warehouse Row (4)-- Chattanooga, Tennessee November 1989 95,000 77
Prime Outlets at Perryville-- Perryville, Maryland June 1990 148,000 93
Prime Outlets at Sedona-- (5) Sedona, Arizona August 1990 82,000 92
Prime Outlets at San Marcos-- San Marcos, Texas August 1990 549,000 91
Prime Outlets at Anderson-- (3) Anderson, California August 1990 165,000 90
Prime Outlets at Post Falls-- (5) Post Falls, Idaho July 1991 179,000 61
Prime Outlets at Ellenton-- Ellenton, Florida October 1991 481,000 95
Prime Outlets at Morrisville-- Raleigh - Durham, North Carolina October 1991 187,000 77
Prime Outlets at Naples-- Naples/Marco Island, Florida December 1991 146,000 84
Prime Outlets at Niagara Falls USA-- Niagara Falls, New York July 1992 534,000 88
Prime Outlets at Woodbury-- (6) Woodbury, Minnesota July 1992 250,000 65
Prime Outlets at Calhoun-- (3) Calhoun, Georgia October 1992 254,000 85
Prime Outlets at Bend-- (5) Bend, Oregon December 1992 132,000 93
Prime Outlets at Jeffersonville I-- Jeffersonville, Ohio July 1993 407,000 92
Prime Outlets at Gainesville-- Gainesville, Texas August 1993 316,000 69
Prime Outlets at Grove City-- Grove City, Pennsylvania August 1994 533,000 97
Prime Outlets at Huntley-- Huntley, Illinois August 1994 282,000 68
Prime Outlets at Florida City-- Florida City, Florida September 1994 208,000 68
Prime Outlets at Pismo Beach-- Pismo Beach, California November 1994 148,000 98
Prime Outlets at Tracy-- Tracy, California November 1994 153,000 89
Prime Outlets at Odessa-- Odessa, Missouri July 1995 296,000 69
Page - (30)
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Occupancy
Outlet Centers Opening Date (Sq. Ft.) Percentage (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Outlets at Darien (7)-- Darien, Georgia July 1995 307,000 60%
Prime Outlets at Gulfport (8)-- Gulfport, Mississippi November 1995 306,000 87
Prime Outlets at Lodi-- (3)Burbank, Ohio November 1996 313,000 84
Prime Outlets at Gaffney (3) (7)-- Gaffney, South Carolina November 1996 305,000 90
Prime Outlets at Lee-- (3) Lee, Massachusetts June 1997 224,000 95
Prime Outlets at Lebanon-- Lebanon, Tennessee April 1998 229,000 95
Prime Outlets at Hagerstown (2)-- Hagerstown, Maryland August 1998 487,000 98
---------- --
Total Outlet Centers (9) 10,226,000 87%
========== ==
====================================================================================================================================
Notes:
(1) Percentage reflects occupied space as of March 31, 2003 as a percent of
available square feet of GLA.
(2) Through affiliates, we have a 30% ownership interest in the joint venture
partnership that owns this outlet center.
(3) Through affiliates, we have an 18.2% ownership interest in the joint
venture partnership that owns this outlet center.
(4) We own a 2% partnership interest as the sole general partner in this
property, but are entitled to 99% of the property's operating cash flow
and net proceeds from a sale or refinancing. This mixed-use development
also includes approximately 154,000 square feet of office space, not
included in this table, which was 95% occupied as of March 31, 2003.
(5) Non-recourse mortgage loans cross-collateralized by Prime Outlets at
Bend, Prime Outlets at Post Falls and Prime Outlets at Sedona are
currently in default and we are in the process of negotiating a transfer
of our ownership interests in these outlet centers to the lender. See
Note 4 - "Debt" of the Notes to Consolidated Financial Statements for
additional information.
(6) Non-recourse mortgage loans on Prime Outlets at Vero Beach and Prime
Outlets at Woodbury were cross-collateralized. The lender foreclosed on
Prime Outlets at Vero Beach on September 9, 2002. We are currently
negotiating the transfer of our ownership interest in Prime Outlets at
Woodbury with the lender. See Note 4 - "Debt" of the Notes to
Consolidated Financial Statements for additional information.
(7) We operate this outlet center pursuant to a long-term ground lease under
which we receive the economic benefit of a 100% ownership interest.
(8) The real property on which this outlet center is located is subject to a
long-term ground lease.
(9) Excludes Oxnard Factory Outlet. Through an affiliate, we have a 50% legal
ownership interest in the joint venture partnership that owns this outlet
center. However, we are currently receiving no economic benefit from the
Oxnard Factory Outlet.
Page - (31)
Results of Operations
Table 1 - Consolidated Statements of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
2003 vs. 2002
----------------------------
Three Months Ended March 31, 2003 2002 Change Change
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Base rents $ 18,993 $ 24,309 $ (5,316) -21.9%
Percentage rents 977 1,320 (343) -26.0%
Tenant reimbursements 10,958 12,834 (1,876) -14.6%
Interest and other 4,012 2,860 1,152 40.3%
-------- -------- -------- -------
Total revenues 34,940 41,323 (6,383) -15.4%
Expenses
Property operating 9,955 10,211 (256) -2.5%
Real estate taxes 2,984 3,666 (682) -18.6%
Depreciation and amortization 7,280 10,208 (2,928) -28.7%
Corporate general and administrative 4,466 3,419 1,047 30.6%
Interest 11,856 17,729 (5,873) -33.1%
Other charges 688 2,472 (1,784) -72.2%
-------- -------- -------- -------
Total expenses 37,229 47,705 (10,476) -22.0%
-------- -------- -------- -------
Loss before gain on sale of real estate (2,289) (6,382) 4,093 -64.1%
Gain on sale of real estate, net - 16,793 (16,793) n/m
-------- -------- -------- -------
Income (loss) from continuing operations (2,289) 10,411 (12,700) -122.0%
Discontinued operations, including loss of $9,623
on dispositions in 2002 - (8,730) 8,730 n/m
-------- -------- -------- -------
Net income (loss) (2,289) 1,681 (3,970) -236.2%
Allocations to preferred shareholders (5,668) (5,668) - 0.0%
-------- -------- -------- -------
Net loss applicable to common shares $ (7,957) $ (3,987) $ (3,970) 99.6%
======== ======== ======== =======
Basic and diluted earnings per common share:
Income (loss) from continuing operations $ (0.18) $ 0.11
Discontinued operations - (0.20)
-------- --------
Net loss $ (0.18) $ (0.09)
======== ========
Weighted-average common shares
outstanding - basic and diluted 43,578 43,578
======== ========
====================================================================================================================================
Page - (32)
Comparison of the three months ended March 31, 2003 to the three months ended
March 31, 2002
Summary
We reported income (loss) from continuing operations of $(2,289) and
$10,411 for the three months ended March 31, 2003 and 2002, respectively. For
the three months ended March 31, 2003, the net loss applicable to our common
shareholders was $7,957, or $0.18 per common share. For the three months ended
March 31, 2002, the net loss applicable to our common shareholders was $3,987,
or $0.09 per common share.
During the three months ended March 31, 2002, we reported a loss from
discontinued operations of $8,730, or $0.20 per common share. This loss from
discontinued operations included a loss related to dispositions of $9,623.
Revenues
Total revenues were $34,940 for the three months ended March 31, 2003
compared to $41,323 for the same period in 2002, a decrease of $6,383, or 15.4%.
Base rents decreased $5,316, or 21.9%, to $18,993 in 2003 compared to $24,309 in
2002. These decreases are primarily due to (i) transactions involving the 2002
Joint Venture Properties, (ii) changes in economic rental rates and (iiii) the
slight reduction in outlet center occupancy during the 2003 period.
Straight-line rent expense, included in base rent was $138 and $33 for the three
months ended March 31, 2003 and 2002, respectively.
Percentage rents, which represent rents based on a percentage of sales
volume above a specified threshold, decreased $343, or 26.0%, to $977 during the
three months ended March 31, 2003 compared to $1,320 for the same period in
2002. This decrease was primarily due to (i) transactions involving the 2002
Joint Venture Properties and (ii) changes in economic rental rates.
Tenant reimbursements, which represent the contractual recovery from
tenants of certain operating expenses, decreased by $1,876, or 14.6%, to $10,958
during the three months ended March 31, 2003 compared to $12,834 for the same
period in 2002. This decline is primarily due to (i) transactions involving the
2002 Joint Venture Properties, (ii) changes in economic rental rates and (iii)
the slightly reduced aggregate outlet center weighted-average occupancy during
the 2003 period.
As shown in TABLE 2, tenant reimbursements as a percentage of recoverable
property operating expenses and real estate taxes was 84.7% during the three
months ended March 31, 2003 compared to 92.5% for the same period in 2002. The
decline in tenant reimbursements as a percentage of recoverable property
operating expenses and real estate taxes was primarily attributable to the
aforementioned changes in economic rental rates and weighted-average occupancy.
Table 2 - Tenant Recoveries as a Percentage of Total Recoverable Expenses
- --------------------------------------------------------------------------------
Three Months Ended March 31, 2003 2002
- --------------------------------------------------------------------------------
Tenant reimbursements $ 10,958 $ 12,834
Recoverable Expenses:
Property operating $ 9,955 $ 10,211
Real estate taxes 2,984 3,666
-------- --------
Total recoverable expenses $ 12,939 $ 13,877
======== ========
Tenant reimbursements as a percentage
of total recoverable expenses 84.7% 92.5%
======== ========
================================================================================
Page - (33)
Interest and other income increased by $1,152, or 40.3%, to $4,012 during
the three months ended March 31, 2003 compared to $2,860 for the same period in
2002. The increase was primarily attributable to (i) higher equity in earnings
of unconsolidated joint ventures of $973 and (ii) an increase in all other
income of $179. The increase in equity in earnings of unconsolidated joint
ventures is primarily associated with the transactions involving the 2002 Joint
Venture Properties.
Expenses
Property operating expenses decreased by $256, or 2.5%, to $9,955 during
the three months ended March 31, 2003 compared to $10,211 for the same period in
2002. Real estate taxes expense decreased by $682, or 18.6%, to $2,984 during
the three months ended March 31, 2003 compared to $3,666 for the same period in
2002. The decrease in property operating expenses is primarily because of the
transactions involving the 2002 Joint Venture Properties partially offset by
higher marketing costs during the 2003 period. The decrease in real estate taxes
expense is primarily because of the transactions involving the 2002 Joint
Venture Properties.
As shown in TABLE 3, depreciation and amortization expense decreased by
$2,982, or 28.7%, to $7,280 during the three months ended March 31, 2003
compared to $10,208 for the same period in 2002. This decrease was primarily
attributable to the depreciation and amortization of assets associated with the
transactions involving the 2002 Joint Venture Properties.
Table 3 - Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense for the three
months ended March 31, 2003 and 2002 are summarized as follows:
- --------------------------------------------------------------------------------
Three Months Ended March 31, 2003 2002
- --------------------------------------------------------------------------------
Building and improvements $ 3,447 $ 5,363
Land improvements 938 1,102
Tenant improvements 2,242 3,028
Furniture and fixtures 598 642
Leasing commissions 55 73
------- --------
Total $ 7,280 $ 10,208
======= ========
================================================================================
As shown in TABLE 4, interest expense decreased by $5,873, or 33.1%, to
$11,856 during the three months ended March 31, 2003 compared to $17,729 for the
same period in 2002. This decrease reflects (i) lower interest incurred of
$6,082, (ii) a decrease in amortization of deferred financing costs of $1,257
and (iii) higher amortization of debt premiums of $23. Partially offsetting
these items was interest expense of $1,489 associated with certain mortgage debt
that was defeased in December 2002. See Note 4 - "Debt" of the Notes to
Consolidated Financial Statements for additional information.
The decrease in interest incurred is primarily attributable to (i) a
reduction of approximately $123,216 in our weighted-average debt outstanding,
excluding debt premiums, during the three months ended March 31, 2003 compared
to the same period in 2002 and (ii) a decrease in the weighted-average
contractual interest rate on our debt for the three months ended March 31, 2003
compared to the same period in 2002. The decrease in weighted-average debt
outstanding was primarily attributable to asset dispositions. The
weighted-average contractual interest rates for the 2003 and 2002 periods were
approximately 8.09% and 9.32%, respectively.
Page - (34)
Table 4 - Components of Interest Expense
The components of interest expense for the three months ended March 31,
2003 and 2002 are summarized as follows:
- --------------------------------------------------------------------------------
Three Months Ended March 31, 2003 2002
- --------------------------------------------------------------------------------
Interest incurred $ 10,460 $ 16,542
Amortization of deferred financing costs 426 1,683
Amortization of debt premiums (519) (496)
Interest expense - defeased debt 1,489 -
-------- --------
Total $ 11,856 $ 17,729
======== ========
================================================================================
Other charges decreased by $1,784, or 72.2%, to $688 for the three months
ended March 31, 2003 compared to $2,472 for the same period in 2002. This
decrease was primarily attributable to lower bad debt expense of $1,808
partially offset by an increase in all other expenses of $24. The decrease in
bad debt expense resulted from (i) resolution of certain disputes with tenants
and (ii) reduced tenant bankruptcies, abandonments and store closings during the
2003 period.
Merchant Sales
For the three months ended March 31, 2003, same-store sales in our outlet
center portfolio decreased 7.5% compared to the same period in 2002. "Same-store
sales" is defined as the weighted-average sales per square foot reported by
merchants for stores open since January 1, 2002. The weighted-average sales per
square foot reported as reported by our merchants were $245 for the year ended
December 31, 2002.
Liquidity and Capital Resources
Sources and Uses of Cash
For the three months ended March 31, 2003, net cash provided by operating
activities was $2,651, net cash provided by investing activities was $627 and
net cash used in financing activities was $1,950.
The net cash provided by investing activities during the three months ended
March 31, 2003 consisted of $1,085 of net proceeds from the disposition of
excess land and $311 of distributions from unconsolidated joint venture
partnerships partially offset by $769 of additions to rental property. The
additions to rental property included costs incurred in connection with
re-leasing space to new merchants and costs associated with renovations. During
the three months ended March 31, 2003, we did not engage in any significant
development activities, however, we continue to engage in certain consulting
activities in Europe. Such activities do not have a significant impact on our
liquidity or financial condition.
The gross uses of cash for financing activities of $1,950 during three
months ended March 31, 2003 consisted of scheduled principal amortization on
debt.
Page - (35)
Guarantees and Guarantees of Indebtedness of Others
HGP Guarantees
On July 15, 2002, Horizon Group Properties, Inc. and its affiliates ("HGP")
announced they had refinanced a secured credit facility (the "HGP Secured Credit
Facility") through a series of new loans aggregating $32,500. Prior to the
refinancing, we were a guarantor under the HGP Secured Credit Facility in the
amount of $10,000. In connection with the refinancing, our guarantee was reduced
to a maximum of $4,000 as security for a $3,000 mortgage loan and a $4,000
mortgage loan (collectively, the "HGP Monroe Mortgage Loan") secured by HGP's
outlet shopping center located in Monroe, Michigan. The HGP Monroe Mortgage Loan
has a 3-year term, bears interest at the prime lending rate plus 2.50% (with a
minimum of 9.90%) and requires monthly interest-only payments. The HGP Monroe
Mortgage Loan may be prepaid without penalty after two years. Our guarantee with
respect to the HGP Monroe Mortgage Loan will be extinguished if the principal
amount of such obligation is reduced to $5,000 or less through repayments.
Additionally, we are a guarantor with respect to certain mortgage
indebtedness (the "HGP Office Building Mortgage") in the amount of $2,129 (as of
March 31, 2003) on HGP's corporate office building and related equipment located
in Norton Shores, Michigan. The HGP Office Building Mortgage matures on May 31,
2003, bears interest at LIBOR plus 5.50%, and requires monthly debt service
payments.
On October 11, 2001, HGP announced that it was in default under two loans
with an aggregate principal balance of approximately $45.5 million secured by
six of its other outlet centers. Such defaults do not constitute defaults under
the HGP Monroe Mortgage Loan or the HGP Office Building Mortgage nor did they
constitute a default under the HGP Secured Credit Facility. We have not recorded
any liabilities related to these guarantees and no claims have been made under
our guarantees with respect to the HGP Monroe Mortgage Loan or the HGP Office
Building Mortgage. HGP is a publicly traded company that was formed in
connection with our merger with Horizon Group, Inc. ("Horizon") in June 1998.
Prime/Estein Venture Guarantees
We own three outlet centers through the Prime/Estein Venture. The
Prime/Estein Venture is an unconsolidated joint venture partnership between one
of our affiliates and an affiliate of Estein & Associates USA, Ltd. ("Estein"),
a real estate investment company. Pursuant to Prime/Estein Venture-related
documents to which affiliates of ours are parties, we are obligated to provide
to, or obtain for, the Prime/Estein Venture fixed-rate financing at an annual
rate of 7.75% (the "Interest Rate Subsidy Agreement") for the Birch Run Center,
the Prime Outlets at Williamsburg (the "Williamsburg Center") and the Hagerstown
Center.
In August 2001, we, through affiliates, completed a refinancing of $63,000
of first mortgage loans secured by the Birch Run Center. The refinanced loan
(the "Birch Run First Mortgage") (i) has a term of 10-years, (ii) bears interest
at an effective rate of 8.12% and (iii) requires monthly payments of principal
and interest pursuant to a 25-year amortization schedule. Pursuant to the
Interest Rate Subsidy Agreement, we are required to pay to the Prime/Estein
Venture the difference between the cost of the financing at an assumed rate of
7.75% and the actual cost of such financing at the annual rate of 8.12% (the
"Interest Rate Subsidy Obligation"). The net present value of the Interest
Subsidy Obligation (included in accounts payable and other liabilities in the
accompanying Consolidated Balance Sheet) was $1,437 as of March 31, 2003.
Page - (36)
In October 2001, we, through affiliates, completed the refinancing of a
$32,500 first mortgage loan secured by the Williamsburg Center. The new first
mortgage loan (the "Williamsburg First Mortgage") (i) has a term of 10-years,
(ii) bears interest at a fixed-rate of 7.69% and (iii) requires monthly payments
of principal and interest pursuant to a 25-year amortization schedule. Pursuant
to the Interest Rate Subsidy Agreement, the Prime/Estein Venture is required to
pay to us the difference between the cost of the financing at an assumed rate of
7.75% and the actual cost of such financing at the annual rate of 7.69%.
On January 11, 2002, we sold the Hagerstown Center to the Prime/Estein
Venture. In connection with the sale, the Prime/Estein Venture assumed the
Hagerstown First Mortgage in the amount of $46,862; however, our guarantee of
such indebtedness remains in place. Additionally, we are obligated to refinance
the Hagerstown First Mortgage on behalf of the Prime/Estein Venture on or before
June 1, 2004, the date on which such indebtedness matures. Additionally, the
Prime/Estein Venture's cost of the Hagerstown First Mortgage and any refinancing
of it are fixed at an annual rate of 7.75% for a period of 10 years. If the
actual cost of such indebtedness should exceed 7.75% at any time during the
10-year period, we will be obligated to pay the difference to the Prime/Estein
Venture. If the actual cost of such indebtedness is less than 7.75% at any time
during the 10-year period, however, the Prime/Estein Venture will be obligated
to pay the difference to us. The actual cost of the Hagerstown First Mortgage is
30-day LIBOR plus 1.50%, or 2.84% as of March 31, 2003. Because the Hagerstown
First Mortgage bears interest at a variable rate, we are exposed to the impact
of interest rate changes. We have not recorded any liability related to our
guarantee of the Hagerstown First Mortgage; however, in connection with the sale
of the Hagerstown Center, we established a reserve for estimated refinancing
costs in the amount of $937, which is included in accounts payable and other
liabilities in the accompanying Consolidated Balance Sheet as of March 31, 2003.
See Note 3 - "Property Dispositions" of the Notes to Consolidated Financial
Statements for additional information.
Mandatory Redemption Obligation
In connection with our sale of the Bridge Properties in July 2002, we
guaranteed FRIT PRT Bridge Acquisition LLC ("FRIT") (i) a 13% return on its
$17,236 of invested capital and (ii) the full return of its invested capital
(the "Mandatory Redemption Obligation") in FPI by December 31, 2003. As of March
31, 2003, our Mandatory Redemption Obligation with respect to the full return of
FRIT's invested capital was $16,356 (included in accounts payable and other
liabilities in the accompanying Consolidated Balance Sheet). On April 4, 2003,
we made an additional payment with respect to the Mandatory Redemption
Obligation of $1,085 with the net proceeds from the March 31, 2003 sale of
certain excess land. See Note 3 - "Property Dispositions" of the Notes to
Consolidated Financial Statements for additional information.
Defaults on Certain Non-recourse Mortgage Indebtedness
During 2001, certain of our subsidiaries suspended regularly scheduled
monthly debt service payments on two non-recourse mortgage loans held by New
York Life Insurance Company ("New York Life") at the time of the suspension.
These non-recourse mortgage loans were cross-defaulted and cross-collateralized
by Prime Outlets at Conroe (the "Conroe Center"), located in Conroe, Texas, and
Prime Outlets at Jeffersonville II (the "Jeffersonville II Center"), located in
Jeffersonville, Ohio. Effective January 1, 2002, New York Life foreclosed on the
Conroe Center. Effective July 18, 2002, New York Life sold its interest in the
Jeffersonville II Center loan. On August 13, 2002, we transferred our ownership
interest in the Jeffersonville II Center to New York Life's successor. See Note
3 - "Property Dispositions" for additional information.
Page - (37)
The foreclosure of the Conroe Center did not have a material impact on our
results of operations or financial condition because during 2001 all excess cash
flow from the operations of the Conroe Center was utilized for debt service on
its non-recourse mortgage loan. Additionally, the transfer of our ownership
interest in the Jeffersonville II Center did not have a material impact on our
results of operations or financial condition because during 2001 and through the
transfer date in 2002, all excess cash flow from the operations of the
Jeffersonville II Center was utilized for debt service on the non-recourse
mortgage loan.
During August of 2002, certain of our subsidiaries suspended regularly
scheduled monthly debt service payments on two non-recourse mortgage loans which
were cross-collateralized by Prime Outlets at Vero Beach (the "Vero Beach
Center"), located in Vero Beach, Florida, and Prime Outlets at Woodbury (the
"Woodbury Center"), located in Woodbury, Minnesota (collectively, the "John
Hancock Properties"). These non-recourse mortgage loans were held by John
Hancock Life Insurance Company ("John Hancock"). Effective September 9, 2002,
John Hancock foreclosed on the Vero Beach Center. Additionally, we are currently
negotiating a transfer of our ownership interest in the Woodbury Center to John
Hancock. Foreclosure on the Vero Beach Center did not, and the expected transfer
of our ownership interest in the Woodbury Center is not, expected to have a
material impact on our results of operations or financial condition because
during 2002, all excess cash flow from the operations of the John Hancock
Properties was utilized for debt service on their non-recourse mortgage loans.
In December 2002, we notified the servicer of certain non-recourse mortgage
loans (cross-collateralized by Prime Outlets at Bend, Prime Outlets at Post
Falls and Prime Outlets at Sedona) totaling $24,919 as of March 31, 2003 that
the net cash flow from the properties securing the loans was insufficient to
fully pay the required monthly debt service. At that time, certain of our
subsidiaries suspended the regularly scheduled monthly debt service payments.
Subsequent to our notification to the servicer, we have been remitting on a
monthly basis all available cash flow from the properties, after a reserve for
monthly operating expenses, as partial payment of the debt service. The failure
to pay the full amount due constitutes a default under the loan agreements which
allows the lenders to accelerate the loan and to exercise various remedies
contained in the loan agreements, including application of escrow balances to
delinquent payments and, ultimately, foreclosure on the properties which
collateralize the loans. The lender has notified us that it has accelerated the
loan. Since that time we have initiated discussions with the servicer of the
loans regarding restructuring of the loans. There can be no assurance that such
discussions will result in any modification to the terms of the loans. However,
any action by the lender with respect to these properties is not expected to
have a material impact on our results of operations or financial condition
because we are currently only remitting available cash flow.
Page - (38)
Defeasance of Mega Deal Loan
On December 6, 2002, we completed the sale of two outlet centers (together,
the "Colorado Properties"), which were part of the 15 properties contained in
the collateral pool securing a first mortgage and expansion loan (the "Mega Deal
Loan"), which had a then outstanding balance of $338,940. In connection with the
release of the Colorado Properties from the collateral pool, we were required to
partially defease the Mega Deal Loan. Therefore, the Mega Deal Loan was
bifurcated into (i) a defeased portion in the amount of $74,849 (the "Defeased
Notes Payable") and (ii) an undefeased portion in the amount of $264,091, which
is still referred to as the Mega Deal Loan. Both the Defeased Notes Payable and
the Mega Deal Loan (i) bear interest at a fixed-rate of 7.782%, (ii) require
monthly payments of principal and interest pursuant to a 30-year amortization
schedule and (iii) mature on November 11, 2003. The Mega Deal Loan is now
secured by the remaining 13 properties contained in the collateral pool. We used
$79,257 of the gross proceeds from the sale of the Colorado Properties to
purchase US Treasury Securities, which were placed into a trustee escrow (the
"Trustee Escrow"). The Trustee Escrow is used to make the scheduled monthly debt
service payments, including the payment of the then outstanding principal
amount, together with all accrued and unpaid interest on the maturity date of
November 11, 2003, under the Defeased Notes Payable. As of March 31, 2003, the
outstanding balance of the Defeased Notes Payable was $74,509 and the balance of
the Trustee Escrow was $77,365 (included in restricted cash in the accompanying
Consolidated Balance Sheet). See Note 3 - "Property Dispositions" of the Notes
to Consolidated Financial Statements for additional information. Furthermore, in
connection with the partial defeasance of the Mega Deal Loan we amended the Mega
Deal Loan so that (i) we are required to fund 10 monthly payments of $500 into a
lender escrow to be used as additional cash collateral and (ii) release prices
for the remaining 13 properties in the collateral pool were amended to provide
for a more orderly refinancing of the Mega Deal Loan.
Debt Service Obligations
The scheduled principal maturities of our debt, excluding (i) unamortized
debt premiums of $7,435 and (ii) $41,250 of aggregate non-recourse mortgage
indebtedness in default (see "Defaults on Certain Non-recourse Mortgage
Indebtedness" above), and related average contractual interest rates by year of
maturity as of March 31, 2003 are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Bonds Payable
(including sinking Defeased
fund payments) Notes Payable Notes Payable Total Debt
------------------------ ------------------------ ------------------------ -----------------------
Average Average Average Average
Interest Principal Interest Principal Interest Principal Interest Principal
Years Ended December 31, Rates Maturities Rates Maturities Rates Maturities Rates Maturities
- ------------------------------------------------------------------------------------------------------------------------------------
2003 6.46% $ 636 7.79% $ 265,009 7.78% $ 74,509 7.78% $ 340,154
2004 6.34% 726 7.97% 4,571 7.75% 5,297
2005 6.34% 773 8.58% 11,574 8.44% 12,347
2006 6.34% 820 8.83% 120,437 8.81% 121,257
2007 6.34% 878 7.60% 1,002 7.02% 1,880
Thereafter 6.52% 18,618 7.59% 57,995 7.33% 76,613
---- -------- ---- --------- ---- -------- ---- ---------
6.49% $ 22,451 8.06% $ 460,588 7.78% $ 74,509 7.96% $ 557,548
==== ======== ==== ========= ==== ======== ==== =========
====================================================================================================================================
Such indebtedness in the amount of $557,548 had a weighted-average maturity
of 2.3 years and bore contractual interest at a weighted-average rate of 7.96%
per annum. At March 31, 2003, all of such indebtedness bore interest at fixed
rates. Our remaining scheduled principal payments during 2003 for such
indebtedness aggregated $340,154. In addition to regularly scheduled principal
payments, the remaining 2003 scheduled principal payments also reflect balloon
payments of (i) $260,681 for the Mega Deal Loan and (ii) $73,882 due for the
Defeased Notes Payable. Both the Mega Deal Loan and the Defeased Notes Payable
are scheduled to mature on November 11, 2003. All debt service due under the
Defeased Notes Payable, including the balloon payment due at maturity, will be
made from the Trustee Escrow. See "Going Concern" for additional information.
Page - (39)
Going Concern
Our liquidity depends on cash provided by operations and potential capital
raising activities such as funds obtained through borrowings, particularly
refinancing of existing debt, and cash generated through asset sales. Although
we believe that estimated cash flows from operations and potential capital
raising activities will be sufficient to satisfy our scheduled debt service and
other obligations and sustain our operations for the next year, there can be no
assurance that we will be successful in obtaining the required amount of funds
for these items or that the terms of the potential capital raising activities,
if they should occur, will be as favorable as we have experienced in prior
periods.
During 2003, our Mega Deal Loan matures on November 11, 2003. The Mega Deal
Loan, which is secured by a 13 property collateral pool, had an outstanding
principal balance of $262,890 as of March 31, 2003 and will require a balloon
payment of $260,681 at maturity. Based on our initial discussions with various
prospective lenders, we are currently projecting a potential shortfall with
respect to refinancing the Mega Deal Loan. However, we believe this shortfall
may be alleviated through potential asset sales and/or other capital raising
activities, including the placement of mezzanine level debt. We caution that our
assumptions are based on current market conditions and, therefore, are subject
to various risks and uncertainties, including changes in economic conditions
which may adversely impact our ability to refinance the Mega Deal Loan at
favorable rates or in a timely and orderly fashion, or which may adversely
impact our ability to consummate various asset sales or other capital raising
activities.
In connection with the completion of the sale of the Bridge Properties in
July 2002, we guaranteed to FRIT (i) a 13% return on its $17,236 of invested
capital, and (ii) the full return the Mandatory Redemption Obligation by
December 31, 2003. As of March 31, 2003, the Mandatory Redemption Obligation
(included in accounts payable and other liabilities in the accompanying
Consolidated Balance Sheet) was $16,356. On April 4, 2003, we made an additional
payment of $1,085 with net proceeds from the March 31, 2003 sale of certain
excess land which reduced the balance of the Mandatory Redemption Obligation to
$15,271. Although we continue to seek to generate additional liquidity to repay
the Mandatory Redemption Obligation through (i) the sale of FRIT's ownership
interest in the Bridge Properties and/or (ii) the placement of additional
indebtedness on the Bridge Properties, there can be no assurance that we will be
able to complete such capital raising activities by December 31, 2003 or that
such capital raising activities, if they should occur, will generate sufficient
proceeds to repay the Mandatory Redemption Obligation in full. Failure to repay
the Mandatory Redemption Obligation by December 31, 2003 would constitute a
default, which would enable FRIT to exercise its rights with respect to the
collateral pledged as security to the guarantee, including some of our
partnership interests in the 13 property collateral pool under the
aforementioned Mega Deal Loan. Because the Mandatory Redemption Obligation is
secured by some of our partnership interests in the 13 property collateral pool
under the Mega Deal Loan, we may be required to repay the Mandatory Redemption
Obligation before, or in connection with, the refinancing of the Mega Deal Loan.
These conditions raise substantial doubt about our ability to continue as a
going concern. The financial statements contained herein do not include any
adjustment to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
Page - (40)
Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated
Partnerships
Two mortgage loans related to projects in which we, through subsidiaries,
indirectly own joint venture interests have matured and are in default. The
mortgage loans, at the time of default, were (i) a $10,389 first mortgage loan
on Phase I of the Bellport Outlet Center, held by Union Labor Life Insurance
Company ("Union Labor"); and (ii) a $13,338 first mortgage loan on Oxnard
Factory Outlet, an outlet center located in Oxnard, California, held by Fru-Con.
An affiliate of ours has a 50% ownership interest in the partnership, which owns
Phase I of the Bellport Outlet Center. Fru-Con and us are each a 50% partner in
the partnership that owns the Oxnard Factory Outlet.
Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center
and a receiver was appointed March 27, 2001 by the court involved in the
foreclosure action. Effective May 1, 2001, a manager hired by the receiver began
managing and leasing Phase I of the Bellport Outlet Center. A judgment for
foreclosure was entered on January 25, 2003 in the amount of $12,711. The
foreclosure occurred on March 17, 2003 with Union Labor acquiring the property
for $5,100. We continue to negotiate the terms of a transfer of our ownership
interest in Oxnard Factory Outlet to Fru-Con. We do not manage or lease Oxnard
Factory Outlet.
We believe neither of these mortgage loans is recourse to us. It is
possible, however, that either or both of the respective lenders will, after
completing its foreclosure action, file a lawsuit seeking to collect from us the
difference between the value of the mortgaged property and the amount due under
the loan. If such an action is brought, the outcome, and our ultimate liability,
if any, cannot be predicted at this time.
In addition, we are currently not receiving, directly or indirectly, any
cash flow from Oxnard Factory Outlet and were not receiving any cash flow from
Phase I of the Bellport Outlet Center prior to the loss of control of such
project. We account for our interests in (i) Phases I of the Bellport Outlet
Center and (ii) the Oxnard Factory Outlet in accordance with the equity method
of accounting. As of March 31, 2003, the carrying value of our investment in
these properties was $0.
Dividends and Distributions
To qualify as a REIT for federal income tax purposes, we are required to
pay distributions to our common and preferred shareholders of at least 90% of
our REIT taxable income in addition to satisfying other requirements. Although
we intend to make distributions, if necessary, to remain qualified as a REIT
under the Code, we also intend to retain such amounts as we consider necessary
from time to time for our capital and liquidity needs.
Our policy remains to pay distributions only to the extent necessary to
maintain our status as a REIT for federal income tax purposes. During 2002, we
were not required to pay any distributions in order to maintain our status as a
REIT and based on our current federal income tax projections, we do not expect
to pay any distributions during 2003. On May 15, 2003, we will be in arrears on
14 quarters of preferred stock distributions due February 15, 2000 through May
15, 2003, respectively.
We may not make distributions to our common shareholders or our holders of
common units of limited partnership interests in the Operating Partnership
unless we are current with respect to distributions to our preferred
shareholders. As of March 31, 2003, unpaid dividends for the period beginning on
November 16, 1999 through March 31, 2003 on our Series A Senior Preferred Stock
and Series B Convertible Preferred Stock aggregated $20,377 and $56,142,
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 March 31, 2003 are $6,037 ($2.625 per share) and $16,635
($2.125 per share), respectively.
Page - (41)
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. Costs incurred related to such
activities are reflected in corporate general and administrative expense in the
accompanying Consolidated Statements of Operations.
Settlement of Tenant Matters
During 2002, we entered into settlement agreements with respect to certain
tenant matters providing for aggregate payments of $2,760. Through December 31,
2002, we made approximately $2,607 of such required payments. The 2002 payments
were principally made from certain funds escrowed under a mezzanine loan, which
was repaid in full in December 2002. The remaining payment of $153 was made in
January 2003 with cash from operations. These settlement agreements did not have
a material impact on our financial condition or our results from operations. We
had previously established reserves aggregating $5,000 for the settlement of
such matters.
Development Activities and Capital Expenditures
During 2003, we will continue to explore potential international
opportunities and will selectively consider expansion and/or redevelopment of
certain of our existing outlet centers. We do not currently expect such
activities to have a significant impact on our liquidity or financial condition.
Additionally, we expect to incur costs during the remainder of 2003 (i) in
connection with releasing space to new tenants and (ii) for repairs and
maintenance of our properties. However, we do not expect such expenditures to
have a significant impact on our liquidity or financial condition because
reserves for such costs are paid monthly into escrow accounts under many of our
loans.
Recent Accounting Pronouncements
In October, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 144, "Accounting for
Impairment of Disposal of Long-lived Assets." FAS No. 144 supercedes FAS No.
121, however it retains the fundamental provisions of that statement as related
to the recognition and measurement of the impairment of long-lived assets to be
"held and used." In addition, FAS No. 144 (i) provides further guidance
regarding the estimation of cash flows in the performance of a recoverability
test, (ii) requires that a long-lived asset to be disposed of other than by sale
(e.g., abandoned) be classified as "held and used" until it is disposed of, and
(iii) established more restrictive criteria to classify an asset as "held for
sale." Effective January 1, 2002, we adopted FAS No. 144. Our adoption of FAS
No. 144 effective January 1, 2002 did not have a material impact on our results
of operations or financial position.
In accordance with the requirements of FAS No. 144, we have classified the
operating results, including gains and losses related to disposition, for
certain properties either disposed of or classified as assets held for sale
during 2002 as discontinued operations in the Consolidated Statements of
Operations for all periods presented. See Note 3 - "Property Dispositions" for
additional information.
Page - (42)
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 clarifies the application of existing accounting
pronouncements to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The provisions of FIN No. 46
were immediately effective for all variable interests in variable interest
entities created after January 31, 2003, and we will need to apply the
provisions of FIN No. 46 to any existing variable interests in variable interest
entities by no later than July 1, 2003. We did not create any variable interest
entities during the three months ended March 31, 2003 and we do not believe that
FIN No. 46 will have a significant impact on our financial statements.
Risk Management Activities
We are subject to various market risks and uncertainties, including, but
not limited to, the effects of current and future economic conditions, and the
resulting impact on our tenants' sales and our revenue; the effects of increases
in market interest rates from current levels (see below); the risks associated
with existing vacancy rates or potential increases in vacancy rates because of,
among other factors, tenant bankruptcies and store closures, and the resulting
impact on our revenue; and risks associated with refinancing our current debt
obligations or obtaining new financing under terms less favorable than we have
experienced in prior periods.
Interest Rate Risk
In the ordinary course of business, we are exposed to the impact of
interest rate changes. We employ established policies and procedures to manage
our exposure to interest rate changes. Historically, we have used a mix of fixed
and variable-rate debt to (i) limit the impact of interest rate changes on our
results from operations and cash flows and (ii) lower our overall borrowing
costs. In certain cases, we have used derivative financial instruments such as
interest rate protection agreements to manage interest rate risk associated with
variable-rate indebtedness. Nevertheless, as of March 31, 2003, all of our
outstanding indebtedness bore interest at fixed rates. See Item 3 -
"Quantitative and Qualitative Disclosures About Material Risk" for additional
information. Also see "Guarantees of Debt and Indebtedness of Others" for
additional information.
Economic Conditions
In general, the leases relating to our outlet centers have terms of three
to five years and most contain provisions that somewhat mitigate the impact of
inflation. Such provisions include clauses providing for increases in base rent
and clauses enabling us to receive percentage rents for annual sales in excess
of certain thresholds based on merchants' gross sales. In addition, lease
agreements generally provide for (i) the recovery of a merchant's proportionate
share of actual costs of common area maintenance ("CAM"), refuse removal,
insurance, and real estate taxes, (ii) a contribution for advertising and
promotion and (iii) an administrative fee. CAM includes items such as utilities,
security, parking lot cleaning, maintenance and repair of common areas, capital
replacement reserves, landscaping, seasonal decorations, public restroom
maintenance and certain administrative expenses. We continually monitor our
lease provisions in light of current and expected economic conditions and other
factors. In this regard, we may consider alternative lease provisions (e.g.,
fixed CAM) where appropriate.
Page - (43)
Funds from Operations
Industry analysts generally consider funds from operations ("FFO"), as
defined by the National Association of Real Estate Investment Trusts ("NAREIT"),
an alternative non-GAAP measure of performance of an equity REIT. In 1991,
NAREIT adopted its definition of FFO. This definition was clarified in 1995,
1999 and 2002. FFO is currently defined by NAREIT as net income or loss
(computed in accordance with GAAP), excluding gains or losses from provisions
for asset impairment and sales of depreciable operating property, plus
depreciation and amortization (other than amortization of deferred financing
costs and depreciation of non-real estate assets) and after adjustment for
unconsolidated partnerships and joint ventures and discontinued operations. FFO
includes non-recurring events, except for those that are defined as
"extraordinary items" in accordance with GAAP. FFO excludes the earnings impact
of "cumulative effects of accounting changes" as defined by GAAP. Effective
January 1, 2002, FFO related to assets held for sale, sold or otherwise
transferred and included in results of discontinued operations (in accordance
with the requirements of FAS No. 144) should continue to be included in FFO.
We believe that FFO is an important and widely used non-GAAP measure of the
operating performance of REITs, which provides a relevant basis for comparison
to other REITs. Therefore, FFO is presented to assist investors in analyzing our
performance. Our FFO is not comparable to FFO reported by other REITs that do
not define the term using the current NAREIT definition or that interpret the
current NAREIT definition differently than we do. Therefore, we caution that the
calculation of FFO may vary from entity to entity and, as such the presentation
of FFO by us may not be comparable to other similarly titled measures of other
reporting companies. We believe that to facilitate a clear understanding of our
operating results, FFO should be examined in conjunction with net income
determined in accordance with GAAP. FFO does not represent cash generated from
operating activities in accordance with GAAP and should not be considered as an
alternative to net income as an indication of our performance or to cash flows
as a measure of liquidity or ability to make distributions.
FFO was $5,154 for the three months ended March 31, 2003 compared to $6,963
for the same period in 2002. The first quarter of 2003 FFO results include $964
of net interest expense attributable to mortgage indebtedness that was defeased
in December 2002. This net interest expense had no impact on our operating cash
flow during 2003 because such payments were made from previously established
escrows. FFO adjusted ("Adjusted FFO") to exclude the impact of the net interest
expense attributable to the defeased indebtedness was $6,118.
The decrease in our Adjusted FFO results during the first quarter of 2003
compared to our FFO results for the same period in 2002 reflects (i) the reduced
weighted-average portfolio occupancy during the 2003 period, (ii) changes in
economic rental rates and (iii) the loss of net operating income resulting from
the dispositions of properties, partially offset by interest savings
attributable to the repayment of indebtedness.
Page - (44)
TABLE 5 provides a reconciliation of income (loss) from continuing
operations to FFO and Adjusted FFO for the three months ended March 31, 2003 and
2002.
Table 5 - Funds from Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ (2,289) $ 10,411
Adjustments:
Gain on sale of real estate - (16,793)
Depreciation and amortization 7,280 10,208
Non-real estate depreciation and amortization (532) (554)
Unconsolidated joint ventures' adjustments 695 783
Discontinued operations - 2,908
-------- --------
FFO per NAREIT Definition 5,154 6,963
Defeased debt adjustment(1) 964 -
-------- --------
Adjusted FFO $ 6,118 $ 6,963
======== ========
Other Data:
Net cash provided by operating activities $ 2,962 $ 4,668
Net cash provided by investing activities 316 10,576
Net cash used in financing activities (1,950) (16,691)
====================================================================================================================================
Note:
(1) In December 2002, we partially defeased our Mega Deal Loan in connection
with the sale of the Colorado Properties. In connection with the
defeasance, we purchased US Treasury Securities, which are maintained in a
Trustee Escrow. All debt service due under the Defeased Notes Payable
during the three months ended March 31, 2003 was made from the Trustee
Escrow. During the three months ended March 31, 2003, the interest income
earned on the Trustee Escrow was $525 and the interest expense on the
Defeased Notes Payable was $1,489, which are included in our results from
operations in the accompanying Consolidated Statements of Operations. These
items had no impact on our operating cash flow during 2003 because the cash
settlement with respect to the Defeased Notes Payable occurred during 2002
and the payments made in 2003 were from restricted cash. Accordingly, we
believe it is appropriate to adjust for them in our Adjusted FFO
calculation.
Page - (45)
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. Historically, we have used a mix of fixed
and variable-rate debt to (i) limit the impact of interest rate changes on our
results from operations and cash flows and (ii) lower our overall borrowing
costs. Nevertheless, as of March 31, 2003, all of our outstanding indebtedness
bore interest at fixed rates. The following table provides a summary of
principal cash flows, excluding (i) unamortized debt premiums of $7,435 and (ii)
non-recourse mortgage indebtedness aggregating $41,250 on certain properties
which is in default (see "Defaults on Certain Non-recourse Mortgage
Indebtedness" within "Liquidity and Capital Resources" of Item 2 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
additional information), and related contractual interest rates by fiscal year
of maturity. See Note 4 - "Debt" of the Notes to Consolidated Financial
Statements contained herein for additional information with respect to the terms
of our debt instruments.
- ------------------------------------------------------------------------------------------------------------------------------------
Year of Maturity
- ------------------------------------------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total
- ------------------------------------------------------------------------------------------------------------------------------------
Bonds Payable
Principal $ 636 $ 726 $ 773 $ 820 $ 878 $ 18,618 $ 22,451
Average interest rate 6.46% 6.34% 6.34% 6.34% 6.34% 6.52% 6.49%
Notes Payable
Principal $ 265,009 $ 4,571 $ 11,574 $ 120,437 $ 1,002 $ 57,995 $ 460,588
Average interest rate 7.79% 7.97% 8.58% 8.83% 7.60% 7.59% 8.06%
Defeased Notes Payable
Principal $ 74,509 $ 74,509
Average interest rate 7.78% 7.78%
====================================================================================================================================
Page - (46)
Additionally, we sold Prime Outlets at Hagerstown (the "Hagerstown Center")
on January 11, 2002 to an existing joint venture partnership (the "Prime/Estein
Venture"). In connection with the sale, the Prime/Estein Venture assumed the
first mortgage loan on the Hagerstown Center (the "Hagerstown First Mortgage")
in the amount of $46,862; however, our guarantee of such indebtedness remains in
place. Additionally, we are obligated to refinance the Hagerstown First Mortgage
on behalf of the Prime/Estein Venture on or before June 1, 2004, the date on
which such indebtedness matures. Additionally, the Prime/Estein Venture's cost
of the Hagerstown First Mortgage and any refinancing of it are fixed at an
annual rate of 7.75% for a period of 10 years. If the actual cost of such
indebtedness should exceed 7.75% at any time during the 10-year period, we will
be obligated to pay the difference to the Prime/Estein Venture. If the actual
cost of such indebtedness is less than 7.75% at any time during the 10-year
period, however, the Prime/Estein Venture will be obligated to pay the
difference to us. The actual cost of the Hagerstown First Mortgage is 30-day
LIBOR plus 1.50%, or 2.84% as of March 31, 2003. Because the Hagerstown First
Mortgage bears interest at a variable rate, we are exposed to the impact of
interest rate changes. At March 31, 2003, a hypothetical 100 basis point move in
the LIBOR rate would impact our guarantee by $469. See Note 3 - "Property
Dispositions" of the Notes to Consolidated Financial Statements for additional
information.
Item 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.
Page - (47)
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
For a description of legal proceedings involving the Company and its properties,
please see Part I, Item 3 - "Legal Proceedings" of the Company's Annual Report
on Form K for the year ended December 31, 2002 and Note 6 - "Legal Proceedings"
of the Notes to Consolidated Financial Statements contained herein. The
following information updates such disclosure.
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 ("CAM")
charges and promotion fund charges. The U.S. District Court dismissed the
lawsuit on June 19, 2000. AFS appealed the U.S. District Court's decision to the
United States Court of Appeals for the Fourth Circuit. Briefs were submitted and
oral argument before a panel of judges of the United States Court of Appeals for
the Fourth Circuit was held on October 30, 2001, during which the panel of
judges requested further briefing of certain issues. On July 29, 2002, the
Fourth Circuit affirmed the dismissal. AFS filed a request for further review by
the Fourth Circuit which request was denied. In January 2003, AFS filed a
petition for a writ of certiorari by the United States Supreme Court (the
"Supreme Court") and the Company filed its opposition on February 24, 2003. The
Supreme Court subsequently denied the writ of certiorari and the parties have
agreed to dismiss any remaining claims, thereby terminating the AFS lawsuit.
As previously disclosed by the Company, certain tenants in the Company's and its
affiliates' outlet centers have made or may make allegations concerning
overcharging for CAM and promotion fund charges because of varying clauses in
their leases pursuant to which they claim under various circumstances that they
were not required to pay some or all of the pass-through charges. Such claims if
asserted and found meritorious, could have a material affect on the Company's
financial condition. Determination of whether liability would exist to the
Company would depend on interpretation of various lease clauses within a
tenant's lease and all of the other leases at each center collectively. To date
such issues have been raised and resolved with Dinnerware Plus Holdings, Inc.
("Mikasa"), Melru Corporation, Designs, Inc. and Brown Group Retail, Inc., all
of which at one time or another were in litigation, or threatened litigation
with the Company. Additionally, during the first quarter of 2003, Gap Inc.
notified the Company that it believes it is entitled to a refund of certain
pass-through charges as a result of certain clauses in its leases.
In the second quarter of 2002, the Company recorded a non-recurring charge to
establish a reserve in the amount of $3.0 million for resolution of these
matters, in addition to the Mikasa matter referred to above. This reserve was
estimated in accordance with our established policies and procedures concerning
loss contingencies for additional information). The balance of the unused
reserve (which is included in the accounts payable and other liabilities in the
Consolidated Balance Sheet) is approximately $2.2 million as of March 31, 2003.
Based on presently available information, the Company believes it is probable
the remaining reserve will be utilized over the next several years in resolving
claims relating to the pass-through and promotional fund provisions contained in
its leases, inclusive of amounts that may be owed, if any, to the Gap Inc. The
Company cautions, however, that given the inherent uncertainties of litigation
and the complexities associated with a large number of leases and other factual
questions at issue, actual costs may vary from this estimate. No other such
tenant, however, has filed a suit or indicated to the Company that it intends to
file a suit. Nevertheless, it is too early to make any predictions as to whether
the Company or its affiliates may be found liable with respect to other tenants,
or to predict damages should liability be found.
Page - (48)
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 March 31, 2003, the aggregate arrearage
on the Series A Senior Preferred Stock and the Series B Convertible Preferred
Stock was approximately $20.4 million and approximately $56.1 million,
respectively.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
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.
Reports on Form 8-K:
None
Page - (49)
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: May 14, 2003 /s/ Robert A. Brvenik
--------------------------------------------
Robert A. Brvenik
President, Chief Financial Officer and Treasurer
Page - (50)
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: May 14, 2003 /s/ Glenn D. Reschke
--------------------
Glenn D. Reschke
Chairman and Chief Executive Officer
Page - (51)
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: May 14, 2003 /s/ Robert A. Brvenik
---------------------
Robert A. Brvenik
President, Chief Financial Officer and Treasurer