United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission file number 1-11986 TANGER FACTORY OUTLET CENTERS, INC. (Exact name of Registrant as specified in its charter) North Carolina 56-1815473 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3200 Northline Avenue Suite 360 Greensboro, NC 27408 (336) 292-3010 (Address of principal executive offices) (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered Common Shares, $.01 par value New York Stock Exchange Series A Cumulative Convertible Redeemable New York Stock Exchange Preferred Shares, $.01 par value Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] The aggregate market value of voting shares held by non-affiliates of the Registrant was approximately $266, 767,000 based on the closing price on the New York Stock Exchange for such stock on March 21, 2003. The number of Common Shares of the Registrant outstanding as of March 21, 2003 was 9,299,665. Documents Incorporated By Reference Part III incorporates certain information by reference from the Registrant's definitive proxy statement to be filed with respect to the Annual Meeting of Shareholders to be held May 9, 2003. 1 PART I Item 1. Business The Company Tanger Factory Outlet Centers, Inc. and subsidiaries, a fully-integrated, self-administered and self-managed real estate investment trust ("REIT"), focuses exclusively on developing, acquiring, owning, operating and managing factory outlet centers. Since entering the factory outlet center business 22 years ago, we have become one of the largest owners and operators of factory outlet centers in the United States. As of December 31, 2002, we had ownership interests in or management responsibilities for 34 centers with a total gross leasable area ("GLA") of approximately 6.2 million square feet. These centers were approximately 98% occupied, contained over 1,300 stores and represented over 300 store brands as of such date. Our factory outlet centers and other assets are held by, and all of our operations are conducted by, Tanger Properties Limited Partnership. Accordingly, the descriptions of our business, employees and properties are also descriptions of the business, employees and properties of the Operating Partnership. Unless the context indicates otherwise, the term "Company" refers to Tanger Factory Outlet Centers, Inc. and subsidiaries and the term "Operating Partnership" refers to Tanger Properties Limited Partnership. The terms "we", "our" and "us" refer to the Company or the Company and the Operating Partnership together, as the text requires. We own the majority of the units of partnership interest issued by the Operating Partnership (the "Units") through our two wholly-owned subsidiaries, the Tanger GP Trust and the Tanger LP Trust. The Tanger GP Trust controls the Operating Partnership as its sole general partner. The Tanger LP Trust holds a limited partnership interest. The Tanger family, through its ownership of the Tanger Family Limited Partnership ("TFLP"), holds the remaining Units as a limited partner. Stanley K. Tanger, our Chairman of the Board and Chief Executive Officer, is the sole general partner of TFLP. As of December 31, 2002, our wholly-owned subsidiaries owned 9,061,025 Units, and 80,190 Preferred Units (which are convertible into approximately 722,509 limited partnership Units) and TFLP owned 3,033,305 Units. TFLP's Units are exchangeable, subject to certain limitations to preserve our status as a REIT, on a one-for-one basis for our common shares. See "Business-The Operating Partnership". Preferred Units are automatically converted into limited partnership Units to the extent of any conversion of our preferred shares into our common shares. As of March 21, 2003, our management beneficially owns approximately 25% of all outstanding common shares (assuming the Series A Preferred Shares and the limited partner's Units are exchanged for common shares but without giving effect to the exercise of any outstanding stock and partnership Unit options). Ownership of our common and preferred shares is restricted to preserve our status as a REIT for federal income tax purposes. Subject to certain exceptions, a person may not actually or constructively own more than 4% of our common shares (including common shares which may be issued as a result of conversion of Series A Preferred Shares) or more than 29,400 Series A Preferred Shares (or a lesser number in certain cases). We also operate in a manner intended to enable us to preserve our status as a REIT, including, among other things, making distributions with respect to our outstanding common and preferred shares equal to at least 90% of our taxable income each year. We are a North Carolina corporation that was formed in March 1993. The executive offices are currently located at 3200 Northline Avenue, Suite 360, Greensboro, North Carolina, 27408 and the telephone number is (336) 292-3010. The Company's website can be accessed at www.tangeroutlet.com. A copy of our 10-K's, 10-Q's, and 8-K's can be obtained, free of charge, on the Company's website. 2 Recent Developments At December 31, 2002, we had ownership interests in or management responsibilities for 34 centers in 21 states totaling 6.2 million square feet of operating GLA compared to 32 centers in 20 states totaling 5.4 million square feet of operating GLA as of December 31, 2001. The increase is due to the following events: o Disposition of our wholly-owned property in Fort Lauderdale, Florida, totaling 165,000 square feet o Development, through a 50% ownership joint venture, of our property in Myrtle Beach, South Carolina totaling 260,000 square feet o Acquisition of our wholly-owned property in Howell, Michigan totaling 325,000 square feet o Obtained management responsibilities of a property in Vero Beach, Florida totaling 329,000 square feet o Disposition of our wholly-owned property in Bourne, Massachusetts, totaling 23,000 square feet at which we retain limited management responsibilities Any developments or expansions that we, or a joint venture that we are involved in, have planned or anticipated, may not be started or completed as scheduled, or may not result in accretive net income or funds from operations. In addition, we regularly evaluate acquisition or disposition proposals and engage from time to time in negotiations for acquisitions or dispositions of properties. We may also enter into letters of intent for the purchase or sale of properties. Any prospective acquisition or disposition that is being evaluated or which is subject to a letter of intent may not be consummated, or if consummated, may not result in accretive net income or funds from operations. During 2002, we continued to maintain strong relationships with multiple sources of capital. We completed the following liquidity transactions during the year: o In September 2002, we completed a public offering of 1,000,000 common shares at a price of $29.25 per share, receiving net proceeds of approximately $28.0 million. The net proceeds were used, together with other available funds to acquire the Kensington Valley Factory Shops in Howell, Michigan mentioned above, reduce the outstanding balance on our lines of credit and for general corporate purposes. o We extended the maturities of our existing three unsecured lines of credit totaling $75 million with Bank of America, Fleet National Bank and SouthTrust Bank until June 30, 2004 and added an additional $10 million line of credit with Wells Fargo Bank which also matures on June 30, 2004. This addition brings our total capacity under lines of credit to $85 million. o In conjunction with the construction of the Myrtle Beach, South Carolina center mentioned above, we, through our 50% ownership joint venture, TWMB Associates, LLC ("TWMB"), closed on a variable rate, construction loan in the amount of $36.2 million with Bank of America, NA (Agent) and SouthTrust Bank. In August of 2002, TWMB entered into an interest rate swap agreement with Bank of America, NA effective through August 2004 with a notional amount of $19 million. This swap effectively changes the payment of interest on $19 million of variable rate debt to fixed rate debt for the contract period at a rate of 4.49%. During 2002, we purchased primarily at par, $10.4 million of our outstanding 7.875% senior, unsecured public notes that mature in October 2004. The purchases were funded by amounts available under our unsecured lines of credit. During 2001, we purchased $14.5 million of these notes at par. In total, $24.9 million of the October 2004 notes were purchased in 2001 and 2002. We currently have authority from our Board of Directors to purchase an additional $25 million of our outstanding 7.875% senior, unsecured public notes and may, from time to time, do so at management's discretion. The Factory Outlet Concept Factory outlets are manufacturer-operated retail stores that sell primarily first quality, branded products at significant discounts from regular retail prices charged by department stores and specialty stores. Factory outlet centers offer numerous advantages to both consumers and manufacturers. Manufacturers selling in factory outlet stores are often able to charge customers lower prices for brand name and designer products by eliminating the third party retailer. Factory outlet centers also typically have lower operating costs than other retailing formats, which enhance the manufacturer's profit potential. Factory outlet centers enable manufacturers to optimize the size of production runs while continuing to maintain control of their distribution channels. In addition, factory outlet centers benefit manufacturers by permitting them to sell out-of-season, overstocked or discontinued merchandise without alienating department stores or hampering the manufacturer's brand name, as is often the case when merchandise is distributed via discount chains. 3 Our factory outlet centers range in size from 11,000 to 729,238 square feet of GLA and are typically located at least 10 miles from densely populated areas, where major department stores and manufacturer-owned full-price retail stores are usually located. Manufacturers prefer these locations so that they do not compete directly with their major customers and their own stores. Many of our factory outlet centers are located near tourist destinations to attract tourists who consider shopping to be a recreational activity. These centers are typically situated in close proximity to interstate highways that provide accessibility and visibility to potential customers. We believe that factory outlet centers continue to present attractive opportunities for capital investment, particularly with respect to strategic re-merchandising plans and expansions of existing centers. We believe that under present conditions such development or expansion costs, coupled with current market lease rates, permit attractive investment returns. We further believe, based upon our contacts with present and prospective tenants, that many companies, including prospective new entrants into the factory outlet business, desire to open a number of new factory outlet stores in the next several years, particularly where there are successful factory outlet centers in which such companies do not have a significant presence or where there are few factory outlet centers. Our Factory Outlet Centers Each of our factory outlet centers carries the Tanger brand name. We believe that both national manufacturers and consumers recognize the Tanger brand as one that provides outlet shopping centers where consumers can trust the brand, quality and price of the merchandise they purchase directly from the manufacturers. As one of the original participants in this industry, we have developed long-standing relationships with many national and regional manufacturers. Because of our established relationships with many manufacturers, we believe we are well positioned to capitalize on industry growth. As of March 1, 2003, we had a diverse tenant base comprised of over 300 different well-known, upscale, national designer or brand name concepts, such as Dana Buchman, Liz Claiborne, Reebok, Nike, Tommy Hilfiger, Brooks Brothers, Nautica, Coach, Polo Ralph Lauren, GAP, Old Navy and Banana Republic. Most of the factory outlet stores are directly operated by the respective manufacturer. No single tenant (including affiliates) accounted for 10% or more of combined base and percentage rental revenues during 2002, 2001 and 2000. As of March 1, 2003, our largest tenant, including all of its store concepts, accounted for approximately 6.6% of our GLA. Because our typical tenant is a large, national manufacturer, we have not experienced any material problems with respect to rent collections or lease defaults. Revenues from fixed rents and operating expense reimbursements accounted for approximately 91% of our total revenues in 2002. Revenues from contingent sources, such as percentage rents, vending income and miscellaneous income, accounted for approximately 8% of 2002 revenues. As a result, only small portions of our revenues are dependent on contingent revenue sources. Business History Stanley K. Tanger, the Company's founder, Chairman and Chief Executive Officer, entered the factory outlet center business in 1981. Prior to founding the Company, Stanley K. Tanger and his son, Steven B. Tanger, the Company's President and Chief Operating Officer, built and managed a successful family owned apparel manufacturing business, Tanger/Creighton Inc. ("Tanger/Creighton"), which business included the operation of five factory outlet stores. Based on their knowledge of the apparel and retail industries, as well as their experience operating Tanger/Creighton's factory outlet stores, the Tangers recognized that there would be a demand for factory outlet centers where a number of manufacturers could operate in a single location and attract a large number of shoppers. From 1981 to 1986, Stanley K. Tanger solely developed the first successful factory outlet centers. Steven Tanger joined the company in 1986 and by June 1993, together, the Tangers had developed 17 centers with a total GLA of approximately 1.5 million square feet. In June of 1993, we completed our initial public offering ("IPO"), making Tanger Factory Outlet Centers, Inc. the first publicly traded outlet center company. Since our IPO, through strategic development, acquisitions and some dispositions, we have added approximately 4.7 million square feet of GLA to our portfolio, bringing our portfolio of owned and managed properties as of December 31, 2002 to 34 centers totaling approximately 6.2 million square feet of GLA. 4 Business and Operating Strategy Our strategy is to increase revenues through new development, selective acquisitions and expansions of factory outlet centers while minimizing our operating expenses by designing low maintenance properties and achieving economies of scale. We continue to focus on strengthening our tenant base in our centers by replacing low volume tenants with high volume anchor tenants. We typically seek opportunities to develop or acquire new centers in locations that have at least 5 million people residing within an hour's drive, an average household income within a 50-mile radius of at least $35,000 per year and access to frontage on a major or interstate highway with a traffic count of at least 50,000 cars per day. We also seek to enhance our customer base by developing centers near or at established tourist destinations. Our current goal is to target sites that are large enough to support centers with approximately 75 stores totaling at least 300,000 square feet of GLA. We generally prelease at least 50% of the space in each center prior to acquiring the site and beginning construction. Construction of a new factory outlet center has normally taken us four to six months from groundbreaking to the opening of the first tenant store. Construction of expansions to existing properties typically takes less time, usually between three to four months. Capital Strategy We intend to achieve a strong and flexible financial position by: (1) maintaining a quality portfolio of strong income producing properties, (2) managing our leverage position relative to our portfolio when pursuing new development and expansion opportunities, (3) extending and sequencing debt maturities, (4) managing our interest rate risk, (5) maintaining our liquidity and (6) utilizing internally generated sources of capital by maintaining a low distribution payout ratio, defined as annual distributions as a percent of funds from operations, and subsequently reinvesting a significant portion of our cash flow into our portfolio. For a discussion of funds from operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Funds From Operations". We have successfully increased our dividend each of our first nine years as a public company. At the same time, we continue to have a low distribution payout ratio, which for the year ended December 31, 2002, was 72%. As a result, we retained approximately $12.3 million of our 2002 FFO. A low distribution payout ratio allows us to retain capital to maintain the quality of our portfolio, as well as to develop, acquire and expand properties and reduce outstanding debt. We intend to retain the ability to raise additional capital, including public debt or equity, to pursue attractive investment opportunities that may arise and to otherwise act in a manner that we believe to be in our shareholders' best interests. During the second quarter of 2001, we amended our shelf registration for the ability to issue up to $400 million, ($200 million in debt and $200 million in equity securities). In July 2002, we again amended the shelf registration to allow us to issue the $400 million in either all debt or all equity or any combination thereof up to $400 million. In September 2002, we completed a public offering of 1,000,000 common shares at a price of $29.25 per share, receiving net proceeds of approximately $28.0 million. We used the net proceeds, together with other available funds, to acquire one outlet center in Howell, Michigan, to reduce the outstanding balance on our lines of credit and for general corporate purposes. To generate capital to reinvest into other attractive investment opportunities, we may also consider the use of operational and developmental joint ventures, selling certain properties that do not meet our long-term investment criteria as well as outparcels on existing properties. We maintain unsecured, revolving lines of credit that provided for unsecured borrowings up to $85 million at December 31, 2002, an increase of $10 million in capacity from December 31, 2001. During 2002, we extended the maturity of all lines of credit to June 30, 2004. Based on cash provided by operations, existing credit facilities, ongoing negotiations with certain financial institutions and our ability to sell debt or equity subject to market conditions, we believe that we have access to the necessary financing to fund the planned capital expenditures during 2003. 5 The Operating Partnership Our centers and other assets are held by, and all of our operations are conducted by, the Operating Partnership. As of December 31, 2002, our wholly-owned subsidiaries owned 9,061,025 Units, and 80,190 Preferred Units (which are convertible into approximately 722,509 limited partnership Units) and the Tanger Family owned the remaining 3,033,305 Units. TFLP's Units are exchangeable, subject to certain limitations to preserve our status as a REIT, on a one-for-one basis for our common shares. Each preferred partnership Unit entitles us to receive distributions from the Operating Partnership, in an amount equal to the distribution payable with respect to a share of Series A Preferred Shares, prior to the payment by the Operating Partnership of distributions with respect to the general partnership Units. Preferred partnership Units will be automatically converted by holders into limited partnership Units to the extent that the Series A Preferred Shares are converted into Common Shares and will be redeemed by the Operating Partnership to the extent that the Series A Preferred Shares are redeemed by us. Competition We carefully consider the degree of existing and planned competition in a proposed area before deciding to develop, acquire or expand a new center. Our centers compete for customers primarily with factory outlet centers built and operated by different developers, traditional shopping malls and full- and off-price retailers. However, we believe that the majority of our customers visit factory outlet centers because they are intent on buying name-brand products at discounted prices. Traditional full- and off-price retailers are often unable to provide such a variety of name-brand products at attractive prices. Tenants of factory outlet centers typically avoid direct competition with major retailers and their own specialty stores, and, therefore, generally insist that the outlet centers be located not less than 10 miles from the nearest major department store or the tenants' own specialty stores. For this reason, our centers compete only to a very limited extent with traditional malls in or near metropolitan areas. We compete favorably with two large national developers of factory outlet centers and numerous small developers. Competition with other factory outlet centers for new tenants is generally based on cost, location, quality and mix of the centers' existing tenants, and the degree and quality of the support and marketing services provided. As a result of these factors and due to the strong tenant relationships that presently exist with the current major outlet developers, we believe there are significant barriers to entry into the outlet center industry by new developers. We also believe that our centers have an attractive tenant mix, as a result of our decision to lease substantially all of our space to manufacturer operated stores rather than to off-price retailers, and also as a result of the strong brand identity of our major tenants. Corporate and Regional Headquarters We rent space in an office building in Greensboro, North Carolina in which our corporate headquarters are located. In addition, we rent a regional office in New York City, New York under a lease agreement and sublease agreement, respectively, to better service our principal fashion-related tenants, many of who are based in and around that area. We maintain offices and employ on-site managers at 26 centers. The managers closely monitor the operation, marketing and local relationships at each of their centers. Insurance We believe that as a whole our properties are covered by adequate comprehensive liability, fire, flood and extended loss insurance provided by reputable companies with commercially reasonable and customary deductibles and limits. Specified types and amounts of insurance are required to be carried by each tenant under their lease agreement with us. There are however, types of losses, like those resulting from wars or earthquakes, which may either be uninsurable or not economically insurable in some or all of our locations. An uninsured loss could result in a loss to us of both our capital investment and anticipated profits from the affected property. 6 Employees As of March 1, 2003, we had 157 full-time employees, located at our corporate headquarters in North Carolina, our regional office in New York and our 26 business offices. At that date, we also employed 169 part-time employees at various locations. Item 2. Properties As of March 1, 2003, our portfolio consisted of 34 centers located in 21 states. Our centers range in size from 11,000 to 729,238 square feet of GLA. These centers are typically strip shopping centers that enable customers to view all of the shops from the parking lot, minimizing the time needed to shop. The centers are generally located near tourist destinations or along major interstate highways to provide visibility and accessibility to potential customers. We believe that the centers are well diversified geographically and by tenant and that we are not dependent upon any single property or tenant. The only center that represents more than 10% of our consolidated total assets or consolidated gross revenues as of and for the year ended December 31, 2002 is the property in Riverhead, NY. See "Business and Properties - Significant Property". No other center represented more than 10% of our consolidated total assets or consolidated gross revenues as of December 31, 2002. We have an ongoing strategy of acquiring centers, developing new centers and expanding existing centers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for a discussion of the cost of such programs and the sources of financing thereof. Certain of our centers serve as collateral for mortgage notes payable. Of the 29 centers that we have ownership interests in, we own the land underlying 25 and have ground leases on four. The land on which the Pigeon Forge and Sevierville centers are located are subject to long-term ground leases expiring in 2086 and 2046, respectively. The land parcel on which the original Riverhead Center is located, approximately 47 acres, is also subject to a ground lease with an initial term expiring in 2004, with renewal at our option for up to seven additional terms of five years each. The land parcel on which the Riverhead Center expansion is located, containing approximately 43 acres, is owned by us. The land parcel on which the Myrtle Beach center is located, is also subject to a ground lease with an initial term expiring in 2026, with renewal at TWMB's option for up to seven additional terms of ten years each. The term of our typical tenant lease averages approximately five years. Generally, leases provide for the payment of fixed monthly rent in advance. There are often contractual base rent increases during the initial term of the lease. In addition, the rental payments are customarily subject to upward adjustments based upon tenant sales volume. Most leases provide for payment by the tenant of real estate taxes, insurance, common area maintenance, advertising and promotion expenses incurred by the applicable center. As a result, substantially all operating expenses for the centers are borne by the tenants.
7 Location of Centers (as of March 1, 2003) (1) Number of GLA % State Centers (sq. ft.) of GLA - --------------------------- ------------- -------------- --------------- Georgia 4 950,590 17 New York 1 729,238 13 Texas 2 619,426 11 Tennessee 2 477,412 8 Michigan 2 437,651 8 Missouri 1 277,494 5 Iowa 1 277,230 5 South Carolina (2) 1 260,033 5 Pennsylvania 1 255,059 4 Louisiana 1 245,199 4 Florida 1 198,789 3 North Carolina 2 187,702 3 Arizona 1 184,768 3 Indiana 1 141,051 2 Minnesota 1 134,480 2 California 1 105,950 2 Maine 2 84,397 2 Alabama 1 79,575 1 New Hampshire 2 61,745 1 West Virginia 1 49,252 1 - --------------------------- ------------- -------------- --------------- Total 29 5,757,041 100 =========================== ============= ============== =============== (1) Excludes centers managed by us but in which we have no ownership interests. (2) Represents property that is currently held through an unconsolidated joint venture in which we own a 50% interest.
8 The table set forth below summarizes certain information with respect to our existing centers, excluding centers we manage but in which we have no ownership interests, as of March 1, 2003. Except as noted, all properties are fee owned.
Mortgage Debt Outstanding GLA % (000's) as of Location (sq. ft.) Occupied December 31, 2002 - ----------------------------- ----------- ----- ----------- -------------------- Riverhead, NY (1) 729,238 98 --- San Marcos, TX 441,936 99 37,946 Sevierville, TN (2) 382,854 100 --- Commerce II, GA 342,556 90 29,500 Howell, MI 325,231 99 --- Branson, MO 277,494 96 24,000 Williamsburg, IA 277,230 98 19,429 Myrtle Beach, SC (2) (3) 260,033 100 --- Lancaster, PA 255,059 90 14,516 Locust Grove, GA 248,854 99 --- Gonzales, LA 245,199 98 --- Fort Meyers, FL 198,789 99 --- Commerce I, GA 185,750 79 8,288 Casa Grande, AZ 184,768 89 --- Terrell, TX 177,490 96 --- Dalton, GA 173,430 93 11,133 Seymour, IN 141,051 74 --- North Branch, MN 134,480 99 --- West Branch, MI 112,420 95 7,067 Barstow, CA 105,950 60 --- Blowing Rock, NC 105,448 94 9,655 Pigeon Forge, TN (2) 94,558 95 --- Nags Head, NC 82,254 100 6,552 Boaz, AL 79,575 89 --- Kittery I, ME 59,694 100 6,335 LL Bean, North Conway, NH 50,745 100 --- Martinsburg, WV 49,252 73 --- Kittery II, ME 24,703 66 --- Clover, North Conway, NH 11,000 100 --- - ---------------------------- ------------ ----- -------- --------------------- 5,757,041 95 $ 174,421 ============================ ============ ===== ======== ===================== (1) A portion of the Riverhead center (totaling approximately 298,000 square feet) is subject to a ground lease through May 31, 2004 which may be renewed at our option for up to seven additional terms of five years each. (2) These properties are subject to a ground lease. (3) Represents property that is currently held through an unconsolidated joint venture in which we own a 50% interest. The joint venture had $25.5 million of construction loan debt as of December 31, 2002.
9 Lease Expirations The following table sets forth, as of March 1, 2003, scheduled lease expirations, assuming none of the tenants exercise renewal options. Most leases are renewable for five year terms at the tenant's option.
% of Gross Annualized Average Base Rent No. of Approx. Annualized Annualized Represented Leases GLA Base Rent Base Rent by Expiring Year Expiring(1) (sq. ft.) (1) per sq. ft. (000's) (2) Leases - ------------------------ ----------------- ----------------- ------------- --------------- -------------- 2003 142 541,000 (3) $ 12.54 $6,783 10 2004 277 1,196,000 13.57 16,227 23 2005 190 835,000 15.69 13,098 16 2006 188 795,000 15.54 12,362 15 2007 204 839,000 18.10 15,177 16 2008 96 438,000 15.06 6,598 8 2009 20 137,000 12.30 1,689 3 2010 17 79,000 14.67 1,156 2 2011 9 94,000 12.75 1,193 2 2012 19 173,000 11.24 1,949 3 2013 & thereafter 21 110,000 12.50 1,375 2 - ------------------------ ----------- ----------------------- ---------- -------------- ------------------ Total 1,183 5,237,000 $ 14.82 $ 77,607 100 ======================== =========== ======================= ========== ============== ================== (1) Excludes leases that have been entered into but which tenant has not yet taken possession, vacant suites, space under construction, temporary leases and month-to-month leases totaling in the aggregate approximately 520,000 square feet. (2) Base rent is defined as the minimum payments due, excluding periodic contractual fixed increases and rents calculated based on a percentage of tenants' sales. (3) As of March 1, 2003, approximately 529,000 square feet of the total scheduled to expire in 2003 had already renewed.
Rental and Occupancy Rates The following table sets forth information regarding the expiring leases during each of the last five calendar years.
Renewed by Existing Re-leased to Total Expiring Tenants New Tenants ----------------------------------- ---------------------------- ---------------------------- % of % of % of GLA Total Center GLA Expiring GLA Expiring Year (sq. ft.) GLA (sq. ft.) GLA (sq. ft.) GLA - ---------------- --------------- ---------------- ------------- ----------- ------------ ------------ 2002 935,000 16 819,000 88 56,000 6 2001 684,000 13 560,000 82 55,000 8 2000 690,000 13 520,000 75 68,000 10 1999 715,000 14 606,000 85 23,000 3 1998 549,000 11 408,000 74 39,000 7
10 The following table sets forth the average base rental rate increases per square foot upon re-leasing stores that were turned over or renewed during each of the last five calendar years.
Renewals of Existing Leases Stores Re-leased to New Tenants (1) ---------------------------------------------------- ------------------------------------------------------ Average Annualized Base Rents Average Annualized Base Rents ($ per sq. ft.) ($ per sq. ft.) -------------------------------------- ---------------------------------------- GLA % GLA Year (sq. ft.) Expiring New Increase (sq. ft.) Expiring New % Change - --------- ---------- ----------- --------- ---------- ---------- ----------- --------- ---------- 2002 819,000 $14.86 $15.02 1 229,000 $15.14 $15.74 4 2001 560,000 14.08 14.89 6 269,000 14.90 16.43 10 2000 520,000 13.66 14.18 4 303,000 14.68 15.64 7 1999 606,000 14.36 14.36 -- 241,000 15.51 16.57 7 1998 407,000 13.83 14.07 2 221,000 15.33 13.87 (9) - --------------------- (1) The square footage released to new tenants for 2002, 2001, 2000, 1999 and 1998 contains 56,000, 55,000, 68,000, 23,000,and 39,000 square feet, respectively, that was released to new tenants upon expiration of an existing lease during the current year.
Occupancy Costs We believe that our ratio of average tenant occupancy cost (which includes base rent, common area maintenance, real estate taxes, insurance, advertising and promotions) to average sales per square foot is low relative to other forms of retail distribution. The following table sets forth, for each of the last five years, tenant occupancy costs per square foot as a percentage of reported tenant sales per square foot.
Occupancy Costs as a Year % of Tenant Sales ------------------------------ -------------------------- 2002 7.2 2001 7.1 2000 7.4 1999 7.8 1998 7.9
11 Tenants The following table sets forth certain information with respect to our ten largest tenants and their store concepts as of March 1, 2003.
Number GLA % of Total Tenant of Stores (sq. ft.) GLA - --------------------------------------------- ------------- ------------- ---------------- The Gap, Inc.: GAP 18 157,702 2.7 Old Navy 13 183,585 3.2 Banana Republic 5 38,824 0.7 ------------- ------------- ---------------- 36 380,111 6.6 Phillips-Van Heusen Corporation: Bass Shoe 22 146,666 2.5 Van Heusen 22 92,697 1.6 Geoffrey Beene Co. Store 12 46,001 0.8 Izod 14 33,300 0.6 ------------- ------------- ---------------- 70 318,664 5.5 Liz Claiborne: Liz Claiborne 23 264,371 4.6 Elizabeth 7 25,984 0.5 DKNY Jeans 3 8,820 0.2 Dana Buchman 2 4,500 0.1 Special Brands By Liz Claiborne 2 5,880 0.1 Claiborne Mens 1 3,100 --- ------------- ------------- ---------------- 38 312,655 5.5 Reebok International, Ltd.: Reebok 21 171,661 3.0 Rockport 4 11,900 0.2 Greg Norman 1 3,000 --- ------------- ------------- ---------------- 26 186,561 3.2 Dress Barn Inc. 20 143,512 2.5 Sara Lee Corporation: L'eggs, Hanes, Bali 26 113,810 2.0 Socks Galore 5 6,230 0.1 Understatements 1 3,000 --- ------------- ------------- ---------------- 32 123,040 2.1 Brown Group Retail, Inc: Factory Brand Shoe 16 97,102 1.7 Naturalizer 9 23,344 0.4 ------------- ------------- ---------------- 25 120,446 2.1 American Commercial, Inc: Mikasa Factory Store 15 120,086 2.1 Polo Ralph Lauren: Polo Ralph Lauren 11 91,566 1.6 Polo Jeans 4 15,000 0.3 ------------- ------------- ---------------- 15 106,566 1.9 VF Factory Outlet, Inc. 4 105,697 1.8 - --------------------------------------------- ------------- ------------- ---------------- Total of all tenants listed in table 281 1,917,338 33.3 ============================================= ============= ============= ================
12 Significant Property The center in Riverhead, New York is our only center that comprises more than 10% of consolidated total assets or consolidated total gross revenues. The Riverhead, NY center represented 19% of our consolidated total assets and 21% of our consolidated gross revenue for the year ended December 31, 2002. The Riverhead center was originally constructed in 1994 and now totals 729,238 square feet. Tenants at the Riverhead center principally conduct retail sales operations. The occupancy rate as of the end of 2002, 2001 and 2000 was 100%, 99% and 94%. Average annualized base rental rates during 2002, 2001 and 2000 were $19.71, $18.68 and $19.72 per weighted average GLA, respectively. Depreciation on the Riverhead center is recognized on a straight-line basis over 33.33 years, resulting in a depreciation rate of 3% per year. At December 31, 2002, the net federal tax basis of this center was approximately $80.5 million. Real estate taxes assessed on this center during 2002 amounted to $3.4 million. Real estate taxes for 2003 are estimated to be approximately $3.6 million. The following table sets forth, as of March 1, 2003, scheduled lease expirations at the Riverhead center assuming that none of the tenants exercise renewal options:
% of Gross Annualized Base Rent No. of Annualized Annualized Represented Leases GLA Base Rent Base Rent by Expiring Year Expiring (1) (sq. ft.) (1) per sq. ft. (000) (2) Leases - --------------------------- ----------------- ----------------- ------------------ ---------------- ---------------- 2003 7 19,000 $ 21.48 $ 409 3 2004 31 138,000 19.48 2,697 20 2005 19 90,000 22.33 2,009 13 2006 13 46,000 23.17 1,055 7 2007 53 190,000 25.78 4,900 27 2008 20 91,000 21.61 1,965 13 2009 2 38,000 10.27 388 5 2010 --- --- --- --- --- 2011 2 31,000 12.69 393 4 2012 2 20,000 6.00 117 3 2013 and thereafter 3 36,000 16.12 588 5 - ---------------------------- --------- --------------------- ------------------ --------------- -------------------- Total 152 699,000 $ 20.77 $ 14,521 100 ============================ ========= ===================== ================== =============== ==================== (1) Excludes leases that have been entered into but which tenant has not taken possession, vacant suites, temporary leases and month-to-month leases totaling in the aggregate approximately 30,000 square feet. (2) Base rent is defined as the minimum payments due, excluding periodic contractual fixed increases and rents calculated based on a percentage of tenants' sales.
Item 3. Legal Proceedings We are subject to legal proceedings and claims that have arisen in the ordinary course of our business and have not been finally adjudicated. In our opinion, the ultimate resolution of these matters will have no material effect on our results of operations or financial condition. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders, through solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended December 31, 2002. 13 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information concerning our executive officers:
NAME AGE POSITION - --------------------------- --- ----------------------------------------------- Stanley K. Tanger.......... 79 Founder, Chairman of the Board of Directors and Chief Executive Officer Steven B. Tanger........... 54 Director, President and Chief Operating Officer Rochelle G. Simpson ....... 64 Secretary and Executive Vice President - Administration and Finance Willard A. Chafin, Jr...... 65 Executive Vice President - Leasing, Site Selection, Operations and Marketing Frank C. Marchisello, Jr... 44 Senior Vice President - Chief Financial Officer Joseph H. Nehmen........... 54 Senior Vice President - Operations Carrie A. Warren........... 40 Senior Vice President - Marketing Virginia R. Summerell...... 44 Treasurer and Assistant Secretary Kevin M. Dillon............ 44 Vice President - Construction and Development Lisa J. Morrison........... 43 Vice President - Leasing
The following is a biographical summary of the experience of our executive officers: Stanley K. Tanger. Mr. Tanger is the founder, Chief Executive Officer and Chairman of the Board of Directors of the Company. He also served as President from inception of the Company to December 1994. Mr. Tanger opened one of the country's first outlet shopping centers in Burlington, North Carolina in 1981. Before entering the factory outlet center business, Mr. Tanger was President and Chief Executive Officer of his family's apparel manufacturing business, Tanger/Creighton, Inc., for 30 years. Steven B. Tanger. Mr. Tanger is a director of the Company and was named President and Chief Operating Officer effective January 1, 1995. Previously, Mr. Tanger served as Executive Vice President since joining the Company in 1986. He has been with Tanger-related companies for most of his professional career, having served as Executive Vice President of Tanger/Creighton for 10 years. He is responsible for all phases of project development, including site selection, land acquisition and development, leasing, marketing and overall management of existing outlet centers. Mr. Tanger is a graduate of the University of North Carolina at Chapel Hill and the Stanford University School of Business Executive Program. Mr. Tanger is the son of Stanley K. Tanger. Rochelle G. Simpson. Ms. Simpson was named Executive Vice President - Administration and Finance in January 1999. She previously held the position of Senior Vice President - Administration and Finance since October 1995. She is also the Secretary of the Company and previously served as Treasurer from May 1993 through May 1995. She entered the factory outlet center business in January 1981, in general management and as chief accountant for Stanley K. Tanger and later became Vice President - Administration and Finance of the Predecessor Company. Ms. Simpson oversees the accounting and finance departments and has overall management responsibility for the Company's headquarters. Willard A. Chafin, Jr. Mr. Chafin was named Executive Vice President - Leasing, Site Selection, Operations and Marketing of the Company in January 1999. Mr. Chafin previously held the position of Senior Vice President - Leasing, Site Selection, Operations and Marketing since October 1995. He joined the Company in April 1990, and since has held various executive positions where his major responsibilities included supervising the Marketing, Leasing and Property Management Departments, and leading the Asset Management Team. Prior to joining the Company, Mr. Chafin was the Director of Store Development for the Sara Lee Corporation, where he spent 21 years. Before joining Sara Lee, Mr. Chafin was employed by Sears Roebuck & Co. for nine years in advertising/sales promotion, inventory control and merchandising. 14 Frank C. Marchisello, Jr. Mr. Marchisello was named Senior Vice President and Chief Financial Officer in January 1999. He was named Vice President and Chief Financial Officer in November 1994. Previously, he served as Chief Accounting Officer since joining the Company in January 1993 and Assistant Treasurer since February 1994. He was employed by Gilliam, Coble & Moser, certified public accountants, from 1981 to 1992, the last six years of which he was a partner of the firm in charge of various real estate clients. Mr. Marchisello is a graduate of the University of North Carolina at Chapel Hill and is a certified public accountant. Joseph H. Nehmen. Mr. Nehmen was named Senior Vice President of Operations in January 1999. He joined the Company in September 1995 and was named Vice President of Operations in October 1995. Mr. Nehmen has over 20 years experience in private business. Prior to joining Tanger, Mr. Nehmen was owner of Merchants Wholesaler, a privately held distribution company in St. Louis, Missouri. He is a graduate of Washington University. Mr. Nehmen is the son-in-law of Stanley K. Tanger and brother-in-law of Steven B. Tanger. Carrie A. Warren. Ms. Warren was named Senior Vice President - Marketing in May 2000. Previously, she held the position of Vice President - Marketing since September 1996 and Assistant Vice President - Marketing since joining the Company in December 1995. Prior to joining Tanger, Ms. Warren was with Prime Retail, L.P. for 4 years where she served as Regional Marketing Director responsible for coordinating and directing marketing for five outlet centers in the southeast region. Prior to joining Prime Retail, L.P., Ms. Warren was Marketing Manager for North Hills, Inc. for five years and also served in the same role for the Edward J. DeBartolo Corp. for two years. Ms. Warren is a graduate of East Carolina University. Virginia R. Summerell. Ms. Summerell was named Treasurer of the Company in May 1995 and Assistant Secretary in November 1994. Previously, she held the position of Director of Finance since joining the Company in August 1992, after nine years with NationsBank. Her major responsibilities include maintaining banking relationships, oversight of all project and corporate finance transactions and development of treasury management systems. Ms. Summerell is a graduate of Davidson College and holds an MBA from the Babcock School at Wake Forest University. Kevin M. Dillon. Mr. Dillon was named Vice President - Construction and Development in May 2002. Previously, he held the positions of Vice President - Construction from October 1997 to May 2002, Director of Construction from September 1996 to October 1997 and Construction Manager from November 1993, the month he joined the Company, to September 1996. Prior to joining the Company, Mr. Dillon was employed by New Market Development Company for six years where he served as Senior Project Manager. Prior to joining New Market, Mr. Dillon was the Development Director of Western Development Company where he spent 6 years. Lisa J. Morrison. Ms. Morrison was named Vice President - Leasing in May 2001. Previously, she held the position of Assistant Vice President of Leasing from August 2000 to May 2001 and Director of Leasing from April 1999 until August 2000. Prior to joining the Company, Ms. Morrison was employed by the Taubman Company and Trizec Properties, Inc. where she served as a leasing agent. Her major responsibilities include managing the leasing strategies for our operating properties, as well as expansions and new development. She also oversees the leasing personnel and the merchandising and occupancy for Tanger properties. 15 PART II Item 5. Market For Registrant's Common Equity and Related Shareholder Matters The Common Shares commenced trading on the New York Stock Exchange on May 28, 1993. The initial public offering price was $22.50 per share. The following table sets forth the high and low sales prices of the Common Shares as reported on the New York Stock Exchange Composite Tape, during the periods indicated.
Common 2002 High Low Dividends Paid - ------------------ ---------------- ------------------ ----------------- First Quarter $ 27.500 $ 20.750 $ .6100 Second Quarter 30.000 25.400 .6125 Third Quarter 29.900 23.000 .6125 Fourth Quarter 31.200 24.340 .6125 - ------------------ ---------------- ------------------ ----------------- Year 2002 $ 31.200 $ 20.750 $2.4475 - ------------------ ---------------- ------------------ ----------------- Common 2001 High Low Dividends Paid - ------------------ ---------------- ------------------ ----------------- First Quarter $ 23.625 $ 19.750 $ .6075 Second Quarter 23.000 20.340 .6100 Third Quarter 23.000 19.100 .6100 Fourth Quarter 21.400 19.900 .6100 - ------------------ ---------------- ------------------ ----------------- Year 2001 $ 23.625 $ 19.100 $2.4375 - ------------------ ---------------- ------------------ ----------------- As of March 1, 2003, there were approximately 710 shareholders of record. Certain of our debt agreements limit the payment of dividends such that dividends shall not exceed FFO, as defined in the agreements, for the prior fiscal year on an annual basis or 95% of FFO on a cumulative basis. Based on continuing favorable operations and available funds from operations, we intend to continue to pay regular quarterly dividends.
16
Item 6. Selected Financial Data 2002 2001 2000 1999 1998 - ------------------------------------------ ------------- ------------- -------------- ------------ ---------------- (In thousands, except per share and center data) OPERATING DATA Total revenues $ 113,167 $ 108,266 $ 106,137 $ 103,093 $ 97,094 Income before equity in earnings of unconsolidated joint ventures, minority interest, discontinued operations,(loss)gain on sale or disposal of real estate and extraordinary item 10,642 7,790 10,598 16,505 14,688 Income from continuing operations 8,628 6,125 8,165 12,444 11,139 Income before extraordinary item 11,007 7,356 4,312 15,837 12,159 Net income 11,007 7,112 4,312 15,588 11,827 - ------------------------------------------ -------------- --------------- ------------- ------------ -------------- SHARE DATA Basic: Income from continuing operations $ .82 $ .55 $ .80 $ 1.34 $ 1.17 Net income $ 1.11 $ .67 $ .32 $ 1.74 $ 1.26 Weighted average common shares 8,322 7,926 7,894 7,861 7,886 Diluted: Income from continuing operations $ .80 $ .55 $ .80 $ 1.34 $ 1.15 Net income $ 1.08 $ .67 $ .31 $ 1.74 $ 1.24 Weighted average common shares 8,514 7,948 7,922 7,872 8,009 Common dividends paid $ 2.45 $ 2.44 $ 2.43 $ 2.42 $ 2.35 - ------------------------------------------ -------------- --------------- ------------- ------------ -------------- BALANCE SHEET DATA Real estate assets, before depreciation $ 622,399 $ 599,266 $ 584,928 $ 566,216 $ 529,247 Total assets 477,675 476,272 487,408 490,069 471,795 Debt 345,005 358,195 346,843 329,647 302,485 Shareholders' equity 90,635 76,371 90,877 107,764 114,039 - ------------------------------------------ -------------- --------------- ------------- ------------ -------------- OTHER DATA Cash flows provided by (used in): Operating activities $ 39,167 $ 44,626 $ 38,420 $ 43,175 $ 35,787 Investing activities $ (26,363) $ (23,269) $ (25,815) $ (45,959) $ (79,236) Financing activities $ (12,247) $ (21,476) $ (12,474) $ (3,043) $ 46,172 Funds from operations (1) $ 41,695 $ 37,768 $ 38,203 $ 41,673 $ 37,048 Gross leasable area open at year end 6,186 5,437 5,284 5,254 5,116 Number of centers 34 32 32 34 34 - ----------------------- (1) Funds from Operations ("FFO") is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. FFO is defined as net income (loss), computed in accordance with generally accepted accounting principles, before extraordinary items and gains (losses) on sale or disposal of depreciable operating properties, plus depreciation and amortization uniquely significant to real estate and after adjustments for unconsolidated partnerships and joint ventures. 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. FFO is not intended to represent cash flows for the period. FFO has not been presented as an alternative to operating income or as an indicator of operating performance, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles.
17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements appearing elsewhere in this report. Historical results and percentage relationships set forth in the consolidated statements of operations, including trends which might appear, are not necessarily indicative of future operations. Unless the context indicates otherwise, the term "Company" refers to Tanger Factory Outlet Centers, Inc. and subsidiaries and the term "Operating Partnership" refers to Tanger Properties Limited Partnership. The terms "we", "our" and "us" refer to the Company or the Company and the Operating Partnership together, as the text requires. The discussion of our results of operations reported in the consolidated statements of operations compares the years ended December 31, 2002 and 2001, as well as December 31, 2001 and 2000. Certain comparisons between the periods are made on a percentage basis as well as on a weighted average gross leasable area ("GLA") basis, a technique which adjusts for certain increases or decreases in the number of centers and corresponding square feet related to the development, acquisition, expansion or disposition of rental properties. The computation of weighted average GLA, however, does not adjust for fluctuations in occupancy that may occur subsequent to the original opening date. Cautionary Statements Certain statements made below are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995 and included this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words `believe', `expect', `intend', `anticipate', `estimate', `project', or similar expressions. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect our actual results, performance or achievements. Factors which may cause actual results to differ materially from current expectations include, but are not limited to, the following: o national and local general economic and market conditions; o demographic changes; our ability to sustain, manage or forecast our growth; existing government regulations and changes in, or the failure to comply with, government regulations; o adverse publicity; liability and other claims asserted against us; o competition; o the risk that we may not be able to finance our planned development activities; o risks related to the retail real estate industry in which we compete, including the potential adverse impact of external factors such as inflation, tenant demand for space, consumer confidence, unemployment rates and consumer tastes and preferences; o risks associated with our development activities, such as the potential for cost overruns, delays and lack of predictability with respect to the financial returns associated with these development activities; o risks associated with real estate ownership, such as the potential adverse impact of changes in the local economic climate on the revenues and the value of our properties; o risks that a significant number of tenants may become unable to meet their lease obligations or that we may be unable to renew or re-lease a significant amount of available space on economically favorable terms; o fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; o business disruptions; 18 o the ability to attract and retain qualified personnel; o the ability to realize planned costs savings in acquisitions; and o retention of earnings. General Overview At December 31, 2002, we had ownership interests in or management responsibilities for 34 centers in 21 states totaling 6.2 million square feet compared to 32 centers in 20 states totaling 5.4 million square feet at December 31, 2001. The increase is due to the following events: o Disposition of our wholly-owned property in Fort Lauderdale, Florida, totaling 165,000 square feet o Development, through a 50% ownership joint venture, of our property in Myrtle Beach, South Carolina totaling 260,000 square feet o Acquisition of our wholly-owned property in Howell, Michigan totaling 325,000 square feet o Obtained management responsibilities of a property in Vero Beach, Florida totaling 329,000 square feet o Disposition of our wholly-owned property in Bourne, Massachusetts, totaling 23,000 square feet for which we retain limited management responsibilities Results of Operations In accordance with SFAS 144 "Accounting for the Impairment or Disposal of Long Lived Assets," effective for financial statements issued for fiscal years beginning after December 15, 2001, results of operations and gain/(loss) on sales of real estate that have separable, identifiable cash flows for properties sold subsequent to December 31, 2001 are reflected in the Consolidated Statements of Operations as discontinued operations for all periods presented. 19 A summary of the operating results for the years ended December 31, 2002, 2001 and 2000 is presented in the following table, expressed in amounts calculated on a weighted average GLA basis.
2002 2001 2000 - ----------------------------------------- ---------- -------------- ------------ GLA open at end of period (000's) Wholly owned 5,469 5,332 5,179 Partially owned (1) 260 --- --- Managed 457 105 105 - ----------------------------------------- ---------- -------------- ------------ Total GLA at end of period (000's) 6,186 5,437 5,284 Weighted average GLA (000's) (2) 5,245 5,111 4,926 States operated in at end of period 21 20 20 Occupancy percentage at end of period 98% 96% 96% Per square foot data Revenues Base rentals $ 14.44 $14.33 $14.08 Percentage rentals .68 .54 .66 Expense reimbursements 5.82 5.77 5.98 Other income .63 .54 .82 - ----------------------------------------- ---------- -------------- ------------ Total revenues 21.57 21.18 21.54 - ----------------------------------------- ---------- -------------- ------------ Expenses Property operating 6.88 6.65 6.70 General and administrative 1.76 1.61 1.50 Interest 5.43 5.90 5.60 Depreciation and amortization 5.48 5.51 5.24 Asset write-down --- --- .37 - ----------------------------------------- ---------- -------------- ------------ Total expenses 19.55 19.67 19.41 - ----------------------------------------- ---------- -------------- ------------ - ----------------------------------------- ---------- -------------- ------------ Income before equity in earnings of unconsolidated joint ventures, minority interest,discontinued operations,loss on sale or disposal of real estate and extraordinary item $ 2.02 $ 1.51 $ 2.13 - ----------------------------------------- ---------- -------------- ------------ (1) Includes one center totaling 260,033 square feet of which we own a 50% interest through a joint venture arrangement. (2) Represents GLA of wholly-owned operating properties weighted by months of operation. GLA is not adjusted for fluctuations in occupancy that may occur subsequent to the original opening date. Excludes GLA of properties for which their results are included in discontinued operations.
2002 Compared to 2001 Base rentals increased $2.5 million, or 3%, in the 2002 period when compared to the same period in 2001. The increase is primarily due to the full nine months effect of an expansion at our San Marcos, TX center which we completed during the fourth quarter of 2001 and the acquisition of our Howell, Michigan center in September 2002. Base rent per weighted average GLA increased by $.11 per square foot from $14.33 per square foot in the 2001 period compared to $14.44 per square foot in the 2002 period. The increase is the result of the addition of the San Marcos expansion to the portfolio which had a higher average base rent per square foot compared to the portfolio average and an increase of 2% in average base rent per square foot on approximately 1.0 million square feet renewed or re-tenanted during 2002. While the overall portfolio occupancy at December 31, 2002 increased 2% from 96% to 98% compared with the prior year end, two centers experienced negative occupancy trends which were offset by positive occupancy gains in other centers. 20 Percentage rentals, which represent revenues based on a percentage of tenants' sales volume above predetermined levels (the "breakpoint"), increased $823,000 or 30%, and on a weighted average GLA basis, increased $.14 per square foot in 2002 compared to 2001. Reported same-space sales per square foot for the twelve months ended December 31, 2002 were $294 per square foot, a 1.4% increase over the prior year ended December 31, 2001. Same-space sales is defined as the weighted average sales per square foot reported in space open for the full duration of each comparison period. Our ability to attract high volume tenants to many of our outlet centers continues to improve the average sales per square foot throughout our portfolio. Reported tenant sales for 2002 for all Tanger Outlet Centers reached a record level of $1.5 billion. Reported same-store sales for the year ended 2002, defined as the weighted average sales per square foot reported by tenants for stores open since January 1, 2001 were down 0.8% compared to 2001. Expense reimbursements, which represent the contractual recovery from tenants of certain common area maintenance, insurance, property tax, promotional, advertising and management expenses generally fluctuates consistently with the reimbursable property operating expenses to which it relates. Expense reimbursements, expressed as a percentage of property operating expenses, decreased to 85% in 2002 from 87% in 2001 primarily as a result of higher real estate taxes due to revaluations, increases in property insurance premiums and increases in other non-reimbursable expenses. Other income increased $534,000, or 19%, in 2002 compared to 2001 primarily due to gains on sales of outparcels of land in 2002 included in other income, increases in vending and other miscellaneous income and the recognition of management, leasing and development fee revenue from our TWMB Associates, LLC ("TWMB") joint venture. Property operating expenses increased by $2.1 million, or 6%, in the 2002 period as compared to the 2001 period and, on a weighted average GLA basis, increased $.23 per square foot from $6.65 to $6.88. The increase is the result of increased costs in marketing, common area maintenance, real estate taxes, property insurance, and other non-reimbursable expenses. General and administrative expenses increased $1.0 million, or 12%, in the 2002 period as compared to the 2001 period. The increase is primarily due to increases in performance based bonus accruals, travel, legal and other professional fees. Also, as a percentage of total revenues, general and administrative expenses were 8% in both the 2002 and 2001 periods and, on a weighted average GLA basis increased $.15 per square foot from $1.61 per square foot in the 2001 period to $1.76 per square foot in the 2002 period. Interest expense decreased $1.7 million during 2002 as compared to 2001 due primarily to lower average interest rates during 2002 and a decrease in the overall debt level due to the use of a portion of the proceeds from our equity offering during the year to reduce outstanding debt. Also, beginning in the fourth quarter of 2001 and continuing through 2002, we purchased, primarily at par, approximately $24.9 million of our outstanding 7.875% senior, unsecured public notes that mature in October 2004. The purchases were funded by amounts available under our unsecured lines of credit. The replacement of the 2004 bonds with funding through lines of credit provided us with a significant interest expense reduction as the lines of credit had a lower interest rate. Depreciation and amortization per weighted average GLA decreased slightly from $5.51 per square foot in the 2001 period to $5.48 per square foot in the 2002 period due to a lower mix of tenant finishing allowances included in buildings and improvements which are depreciated over shorter lives (i.e. over lives generally ranging from 3 to 10 years as opposed to other construction costs which are depreciated over lives ranging from 15 to 33 years). Income from unconsolidated joint ventures increased $392,000 in the 2002 period compared to the 2001 period due to the opening of the Myrtle Beach, South Carolina outlet center by TWMB in June of 2002. The increase in discontinued operations is due to the gains on sales of our Ft. Lauderdale, Florida and Bourne, Massachusetts centers and the leased outparcels of land in Seymour, Indiana and Casa Grande, Arizona, all of which were sold in the 2002 period. 21 2001 Compared to 2000 Base rentals increased $3.9 million, or 6%, in the 2001 period when compared to the same period in 2000. The increase is primarily due to the effect of the expansion completed in 2001 at our San Marcos, Texas center and the full year effect of expansions completed in the fourth quarter of 2000, offset by the loss of rent from the sales of the centers in Lawrence, Kansas and McMinnville, Oregon in June 2000. As noted above, FAS 144 applies only to properties sold subsequent to December 31, 2001. Therefore, the results of operations and resulting loss on sale of real estate from the Lawrence, Kansas and McMinnville, Oregon properties are not included in discontinued operations. The loss from these property sales is included in loss on sale or disposal of real estate in the Consolidated Statement of Operations. Base rent per weighted average GLA increased by $.25 per square foot, or 2%, as a result of the expansions which had a higher average base rent per square foot compared to the portfolio average and the sales of the centers in Lawrence, Kansas and McMinnville, Oregon which had a lower average base rent per square foot compared to the portfolio average. Percentage rentals, which represent revenues based on a percentage of tenants' sales volume above predetermined levels, decreased by $518,000, or 16%, and on a weighted average GLA basis, decreased $.12 per square foot in 2001 compared to 2000. Same-space sales for the year ended December 31, 2001, defined as the weighted average sales per square foot reported in space open for the full duration of each comparison period, increased 5% to $294 per square foot due to our efforts to re-merchandise selected centers by replacing low volume tenants with high volume tenants. However, for the year ended December 31, 2001, reported same-store sales, defined as the weighted average sales per square foot reported by tenants for stores open since January 1, 2000, decreased by 2% compared with the previous year. Expense reimbursements, which represent the contractual recovery from tenants of certain common area maintenance, insurance, property tax, promotional, advertising and management expenses generally fluctuates consistently with the reimbursable property operating expenses to which it relates. Expense reimbursements, expressed as a percentage of property operating expenses, decreased to 87% in 2001 from 89% in 2000 primarily as a result of higher real estate taxes due to revaluations, increases in property insurance premiums and increases in other non-reimbursable expenses. Other income decreased $1.3 million in 2001 as compared to 2000. The 2000 period included gains on sales of land outparcels totaling $908,000 and the recognition of business interruption insurance proceeds relating to the Stroud, Oklahoma center, which was destroyed by a tornado in May 1999, totaling $985,000. These items were offset in part by increases in vending and interest income in the 2001 period. Property operating expenses increased by $1.0 million, or 3%, in 2001 as compared to 2000. On a weighted average GLA basis, property operating expenses decreased from $6.70 to $6.65 per square foot. The decrease per square foot is the result of a company-wide effort to improve operating efficiencies and reduce costs in common area maintenance and marketing partially offset by increases in real estate taxes, property insurance and other non-reimbursable expenses. General and administrative expenses increased $862,000, or 12%, in 2001 as compared to 2000 primarily due to increases in professional fees and provisions for bad debts. As a percentage of revenues, general and administrative expenses were approximately 8% of revenues in 2001 and 7% in 2000. On a weighted average GLA basis, general and administrative expenses increased $.11 per square foot from $1.50 in 2000 to $1.61 in 2001. Interest expense increased $2.6 million during 2001 as compared to 2000 due primarily to our increased debt levels attributable to development completed in 2001 and the full year effect of expansions completed in the fourth quarter of 2000. Our strategy to replace short-term, variable rate debt with long-term, fixed rate debt and extend our average debt maturities has resulted in an overall higher interest rate on outstanding debt. Also, $295,200 paid to terminate certain interest rate swap agreements during the first quarter of 2001 contributed to the increase in interest expense. Depreciation and amortization per weighted average GLA increased 5% from $5.24 per square foot in the 2000 period to $5.51 per square foot in the 2001 period due to a higher mix of tenant finishing allowances included in buildings and improvements which are depreciated over shorter lives (i.e. over lives generally ranging from 3 to 10 years as opposed to other construction costs which are depreciated over lives ranging from 15 to 33 years). 22 The asset write-down recognized in 2000 represents the write off of all development costs associated with our site in Ft. Lauderdale, Florida, as well as additional costs associated with various other non-recurring development activities at other sites, which were discontinued. The costs associated with the Ft. Lauderdale site were written off because we terminated our contract to purchase twelve acres of land in Dania Beach/Ft. Lauderdale, Florida. The loss on sale of real estate during 2000 represents the loss recognized on the sale of our centers in Lawrence, Kansas and McMinnville, Oregon and the land and the remaining site improvements in Stroud, Oklahoma. Net proceeds received from the sale of the centers totaled $7.1 million. The combined net operating income of these two centers represented approximately 1% of the total portfolio's operating income. We sold the Stroud land and site improvements in December 2000 and received net proceeds of approximately $723,500 in January 2001. As noted above, FAS 144 applies only to properties sold subsequent to December 31, 2001. Therefore, the results of operations and resulting losses on sales of real estate from the properties which were sold in 2000 are not included in discontinued operations. The losses from these property sales, totaling $5.0 million, net of minority interest of $1.9 million, are included in loss on sale or disposal of real estate in the Consolidated Statements of Operations. The extraordinary losses recognized in 2001 represent the write-off of unamortized deferred financing costs related to debt that was extinguished prior to its scheduled maturity. Liquidity and Capital Resources Net cash provided by operating activities was $39.2, $44.6 and $38.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. The decreases and increases in cash provided by operating activities in 2002 compared to 2001 and 2001 compared to 2000 are primarily due to changes in other assets and accounts payable and accrued expenses for those respective years. Net cash used in investing activities amounted to $26.4, $23.3 and $25.8 million during 2002, 2001 and 2000, respectively, and reflects the acquisitions, expansions and dispositions of real estate during each year. Cash used in financing activities of $12.2, $21.5 and $12.5 in 2002, 2001 and 2000, respectively, has fluctuated consistently with the capital needed to fund the current development and acquisition activity and reflects increases in dividends paid during 2002, 2001 and 2000. The decrease in cash used in financing activities in 2002 compared to 2001 also reflects the net proceeds of $28.0 million from the issuance of one million common shares and $2.8 million from the exercise of share and unit options in 2002. Acquisitions and Dispositions In September 2002, we completed the acquisition of Kensington Valley Factory Shops, a factory outlet center in Howell, Michigan containing approximately 325,000 square feet, for an aggregate purchase price of $37.5 million. The acquisition was funded with $16.8 million of net proceeds from the sale of our non-core property in Fort Lauderdale, Florida in June 2002 and a portion of the proceeds from the common share offering in September 2002. In November 2002, we completed the disposition of our non-core center in Bourne, Massachusetts which totaled approximately 23,000 square feet. The net proceeds from this sale were $3.1 million. During 2002 we also sold five outparcels of land at various centers (Barstow, California, Gonzales, Louisiana, North Branch, Minnesota, Seymour, Indiana and Casa Grande, Arizona), the last two of which had associated leases with identifiable cash flows. These five outparcel sales generated approximately $1.5 million in net proceeds. Joint Ventures In 2000, we formed a joint venture with C. Randy Warren Jr., former Senior Vice President of Leasing of the Company. The new entity, Tanger-Warren Development, LLC ("Tanger-Warren"), was formed to identify, acquire and develop sites exclusively for us. We agreed to be co-managers of Tanger-Warren, each with 50% ownership interest in the joint venture and any entities formed with respect to a specific project. Our investment in Tanger-Warren amounted to approximately $6,500 and $9,000 as of December 31, 2002 and 2001, respectively, and the impact of this joint venture on our results of operations has been insignificant. 23 In September 2001, we established the TWMB joint venture with respect to our Myrtle Beach, South Carolina project with Rosen-Warren Myrtle Beach LLC ("Rosen-Warren"). We and Rosen-Warren, each as 50% owners, contributed $4.3 million in cash for a total initial equity in TWMB of $8.6 million. In September of 2001, TWMB began construction on its first phase of a new 400,000 square foot Tanger Outlet Center in Myrtle Beach, South Carolina. The first phase opened 100% leased on June 28, 2002 at a cost of approximately $35.4 million with approximately 260,000 square feet and 60 brand name outlet tenants. In November 2002, we began construction on a 64,000 square foot second phase which is estimated to cost $6.5 million. We and Rosen-Warren have each contributed approximately $1.1 million toward this second phase, with the majority of the contribution being made in the first quarter of 2003. In conjunction with the construction of the center, TWMB closed on a variable rate, construction loan in the amount of $36.2 million with Bank of America, NA (Agent) and SouthTrust Bank. As of December 31, 2002 the construction loan had a balance of $25.5 million. In August of 2002, TWMB entered into an interest rate swap agreement with Bank of America, NA effective through August 2004 with a notional amount of $19 million. Under this agreement, TWMB receives a floating interest rate based on the 30 day LIBOR index and pays a fixed interest rate of 2.49%. This swap effectively changes the payment of interest on $19 million of variable rate debt to fixed rate debt for the contract period at a rate of 4.49%. All debt incurred by this unconsolidated joint venture is collateralized by its property as well as joint and several guarantees by Rosen-Warren and us. Either partner in TWMB has the right to initiate the sale or purchase of the other party's interest. If such action is initiated, one partner would determine the fair market value purchase price of the venture and the other would determine whether they would take the role of seller or purchaser. The partners' roles in this transaction would be determined by the tossing of a coin, commonly known as a Russian roulette provision. If either Rosen-Warren or we enact this provision and depending on our role in the transaction as either seller or purchaser, we can potentially incur a cash outflow for the purchase of Rosen-Warren's interest. However, we do not expect this event to occur in the near future based on the positive results and expectations of developing and operating an outlet center in the Myrtle Beach area. Other Developments On July 1, 2002, our option to purchase the retail portion of a site at the Bourne Bridge Rotary in Cape Cod, Massachusetts was terminated due to the seller's inability to obtain the proper approvals for the Bourne project from the local authorities by such date. As a result of the termination, the net carrying amount of assets remaining on this project includes a $150,000 note receivable at 5% annual interest that becomes due from the seller and is payable with accrued interest on July 1, 2003. At this time we believe that this note receivable is fully collectible. Any developments or expansions that we, or a joint venture that we are involved in, have planned or anticipated may not be started or completed as scheduled, or may not result in accretive net income or funds from operations. In addition, we regularly evaluate acquisition or disposition proposals and engage from time to time in negotiations for acquisitions or dispositions of properties. We may also enter into letters of intent for the purchase or sale of properties. Any prospective acquisition or disposition that is being evaluated or which is subject to a letter of intent may not be consummated, or if consummated, may not result in an increase in net income or funds from operations. Financing Arrangements During 2002, we purchased primarily at par, $10.4 million of our outstanding 7.875% senior, unsecured public notes that mature in October 2004. The purchases were funded by amounts available under our unsecured lines of credit. During 2001, we purchased $14.5 million of these notes at par. In total, $24.9 million of the October 2004 notes were purchased in 2001 and 2002. We currently have authority from our Board of Directors to purchase an additional $25 million of our outstanding 7.875% senior, unsecured public notes and may, from time to time, do so at management's discretion. 24 At December 31, 2002, approximately 49% of our outstanding long-term debt represented unsecured borrowings and approximately 61% of the gross book value of our real estate portfolio was unencumbered. The average interest rate, including loan cost amortization, on average debt outstanding for the years ended December 31, 2002 and 2001 was 8.1% and 8.8%, respectively. We intend to retain the ability to raise additional capital, including public debt or equity, to pursue attractive investment opportunities that may arise and to otherwise act in a manner that we believe to be in our shareholders' best interests. During the second quarter of 2001, we amended our shelf registration for the ability to issue up to $400 million, ($200 million in debt and $200 million in equity securities). In July 2002, we again amended the shelf registration to allow us to issue the $400 million in either all debt or all equity or any combination thereof up to $400 million. On September 4, 2002, we completed a public offering of 1,000,000 common shares at a price of $29.25 per share, receiving net proceeds of approximately $28.0 million. We used the net proceeds, together with other available funds, to acquire one outlet center in Howell, Michigan, to reduce the outstanding balance on our lines of credit and for general corporate purposes. To generate capital to reinvest into other attractive investment opportunities, we may also consider the use of operational and developmental joint ventures, selling certain properties that do not meet our long-term investment criteria as well as outparcels on existing properties. We maintain unsecured, revolving lines of credit that provided for unsecured borrowings up to $85 million at December 31, 2002, an increase of $10 million in capacity from December 31, 2001. During 2002, we extended the maturity of all lines of credit to June 30, 2004. Based on cash provided by operations, existing credit facilities, ongoing negotiations with certain financial institutions and our ability to sell debt or equity subject to market conditions, we believe that we have access to the necessary financing to fund the planned capital expenditures during 2003. We anticipate that adequate cash will be available to fund our operating and administrative expenses, regular debt service obligations, and the payment of dividends in accordance with Real Estate Investment Trust ("REIT") requirements in both the short and long term. Although we receive most of our rental payments on a monthly basis, distributions to shareholders are made quarterly and interest payments on the senior, unsecured notes are made semi-annually. Amounts accumulated for such payments will be used in the interim to reduce the outstanding borrowings under the existing lines of credit or invested in short-term money market or other suitable instruments. Contractual Obligations and Commercial Commitments The following table details our contractual obligations over the next five years and thereafter as of December 31, 2002 (in thousands):
Contractual Obligations 2003 2004 2005 2006 2007 Thereafter --------- --------- ---- ---- ---- ---- ---------- Debt $2,519 $73,324 $23,100 $55,668 $2,349 $188,045 Operating leases 2,551 2,547 2,478 2,441 2,378 73,860 - ------------------------- ----------- ---------- ----------- ---------- ----------- ------------ $5,070 $75,871 $25,578 $58,109 $4,727 $261,905 - ------------------------- ----------- ---------- ----------- ---------- ----------- ------------
Our debt agreements require the maintenance of certain ratios, including debt service coverage and leverage, and limit the payment of dividends such that dividends and distributions will not exceed funds from operations, as defined in the agreements, for the prior fiscal year on an annual basis or 95% of funds from operations on a cumulative basis. We have historically been and currently are in compliance with all of our debt covenants. We expect to remain in compliance with all our existing debt covenants; however, should circumstances arise that would cause us to be in default, the various lenders would have the ability to accelerate the maturity on our outstanding debt. We operate in a manner intended to enable us to qualify as a REIT under the Internal Revenue Code (the "Code"). A REIT which distributes at least 90% of its taxable income to its shareholders each year and which meets certain other conditions is not taxed on that portion of its taxable income which is distributed to its shareholders. Based on our 2002 taxable income to shareholders, we were required to distribute approximately $5,054,000 in order to maintain our REIT status as described above. We distributed approximately $20,187,000 to common shareholders based on our current dividend level, which significantly exceeds our required distributions. If events were to occur that would cause our dividend to be reduced, we believe we still have an adequate margin regarding required dividend payments based on our historic dividend and taxable income levels to maintain our REIT status. 25 The following table details our commercial commitments as of December 31, 2002 (in thousands):
Commercial Commitments 2004 -------------- Lines of credit $ 64,525 Joint venture guarantees 36,200 - --------------------------------------- -------------- $ 100,725 - --------------------------------------- --------------
We currently maintain four unsecured, revolving credit facilities with major national banking institutions, totaling $85 million. As of December 31, 2002 amounts outstanding under these credit facilities totaled $20.5 million. All four credit facilities expire in June 2004. We are party to a joint and several guarantee with respect to the $36.2 million construction loan obtained by TWMB. See "Joint Ventures" section above for further discussion of the guarantee. Related Party Transactions During 2002, Stanley K. Tanger, our Chairman of the Board and Chief Executive Officer, completed the early repayment of a $2.5 million demand note receivable to the Company through accelerated payments. In 2001, also through accelerated payments, Steven B. Tanger, our President and Chief Operating Officer, completed the early repayment of a $845,000 demand note receivable to the Company. As noted above in "Joint Ventures", we are a 50% owner of the TWMB joint venture. TWMB pays us management, leasing and development fees for services provided to the joint venture. During 2002, we recognized approximately $74,000 in management fees, $259,000 in leasing fees and $76,000 in development fees in other income. Market Risk We are exposed to various market risks, including changes in interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We negotiate long-term fixed rate debt instruments and enter into interest rate swap agreements to manage our exposure to interest rate changes. The swaps involve the exchange of fixed and variable interest rate payments based on a contractual principal amount and time period. Payments or receipts on the agreements are recorded as adjustments to interest expense. At December 31, 2002, we had an interest rate swap agreement effective through January 2003 with a notional amount of $25 million. Under this agreement, we receive a floating interest rate based on the 30 day LIBOR index and pay a fixed interest rate of 5.97%. This swap effectively changes our payment of interest on $25 million of variable rate debt to fixed rate debt for the contract period at a rate of 7.72%. The fair value of the interest rate swap agreement represents the estimated receipts or payments that would be made to terminate the agreement. At December 31, 2002, we would have paid approximately $98,000 to terminate the agreement. The fair value is based on dealer quotes, considering current interest rates and remaining term to maturity. The fair market value of long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The estimated fair value of our total long-term debt at December 31, 2002 was $349.7 million while the recorded value was $345.0 million, respectively. A 1% increase from prevailing interest rates at December 31, 2002 would result in a decrease in fair value of total long-term debt by approximately $10.6 million. Fair values were determined from quoted market prices, where available, using current interest rates considering credit ratings and the remaining terms to maturity. 26 Critical Accounting Policies We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Cost Capitalization We capitalize all fees and costs incurred to initiate operating leases, including certain general and overhead costs, as deferred charges. The amount of general and overhead costs we capitalized is based on our estimate of the amount of costs directly related to executing these leases. We amortize these costs to expense over the average minimum lease term. We capitalize all costs incurred for the construction and development of properties, including certain general and overhead costs. The amount of general and overhead costs we capitalize is based on our estimate of the amount of costs directly related to the construction or development of these assets. Direct costs to acquire assets are capitalized once the acquisition becomes probable. Impairment of Long-Lived Assets Rental property held and used by us is reviewed for impairment in the event that facts and circumstances indicate the carrying amount of an asset may not be recoverable. In such an event, we compare the estimated future undiscounted cash flows associated with the asset to the asset's carrying amount, and if less, recognize an impairment loss in an amount by which the carrying amount exceeds its fair value. We believe that no impairment existed at December 31, 2002. Revenue Recognition Base rentals are recognized on a straight-line basis over the term of the lease. Substantially all leases contain provisions which provide additional rents based on tenants' sales volume ("percentage rentals") and reimbursement of the tenants' share of advertising and promotion, common area maintenance, insurance and real estate tax expenses. Percentage rentals are recognized when specified targets that trigger the contingent rent are met. Expense reimbursements are recognized in the period the applicable expenses are incurred. Payments received from the early termination of leases are recognized when the applicable space is released, or, otherwise are amortized over the remaining lease term. Funds from Operations We believe that for a clear understanding of our consolidated historical operating results, FFO should be considered along with net income as presented in the audited consolidated financial statements included elsewhere in this report. FFO is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare one equity REIT with another on the basis of operating performance. FFO is generally defined as net income (loss), computed in accordance with generally accepted accounting principles, before extraordinary items and gains (losses) on sale or disposal of depreciable operating properties, plus depreciation and amortization uniquely significant to real estate and after adjustments for unconsolidated partnerships and joint ventures. 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. FFO does not represent net income or cash flow from operations as defined by generally accepted accounting principles and should not be considered an alternative to net income as an indication of operating performance or to cash flows from operations as a measure of liquidity. FFO is not necessarily indicative of cash flows available to fund dividends to shareholders and other cash needs. 27 Below is a calculation of FFO for the years ended December 31, 2002, 2001 and 2000 as well as actual cash flow and other data for those respective periods (in thousands):
2002 2001 2000 - -------------------------------------------------------------- ------------ -------------- ------------ Funds from Operations: Net income $ 11,007 $ 7,112 $ 4,312 Adjusted for: Extraordinary item-loss on early extinguishment of debt --- 244 --- Minority interest 2,406 1,665 2,433 Minority interest, depreciation and amortization attributable to discontinued operations 1,102 898 880 Depreciation and amortization uniquely significant to real estate - wholly owned 28,460 27,849 25,531 Depreciation and amortization uniquely significant to real estate - unconsolidated joint ventures 422 --- --- (Gain) loss on sale or disposal of real estate (1,702) --- 5,047 -------------------------------------------------------------- ------------ -------------- ------------ Funds from operations before minority interest (1) $ 41,695 $ 37,768 $ 38,203 Cash flow provided by (used in): Operating activities $ 39,167 $ 44,626 $ 38,420 Investing activities $(26,363) $(23,269) $(25,815) Financing activities $(12,247) $(21,476) $(12,474) Weighted average shares outstanding (2) 12,271 11,707 11,706 - -------------------------------------------------------------- ------------ -------------- ------------ (1) For the years ended December 31, 2002 and 2000, includes $728 and $908 in gains on sales of outparcels of land. (2) Assumes our preferred shares, share and unit options and partnership units of the Operating Partnership held by the minority interest are all converted to our common shares.
New Accounting Pronouncements In April 2002, the Financial Accounting Standards Board (FASB or the "Board") issued FASB Statement No. 145 (FAS 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". In rescinding FASB Statement No. 4 (FAS 4), "Reporting Gains and Losses from Extinguishment of Debt", and FASB Statement No. 64 (FAS 64), "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements", FAS 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. Generally, FAS 145 is effective for transactions occurring after December 31, 2002. We adopted this statement effective January 1, 2003, the effects of which will be the reclassification of a loss on early extinguishments of debt for the year ended 2001, thereby decreasing income from continuing operations for the year ended December 31, 2001 by $244,000. In October 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" and realigns liability recognition in accordance with FASB Concepts Statement No. 6, "Elements of Financial Statements". The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this pronouncement will not have a material impact on our results of operations or financial position. 28 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB Statement No. 123", which is effective for fiscal years ending after December 15, 2002. This Statement amends SFAS 123 "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We are currently evaluating the effects of this statement and at this time do not believe that it will have a material effect on our results of operations or financial position. In January of 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). FIN 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 46 will be immediately effective for all variable interests in variable interest entities created after January 31, 2003, and the Company will need to apply its provisions to any existing variable interests in variable interest entities by no later than June 30, 2003. We are currently evaluating the effects of this statement and at this time do not believe that it will have a material effect on our results of operations or financial position. Economic Conditions and Outlook The majority of our leases contain provisions designed to mitigate the impact of inflation. Such provisions include clauses for the escalation of base rent and clauses enabling us to receive percentage rentals based on tenants' gross sales (above predetermined levels, which we believe often are lower than traditional retail industry standards) which generally increase as prices rise. Most of the leases require the tenant to pay their share of property operating expenses, including common area maintenance, real estate taxes, insurance and advertising and promotion, thereby reducing exposure to increases in costs and operating expenses resulting from inflation. While factory outlet stores continue to be a profitable and fundamental distribution channel for brand name manufacturers, some retail formats are more successful than others. As typical in the retail industry, certain tenants have closed, or will close, certain stores by terminating their lease prior to its natural expiration or as a result of filing for protection under bankruptcy laws. During 2003, we have approximately 1,070,000 square feet or 19% of our portfolio coming up for renewal. If we were unable to successfully renew or release a significant amount of this space on favorable economic terms, the loss in rent could have a material adverse effect on our results of operations. We renewed 88% of the 935,000 square feet that came up for renewal in 2002 with the existing tenants at an average base rental rate approximately 1% higher than the expiring rate. We also re-tenanted 229,000 square feet during 2002 at a 4% increase in the average base rental rate. Existing tenants' sales have remained stable and renewals by existing tenants have remained strong. The existing tenants have already renewed approximately 529,000, or 49%, of the square feet scheduled to expire in 2003 as of March 1, 2003. In addition, we continue to attract and retain additional tenants. Our factory outlet centers typically include well-known, national, brand name companies. By maintaining a broad base of creditworthy tenants and a geographically diverse portfolio of properties located across the United States, we reduce our operating and leasing risks. No one tenant (including affiliates) accounts for more than 6% of our combined base and percentage rental revenues. Accordingly, we do not expect any material adverse impact on our results of operation and financial condition as a result of leases to be renewed or stores to be released. As of December 31, 2002 and 2001, our centers were 98% and 96% occupied, respectively. Consistent with our long-term strategy of re-merchandising centers, we will continue to hold space off the market until an appropriate tenant is identified. While we believe this strategy will add value to our centers in the long-term, it may reduce our average occupancy rates in the near term. 29 Item 8. Financial Statements and Supplementary Data The information required by this Item is set forth at the pages indicated in Item 14(a) below. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable. PART III Certain information required by Part III is omitted from this Report in that the registrant will file a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement which specifically address the items set forth herein are incorporated by reference. Item 10. Directors and Executive Officers of the Registrant The information concerning our directors required by this Item is incorporated by reference to our Proxy Statement. The information concerning our executive officers required by this Item is incorporated by reference herein to the section in Part I, Item 4, entitled "Executive Officers of the Registrant". The information regarding compliance with Section 16 of the Securities and Exchange Act of 1934 is to be set forth in the Proxy Statement and is hereby incorporated by reference. Item 11. Executive Compensation The information required by this Item is incorporated by reference to our Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this Item is incorporated by reference to our Proxy Statement. The following table provides information as of December 31, 2002 with respect to compensation plans under which the Company's equity securities are authorized for issuance:
(c) Number of Securities Remaining (a) (b) Available for Future Number of Securities to Weighted Average Issuance Under Equity be Issued Upon Exercise Exercise Price of Compensation Plans of Outstanding Options, Outstanding Options, (Excluding Securities Plan Category Warrants and Rights Warrants and Rights Reflected in Column (a)) - ------------- ----------------------- -------------------- ----------------------- Equity compensation plans approved 1,318,700 $23.89 230,200 by security holders Equity compensation plans not approved by security holders --- --- --- Total 1,318,700 $23.89 230,200 Item 13. Certain Relationships and Related Transactions The information required by this Item is incorporated by reference to our Proxy Statement.
30 Item 14. Controls and Procedures The Chief Executive Officer, Stanley K. Tanger, and Chief Financial Officer, Frank C. Marchisello Jr., evaluated the effectiveness of the registrant's disclosure controls and procedures on March 28, 2003 (Evaluation Date), and concluded that, as of the Evaluation Date, the registrant's disclosure controls and procedures were effective to ensure that the information the registrant is required to disclose in its filings with the Securities and Exchange Commission under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and to ensure that information required to be disclosed by the registrant in the reports that it files under the Exchange Act is accumulated and communicated to the registrant's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There were no significant changes in the registrant's internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date. 31 PART IV Item 15. Exhibits, Financial Statements Schedules, and Reports on Form 8-K (a) Documents filed as a part of this report: 1. Financial Statements Report of Independent Accountants F-1 Consolidated Balance Sheets-December 31, 2002 and 2001 F-2 Consolidated Statements of Operations- Years Ended December 31, 2002, 2001 and 2000 F-3 Consolidated Statements of Shareholders' Equity- For the Years Ended December 31, 2002, 2001 and 2000 F-4 Consolidated Statements of Cash Flows- Years Ended December 31, 2002, 2001 and 2000 F-5 Notes to Consolidated Financial Statements F-6 to F-19 2. Financial Statement Schedule Schedule III Report of Independent Accountants F-20 Real Estate and Accumulated Depreciation F-21 to F-23 32 All other schedules have been omitted because of the absence of conditions under which they are required or because the required information is given in the above-listed financial statements or notes thereto. 3. Exhibits Exhibit No. Description 3.1 Amended and Restated Articles of Incorporation of the Company. (Note 6) 3.1A Amendment to Amended and Restated Articles of Incorporation dated May 29, 1996. (Note 6) 3.1B Amendment to Amended and Restated Articles of Incorporation dated August 20, 1998. (Note 9) 3.1C Amendment to Amended and Restated Articles of Incorporation dated September 30, 1999. (Note 11) 3.2 Restated By-Laws of the Company. (Note 11) 3.3 Amended and Restated Agreement of Limited Partnership for the Operating Partnership. (Note 11) 3.3A Amendment No. 1 to Tanger Properties Limited Partnership Amended and Restated Agreement of Limited Partnership, dated September 10, 2002. 4.1 Form of Deposit Agreement, by and between the Company and the Depositary, including Form of Depositary Receipt. (Note 1) 4.2 Form of Preferred Stock Certificate. (Note 1) 4.3 Rights Agreement, dated as of August 20, 1998, between Tanger Factory Outlet Centers, Inc. and BankBoston, N.A., which includes the form of Articles of Amendment to the Amended and Restated Articles of Incorporation, designating the preferences, limitations and relative rights of the Class B Preferred Stock as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights as Exhibit C. (Note 8) 4.3A Amendment to Rights Agreement, dated as of October 30, 2001. (Note 13) 10.1 Amended and Restated Unit Option Plan. (Note 9) 10.2 Amended and Restated Share Option Plan of the Company. (Note 9) 10.3 Form of Stock Option Agreement between the Company and certain Directors. (Note 3) 10.4 Form of Unit Option Agreement between the Operating Partnership and certain employees. (Note 3) 10.5 Amended and Restated Employment Agreement for Stanley K. Tanger, as of January 1, 1998. (Note 9) 10.5A Amended Employment Agreement for Stanley K. Tanger, as of January 1, 2001. (Note 13) 10.6 Amended and Restated Employment Agreement for Steven B. Tanger, as of January 1, 1998. (Note 9) 10.6A Amended Employment Agreement for Steven B. Tanger, as of January 1, 2001. (Note 13) 10.7 Amended and Restated Employment Agreement for Willard Albea Chafin, Jr., as of January 1, 2002. (Note 13) 10.8 Amended and Restated Employment Agreement for Rochelle Simpson, as of January 1, 2002. (Note 13) 33 10.9 Not applicable. 10.10 Amended and Restated Employment Agreement for Frank C. Marchisello, Jr., as of January 1, 2002. (Note 13) 10.11 Registration Rights Agreement among the Company, the Tanger Family Limited Partnership and Stanley K. Tanger. (Note 2) 10.11A Amendment to Registration Rights Agreement among the Company, the Tanger Family Limited Partnership and Stanley K. Tanger. (Note 4) 10.12 Agreement Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. (Note 2) 10.13 Assignment and Assumption Agreement among Stanley K. Tanger, Stanley K. Tanger & Company, the Tanger Family Limited Partnership, the Operating Partnership and the Company. (Note 2) 10.14 Promissory Notes by and between the Operating Partnership and John Hancock Mutual Life Insurance Company aggregating $66,500,000. (Note 10) 10.15 Form of Senior Indenture. (Note 5) 10.16 Form of First Supplemental Indenture (to Senior Indenture). (Note 5) 10.16A Form of Second Supplemental Indenture (to Senior Indenture) dated October 24, 1997 among Tanger Properties Limited Partnership, Tanger Factory Outlet Centers, Inc. and State Street Bank & Trust Company. (Note 7) 10.17 Promissory Note 05/16/2000 (Note 12) 10.18 Promissory Note 05/16/2000 (Note 12) 21.1 List of Subsidiaries. (Note 13) 23.1 Consent of PricewaterhouseCoopers LLP. Notes to Exhibits: 1. Incorporated by reference to the exhibits to the Company's Registration Statement on Form S-11 filed October 6, 1993, as amended. 2. Incorporated by reference to the exhibits to the Company's Registration Statement on Form S-11 filed May 27, 1993, as amended. 3. Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. 4. Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 5. Incorporated by reference to the exhibits to the Company's Current Report on Form 8-K dated March 6, 1996. 6. Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 7. Incorporated by reference to the exhibits to the Company's Current Report on Form 8-K dated October 24, 1997. 8. Incorporated by reference to Exhibit 1.1 to the Company's Registration Statement on Form 8-A, filed August 24, 1998. 9. Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 10. Incorporated by reference to the exhibit to the Company's Quarterly Report on 10-Q for the quarter ended March 31, 1999. 11. Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 34 12. Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 13. Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. (b) Reports on Form 8-K - none. We filed the following reports on Form 8-K during the three months ended December 31, 2002: Current Report on Form 8-K dated October 29, 2002 to file the September 30, 2002 Supplemental Operating and Financial Data. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TANGER FACTORY OUTLET CENTERS, INC. By:/s/ Stanley K. Tanger ------------------------------------------- Stanley K. Tanger Chairman of the Board and Chief Executive Officer March 28, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date /s/ Stanley K. Tanger Chairman of the Board and Chief March 28, 2003 - ------------------------ Executive Officer (Principal Stanley K. Tanger Executive Officer) /s/ Steven B. Tanger Director, President and March 28, 2003 - ------------------------ Chief Operating Officer Steven B. Tanger /s/ Frank C. Marchisello Jr. Senior Vice President and March 28, 2003 - ---------------------------- Chief Financial Officer Frank C. Marchisello, Jr. (Principal Financial and Accounting Officer) /s/ Jack Africk Director March 28, 2003 - ------------------------ Jack Africk /s/ William G. Benton Director March 28, 2003 - ------------------------ William G. Benton /s/ Thomas E. Robinson Director March 28, 2003 - ---------------------- Thomas E. Robinson 36 CERTIFICATION I, Stanley K. Tanger certify that: 1. I have reviewed this annual report on Form 10-K of Tanger Factory Outlet Centers, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this 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 officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 By: /s/ Stanley K. Tanger --------------------- Stanley K. Tanger Chairman of the Board and Chief Executive Officer 37 CERTIFICATION I, Frank C. Marchisello, Jr. certify that: 1. I have reviewed this annual report on Form 10-K of Tanger Factory Outlet Centers, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 By: /s/ Frank C. Marchisello, Jr. ----------------------------- Frank C. Marchisello, Jr. Senior Vice President Chief Financial Officer 38 Certification of Chief Executive Officer Pursuant to 18 U.S.C. ss. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Tanger Factory Outlet Centers, Inc. (the "Company") hereby certifies, to such officer's knowledge, that: (i) the accompanying Annual Report on Form 10-K of the Company for the annual period ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 28, 2003 /s/ Stanley K. Tanger --------------------------- Stanley K. Tanger Chairman of the Board and Chief Executive Officer 39 Certification of Chief Financial Officer Pursuant to 18 U.S.C. ss. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Tanger Factory Outlet Centers, Inc. (the "Company") hereby certifies, to such officer's knowledge, that: (i) the accompanying annual Report on Form 10-K of the Company for the annual period ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 28, 2003 /s/ Frank C. Marchisello Jr. ---------------------------- Frank C. Marchisello, Jr. Senior Vice President Chief Financial Officer 40 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Tanger Factory Outlet Centers, Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 2 to the consolidated financial statements, the Company changed its accounting policy for asset impairments and reporting discontinued operations, in accordance with FAS 144 "Accounting for the Impairment or Disposal of Long Lived Assets". /s/PricewaterhouseCoopers LLP Raleigh, NC January 17, 2003 F -1
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31, 2002 2001 - ------------------------------------------------------------------------------------------ ASSETS Rental Property Land $ 51,274 $ 60,158 Buildings, improvements and fixtures 571,125 539,108 - ------------------------------------------------------------------------------------------ 622,399 599,266 Accumulated depreciation (174,199) (148,950) - ------------------------------------------------------------------------------------------ Rental property, net 448,200 450,316 Cash and cash equivalents 1,072 515 Deferred charges, net 10,104 11,413 Other assets 18,299 14,028 - ------------------------------------------------------------------------------------------ Total assets $ 477,675 $ 476,272 ========================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Debt Senior, unsecured notes $ 150,109 $ 160,509 Mortgages payable 174,421 176,736 Lines of credit 20,475 20,950 - ------------------------------------------------------------------------------------------ 345,005 358,195 Construction trade payables 3,310 3,722 Accounts payable and accrued expenses 15,095 16,478 - ------------------------------------------------------------------------------------------ Total liabilities 363,410 378,395 - ------------------------------------------------------------------------------------------ Commitments and contingencies Minority interest 23,630 21,506 - ------------------------------------------------------------------------------------------ Shareholders' equity Preferred shares, $.01 par value, 1,000,000 shares authorized, 80,190 and 80,600 shares issued and outstanding at December 31, 2002 and 2001 1 1 Common shares, $.01 par value, 50,000,000 shares authorized, 9,061,025 and 7,929,711 shares issued and outstanding at December 31, 2001 and 2000 90 79 Paid in capital 161,192 136,529 Distributions in excess of net income (70,485) (59,534) Accumulated other comprehensive loss (163) (704) - ------------------------------------------------------------------------------------------ Total shareholders' equity 90,635 76,371 - ------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 477,675 $ 476,272 ========================================================================================== The accompanying notes are an integral part of these consolidated financial statements.
F - 2
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Year Ended December 31, 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- REVENUES Base rentals $ 75,755 $ 73,263 $ 69,368 Percentage rentals 3,558 2,735 3,253 Expense reimbursements 30,550 29,498 29,460 Other income 3,304 2,770 4,056 - --------------------------------------------------------------------------------------------------------------------------- Total revenues 113,167 108,266 106,137 - --------------------------------------------------------------------------------------------------------------------------- EXPENSES Property operating 36,083 33,970 33,013 General and administrative 9,228 8,227 7,366 Interest 28,460 30,134 27,565 Depreciation and amortization 28,754 28,145 25,795 Asset write-down --- --- 1,800 - --------------------------------------------------------------------------------------------------------------------------- Total expenses 102,525 100,476 95,539 - --------------------------------------------------------------------------------------------------------------------------- Income before equity in earnings of unconsolidated joint ventures, minority interest, discontinued operations, (loss) on sale or disposal of real estate and extraordinary item 10,642 7,790 10,598 Equity in earnings of unconsolidated joint ventures 392 --- --- Minority interest (2,406) (1,665) (2,433) - --------------------------------------------------------------------------------------------------------------------------- Income from continuing operations 8,628 6,125 8,165 Discontinued operations 2,379 1,231 1,194 - --------------------------------------------------------------------------------------------------------------------------- Income before (loss) on sale or disposal of real estate and extraordinary item 11,007 7,356 9,359 (Loss) on sale or disposal of real estate --- --- (5,047) - --------------------------------------------------------------------------------------------------------------------------- Income before extraordinary item 11,007 7,356 4,312 Extraordinary item --- (244) --- - --------------------------------------------------------------------------------------------------------------------------- Net income 11,007 7,112 4,312 Less applicable preferred share dividends (1,771) (1,771) (1,823) - --------------------------------------------------------------------------------------------------------------------------- Net income available to common shareholders $ 9,236 $ 5,341 $ 2,489 =========================================================================================================================== Basic earnings per common share: Income from continuing operations $ 0.82 $ 0.55 $ 0.80 Net income $ 1.11 $ 0.67 $ 0.32 =========================================================================================================================== Diluted earnings per common share: Income from continuing operations $ 0.80 $ 0.55 $ 0.80 Net income $ 1.08 $ 0.67 $ 0.31 =========================================================================================================================== The accompanying notes are an integral part of these consolidated financial statements.
F - 3
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended December 31, 2002, 2001, and 2000 (In thousands, except share data) Distributions Other Total Preferred Common Paid in in excess of Comprehensive Shareholder's Shares Shares Capital Net Income Loss Equity - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 1 79 136,571 (28,887) --- 107,764 Net income --- --- --- 4,312 --- 4,312 Conversion of 4,670 preferred shares into 42,076 common shares --- --- --- --- --- --- Adjustment for minority interest in the Operating Partnership --- --- (213) --- --- (213) Preferred dividends ($21.87 per share) --- --- --- (1,840) --- (1,840) Common dividends ($2.43 per share) --- --- --- (19,146) --- (19,146) - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 1 79 136,358 (45,561) --- 90,877 Comprehensive income: Net income --- --- --- 7,112 --- 7,112 Other comprehensive loss --- --- --- --- (704) (704) - --------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income --- --- --- 7,112 (704) 6,408 Issuance of 10,800 common shares upon exercise of unit options --- --- 201 --- --- 201 Adjustment for minority interest in the Operating Partnership --- --- (30) --- --- (30) Preferred dividends ($21.96 per share) --- --- --- (1,770) (1,770) Common dividends ($2.44 per share) --- --- --- (19,315) (19,315) - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001 $ 1 $ 79 $ 136,529 $ (59,534) $ (704) $ 76,371 Comprehensive income: Net income - - - 11,007 - 11,007 Other comprehensive gain - - - - 541 541 - --------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income - - - 11,007 541 11,548 Conversion of 410 preferred shares into 3,694 common shares - - - - - - Issuance of 127,620 common shares upon exercise of unit options - 1 2,793 - - 2,794 Issuance of 1,000,000 common shares, net of issuance costs of $1.3 million - 10 27,950 - - 27,960 Adjustment for minority interest in the Operating Partnership - - (6,080) - - (6,080) Preferred dividends ($22.05 per share) - - - (1,771) - (1,771) Common dividends ($2.45 per share) - - - (20,187) - (20,187) - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2002 $ 1 $ 90 $ 161,192 $ (70,485) $ (163) $ 90,635 - --------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
F - 4
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 11,007 $ 7,112 $ 4,312 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 28,989 28,572 26,218 Amortization of deferred financing costs 1,209 1,309 1,264 Equity in earnings of unconsolidated joint ventures (392) --- --- Minority interest 3,273 2,042 956 Loss on early extinguishment of debt --- 338 --- Asset write-down --- --- 1,800 (Gain) loss on sale or disposal of real estate (1,702) --- 6,981 (Gain) on sale of outparcels of land (728) --- (908) Straight-line base rent adjustment 248 342 92 Increase (decrease) due to changes in: Other assets (2,168) 2,213 (2,021) Accounts payable and accrued expenses (569) 2,698 (274) - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activites 39,167 44,626 38,420 - ---------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Acquisition of rental properties (37,500) --- --- Additions to rental properties (5,847) (20,368) (36,056) Additions to investments in unconsolidated joint ventures (130) (4,068) (117) Additions to deferred lease costs (1,630) (1,618) (2,238) Net proceeds from sale of real estate 21,435 723 8,598 Increase in escrow from rental property sale (4,008) --- --- Net insurance proceeds from property losses --- --- 4,046 Distributions received from unconsolidated joint ventures 520 --- --- Collections from (advances to) officers, net 797 2,062 (48) - ---------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (26,363) (23,269) (25,815) - ---------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Cash dividends paid (21,958) (21,085) (20,986) Distributions to minority interest (7,424) (7,394) (7,362) Net proceeds from sale of common shares 27,960 --- --- Proceeds from issuance of debt 126,320 279,075 172,595 Repayments of debt (139,510) (267,723) (155,399) Additions to deferred financing costs (429) (4,550) (1,322) Proceeds from exercise of share and unit optio 2,794 201 --- - ---------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities $ (12,247) $ (21,476) $ (12,474) - ---------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 557 (119) 131 Cash and cash equivalents, beginning of period 515 634 503 - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 1,072 $ 515 $ 634 ============================================================================================================================ The accompanying notes are an integral part of these consolidated financial statements.
F - 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization of the Company Tanger Factory Outlet Centers, Inc., a fully-integrated, self-administered, self-managed real estate investment trust ("REIT"), develops, owns and operates factory outlet centers. Recognized as one of the largest owners and operators of factory outlet centers in the United States, we have ownership interests in or management responsibilities for 34 centers in 21 states totaling approximately 6.2 million feet of gross leasable area at the end of 2002. We provide all development, leasing and management services for our centers. Unless the context indicates otherwise, the term "Company" refers to Tanger Factory Outlet Centers, Inc. and subsidiaries and the term "Operating Partnership" refers to Tanger Properties Limited Partnership. The terms "we", "our" and "us" refer to the Company or the Company and the Operating Partnership together, as the text requires. Our factory outlet centers and other assets are held by, and all of our operations are conducted by, Tanger Properties Limited Partnership. The majority of the units of partnership interest issued by the Operating Partnership (the "Units") are held by two wholly owned subsidiaries, the Tanger GP Trust and the Tanger LP Trust. The Tanger GP Trust controls the Operating Partnership as its sole general partner. The Tanger LP Trust holds a limited partnership interest. All of the remaining Units are owned by the Tanger Family through the Tanger Family Limited Partnership ("TFLP"). TFLP holds a limited partnership interest in and is the minority owner of the Operating Partnership. Stanley K. Tanger, the Company's Chairman of the Board and Chief Executive Officer, is the sole general partner of TFLP. As of December 31, 2002, our wholly owned subsidiaries owned 9,061,025 Units, and 80,190 Preferred Units (which are convertible into approximately 722,509 limited partnership Units) and TFLP owned 3,033,305 Units. TFLP's Units are exchangeable, subject to certain limitations to preserve our status as a REIT, on a one-for-one basis for our common shares. Preferred Units are automatically converted into limited partnership Units to the extent of any conversion of our preferred shares into our common shares. 2. Summary of Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include our accounts, our wholly-owned subsidiaries and the Operating Partnership. All significant intercompany balances and transactions have been eliminated in consolidation. Investments in real estate joint ventures that represent non-controlling ownership interests are accounted for using the equity method of accounting. Minority Interest - Minority interest reflects TFLP's percentage ownership of the Operating Partnership's Units. Income is allocated to the TFLP based on its respective ownership interest. Reclassifications - Certain amounts in the 2001 and 2000 financial statements have been reclassified to conform to the 2002 presentation. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Operating Segments - We aggregate the financial information of all centers into one reportable operating segment because the centers all have similar economic characteristics and provide similar products and services to similar types and classes of customers. F - 6 Rental Properties - Rental properties are recorded at cost less accumulated depreciation. Costs incurred for the construction and development of properties, including certain general and overhead costs, are capitalized. The amount of general and overhead costs capitalized is based on our estimate of the amount of costs directly related to the construction or development of these assets. Direct costs to acquire assets are capitalized once the acquisition becomes probable. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets. We generally use estimated lives ranging from 25 to 33 years for buildings, 15 years for land improvements and seven years for equipment. Expenditures for ordinary maintenance and repairs are charged to operations as incurred while significant renovations and improvements, including tenant finishing allowances, that improve and/or extend the useful life of the asset are capitalized and depreciated over their estimated useful life. Buildings, improvements and fixtures consist primarily of permanent buildings and improvements made to land such as landscaping and infrastructure and costs incurred in providing rental space to tenants. Interest costs capitalized during 2002, 2001 and 2000 amounted to $172,000, $551,000 and $1,020,000 and development costs capitalized amounted to $467,000, $616,000 and $843,000, respectively. Depreciation expense for each of the years ended December 31, 2002, 2001 and 2000 was $26,906,000, $26,585,000 and $24,239,000, respectively. The pre-construction stage of project development involves certain costs to secure land control and zoning and complete other initial tasks essential to the development of the project. These costs are transferred from other assets to rental property under construction when the pre-construction tasks are completed. Costs of potentially unsuccessful pre-construction efforts are charged to operations when the project is abandoned. Cash and Cash Equivalents - All highly liquid investments with an original maturity of three months or less at the date of purchase are considered to be cash and cash equivalents. Cash balances at a limited number of banks may periodically exceed insurable amounts. We believe that we mitigate our risk by investing in or through major financial institutions. Recoverability of investments is dependent upon the performance of the issuer. Deferred Charges - Deferred lease costs consist of fees and costs incurred, including certain general and overhead costs, to initiate operating leases and are amortized over the average minimum lease term. Deferred financing costs include fees and costs incurred to obtain long-term financing and are amortized over the terms of the respective loans. Unamortized deferred financing costs are charged to expense when debt is retired before the maturity date. Guarantees of Indebtedness - In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. Currently we are a party to joint and several guarantees for the construction loan of TWMB Associates, LLC, a 50% ownership joint venture, for which our Myrtle Beach, South Carolina property serves as collateral. See Footnote 4 "Real Estate Joint Ventures" for further disclosure regarding the indebtedness and related guarantees. This guarantee was already in place as of December 31, 2002 therefore no liability has been recognized for the fair value of the obligation. Impairment of Long-Lived Assets - Rental property held and used by us is reviewed for impairment in the event that facts and circumstances indicate the carrying amount of an asset may not be recoverable. In such an event, we compare the estimated future undiscounted cash flows associated with the asset to the asset's carrying amount, and if less, recognize an impairment loss in an amount by which the carrying amount exceeds its fair value. We believe that no material impairment existed at December 31, 2002. On January 1, 2002 we adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"), which replaces FAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"). FAS 144 retains the requirements of FAS 121 to recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and to measure an impairment loss as the difference between the carrying amount and fair value of the asset. The provisions of FAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. F - 7 Under both FAS No. 121 and 144, real estate assets designated as held for sale are stated at their fair value less costs to sell. We classify real estate as held for sale when it meets the requirements of FAS 144 and our Board of Directors approves the sale of the assets. Subsequent to this classification, no further depreciation is recorded on the assets. Under FAS No. 121, the operating results of real estate assets held for sale are included in continuing operations. Upon implementation of FAS 144, the operating results of newly designated real estate assets held for sale are included in discontinued operations in our results of operations. Derivatives - We selectively enter into interest rate protection agreements to mitigate changes in interest rates on our variable rate borrowings. The notional amounts of such agreements are used to measure the interest to be paid or received and do not represent the amount of exposure to loss. None of these agreements are used for speculative or trading purposes. On January 1, 2001 we adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by FAS 137 and FAS 138, (collectively, "FAS 133"). FAS 133 requires entities to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at their fair value. FAS 133 also requires us to measure the effectiveness, as defined by FAS 133, of all derivatives. We formally document our derivative transactions, including identifying the hedge instruments and hedged items, as well as our risk management objectives and strategies for entering into the hedge transaction. At inception and on a quarterly basis thereafter, we assess the effectiveness of derivatives used to hedge transactions. If a derivative is deemed effective, we record the change in fair value in other comprehensive income. If after assessment it is determined that a portion of the derivative is ineffective, then that portion of the derivative's change in fair value will be immediately recognized in earnings. Income Taxes - We operate in a manner intended to enable us to qualify as a REIT under the Internal Revenue Code (the "Code"). A REIT which distributes at least 90% of its taxable income to its shareholders each year and which meets certain other conditions is not taxed on that portion of its taxable income which is distributed to its shareholders. We intend to continue to qualify as a REIT and to distribute substantially all of our taxable income to our shareholders. Accordingly, no provision has been made for Federal income taxes. We paid preferred dividends per share of $22.05, $21.96 and $21.87, in 2002, 2001 and 2000, respectively, all of which are treated as ordinary income except for the 2002 dividend of which $.02 was treated as a long-term capital gain. For income tax purposes, distributions paid to common shareholders consist of ordinary income, capital gains, return of capital or a combination thereof. For the year ended December 31, 2002, we elected to distribute all of our taxable capital gains. Dividends per share were taxable as follows: Common dividends per share: 2002 2001 2000 - -------------------------------- ---------------- ------------- -------------- Ordinary income $ .734 $ .536 $ .341 Return of capital 1.690 1.902 2.087 Long-term capital gain .024 --- --- - -------------------------------- ---------------- ------------- -------------- $2.448 $2.438 $ 2.428 - -------------------------------- ---------------- ------------- -------------- The following reconciles net income available to common shareholders to taxable income available to common shareholders for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000 - ---------------------------------------------------- ------------ ------------- -------------- Net income available to common shareholders $ 9,236 $ 5,341 $2,489 Book/tax difference on: Depreciation and amortization (1,092) (667) (1,114) Gain/(Loss) on sale or disposal of real estate (1,580) (1,116) 643 Other differences (949) (176) 73 - ---------------------------------------------------- ------------ ------------- -------------- - ---------------------------------------------------- ------------ ------------- -------------- Taxable income available to common shareholders 5,615 3,382 2,091 - ---------------------------------------------------- ------------ ------------- --------------
Revenue Recognition - Base rentals are recognized on a straight-line basis over the term of the lease. Substantially all leases contain provisions which provide additional rents based on tenants' sales volume ("percentage rentals") and reimbursement of the tenants' share of advertising and promotion, common area maintenance, insurance and real estate tax expenses. Percentage rentals are recognized when specified targets that trigger the contingent rent are met. Expense reimbursements are recognized in the period the applicable expenses are incurred. Payments received from the early termination of leases are recognized when the applicable space is released, or, otherwise are amortized over the remaining lease term. F - 8 We provide management, leasing and development services for a fee for certain properties that are not owned by us or are partly owned through a joint venture. Fees received for these services are recognized as other income when earned. Concentration of Credit Risk - We perform ongoing credit evaluations of our tenants. Although the tenants operate principally in the retail industry, the properties are geographically diverse. No single tenant accounted for 10% or more of combined base and percentage rental income during 2002, 2001 or 2000. Supplemental Cash Flow Information - We purchase capital equipment and incur costs relating to construction of new facilities, including tenant finishing allowances. Expenditures included in construction trade payables as of December 31, 2002, 2001 and 2000 amounted to $3,310,000, $3,722,000 and $9,784,000, respectively. Interest paid, net of interest capitalized, in 2002, 2001 and 2000 was $27,512,000, $27,379,000 and $25,644,000, respectively. New Accounting Pronouncements - In April 2002, the Financial Accounting Standards Board (FASB or the "Board") issued FASB Statement No. 145 (FAS 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". In rescinding FASB Statement No. 4 (FAS 4), "Reporting Gains and Losses from Extinguishment of Debt", and FASB Statement No. 64 (FAS 64), "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements", FAS 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. Generally, FAS 145 is effective for transactions occurring after December 31, 2002. We adopted this statement effective January 1, 2003, the effects of which will be the reclassification of a loss on early extinguishments of debt for the year ended, thereby decreasing income from continuing operations for the year ended December 31, 2001 by $244,000. In October 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" and realigns liability recognition in accordance with FASB Concepts Statement No. 6, "Elements of Financial Statements". The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this pronouncement will not have a material impact on our results of operations or financial position. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure an amendment of FASB Statement No. 123", which is effective for fiscal years ending after December 15, 2002. This Statement amends SFAS 123 "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We are currently evaluating the effects of this statement but and at this time do not believe that it will have a material effect on our results of operations or financial position. In January of 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). FIN 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 46 will be immediately effective for all variable interests in variable interest entities created after January 31, 2003, and the Company will need to apply its provisions to any existing variable interests in variable interest entities by no later than June 30, 2003. We are currently evaluating the effects of this statement but and at this time do not believe that it will have a material effect on our results of operations or financial position. 3. Acquisitions and Development of Rental Properties In June 2002, through our unconsolidated 50% ownership joint venture, TWMB Associates, LLC ("TWMB"), with Rosen-Warren Myrtle Beach LLC ("Rosen-Warren"), we opened the first phase of our new 400,000 square foot Tanger Outlet Center in Myrtle Beach, South Carolina. The first phase consists of approximately 260,000 square feet and features 60 brand name designer outlet stores. F - 9 Also in September 2002, we completed the acquisition of Kensington Valley Factory Shops, a factory outlet center in Howell, Michigan containing approximately 325,000 square feet, for an aggregate purchase price of $37.5 million. The acquisition was accounted for using the purchase method whereby the purchase price was allocated to assets acquired based on their fair values. The results of operations of the acquired property have been included in the consolidated results of operations since the acquisition date. 4. Investments in Real Estate Joint Ventures In 2000, we formed a joint venture with C. Randy Warren Jr., former Senior Vice President of Leasing of the Company. The new entity, Tanger-Warren Development, LLC ("Tanger-Warren"), was formed to identify, acquire and develop sites exclusively for us. We agreed to be co-managers of Tanger-Warren, each with 50% ownership interest in the joint venture and any entities formed with respect to a specific project. Our investment in Tanger-Warren amounted to approximately $6,500 and $9,000 as of December 31, 2002 and 2001, respectively, and the impact of this joint venture on our results of operations has been insignificant. In September 2001, we established the TWMB joint venture with respect to our Myrtle Beach, South Carolina project with Rosen-Warren. We and Rosen-Warren, each as 50% owners, contributed $4.3 million in cash for a total initial equity in TWMB of $8.6 million. In September of 2001, TWMB began construction on its first phase of a new 400,000 square foot Tanger Outlet Center in Myrtle Beach, South Carolina. The first phase opened 100% leased on June 28, 2002 at a cost of approximately $35.4 million with approximately 260,000 square feet and 60 brand name outlet tenants. In November 2002, we began construction on a 64,000 square foot second phase which is estimated to cost $6.5 million. We and Rosen-Warren have contributed approximately $1.1 million each toward this second phase, with the majority of the contribution being made in the first quarter of 2003. In conjunction with the construction of the center, TWMB closed on a variable rate, construction loan in the amount of $36.2 million with Bank of America, NA (Agent) and SouthTrust Bank. As of December 31, 2002 the construction loan had a balance of $25.5 million. In August of 2002, TWMB entered into an interest rate swap agreement with Bank of America, NA effective through August 2004 with a notional amount of $19 million. Under this agreement, TWMB receives a floating interest rate based on the 30 day LIBOR index and pays a fixed interest rate of 2.49%. This swap effectively changes the payment of interest on $19 million of variable rate debt to fixed rate debt for the contract period at a rate of 4.49%. All debt incurred by this unconsolidated joint venture is collateralized by its property as well as joint and several guarantees by Rosen-Warren and us. Our investment in unconsolidated real estate joint ventures, of which we own 50%, was $3.9 million and $4.2 million as of December 31, 2002 and 2001, respectively. These investments are recorded initially at cost and subsequently adjusted for our net equity in the venture's income (loss) and cash contributions and distributions. Our investments in real estate joint ventures are included in other assets and are reduced by 50% of the profits earned for leasing and development services we provided to the joint ventures. Summary unaudited financial information of joint ventures accounted for using the equity method as of December 31, 2002 and 2001 is as follows (in thousands):
Summary Balance Sheets - Unconsolidated Joint Ventures: 2002 2001 - ------------------------------------------------ --------------- -------------- Assets: Investment properties at cost, net $32,153 $ 7,348 Cash and cash equivalents 514 136 Deferred charges, net 1,751 1,433 Other assets 1,491 766 - ------------------------------------------------ --------------- -------------- Total assets $35,909 $ 9,683 ================================================ =============== ============== Liabilities and Owners' Equity: Mortgage payable $25,513 $ 10 Construction trade payables 1,644 586 Accounts payable and other liabilities 522 444 - ------------------------------------------------ --------------- -------------- Total liabilities 27,679 1,040 Owners' equity 8,230 8,643 - ------------------------------------------------ --------------- -------------- Total liabilities and owners' equity $35,909 $ 9,683 ================================================ =============== ==============
F - 10
Summary Statement of Operations - Unconsolidated Joint Ventures: 2002 - ----------------------------------------------- ---------------- Revenues: $4,119 - ----------------------------------------------- ---------------- Expenses: Property operating 1,924 General and administrative 13 Interest 578 Depreciation and amortization 884 - ----------------------------------------------- ---------------- Total expenses 3,399 - ----------------------------------------------- ---------------- Net income $ 720 - ----------------------------------------------- ---------------- Tanger Factory Outlet Centers, Inc. share of: - ----------------------------------------------- ---------------- Net income $ 392 Depreciation (real estate related) $ 422 - ----------------------------------------------- ----------------
5. Disposition of Properties We completed the sale of two of our non-core properties located in Ft. Lauderdale, Florida and Bourne, Massachusetts in June and November 2002, respectively. Net proceeds received from the sales of these properties were approximately $19.9 million. We recorded a gain on sale of real estate of $1.7 million in discontinued operations. Throughout 2002, we sold five outparcels of land, two of which had related land leases with identifiable cash flows, at various properties in our portfolio. These sales totaled $1.5 million in net proceeds. Gains of $167,000 were recorded in other income for the three land outparcels sold and gains of $561,000 were recorded in discontinued operations for the two outparcels with identifiable cash flows as accounted for under FAS 144. In accordance with FAS 144, effective for financial statements issued for fiscal years beginning after December 15, 2001, results of operations and gain/(loss) on sales of real estate for properties with identifiable cash flows sold subsequent to December 31, 2001 are reflected in the Consolidated Statements of Operations as discontinued operations for all periods presented. Below is a summary of the results of operations of these properties through their respective disposition dates (in thousands): Summary Statements of Operations - Disposed Properties:
2002 2001 2000 - ------------------------------------- ----------------- -------------------- ----------------- Revenues: Base rentals $ 1,225 $ 2,091 $ 2,089 Expense reimbursements 399 709 586 Other income 6 2 9 - ------------------------------------- ----------------- -------------------- ----------------- Total revenues 1,630 2,802 2,684 - ------------------------------------- ----------------- -------------------- ----------------- Expenses: Property operating 411 673 610 Depreciation and amortization 235 427 423 - ------------------------------------- ----------------- -------------------- ----------------- Total expenses 646 1,100 1,033 - ------------------------------------- ----------------- -------------------- ----------------- Discontinued operations before gain on sale of real estate 984 1,702 1,651 Gain on sale of outparcels 561 --- --- Gain on sale of real estate 1,702 --- --- - ------------------------------------- ----------------- -------------------- ----------------- Discontinued operations before minority interest 3,247 1,702 1,651 Minority interest (868) (471) (457) - ------------------------------------- ----------------- -------------------- ----------------- Discontinued operations $ 2,379 $ 1,231 $ 1,194 ===================================== ================= ==================== =================
F - 11 In June 2000, we sold our centers in Lawrence, Kansas and McMinnville, Oregon. Net proceeds received from the sales totaled $7.1 million. The combined net operating income of these two centers represented approximately 1% of our total portfolio's operating income. In December 2000, we sold the land and site improvements that the Stroud, Oklahoma center was located on prior to its destruction in May 1999 by a tornado. The net proceeds from the sale of this real estate of approximately $723,500 were received in January 2001. As noted above, FAS 144 applies only to properties sold subsequent to December 31, 2001. Therefore, the results of operations and resulting losses on sales of real estate from the properties which were sold in 2000 are not included in discontinued operations. The losses from these property sales, totaling $5.0 million, net of minority interest of $1.9 million, are included in loss on sale or disposal of real estate in the Consolidated Statements of Operations. 6. Deferred Charges Deferred charges as of December 31, 2002 and 2001 consists of the following (in thousands):
2002 2001 - ------------------------------- -------------- --------------- Deferred lease costs $ 15,414 $14,467 Deferred financing costs 8,412 8,210 - ------------------------------- -------------- --------------- 23,826 22,677 Accumulated amortization (13,722) (11,264) - ------------------------------- -------------- --------------- $ 10,104 $ 11,413 - ------------------------------- -------------- ---------------
Amortization of deferred lease costs for the years ended December 31, 2002, 2001 and 2000 was $1,739,000, $1,642,000 and $1,578,000, respectively. Amortization of deferred financing costs, included in interest expense in the accompanying Consolidated Statements of Operations, for the years ended December 31, 2002, 2001 and 2000 was $1,209,000, $1,277,000 and $1,264,000, respectively. During 2001, we expensed the unamortized financing costs totaling $244,000, net of minority interest of $94,000, related to debt extinguished prior to its respective maturity date. Such amount is shown as an extraordinary item in the accompanying Consolidated Statements of Operations. 7. Related Party Transactions During 2002, Stanley K. Tanger, our Chairman of the Board and Chief Executive Officer, completed the early repayment of a $2.5 million demand note receivable to the Company through accelerated payments. In 2001, also through accelerated payments, Steven B. Tanger, our President and Chief Operating Officer, completed the early repayment of a $845,000 demand note receivable to the Company. As noted above in Note 4 "Investments in Real Estate Joint Ventures", we are a 50% owner of the TWMB joint venture. TWMB pays us management, leasing and development fees for services provided to the joint venture. During 2002, we recognized approximately $74,000 in management fees, $259,000 in leasing fees and $76,000 in development fees. F - 12 8. Long-Term Debt
Long-term debt at December 31, 2002 and 2001 consists of the following (in thousands): 2002 2001 - ------------------------------------------------------------------------- -------------- --------------- 7.875% Senior, unsecured notes, maturing October 2004 $ 50,109 $ 60,509 9.125% Senior, unsecured notes, maturing February 2008 100,000 100,000 Mortgage notes with fixed interest: 9.77%, maturing April 2005 14,516 14,822 9.125%, maturing September 2005 8,288 8,723 7.875%, maturing April 2009 62,874 63,968 7.98%, maturing April 2009 19,036 19,303 8.86%, maturing September 2010 16,207 16,420 Mortgage notes with variable interest: LIBOR plus 1.75%, maturing March 2006 53,500 53,500 Revolving lines of credit with variable interest rates ranging ......from either prime less .25% to prime or from LIBOR plus 1.60% to LIBOR plus 1.75% 20,475 20,950 - ------------------------------------------------------------------------- -------------- --------------- $ 345,005 $ 358,195 - ------------------------------------------------------------------------- -------------- ---------------
During 2002, we added an additional $10 million revolving credit facility to increase our unsecured lines of credit borrowing capacity to $85 million. All lines of credit expire in June 2004. Interest is payable based on alternative interest rate bases at our option. Certain of our properties, which had a net book value of approximately $172.8 million at December 31, 2002, serve as collateral for the fixed and variable rate mortgages. The lines of credit require the maintenance of certain ratios, including debt service coverage and leverage, and limit the payment of dividends such that dividends and distributions will not exceed funds from operations, as defined in the agreements, for the prior fiscal year on an annual basis or 95% of funds from operations on a cumulative basis. All five existing fixed rate mortgage notes are with insurance companies and contain prepayment penalty clauses. During 2002, we purchased primarily at par, $10.4 million of our outstanding 7.875% senior, unsecured public notes that mature in October 2004. The purchases were funded by amounts available under our unsecured lines of credit. During 2001, we purchased $14.5 million of these notes at par. In total, $24.9 million of the October 2004 notes were purchased in 2001 and 2002. During 2001, we issued $100 million of 9.125% senior, unsecured notes, maturing on February 15, 2008. The net proceeds of $97 million were used to repay all of the outstanding indebtedness under our $75 million 8.75% notes which were due March 11, 2001. The net proceeds were also used to repay the $20 million LIBOR plus 2.25% term loan due January 2002 with Fleet National Bank and Bank of America. The interest rate swap agreements associated with this loan were terminated at a cost of $295,200 which has been included in interest expense. The remaining proceeds were used for general operating purposes. Maturities of the existing long-term debt are as follows ($ in thousands): Year Amount % ---------------------------------- ------------- ------------ 2003 $ 2,519 1 2004 73,324 21 2005 23,100 7 2006 55,668 16 2007 2,349 1 Thereafter 188,045 54 ---------------------------------- ------------- ------------ $ 345,005 100 ---------------------------------- ------------- ------------ F - 13 9. Derivatives and Fair Value of Financial Instruments In August 2002, TWMB, our 50% unconsolidated joint venture, entered into a swap agreement with Bank of America, NA effective through August 2004 with a notional amount of $19 million. Under this agreement, TWMB receives a floating interest rate based on the 30 day LIBOR index and pays a fixed interest rate of 2.49%. This swap effectively changes the payment of interest on $19 million of variable rate debt to fixed rate debt for the contract period at a rate of 4.49%. At December 31, 2002, TWMB would have had to pay $277,000 to terminate the agreement. In December 2000, we entered an interest rate swap agreement effective through January 2003 with a notional amount of $25 million that fixed the 30 day LIBOR index at 5.97%. At December 31, 2002, we would have had to pay $98,000 to terminate the agreement. In January 2000, we entered into interest rate swap agreements on notional amounts totaling $20.0 million. In order to fix the interest rate, we paid $162,000. As mentioned above in Note 8, these agreements subsequently were terminated in February 2001 at a cost of $295,200. The carrying amount of cash equivalents approximates fair value due to the short-term maturities of these financial instruments. The fair value of long-term debt at December 31, 2002 and 2001, was estimated, at the present value of future cash flows, discounted at interest rates available at the reporting date for new debt of similar type and remaining maturity, was approximately $349.7 and $358.2 million, respectively. 10. Shareholders' Equity In September 2002, we completed a public offering of 1,000,000 common shares at a price of $29.25 per share, receiving net proceeds of approximately $28.0 million. The net proceeds were used, together with other available funds to acquire the Kensington Valley Factory Shops in Howell, Michigan mentioned in Note 3 above, reduce the outstanding balance on our lines of credit and for general corporate purposes. The Series A Cumulative Convertible Redeemable Preferred Shares (the "Preferred Shares") were sold to the public during 1993 in the form of Depositary Shares, each representing 1/10 of a Preferred Share. Proceeds from this offering, net of underwriters discount and estimated offering expenses, were contributed to the Operating Partnership in return for preferred partnership Units. The Preferred Shares have a liquidation preference equivalent to $25 per Depositary Share and dividends accumulate per Depositary Share equal to the greater of (i) $1.575 per year or (ii) the dividends on the common shares or portion thereof, into which a depositary share is convertible. The Preferred Shares rank senior to the common shares in respect of dividend and liquidation rights. The Preferred Shares are convertible at the option of the holder at any time into common shares at a rate equivalent to .901 common shares for each Depositary Share. At December 31, 2002, 722,509 common shares were reserved for the conversion of Depositary Shares. The Preferred Shares and Depositary Shares may be redeemed at the option of the Company, in whole or in part, at a redemption price of $25 per Depositary Share, plus accrued and unpaid dividends. 11. Shareholders' Rights Plan On July 30, 1998, our Board of Directors declared a distribution of one Preferred Share Purchase Right (a "Right") for each then outstanding common share to shareholders of record on August 27, 1998. The Rights are exercisable only if a person or group acquires 15% or more of our outstanding common shares or announces a tender offer the consummation of which would result in ownership by a person or group of 15% or more of the common shares. Each Right entitles shareholders to buy one-hundredth of a share of a new series of Junior Participating Preferred Shares at an exercise price of $120, subject to adjustment. F - 14 If an acquiring person or group acquires 15% or more of our outstanding common shares, an exercisable Right will entitle its holder (other than the acquirer) to buy, at the Right's then-current exercise price, our common shares having a market value of two times the exercise price of one Right. If an acquirer acquires at least 15%, but less than 50%, of our common shares, the Board may exchange each Right (other than those of the acquirer) for one common share (or one-hundredth of a Class B Preferred Share) per Right. In addition, under certain circumstances, if we are involved in a merger or other business combination where we are not the surviving corporation, an exercisable Right will entitle its holder to buy, at the Right's then-current exercise price, common shares of the acquiring company having a market value of two times the exercise price of one Right. We may redeem the Rights at $.01 per Right at any time prior to a person or group acquiring a 15% position. The Rights will expire on August 26, 2008. 12. Earnings Per Share A reconciliation of the numerators and denominators in computing earnings per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share", for the years ended December 31, 2002, 2001 and 2000 is set forth as follows (in thousands, except per share amounts):
2002 2001 2000 - ---------------------- -------------------------------------------- ------------ ---------------- ------------- NUMERATOR: Income from continuing operations $8,628 $6,125 $ 8,165 Less applicable preferred share dividends (1,771) (1,771) (1,823) - ------------------------------------------------------------------- ------------ ---------------- ------------- Income from continuing operations available to common shareholders - basic and diluted 6,857 4,354 6,342 Discontinued operations 2,379 1,231 1,194 (Loss) on sale or disposal of real estate --- --- (5,047) Extraordinary item - early extinguishments of debt --- (244) --- - ------------------------------------------------------------------- ------------ ---------------- ------------- Net income available to common shareholders- basic and diluted 9,236 5,341 2,489 - ------------------------------------------------------------------- ------------ ---------------- ------------- DENOMINATOR: Basic weighted average common shares 8,322 7,926 7,894 Effect of outstanding share and unit options 192 22 28 - ------------------------------------------------------------------- ------------ ---------------- ------------- Diluted weighted average common shares $ 8,514 $ 7,948 $7,922 - ------------------------------------------------------------------- ------------ ---------------- ------------- Basic earnings per common share: Income from continuing operations $ .82 $ .55 $ .80 Discontinued operations .29 .15 .15 (Loss) on sale or disposal of real estate --- --- (.63) Extraordinary item - early extinguishments of debt --- (.03) --- - ------------------------------------------------------------------- ------------ ---------------- ------------- Net income $1.11 $ .67 $ .32 - ------------------------------------------------------------------- ------------ ---------------- ------------- Diluted earnings per common share: Income from continuing operations $ .80 $ .55 $ .80 Discontinued operations .28 .15 .15 (Loss) on sale or disposal of real estate --- --- (.64) Extraordinary item - early extinguishments of debt --- (.03) --- - ------------------------------------------------------------------- ------------ ---------------- ------------- Net income $1.08 $ .67 $ .31 - ------------------------------------------------------------------- ------------ ---------------- -------------
F - 15 Options to purchase common shares excluded from the computation of diluted earnings per share during 2002, 2001 and 2000 because the exercise price was greater than the average market price of the common shares totaled 235,000, 1,244,000 and 1,270,078 shares, respectively. The assumed conversion of the preferred shares as of the beginning of each year would have been anti-dilutive. The assumed conversion of the Units held by TFLP as of the beginning of the year, which would result in the elimination of earnings allocated to the minority interest, would have no impact on earnings per share since the allocation of earnings to an Operating Partnership Unit is equivalent to earnings allocated to a common share. 13. Employee Benefit Plans We have a non-qualified and incentive share option plan ("The Share Option Plan") and the Operating Partnership has a non-qualified Unit option plan ("The Unit Option Plan"). Units received upon exercise of Unit options are exchangeable for common shares. We account for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined for options granted since January 1, 1995 consistent with FAS 123, our net income and earnings per share would have been reduced to the following pro forma amounts (in thousands, except per share amounts):
2002 2001 2000 - ------------------ ---------------- ------------ ------------- ------------ Net income: As reported $11,007 $ 7,112 $4,312 Pro forma 10,814 6,937 $4,094 Basic EPS: As reported $ 1.11 $ .67 $ .32 Pro forma $ 1.09 $ .65 $ .29 Diluted EPS: As reported $ 1.08 $ .67 $ .31 Pro forma $ 1.06 $ .65 $ .29
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for the grant in 2000: expected dividend yield of 11%; expected lives ranging from 5 years to 7 years; expected volatility of 23%; and risk-free interest rates ranging from 6.17% to 6.61%. There were no option grants in 2002 and 2001. We may issue up to 1,750,000 shares under The Share Option Plan and The Unit Option Plan. We have granted 1,519,800 options, net of options forfeited, through December 31, 2002. Under both plans, the option exercise price is determined by the Share and Unit Option Committee of the Board of Directors. Non-qualified share and Unit options granted expire 10 years from the date of grant and 20% of the options become exercisable in each of the first five years commencing one year from the date of grant. Options outstanding at December 31, 2002 have exercise prices between $18.625 and $31.25, with a weighted average exercise price of $23.89 and a weighted average remaining contractual life of 3.63 years. F - 16 A summary of the status of our two plans at December 31, 2002, 2001 and 2000 and changes during the years then ended is presented in the table and narrative below:
2002 2001 2000 --------------------------- --------------------------- ---------------------- Wtd Avg Wtd Avg Wtd Avg Shares Ex Price Shares Ex Price Shares Ex Price - ------------------------------------- ------------- ------------- ------------ -------------- ----------- ---------- Outstanding at beginning 1,455,830 $ 23.72 1,475,270 $ 23.68 1,280,890 $ 24.63 of year Granted --- --- --- --- 240,200 18.63 Exercised (127,620) 21.89 (10,800) 18.63 --- --- Forfeited (9,510) 25.45 (8,640) 23.66 (45,820) 23.72 - ------------------------------------- -------------- ---------- -------------- ------------- ------------- ---------- Outstanding at end of year 1,318,700 $ 23.89 1,455,830 $ 23.72 1,475,270 $ 23.68 - ------------------------------------- -------------- ---------- -------------- ------------- ------------- ---------- Exercisable at end of year 1,048,880 $ 24.45 1,047,890 $ 24.25 888,230 $ 24.28 Weighted average fair value of options granted $--- $ --- $ 1.20
We have a qualified retirement plan, with a salary deferral feature designed to qualify under Section 401 of the Code (the "401(k) Plan"), which covers substantially all of our officers and employees. The 401(k) Plan permits our employees, in accordance with the provisions of Section 401(k) of the Code, to defer up to 20% of their eligible compensation on a pre-tax basis subject to certain maximum amounts. Employee contributions are fully vested and are matched by us at a rate of compensation deferred to be determined annually at our discretion. The matching contribution is subject to vesting under a schedule providing for 20% annual vesting starting with the second year of employment and 100% vesting after six years of employment. The employer matching contribution expense for the years 2002, 2001 and 2000 was immaterial. 14. Asset Write-Down During November 2000, we terminated our contract to purchase twelve acres of land in Dania Beach/Ft. Lauderdale, FL. Because of this event, we wrote off all development costs associated with the site in Ft. Lauderdale. In addition, other costs associated with various other development activities at other sites were written off. The total non-cash charge for abandoned development costs in the fourth quarter of 2000 was $1.8 million. F - 17 15. Other Comprehensive Income Effective January 1, 2001, we FAS 133. Upon adoption we recorded a cumulative effect adjustment of $216,500 loss, net of minority interest of $83,000, in other comprehensive income (loss). As discussed in Note 9, certain interest rate swap agreements were terminated during the first quarter of 2001 and the other comprehensive loss totaling $106,000, net of minority interest of $41,000, recognized at adoption relating to these agreements was reclassified to earnings. In accordance with the provisions of FAS 133, our interest rate swap agreement and TWMB's interest rate swap agreement have been designated as cash flow hedges and are carried on their respective balance sheets at fair value. At December 31, 2002, the fair value of our hedge is recorded as a liability of $98,000 in accounts payable and accrued expenses. Our portion of the fair value of TWMB's hedge is recorded as a reduction in investment in joint ventures of $139,000 in other assets. For the years ended December 31, 2002 and 2001, the change in the fair value of derivative instruments was recorded as a $643,000 gain and $593,000 loss, net of minority interest of $232,000 and $227,000, to accumulated other comprehensive income. Total comprehensive income for the years ended December 31, 2002 and 2001 is as follows (in thousands):
2002 2001 - ----------------------------------------------------------------------- -------------- -------------- Net income $ 11,007 $ 7,112 - ----------------------------------------------------------------------- -------------- -------------- Other comprehensive income (loss): Cumulative effect adjustment of FAS 133 adoption, net of minority interest of $83 --- (217) Reclassification to earnings on termination of cash flow hedge, net of minority interest of $41 --- 106 Change in fair value of our portion of TWMB cash flow hedge, net of minority interest of $37 (102) --- Change in fair value of cash flow hedge, net of minority interest of $232 and $227 643 (593) - ----------------------------------------------------------------------- -------------- -------------- Other comprehensive gain (loss) 541 (704) - ----------------------------------------------------------------------- -------------- -------------- Total comprehensive income $11,548 $ 6,408 - ----------------------------------------------------------------------- -------------- --------------
16. Supplementary Income Statement Information The following amounts are included in property operating expenses for the years ended December 31, 2002, 2001 and 2000 (in thousands):
2002 2001 2000 - -------------------------------- ------------- ------------ ------------ Advertising and promotion $ 9,840 $ 9,206 $ 9,074 Common area maintenance 13,719 13,078 13,676 Real estate taxes 8,790 8,359 7,421 Other operating expenses 3,734 3,327 2,842 - -------------------------------- ------------- ------------ ------------ $ 36,083 $ 33,970 $ 33,013 - -------------------------------- ------------- ------------ ------------
17. Lease Agreements The Company is the lessor of a total of 1,338 stores in our 28 wholly-owned factory outlet centers, under operating leases with initial terms that expire from 2003 to 2019. Most leases are renewable for five years at the lessee's option. Future minimum lease receipts under non-cancelable operating leases as of December 31, 2002 are as follows (in thousands): 2003 $ 70,320 2004 59,079 2005 44,573 2006 31,079 2007 19,244 Thereafter 25,909 -------------------- -------------------- $ 250,204 -------------------- -------------------- F -18 18. Commitments and Contingencies We purchased the rights to lease land on which two of the outlet centers are situated for $1,520,000. These leasehold rights are being amortized on a straight-line basis over 30 and 40 year periods. Accumulated amortization was $713,000 and $664,000 at December 31, 2002 and 2001, respectively. Our non-cancelable operating leases, with initial terms in excess of one year, have terms that expire from 2003 to 2085. Annual rental payments for these leases aggregated $2,437,000, $2,333,000 and $2,023,000, for the years ended December 31, 2002, 2001 and 2000, respectively. Minimum lease payments for the next five years and thereafter are as follows (in thousands): 2003 $ 2,551 2004 2,547 2005 2,478 2006 2,441 2007 2,378 Thereafter 73,860 -------------- ----------- $ 86,255 -------------- ----------- We are also subject to legal proceedings and claims which have arisen in the ordinary course of its business and have not been finally adjudicated. In our opinion, the ultimate resolution of these matters will have no material effect on our results of operations, financial condition or cash flows. F - 19 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Tanger Factory Outlet Centers, Inc. and Subsidiaries Our audits of the consolidated financial statements referred to in our report dated January 17, 2003 appearing in the 2002 Form 10-K of Tanger Factory Outlet Centers, Inc. also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP Raleigh, North Carolina January 17, 2003 F - 20
TANGER FACTORY OUTLET CENTERS, INC. and SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION For the Year Ended December 31, 2002 (In thousands) - ------------------------------------- -------------- ------------------------ ----------------------- Costs Capitalized Subsequent to Acquisition Description Initial cost to Company (Improvements) - ------------------------------------- -------------- ------------------------ ----------------------- Buildings, Buildings, Outlet Center Improvements Improvements Name Location Encumbrances Land & Fixtures Land & Fixtures - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Barstow Barstow, CA -- $3,672 $ 12,533 $ --- $ 1,226 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Blowing Rock Blowing Rock, NC $ 9,655 1,963 9,424 --- 2,250 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Boaz Boaz, AL --- 616 2,195 --- 2,251 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Branch North Branch, MN --- 243 5,644 249 4,072 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Branson Branson, MO 24,000 4,557 25,040 --- 8,345 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Casa Grande Casa Grande, AZ --- 741 9,091 --- 1,995 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Clover North Conway, NH --- 393 672 --- 250 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Commerce I Commerce, GA 8,288 755 3,511 492 9,467 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Commerce II Commerce, GA 29,500 1,262 14,046 541 18,072 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Dalton Dalton, GA 11,133 1,641 15,596 --- 552 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Gonzales Gonzales, LA --- 718 15,895 17 5,285 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Howell Howell, MI --- 2,250 35,250 --- 226 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Kittery-I Kittery, ME 6,335 1,242 2,961 229 1,346 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Kittery-II Kittery, ME --- 921 1,835 529 610 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Lancaster Lancaster, PA 14,516 3,691 19,907 --- 11,321 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- LL Bean North Conway, NH --- 1,894 3,351 --- 1,137 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Locust Grove Locust Grove, GA --- 2,558 11,801 --- 8,404 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Martinsburg Martinsburg, WV --- 800 2,812 --- 1,495 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Nags Head Nags Head, NC 6,552 1,853 6,679 --- 1,910 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Pigeon Forge Pigeon Forge, TN --- 299 2,508 --- 2,068 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Riverhead Riverhead, NY --- --- 36,374 6,152 73,585 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- San Marcos San Marcos, TX 37,946 1,801 9,440 18 35,755 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Sanibel Sanibel, FL --- 4,916 23,196 --- 3,052 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Sevierville Sevierville, TN --- --- 18,495 --- 26,213 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Seymour Seymour, IN --- 1,590 13,249 --- 721 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Terrell Terrell, TX --- 778 13,432 --- 6,484 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- West Branch West Branch, MI 7,067 350 3,428 121 5,257 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- Williamsburg Williamsburg, IA 19,429 706 6,781 716 12,630 - ----------------- ------------------- -------------- --------- -------------- -------- -------------- $ 174,421 $42,210 $325,146 $9,064 $245,979 - ----------------- ------------------- -------------- --------- -------------- -------- --------------
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TANGER FACTORY OUTLET CENTERS, INC. and SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION For the Year Ended December 31, 2002 (In thousands) - ------------------------------------- -------------------------------------- ------------- ------------- -------------- Gross Amount Carried at Close of Period Description 12/31/02 (1) - ------------------------------------- -------------------------------------- ------------- ------------- -------------- Life Used to Compute Buildings, Depreciation Outlet Center Improvements Accumulated Date of in Income Name Location Land & Fixtures Total Depreciation Construction Statement - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Barstow Barstow, CA $3,672 $13,759 $17,431 $5,316 1995 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Blowing Rock Blowing Rock, NC 1,963 11,674 13,637 2,156 1997 (3) (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Boaz Boaz, AL 616 4,446 5,062 2,417 1988 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Branch North Branch, MN 492 9,716 10,208 4,760 1992 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Branson Branson, MO 4,557 33,385 37,943 12,820 1994 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Casa Grande Casa Grande, AZ 741 11,086 11,827 5,755 1992 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Clover North Conway, NH 393 922 1,315 588 1987 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Commerce I Commerce, GA 1,247 12,978 14,225 5,818 1989 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Commerce II Commerce, GA 1,803 32,118 33,921 9,627 1995 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Dalton Dalton, GA 1,641 16,148 17,789 2,592 1998 (3) (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Gonzales Gonzales, LA 735 21,180 21,915 10,132 1992 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Howell Howell, MI 2,250 35,476 37,726 388 2002 (3) (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Kittery-I Kittery, ME 1,471 4,307 5,778 2,758 1986 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Kittery-II Kittery, ME 1,450 2,445 3,895 1,233 1989 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Lancaster Lancaster, PA 3,691 31,228 34,919 10,398 1994 (3) (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- LL Bean North Conway, NH 1,894 4,488 6,382 2,472 1988 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Locust Grove Locust Grove, GA 2,558 20,205 22,763 7,447 1994 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Martinsburg Martinsburg, WV 800 4,307 5,107 2,439 1987 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Nags Head Nags Head, NC 1,853 8,589 10,442 1,974 1997 (3) (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Pigeon Forge Pigeon Forge, TN 299 4,576 4,875 2,527 1988 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Riverhead Riverhead, NY 6,152 109,959 116,111 29,259 1993 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- San Marcos San Marcos, TX 1,819 45,195 47,014 11,036 1993 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Sanibel Sanibel, FL 4,916 26,248 31,164 3,823 1998 (3) (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Sevierville Sevierville, TN --- 44,708 44,708 8,970 1997 (3) (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Seymour Seymour, IN 1,590 13,970 15,560 6,064 1994 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Terrell Terrell, TX 778 19,916 20,694 7,769 1994 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- West Branch West Branch, MI 471 8,685 9,156 3,944 1991 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- Williamsburg Williamsburg, IA 1,422 19,411 20,832 9,717 1991 (2) - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- $51,274 $571,125 $622,399 $174,199 - ----------------- ------------------- --------- --------------- ------------ ------------- ------------- -------------- (1) Aggregate cost for federal income tax purposes is approximately $642,559,000. (2) The Company generally uses estimated lives ranging from 25 to 33 years for buildings and 15 years for land improvements. Tenant finishing allowances are depreciated over the initial lease term. (3) Represents year acquired
F -22 TANGER FACTORY OUTLET CENTERS, INC. and SUBSIDIARIES SCHEDULE III - (Continued) REAL ESTATE AND ACCUMULATED DEPRECIATION For the Year Ended December 31, 2002 (In Thousands) The changes in total real estate for the three years ended December 31, 2002 are as follows:
2002 2001 2000 -------------- ---------------- ----------------- Balance, beginning of year $599,266 $584,928 $566,216 Acquisition of real estate 37,500 --- --- Improvements 5,324 14,338 39,701 Dispositions and other (19,691) --- (20,989) -------------- ---------------- ----------------- Balance, end of year $622,399 $599,266 $584,928 ============== ================ =================
The changes in accumulated depreciation for the three years ended December 31, 2002 are as follows:
2002 2001 2000 -------------- ---------------- ---------------- Balance, beginning of year $ 148,950 $ 122,365 $104,511 Depreciation for the period 26,906 26,585 24,239 Dispositions and other (1,657) --- (6,385) -------------- ---------------- ---------------- Balance, end of year $174,199 $148,950 $122,365 ============== ================ ================
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