-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UvEeKmbDYZfPTRLE6tqsP21ulByLjp14KrUtisr9f1pii7X84Foo3IrtBYdXPco7 9mPDAw1fVWWa51TV/lSPoQ== 0000910612-03-000086.txt : 20030814 0000910612-03-000086.hdr.sgml : 20030814 20030814165251 ACCESSION NUMBER: 0000910612-03-000086 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CBL & ASSOCIATES PROPERTIES INC CENTRAL INDEX KEY: 0000910612 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 621545718 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12494 FILM NUMBER: 03848475 BUSINESS ADDRESS: STREET 1: 2030 HAMILTON PLACE BVLD, SUITE 500 STREET 2: CBL CENTER CITY: CHATTANOOGA STATE: TN ZIP: 37421 BUSINESS PHONE: 4238550001 MAIL ADDRESS: STREET 1: 2030 HAMILTON PLACE BVLD, SUITE 500 STREET 2: CBL CENTER CITY: CHATTANOOGA STATE: TN ZIP: 37421 10-Q 1 form10qjun2003.txt FORM 10Q JUN 2003 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30,2003 ------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended __________to ____________ Commission File No. 1-12494 CBL & ASSOCIATES PROPERTIES, INC. (Exact name of registrant as specified in its charter) Delaware 62-1545718 - --------------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 2030 Hamilton Place Blvd., Suite #500 Chattanooga, Tennessee 37421-6000 - -------------------------------------------- ------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (423) 855-0001 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each Exchange Title of Each Class on which Registered - ------------------------------------------------ ----------------------- Common Stock, $.01 par value per share New York Stock Exchange 9.0% Series A Cumulative Redeemable Preferred New York Stock Exchange Stock, par value $.01 per share 8.75% Series B Cumulative Redeemable Preferred New York Stock Exchange Stock, par value $.01 per share 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes_X__ No_____ As of August 11, 2003, there were 30,191,383 shares of common stock, par value $0.01 per share, outstanding. CBL & Associates Properties, Inc. INDEX PAGE NUMBER PART I FINANCIAL INFORMATION ITEM 1: FINANCIAL INFORMATION 3 CONSOLIDATED BALANCE SHEETS AS OF 4 JUNE 30, 2003 AND DECEMBER 31, 2002 CONSOLIDATED STATEMENTS OF OPERATIONS FOR 5 THREE MONTHS AND THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 6 THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 ITEM 2: MANAGEMENT'S DISCUSSION AND 16 ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 3: QUANTITATIVE AND QUALITATIVE 31 DISCLOSURE ABOUT MARKET RISK ITEM 4: CONTROLS AND PROCEDURES 32 PART II OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS 33 ITEM 2: CHANGES IN SECURITIES 33 ITEM 3: DEFAULTS UPON SENIOR SECURITIES 33 ITEM 4: SUBMISSION OF MATTERS TO HAVE A 33 VOTE OF SECURITY HOLDERS ITEM 5: OTHER INFORMATION 34 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 34 SIGNATURE 35 2 CBL & Associates Properties, Inc. Item 1: Financial Information The accompanying financial statements are unaudited; however, they have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. The results for the interim periods ended June 30, 2003, are not necessarily indicative of the results to be obtained for the full fiscal year. These financial statements should be read in conjunction with the CBL & Associates Properties, Inc. (the "Company"), audited financial statements and notes thereto included in the CBL & Associates Properties, Inc. Form 10-K for the year ended December 31, 2002. 3 CBL & Associates Properties, Inc. Consolidated Balance Sheets (In thousands, except share data) (Unaudited)
June 30, December 31, 2003 2002 --------------- --------------- ASSETS Real estate assets: Land.............................................................. $ 584,175 $ 570,818 Buildings and improvements........................................ 3,513,308 3,394,787 --------------- --------------- 4,097,483 3,965,605 Less accumulated depreciation................................... (483,228) (434,840) --------------- --------------- 3,614,255 3,530,765 Developments in progress.......................................... 107,278 80,720 --------------- --------------- Net investment in real estate assets............................ 3,721,533 3,611,485 Cash and cash equivalents........................................... 25,750 13,355 Receivables: Tenant, net of allowance for doubtful accounts of $2,889 in 2003 and $2,861 in 2002........................................ 41,252 37,994 Other............................................................. 3,193 3,692 Mortgage and other notes receivable................................. 22,070 23,074 Investment in unconsolidated affiliates............................. 72,556 68,232 Other assets........................................................ 63,353 37,282 --------------- --------------- $ 3,949,707 $ 3,795,114 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Mortgage and other notes payable.................................... $ 2,540,914 $ 2,402,079 Accounts payable and accrued liabilities............................ 148,251 151,332 --------------- --------------- Total liabilities................................................. 2,689,165 2,553,411 --------------- --------------- Minority interests.................................................. 505,088 500,513 --------------- --------------- Commitments and contingencies (Note 10)............................. Shareholders' equity: Preferred stock, $.01 par value, 15,000,000 shares authorized: 9.0% Series A Cumulative Redeemable Preferred Stock, 2,675,000 shares outstanding in 2003 and 2002.............. 27 27 8.75% Series B Cumulative Redeemable Preferred Stock, 2,000,000 shares outstanding in 2003 and in 2002 .......... 20 20 Common stock, $.01 par value, 95,000,000 shares authorized, 30,149,026 and 29,797,469 shares issued and outstanding in 2003 and 2002, respectively.................................. 301 298 Additional paid - in capital...................................... 775,587 765,686 Accumulated other comprehensive loss.............................. (626) (2,397) Deferred compensation............................................. (1,808) -- Accumulated deficit............................................... (18,047) (22,444) --------------- --------------- Total shareholders' equity...................................... 755,454 741,190 --------------- --------------- $ 3,949,707 $ 3,795,114 =============== =============== The accompanying notes are an integral part of these balance sheets.
4 CBL & Associates Properties, Inc. Consolidated Statements Of Operations (In thousands, except per share data) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------------- ----------------------------- 2003 2002 2003 2002 ------------ ------------ ------------- ------------ REVENUES: Rentals: Minimum rents..................................... $ 104,604 $ 94,982 $ 207,592 $ 185,551 Percentage rents.................................. 1,198 1,798 7,528 8,515 Other rents....................................... 1,762 1,697 3,791 3,755 Tenant reimbursements................................ 52,251 43,759 102,207 82,345 Management, development and leasing fees............. 1,406 2,456 2,725 3,754 Other................................................ 3,798 3,026 7,149 7,961 ------------ ------------ ------------- ------------ Total revenues..................................... 165,019 147,718 330,992 291,881 ------------ ------------ ------------- ------------ EXPENSES: Property operating................................... 28,052 27,177 56,324 49,497 Depreciation and amortization........................ 27,690 23,646 54,002 46,127 Real estate taxes.................................... 12,818 11,267 26,811 22,794 Maintenance and repairs.............................. 9,616 8,891 20,173 17,453 General and administrative........................... 6,644 5,466 12,997 11,206 Other................................................ 2,315 2,060 4,656 5,807 ------------ ------------ ------------- ------------ Total expenses..................................... 87,135 78,507 174,963 152,884 ------------ ------------ ------------- ------------ Income from operations............................... 77,884 69,211 156,029 138,997 Interest income...................................... 592 230 1,165 983 Interest expense..................................... (38,363) (34,050) (75,319) (70,837) Loss on extinguishment of debt....................... (167) (1,240) (167) (3,187) Gain on sales of real estate assets.................. 3,002 1,789 4,106 2,204 Equity in earnings of unconsolidated affiliates...... 731 2,015 2,488 4,102 Minority interest in earnings: Operating partnership.............................. (17,979) (16,335) (38,616) (32,532) Shopping center properties......................... (893) (1,216) (1,433) (2,133) ------------ ------------ ------------- ------------ Income before discontinued operations................ 24,807 20,404 48,253 37,597 Operating income (loss) of discontinued operations... (93) 353 (6) 919 Gain on discontinued operations...................... -- 164 2,935 1,406 ------------ ------------ ------------- ------------ Net income........................................... 24,714 20,921 51,182 39,922 Preferred dividends.................................. (3,692) (2,010) (7,384) (3,627) ------------ ------------ ------------- ------------ Net income available to common shareholders.......... $ 21,022 $ 18,911 $ 43,798 $ 36,295 ============ ============ ============= ============ Basic per share data: Income before discontinued operations, net of preferred dividends.................... $ 0.71 $ 0.63 $ 1.37 $ 1.23 Discontinued operations.......................... 0.00 0.02 0.10 0.08 ------------ ------------ ------------- ------------ Net income available to common shareholders...... $ 0.70 $ 0.65 $ 1.47 $ 1.31 ============ ============ ============= ============ Weighted average common shares outstanding....... 29,886 29,084 29,806 27,728 Diluted per share data: Income before discontinued operations, net of preferred dividends.................... $ 0.68 $ 0.61 $ 1.32 $ 1.19 Discontinued operations.......................... 0.00 0.02 0.10 0.08 ------------ ------------ ------------- ------------ Net income available to common shareholders...... $ 0.68 $ 0.63 $ 1.42 $ 1.27 ============ ============ ============= ============ Weighted average common and potential dilutive common shares outstanding........................ 31,066 29,943 30,942 28,541 The accompanying notes are an integral part of these statements.
5 CBL & Associates Properties, Inc. Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Six Months Ended June 30, ---------------------------- 2003 2002 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................... $ 51,182 $ 39,922 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................................................ 41,057 38,275 Amortization................................................................ 15,309 9,063 Gain on sales of real estate assets......................................... (4,106) (2,204) Gain on discontinued operations............................................. (2,935) (1,406) Loss on extinguishment of debt.............................................. 167 3,187 Issuance of stock under incentive plan...................................... 1,203 1,926 Write-off of development projects........................................... 107 57 Deferred compensation....................................................... 177 -- Amortization of deferred compensation....................................... 62 -- Minority interest in earnings............................................... 40,049 34,665 Changes in: Tenant and other receivables................................................ (3,065) 1,942 Other assets................................................................ (6,172) (3,240) Accounts payable and accrued liabilities.................................... (8,047) 515 ----------- ----------- Net cash provided by operating activities........................... 124,988 122,702 =========== =========== CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of real estate and lease assets.............................. (40,635) (53,494) Additions to real estate assets........................................... (27,922) (35,426) Other capital expenditures................................................ (73,156) (32,928) Capitalized interest...................................................... (2,742) (1,858) Additions to other assets................................................. (1,014) (1,470) Deposits in escrow........................................................ -- (12,845) Proceeds from sales of real estate assets................................. 15,657 37,932 Payments received on mortgage notes receivable............................ 1,004 1,488 Additions to mortgage notes receivable.................................... -- (5,160) Distributions in excess of equity in earnings of unconsolidated affiliates 148 3,042 Additional investments in and advances to unconsolidated affiliates....... (4,472) (2,659) ----------- ----------- Net cash used in investing activities............................... (133,132) (103,378) =========== =========== CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from mortgage and other notes payable............................ 243,680 566,270 Principal payments on mortgage and other notes payable.................... (144,871) (714,050) Additions to deferred financing costs..................................... (3,331) (5,283) Prepayment penalties on extinguishment of debt............................ -- (1,875) Proceeds from issuance of common stock.................................... 2,173 116,400 Proceeds from issuance of preferred stock................................. -- 96,394 Proceeds from exercise of stock options................................... 5,425 4,523 Repurchase of preferred stock............................................. -- (5,000) Distributions to minority investors....................................... (35,981) (32,142) Dividends paid............................................................ (46,556) (33,411) ----------- ----------- Net cash provided by (used in) financing activities................. 20,539 (8,174) ----------- ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS....................................... 12,395 11,150 CASH AND CASH EQUIVALENTS, beginning of period................................ 13,355 10,137 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period...................................... $ 25,750 $ 21,287 =========== =========== SUPPLEMENTAL INFORMATION: Cash paid for interest, net of amounts capitalized.......................... $ 73,699 $ 71,964 =========== =========== The accompanying notes are an integral part of these statements.
6 CBL & Associates Properties, Inc. Notes to Unaudited Consolidated Financial Statements (In thousands, except per share data) Note 1 - Organization and Basis of Presentation CBL & Associates Properties, Inc. (the "Company"), a Delaware corporation, is a self-managed, self-administered, fully integrated real estate investment trust ("REIT") that is engaged in the development, acquisition and operation of regional shopping malls and community centers. The Company's shopping center properties are located primarily in the Southeast, as well as in select markets in the Northeast and Midwest regions of the United States. The Company conducts substantially all of its business through CBL & Associates Limited Partnership (the "Operating Partnership"). The Company is the 100% owner of two qualified REIT subsidiaries, CBL Holdings I, Inc. and CBL Holdings II, Inc. At June 30, 2003, CBL Holdings I, Inc., the sole general partner of the Operating Partnership, owned a 1.7% general partnership interest and CBL Holdings II, Inc. owned a 52.3% limited partnership interest in the Operating Partnership for a combined interest held by the Company of 54.0%. At June 30, 2003, the Operating Partnership owns controlling interests in 51 regional malls, 20 associated centers (each adjacent to a regional shopping mall), 62 community centers and an office building. The Operating Partnership consolidates the financial statements of all entities in which it has a controlling financial interest. The Operating Partnership owns non-controlling interests in four regional malls, two associated centers and two community centers. Because major decisions such as the acquisition, sale or refinancing of principal partnership assets must be approved by one or more of the other partners, the Operating Partnership does not control these partnerships and, accordingly, accounts for these investments using the equity method. The Operating Partnership currently has under construction one mall, which is owned in a joint venture, one associated center, and two community centers and has options to acquire certain development properties owned by third parties. The minority interest in the Operating Partnership is held primarily by CBL & Associates, Inc. and its affiliates (collectively "CBL's Predecessor") and by affiliates of The Richard E. Jacobs Group, Inc. ("Jacobs"). CBL's Predecessor contributed their interests in certain real estate properties and joint ventures to the Operating Partnership in exchange for a limited partnership interest when the Operating Partnership was formed in November 1993. Jacobs contributed their interests in certain real estate properties and joint ventures to the Operating Partnership in exchange for a limited partnership interest when the Operating Partnership acquired Jacobs' interests in 23 properties in January 2001. At June 30, 2003, CBL's Predecessor owned a 15.7% limited partnership interest, Jacobs owned a 21.4% limited partnership interest and third parties owned an 8.9% limited partnership interest in the Operating Partnership. CBL's Predecessor also owned 2.3 million shares of the Company's common stock at June 30, 2003, for a combined total interest of 19.7% in the Operating Partnership. Under the terms of the Operating Partnership's limited partnership agreement, each of the limited partners has the right to exchange all or a portion of its partnership interests for shares of the Company's common stock or their cash equivalent, at the Company's election. In such case, the Company assumes the limited partner's ownership of its interests in the Operating Partnership. The number of shares of common stock received by a limited partner of the Operating Partnership upon exercise of its exchange rights will be equal on a one-for-one basis to the number of partnership units exchanged by the limited partner. The amount of cash received by the limited partner, if the Company elects to pay cash, will be based on the trading price at the time of exercise of the shares of common stock that would otherwise have been received by the limited partner in the exchange. Neither the limited partnership interests in the Operating Partnership nor the shares of common stock of the Company are subject to any right of mandatory redemption. 7 The Operating Partnership conducts the Company's property management and development activities through CBL & Associates Management, Inc. (the "Management Company") to comply with certain requirements of the Internal Revenue Code of 1986, as amended (the "Code"). The Operating Partnership has a controlling financial interest in the Management Company based on the following factors: |X| The Operating Partnership holds 100% of the preferred stock and owns 6% of the common stock of the Management Company. Through its ownership of the preferred stock, the Operating Partnership has the right to perpetually receive 95% of the economic benefits of the Management Company's operations. |X| The Operating Partnership provides all of the operating capital of the Management Company. |X| The Management Company does not perform any material services for entities in which the Operating Partnership is not a significant investor. |X| The remaining 94% of the Management Company's common stock is owned by individuals who are directors and/or officers of the Company (with the exception of one individual who is a member of the immediate family of a director of the Company) and whose interests are aligned with those of the Company. These individuals contributed nominal amounts of equity in exchange for their interest in the Management Company's common stock. |X| All of the members of the Management Company's Board of Directors are members of the Company's Board of Directors. All of these factors result in the Company having a controlling financial interest in the Management Company and, accordingly, the Management Company is treated as a consolidated subsidiary. CBL & Associates Properties, Inc., the Operating Partnership and the Management Company are collectively referred to herein as "the Company". Note 2 - INVESTMENT IN UNCONSOLIDATED AFFILIATES The Operating Partnership owns non-controlling interests in four regional malls, two associated centers and two community centers, as well as one mall under construction, vacant land held for sale or lease and one development property. Condensed combined financial statement information for the unconsolidated affiliates is as follows:
Company's Share for the Total for the Six Months Six Months Ended June 30, Ended June 30, ---------------------------- --------------------------- 2003 2002 2003 2002 ------------ ----------- ----------- ----------- Revenues $ 20,516 $ 26,654 $ 11,954 $ 11,351 Depreciation and amortization (3,673) (3,539) (2,019) (1,772) Interest expense (5,331) (6,707) (3,882) (2,322) Other operating expenses (5,455) (7,399) (3,565) (3,155) ------------ ----------- ----------- ---------- Income from operations $ 6,057 $ 9,009 $ 2,488 $ 4,102 ============ =========== =========== ==========
Note 3 - MORTGAGE AND OTHER NOTES PAYABLES Mortgage and other notes payable consisted of the following at June 30, 2003 and December 31, 2002, respectively: 8
June 30, 2003 December 31, 2002 ------------------------------- --------------------------- Weighted Weighted Average Average Interest Interest Amount Rate(1) Amount Rate(1) --------------- ------------ -------------- ------------ Fixed-rate debt: Non-recourse loans on operating properties $ 1,973,945 7.02% $ 1,867,915 7.16% --------------- -------------- Variable-rate debt: Recourse term loans on operating properties 305,721 3.73% 290,954 3.98% properties Lines of credit 245,000 2.15% 221,275 2.69% Construction loans 16,248 2.71% 21,935 3.08% --------------- -------------- Total variable-rate debt 566,969 3.02% 534,164 3.41% --------------- -------------- Total $ 2,540,914 6.13% $ 2,402,079 6.32% =============== ============== (1) Weighted-average interest rate before amortization of deferred financing costs.
On February 26, 2003, the Company obtained an $85,000, non-recourse loan that is secured by Westmoreland Mall and Westmoreland Crossing in Greensburg, PA. The loan bears interest at 5.05% and has a term of ten years with payments based on a 25-year amortization schedule. On February 28, 2003, the Company entered into a new secured credit facility for $255,000. This new credit facility replaced both the Company's $130,000 secured credit facility and its unsecured facility of $105,275. The new credit facility bears interest at LIBOR plus 100 basis points, expires in February 2006, and has a one-year extension, which is at the Company's election. Six regional malls and three associated centers secure the new credit facility. As discussed in Note 6, the Company assumed $40,000 of debt in connection with its acquisition of Sunrise Mall on May 1, 2003. The debt bears interest at LIBOR plus 300 basis points, with a floor of 4.90%, and matures in May 2004. The Company's credit facilities total $365,000, of which $99,566 was available at June 30, 2003. In addition to the $245,000 of outstanding borrowings under these credit facilities, there were also $20,434 outstanding under letters of credit. Additionally, the Company had other credit facilities totaling $19,585 that are used only for issuances of letters of credit, of which $5,930 was available at June 30, 2003. As of June 30, 2003, the Company had total commitments under construction loans of $29,018, of which $12,965 was available to be used for completion of construction and redevelopment projects and replenishment of working capital previously used for construction. The Company also had $12,276 available in unfunded construction loans on operating properties that can be used to replenish working capital previously used for construction. The weighted average remaining term of the Company's consolidated debt was 5.3 years at June 30, 2003 and 5.7 years at December 31, 2002. In May 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections", which rescinds SFAS No. 4. As a result, gains and losses from extinguishments of debt should be classified as extraordinary items only if they meet the criteria of Accounting Principles Board Opinion No. 30 ("APB 30"). SFAS No. 145 was effective for the Company on January 1, 2003. All losses on extinguishment of debt that were classified as an extraordinary item in prior periods have been reclassified to expense in the accompanying consolidated statements of operations. Fourteen malls, five associated centers and the office building are owned by special purpose entities that are included in the consolidated financial statements. The sole business purpose of the special purpose entities is the 9 ownership and operation of the properties. The mortgaged real estate and other assets owned by these special purpose entities are restricted under the loan agreements in that they are not available to settle other debts of the Company. However, so long as the loans are not under an event of default, as defined in the loan agreements, the cash flows from these properties, after payments of debt service, operating expenses and reserves, are available for distribution to the Company. Note 4 - DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivative financial instruments to manage exposure to interest rate risks inherent in variable-rate debt and does not use them for trading or speculative purposes. At June 30, 2003, the Company had one interest rate swap agreement, which was designated as a cash flow hedge, with a notional amount of $80,000 that expires August 30, 2003. Under this interest rate swap agreement, the Company receives payments at a rate equal to LIBOR (1.125% at June 30, 2003) and pays interest at a fixed rate of 5.83%. The Company also had one interest rate cap of 5.50%, which expires May 7, 2004, that was in place on $40,000 of variable rate debt that was assumed in connection with the acquisition of Sunrise Mall during the second quarter (see Note 6). At June 30, 2003, the interest rate swap's fair value of $(626) was recorded in accounts payable and accrued liabilities. The interest rate cap's fair value was $0 at June 30, 2003. For the quarter, adjustments of $917 were recorded as adjustments in other comprehensive income. Over time, unrealized gains and losses held in accumulated other comprehensive loss will be reclassified to earnings. This reclassification occurs in the same period or periods that the hedged cash flows affect earnings. The Company estimates that it will reclassify the entire balance of $(626) to earnings as interest expense by August 30, 2003. The Company is exposed to credit losses if counterparties to the swap and cap agreements are unable to perform; therefore, the Company continually monitors the credit standing of the counterparties. Note 5 - SEGMENT INFORMATION The Company measures performance and allocates resources according to property type, which is determined based on certain criteria such as type of tenants, capital requirements, economic risks, leasing terms, and short- and long-term returns on capital. Rental income and tenant reimbursements from tenant leases provide the majority of revenues from all segments. Information on the Company's reportable segments is presented as follows: 10
Associated Community Three Months Ended June 30, 2003 Malls Centers Centers All Other Total - -------------------------------------- ------------ ------------ ------------ ------------ --------- Revenues $ 138,824 $ 5,804 $ 14,971 $ 5,420 $ 165,019 Property operating expenses (1) (47,364) (1,298) (3,583) 1,759 (50,486) Interest expense (34,425) (948) (2,048) (942) (38,363) Other expense -- -- -- (2,315) (2,315) Gain on sales of real estate assets -- -- 183 2,819 3,002 ------------ ------------ ------------ ------------ --------- Segment profit and loss $ 57,035 $ 3,558 $ 9,523 $ 6,741 76,857 ============ ============ ============ ============ Depreciation and amortization (27,690) General and administrative (6,644) Interest income 592 Loss on extinguishment of debt (167) Equity in earnings and minority interest in earnings (18,141) --------- Income before discontinued operations $ 24,807 ========= Capital expenditures (2) $ 96,969 $ 9,463 $ 4,313 $ 5,673 $ 117,418
Associated Community Three Months Ended June 30, 2002 Malls Centers Centers All Other Total - -------------------------------------- ------------ ------------ ------------ ------------ --------- Revenues $ 123,169 $ 4,950 $ 14,030 $ 5,569 $ 147,718 Property operating expenses (1) (43,205) (877) (3,389) 136 (47,335) Interest expense (28,811) (980) (2,401) (1,858) (34,050) Other expense -- -- -- (2,060) (2,060) Gain on sales of real estate assets -- -- -- 1,789 1,789 ------------ ------------ ------------ ------------ --------- Segment profit and loss $ 51,153 $ 3,093 $ 8,240 $ 3,576 66,062 ============ ============ ============ ============ Depreciation and amortization (23,646) General and administrative (5,466) Interest income 230 Loss on extinguishment of debt (1,240) Equity in earnings and minority interest in earnings (15,536) --------- Income before discontinued operations $ 20,404 ========= Capital expenditures (2) $ 121,516 $ 219 $ 6,906 $ 26,498 $ 155,139
11
Associated Community Six Months Ended June 30, 2003 Malls Centers Centers All Other Total - -------------------------------------- ------------ ------------ ------------ ------------ --------- Revenues $ 279,442 $ 11,199 $ 30,204 $ 10,147 $ 330,992 Property operating expenses (1) (95,196) (2,636) (7,438) 1,962 (103,308) Interest expense (67,236) (1,900) (3,989) (2,194) (75,319) Other expense -- -- -- (4,656) (4,656) Gain (loss) on sales of real estate assets (5) -- 164 3,947 4,106 ------------ ------------ ------------ ------------ --------- Segment profit and loss $ 117,005 $ 6,478 $ 18,681 $ 9,651 151,815 ============ ============ ============ ============ Depreciation and amortization (54,002) General and administrative (12,997) Interest income 1,165 Loss on extinguishment of debt (167) Equity in earnings and minority interest in earnings (37,561) --------- Income before discontinued operations $ 48,253 ========= Total assets (2) $3,182,195 $ 189,142 $ 442,704 $ 135,666 $3,949,707 Capital expenditures (2) $ 134,454 $ 15,026 $ 11,002 $ 8,700 $ 169,182
Associated Community Six Months Ended June 30, 2002 Malls Centers Centers All Other Total - -------------------------------------- ------------ ------------ ------------ ------------ --------- Revenues $ 244,587 $ 9,393 $ 29,965 $ 7,936 $ 291,881 Property operating expenses (1) (84,743) (2,189) (7,757) 4,945 (89,744) Interest expense (58,974) (1,933) (5,041) (4,889) (70,837) Other expense -- -- -- (5,807) (5,807) Gain on sales of real estate assets (283) -- 2,361 126 2,204 ------------ ------------ ------------ ------------ --------- Segment profit and loss $ 100,587 $ 5,271 $ 15,877 $ 5,962 127,697 ============ ============ ============ ============ Depreciation and amortization (46,127) General and administrative (11,206) Interest income 983 Loss on extinguishment of debt (3,187) Equity in earnings and minority interest in earnings (30,563) --------- Income before discontinued operations $ 37,597 ========= Total assets (2) $2,848,354 $ 121,899 $ 446,496 $ 115,912 $3,532,661 Capital expenditures (2) $ 195,656 $ 6,112 $ 26,133 $ 26,920 $ 254,821 (1) Property operating expenses include property operating expenses, real estate taxes and maintenance and repairs. (2) Amounts include investments in unconsolidated affiliates. Developments in progress are included in the All Other category.
12 Note 6 - ACQUISITIONS On May 1, 2003, the Company acquired Sunrise Mall and its associated center, Sunrise Commons, which are located in Brownsville, TX. The results of operations of both Sunrise Mall and Sunrise Commons have been included in the consolidated financial statements since the date of acquisition. The total purchase price of $80,686 consisted of $40,686 in cash and the assumption of $40,000 of debt. The $40,000 of debt bears interest at LIBOR plus 300 basis points, with a floor of 4.90%, and matures in May 2004. This debt was assumed subject to a pre-existing interest rate cap of 5.50% The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date.
Land $ 5,765 Building and improvements 55,390 Lease assets 19,531 ---------- Total assets 80,686 Debt (40,000) ---------- Net assets acquired $ 40,686 ==========
Note 7 - DISCONTINUED OPERATIONS On February 28, 2003, the Company sold a community center for $7,760 and recognized a net gain on discontinued operations of $2,935. Total revenues for this community center were $116 and $389 for the six months ended June 30, 2003 and 2002, respectively, and $0 and $197 for the three months ended June 30, 2003 and 2002, respectively. Note 8- EARNINGS PER SHARE Basic earnings per share ("EPS") is computed by dividing net income available to common shareholders by the weighted-average number of unrestricted common shares outstanding for the period. Diluted EPS assumes the issuance of common stock for all potential dilutive common shares outstanding. The limited partners' rights to convert their minority interest in the Operating Partnership into shares of common stock are not dilutive. The following summarizes the impact of potential dilutive common shares on the denominator used to compute earnings per share:
Three Months Ended June 30, Six Months Ended June 30, ---------------------------- -------------------------- 2003 2002 2003 2002 ------------ ------------ ----------- ----------- Weighted average shares outstanding 30,036 29,183 29,944 27,826 Effect of nonvested stock awards (150) (99) (138) (98) ------------ ------------ ----------- ----------- Denominator - basic earnings per share 29,886 29,084 29,806 27,728 Effect of dilutive securities: Stock options, nonvested stock awards and deemed shares related to deferred compensation plans 1,180 859 1,136 813 ------------ ------------ ----------- ----------- Denominator - diluted earnings per share 31,066 29,943 30,942 28,541 ============ ============ =========== ===========
Note 9- COMPREHENSIVE INCOME Comprehensive income includes all changes in shareholders' equity during the period, except those resulting from investments by shareholders and distributions to shareholders. Comprehensive income consisted of the following components:
Three Months Ended June 30, Six Months Ended June 30, ------------------------------- ---------------------------- 2003 2002 2003 2002 --------------- ------------- ------------- ------------ Net income $24,714 $20,921 $51,182 $39,922 Gain on current period cash flow hedges 917 466 1,771 2,608 --------------- ------------- ------------- ------------ Comprehensive income $25,631 $21,387 $52,953 $42,530 =============== ============= ============= ============
13 Note 10 - CONTINGENCIES The Company is currently involved in certain litigation that arises in the ordinary course of business. It is management's opinion that the pending litigation will not materially affect the financial position or results of operations of the Company. Based on environmental studies completed to date, management believes any exposure related to environmental cleanup will not materially affect the Company's financial position or results of operations. The Company has guaranteed all of the construction debt related to Waterford Commons, a community center in Waterford, CT, which is owned in a joint venture with a third party that owns a minority interest. The total amount of the commitment for this construction loan is $30,000, of which $10,762 was outstanding at June 30, 2003. The Company will receive a fee from the joint venture in exchange for the guaranty, which will be recognized as revenue pro rata over the term of the guaranty to the extent of the third-party partner's ownership interest. The guaranty will expire when the construction loan matures in July 2004. The fee had not been received as of June 30, 2003. The Company has guaranteed 50% of the debt of Parkway Place L.P., an unconsolidated affiliate in which the Company owns a 45% interest, which owns Parkway Place in Huntsville, AL. The total amount outstanding at June 30, 2003, was $29,235, of which the Company has guaranteed $14,618. The guaranty will expire when the related debt matures in December 2003. The Company did not receive a fee for issuing this guaranty. Under the terms of the partnership agreement of Mall of South Carolina L.P., an unconsolidated affiliate in which the Company owns a 50% interest, the Company has guaranteed 100% of the construction debt to be incurred to develop Coastal Grand in Myrtle Beach, SC. The Company received a fee of $1,571 for this guaranty when it was issued during the three months ended June 30, 2003. The Company will recognize one-half of this fee as revenue pro rata over the term of the guaranty until it expires in May 2006, which represents the portion of the fee attributable to the third-party partner's ownership interest. The Company recognized $44 of revenue related to this guaranty during the three months ended June 30, 2003. Note 11 - STOCK-BASED COMPENSATION Historically, the Company has accounted for stock options using the intrinsic value method of APB No. 25, "Accounting for Stock Issued to Employees". Effective January 1, 2003, the Company will record the expense associated with stock options granted after January 1, 2003, on a prospective basis in accordance with the fair value and transition provisions of SFAS No. 123, "Accounting for Stock Based Compensation". There were no stock options granted during the six months ended June 30, 2003. No stock-based compensation expense related to stock options granted prior to January 1, 2003, has been reflected in net income since all options granted had an exercise price equal to the fair value of the Company's common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to employee stock options: 14
Three Months Ended June 30, Six Months Ended June 30, ----------------------------- --------------------------- 2003 2002 2003 2002 ------------- ------------ ------------ ------------ Net income available to common shareholders, as reported $21,022 $18,911 $43,798 $36,295 Compensation expense determined under fair value method (148) (111) (302) (226) ------------- ------------ ------------ ------------ Pro forma net income available to common shareholders $20,874 $18,800 $43,496 $36,069 ============= ============ ============ ============ Earnings per share: Basic, as reported $0.70 $0.65 $1.47 $1.31 ============= ============ ============ ============ Basic, pro forma $0.70 $0.65 $1.46 $1.30 ============= ============ ============ ============ Diluted, as reported $0.68 $0.63 $1.42 $1.27 ============= ============ ============ ============ Diluted, pro forma $0.67 $0.63 $1.41 $1.26 ============= ============ ============ ============
Note 12 - Recent Accounting Pronouncements In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that the costs associated with exit or disposal activity be recognized and measured at fair value when the liability is incurred. The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002. Since the Company typically does not engage in significant disposal activities, the implementation of SFAS No. 146 in 2003 did not have a significant impact on the Company's reported financial results. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of SFAS No. 5, 57, and 107, and rescission of FASB Interpretation No. 34." The interpretation elaborates on the disclosures to be made by a guarantor in its financial statements. It also requires a guarantor to recognize a liability for the fair value of the obligation undertaken in issuing the guarantee at the inception of a guarantee, which is effective for guarantees issued or modified after December 31, 2002. The Company adopted the disclosure provisions of FASB Interpretation No. 45 in the fourth quarter of 2002. In accordance with the interpretation, the Company adopted the remaining provisions of FASB Interpretation No. 45 effective January 1, 2003. See Note 10 for disclosures related to the Company's guarantees. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51". FASB Interpretation No. 46 requires the consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently, entities are generally consolidated by an enterprise when it has a controlling financial interest through ownership of a majority voting interest in the entity. The consolidation provisions of FASB Interpretation No. 46 will be effective for the Company beginning with the quarter ending September 30, 2003, for entities formed prior to January 1, 2003. The Company is currently evaluating the effects of the issuance of FASB Interpretation No. 46. Note 13 - NONCASH INVESTING AND FINANCING ACTIVITIES The Company's noncash investing and financing activities were as follows for the six months ended June 30, 2003 and 2002:
Six Months Ended June 30, ------------------------- 2003 2002 ------------------------- Debt assumed to acquire property interest $ 40,000 $ 40,709 ========================= Issuance of minority interest to acquire property interest $ -- $ 4,487 =========================
15 Note 14 - SUBSEQUENT EVENTS On July 25, 2003, the Company announced that it had entered into separate agreements to acquire four regional malls for a total purchase price of $340,000. The purchase price will consist of cash and the assumption of $170,000 of non-recourse fixed rate debt with a weighted average interest rate of 7.71%. The Company expects the acquisition to close in at least two separate transactions beginning in the third quarter of 2003. On August 6, 2003, the Company agreed to issue 4,200,000 depositary shares in a public offering, each representing one-tenth of a share of 7.75% Series C cumulative redeemable preferred stock with a par value of $0.01 per share. The underwriters of the offering have been granted an option, exercisable for 30 days, to purchase up to an additional 630,000 depositary shares. The Series C preferred stock has a liquidation preference of $250.00 per share ($25.00 per depositary share). Dividends on the Series C preferred stock are cumulative, accrue from the date of issuance and are payable quarterly in arrears at a rate of $19.375 per share ($1.9375 per depositary share) per annum. The Series C preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not redeemable before August 22, 2008. The net proceeds will be used to partially fund the purchase price of the four malls discussed in the preceding paragraph and for general corporate purposes, including funding future developments, expansions and acquisitions. The offering is scheduled to close on August 22, 2003. On August 6, 2003, the Company sold a community center in for $1.1 million and recognized a gain of $0.4 million. The results of operations of this community center will be reflected as discontinued operations beginning in the third quarter of 2003. Note 15 - RECLASSIFICATIONS Certain reclassifications have been made to prior periods' financial information to conform to the current period presentation. Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes that are included in this Form 10-Q. Certain statements made in this section or elsewhere in this report may be deemed "forward looking statements" within the meaning of the federal securities laws. Although the Company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the Company can give no assurance that these expectations will be attained, and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. Such risks and uncertainties include, without limitation, general industry, economic and business conditions, interest rate fluctuations, costs of capital and capital requirements, availability of real estate properties, inability to consummate acquisition opportunities, competition from other companies and retail formats, changes in retail rental rates in the Company's markets, shifts in customer demands, tenant bankruptcies or store closings, changes in vacancy rates at the Company's properties, changes in operating expenses, changes in applicable laws, rules and regulations, the ability to obtain suitable equity and/or debt financing and the continued availability of financing in the amounts and on the terms necessary to support the Company's future business. The Company disclaims any obligation to update or revise any forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking information. 16 GENERAL BACKGROUND See Note 1 to the unaudited consolidated financial statements for a description of the Company. The Company classifies its regional malls into two categories - malls that have completed their initial lease-up ("Stabilized Malls") and malls that are in their initial lease-up phase ("Non-Stabilized Malls"). The Non-Stabilized Mall category is presently comprised of The Lakes Mall in Muskegon, MI, which opened in August 2001, and Parkway Place Mall in Huntsville, AL, which opened in October 2002. RESULTS OF OPERATIONS COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 TO THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 The following significant transactions impact the comparison of the results of operations for the three months ended June 30, 2003 to the comparable period ended June 30, 2002: |X| The Company has opened or acquired nine properties since May 1, 2002. Therefore, the three months ended June 30, 2003, include a greater amount of operations for these properties than the comparable period a year ago. The properties opened or acquired are as follows:
Open/Acquisition Project Name Location Type of Addition Date ---------------------------- ------------------- -------------------- ----------------- Richland Mall Waco, TX Acquisition May 2002 Panama City Mall Panama City, FL Acquisition May 2002 Parkdale Crossing Beaumont, TX New development November 2002 Westmoreland Mall Greensburg, PA Acquisition December 2002 Westmoreland Crossing Greensburg, PA Acquisition December 2002 Sunrise Mall Brownsville, TX Acquisition May 2003 Sunrise Commons Brownsville, TX Acquisition May 2003 The Shoppes at Hamilton Place Chattanooga, TN New development May 2003 Cobblestone Village St. Augustine, FL New development May 2003
|X| In December 2002, the Company acquired the remaining ownership interest in East Towne Mall, West Towne Mall and West Towne Crossing in Madison, WI. These properties were consolidated during the second quarter of 2003, but were accounted for as unconsolidated affiliates during the second quarter of 2002. 17
(Dollars in Thousands) 2003 2002 $ Variance % Variance -------- -------- ---------- ---------- Total revenues $165,019 $147,718 $17,301 11.7% -------- -------- ---------- ---------- Expenses: Property operating, real estate taxes and maintenance and repairs 50,486 47,335 3,151 6.7% Depreciation and amortization 27,690 23,646 4,044 17.1% General and administrative 6,644 5,466 1,178 21.6% Other 2,315 2,060 255 12.4% -------- -------- ---------- ---------- Total expenses 87,135 78,507 8,628 11.0% -------- -------- ---------- ---------- Income from operations 77,884 69,211 8,673 12.5% Interest income 592 230 362 157.4% Interest expense (38,363) (34,050) (4,313) 12.7% Loss on extinguishment of debt (167) (1,240) 1,073 (86.5)% Gain on sales of real estate assets 3,002 1,789 1,213 67.8% Equity in earnings of unconsolidated affiliates 731 2,015 (1,284) (63.7)% Minority interest in earnings: Operating partnership (17,979) (16,335) (1,644) 10.1% Shopping center properties (893) (1,216) 323 (26.6)% -------- -------- ---------- ---------- Income before discontinued operations 24,807 20,404 4,403 21.6% Income from discontinued operations (93) 517 (610) 118.0% -------- -------- ---------- ---------- Net income 24,714 20,921 3,793 18.1% Preferred dividends (3,692) (2,010) (1,682) 83.7% -------- -------- ---------- ---------- Net income available to common shareholders $21,022 $18,911 $2,111 11.2% ======== ======== ========== ==========
Revenues The $17.3 million increase in revenues resulted primarily from: |X| an increase in minimum rents and tenant reimbursements of $15.2 million attributable to the nine properties opened or acquired since May 1, 2002 and the three properties that are now consolidated, |X| an increase in minimum rents and tenant reimbursements of $2.9 million from the Company's remaining properties, including a reduction in lease termination fees of $2.6 million to $1.2 million in the second quarter of 2003 compared to $3.8 million in the second quarter of 2002. The Company's cost recovery percentage increased to 101% for the second quarter of 2003 compared to 92.5% for the second quarter of 2002 due to increases in occupancy and the recovery of capital expenditures from tenants, |X| an increase in other revenues of $0.8 million due to an increase in the revenues of the Company's taxable REIT subsidiary, |X| a reduction in percentage rents of $0.6 million, which resulted from a decline at the Company's existing properties of $0.8 offset by an increase of $0.2 million from the addition of the twelve properties discussed above, and |X| a reduction of $1.1 million in management, development and leasing fees, which resulted from a decrease in management and leasing fees related to the three properties that are now consolidated. Expenses The $3.2 million increase in property operating expenses, including real estate taxes and maintenance and repairs, resulted from: |X| an increase of $0.5 million attributable to the nine properties opened or acquired since May 1, 2002 and the three properties that are now consolidated and |X| an increase of $2.7 million in general operating costs at the Company's remaining properties. 18 The increase of $4.0 million in depreciation and amortization expense was primarily due to: |X| an increase of $2.8 million attributable to the nine properties opened or acquired since May 1, 2002 and the three properties that are now consolidated and |X| an increase of $1.2 million as a result of the ongoing capital expenditures made by the Company for renovations, expansions, tenant allowances and deferred maintenance. General and administrative expenses increased $1.2 million primarily as a result of additional salaries and benefits of personnel added to manage newly opened or acquired properties, as well as annual increases in salaries and benefits of existing personnel. Other expense increased due to an increase in operating expenses of the Company's taxable REIT subsidiary. Interest Income The increase of $0.4 million in interest income results from the increase in the amount of mortgage and other notes receivable outstanding compared to the prior year period. The increase in mortgage and other notes receivable primarily relates to mortgage notes receivable from buyers of real estate assets the Company has sold. Interest Expense Interest expense increased by $4.3 million primarily due to the additional debt related to the nine properties opened or acquired since May 1, 2002 and the three properties that are now consolidated. Loss on Extinguishment of Debt The loss on extinguishment of debt of $167,000 recognized during the second quarter of 2003 resulted from the write-off of unamortized deferred financing costs related to a loan that was retired before its scheduled maturity. The loss on extinguishment of debt in the second quarter of 2002 consisted of the write-off of $1.2 million of unamortized deferred financing costs. Gain on Sales of Real Estate Assets The gain on sales of $3.0 million in the second quarter of 2003 was primarily from gains on sales of ten outparcels and an option on land. The gain on sales of $1.8 million in the second quarter of 2002 resulted from gains on sales of two outparcels offset by a loss on one outparcel. Equity in Earnings of Unconsolidated Affiliates The three properties that are now consolidated accounted for $1.2 million of the decline in equity in earnings of unconsolidated affiliates. Discontinued Operations Discontinued operations in the second quarter of 2003 represent the true-up of estimated costs related to the sale of Capital Crossing to the actual amounts that became known in the second quarter. Discontinued operations in the second quarter of 2002 represent the operations for Capital Crossing plus five community centers and one office building that were sold during 2002. In accordance with SFAS No. 144, the results of operations of operating properties that have been sold are reclassified and presented as discontinued operations for all periods presented. One of the community centers and the office building were sold for gains and one community center was sold at a loss during the second quarter of 2002. 19 COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 TO THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 The following significant transactions impact the comparison of the results of operations for the six months ended June 30, 2003 to the comparable period ended June 30, 2002: |X| The Company has opened or acquired nine properties since May 1, 2002. Therefore, the six months ended June 30, 2003, include a greater amount of operations for these properties than the comparable period a year ago. The properties opened or acquired are as follows:
Open/Acquisition Project Name Location Type of Addition Date ------------------------------ -------------------- -------------------- ----------------- Richland Mall Waco, TX Acquisition May 2002 Panama City Mall Panama City, FL Acquisition May 2002 Parkdale Crossing Beaumont, TX New development November 2002 Westmoreland Mall Greensburg, PA Acquisition December 2002 Westmoreland Crossing Greensburg, PA Acquisition December 2002 Sunrise Mall Brownsville, TX Acquisition May 2003 Sunrise Commons Brownsville, TX Acquisition May 2003 The Shoppes at Hamilton Place Chattanooga, TN New development May 2003 Cobblestone Village St. Augustine, FL New development May 2003
|X| In December 2002, the Company acquired the remaining ownership interest in East Towne Mall, West Towne Mall and West Towne Crossing in Madison, WI. These properties were consolidated during the six months ended June 30, 2003, but were accounted for as unconsolidated affiliates during the six months ended June 30, 2002. (Dollars in Thousands)
2003 2002 $ Variance % Variance -------- -------- ---------- ---------- Total revenues $330,992 $291,881 $39,111 13.4% -------- -------- ---------- ---------- Expenses: Property operating, real estate taxes and maintenance and repairs 103,308 89,744 13,564 15.1% Depreciation and amortization 54,002 46,127 7,875 17.1% General and administrative 12,997 11,206 1,791 16.0% Other 4,656 5,807 (1,157) (19.8)% -------- -------- ---------- ---------- Total expenses 174,963 152,884 22,079 14.4% -------- -------- ---------- ---------- Income from operations 156,029 138,997 17,032 12..3% Interest income 1,165 983 182 18.5% Interest expense (75,319) (70,837) (4,482) 6.3% Loss on extinguishment of debt (167) (3,187) (3,020) (94.8)% Gain on sales of real estate assets 4,106 2,204 1,902 86.3% Equity in earnings of unconsolidated affiliates 2,488 4,102 (1,614) (39.3)% Minority interest in earnings: Operating partnership (38,616) (32,532) (6,084) 18.7% Shopping center properties (1,433) (2,133) 700 (32.8)% -------- -------- ---------- ---------- Income before discontinued operations 48,253 37,597 10,656 28.3% Income from discontinued operations 2,929 2,325 604 26.0% -------- -------- ---------- ---------- Net income 51,182 39,922 11,260 28.2% Preferred dividends (7,384) (3,627) (3,757) 103.6% -------- -------- ---------- ---------- Net income available to common shareholders $43,798 $36,295 $7,503 20.7% ======== ======== ========== ==========
20 Revenues The $39.1 million increase in revenues resulted primarily from: |X| an increase in minimum rents and tenant reimbursements of $28.8 million attributable to the nine properties opened or acquired since the May 1, 2002 and the three properties that are now consolidated, |X| an increase in minimum rents and tenant reimbursements of $13.1 million from the Company's remaining properties, including a reduction in lease termination fees of $3.0 million to $1.6 million in the first six months of 2003 compared to $4.6 million for the same period in 2002. The Company's cost recovery percentage increased to 98.9% for the first six months of 2003 compared to 91.8% for the comparable periods of 2002 due to increases in occupancy and the recovery of capital expenditures from tenants, |X| a reduction in percentage rents of $1.0 million, which resulted from a decline at the Company's existing properties of $1.5 million, offset by an increase of $0.5 million from the addition of the properties discussed above, |X| a reduction of $1.0 million in management, development and leasing fees, which resulted from a decrease in management and leasing fees related to the three properties that are now consolidated, and |X| a reduction in other revenues of $0.8 million due to a reduction in the revenues of the Company's taxable REIT subsidiary. Expenses The $13.6 million increase in property operating expenses, including real estate taxes and maintenance and repairs, resulted from: |X| an increase of $10.6 million attributable to the nine properties opened or acquired since May 1, 2002 and the three properties that are now consolidated and |X| an increase of $3.0 million in general operating costs at the Company's remaining properties. The increase of $7.9 million in depreciation and amortization expense was primarily due to: |X| an increase of $5.1 million attributable to the nine properties opened or acquired since the first quarter of 2002 and the three properties that are now consolidated and |X| an increase of $2.8 million as a result of the ongoing capital expenditures made by the Company for renovations, expansions, tenant allowances and deferred maintenance. General and administrative expenses increased $1.8 million primarily as a result of additional salaries and benefits of personnel added to manage newly opened or acquired properties, as well as annual increases in salaries and benefits of existing personnel. Other expense decreased due to a reduction in operating expenses of the Company's taxable REIT subsidiary. Interest Income The increase of $0.2 million in interest income results from the increase in the amount of mortgage and other notes receivable outstanding compared to the prior year period. The increase in mortgage and other notes receivable primarily relates to mortgage notes receivable from buyers of real estate assets the Company has sold. Interest Expense Interest expense increased $4.5 million primarily because of the additional debt related to the properties opened or acquired since May 1, 2002 and the properties that are now consolidated. 21 Loss on Extinguishment of Debt The loss on extinguishment of debt of $167,000 recognized during the first six months of 2003 resulted from the write-off of unamortized deferred financing costs related to a loan that was retired before its scheduled maturity. The loss on extinguishment of debt in the first six months of 2002 consisted of prepayment penalties of $1.9 million and the write-off of $1.3 million of unamortized deferred financing costs. Gain on Sales of Real Estate Assets The gain on sales of $4.1 million in 2003 resulted from gains on sales of 12 outparcels and two options on land. The gain on sales of $2.2 million in 2002 resulted from gains on five outparcels offset by losses on two outparcels and one department store building. Equity in Earnings of Unconsolidated Affiliates The decrease in equity in earnings of unconsolidated affiliates of $1.6 million was due to a reduction of $2.0 million related to the three properties that are now consolidated, offset by improvements in the operations of the remaining unconsolidated affiliates. The improvement from the remaining unconsolidated affiliates was primarily attributable to Kentucky Oaks Mall, where occupancy increased 4.90% compared to the prior year. The increase in the equity in earnings of Kentucky Oaks Mall was $0.7 million. Discontinued Operations Discontinued operations in 2003 relate to Capital Crossing, a community center in Raleigh, NC, that was sold during the first quarter of 2003 for a gain of $2.9 million. Discontinued operations in 2002 represent the operations of Capital Crossing plus five community centers and one office building that were sold during 2002. Two of the community centers and the office building were sold for gains and one community center was sold at a loss in the first six months of 2002. PERFORMANCE MEASUREMENTS The shopping center business is, to some extent, seasonal in nature with tenants achieving the highest levels of sales during the fourth quarter because of the holiday season. The malls earn most of their "temporary" rents (rents from short-term tenants), during the holiday period. Thus, occupancy levels and revenue production are generally the highest in the fourth quarter of each year. Results of operations realized in any one quarter may not be indicative of the results likely to be experienced over the course of the fiscal year. The Company's consolidated revenues were derived from the Company's property types as follows for the six months ended June 30, 2003: Malls 84.4% Associated centers 3.4% Community centers 9.1% Mortgages, office building and other 3.1% 22 Sales and Occupancy Costs For those tenants who occupy 10,000 square feet or less and have reported sales, mall shop sales in the 53 Stabilized Malls decreased by 1.5% on a comparable per square foot basis to $125.71 per square foot for the six months ended June 30, 2003 from $127.61 per square foot for the six months ended June 30, 2002. Total sales volume in the mall portfolio, including Non-Stabilized Malls, decreased 0.5% to $1.325 billion for the six months ended June 30, 2003 from $1.332 billion for the six months ended June 30, 2002. Sales were negatively impacted by severe winter weather and the effects of the war in Iraq. Occupancy costs as a percentage of sales for the Stabilized Malls for the six months ended June 30, 2003 and 2002, were 14.5% and 14.1%, respectively. Occupancy costs as a percentage of sales are generally higher in the first three quarters of the year as compared to the fourth quarter due to the seasonality of retail sales. Occupancy Occupancy for the Company's portfolio was as follows:
At June 30, --------------------------------- 2003 2002 ----------------- --------------- Total portfolio occupancy 92.4% 91.1% Total mall portfolio 91.7% 89.4% Stabilized Malls (53) 92.2% 89.7% Non-Stabilized Malls (2) 77.8% 84.5% Associated centers 91.7% 95.9% Community centers 94.0% 94.3%
Occupancy for the associated centers declined due to the acquisition of Westmoreland Crossing in Greensburg, PA, in December 2002, which has a 68,000 square foot former Ames store that is vacant. Excluding Westmoreland Crossing, occupancy for the associated centers would have been 95.3% at June 30, 2003. Occupancy for the Non-Stabilized Malls declined because Arbor Place in Douglasville, GA, was moved from the Non-Stabilized Mall category to the Stabilized Mall category. Average Base Rents Average base rents per square foot for the portfolio were as follows:
At June 30, ---------------------- Percentage Increase 2003 2002 (Decrease) -------- ------- ---------- Stabilized Malls $23.98 $23.22 3.3% Non-Stabilized Malls 26.52 21.87 21.3% Associated centers 9.88 9.78 1.0% Community centers 9.39 9.65 (2.7)%
23 Leasing Results The Company achieved the following results from renewal and new leasing for the six months ended June 30, 2003, compared to the base rent at the end of the lease term for spaces previously occupied:
Base Rent Base Rent Per Square Per Square Percentage Foot Foot Renewal/ Increase Prior Lease New Lease (1) (Decrease) -------------- -------------- ----------- Stabilized malls $21.53 $21.99 2.1% Associated centers 15.33 14.43 (5.9)% Community centers 10.31 10.46 1.5% (1) Average base rent over the term of the lease.
CASH FLOWS Cash provided by operating activities increased $2.3 million primarily due to the additional operations of the nine properties opened or acquired since the first quarter of 2002 and the three properties that are now consolidated. Additionally, the Company's cost recovery ratio increased to 98.9% in 2003 from 91.8% in 2002 as a result of increased portfolio occupancy and the recovery of capital expenditures from tenants. Cash used in investing activities increased $42.6 million primarily due to increases in other capital expenditures related to ongoing renovations of properties and a significant decrease in the amount of proceeds received on sales of real estate assets due to fewer transactions in the current year period as compared to the prior year period. Cash provided by financing activities was $20.5 million in 2003 as compared to cash used in financing activities of $21.0 million in 2002. The change was due to a significant decrease in the amount of loan borrowings and repayments, a significant decrease in proceeds from issuances of common and preferred stocks, an increase in distributions to minority investors and an increase in the amount of dividends paid. LIQUIDITY AND CAPITAL RESOURCES The principal uses of the Company's liquidity and capital resources have historically been for property development, expansions, renovations, acquisitions, debt repayment and distributions to shareholders. In order to maintain its qualification as a real estate investment trust for federal income tax purposes, the Company is required to distribute at least 90% of its taxable income, computed without regard to net capital gains or the dividends-paid deduction, to its shareholders. The Company's current capital structure includes: |X| property specific mortgages, which are generally non-recourse, |X| construction loans, term loans, and revolving lines of credit, which have recourse to the Company |X| common stock and preferred stock, |X| joint venture investments and |X| a minority interest in the Operating Partnership. The Company anticipates that the combination of its equity and debt sources will, for the foreseeable future, provide adequate liquidity to continue its capital programs substantially as in the past and make distributions to its shareholders in accordance with the requirements applicable to real estate investment trusts. 24 The Company's policy is to maintain a conservative debt-to-total-market capitalization ratio in order to enhance its access to the broadest range of capital markets, both public and private. Based on the Company's share of total consolidated and unconsolidated debt and the market value of equity described below, the Company's debt-to-total-market capitalization (debt plus market value equity) ratio was 50.3% at June 30, 2003. Equity As a publicly traded company, the Company has access to capital through both the public equity and debt markets. The Company has an effective shelf registration statement with the Securities and Exchange Commission, that authorizes the Company to publicly issue shares of preferred stock and common stock, preferred and common stock represented by depositary shares and warrants to purchase shares of common stock up to $562.0 million, which includes $62.3 million that is available under a previously filed shelf registration statement. On August 6, 2003, the Company agreed to issue 4,200,000 depositary shares in a public offering, each representing one-tenth of a share of 7.75% Series C cumulative redeemable preferred stock with a par value of $0.01 per share. The underwriters of the offering have been granted an option, exercisable for 30 days, to purchase up to an additional 630,000 depositary shares. The Series C preferred stock has a liquidation preference of $250.00 per share ($25.00 per depositary share). Dividends on the Series C preferred stock are cumulative, accrue from the date of issuance and are payable quarterly in arrears at a rate of $19.375 per share ($1.9375 per depositary share) per annum. The Series C preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not redeemable before August 22, 2008. The net proceeds will be used to partially fund the purchase of the four malls to be acquired as discussed in the Acquisitions section that follows and for general corporate purposes, including funding future developments, expansions and acquisitions. The offering is scheduled to close on August 22, 2003. As of June 30, 2003, the minority interest in the Operating Partnership includes the 15.7% ownership interest in the Operating Partnership held by the Company's executive and senior officers that may be exchanged for approximately 8.8 million shares of common stock. Additionally, executive and senior officers and directors own approximately 2.3 million shares of the Company's outstanding common stock, for a combined total interest in the Operating Partnership of approximately 19.7%. Limited partnership interests issued to acquire the Richard E. Jacobs Group's interest in a portfolio of properties in January 2001 and March 2002, may be exchanged for approximately 12.0 million shares of common stock, which represents a 21.4% interest in the Operating Partnership. Other third-party interests may be exchanged for approximately 5.0 million shares of common stock, which represents an 8.9% interest in the Operating Partnership. Assuming the exchange of all limited partnership interests in the Operating Partnership for common stock, there would be approximately 55.8 million shares of common stock outstanding with a market value of approximately $2.40 billion at June 30, 2003 (based on the closing price of $43.00 per share on June 30, 2003). The Company's total market equity is $2.57 billion, which includes 2.675 million shares of Series A preferred stock ($66.9 million based on a liquidation preference of $25.00 per share) and 2.0 million shares of Series B preferred stock ($100.0 million based on a liquidation preference of $50.00 per share). The Company's executive and senior officers' and directors' ownership interests had a market value of approximately $478.8 million at June 30, 2003. 25 Debt The Company presents its total share of consolidated and unconsolidated debt because the Company believes that this amount provides investors with a clearer understanding of the Company's total debt obligations. The Company's share of mortgage debt on consolidated properties, adjusted for minority investors' interests in consolidated properties, and its pro rata share of mortgage debt on unconsolidated properties, consisted of the following at June 30, 2003 (in thousands):
Minority Company's Share Investors' Company's Weighted of Share of Total Average Consolidated Unconsolidated Consolidated Share Interest Debt Debt Debt of Debt Rate(1) Total -------------- ---------------- ------------ ------------- ---------- Fixed-rate debt: Non-recourse loans on operating properties $1,973,945 $ 37,924 $(19,857) $1,992,012 7.05% -------------- ---------------- ------------ ------------- Variable-rate debt: Recourse term loans on operating properties 305,721 29,235 -- 334,956 3.66% Lines of credit 245,000 -- -- 245,000 2.15% Construction loans 16,248 14,962 -- 31,210 2.82% -------------- ---------------- ------------ ------------- Total variable-rate debt 566,969 44,197 -- 611,166 3.01% ============== ================ ============ ============= Total $2,540,914 $ 82,121 $(19,857) $2,603,178 6.10% ============== ================ ============ ============= (1) Weighted-average interest rate before amortization of deferred financing costs.
On February 26, 2003, the Company obtained an $85.0 million, non-recourse loan that is secured by Westmoreland Mall and Westmoreland Crossing in Greensburg, PA. The loan bears interest at a fixed rate of 5.05% and has a term of ten years with a 25-year amortization schedule. On February 28, 2003, the Company entered into a new secured credit facility for $255.0 million. This new credit facility replaced both the Company's $130.0 million secured credit facility and its unsecured facility of $105.3 million. The new credit facility bears interest at LIBOR plus 100 basis points, expires in February 2006, and has a one-year extension, which is at the Company's election. Six regional malls and three associated centers secure the new credit facility. The Company's credit facilities total $365.0 million, of which $82.6 million was available at June 30, 2003. Additionally, the Company had other credit facilities totaling $19.6 million that are used only for issuances of letters of credit, of which $5.9 million was available at June 30, 2003. As of June 30, 2003, total commitments under construction loans were $161.8 million, of which $106.5 million was available to be used for completion of construction and redevelopment projects and replenishment of working capital previously used for construction. The Company also had $13.6 million available in unfunded construction loans on operating properties that can be used to replenish working capital previously used for construction. The Company has fixed the interest rate on $80.0 million of an operating property's debt at a rate of 6.95% using an interest rate swap agreement that expires in August 2003. The Company did not incur any fees for the swap agreement. The Company also has an interest rate cap of 5.50% that was in place on the $40.0 million of variable rate debt the Company assumed in connection with its acquisition of Sunrise Mall (see Acquisitions). The interest rate cap agreement expires in May 2004. The Company expects to refinance the majority of its mortgage notes payable maturing over the next five years with replacement loans. Taking into consideration extension options that are available to the Company, there are no debt maturities through December 31, 2003, other than normal principal amortization. 26 DEVELOPMENTS, EXPANSIONS, ACQUISITIONS AND DISPOSITIONS The Company expects to continue to have access to the capital resources necessary to expand and develop its business. Future development and acquisition activities will be undertaken as suitable opportunities arise. The Company does not expect to pursue these opportunities unless adequate sources of financing are available and a satisfactory budget with targeted returns on investment has been approved internally. The Company intends to fund major development, expansion and acquisition activities with traditional sources of construction and permanent debt financing as well as other debt and equity financings, including public financings and the lines of credit, in a manner consistent with its intention to operate with a conservative debt-to-total-market capitalization ratio. Developments and Expansions The following development projects are currently under construction:
Projected Property Location GLA Opening Date - ------------------------------------- ------------------------------------ -------------- --------------------------- MALL - ---- Coastal Grand Myrtle Beach, SC 902,000 March 2004 (50/50 Joint Venture)* ASSOCIATED CENTER - ----------------- The Shoppes of Panama City Panama City, FL 110,000 February 2004 COMMUNITY CENTERS - ----------------- Waterford Commons Waterford, CT 348,000 September 2003 (75/25 Joint Venture)** Wilkes-Barre Township Marketplace Wilkes-Barre Township, PA 281,000 May 2004 * Joint venture development. ** The Company will own at least 75% of the joint venture.
The following renovation projects are currently under construction:
Property Location Projected Completion Date ----------------------- ------------------------ ------------------------- Parkdale Mall Beaumont, TX August 2003 Jefferson Mall Louisville, KY October 2003 Eastgate Mall Cincinnati, OH November 2003 East Towne Mall Madison, WI November 2003 West Towne Mall Madison, WI November 2003 St. Clair Square Fairview Heights, IL November 2003
The Company has entered into a number of option agreements for the development of future regional malls and community centers. Except for the projects discussed under Developments and Expansions above and Acquisitions below, the Company does not have any other material capital commitments. Acquisitions On May 1, 2003, the Company acquired Sunrise Mall, a 740,000 square foot regional mall, and Sunrise Commons, a 225,000 square foot associated center, in Brownsville, TX, for a total purchase price of $80.7 million. The total purchase price consisted of $40.7 million in cash and the assumption of a non-recourse loan of $40.0 million that bears interest at 300 basis points over LIBOR, with a minimum rate of 4.90%. This debt was assumed subject to a pre-existing interest rate cap of 5.50%. 27 On July 25, 2003, the Company announced that it had entered into separate agreements to acquire four regional malls for a total purchase price of $340.0 million. The purchase price will consist of cash and the assumption of $170.0 million of non-recourse fixed rate debt with a weighted average interest rate of 7.71%. The Company anticipates that three of the transactions will close during the third quarter of 2003 and that the fourth will close during the fourth quarter of 2003. Dispositions On February 28, 2003, the Company sold Capital Crossing, a community center in Raleigh, NC, for $7.8 million and recognized a net gain on discontinued operations of $2.9 million. In addition, the Company sold twelve outparcels, plus two options on land, and recognized a total net gain of $4.1 million during the six months ended June 30, 2003. On August 6, 2003, the Company a community center for $1.1 million and recognized a gain of $0.4 million. The results of operations of this community center will be reflected as discontinued operations beginning in the third quarter of 2003. OTHER CAPITAL EXPENDITURES The Company prepares an annual capital expenditure budget for each property that is intended to provide for all necessary recurring and non-recurring capital improvements. The Company believes that its operating cash flows will provide the necessary funding for such capital improvements. These cash flows will be sufficient to cover tenant finish costs associated with tenant leases and capital expenditures necessary for the enhancement and maintenance of the properties. Including its share of unconsolidated affiliates' capital expenditures and excluding minority investor's share of capital expenditures, the Company spent $19.3 million during the first six months of 2003 for tenant allowances, which generate increased rents from tenants over the terms of their leases. Deferred maintenance expenditures, a majority of which are recovered from tenants, were $13.7 million for the first six months of 2003. Renovation expenditures, which include some deferred maintenance items, were $40.8 million for the six months ended June 30, 2003, a portion of which is recovered from tenants. Deferred maintenance expenditures and renovation expenditures included $4.3 million for the resurfacing and the improved lighting of parking lots and $4.2 million for roof repairs and replacements. Deferred maintenance expenditures are billed to tenants as common area maintenance expense, and most are recovered over a 5- to 15-year period. Renovation expenditures are primarily for remodeling and upgrades of malls, of which approximately 30% is recovered from tenants over a 5- to 15-year period. OTHER The Company believes the properties are in compliance, in all material respects, with federal, state and local ordinances and regulations regarding the handling, discharge and emission of hazardous or toxic substances. The Company has not been notified by any governmental authority, and is not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances in connection with any of its present or former properties. Therefore, the Company has not recorded any material liability in connection with environmental matters. 28 CRITICAL ACCOUNTING POLICIES A critical accounting policy is one that is both important to the presentation of a company's financial condition and results of operations and requires significant judgment or complex estimation processes. The Company believes that its most significant accounting policies are those related to revenue recognition, accounting for the development of real estate assets and evaluating long-lived assets for impairment. Minimum rental revenue from operating leases is recognized on a straight-line basis over the initial terms of the related leases. Certain tenants are required to pay percentage rent if their sales volumes exceed thresholds specified in their lease agreements. Percentage rent is recognized as revenue when the thresholds are achieved and the amounts become determinable. The Company receives reimbursements from tenants for real estate taxes, insurance, common area maintenance, and other recoverable operating expenses as provided in the lease agreements. Tenant reimbursements are recognized as revenue in the period the related operating expenses are incurred. Tenant reimbursements related to certain capital expenditures are billed to tenants over periods of 5 to 15 years and are recognized as revenue when billed. The Company receives management, leasing and development fees from third parties and unconsolidated affiliates. Management fees are charged as a percentage of minimum and percentage rents and are recognized as revenue when earned. Development fees are recognized as revenue on a pro rata basis over the development period. Leasing fees are charged for newly executed leases and recognized as revenue when earned. Gain on sales of real estate assets is recognized when title to the asset is transferred to the buyer, if the buyer's initial and continuing investment is adequate and the buyer assumes all future ownership risks of the asset. The Company capitalizes predevelopment project costs paid to third parties. All previously capitalized predevelopment costs are expensed when it is no longer probable that the project will be completed. Once development of a project commences, all direct costs incurred to construct the project, including interest and real estate taxes are capitalized. Additionally, certain general and administrative expenses are allocated to the projects and capitalized based on the amount of time applicable personnel work on the development project, and the investment in the project relative to all development projects. Once a project is completed and placed in service, it is depreciated over its estimated useful life. Buildings and improvements are depreciated generally over 40 years and leasehold improvements are amortized over the lives of the applicable leases or the estimated useful life of the assets, whichever is shorter. Ordinary repairs and maintenance are expensed as incurred. Major replacements and improvements are capitalized and depreciated over their estimated useful lives. In accordance with Statement of Financial Accounting Standards Nos. 141 and 142, when operating real estate assets are acquired, the Company estimates the fair value of acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities generally consisting of the fair value of (i) above and below market leases, (ii) in-place leases and (iii) tenant relationships. The Company allocates the purchase price to the assets acquired and liabilities assumed based on their relative fair values. The Company determines the estimates of fair value based on estimated cash flow projections utilizing appropriate discount and capitalization rates and available market information. The capitalized above market (deferred charge) or below market (deferred credit) intangible is amortized to rental income over the remaining non-cancelable term of the respective leases. The intangible related to in-place leases is amortized over the remaining term of the respective leases. 29 The Company periodically evaluates its real estate assets to determine if there has been any impairment in their carrying values and records impairment losses if the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts or if there are other indicators of impairment. At June 30, 2003, the Company did not own any real estate assets that were impaired. ACCOUNTING FOR STOCK OPTIONS Historically, the Company has accounted for stock options using the intrinsic value method of APB No. 25, "Accounting for Stock Issued to Employees". Effective January 1, 2003, the Company began recording the expense associated with stock options granted after January 1, 2003, on a prospective basis in accordance with the fair value and transition provisions of Statement of Financial Accountings Standards No. 123, "Accounting for Stock-Based Compensation." There were no stock options granted during the six months ended June 30, 2003. RECENT ACCOUNTING PRONOUNCEMENTS As described in Note 12 to the unaudited consolidated financial statements, the FASB has issued certain statements that were effective January 1, 2003. IMPACT OF INFLATION In the last three years, inflation has not had a significant impact on the Company because of the relatively low inflation rate. Substantially all tenant leases do, however, contain provisions designed to protect the Company from the impact of inflation. These provisions include clauses enabling the Company to receive percentage rent based on tenant's gross sales, which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of the leases. In addition, many of the leases are for terms of less than ten years, which may enable the Company to replace existing leases with new leases at higher base and/or percentage rents if rents of the existing leases are below the then existing market rate. Most of the leases require tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. FUNDS FROM OPERATIONS Funds from operations ("FFO") is a widely used measure of the operating performance of real estate investment trusts that supplements net income determined in accordance with generally accepted accounting principles ("GAAP"). The Company computes FFO in accordance with the National Association of Real Estate Investment Trusts' definition of FFO, which is net income (computed in accordance with GAAP) excluding gains or losses on sales of operating properties, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Beginning with the first quarter of 2003, the Company includes gains on sales of outparcels in FFO to comply with the Securities and Exchange Commission's rules related to disclosure of non-GAAP financial measures. FFO for the comparable periods of 2002 have been restated to include gains on sales of outparcels. The Company believes that FFO provides an additional indicator of the operating performance of the Company's properties without giving effect to real estate depreciation and amortization, which assumes the value of real estate assets declines predictably over time. Since values of well-maintained real estate assets have historically risen or fallen with market conditions, the Company believes that FFO provides investors with a better understanding of the Company's operating performance. 30 The use of FFO as an indicator of operating performance is influenced not only by the operations of the properties and interest rates, but also by the capital structures of the Company and the Operating Partnership. Accordingly, FFO will be one of the significant factors considered by the Board of Directors in determining the amount of cash distributions the Operating Partnership will make to its partners, including the REIT. FFO does not represent cash flow from operations as defined by accounting principals generally accepted in the United States, is not necessarily indicative of cash available to fund all cash flow needs and should not be considered as an alternative to net income for purposes of evaluating the Company's operating performance or to cash flow as a measure of liquidity. For the three months ended June 30, 2003, FFO increased $8.0 million, or 13.5%, to $67.4 million from $59.4 million for the same period in 2002. For the six months ended June 30, 2003, FFO increased by $19.8 million, or 17.3%, to $134.7 million as compared to $114.9 million for the same period in 2002. The increase in FFO is primarily attributable to the results of operations of the properties added to the portfolio, increases in base rents and tenant reimbursements at the existing properties and increases in gains on outparcel sales. These increases were offset by reductions related to operating properties that were sold and a reduction in lease termination fees. Lease termination fees were $1.2 million and $3.8 million in the three months ended June 30, 2003 and 2002, respectively, and $1.6 million and $4.6 million in the six months ended June 30, 2003 and 2002, respectively. Gains on sales of outparcels were $3.0 million and $1.8 million in the three months ended June 30, 2003 and 2002, respectively, and $4.1 million and $2.2 million in the six months ended June 30, 2003 and 2002, respectively. The Company's calculation of FFO is as follows (in thousands):
Three Months Ended Six Months Ended June 30, June 30, --------------------------- -------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ---------- Consolidated net income available to common shareholders $ 21,022 $ 18,911 $ 43,798 $ 36,295 Depreciation and amortization from consolidated properties 27,690 23,646 54,002 46,127 Depreciation and amortization from unconsolidated affiliates 1,123 848 2,019 1,772 Depreciation and amortization from discontinued operations -- 214 10 465 Minority interest in earnings of operating partnership 17,979 16,335 38,616 32,532 Minority investors' share of depreciation and amortization in shopping center properties (275) (302) (541) (694) Gain on discontinued operations -- (164) (2,935) (1,406) Depreciation and amortization of non-real estate assets (133) (116) (266) (227) ----------- ----------- ----------- ---------- FUNDS FROM OPERATIONS $ 67,406 $ 59,372 $ 134,703 $ 114,864 =========== =========== =========== ========== DILUTED WEIGHTED AVERAGE SHARES AND POTENTIAL DILUTIVE COMMON SHARES WITH OPERATING PARTNERSHIP UNITS FULLY CONVERTED 56,748 54,966 56,625 53,399
Item 3: Quantitative and Qualitative Disclosure About Market Risk The Company has exposure to interest rate risk on its debt obligations and derivative financial instruments. The Company uses derivative financial instruments to manage its exposure to changes in interest rates and not for speculative purposes. The Company's interest rate risk management policy requires that derivative instruments be used for hedging purposes only and that they be entered into only with major financial institutions based on their credit ratings and other factors. 31 Based on the Company's share of consolidated and unconsolidated variable rate debt at June 30, 2003, excluding debt fixed using an interest rate swap agreement, a 0.5% increase or decrease in interest rates on this variable rate debt would decrease or increase annual cash flows by approximately $3.1 million and, after the effect of capitalized interest, annual earnings by approximately $2.7 million. Based on the Company's share of consolidated and unconsolidated debt at June 30, 2003, a 0.5% increase in interest rates would decrease the fair value of debt by approximately $52.9 million, while a 0.5% decrease in interest rates would increase the fair value of debt by approximately $54.6 million. See Note 4 to the unaudited consolidated financial statements for a description of the Company's derivative financial instruments. Item 4: Controls and Procedures As of the end of the period covered by this quarterly report, an evaluation, under Rule 13a-15 of the Securities Exchange Act of 1934 was performed under the supervision of the Company's Chief Executive Officer and Chief Financial Officer and with the participation of the Company's management, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. No change in the Company's internal control over financial reporting occurred during the period covered by this quarterly report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 32 PART II - OTHER INFORMATION ITEM 1: Legal Proceedings None ITEM 2: Changes in Securities None ITEM 3: Defaults Upon Senior Securities None ITEM 4: Submission of Matter to a Vote of Security Holders The Company held its Annual Meeting of Shareholders on May 5, 2003. The matters that were submitted to a vote of shareholders and the related results are as follows: 1. The following directors were re-elected to three-year terms that expire in 2006: |X| John N. Foy (23,503,501 votes for and 2,341,328 votes against or withheld), |X| Martin J. Cleary (23,502,621 votes for and 2,342,208 votes against or withheld), and |X| William J. Poorvu (23,396,272 votes for and 2,448,557 votes against or withheld). The following additional directors are presently serving three-year terms, which continue beyond the 2003 Annual Meeting: |X| Charles B. Lebovitz (term expires 2005), |X| Stephen D. Lebovitz (term expires 2004), |X| Claude M. Ballard (term expires 2005), |X| Gary L. Bryenton (term expires 2005), |X| Leo Fields (term expires 2005), and |X| Winston W. Walker (term expires 2004). 2. An amendment to the Company's Amended and Restated Certificate of Incorporation to increase the number of authorized shares of the Company's preferred stock, $0.01 par value, from 5,000,000 shares to 15,000,000 shares was approved (Common stock: 18,622,284 votes for and 4,764,369 against; Series A Preferred Stock: 1,456,555 votes for and 88,579 against; Series B Preferred Stock: 1,107,842 votes for and 9,350 against). 3. The adoption of an Amended and Restated Stock Incentive Plan for the Company was approved (20,811,948 votes for and 2,545,071 against). 33 ITEM 5: Other Information None ITEM 6: Exhibits and Reports on Form 8-K A. Exhibits 10.1 Form of Stock Restriction Agreement for restricted stock awards with annual installment vesting, see page 36. 10.2 Amended and Restated CBL & Associates Properties, Inc. Stock Incentive Plan(t) page 38. 10.2.1 Form of Stock Restriction Agreement for restricted stock awards with annual installment vesting, see page 58. 31.1 Certification pursuant to Securities Exchange Act Rule 13a-14(a) by the Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, see page 61. 31.2 Certification pursuant to Securities Exchange Act Rule 13a-14(a) by the Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, see page 62. 32.1 Certification pursuant to 18 U.S.C Section 1350 by the Chief Executive Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, see page 63. 32.2 Certification pursuant to 18 U.S.C. Section 1350 by the Chief Financial Officer as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, see page 64. t A management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of this report. B. Reports on Form 8-K The following items were reported: The outline from the Company's July 25, 2003 conference call with analysts and investors regarding earnings, the Company's earnings release and the Company's supplemental information package (Items 9 and 12) were furnished on July 25, 2003. The disclosures required by Regulation G related to the Company's 2002 Annual Report on Form 10-K, which was filed on March 21, 2003, were filed on August 5, 2003. 34 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. /s/ John N. Foy -------------------------------------------------------- Vice Chairman of the Board, Chief Financial Officer and Treasurer (Authorized Officer of the Registrant, Principal Financial Officer) Date: August 14, 2003 35 EX-10 4 exhibit101.txt EX 10.1 CERTIFICATE OF INC Exhibit 10.1 CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF CBL & ASSOCIATES PROPERTIES, INC. 1. The name of the corporation (which is hereinafter referred to as the "Corporation") is CBL & Associates Properties, Inc. 2. The Amended and Restated Certificate of Incorporation of the Corporation, dated November 2, 1993, as amended by the Certificate of Amendment to the Amended and Restated Certificate of Incorporation, dated May 8, 1996, as amended by the Certificate of Amendment to the Amended and Restated Certificate of Incorporation, dated January 31, 2001, as supplemented by the Certificate of Designation, dated June 29, 1998, the Certificate of Designation, dated May 4, 1999, the Certificate of Designation, dated June 11, 2002, and the Certificate of Decrease, dated June 26, 2002 (the "Amended and Restated Certificate of Incorporation") shall be further amended as provided below. 3. This Certificate of Amendment has been duly proposed by resolutions adopted and declared advisable by the Board of Directors of the Corporation, duly adopted by the stockholders of the Corporation and duly executed and acknowledged by the officers of the Corporation in accordance with the provisions of Sections 103 and 242 of the General Corporation Law of the state of Delaware. 4. The text of Article IV of the Amended and Restated Certificate of Incorporation is hereby amended as follows: ARTICLE IV Section A of Article IV is hereby deleted in its entirety and in its place is inserted the following as Section A of Article IV: A. Classes and Number of Shares. The total number of shares of all classes of Equity Stock that the Corporation shall have authority to issue is One Hundred and Ten Million (110,000,000) shares, consisting of (i) Fifteen Million (15,000,000) shares of preferred stock, par value $.01 per share (the "Preferred Stock"), and (ii) Ninety-Five Million (95,000,000) shares of common stock, par value $.01 per share (the "Common Stock"). 36 IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by its Chairman of the Board and Chief Executive Officer and attested to by its Secretary this 23rd day of June, 2003. CBL & ASSOCIATES PROPERTIES, INC. BY: \s\ Charles B. Lebovitz Charles B. Lebovitz Chairman of the Board and Chief Executive Officer Attest: \s\ Stephen D. Lebovitz Stephen D. Lebovitz Secretary 37 EX-10 5 exhibit102.txt EX 10.2 AMEND STOCK INCENTIVE PLAN Exhibit 10.2 AMENDED AND RESTATED CBL & ASSOCIATES PROPERTIES, INC. STOCK INCENTIVE PLAN 38 AMENDED AND RESTATED CBL & ASSOCIATES PROPERTIES, INC. STOCK INCENTIVE PLAN WHEREAS, the CBL & Associates Properties, Inc. 1993 Stock Incentive Plan was adopted by the Company on October 27, 1993 (the "Initial Plan"); WHEREAS, the Initial Plan has been amended by Amendment No. 1 on May 1, 1996, Amendment No. 2 on May 3, 2000 and by Amendment No. 3 on May 7, 2002; WHEREAS, the Initial Plan, as amended, is scheduled to terminate on October 27, 2003; WHEREAS, the Awards granted under the Initial Plan, as amended, and the status of the Initial Plan, as amended, were, as follows as of March 10, 2003 (the record date for stockholders voting on the adoption of the Plan, as defined below):
Stock Awards (fully vested on grant or fully vested as of March 10, 2003) 301,336 Deferred Stock Awards (subject to vesting/issuance following March 10, 2003) 205,534 Outstanding Employee Stock Options (vested and non-vested unexercised stock options granted to employees prior to March 10, 2003) 2,510,377 Non-Employee Directors Shares 3,000 Outstanding Non-Employee Directors Stock Options 20,000 Shares Available For Awards 1,109,461
WHEREAS, the Board of Directors of the Company has recommended to the Company's stockholders that the Initial Plan, as amended, be amended and restated on the terms set forth herein as the Amended and Restated CBL & Associates Properties, Inc. Stock Incentive Plan (herein, the "Plan"), and has submitted such recommendation to the Company's stockholders for vote of the stockholders on May 5, 2003. Pursuant to the recommendation of the Board of Directors of the Company and subject to the approval of the Company's stockholders on May 5, 2003, the Initial Plan, as amended, is hereby amended and restated in its entirety on the terms and provisions set forth below. Notwithstanding the preceding sentence, the terms and provisions of Pre-Amendment Awards, as defined below, shall continue in force as such terms and provisions existed on the date such Pre-Amendment Awards were made. Effective Date - provided the Company's stockholders have approved this Plan, the effective date of this Plan shall be May 5, 2003, the date the Plan was submitted to the Company's stockholders for vote. Expiration Date - the expiration date of this Plan, after which no Awards may be granted hereunder, shall be May 5, 2013; provided, however, that the administration of the Plan shall continue in effect until all matters relating to the payment of Awards previously granted have been settled. 39 SECTION 1. Purpose; Definitions. Purpose. The purpose of the Plan is to give the Company a significant advantage in attracting, retaining and motivating officers, employees and directors of the Company and to provide the Company and is Subsidiaries with the ability to provide incentives more directly linked to the long term profitability of the Company's businesses and increases in stockholder value thereby strengthening the commitment of the Company's officers, employees and directors to the welfare of the Company and promoting an identity of interest between stockholders and the Company's officers, employees and directors. Definitions. For purposes of the Plan, the following terms are defined as set forth below: "Affiliate" means CBL & Associates Management, Inc., and any other corporation or other entity in which the Company has a substantial direct or indirect ownership interest, and designated by the Compensation Committee as such. "Award" means awards/grants of Stock Option(s), unrestricted Stock, Restricted Stock, Non-Employee Director Share(s), Non-Employee Director Stock Option(s) and/or any other stock based awards described in Section 7 below that is made pursuant to the terms of this Plan. "Board" means the Board of Directors of the Company. "Cause" has the meaning set forth in Section 5(a)(ix) below. "Change in Control" shall mean the happening of any of the following events: (i) An acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common Stock of the Company (the "Outstanding Common Stock") or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); excluding, however, the following: (I) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company, (II) any acquisition by the Company, or members of the Company's management, or any combination thereof, (III) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (IV) any acquisition by any Person pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this definition; or (ii) A change in the composition of the Board such that the individuals who, as of the effective date of the Plan, constitute the Board (such Board shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, for the purposes of this definition, that any individual who becomes a member of the Board subsequent to such effective date, whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this provision) shall be considered as though such individual were a member of the Incumbent Board; but, provided further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board; or 40 (iii)The approval by the stockholders of the Company of a Corporate Event as defined in Section 8(a) below; excluding, however, such a Corporate Event pursuant to which (A) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Common Stock and Outstanding Voting Securities immediately prior to such Corporate Event will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Event (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more Subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Event, of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be; (B) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or such corporation resulting from such Corporate Event) will beneficially own, directly or indirectly, 20% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Event or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors except to the extent that such ownership existed with respect to the Company prior to the Corporate Event; and (C) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Event; or (iv) The approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. "Commission" means the Securities and Exchange Commission or any successor agency. "Common Stock" means common stock, par value $0.01 per share, of the Company. "Company" means CBL & Associates Properties, Inc., Delaware corporation. "Compensation Committee" means the Compensation Committee referred to in Section 2 below. "Corporate Event" shall have the meaning ascribed to that term in Section 8(a) below. 41 "Date of Grant" means the date on which the granting of an Award is authorized or such other date as may be set forth in such authorization. "Disability" means permanent and total disability as determined under procedures established by the Compensation Committee for purposes of the Plan. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. "FairMarket Value" means, as of any given date, the mean between the highest and lowest reported sales prices of the Common Stock on the New York Stock Exchange or, if not listed on such exchange, on any other national securities exchange on which the Common Stock is listed or on NASDAQ. If there is no regular public trading market for such Common Stock the Fair Market Value of the Common Stock shall be determined by the Compensation Committee in good faith. "Incentive Stock Option" means any Stock Option intended to be and designated as an "incentive stock option" within the meaning of Section 422 of the Code. "Mature Stock" shall have the meaning ascribed to that term in Section 5(a)(iv) below. "Non-Employee Director Share" means a share of Common Stock granted to Non-Employee Directors as set forth in Section 13 below. "Non-Employee Director Stock Option" means a Stock Option granted to Non-Employee Directors as set forth in Section 13 below. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. "Participant" shall mean any recipient of an Award under this Plan. "Plan" means the Amended and Restated CBL & Associates Properties, Inc. Stock Incentive Plan, as set forth herein and as hereinafter amended from time to time. "Pre-Amendment Awards" means collectively the Deferred Stock Awards set forth in the 4th Whereas clause above, the Outstanding Employee Stock Options set forth in the 4th Whereas clause above, the Non-Employee Director Shares set forth in the 4th Whereas clause above and the Outstanding Non-Employee Director Stock Options set forth in the 4th Whereas clause above. "Restricted Stock" means an Award granted under Section 6 below. "Retirement" means retirement from active employment under a pension plan of the Company, any Subsidiary or Affiliate, or under an employment contract with any of them, or termination of employment at or after age 65 under circumstances which the Compensation Committee, in its sole discretion, deems equivalent to retirement. "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission under Section 16(b) of the Exchange Act, as amended from time to time. 42 "Stock Award(s)" means any award of Common Stock of the Company, whether such award is in the form of Restricted Stock or Stock that is unrestricted. "Stock Option" or "Option" means an option granted under Section 5(a) below. "Subsidiary" means a "subsidiary corporation" within the meaning of Section 424(f) of the Code. "Termination of Employment" means the termination of the Participant's employment with the Company or any Subsidiary or Affiliate. A Participant employed by a Subsidiary or an Affiliate shall also be deemed to incur a Termination of Employment if the Subsidiary or Affiliate ceases to be such a Subsidiary or Affiliate, as the case may be, and the Participant does not immediately thereafter become an employee of the Company or another Subsidiary or Affiliate. In addition, certain other terms used herein have definitions given to them in the first place in which they are used. SECTION 2. Administration. The Plan shall be administered by the Compensation Committee of the Board as such is presently situated on the Effective Date and as it shall be constituted after the Effective Date throughout the term of this Plan (the "Compensation Committee"). The Compensation Committee is required to be comprised of Independent Directors, as defined by the Board and/or applicable law. If at any time no Compensation Committee shall be in office, the functions of the Compensation Committee specified in the Plan shall be exercised by the Board or by such other committee of the Board; provided any such other committee that shall be charged with the responsibility of exercising the functions of the Compensation Committee hereunder in the absence of the Compensation Committee shall be comprised of not less than two Persons who shall meet the definition of "Independent Director" as set forth above. Subject to Section 14 hereof, the Compensation Committee shall have primary authority to grant Awards pursuant to the terms of the Plan to officers, employees and directors of the Company and its Subsidiaries and Affiliates. Among other things, the Compensation Committee shall have the authority, subject to the terms of the Plan: (a) to select the officers, employees and directors to whom Awards may from time to time be granted; provided that awards to non-employee directors shall be made only in accordance with Section 13 below; (b) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options and Restricted Stock or any combination thereof are to be granted hereunder; (c) to determine the number of shares of Common Stock to be covered by each Award granted hereunder; 43 (d) to determine the terms and conditions of any Award granted hereunder (including, but not limited to, subject to Section 5(a) below, the option price, any vesting restriction or limitation and any vesting acceleration or forfeiture waiver regarding any Award and the shares of Common Stock relating thereto, based on such factors as the Compensation Committee shall determine); (e) to modify, amend or adjust the terms and conditions of any Award, at any time or from time to time, including, but not limited to, with respect to performance goals and measurements applicable to performance-based Awards pursuant to the terms of the Plan; (f) to determine to what extent and under what circumstances Common Stock and other amounts payable with respect to an Award shall be deferred; and (g) to determine under what circumstances a Stock Option may be settled in cash or Common Stock under Section 5(a)(iv) below. The Compensation Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable, to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreement relating thereto) and to otherwise supervise the administration of the Plan. The Compensation Committee may act with respect to the Plan only by a majority of its members then in office, except that the members thereof may authorize any one or more of their number or any officer of the Company to execute and deliver documents on behalf of the Compensation Committee. Any determination made by the Compensation Committee or pursuant to delegated authority pursuant to the provisions of the Plan with respect to any Award shall be made in the sole discretion of the Compensation Committee or such delegate at the time of the grant of the Award or, unless in contravention of any express term of the Plan, at any time thereafter. All decisions made by the Compensation Committee or any appropriately delegated officer pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan Participants subject to Plan provisions, including but not limited to Section 14 below. SECTION 3. Common Stock Subject to Plan. (a) Number of Shares of Common Stock Available. Subject to adjustment as provided herein, the total number of shares of Common Stock available for distribution pursuant to Awards under the Plan shall be 5,200,000 shares of Common Stock, and the maximum number of shares of Common Stock with respect to which Options may be granted to any Plan Participant during any calendar year shall not exceed 100,000. Shares subject to an Award under the Plan may be authorized and unissued shares or may be treasury shares. (b) Adjustments. Awards granted under the Plan and any agreements evidencing such Awards, the maximum number of shares of Stock subject to all Awards under the Plan, the number of shares of Stock subject to outstanding Awards and the maximum number of shares of Stock with respect to which any one person may be granted Options or stock appreciation rights during any year may be subject to adjustment or substitution, as determined by the Company or the Compensation Committee, as to the number, price or kind of a share of Stock or other consideration subject to such Awards or as otherwise determined by the Company or the Compensation Committee to be equitable: 44 (i) in the event of changes in the outstanding Stock or in the capital structure of the Company by reason of stock dividends, stock splits, reverse stock splits, recapitalizations, reorganizations, mergers, consolidations, combinations, exchanges, or other relevant changes in capitalization occurring after the Date of Grant of any such Award; or (ii) in the event of any change in applicable laws or any change in circumstances which results in or would result in any substantial dilution or enlargement of the rights granted to, or available for, Participants in the Plan; or (iii) for any other reason which the Company or the Compensation Committee determines otherwise warrants equitable adjustment because it interferes with the intended operation of the Plan. Any adjustment to Incentive Stock Options under this Section 3(b) shall take into account that adjustments which constitute a "modification" within the meaning of Section 424(h)(3) of the Code may have an adverse tax impact on such Incentive Stock Options and the Compensation Committee may, in its sole discretion, provide for a different adjustment or no adjustment in order to preserve the tax effects of Incentive Stock Options. Unless otherwise determined by the Company or the Compensation Committee, any adjustments or substitutions under this Section 3(b) shall be made in a manner which does not adversely affect the exemption provided pursuant to Rule 16b-3 under the Exchange Act and any such adjustments or substitutions shall be subject to the provisions of this Plan including, but not limited to Section 9 and Section 14 below. Further, with respect to Awards intended to qualify as "performance-based compensation" under Section 162(m) of the Code, such adjustments or substitutions shall, unless otherwise determined by the Company or the Compensation Committee, be made only to the extent that the Company or the Compensation Committee determines that such adjustments or substitutions may be made without a loss of deductibility for such Awards under Section 162(m) of the Code. The Company shall give each Participant notice of an adjustment hereunder and, upon notice, such adjustment shall be conclusive and binding for all purposes. SECTION 4. Eligibility. Officers, employees and directors of the Company, its Subsidiaries and Affiliates who are responsible for or contribute to the management, growth and profitability of the business of the Company, its Subsidiaries and Affiliates are eligible to be granted Awards under the Plan. Except as expressly authorized by Section 13 of the Plan, however, no grant shall be made to a director who is not an officer or a salaried employee of the Company, its Subsidiaries and/or Affiliates. SECTION 5. Stock Options; Stock Awards. (a) Stock Options. Stock Options may be granted alone or in addition to other Awards granted under the Plan and may be of two types: Incentive Stock Options and Non-Qualified Stock Options. Any Stock Option granted under the Plan shall be in such form as the Compensation Committee may from time to time approve. The Compensation Committee shall have the authority to grant any optionee Incentive Stock Options, Non-Qualified Stock Options or both types of Stock Options. Incentive Stock Options may be granted only to employees of the Company and its Subsidiaries and Affiliates. To the extent that any Stock Option is not designated as an Incentive Stock Option or even if so designated does not qualify as an Incentive Stock Option, it shall constitute a Non-Qualified Stock Option. 45 Stock Options shall be evidenced by option agreements, the terms and provisions of which may differ. An option agreement shall indicate on its face whether it is intended to be an agreement for an Incentive Stock Option or a Non-Qualified Stock Option. The grant of a Stock Option shall occur on the date the Compensation Committee by resolution selects an individual to be a Participant in any grant of a Stock Option, determines the number of shares of Stock to be subject to such Stock Option to be granted to such individual and specifies the terms and provisions of the Stock Option. The Company shall notify a Participant of any grant of a Stock Option, and a written option agreement or agreements shall be duly executed and delivered by the Company to the Participant. Such agreement or agreements shall become effective upon execution by the Participant. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered nor shall any discretion or authority granted under the Plan be exercised so as to disqualify the Plan under Section 422 of the Code or, without the consent of the optionee affected, to disqualify any Incentive Stock Option under such Section 422 of the Code. Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions as the Compensation Committee shall deem desirable: (i) Option Price. The option price per share of Common Stock purchasable under a Stock Option (A) shall be determined by the Compensation Committee and set forth in the option agreement, (B) shall not be less than the Fair Market Value of the Common Stock subject to the Stock Option on the Date of Grant and (C) in the case of an Incentive Stock Option granted to an optionee who owns stock representing more than 10% of the voting power of all classes of stock of the Company or any subsidiary of the Company, shall not be less than 110% of the Fair Market Value of the Common Stock subject to the Incentive Stock Option on the Date of Grant. (ii) Option Term. The term of each Stock Option shall be fixed by the Compensation Committee, but (A) no Stock Option shall be exercisable more than 10 years after the date the Stock Option is granted and (B) no Incentive Stock Option granted to an optionee who owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Subsidiary shall be exercisable more than five years after the date the Stock Option is granted. (iii) Exercisability. Except as otherwise provided herein, Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Compensation Committee. If the Compensation Committee provides that any Stock Option is exercisable only in installments, the Compensation Committee may at any time waive such installment exercise provisions, in whole or in part, based on such factors as the Compensation Committee may determine. In addition, the Compensation Committee may at any time, in whole or in part, accelerate the exercisability of any Stock Option. Notwithstanding any other provision hereof, the aggregate Fair Market Value, determined on the date of award, of Common Stock with respect to which Incentive Stock Options are exercisable by an optionee for the first time during any calendar year under all stock option plans of the Company and any Subsidiary of the Company shall not exceed $100,000. 46 (iv) Method of Exercise. Subject to the provisions of this Section 5(a), Stock Options may be exercised, in whole or in part, at any time during the option term by giving written notice of exercise to the Company specifying the number of shares of Common Stock subject to the Stock Option to be purchased. The option price of Common Stock to be purchased upon exercise of any Option shall be paid in full in cash (by certified or bank check, or such other instrument as the Company may accept) or, if and to the extent set forth in the option agreement, may also be paid by one or more of the following: (A) in the case of the exercise of a Non-Qualified Stock Option, in the form of unrestricted Common Stock already owned by the optionee that meets the definition of "Mature Stock", as defined below, based in any such instance on the Fair Market Value of the Common Stock on the date the Stock Option is exercised; provided, however, that, in the case of an Incentive Stock Option, the right to make a payment in the form of already owned shares of Common Stock may be authorized only at the time the Stock Option is granted; (B) by requesting the Company to withhold from the number of shares of Common Stock otherwise issuable upon exercise of the Stock Option that number of shares having an aggregate Fair Market Value on the date of exercise equal to the exercise price for all of the shares of Common Stock subject to such exercise; or (C) by a combination thereof, in each case in the manner provided in the option agreement. As noted above, the option price may be paid in shares of Common Stock owned by the optionee upon the exercise of a Stock Option provided the shares of Common Stock so utilized meet the definition of "Mature Stock". For purposes hereof, the term "Mature Stock" shall mean (I) shares of unrestricted Common Stock that have been owned by the optionee for at least six (6) consecutive months prior to the date of the exercise of the Stock Option wherein such shares at to be utilized to pay all or a portion of the Option Price; or (II) shares of unrestricted Common Stock that were purchased by the optionee in an open-market transaction prior to the exercise of the Stock Options wherein such shares are to be utilized to pay all or a portion of the Option Price. In the discretion of the Compensation Committee and to the extent allowed under applicable law, payment for any shares subject to a Stock Option may also be made by delivering a properly executed exercise notice to the Company, together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of funds to pay the purchase price. (v) Transferability of Stock Options. No Stock Option shall be transferable by the optionee other than (A) by will or by the laws of descent and distribution or (B) pursuant to a qualified domestic relations order (as defined in the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder) or (C) by a gift to a "family member", as herein defined. All Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee or by the guardian or legal representative of the optionee or by an alternate payee pursuant to such qualified domestic relations order or by the "family member" who is the donee of a gift, it being understood that the terms "holder" and "optionee" include the guardian, legal representative or family member donee of the optionee named in the option agreement and any person to whom an option is transferred by will or the laws of descent and distribution, pursuant to a qualified domestic relations order or pursuant to a gift to a "family member". For purposes of this Plan, the term "family member" as relates to the optionee means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, including adoptive relationships, any person sharing the optionee's household (other than a tenant or employee), a trust in which these persons (or the 47 optionee) control the management of the assets and any other entity in which these persons (or the optionee) own more than fifty percent of the voting interests. No Stock Option may be transferred for value except for (I) transfers under a qualified domestic relations order in settlement of marital property rights; and (II) a transfer to an entity in which more than fifty percent of the voting interests are owned by "family members" (or the optionee) in exchange for an interest in that entity. Notwithstanding the above definition of "family member" and prohibitions on transfers and exceptions thereto, the definition of "family member" and the prohibitions and exceptions to transfers shall be subject to the definitions thereof and restrictions set forth on Form S-8 Registration Statement Under the Securities Act of 1933 as such definitions and restrictions shall be revised, amended or replaced from time to time. (vi) Termination by Death. If an optionee's employment terminates by reason of death, any Stock Option held by such optionee may thereafter be exercised, to the extent then exercisable, or on such accelerated basis as the Compensation Committee may determine, for a period of one year (or such other period as the Compensation Committee may specify in the option agreement) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment due to death, if an Incentive Stock option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (vii) Termination by Reason of Disability. If an optionee's employment terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination, or on such accelerated basis as the Compensation Committee may determine, for a period of three years (or such shorter period as the Compensation Committee may specify in the option agreement) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that if the optionee dies within such three-year period (or such shorter period), any unexercised Stock Option held by such optionee shall, notwithstanding the expiration of such three-year (or such shorter) period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of one year from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (viii) Termination by Reason of Retirement. If an optionee's employment terminates by reason of Retirement, any Non-Qualified Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of such Retirement or on such accelerated basis as the Compensation Committee may determine, for a period of three years (or such shorter period as the Compensation Committee may specify in the option agreement) from the date of such termination of employment or until the expiration of the stated term of such Non-Qualified Stock Option, whichever period is the shorter; provided, however, that if the optionee dies within such three-year (or such shorter) period, any unexercised Non-Qualified Stock Option held by such optionee shall, notwithstanding the expiration of such three-year (or such shorter) period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of one year-from the date of such death or until the expiration of the stated term of such Non-Qualified Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Retirement, an Incentive Stock Option may be exercised by the optionee to the extent it was exercisable at the time of such Retirement or on such accelerated basis as the Compensation Committee may determine, only 48 within a period of three months thereafter or prior to the expiration of the stated term of such Incentive Stock Option, whichever period is the shorter; provided, however, that if the optionee dies within such three-month period, any unexercised Incentive Stock Option held by such optionee shall, notwithstanding the expiration of such three-month period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of one year from the date of such death or until the expiration of the stated term of such Incentive Stock Option, whichever period is the shorter. (ix) Other Termination. Unless otherwise determined by the Compensation Committee, if there occurs a Termination of Employment for any reason other than death, Disability, Retirement or Cause, any Stock Option held by such optionee shall thereupon terminate, except that such Stock Option, to the extent then exercisable, or on such accelerated basis as the Compensation Committee may determine, may, if such Termination of Employment is without Cause, be exercised for the lesser of (A) in the case of a Non-Qualified Stock Option, one year from the date of such Termination of Employment or the balance of such Stock Option's term and (B) in the case of an Incentive Stock Option, three months from the date of such Termination of Employment or the balance of such Stock Option's term; provided, however, that if the optionee dies within such one-year or three-month period, any unexercised Stock Option held by such optionee shall notwithstanding the expiration of such one-year or three-month period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of one year from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of Termination of Employment for Cause, any unexercised Stock Option held by such optionee shall expire immediately upon the giving to the optionee of notice of such Termination of Employment. Unless otherwise determined by the Compensation Committee, for the purposes of the Plan, "Cause" shall mean (I) the conviction of the optionee for a felony under Federal law or the law of the state in action occurred, (II) dishonesty in the course of the optionee's employment duties or (III) willful and failure on the part of the optionee to perform his duties in any material respect. (x) Cashing Out of Stock Option. On receipt of written notice of exercise and subject to confirmation of applicable accounting implications, the Compensation Committee may elect to cash out all or any part of the shares of Common Stock for which a Stock Option is being exercised by paying the optionee an amount, in cash or Common Stock, equal to the excess of the Fair Market Value of the Common Stock over the option price times the number of shares of Common Stock for which the Stock Option is being exercised on the effective date of such cash out. (xi) Corporate Event Cash Out. The provisions of Section 8 below shall be applicable in the event of a Corporate Event as defined therein. (b) Stock Awards. Subject to the terms of this Plan, the Compensation Committee may grant Awards to individuals in the form of shares of Common Stock of the Company and may place restrictions on such Awards as set forth in Section 6 below or may grant such shares of Common Stock without restrictions. SECTION 6. Restricted Stock. (a) Administration. Restricted Stock may be awarded either alone, in addition to or in tandem with other Awards granted under the Plan. The Compensation Committee shall determine the eligible persons to whom and the time or times at which Restricted Stock shall be awarded, the number of shares of Restricted Stock to be awarded, the number of shares of Restricted Stock to be awarded to any person, the duration of the period (the "Restrictions Period") 49 during which, and the conditions under which receipt of the Common Stock will be Restricted, and the other terms and conditions of the Award in addition to those set forth in Section 6(b). The Compensation Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals or such other factors or criteria as the Compensation Committee shall determine, in its sole discretion. The provisions of Restricted Stock awards need not be the same with respect to each recipient. (b) Terms and Conditions. The shares of Restricted Stock awarded pursuant to this Section 6 may, in the sole discretion of the Compensation Committee, be subject to any of the following terms and conditions: (i) Subject to the provisions of this Plan and the Award agreement referred to in Section 6(b)(v) below, Restricted Stock Awards may not be sold, assigned, transferred, pledged or otherwise encumbered during the Restrictions Period and a legend evidencing such restrictions shall, at the request of the Company or the Compensation Committee and upon such language as the Company or the Compensation Committee shall require, be inserted on any stock certificate evidencing shares received under a Restricted Stock Award. At the expiration of the Restrictions Period if such Participant has previously received stock certificates with the above-referenced legend thereon with respect to the referenced Restricted Stock Award, certificates for shares of Common Stock without such legend shall, within a reasonable time following the request of the Participant or his or her legal representative, be delivered to the Participant or his or her legal representative, by the Company's transfer agent in a number equal to the shares represented by the stock certificates previously received by such Participant with respect to the referenced Restricted Stock Award. If the Participant has not received certificates representing his or her Restricted Stock Award by the end of the Restrictions Period, the Company shall, within a reasonable time following the request of the Participant or his or her legal representative, cause the Company's transfer agent to deliver to the Participant or his or her legal representative stock certificates, without the above-referenced legend appearing thereon, in a number equal to the number of shares with respect to the referenced Restricted Stock Award. (ii) Unless otherwise determined by the Compensation Committee at grant, amounts equal to any dividends declared during the Restrictions Period with respect to the number of shares covered by a Restricted Stock Award will be paid to the Participant currently, or deferred and deemed to be reinvested in additional Restricted Stock, or otherwise reinvested, all as determined at or after the time of the Award by the Compensation Committee or, if the Compensation Committee determines to allow the Participant to make the election, at the election of the Participant. (iii) Subject to the provisions of the Award agreement and this Section 6, upon termination of a Participant's employment with the Company and any Subsidiary or Affiliate for any reason during the Restrictions Period for a given Award, the Restricted Stock in question will vest, or be forfeited, in accordance with the terms and conditions established by the Compensation Committee at grant. (iv) The Compensation Committee may, at or after grant, accelerate the vesting of all or any part of any Restricted Stock Award and/or waive the deferral limitations for all or any part of such Award. 50 (v) Each Restricted Stock Award shall be confirmed by, and subject to the terms of, a Restricted Stock agreement executed by the Company and the Participant. (c) Limitations and Additional Restrictions Applicable to Restricted Stock Awards. Notwithstanding the provisions of this Section 6, any awards of Restricted Stock under this Plan shall be subject to the provisions of Section 14 below. SECTION 7. Other Stock-Based Awards Subject to all other applicable provisions of this Plan, including but not limited to the provisions of Section 9 and Section 14 below, the Compensation Committee may grant any other cash, stock or stock-related Awards to any eligible individual under this Plan that the Compensation Committee deems appropriate, including, but not limited to, stock appreciation rights, limited stock appreciation rights, phantom stock Awards, the bargain purchase of Stock and Stock bonuses. Any such benefits and any related agreements shall contain such terms and conditions as the Compensation Committee deems appropriate including, but not limited to the right to settle any stock appreciation right by use of Common Stock. Such Awards and agreements need not be identical. The Compensation Committee may provide a stock option deferral program or similar types of plans designed to provide further deferral of taxable income to Participants including the use of unfunded deferred compensation arrangements that may provide for future payments to Participants in the form of Common Stock or cash provided such programs or plans do not include re-pricing of Stock Options, and such programs or plans shall be subject to the provisions of this Plan, including but not limited to the provisions of Section 9 and Section 14 below. With respect to any benefit under which shares of Stock are or may in the future be issued for consideration other than prior services, the amount of such consideration shall not be less than the amount (such as the par value of such shares) required to be received by the Company in order to comply with applicable state law. SECTION 8. Changes in Company's Capital Structure. (a) Corporate Events. Notwithstanding the above, in the event of any of the following: (i) The Company is merged or consolidated with another corporation or entity; (ii) All or substantially all of the assets of the Company or the Common Stock are acquired by another person or entity; (iii) The reorganization or liquidation of the Company; or (iv) The Company shall enter into a written agreement to undergo an event described in clauses (i), (ii) or (iii) above, 51 (each (i), (ii), (iii) and (iv) above, a "Corporate Event") then, the Company shall require the successor corporation or parent thereof to assume such outstanding Awards; provided, however, the Company or the Compensation Committee may, in lieu of requiring such assumption, provide that all outstanding Awards shall terminate as of the consummation of such Corporate Event, and (x) accelerate the exercisability of, or cause all vesting restrictions to lapse on, all outstanding Awards to a date at least ten days prior to the date of such Corporate Event and/or (y) provide that holders of Awards will receive a cash payment in respect of cancellation of their Awards based on the amount (if any) by which the per share consideration being paid for the Stock in connection with such Corporate Event exceeds the applicable exercise price. For purposes of this Section 8, an Award shall be considered assumed, without limitation, if, at the time of issuance of the stock or other consideration upon a Corporate Event, each holder of an Award would be entitled to receive upon exercise of the award the same number and kind of shares of stock or the same amount of property, cash or securities as such holder would have been entitled to receive upon the occurrence of the transaction if the holder had been, immediately prior to such transaction, the holder of the number of shares of Stock covered by the Award at such time; provided, that if such consideration received in the transaction is not solely equity securities of the successor entity, the Company or the Compensation Committee may, with the consent of the successor entity, provide for the consideration to be received upon exercise of the Award to be solely equity securities of the successor entity equal to the Fair Market Value of the per share consideration received by holders of Stock in the Corporate Event. (b) Effect of Change in Control. Except to the extent reflected in a particular Award agreement or as determined by the Company or the Compensation Committee, in the event of a Change in Control, notwithstanding any vesting schedule with respect to an Award of Options or Restricted Stock, such Option shall become immediately exercisable with respect to 100% of the shares subject to such Option, and the Restrictions Period shall expire immediately with respect to 100% of such shares of Restricted Stock. In the event of a Change in Control, all other Awards shall become fully vested and or payable to the fullest extent of any Award or portion thereof that has not then expired and any restrictions with respect thereto shall expire. The Company and the Compensation Committee shall have full authority and discretion to interpret this Section 8(b) and to implement any course of action with respect to any Award so as to satisfy the intent of this provision. The obligations of the Company under the Plan shall be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company, or upon any successor corporation or organization succeeding to substantially all of the assets and business of the Company. SECTION 9. Term, Amendment and Termination. The Plan will terminate on May 5, 2013. Under the Plan, Awards outstanding as of May 5, 2013 shall not be affected or impaired by the termination of the Plan. The Board may not amend, alter or discontinue the Plan or an Award in such manner so as to impair the rights of an optionee under a Stock Option or a recipient of a Restricted Stock Award theretofore granted without the optionee's or recipient's consent except such an amendment made to cause the Award to qualify for the exemption provided by Rule 16b-3. If any proposed amendment to the Plan would (i) materially increase the benefits accruing to Participants under the Plan, (ii) materially increase the aggregate number of securities that may be issued under the Plan or (iii) materially reduce the requirements as to 52 eligibility for participation in the Plan, then to the extent required by applicable law or deemed necessary or advisable by the Compensation Committee, such amendment shall be presented to the Company's stockholders for approval. Notwithstanding the foregoing, however, the requirement that any such amendments to the Plan be presented to the Company's stockholders for approval shall not apply to such amendments as required by applicable law or to cause the Plan to comply with generally accepted accounting principles. Subject to the above provisions, the Board shall have authority to amend the Plan to take into account changes in law and tax and accounting rules, as well as other developments and to grant Awards which qualify for beneficial treatment under such rules without stockholder approval. Notwithstanding the above provisions, any changes or adjustments as described in Section 3(b) above may be made without stockholder approval. SECTION 10. Unfunded Status of Plan. It is presently intended that the Plan constitute an "unfunded" plan for incentive and deferred compensation. The Compensation Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Common Stock or make payments; provided, however, that, unless the Compensation Committee otherwise determines, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. No provision of the Plan shall require the Company, for the purpose of satisfying any obligations under the Plan, to purchase assets or place any assets in a trust or other entity to which contributions are made or otherwise to segregate any assets, nor shall the Company maintain separate bank accounts, books, records or other evidence of the existence of a segregated or separately maintained or administered fund for such purposes. Holders shall have no rights under the Plan other than as unsecured general creditors of the Company, except that insofar as they may have become entitled to payment of additional compensation by performance of services, they shall have the same rights as other employees under general law. SECTION 11. General Provisions. (a) Additional Provisions of an Award. The Compensation Committee may require each person purchasing or receiving shares pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to the distribution thereof. The certificates for such shares may include any legend which the Compensation Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Common Stock or other securities delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Compensation Committee may deem advisable under the rules, regulations and other requirements of the Commission, any stock exchange upon which the Common Stock is then listed and any applicable Federal or state securities law, and the Compensation Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Privileges of Stock Ownership. Except as otherwise provided in this Plan, no person shall be entitled to the privileges of stock ownership in respect of shares of Common Stock which are subject to Awards hereunder until such shares shall have been issued to such person. (c) Government and Other Regulations. The obligation of the Company to make payment of Awards in Stock or otherwise shall be subject to all applicable laws, rules and regulations, and to such approvals by governmental agencies as may be required. Notwithstanding any terms or conditions of any Award to the contrary, 53 the Company shall be under no obligation to offer to sell or to sell and shall be prohibited from offering to sell or selling any shares of Stock pursuant to an Award unless such shares have been properly registered for sale pursuant to the Securities Act with the Securities and Exchange Commission or unless the Company has received an opinion of counsel, satisfactory to the Company, that such shares may be offered or sold without such registration pursuant to an available exemption therefrom and the terms and conditions of such exemption have been fully complied with. The Company shall be under no obligation to register for sale under the Securities Act any of the shares of Stock to be offered or sold under the Plan. If the shares of Stock offered for sale or sold under the Plan are offered or sold pursuant to an exemption from registration under the Securities Act, the Company may restrict the transfer of such shares and may legend the Stock certificates representing such shares in such manner as it deems advisable to ensure the availability of any such exemption. (d) No Restriction on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Subsidiary or Affiliate from adopting other or additional compensation arrangements for its employees. (e) No Employment Right or Claim. The adoption of the Plan shall not confer upon any employee any right to continued employment nor shall it interfere in any way with the right of the Company or any Subsidiary or Affiliate to terminate the employment of any employee at any time. No individual shall have any claim or right to be granted an Award under the Plan, or, having been selected for the grant of an Award, to be selected for the grant of any other Award. (f) Tax Withholding. No later than the date as of which an amount first becomes subject to being included in the gross income of the Participant for Federal income tax purposes with respect to any Award under the Plan, the Participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any Federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. If so determined by the Compensation Committee, withholding obligations may be settled with Common Stock, including Common Stock that is part of the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company, its Subsidiaries and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Participant. The Compensation Committee may establish such procedures as it deems appropriate, including the making of irrevocable elections, for the settlement of withholding obligations with Common Stock. (g) Payments to Persons Other Than Participants. If any person to whom any amount is payable under the Plan is unable to care for his affairs because of illness or accident, or is a minor, or has died, then any payment due to such person or his estate (unless a prior claim therefor has been made by a duly appointed legal representative) may, if the Compensation Committee so directs the Company, be paid to his spouse, child, relative, an institution maintaining or having custody of such person, or any other person deemed by the Compensation Committee to be a proper recipient on behalf of such person otherwise entitled to payment. Any such payment shall be a complete discharge of the liability of the Company therefor. (h) No Liability of Compensation Committee Members. No member of the Compensation Committee shall be personally liable by reason of any contract or other instrument executed by such member or on his behalf in his capacity as a member of the Compensation Committee nor for any mistake of judgment made in good faith, and the Company shall indemnify and hold harmless each member of the 54 Compensation Committee and each other employee, officer or director of the Company to whom any duty or power relating to the administration or interpretation of the Plan may be allocated or delegated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud or willful bad faith; provided, however, that approval of the Board shall be required for the payment of any amount in settlement of a claim against any such person. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Certificate of Incorporation or By-Laws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. (i) Reliance on Reports. Each member of the Compensation Committee and each member of the Board shall be fully justified in relying, acting or failing to act, and shall not be liable for having so relied, acted or failed to act in good faith, upon any report made by the independent public accountant of the Company and its Subsidiaries and upon any other information furnished in connection with the Plan by any person or persons other than himself. (j) Relationship to Other Benefits. No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, profit sharing, group insurance or other benefit plan of the Company or any Subsidiary except as otherwise specifically provided in such other plan. (k) Expenses. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries. (l) Pronouns. Masculine pronouns and other words of masculine gender shall refer to both men and women. (m) Titles and Headings. The titles and headings of the sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. (n) Termination of Employment. For all purposes herein, a person who transfers from employment or service with the Company to employment or service with a Subsidiary or vice versa shall not be deemed to have terminated employment or service with the Company or a Subsidiary. (o) Other Procedures.The Compensation Committee shall establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable in the event of the Participant's death are to be paid. (p) Governing Law. The Plan and all Awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware. SECTION 12. Effective Date of Plan. Provided the Plan is approved by the Company's stockholders, the Plan shall be effective on May 5, 2003, the date the Plan was submitted to the Company's stockholders for vote. SECTION 13. Non-Employee Director Stock Options and Non-Employee Director Shares. 55 (a) Each director of the Company who is not otherwise an employee of the Company or any Subsidiary or Affiliate from and after the effective date of the Plan (a "Non-Employee Director") shall, on each December 31 during such Non-Employee Director's term, automatically be granted Non-Qualified Stock Options to purchase 500 shares of Common Stock having an exercise price per share equal to 100% of the Fair Market value of the Common Stock at the Date of Grant of such Non-Qualified Stock Option. Each such Non-Employee Director, upon joining the Board, shall also be awarded 500 shares of Common Stock ("Non-Employee Director Shares"). Non-Employee Director Shares shall be fully vested upon grant, but may not be sold, pledged, or otherwise transferred in any manner during a Non-Employee Director's term and for one year thereafter. The Compensation Committee may require that such shares- bear an appropriate legend evidencing such transfer restrictions. (b) An automatic Non-Employee Director Stock Option shall be granted hereunder only if as of each Date of Grant (or, in the case of any initial grant, from and after the effective date of the Plan) the Non-Employee Director (i) is not otherwise an employee of the Company or any Subsidiary or Affiliate, (ii) has not been an employee of the Company or any Subsidiary or Affiliate for any part of the preceding fiscal year and (iii) has served on the Board continuously since the commencement of his term. (c) Each holder of a Stock Option granted pursuant to this Section 13 shall also have the rights specified in Section 5(a). (d) In the event that the number of shares of Common Stock available for future grant under the Plan is insufficient to make all automatic grants required to be made on such date, then all Non-Employee Directors entitled to a grant on such date shall share ratably in the number of options on shares available for grant under the Plan. (e) Except as expressly provided in this Section 13, any Stock Option granted hereunder shall be subject to the terms and conditions of the Plan as if the grant were made pursuant to Section 5(a) hereof. (f) Awards granted under this Section 13 shall be subject to any applicable restrictions set forth in Section 14(a) below. SECTION 14. Award Limitations. (a) General Restriction. Any provision of this Plan to the contrary notwithstanding, in no event shall any Awards or Award of Non-Employee Director Shares be made, and in no event shall any option be granted or exercised, if the grant or exercise of such Award or Option, would result in a violation of the Common Stock ownership limits or any other requirements necessary for qualification of the Company as a "real estate investment trust" for federal income tax purposes. For purposes of the Plan, in determining whether such limits would be violated, Participants shall be deemed to own beneficially any shares of Common Stock subject to unexercised Options, whether or not vested. Any such Award or grant or exercise of Options, if made, shall be null and void and shall have no legal effect. In addition, the Plan and any Awards or Options granted hereunder shall be subject in all events to, and shall in no event violate (i) the "Ownership Limit" as set forth in the Company's Amended and Restated Certificate of Incorporation, (ii) the provisions of any applicable rule or regulation of the Securities and Exchange Commission, the New York Stock Exchange and/or such other exchange upon which the Company's stock may be traded or (iii) any provision of any federal or state law, rule or regulation. 56 (b) Restrictions on Stock Awards. Stock Awards granted from the Plan must be subject to the following guidelines: (i) Stock Awards may be granted from the Plan in lieu of cash compensation; and (ii) Except for Stock Awards falling within the 5% Authorization (defined below), Stock Awards that are granted from the Plan other than in lieu of cash compensation (A) pursuant to a stock award program or (B) independently, must provide for a vesting period of a minimum of three (3) years or may provide for a vesting period of less than three (3) years but at least one (1) year if the restrictions period placed upon the Stock Award is performance based. Up to a maximum of Stock Awards equivalent to 5% of the total shares available for grant under the Plan as set forth in the first sentence of Section 3(a) above (the "5% Authorization"), Stock Awards may be granted to officers and employees of the Company other than in lieu of cash compensation and without the necessity of compliance with the vesting or performance based criteria set forth directly above. 57 EX-10 6 exhibit1021.txt EX 10.2.1 RESTRICTED STOCK AW Exhibit 10.2.1 2003 STOCK RESTRICTION AGREEMENT This 2003 Stock Restriction Agreement (the "Agreement") is made as of the 5th day of May, 2003 (the "Agreement Date"), by and between CBL & ASSOCIATES PROPERTIES, INC., a Delaware corporation (the "Company"), and (the "Employee"). The Employee's date of receipt of the Stock Award set forth in this Agreement shall be and is ________________ (the "Receipt Date"). WHEREAS, pursuant to the Plan (as hereinafter defined) and subject to the terms of this Agreement, the Company desires to grant to the Employee shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company. NOW, THEREFORE, in connection with the mutual covenants hereinafter set forth and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions; Conflicts. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed thereto in the Amended and Restated CBL & Associates Properties, Inc. 1993 Stock Incentive Plan (the "Plan"). The terms and provisions of the Plan are incorporated herein and in the event of any conflict or inconsistency between the terms and provisions of the Plan and the terms and provisions of this Agreement, the terms and provisions of the Plan shall govern and control. 2. Grant of Common Stock. Subject to the terms and conditions of this Agreement, the Company hereby grants to the Employee all right, title and interest in shares of Common Stock (the "Stock Award") . 3. Vesting. The Stock Award, subject to the terms, conditions and limitations contained herein, shall vest in accordance with the following installments: Twenty percent (20%) on the first anniversary of the Agreement Date hereof, and an additional twenty percent (20%) on each of the succeeding four (4) anniversaries of the Agreement Date hereof (the "Vesting Period"); provided that, with respect to each such installment, the Employee has remained in continuous employment with the Company from the Agreement Date through the date such installment is designated to vest. 4. Termination of Employment. If the Employee's employment terminates for any reason including death, disability or retirement, any non-vested portion of the Stock Award shall thereupon be deemed forfeited and the Employee shall have no further right, title and/or interest in the non-vested portion of the shares of Common Stock subject to the Stock Award. 5. Rights as a Shareholder. The Employee shall have all of the rights as a shareholder with respect to any shares of Common Stock issued pursuant to the Stock Award subject only to the transfer restrictions set forth in Paragraph 6 below and forfeiture provisions set forth above. The Employee's rights as a shareholder shall include the rights to receive all dividends on the Common Stock and to exercise any voting rights attributable to the Common Stock for so long as the Employee shall own the Common Stock but such rights shall cease as to any non-vested portion of the shares of Common Stock subject to the Stock Award that are forfeited pursuant to the terms of this Agreement. 6. Non-Transferability of Stock Award. Except for any transfers that may be required by law, including pursuant to any domestic relations order or otherwise, no non-vested portion of the Common Stock making up the Stock Award 58 may be transferred by the Employee until the termination of the Vesting Period and any non-permitted attempted transfer by the Employee of any such non-vested portion prior to the termination of the Vesting Period shall be null and void. Any transferee who may receive any of such non-vested portion of the Common Stock making up the Stock Award pursuant to a transfer required by law as set forth above shall be subject to all the terms and provisions of this Agreement and any termination of the employment of the Employee prior to the termination of the Vesting Period shall cause the forfeiture of any non-vested shares of the Common Stock making up the Stock Award even if such shares are in the hands of a transferee. 7. Certificate Legend. All shares of non-vested Common Stock issued to the Employee pursuant to the Stock Award (if any of such shares are issued prior to the vesting thereof) in certificate form shall bear the legend stating that said shares are subject to and their transferability restricted by the terms and provisions of this Agreement. The Company agrees to remove said legend from the referenced shares of Common Stock in the event and at the time the Employee's right to said shares of Common Stock shall vest. As set forth in Paragraph 14 below, upon the vesting of shares of Common Stock making up the Stock Award, such vested shares shall be issued in certificate form to the Employee without the above-stated legend thereon. 8. No Enlargement of Employee Rights. Nothing in this Agreement shall be construed to confer upon the Employee any right to continued employment or to restrict in any way the right of the Company or any Subsidiary or Affiliate to terminate the Employee's employment at any time. 9. Income Tax Withholding. The Company, in its sole discretion, shall make such provisions and take such steps as it may deem necessary or appropriate for the withholding of all Federal, state, local and other taxes required by law to be withheld with respect to the shares of Common Stock issued pursuant to the Stock Award (as such shares vest or if certain tax elections are made by the Employee, i.e., a Section 83(b) election under applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code")) and any dividends paid on any portion of non-vested shares of Common Stock, including, but not limited to, the following: (i) deducting the amount of any such withholding taxes therefrom or from any other amounts then or thereafter payable to the Employee by the Company or any of its Subsidiaries or Affiliates; (ii) requiring the Employee, or the beneficiary or legal representative of the Employee, to pay to the Company the amount required to be withheld or to execute such documents as the Company deems necessary or desirable to enable the Company to satisfy its withholding obligations; and/or (iii) withholding from the shares of Common Stock otherwise payable and/or deliverable one or more of such shares having an aggregate Fair Market Value, determined as of the date the withholding tax obligation arises, less than or equal to the amount of the total withholding tax obligation. 10. Restricted Stock. The Stock Award granted hereunder is intended to be a grant of restricted property to the Employee that is subject to a "substantial risk of forfeiture" as defined in Section 83 of the Code. 11. Binding Effect. This Agreement shall be binding upon the heirs, executors, administrators and successors of the parties hereto. 12. Governing Law. This Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware without reference to the principles of conflicts of laws thereof. 13. Headings. Headings are for the convenience of the parties and are not deemed to be part of this Agreement. 14. Power of Attorney; Restricted Stock Account. The Employee, by execution of this Agreement, does hereby appoint the Company as the Employee's attorney-in-fact for the limited purposes of executing any documents or instruments necessary in conjunction with the shares of Common Stock issued to the Employee pursuant to the Stock Award while such shares are subject to the restrictions provided by this Agreement. The Employee understands and acknowledges that the shares of Common Stock issued to the Employee pursuant to 59 the Stock Award will be held in an un-certificated form in an account maintained by the Company's stock transfer agent until such time as such shares of Common Stock are no longer subject to the restrictions set forth in this Agreement. The Employee understands and acknowledges that as the shares of Common Stock issued to the Employee pursuant to the Stock Award shall vest during the Vesting Period, the Company shall cause such vested shares to be issued out of the above-stated account and delivered to the Employee in certificated form (less any applicable employment taxes) and such vested shares shall no longer be subject to the terms and provisions of this Agreement. The Employee understands and acknowledges that in the event the Employee's employment with the Company, its Subsidiaries or Affiliates, is terminated at any time during the Vesting Period, any non-vested shares of Common Stock making up the Stock Award shall then be cancelled and/or returned to the Company and that the Company shall be entitled to take such action on behalf of the Employee in the form of executing such documents or instruments to authorize the cancellation of such shares and/or return of same to the Company. 15. Section 83(b) Election. By execution of this Agreement, the Employee is acknowledging that he/she understands that he/she may make a Section 83(b) Election with respect to the Stock Award pursuant to applicable provisions of the Code but that such election must be made on or before the date that is thirty (30) days from the Receipt Date set forth above. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Agreement Date first written above. CBL & ASSOCIATES PROPERTIES, INC. By: ---------------------------------------- Stephen D. Lebovitz, President EMPLOYEE: 60 EX-31 7 cert302ceo.txt EX 31.1 CEO Exhibit 31.1 CERTIFICATION I, Charles B. Lebovitz, certify that: (1) I have reviewed this quarterly report on Form 10-Q of CBL & Associates Properties, Inc.; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; (4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ Charles B. Lebovitz ------------------------------------ Charles B. Lebovitz, Chief Executive Officer 61 EX-31 8 cert302cfo.txt EX 31.2 CFO Exhibit 31.2 CERTIFICATION I, John N. Foy, certify that: (1) I have reviewed this quarterly report on Form 10-Q of CBL & Associates Properties, Inc.; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; (4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ John N. Foy ----------------------------------- John N. Foy, Chief Financial Officer 62 EX-32 9 cert906ceo.txt EX 32.1 CEO Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of CBL & ASSOCIATES PROPERTIES, INC. (the "Company") on Form 10-Q for the three months ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Charles B. Lebovitz, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350 (as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002), that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Charles B. Lebovitz - ------------------------------------ Charles B. Lebovitz, Chief Executive Officer August 14, 2003 - ------------------------------------ Date 63 EX-32 10 cert906cfo.txt EX 32.2 CFO Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of CBL & ASSOCIATES PROPERTIES, INC. (the "Company") on Form 10-Q for the three months ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John N. Foy, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350 (as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002), that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John N. Foy - ------------------------------------ John N. Foy, Vice Chairman of the Board, Chief Financial Officer and Treasurer August 14, 2003 - ------------------------------------ Date 64 -----END PRIVACY-ENHANCED MESSAGE-----