10-Q 1 g10q903.txt FORM 10-Q PERIOD ENDED SEPTEMBER 30, 2003 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 2003 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, for the Transition Period From -------- to ----------- Commission file number 001-13301 ---------------------- PRIME RETAIL, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 38-2559212 ---------------------------------- ------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 100 East Pratt Street Nineteenth Floor Baltimore, Maryland 21202 ------------------------------------------ --------------------------- (Address of principal executive offices) (Zip Code) (410) 234-0782 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NOT APPLICABLE -------------------------------------------------------------------------------- (Former name, former address, or former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. As of November 12, 2003, the issuer had outstanding 43,577,916 shares of Common Stock, $.01 par value per share. Page - (2) Prime Retail, Inc. Form 10-Q INDEX PART I: FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002............................................. 1 Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002............. 2 Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2003 and 2002............. 3 Notes to the Consolidated Financial Statements.................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 22 Item 3. Quantitative and Qualitative Disclosures of Market Risk..... 48 Item 4. Controls and Procedures..................................... 49 PART II: OTHER INFORMATION Item 1. Legal Proceedings........................................... 50 Item 3. Defaults Upon Senior Securities............................. 51 Item 4. Submission of Matters to a Vote of Security Holders......... 52 Item 6. Exhibits and Reports on Form 8-K............................ 52 Signatures........................................................... 53 Page - (3) Introduction Unless the context otherwise requires, all references to "we," "us," "our" or the "company" contained in this Quarterly Report on Form 10-Q mean Prime Retail, Inc. and those entities owned or controlled by Prime Retail, Inc., including Prime Retail, L.P. (the "Operating Partnership"). Historical results and percentage relationships set forth in this Quarterly Report on Form 10-Q are not necessarily indicative of future operations. Forward-Looking Statements Statements contained in this Quarterly Report on Form 10-Q, including the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect management's current views with respect to future events and financial performance. In addition, we may make forward-looking statements in future filings with the Securities and Exchange Commission and in written material, press releases and oral statements issued by us or on our behalf. Forward-looking statements include statements regarding the intent, belief, or current expectations of us or our officers, including statements preceded by, followed by, or including forward-looking terminology such as "may," "will," "should," believe," "expect," "anticipate," "estimate," "continue," "predict," or similar expressions with respect to various matters. These statements are subject to potential risks and uncertainties and, therefore, actual results may differ materially. Such forward-looking statements are subject to certain risks and uncertainties, including, but not limited to, the risk associated with our high level of leverage and our ability to refinance such indebtedness as it becomes due; the risk that we or one or more of our subsidiaries are not able to satisfy scheduled debt service obligations or will not remain in compliance with existing loan covenants; the risk of material adverse affects of future events, including but not limited to tenant bankruptcies, abandonments and the non-payment by tenants of contractual rents and additional rents, on our financial performance; the risk related to the retail industry in which our outlet centers compete, including the potential adverse impact of external factors, such as inflation, consumer confidence, unemployment rates and consumer tastes and preferences; the risk associated with our potential asset sales; the risk of potential increases in market interest rates from current levels; the risk associated with real estate ownership, such as the potential adverse impact of changes in local economic climate on the revenues and the value of our properties; the risk associated with litigation; and the risk associated with competition from web-based and catalogue retailers. All forward-looking statements in this report are based on information available to us on the date of this report. We do not undertake to update any forward-looking statements that may be made by us or on our behalf in this report or otherwise. Page - (4) PRIME RETAIL, INC. Unaudited Consolidated Balance Sheets (Amounts in thousands, except share information)

See accompanying notes to consolidated financial statements. Page - (5) PRIME RETAIL, INC. Unaudited Consolidated Statements of Operations (Amounts in thousands, except per share information)

See accompanying notes to consolidated financial statements. Page - (6) PRIME RETAIL, INC. Unaudited Consolidated Statements of Cash Flows (Amounts in thousands)

See accompanying notes to consolidated financial statements. Page - (7) PRIME RETAIL, INC. Unaudited Consolidated Statements of Cash Flows (continued) (Amounts in thousands) Supplemental Disclosure of Non-cash Investing and Financing Activities The following assets and liabilities were disposed in connection with the disposition of properties during the period indicated:

See accompanying notes to consolidated financial statements. Page - (8) Prime Retail, Inc. Notes to Unaudited Consolidated Financial Statements (Amounts in thousands, except share and unit information) Note 1 - Interim Financial Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of recurring accruals, considered necessary for a fair presentation have been included. Operating results for such interim periods are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the consolidated financial statements and notes thereto included in Prime Retail, Inc.'s (the "Company") Annual Report on Form 10-K for the year ended December 31, 2002. Unless the context otherwise requires, all references to "we," "us," "our" or the Company herein mean Prime Retail, Inc. and those entities owned or controlled by Prime Retail, Inc., including Prime Retail, L.P. (the "Operating Partnership"). The consolidated financial statements include the accounts of the Company, the Operating Partnership and the partnerships in which it has a controlling financial interest. Profits and losses are allocated in accordance with the terms of the agreement of limited partnership of the Operating Partnership. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the (i) reported amounts of assets and liabilities, (ii) disclosure of contingent liabilities at the date of the financial statements and (iii) reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investments in unconsolidated joint ventures are accounted for under the equity method of accounting. Income (loss) applicable to minority interests and common shares as presented in the consolidated statements of operations is allocated based on income (loss) before minority interests after income allocated to preferred shareholders. Significant inter-company accounts and transactions have been eliminated in consolidation. Certain prior period financial information has been reclassified to conform to the current period presentation, which did not have an impact on our results of operations or financial position. Note 2 - Recent Accounting Pronouncements In December 2002, the Financial Accounting Standards Board ("FASB") issued Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the disclosures to be made by a guarantor in interim and annual financial statements about the obligations under certain guarantees. FIN No. 45 also clarifies that a guarantor is required to recognize, at the inception of the guarantee, an initial liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN No. 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. We adopted the disclosure provisions of FIN No. 45 effective December 31, 2002. The initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. We did not issue or modify any guarantees during the nine months ended September 30, 2003. See "Guarantees and Guarantees of Indebtedness of Others" contained in Note 4 - "Debt" for additional information. Page - (9) In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 requires the consolidation of an entity by an enterprise (i) if that enterprise, known as a "primary beneficiary", has a variable interest that will absorb a majority of the entity's expected losses if they occur, receive a majority of the entity's expected residual returns if they occur, or both and (ii) if the entity is a variable interest entity, as defined by FIN No. 46. We did not create any variable interest entities during the nine months ended September 30, 2003. We plan to adopt FIN No. 46 in the fourth quarter of 2003 and do not believe that this adoption will have a significant impact on our financial statements for our existing investments in unconsolidated joint ventures. In May 2003, the FASB issued FAS No 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." FAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of these instruments were previously classified as equity. In October 2003, the FASB decided to indefinitely delay the effective date of the provisions of FAS No. 150 related to finite life entities and also indicated that it may modify other guidance in FAS No. 150. In its original form, we did not anticipate FAS No. 150 having a significant impact on our financial statements. However, that assessment may change if the FASB modifies the guidance in FAS No. 150. Note 3 - Property Dispositions We disposed of 17 and 2 properties through various transactions (including sale, joint venture arrangements, foreclosure and transfer of ownership to the respective lender) during 2002 and 2003. In accordance with FAS No. 144, the operating results of these properties are reflected in either our results from continuing operations or discontinued operations through the respective dates of disposition as discussed below. 2002 Dispositions The operating results for seven properties that were sold to joint venture partnerships during 2002 and in which we still have a significant continuing involvement are not classified as discontinued operations in the Consolidated Statements of Operations. Such properties and/or their operating results through the dates of their respective disposition are collectively referred to as the "2002 Joint Venture Properties". The 2002 Joint Venture Properties consist of our sales of (i) Prime Outlets at Hagerstown (the "Hagerstown Center") and six outlet centers (collectively, the "Bridge Properties"). Additionally, the operating results of Phases II and III of the Bellport Outlet Center (the "Bellport Outlet Center"), which was previously owned through a joint venture partnership and was sold during 2002, are not classified as discontinued operations. We accounted for our ownership interest in the Bellport Outlet Center through the date of disposition in accordance with the equity method of accounting. The following table summarizes these dispositions.

We have classified the operating results, including gains and losses related to disposition, for certain properties disposed of during 2002 as discontinued operations in the Consolidated Statements of Operations through their respective dates of disposition. Page - (10) The following table summarizes these dispositions.

2003 Dispositions Latham Center On March 31, 2003, PFP Venture LLC (the "PFP Venture"), a joint venture partnership in which we indirectly have an ownership interest of approximately 26.4% as of September 30, 2003, completed the sale of Prime Outlets at Latham (the "Latham Center"), an outlet center located in Latham, New York. The Latham Center, which was one of the Bridge Properties, was sold to 400 Old Loudon Road Realty, LLC for cash consideration of $2,200. The net cash proceeds from the sale were $184, after (i) repayment of $1,870 of existing mortgage indebtedness on the Bridge Properties and (ii) prorations, closing costs and fees. In connection with the sale of the Latham Center, the PFP Venture recorded a gain on the sale of real estate of $117 during the first quarter of 2003. We account for our investment in the Bridge Properties in accordance with the equity method of accounting. Woodbury Center During August of 2002, certain of our subsidiaries suspended regularly scheduled monthly debt service payments on two non-recourse mortgage loans which were cross-collateralized by Prime Outlets at Vero Beach (the "Vero Beach Center"), located in Vero Beach, Florida, and Prime Outlets at Woodbury (the "Woodbury Center"), located in Woodbury, Minnesota (collectively, the "John Hancock Properties"). These non-recourse mortgage loans were held by John Hancock Life Insurance Company ("John Hancock"). During the second quarter of 2002, we incurred a provision for asset impairment of $12,200 to adjust our carrying value of the Vero Beach Center to its estimated fair value in accordance with the provisions of FAS No. 144. Effective September 9, 2002, John Hancock foreclosed on the Vero Beach Center and its related assets and liabilities, including our carrying value of the indebtedness of $25,126 (principal outstanding of $24,497 and unamortized debt premium of $629), were transferred to John Hancock. Foreclosure on the Vero Beach Center did not have a material impact on our results of operations or financial condition. Effective July 24, 2003, John Hancock foreclosed on the Woodbury Center and its related assets and liabilities, including our carrying value of the indebtedness of $16,643 (principal of $16,331 and unamortized debt premium of $312) were transferred to John Hancock. In connection with the foreclosure of the Woodbury Center, we recorded a non-recurring gain on disposition (included in discontinued operations) of $2,153. Foreclosure on the Woodbury Center did not have a material impact on our results of operations or financial condition. The operating results of the Woodbury Center are classified as discontinued operations in the Consolidated Statements of Operations through the date of disposition for all periods. Page - (11) The following table summarizes the operating results of all properties classified as discontinued operations in the Consolidated Statements of Operations.

Note 4 - Debt We have fixed rate tax-exempt revenue bonds collateralized by properties located in Chattanooga, Tennessee (the "Chattanooga Bonds") which contain (i) certain covenants, including a minimum debt-service coverage ratio financial covenant (the "Financial Covenant") and (ii) cross-default provisions with respect to certain of our other credit agreements. Based on the operations of the collateral properties, we were not in compliance with the Financial Covenant for the quarters ended June 30, September 30 and December 31, 2002. In the event of non-compliance with the Financial Covenant or default, the holders of the Chattanooga Bonds (the "Bondholders") had the ability to put such obligations to us at a price equal to par plus accrued interest. On January 31, 2003, we entered into an agreement (the "Forbearance Agreement") with the Bondholders. The Forbearance Agreement provides amendments to the underlying loan and other agreements that enable us to be in compliance with various financial covenants, including the Financial Covenant. So long as we continue to comply with the provisions of the Forbearance Agreement and are not otherwise in default of the underlying loan and other documents through December 31, 2004, the revised financial covenants will govern. Additionally, certain quarterly tested financial covenants and other covenants become effective June 30, 2004. Pursuant to the terms of the Forbearance Agreement, in February 2003 we funded $1,000 into an escrow account to be used for the potential conversion of certain of the retail space to office space in the collateral properties and agreed that an event of default with respect to the other debt obligations related to the collateral properties would also constitute a default under the Chattanooga Bonds. The outstanding balance of the Chattanooga Bonds was $17,920 as of September 30, 2003. Page - (12) Notes payable included unamortized debt premiums of $6,091 in the aggregate at September 30, 2003. Our debt premiums are being amortized over the terms of the related debt instruments in accordance with the effective interest method. Amortization of debt premiums (included in interest expense in the Consolidated Statements of Operations) was $499 and $1,482 for the three and nine months ended September 30, 2003, respectively, and $478 and $1,416 for the three and nine months ended September 30, 2002, respectively. Defaults on Certain Non-recourse Mortgage Indebtedness In December 2002, we notified the servicer of certain non-recourse mortgage loans (cross-collateralized by Prime Outlets at Bend, Prime Outlets at Post Falls and Prime Outlets at Sedona) totaling $24,919 as of September 30, 2003 that the net cash flow from the properties securing the loans was insufficient to fully pay the required monthly debt service. At that time, certain of our subsidiaries suspended the regularly scheduled monthly debt service payments. Subsequent to our notification to the servicer, we have been remitting on a monthly basis all available cash flow from the properties, after a reserve for monthly operating expenses, as partial payment of the debt service. The failure to pay the full amount due constitutes a default under the loan agreements which allows the lender to accelerate the loan and to exercise various remedies contained in the loan agreements, including application of escrow balances to delinquent payments and, ultimately, foreclosure on the properties which collateralize the loans. The lender has notified us that it has accelerated the loans and intends to acquire the properties through a foreclosure action on the collateral properties unless the parties can negotiate a mutually acceptable transfer of the properties to the lender. However, any foreclosure action on, or other transfer of, these properties is not expected to have a material impact on our results of operations or financial condition because we are currently only remitting available cash flow. The aggregate carrying value of these properties was $21,415 as of September 30, 2003. Such amount is exceeded by the aggregate outstanding balance of the non-recourse mortgage loans of $24,919 as of September 30, 2003. Upon foreclosure or transfer of the collateral properties, we will record a non-recurring gain for the difference between the carrying value of the properties and their related net asset, including the outstanding loan balances. Defeased Notes Payable On December 6, 2002, we completed the sale of two outlet centers (together, the "Colorado Properties"), which were part of the 15 properties contained in the collateral pool securing a first mortgage and expansion loan (the "Mega Deal Loan"), which had a then outstanding balance of $338,940. In connection with the release of the Colorado Properties from the collateral pool, we were required to partially defease the Mega Deal Loan. Therefore, the Mega Deal Loan was bifurcated into (i) a defeased portion in the amount of $74,849 (the "Defeased Notes Payable") and (ii) an undefeased portion in the amount of $264,091, which is still referred to as the Mega Deal Loan. Both the Defeased Notes Payable and the Mega Deal Loan (i) bore interest at a fixed-rate of 7.782% through their optional prepayment date of November 11, 2003 and (ii) required monthly payments of principal and interest pursuant to a 30-year amortization schedule. The Mega Deal Loan is secured by the remaining 13 properties contained in the collateral pool. We used $79,257 of the gross proceeds from the sale of the Colorado Properties to purchase US Treasury Securities with a par value of $78,277, including accrued interest of $226. The US Treasury Securities were deposited into an escrow account controlled by a trustee (the "Trustee Escrow"). The Trustee Escrow was used to pay all scheduled debt service, including a balloon payment of $73,882 on November 11, 2003, due under the Defeased Notes Payable. The $980 premium we paid for the US Treasury Securities was amortized as a reduction to the interest income (included in interest and other income in the Consolidated Statements of Operations) earned on the Trustee Escrow on basis that approximated the effective interest method. Page - (13) As of September 30, 2003, the outstanding balance of the Defeased Notes Payable was $74,046 and the balance of the Trustee Escrow was $74,103 (included in restricted cash in the Consolidated Balance Sheet). As stated above, on November 11, 2003, the Defeased Notes Payable was repaid in full with the remaining funds in the Trustee Escrow. Furthermore, in connection with the partial defeasance of the Mega Deal Loan we amended the Mega Deal Loan so that (i) we were required to fund 10 monthly payments of $500 (an aggregate of $5,000) into a lender escrow to be used as additional cash collateral and (ii) release prices for the remaining 13 properties in the collateral pool were amended to provide for a more orderly refinancing of the Mega Deal Loan. As of September 30, the additional cash collateral had been fully funded and is included in restricted cash in the Consolidated Balance Sheet. Debt Service Obligations The following table summarizes (A) the scheduled principal maturities of our debt, excluding (i) unamortized debt premiums of $6,091, (ii) $24,919 of aggregate non-recourse mortgage indebtedness in default (see "Defaults on Certain Non-recourse Mortgage Indebtedness" above) and (iii) the Defeased Notes Payable of $74,046, which was paid in full on November 11, 2003 (see above), and (B) the related average contractual interest rates by year of maturity as of September 30, 2003.

Such indebtedness in the amount of $479,948 had a weighted-average maturity of 2.1 years and bore contractual interest at a weighted-average rate of 7.98% per annum. At September 30, 2003, all of such indebtedness bore interest at fixed rates. Our remaining scheduled principal payments during 2003 for such indebtedness aggregated $262,555, which includes $261,259 related to the Mega Deal Loan. See "Going Concern" for additional information. Additionally, we are obligated to refinance a first mortgage loan (the "Hagerstown First Mortgage Loan") in the amount of $46,862 on Prime Outlets at Hagerstown (the "Hagerstown Center") on or before June 1, 2004. The Hagerstown First Mortgage Loan was assumed by an unconsolidated joint venture partnership (the "Prime/Estein Venture"), in which we have an indirect 30% ownership interest, in January 2002. See "Prime/Estein Venture Guarantees" contained in "Guarantees and Guarantees of Indebtedness of Others" for additional information. Page - (14) Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated Partnerships Two mortgage loans related to projects in which we, through subsidiaries, indirectly own joint venture interests have matured and are in default. The mortgage loans, at the time of default, were (i) a $10,389 first mortgage loan on Phase I of the Bellport Outlet Center, held by Union Labor Life Insurance Company ("Union Labor"); and (ii) a $13,338 first mortgage loan on Oxnard Factory Outlet, an outlet center located in Oxnard, California, held by Fru-Con. An affiliate of ours has a 50% ownership interest in the partnership, which owns Phase I of the Bellport Outlet Center. Fru-Con and us are each a 50% partner in the partnership that owns the Oxnard Factory Outlet. Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center and a receiver was appointed March 27, 2001 by the court involved in the foreclosure action. Effective May 1, 2001, a manager hired by the receiver began managing and leasing Phase I of the Bellport Outlet Center. A judgment for foreclosure was entered on January 25, 2003 in the amount of $12,711. The foreclosure occurred on March 17, 2003 with Union Labor acquiring the property for $5,100. Approximately $1,100 of post-judgment interest and fees was subsequently awarded to Union Labor. We continue to negotiate the terms of a transfer of our ownership interest in Oxnard Factory Outlet to Fru-Con. We do not manage or lease Oxnard Factory Outlet. We believe neither of these mortgage loans is recourse to us. It is possible, however, that either or both of the respective lenders will, after completing its foreclosure action, file a lawsuit seeking to collect from us the difference between the value of the mortgaged property and the amount due under the loan. If such an action is brought, the outcome, and our ultimate liability, if any, cannot be predicted at this time. In addition, we are currently not receiving, directly or indirectly, any cash flow from Oxnard Factory Outlet and were not receiving any cash flow from Phase I of the Bellport Outlet Center prior to the loss of control of such project. We account for our interests in (i) Phases I of the Bellport Outlet Center and (ii) the Oxnard Factory Outlet in accordance with the equity method of accounting. As of September 30, 2003, we had no carrying value for our investment in these properties. Guarantees and Guarantees of Indebtedness of Others HGP Guarantees On July 15, 2002, Horizon Group Properties, Inc. and its affiliates ("HGP") announced they had refinanced a secured credit facility (the "HGP Secured Credit Facility") through a series of new loans aggregating $32,500. Prior to the refinancing, we were a guarantor under the HGP Secured Credit Facility in the amount of $10,000. In connection with the refinancing, our guarantee was reduced to a maximum of $4,000 as security for a $3,000 mortgage loan and a $4,000 mortgage loan (collectively, the "HGP Monroe Mortgage Loan") secured by HGP's outlet shopping center located in Monroe, Michigan. In the event the HGP Monroe Mortgage Loan was reduced to $5,000 or less through repayments then our guarantee would be extinguished. In August 2003, HGP repaid $2,000 of the HGP Mortgage Loan and our guarantee obligation was satisfied. Additionally, we were a guarantor with respect to certain mortgage indebtedness (the "HGP Office Building Mortgage") in the amount of $2,129 on HGP's corporate office building and related equipment located in Norton Shores, Michigan. However, the HGP Office Building Mortgage was refinanced in August 2003 and our guarantee obligation was, thus removed. Page - (15) Prime/Estein Venture Guarantees We indirectly have a 30% ownership interest in the Prime/Estein Venture, an unconsolidated joint venture partnership which owns three outlet centers (collectively, the "Prime/Estein Properties"). The Prime/Estein Properties consist of Prime Outlets at Birch Run (the "Birch Run Center"), Prime Outlets at Hagerstown (the "Hagerstown Center") and Prime Outlets at Williamsburg (the "Williamsburg Center"). Pursuant to Prime/Estein Venture-related documents to which affiliates of ours are parties, we are obligated to provide to, or obtain for, the Prime/Estein Venture fixed-rate financing at an annual rate of 7.75% (the "Interest Rate Subsidy Agreement") for the Prime/Estein Venture Properties. In August 2001, we, through affiliates, completed a refinancing of $63,000 of first mortgage loans secured by the Birch Run Center. The refinanced loan (the "Birch Run First Mortgage") (i) has a term of 10-years, (ii) bears interest at an effective rate of 8.12% and (iii) requires monthly payments of principal and interest pursuant to a 25-year amortization schedule. Pursuant to the Interest Rate Subsidy Agreement, we are required to pay to the Prime/Estein Venture the difference between the cost of the financing at an assumed rate of 7.75% and the actual cost of such financing at the annual rate of 8.12% (the "Interest Rate Subsidy Obligation"). The net present value of the Interest Rate Subsidy Obligation (included in accounts payable and other liabilities in the Consolidated Balance Sheet) was $1,354 as of September 30, 2003. In October 2001, we, through affiliates, completed the refinancing of a $32,500 first mortgage loan secured by the Williamsburg Center. The new first mortgage loan (the "Williamsburg First Mortgage") (i) has a term of 10-years, (ii) bears interest at a fixed-rate of 7.69% and (iii) requires monthly payments of principal and interest pursuant to a 25-year amortization schedule. Pursuant to the Interest Rate Subsidy Agreement, the Prime/Estein Venture is required to pay to us the difference between the cost of the financing at an assumed rate of 7.75% and the actual cost of such financing at the annual rate of 7.69%. On January 11, 2002, we sold the Hagerstown Center to the Prime/Estein Venture. In connection with the sale, the Prime/Estein Venture assumed the Hagerstown First Mortgage in the amount of $46,862; however, our guarantee of such indebtedness remains in place. Additionally, we are obligated to refinance the Hagerstown First Mortgage on behalf of the Prime/Estein Venture on or before June 1, 2004, the date on which such indebtedness matures. Additionally, the Prime/Estein Venture's cost of the Hagerstown First Mortgage and any refinancing of it are fixed at an annual rate of 7.75% for a period of 10 years. If the actual cost of such indebtedness should exceed 7.75% at any time during the 10-year period, we will be obligated to pay the difference to the Prime/Estein Venture. If the actual cost of such indebtedness is less than 7.75% at any time during the 10-year period, however, the Prime/Estein Venture will be obligated to pay the difference to us. The actual cost of the Hagerstown First Mortgage is 30-day LIBOR plus 1.50%, or 2.62% as of September 30, 2003. Because the Hagerstown First Mortgage bears interest at a variable rate, we are exposed to the impact of interest rate changes. We have not recorded any liability related to our guarantee of the Hagerstown First Mortgage; however, in connection with the sale of the Hagerstown Center, we established a reserve for estimated refinancing costs in the amount of $937, which is included in accounts payable and other liabilities in the Consolidated Balance Sheet as of September 30, 2003. See Note 3 - "Property Dispositions" for additional information. Page - (16) Second Horizon First Mortgage Loan In April 1998, Horizon consummated an agreement with Castle & Cooke Properties, Inc. ("CCP") which released Horizon from future obligations under a long-term lease of the Dole Cannery outlet center in Honolulu, Hawaii. In connection with an amendment of the Second Horizon Group Limited Partnership ("Second Horizon") agreement (the "Amended Partnership Agreement"), Horizon transferred to an affiliate of CCP (the "CCP Affiliate") substantially all of Horizon's economic interest, but not legal title, in an outlet center (the "Lake Elsinore Center") in Lake Elsinore, California. The Lake Elsinore Center is one of five properties owned by Second Horizon which jointly and severally secure a non-recourse, first mortgage loan (the "Second Horizon Mortgage Loan"). As a result of our merger with Horizon in June 1998, we own the economic interests of the other four properties (the "Prime Properties") and legal title to all five entities. The outstanding balance of the Second Horizon Mortgage Loan as of September 30, 2003 was $94,586, of which $66,330 was allocated to the Prime Properties and is included in notes payable in our Consolidated Balance Sheet as of that date. The remaining $28,034 outstanding as of September 30, 2003 was allocated to the Lake Elsinore Center. We, through our affiliates, assumed certain obligations under the Amended Partnership Agreement with respect to the Second Horizon Mortgage Loan in connection with our merger with Horizon in June 1998. Specifically, we are obligated to contribute sufficient capital to Second Horizon (i) for certain operating expenses associated with the Prime Properties and (ii) to satisfy the outstanding balances of the allocated loan amounts for the Prime Properties under the Second Horizon Mortgage Loan (including any associated expenses) to enable the Second Horizon Mortgage Loan to be repaid in full at its optional prepayment date of October 11, 2006. CCP Affiliate and its parent company are similarly obligated with respect to the Lake Elsinore Center. No claims have been made with respect to these obligations and we have not recorded any liability related to these obligations as of September 30, 2003. Mandatory Redemption Obligation On July 26, 2002, we sold the Bridge Properties to the PFP Venture. In connection with the sale, we guaranteed FRIT PRT Bridge Acquisition LLC ("FRIT"), a third-party joint venture partner, (i) a 13% return on its initial $17,236 of invested capital and (ii) the full return of its invested capital (the "Mandatory Redemption Obligation") by December 31, 2003. As of September 30, 2003, our Mandatory Redemption Obligation with respect to the full return of FRIT's invested capital was $14,489 (included in accounts payable and other liabilities in the Consolidated Balance Sheet). See "Going Concern" for additional information. Going Concern Our liquidity depends on cash provided by operations and potential capital raising activities such as funds obtained through borrowings, particularly refinancing of existing debt, and cash generated through asset sales. Although we believe that estimated cash flows from operations and potential capital raising activities will be sufficient to satisfy our scheduled debt service and other obligations and sustain our operations for the next year, there can be no assurance that we will be successful in obtaining the required amount of funds for these items or that the terms of the potential capital raising activities, if they should occur, will be as favorable as we have experienced in prior periods. Page - (17) As of September 30, 2003, our Mega Deal Loan had an outstanding principal balance of $261,259. The Mega Deal Loan had an optional prepayment date of November 11, 2003 and an outstanding principal balance of $260,681 on such date. As discussed below, certain restrictions have been placed upon us with respect to refinancing the Mega Deal Loan. The Mega Deal Loan was not repaid on the optional prepayment date and as a result the interest rate shall be increased by up to 5.0% to 12.782%. Additionally, commencing on November 11, 2003 the lender may retain all excess cash flow from the 13 properties which secure the Mega Deal Loan. Any excess cash flow retained by the lender can be applied to principal after payment of interest. The aforementioned increase in the Mega Deal Loan's interest rate and the potential loss of excess cash flow from the 13 properties could have severe consequences on our ability to fund our operations. We currently believe a shortfall could occur with respect to refinancing the Mega Deal Loan because we may be unable to place mortgage indebtedness at commercially reasonable terms on all of the properties in the current collateral pool. We are actively marketing for sale several of the collateral properties because their sale could alleviate some or all of any potential shortfall. We also continue to evaluate other capital raising activities, such as the placement of mezzanine level debt on certain of the collateral properties. We caution that our assumptions regarding the refinancing and sale of the collateral properties are based on current market conditions and, therefore, are subject to various risks and uncertainties, including changes in economic conditions which may adversely impact our ability to refinance the Mega Deal Loan at favorable rates or in a timely and orderly fashion and which may adversely impact our ability to consummate various asset sales or other capital raising activities. On July 8, 2003, an affiliate of The Lightstone Group, LLC ("Lightstone") and the Company entered into a merger agreement (the "Merger Agreement") pursuant to which the Company would be acquired by such affiliate (the "Merger" or the "Transaction"). (See Note 10 - "Merger Agreement" for additional information.) In connection with the execution of the Merger Agreement, certain restrictions were placed on us with respect to the refinancing of the Mega Deal Loan. Specifically, we were restricted from negotiating or discussing the refinancing of the properties securing the Mega Deal Loan with any lenders until September 15, 2003, at which time we were permitted to discuss refinancing of the Mega Deal Loan with certain enumerated lenders. However, we are precluded from closing any loans relating to the refinancing of the Mega Deal Loan until January 11, 2004. Lightstone is obligated to (i) pay (A) one-half of the additional interest incurred by us between November 11, 2003 and December 31, 2003, and (B) all of the additional interest incurred by us between January 1, 2004 and January 11, 2004 with respect to the Mega Deal Loan and (ii) loan us, at a rate of 7% and for a term of not less than one year, an amount equal to any excess cash flow retained by the lender and applied to principal under the Mega Deal Loan commencing on November 11, 2003 and through January 11, 2004. In addition to the restrictions with respect to the refinancing of the Mega Deal Loan discussed above, pursuant to the terms of the Merger Agreement, we have also agreed to certain conditions pending the closing of the Transaction. These conditions provide for certain restrictions with respect to our operating and refinancing activities (see Note 10 - "Merger Agreement" for additional information). These restrictions could adversely affect our liquidity in addition to our ability to refinance the Mega Deal Loan in a timely and orderly fashion. If the Merger Agreement is terminated under certain circumstances, we would be required to make payments to Lightstone ranging from $3,500 to $6,000 which would adversely affect our liquidity. See Note 10 - "Merger Agreement" for additional information. Page - (18) In connection with the completion of the sale of the Bridge Properties in July 2002, we guaranteed to FRIT (i) a 13% return on its $17,236 of invested capital, and (ii) the full return of the Mandatory Redemption Obligation by December 31, 2003. As of September 30, 2003, the Mandatory Redemption Obligation (included in accounts payable and other liabilities in the Consolidated Balance Sheet) was $14,489. We continue to seek to generate additional liquidity to repay the Mandatory Redemption Obligation through the placement of additional indebtedness on the Bridge Properties. There can be no assurance that we will be able to complete such capital raising activities by December 31, 2003 or that such capital raising activities, if they should occur, will generate sufficient proceeds to repay the Mandatory Redemption Obligation in full. Failure to repay the Mandatory Redemption Obligation by December 31, 2003 would constitute a default, which would enable FRIT to exercise its rights with respect to the collateral pledged as security to the guarantee, including some of our partnership interests in the 13 properties which secure the Mega Deal Loan. Because the Mandatory Redemption Obligation is secured by some of our partnership interests in the 13 properties which secure the Mega Deal Loan, we may be required to repay the Mandatory Redemption Obligation before, or in connection with, the refinancing of the Mega Deal Loan. Additionally, any change in control with respect to us accelerates the Mandatory Redemption Obligation. In connection with the execution of the Merger Agreement, Lightstone has agreed to provide sufficient financing, if necessary, to repay the Mandatory Redemption Obligation in full at its maturity. The new financing would be at substantially similar economic terms and conditions as those currently in place for the Mandatory Redemption Obligation and would have a one-year term. See Note 10 - "Merger Agreement" for additional information. As previously discussed, we currently have a Forbearance Agreement in place with respect to our Chattanooga Bonds in the amount of $17,920. However, based on our current projections, we believe we will not be in compliance with certain quarterly tested financial covenants when they become effective on June 30, 2004 which would enable the Bondholders to elect to put the Chattanooga Bonds to us at their par amount plus accrued interest. We continue to explore opportunities to (i) obtain alternative financing from other financial institutions, (ii) sell the properties securing the Chattanooga Bonds and (iii) explore other possible capital transactions in order to generate cash to repay the Chattanooga Bonds. There can be no assurance that we will be able to complete any such activity sufficient to repay the amount outstanding under the Chattanooga Bonds in the event the Bondholders are able and elect to exercise their put rights. These conditions raise substantial doubt about our ability to continue as a going concern. The financial statements contained herein do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties. Note 5 - Shareholders' Equity To qualify as a real estate investment trust ("REIT") for federal income tax purposes, we are required to pay distributions to our common and preferred shareholders of at least 90% of our REIT taxable income in addition to satisfying other requirements. Although we intend to make distributions, if necessary, to remain qualified as a REIT under the Code, we also intend to retain such amounts as we consider necessary from time to time for our capital and liquidity needs. Page - (19) Our policy remains to pay distributions only to the extent necessary to maintain our status as a REIT for federal income tax purposes. During 2002, we were not required to pay any distributions in order to maintain our status as a REIT and based on our current federal income tax projections, we do not expect to pay any distributions during 2003. On November 15, 2003 we will be in arrears on 16 quarters of preferred stock distributions due February 15, 2000 through November 15, 2003, respectively. We may not make distributions to our common shareholders or our holders of common units of limited partnership interests in the Operating Partnership unless we are current with respect to distributions to our preferred shareholders. As of September 30, 2003, unpaid dividends for the period beginning on November 16, 1999 through September 30, 2003 on our Series A Senior Cumulative Preferred Stock ("Series A Senior Preferred Stock") and Series B Cumulative Convertible Participating Preferred Stock ("Series B Convertible Preferred Stock") aggregated $23,395 and $64,460, respectively. The annualized dividends on our 2,300,000 shares of Series A Senior Preferred Stock and 7,828,125 shares of Series B Convertible Preferred Stock outstanding as of September 30, 2003 are $6,037 ($2.625 per share) and $16,635 ($2.125 per share), respectively. Note 6 - Legal Proceedings Except as described below, neither we nor any of our properties are currently subject to any material litigation, nor to our knowledge, is any material or other litigation threatened against us, other than routine litigation arising in the ordinary course of business, some of which is expected to be covered by liability insurance and all of which collectively is not expected to have an adverse effect on our consolidated financial statements. Certain tenants in our and our affiliates' outlet centers have made or may make allegations concerning overcharging for common area maintenance ("CAM") and promotion fund charges because of varying clauses in their leases pursuant to which they claim under various circumstances that they were not required to pay some or all of the pass-through charges. Such claims if asserted and found meritorious, could have a material affect on our financial condition. Determination of whether liability would exist to us would depend on interpretation of various lease clauses within a tenant's lease and all of the other leases at each center collectively. To date such issues have been raised and resolved with various tenants, some of which at one time or another were the subject of litigation, or threatened litigation with us. Additionally, on April 9, 2003, Gap Inc. notified us that it believes it is entitled to a refund of certain pass-through charges as a result of certain clauses in its leases. The Company and Gap, Inc. are in discussions concerning the claims of Gap, Inc. In the second quarter of 2002, we recorded a non-recurring charge to establish a reserve in the amount of $3,000 for resolution of these matters. This reserve was estimated in accordance with our established policies and procedures concerning loss contingencies for additional information. The balance of the unused reserve (which is included in the accounts payable and other liabilities in the Consolidated Balance Sheet) is $2,240 as of September 30, 2003. Based on presently available information, we believe it is probable the remaining reserve will be utilized over the next several years in resolving claims relating to the pass-through and promotional fund provisions contained in our leases, inclusive of amounts that may be owed, if any, to Gap Inc. We caution, however, that given the inherent uncertainties of litigation and the complexities associated with a large number of leases and other factual questions at issue, actual costs may vary from this estimate. No other such tenant, however, has filed a suit or indicated to us that it intends to file a suit. Nevertheless, it is too early to make any predictions as to whether we or our affiliates may be found liable with respect to other tenants, or to predict damages should liability be found. Page - (20) Our affiliates routinely file lawsuits to collect past rent due from, and to evict, tenants which have defaulted under their leases. There are currently dozens of such actions pending. In addition to defending against our affiliates' claims and eviction actions, some tenants file counterclaims against our affiliates. A tenant who files such a counterclaim typically claims that our affiliate which owns the outlet center in question defaulted under the tenant's lease, overcharged the tenant for CAM and promotion fund charges, made misrepresentations during the leasing process, or failed to maintain or market the outlet center in question as required by the lease. One such case involves a collections and eviction action in Puerto Rico captioned Outlet Village of Puerto Rico Limited Partnership, S.E. v. WEPA, Inc., and another, for instance, involves a collection case in San Marcos, Texas, captioned, San Marcos Factory Stores, Ltd. v. SM Collectibles, Inc. d/b/a Country Clutter. In response to such counterclaims our affiliates usually continue to pursue their collection or eviction actions and defend against the counterclaims. Despite the fact that we and our affiliates believe such counterclaims are without merit and defend against them vigorously, the outcome of all such counterclaims, and, thus, the liability, if any, of us and our affiliates, cannot be predicted at this time. Several entities (the "eOutlets Plaintiffs") filed or stated an intention to file lawsuits (collectively, the "eOutlets Lawsuits") against us and our affiliates arising out of our on-line venture, primeoutlets.com. inc., also known as eOutlets, an affiliate of ours. primeoutlets.com, inc. filed for protection under Chapter 7 of the United States Bankruptcy Code in November of 2000 under the name E-Outlets Resolution Corp. (the "Debtor"). The eOutlets Plaintiffs sought to hold us and our affiliates responsible under various legal theories for liabilities incurred by primeoutlets.com, inc., including the theories that we guaranteed the obligations of eOutlets and that we were the "alter-ego" of eOutlets. Other than the suit filed on November 5, 2002 and discussed below, these eOutlets Lawsuits against us have been resolved or are now barred by the applicable statute of limitations or otherwise. On November 5, 2002, the bankruptcy trustee for the Debtor brought suit against Prime Retail, L.P., Prime Retail, Inc., and Prime Retail E-Commerce, Inc. (the "Entity Defendants") and certain former directors of the Debtor (the "Individual Defendants"). Motions to dismiss the suit were filed by all Defendants and a hearing was held on September 23, 2003. After the hearing, the Trustee's remaining claims involve promissory estoppel, breach of contract, breach of fiduciary duty, tortious interference with prospective business advantage, and preferences against the Entity Defendants, and breach of fiduciary duty and gross negligence against the individual defendants. We have tendered the suit, both as to the Entity Defendants and Individual Defendants, to the Directors' and Officers' insurance carrier. All Defendants believe the suit is without merit and plan on defending it vigorously. Nevertheless, the outcome of this lawsuit, and the ultimate liability of us, if any, cannot be predicted at this time. In May 2001, we, through affiliates, filed suit against Fru-Con Construction, Inc. ("FCC"), the lender on Prime Outlets at New River ("New River") as a result of FCC's foreclosure of New River upon the maturation of the loan. We and our affiliates allege that they have been damaged because of FCC's failure to dispose of the collateral in a commercially reasonable manner and as a result of a violation of federal trademark laws. We, through affiliates, have also filed suit against The Fru-Con Projects, Inc. ("Fru-Con"), a partner in Arizona Factory Shops Partnership and an affiliate of FCC. We and our affiliates allege that Fru-Con failed to use reasonable efforts to assist in obtaining refinancing. Fru-Con has claims pending against us and our affiliates, as part of the same suit, alleging that we and our affiliates breached our contract with Fru-Con by not allowing Fru-Con to participate in an outlet project in Sedona, Arizona (the "Sedona Project") and breached a management and leasing agreement by simultaneously managing and leasing the Sedona Project. We believe our affiliates and us acted property and FCC did not act properly. We and our affiliates will vigorously defend the claims filed against them and prosecute the claims they filed. Nevertheless, the ultimate outcome of the suit, including the liability, if any, of us and our affiliates, cannot be predicted at this time. Page - (21) On August 29, 2003, the Company received notice of a purported class action lawsuit against the Company, the Company's board of directors, Prime Outlets Acquisition Company, LLC and The Lightstone Group, LLC (collectively, "Lightstone") filed by four related series A preferred stockholders (the "Plaintiffs"), in the Circuit Court for Baltimore City, Maryland (the "Court") on August 12, 2003 concerning the Merger. The lawsuit alleges, among other things, that the Company's directors breached their fiduciary duties in approving the Merger, that the consideration payable in respect of the series A preferred stock is unfair and inadequate and that the information made available by the Company in connection with the transaction is deficient. The plaintiffs sought, among other things, that the transaction contemplated by the Merger Agreement be enjoined or, in the event such transaction is consummated, that it be rescinded and damages be awarded to class members. On September 29, 2003, the defendants filed a motion to dismiss the original complaint. In response, on October 8, 2003, the Plaintiffs filed a Verified First Amended Class Action Complaint along with a motion for expedited proceedings and subsequent preliminary injunction hearing. After a court conference, the Plaintiffs converted their motion for a preliminary injunction into one for a temporary restraining order seeking to enjoin the special meeting for and the scheduled vote on the transaction. The Court held a hearing on the defendants' motion to dismiss and the motion for temporary restraining order on October 24 and 28, 2003. On October 28, 2003, the Plaintiffs announced that they were withdrawing their request for injunctive relief, and would not seek to prevent the special meeting from occurring. The Court ruled that it would dismiss the First Amended Complaint, but allow the Plaintiffs 30 days to file a second amended complaint. Note 7 - Investment in Unconsolidated Partnerships We account for our investment in unconsolidated joint ventures in accordance with the equity method of accounting as we exercise significant influence, but do not control these entities. In all of our joint venture arrangements, the rights of the investors are both protective as well as participating. Therefore, these participating rights preclude us from consolidating our investments. Our investments are recorded initially at our cost and subsequently adjusted for equity in earnings (losses) and cash contributions and distributions. As of September 30, 2003 our interests in joint venture partnerships included (i) three outlet centers owned by the Prime/Estein Venture and (ii) five properties owned by the PFP Venture. The Prime/Estein Venture owns the Birch Run Center, the Williamsburg Center and the Hagerstown Center which contain an aggregate 1,485,000 square feet of GLA. The PFP Venture owns the Bridge Properties (Prime Outlets at Anderson, Prime Outlets at Calhoun, Prime Outlets at Gaffney, Prime Outlets at Lee and Prime Outlets at Lodi) which contain an aggregate 1,261,000 square feet of GLA. Our equity in earnings of unconsolidated joint venture partnerships was $521 and $2,273 during the three and nine months ended September 30, 2003, respectively, and $255 and $(181) during the three and nine months ended September 30, 2002, respectively. Our equity in earnings of unconsolidated joint venture partnerships is included in interest and other income in the Consolidated Statements of Operations. The following summarizes unaudited condensed financial information for our investment in unconsolidated joint venture partnerships:

Page - (22) Note 8 - Stock-Based Compensation In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure." FAS No. 148 provides transition methods for entities that elect to adopt the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 requires disclosure of comparable information regarding our method of accounting for stock-based employee compensation for all interim periods. We account for our stock-based employee compensation, which is in the form of common share option grants, under the intrinsic method of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB No. 25, no compensation expense is to be recognized for the common share option grants when the exercise price of the options equals or exceeds the market price of the underlying shares at the date of grant. Under our stock incentive plans, the exercise price for all stock options granted have been no less than the fair market value of our common stock on the date of grant. Accordingly, we have not recorded any compensation expense. Pro-forma information regarding net income and earnings per share is required by FAS No. 123, "Accounting for Stock-Based Compensation," and has been determined as if we had accounted for our stock compensation under the fair value method of that statement. Under the fair value method of FAS No. 123, we would have recognized no additional compensation expense during the three and nine months ended September 30, 2003 and 2002. Note 9 - Special Charges Provision for Asset Impairment During the second quarter of 2003, certain events and circumstances related to two of our properties occurred, including further reduced occupancy and limited leasing success, that indicated these properties were impaired on an other than temporary basis. As a result, we recorded a provision for asset impairment aggregating $6,590 representing the write-down of these properties to their estimated fair values in accordance with the requirements of FAS No. 144, "Accounting for Impairment of Disposal of Long-lived Assets." During the third quarter of 2002, certain events and circumstances occurred, including changes to our anticipated holding periods, reduced occupancy and limited leasing success, that indicated certain of our properties were impaired on an other than temporary basis. As a result, we recorded a provision for asset impairment aggregating $81,619 representing the write-down of these properties to their estimated fair values in accordance with the requirements of FAS No. 144. Non-recurring Other Charges During the second quarter of 2002, we recorded a non-recurring charge in the amount of $3,000 to establish a reserve for pending and potential tenant claims with respect to lease provisions related to their pass-through charges and promotional fund charges. We had previously recorded a non-recurring charge in the amount of $2,000 to establish a reserve for similar matters during the fourth quarter of 2001. To date, we have entered into settlement agreements, which provided for payments aggregating $2,760, of which $2,607 was paid in 2002 and $153 was paid in January 2003. The remaining reserve of $2,240 is included in accounts payable and other liabilities in the Consolidated Balance Sheet as of September 30, 2003. See Note 6 - "Legal Proceedings" for additional information. Page - (23) These reserves were estimated in accordance with our established policies and procedures with respect to loss contingencies and are based on our current assessment of the likelihood of any adverse judgments or outcomes to these matters. Based on presently available information, we believe it is probable the remaining reserve will be utilized over the next several years in connection with the resolution of further claims relating to the pass-through and promotional fund provisions contained in our leases. We caution, however, that given the inherent uncertainties of litigation and the complexities associated with a large number of leases and other factual questions at issue, actual costs may vary from our estimate. Note 10 - Merger Agreement In June 2002, we selected Houlihan Lokey Howard & Zukin Capital to assist us in exploring recapitalization, restructuring, financing and other strategic alternatives designed to strengthen our financial position and address our long-term capital requirements. Costs incurred related to such activities are reflected in corporate general and administrative expense in the accompanying Consolidated Statements of Operations. We are currently a party to the Merger Agreement (dated as of July 8, 2003 and as amended by that first amendment dated as of September 3, 2003, and as otherwise amended), with Prime Outlets Acquisition Company, LLC (the "Buyer"), a Delaware limited liability company which is an affiliate of Lightstone, a New Jersey-based real estate company, which provides for us to be merged with and into the Buyer. Consummation of the Transaction is subject to a number of conditions including the approval of the Transaction and the Merger Agreement by the holders of at least 66 2/3% of both our Series A Senior Preferred Stock and Series B Convertible Preferred Stock, each voting separately as a class, and the approval of a majority of our common stockholders voting as a separate class, as well as other customary approvals. The Transaction, which will result in aggregate consideration of $115,514 payable to our stockholders and unit holders, has a total value of approximately $638,000, including debt expected to be assumed by the Buyer. Under the terms of the Merger Agreement, each holder of our Series A Senior Preferred Stock will receive cash in the amount of $18.40 per share, each holder of our Series B Convertible Preferred Stock will receive cash in the amount of $8.169 per share, and each holder of our common stock will receive cash in the amount of $0.17 per share. Pursuant to the terms of the Merger Agreement, the Buyer and the Company have agreed to certain conditions pending the closing of the Transaction. These conditions provide for certain restrictions with respect to our operating and refinancing activities, including our refinancing of the Mega Deal Loan (see Note 4 - "Debt" of the Notes to Consolidated Financial Statements for additional information). Our board of directors, as well as a special committee comprised of disinterested members of the board of directors (the "Special Committee"), have approved the Transaction and the Merger Agreement and recommended that the stockholders vote in favor of the Transaction. Because our charter does not address the allocation of consideration among our various classes of capital stock in the Transaction, such allocation was determined by the Special Committee and approved by the board of directors. Houlihan Lokey Howard & Zukin Capital acted as financial advisor to the Special Committee and Houlihan Lokey Howard & Zukin Financial Advisors, Inc., an affiliate of Houlihan Lokey Howard & Zukin Capital, has provided an opinion to the Special Committee and our board of directors that the consideration to be received by each of the classes of our stock, considered independently, is fair to such respective classes, from a financial point of view. Formal documentation relating to the Transaction and the Merger Agreement has been filed with the Securities and Exchange Commission and sent to our stockholders and limited partners. Page - (24) Concurrent with the consummation of the Transaction, the agreement of limited partnership of the Operating Partnership will be amended and restated (the "Amended Partnership Agreement") pursuant to which holders of common units in the Operating Partnership (other than common units held by us) will have the opportunity to exchange all, but not less than all, of their units for a like number of preferred units in the Operating Partnership ("Preferred Unit"). Each holder of Preferred Units will be entitled to require the Operating Partnership to redeem all of such holder's Preferred Units for an amount per unit equal to $0.17 (the consideration paid for a share of common stock of the Company in the Transaction) plus accrued and unpaid distributions at the rate of 6% per annum. In addition, the Amended Partnership Agreement contains certain tax related provisions that, subject to certain exceptions, will benefit holders of Preferred Units for a period of seven years including restrictions on the sale of properties and requirements to allocate debt in a certain manner. We have agreed to pay the Buyer a termination fee of $4,500, plus expenses of up to $1,500, if the Transaction is not completed under certain circumstances, including our election to pursue an alternative transaction. In certain other circumstances in which the Transaction has not been completed, including the failure to obtain the stockholder approval of the Transaction, a termination fee will not be payable but we have agreed to reimburse the Buyer for its expenses up to $3,500. As collateral for these obligations, we also entered into an agreement with Lightstone providing for the assignment of our rights to, and interest in, an escrow of $2,800 which was established in connection with our sale of Prime Outlets of Puerto Rico in December 2002 to an affiliate of Lightstone. The special meeting of stockholders (the "Special Meeting") for the purpose of, among other things, voting on the Transaction was originally scheduled for Thursday, October 30, 2003. On October 30, 2003, we announced that the Special Meeting had been adjourned to November 4, 2003 and later announced on November 4, 2003 that the Special Meeting had been adjourned again until Tuesday, November 18, 2003 to provide stockholders with additional time to cast their vote on the Transaction. Before the adjournment of the Special Meeting on October 30, 2003, our common stockholders approved an amendment to our charter to reduce the required vote of the common stockholders to approve a merger from two-thirds to a majority. There can be no assurance as to the timing, terms or completion of the Transaction. Page - (25) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Amounts in thousands, except share, unit and square foot information) Introduction Unless the context otherwise requires, all references to "we," "us," "our" or the "company" herein mean Prime Retail, Inc. and those entities owned or controlled by Prime Retail, Inc., including Prime Retail, L.P. (the "Operating Partnership"). The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. Our operations are substantially conducted through the Operating Partnership. We have an 80% general partnership interest in the Operating Partnership with full and complete control over its management, not subject to removal by the limited partners. We are dependent upon the distributions or other payments from the Operating Partnership to meet our financial obligations. Historical results and percentage relationships set forth herein are not necessarily indicative of future operations. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements and Notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. These Consolidated Financial Statements and Notes thereto have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of such statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent liabilities. We evaluate our estimates on an on-going basis; including those related to (i) revenue recognition, (ii) provisions for bad debt on accounts receivable, (iii) potential impairment of the carrying value of rental properties held for use, (iv) capitalization and depreciation of significant renovations and improvements and (v) contingencies for debt guarantees and litigation. We base our estimates on historical trends and certain other assumptions that we believe are reasonable under the particular circumstances. These estimates ultimately form the basis for making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. To assist you in understanding our financial condition and results from operations, we have identified our critical accounting policies and discussed them below. These accounting policies are most important to the portrayal of our financial condition and results from operations, either because of the significance of the financial statement items to which they relate or because they require our management's most difficult, subjective or complex judgments. Revenue Recognition Leases with tenants are accounted for as operating leases. Minimum rental income is recognized on a straight-line basis over the term of the lease and unpaid rents are included in accounts receivable, net in the accompanying Consolidated Balance Sheets. Certain lease agreements contain provisions, which provide for rents based on a percentage of sales or based on a percentage of sales volume above a specified threshold. These contingent rents are not recognized until the required thresholds are exceeded. In addition, the lease agreements generally provide for the reimbursement of real estate taxes, insurance, advertising and certain common area maintenance costs. These additional rents and tenant reimbursements are accounted for on the accrual basis. Page - (26) Bad Debt Expense We regularly review our accounts receivable to determine an appropriate amount for the allowance for doubtful accounts based upon the impact of economic conditions on ours tenants' ability to pay, past collection experience and such other factors which, in our judgment, deserve current recognition. In turn, a provision for uncollectible accounts receivable ("bad debt expense") is charged against the allowance to maintain the allowance level within this range. If the financial condition of our tenants were to deteriorate, resulting in impairment in their ability to make payments due under their leases, additional allowances may be required. Impairment of Rental Property We monitor our Properties for indicators of impairment on an on-going basis. We record a provision for impairment when we believe certain events and circumstances have occurred which indicate that the carrying value of our Properties might have experienced a decline in value that is other than temporary and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Impairment losses are measured as the difference between the carrying value and the estimated fair value for assets held in the portfolio. For assets held for sale, impairment is measured as the difference between the carrying value and fair value, less estimated costs to dispose. Fair value is based on estimated cash flows discounted at a risk-adjusted rate of return. Adverse changes in market conditions or deterioration in the operating results of our outlet centers and other rental properties could result in losses or an inability to recover the current carrying value of such assets. Such potential losses or the inability to recover the current carrying value may not be reflected in our Properties' current carrying value, thereby possibly requiring an impairment charge in the future. Capitalization and Depreciation of Significant Renovations and Improvements Depreciation is calculated on the straight-line basis over the estimated useful lives of the assets, based upon management's estimates. Significant renovations and improvements, which improve and/or extend the useful life of assets are capitalized and depreciated over their estimated useful lives, based upon management's estimates. Contingencies We are subject to proceedings, lawsuits, and other claims related to various matters (see Note 6 - "Legal Proceedings" of the Notes to the Consolidated Financial Statements for additional information). Additionally, we have guaranteed certain indebtedness of others (see Note 4 - "Debt" of the Notes to Consolidated Financial Statements for additional information). With respect to these contingencies, we assess the likelihood of any adverse judgments or outcomes to these matters and, if appropriate potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies are made after careful analysis of each individual issue. Future reserves may be required because of (i) new developments or changes to the approach in which we deal with each matter or (ii) if unasserted claims arise. Page - (27) Outlet Center Portfolio Portfolio GLA and Occupancy Our outlet center portfolio size reflects (i) our past development (both new outlet centers and expansions to outlet centers) and acquisition activities and (ii) our more recent disposition activities. Our outlet portfolio (including properties owned through joint venture partnerships) consisted of 35 properties totaling 9,976,000 square feet of gross leasable area ("GLA") at September 30, 2003 compared to 40 properties totaling 11,253,000 square feet of GLA at September 30, 2002 and 38 properties totaling 10,269,000 square feet of GLA at December 31, 2002. The change in our outlet center GLA is because of certain property dispositions, which are discussed below. Our outlet center portfolio was 85.3% and 86.8% occupied as of September 30, 2003 and 2002, respectively. The weighted-average occupancy of our outlet center portfolio (excluding those properties disposed of whose results are included in discontinued operations) during the three months ended September 30, 2003 and 2002 was 84.4% and 86.7%, respectively. The weighted-average occupancy of our outlet center portfolio (excluding those properties disposed of whose results are included in discontinued operations) during the nine months ended September 30, 2003 and 2002 was 85.2% and 87.0%, respectively. We disposed of certain properties through various transactions (including sale, joint venture arrangements, foreclosure and transfer of ownership to the applicable lender). These transactions have had a significant impact on the size of our portfolio for the periods presented and are summarized below. See Note 3 - "Property Dispositions" of the Notes to Consolidated Financial Statements for additional information. 2002 Dispositions During 2002, we completed transactions involving 17 properties aggregating 4,431,000 square feet of GLA. These transactions included (i) the sale of seven outlet centers aggregating 1,791,000 square feet of GLA into joint venture arrangements, (ii) the sale of five (including one consisting of 197,000 square feet of GLA that we partially owned through an unconsolidated joint venture) outlet centers aggregating 1,486,000 square feet of GLA to unrelated third parties, (iii) the foreclosure sale and/or transfer of three outlet centers aggregating 922,000 square feet of GLA to the applicable lender and (iv) the sale of two community centers aggregating 232,000 square feet of GLA to unrelated third parties. The seven centers sold into joint venture arrangements consisted of two separate transactions involving (i) Prime Outlets at Hagerstown (the "Hagerstown Center"), which was sold to an existing joint venture partnership (the "Prime/Estein Venture"), and (ii) six outlet centers (collectively, the Bridge Properties"), which were sold to PFP Venture LLC (the "PFP Venture"), a joint venture partnership in which we indirectly had a initial ownership interest of 18.2%. Such properties are collectively referred to as the "2002 Joint Venture Properties". Commencing on the date of disposition, we account for our ownership interest in the 2002 Joint Venture Properties in accordance with the equity method of accounting. The operating results of the 2002 Joint Venture Properties are reflected in our results from continuing operations for all periods presented through their respective dates of disposition. Their operating results have not been classified to discontinued operations because we have a significant continuing involvement in these properties. Additionally, we sold Phases II and III of the Bellport Outlet Center (the "Bellport Outlet Center"). We accounted for our ownership interest in the Bellport Outlet Center in accordance with the equity method of accounting through its date of disposition. The operating results of the remaining disposed properties through their respective dates of disposition have been classified as discontinued operations in the accompanying Consolidated Statements of Operations. Page - (28) 2003 Dispositions During 2003, we completed transactions involving 2 properties aggregating 293,000 square feet of GLA. These transactions included (i) the sale of one outlet center, Prime Outlets at Latham (the "Latham Center") consisting of 43,000 square feet of GLA that we partially owned through an unconsolidated joint venture and (ii) the foreclosure sale of one outlet center aggregating 250,000 square feet of GLA to the applicable lender. We accounted for our ownership interest in the Latham Center in accordance with the equity method of accounting through its date of disposition. The operating results of the other disposed property through its respective date of disposition have been classified as discontinued operations in the accompanying Consolidated Statements of Operations. Effective January 1, 2002, we adopted Statement of Financial Accounting Standards ("FAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In accordance with the requirements of FAS No. 144, we have classified the operating results, including gains and losses related to disposition, for certain properties disposed of during 2003 and 2002 as discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented. The operating results for properties that were sold into joint venture partnerships during 2002 have not been classified to discontinued operations in the accompanying Consolidated Statements of Operations because we still retain a significant continuing involvement in their operations. Such properties and/or their operating results through the dates of their respective disposition are collectively referred to as the "2002 Joint Venture Properties". The following discussion and tables regarding operating results for the comparable periods are reflective of the classification requirements under FAS No. 144 and relate to operating results from continuing operations unless otherwise indicated. The table set forth below summarizes certain information with respect to our outlet centers as of September 30, 2003 (see Note 4 - "Debt" of the Notes to Consolidated Financial Statements contained herein for additional information with respect to indebtedness on our Properties):

Page - (29)

Notes: (1) Percentage reflects occupied space as of September 30, 2003 as a percent of available square feet of GLA. (2) Through affiliates, we have a 30% ownership interest in the joint venture partnership that owns this outlet center. (3) Through affiliates, we have an ownership interest of approximately 26.4% in the joint venture partnership that owns this outlet center as of September 30, 2003. (4) We own a 2% partnership interest as the sole general partner in this property, but are entitled to 99% of the property's operating cash flow and net proceeds from a sale or refinancing. This mixed-use development also includes approximately 154,000 square feet of office space, not included in this table, which was 95% occupied as of September 30, 2003. (5) Non-recourse mortgage loans cross-collateralized by Prime Outlets at Bend, Prime Outlets at Post Falls and Prime Outlets at Sedona are currently in default and we are in the process of negotiating a transfer of our ownership interests in these outlet centers to the lender. See Note 4 - "Debt" of the Notes to Consolidated Financial Statements for additional information. (6) We operate this outlet center pursuant to a long-term ground lease under which we receive the economic benefit of a 100% ownership interest. (7) The real property on which this outlet center is located is subject to a long-term ground lease. (8) Excludes Oxnard Factory Outlet. Through an affiliate, we have a 50% legal ownership interest in the joint venture partnership that owns this outlet center. However, we are currently receiving no economic benefit from the Oxnard Factory Outlet. Page - (30) Results of Operations Table 1 - Consolidated Statements of Operations

Page - (31) Comparison of the three months ended September 30, 2003 to the three months ended September 30, 2002 Summary We reported losses from continuing operations of $3,717 and $85,956 for the three months ended September 30, 2003 and 2002, respectively. For the three months ended September 30, 2003, the net loss applicable to our common shareholders was $7,314, or $0.17 per common share. For the three months ended September 30, 2002, the net loss applicable to our common shareholders was $89,173, or $2.05 per common share. During the three months ended September 30, 2003, we reported a gain from discontinued operations of $2,071, or $0.05 per common share. This gain from discontinued operations included a gain related to dispositions of $2,153. During the three months ended September 30, 2002, we reported a gain from discontinued operations of $2,451, or $0.06 per common share. This gain from discontinued operations included (i) a gain related to dispositions of $17,121 and (ii) a provision for asset impairment of $15,557. The 2002 results from continuing operations include a third quarter provision for asset impairment of $81,619, or $1.87 per common share. Revenues Total revenues were $32,973 for the three months ended September 30, 2003 compared to $35,544 for the same period in 2002, a decrease of $2,571, or 7.2%. Base rents decreased $621, or 3.2%, to $19,001 in 2003 compared to $19,622 in 2002. These decreases are primarily due to (i) transactions involving the 2002 Joint Venture Properties, (ii) changes in economic rental rates and (iiii) the reduction in outlet center occupancy during the 2003 period. Straight-line rent (expense), included in base rent was $18 and $(255) for the three months ended September 30, 2003 and 2002, respectively. Percentage rents, which represent rents based on a percentage of sales volume above a specified threshold, decreased $430, or 51.6%, to $404 during the three months ended September 30, 2003 compared to $834 for the same period in 2002. This decrease was primarily due to (i) transactions involving the 2002 Joint Venture Properties and (ii) changes in economic rental rates. Tenant reimbursements, which represent the contractual recovery from tenants of certain operating expenses, decreased by $748, or 6.5%, to $10,676 during the three months ended September 30, 2003 compared to $11,424 for the same period in 2002. This decline is primarily due to (i) transactions involving the 2002 Joint Venture Properties, (ii) changes in economic rental rates and (iii) the reduced aggregate outlet center weighted-average occupancy during the 2003 period. As shown in TABLE 2, tenant reimbursements as a percentage of recoverable property operating expenses and real estate taxes was 92.5% during the three months ended September 30, 2003 compared to 88.4% for the same period in 2002. This increase reflects the aforementioned changes in economic rental rates. Page - (32) Table 2 - Tenant Recoveries as a Percentage of Total Recoverable Expenses

Interest and other income decreased by $772, or 21.1%, to $2,892 during the three months ended September 30, 2003 compared to $3,664 for the same period in 2002. This decrease reflects lower (i) interest income of $364, (ii) other income of $249, (iii) gains on sales of outparcel land of $195, (iv) lease termination income of $86, (v) leasing commissions of $86 and (vi) municipal assistance income of $58, partially offset by higher equity in earnings of unconsolidated joint venture partnerships of $266. Expenses Property operating expenses decreased by $991, or 10.0%, to $8,936 during the three months ended September 30, 2003 compared to $9,927 for the same period in 2002. Real estate taxes expense decreased by $399, or 13.3%, to $2,600 during the three months ended September 30, 2003 compared to $2,999 for the same period in 2002. The decrease in property operating expenses is primarily because of (i) the transactions involving the 2002 Joint Venture Properties and (ii) reduced marketing costs during the 2003 period. The decrease in real estate taxes expense is primarily attributable to (i) the transactions involving the 2002 Joint Venture Properties and (ii) reduced assessments on certain properties. As shown in TABLE 3, depreciation and amortization expense decreased by $1,584 or 19.2%, to $6,645 during the three months ended September 30, 2003 compared to $8,229 for the same period in 2002. This decrease was primarily due to (i) a reduction in depreciation and amortization resulting from certain provisions for asset impairment recorded during 2002 and 2003 and (ii) the transactions involving the 2002 Joint Venture Properties. Table 3 - Components of Depreciation and Amortization Expense The components of depreciation and amortization expense for the three months ended September 30, 2003 and 2002 are summarized as follows:

Page - (33) As shown in TABLE 4, interest expense decreased by $1,993, or 14.6%, to $11,700 during the three months ended September 30, 2003 compared to $13,693 for the same period in 2002. This decrease reflects (i) lower interest incurred, excluding defeased debt, of $2,883, (ii) a decrease in amortization of deferred financing costs of $628 and (iii) higher amortization of debt premiums of $21. Partially offsetting these items was interest expense of $1,539 associated with certain mortgage debt that was defeased in December 2002. See Note 4 - "Debt" of the Notes to Consolidated Financial Statements for additional information. The decrease in interest incurred, excluding defeased debt, is primarily attributable to (i) a reduction of approximately $15,476 in our weighted-average debt outstanding, excluding debt premiums, during the three months ended September 30, 2003 compared to the same period in 2002 and (ii) a decrease in the weighted-average contractual interest rate on our debt for the three months ended September 30, 2003 compared to the same period in 2002. The decrease in weighted-average debt outstanding was primarily attributable to asset dispositions. The weighted-average contractual interest rates for the 2003 and 2002 periods were approximately 8.07% and 8.76%, respectively. Table 4 - Components of Interest Expense The components of interest expense for the three months ended September 30, 2003 and 2002 are summarized as follows:

Other charges decreased by $111, or 6.7%, to $1,556 for the three months ended September 30, 2003 compared to $1,667 for same period in 2002. This decrease reflects lower (i) other expenses of $88 and (ii) bad debt expense of $23. Corporate general and administrative expenses increased by $1,987, or 59.0%, to $5,253 during the three months ended September 30, 2003 compared to $3,366 for the same period in 2002. This increase is primarily attributable to legal, financial advisory and proxy costs aggregating $1,469 related to our proposed merger transaction and higher insurance costs of $276. During the third quarter of 2002 certain events and circumstances occurred, including (i) changes to the anticipated holding periods and (ii) further reduced occupancy and limited leasing success, that indicated certain of our properties were impaired on an other than temporary basis. As a result, we recorded a provision for asset impairment aggregating $81,619 representing the write-down of these properties to their estimated fair values in accordance with the requirements of Statement of Financial Accounting Standards ("FAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Page - (34) Comparison of the nine months ended September 30, 2003 to the nine months ended September 30, 2002 Summary We reported losses from continuing operations of $13,988 and $95,907 for the nine months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003, the net loss applicable to our common shareholders was $29,443, or $0.68 per common share. For the nine months ended September 30, 2002, the net loss applicable to our common shareholders was $129,014, or $2.96 per common share. During the nine months ended September 30, 2003, we reported a gain from discontinued operations of $1,549, or $0.04 per common share. This gain from discontinued operations included a gain related to dispositions of $2,153. During the nine months ended September 30, 2002, we reported a gain from discontinued operations of $16,103, or $0.37 per common share. This gain from discontinued operations included a (i) a net gain related to dispositions of $9,619 and (ii) a provision for asset impairment of $27,757. The 2003 results from continuing operations include a second quarter provision for asset impairment of $6,590, or $0.15 per common share. The 2002 results from continuing operations include (i) a third quarter provision for asset impairment of $81,619, or $1.87 per common share, (ii) a net gain on the sale of real estate of $5,802, or $0.13 per common share and (ii) a second quarter non-recurring charge (included in other charges) of $3,000, or $0.07 per common share, related to pending and potential tenant claims with respect to certain lease provisions. Revenues Total revenues were $101,281 for the nine months ended September 30, 2003 compared to $113,920 for the same period in 2002, a decrease of $12,639, or 11.1%. Base rents decreased $10,162, or 15.4%, to $55,934 in 2003 compared to $66,096 in 2002. These decreases are primarily due to (i) transactions involving the 2002 Joint Venture Properties, (ii) changes in economic rental rates and (iiii) the reduction in outlet center occupancy during the 2003 period. Straight-line rent expense, included in base rent was $348 and $300 for the nine months ended September 30, 2003 and 2002, respectively. Percentage rents, which represent rents based on a percentage of sales volume above a specified threshold, decreased $736, or 28.4%, to $1,853 during the nine months ended September 30, 2003 compared to $2,589 for the same period in 2002. This decrease was primarily due to (i) transactions involving the 2002 Joint Venture Properties and (ii) changes in economic rental rates. Tenant reimbursements, which represent the contractual recovery from tenants of certain operating expenses, decreased by $3,577, or 9.8%, to $32,921 during the nine months ended September 30, 2003 compared to $36,498 for the same period in 2002. This decline is primarily due to (i) transactions involving the 2002 Joint Venture Properties, (ii) changes in economic rental rates and (iii) the reduced aggregate outlet center weighted-average occupancy during the 2003 period. As shown in TABLE 5, tenant reimbursements as a percentage of recoverable property operating expenses and real estate taxes was 90.0% during the nine months ended September 30, 2003 compared to 89.7% for the same period in 2002. This increase reflects the aforementioned changes in economic rental rates. Page - (35) Table 5 - Tenant Recoveries as a Percentage of Total Recoverable Expenses

Interest and other income increased by $1,836, or 21.0%, to $10,573 during the nine months ended September 30, 2003 compared to $8,737 for the same period in 2002. This increase reflects higher (i) equity in earnings of unconsolidated joint ventures of $2,092, (ii) property management fee income of $398 and (iii) other income of $204. Partially offsetting these items were lower (i) municipal assistance income of $518 and (ii) interest income of $340. The significant increase in equity in earnings of unconsolidated joint ventures is primarily associated with the transactions involving the 2002 Joint Venture Properties. Expenses Property operating expenses decreased by $2,503, or 8.2%, to $28,184 during the nine months ended September 30, 2003 compared to $30,687 for the same period in 2002. Real estate taxes expense decreased by $1,620, or 16.2%, to $8,392 during the nine months ended September 30, 2003 compared to $10,012 for the same period in 2002. The decrease in property operating expenses is primarily because of the transactions involving the 2002 Joint Venture Properties partially offset by higher insurance and marketing costs during the 2003 period. The decrease in real estate taxes expense is primarily because of the transactions involving the 2002 Joint Venture Properties. As shown in TABLE 6, depreciation and amortization expense decreased by $6,498, or 23.7%, to $20,948 during the nine months ended September 30, 2003 compared to $27,446 for the same period in 2002. This decrease was primarily due to (i) a reduction in depreciation and amortization resulting from certain provisions for asset impairment recorded during 2002 and 2003 and (ii) the transactions involving the 2002 Joint Venture Properties. Table 6 - Components of Depreciation and Amortization Expense The components of depreciation and amortization expense for the nine months ended September 30, 2003 and 2002 are summarized as follows:

As shown in TABLE 7, interest expense decreased by $12,902, or 27.0%, to $34,929 during the nine months ended September 30, 2003 compared to $47,831 for the same period in 2002. This decrease reflects (i) lower interest incurred, excluding defeased debt, of $14,606, (ii) a decrease in amortization of deferred financing costs of $2,764 and (iii) higher amortization of debt premiums of $66. Partially offsetting these items was interest expense of $4,534 associated with certain mortgage debt that was defeased in December 2002. See Note 4 - "Debt" of the Notes to Consolidated Financial Statements for additional information. Page - (36) The decrease in interest incurred, excluding defeased debt, is primarily attributable to (i) a reduction of approximately $120,657 in our weighted-average debt outstanding, excluding debt premiums, during the nine months ended September 30, 2003 compared to the same period in 2002 and (ii) a decrease in the weighted-average contractual interest rate on our debt for the nine months ended September 30, 2003 compared to the same period in 2002. The decrease in weighted-average debt outstanding was primarily attributable to asset dispositions. The weighted-average contractual interest rates for the 2003 and 2002 periods were approximately 8.08% and 8.61%, respectively. Table 7 - Components of Interest Expense The components of interest expense for the nine months ended September 30, 2003 and 2002 are summarized as follows:

Other charges were $2,979 and $8,372 for the nine months ended September 30, 2003 and 2002, respectively, which includes a non-recurring charge of $3,000 in the 2002 period. Excluding the effect of this non-recurring charge, which is discussed below, other charges decreased by $2,393, or 44.5%, to $2,979 for the nine months ended September 30, 2003 compared to $5,372 for the same period in 2002. This decrease reflects lower (i) bad debt expense of $2,013 and (ii) other expenses of $380. The significant decrease in bad debt expense resulted primarily from (i) resolution of certain disputes with tenants and (ii) reduced tenant bankruptcies, abandonments and store closings during 2003. During the second quarter of 2002, we recorded a non-recurring charge (included in other charges) of $3,000 to establish a reserve for pending and potential tenant claims with respect to lease provisions related to their pass-through charges and promotional fund charges. See "Liquidity and Capital Resources" for additional information. Corporate general and administrative expenses increased by $3,585, or 37.1%, to $13,247 during the nine months ended September 30, 2003 compared to $9,662 for the same period in 2002. This increase is primarily attributable to legal, financial advisory and proxy costs aggregating $2,645 related to our proposed merger transaction and higher insurance costs of $1,034. During the second quarter of 2003, certain events and circumstances related to two of our properties occurred, including further reduced occupancy and limited leasing success, that indicated these properties were impaired on an other than temporary basis. As a result, we recorded a provision for asset impairment aggregating $6,590 representing the write-down of these properties to their estimated fair values in accordance with the requirements of FAS No. 144. During the third quarter of 2002 certain events and circumstances occurred, including (i) changes to the anticipated holding periods and (ii) further reduced occupancy and limited leasing success, that indicated certain of our properties were impaired on an other than temporary basis. As a result, we recorded a provision for asset impairment aggregating $81,619 representing the write-down of these properties to their estimated fair values in accordance with the requirements of FAS No. 144. Page - (37) Merchant Sales For the three and nine months ended September 30, 2003, same-store sales in our outlet center portfolio increased by 1.4% and decreased by 1.2%, respectively, compared to the same periods in 2002. "Same-store sales" is defined as the weighted-average sales per square foot reported by merchants for stores open since January 1, 2002. The weighted-average sales per square foot reported as reported by our merchants were $245 for the year ended December 31, 2002. Liquidity and Capital Resources Sources and Uses of Cash For the nine months ended September 30, 2003, net cash provided by operating activities was $7,627, net cash used in investing activities was $1,670 and cash used in financing activities was $5,503. The net cash used in investing activities during the nine months ended September 30, 2003 consisted of $5,631 of additions to rental property partially offset by $1,085 of net proceeds from the disposition of excess land and $2,876 of distributions from unconsolidated joint venture partnerships. The additions to rental property included costs incurred in connection with re-leasing space to new merchants and costs associated with renovations. During the nine months ended September 30, 2003, we did not engage in any significant development activities other than pre-leasing for an expansion to Prime Outlets at Williamsburg and certain consulting activities in Europe. We do not expect these activities to have a significant impact on our liquidity or financial condition. The gross uses of cash for financing activities of $5,503 during nine months ended September 30, 2003 consisted of scheduled principal amortization on debt. Defaults on Certain Non-recourse Mortgage Indebtedness In December 2002, we notified the servicer of certain non-recourse mortgage loans (cross-collateralized by Prime Outlets at Bend, Prime Outlets at Post Falls and Prime Outlets at Sedona) totaling $24,919 as of September 30, 2003 that the net cash flow from the properties securing the loans was insufficient to fully pay the required monthly debt service. At that time, certain of our subsidiaries suspended the regularly scheduled monthly debt service payments. Subsequent to our notification to the servicer, we have been remitting on a monthly basis all available cash flow from the properties, after a reserve for monthly operating expenses, as partial payment of the debt service. The failure to pay the full amount due constitutes a default under the loan agreements which allows the lender to accelerate the loan and to exercise various remedies contained in the loan agreements, including application of escrow balances to delinquent payments and, ultimately, foreclosure on the properties which collateralize the loans. The lender has notified us that it has accelerated the loans and intends to acquire the properties through a foreclosure action on the collateral properties unless the parties can negotiate a mutually acceptable transfer of the properties to the lender. However, any foreclosure action on, or other transfer of, these properties is not expected to have a material impact on our results of operations or financial condition because we are currently only remitting available cash flow. The aggregate carrying value of these properties was $21,415 as of September 30, 2003. Such amount is exceeded by the aggregate outstanding balance of the non-recourse mortgage loans of $24,919 as of September 30, 2003. Upon foreclosure or transfer of the collateral properties, we will record a non-recurring gain for the difference between the carrying value of the properties and their related net asset, including the outstanding loan balances. Page - (38) Defeased Notes Payable On December 6, 2002, we completed the sale of two outlet centers (together, the "Colorado Properties"), which were part of the 15 properties contained in the collateral pool securing a first mortgage and expansion loan (the "Mega Deal Loan"), which had a then outstanding balance of $338,940. In connection with the release of the Colorado Properties from the collateral pool, we were required to partially defease the Mega Deal Loan. Therefore, the Mega Deal Loan was bifurcated into (i) a defeased portion in the amount of $74,849 (the "Defeased Notes Payable") and (ii) an undefeased portion in the amount of $264,091, which is still referred to as the Mega Deal Loan. Both the Defeased Notes Payable and the Mega Deal Loan (i) bore interest at a fixed-rate of 7.782% through their optional prepayment date of November 11, 2003 and (ii) required monthly payments of principal and interest pursuant to a 30-year amortization schedule. The Mega Deal Loan is secured by the remaining 13 properties contained in the collateral pool. We used $79,257 of the gross proceeds from the sale of the Colorado Properties to purchase US Treasury Securities with a par value of $78,277, including accrued interest of $226. The US Treasury Securities were deposited into an escrow account controlled by a trustee (the "Trustee Escrow"). The Trustee Escrow was used to pay all scheduled debt service, including a balloon payment of $73,882 on November 11, 2003, due under the Defeased Notes Payable. The $980 premium we paid for the US Treasury Securities was amortized as a reduction to the interest income (included in interest and other income in the Consolidated Statements of Operations) earned on the Trustee Escrow on basis that approximated the effective interest method. As of September 30, 2003, the outstanding balance of the Defeased Notes Payable was $74,046 and the balance of the Trustee Escrow was $74,103 (included in restricted cash in the Consolidated Balance Sheet). As stated above, on November 11, 2003, the Defeased Notes Payable was repaid in full with the remaining funds in the Trustee Escrow. Furthermore, in connection with the partial defeasance of the Mega Deal Loan we amended the Mega Deal Loan so that (i) we were required to fund 10 monthly payments of $500 (an aggregate of $5,000) into a lender escrow to be used as additional cash collateral and (ii) release prices for the remaining 13 properties in the collateral pool were amended to provide for a more orderly refinancing of the Mega Deal Loan. As of September 30, the additional cash collateral had been fully funded and is included in restricted cash in the Consolidated Balance Sheet. Debt Service Obligations The following table summarizes (A) the scheduled principal maturities of our debt, excluding (i) unamortized debt premiums of $6,091, (ii) $24,919 of aggregate non-recourse mortgage indebtedness in default (see "Defaults on Certain Non-recourse Mortgage Indebtedness" above) and (iii) the Defeased Notes Payable of $74,046, which was paid in full on November 11, 2003 (see above), and (B) the related average contractual interest rates by year of maturity as of September 30, 2003:

Page - (39) Such indebtedness in the amount of $479,948 had a weighted-average maturity of 2.1 years and bore contractual interest at a weighted-average rate of 7.98% per annum. At September 30, 2003, all of such indebtedness bore interest at fixed rates. Our remaining scheduled principal payments during 2003 for such indebtedness aggregated $262,554, which includes $261,259 related to the Mega Deal Loan. See "Going Concern" for additional information. Additionally, we are obligated to refinance a first mortgage loan (the "Hagerstown First Mortgage Loan") in the amount of $46,862 on Prime Outlets at Hagerstown (the "Hagerstown Center") on or before June 1, 2004. The Hagerstown First Mortgage Loan was assumed by an unconsolidated joint venture partnership (the "Prime/Estein Venture"), in which we have an indirect 30% ownership interest, in January 2002. See "Prime/Estein Venture Guarantees" contained in "Guarantees and Guarantees of Indebtedness of Others" for additional information. Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated Partnerships Two mortgage loans related to projects in which we, through subsidiaries, indirectly own joint venture interests have matured and are in default. The mortgage loans, at the time of default, were (i) a $10,389 first mortgage loan on Phase I of the Bellport Outlet Center, held by Union Labor Life Insurance Company ("Union Labor"); and (ii) a $13,338 first mortgage loan on Oxnard Factory Outlet, an outlet center located in Oxnard, California, held by Fru-Con. An affiliate of ours has a 50% ownership interest in the partnership, which owns Phase I of the Bellport Outlet Center. Fru-Con and us are each a 50% partner in the partnership that owns the Oxnard Factory Outlet. Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center and a receiver was appointed March 27, 2001 by the court involved in the foreclosure action. Effective May 1, 2001, a manager hired by the receiver began managing and leasing Phase I of the Bellport Outlet Center. A judgment for foreclosure was entered on January 25, 2003 in the amount of $12,711. The foreclosure occurred on March 17, 2003 with Union Labor acquiring the property for $5,100. Approximately $1,100 of post-judgment interest and fees was subsequently awarded to Union Labor. We continue to negotiate the terms of a transfer of our ownership interest in Oxnard Factory Outlet to Fru-Con. We do not manage or lease Oxnard Factory Outlet. We believe neither of these mortgage loans is recourse to us. It is possible, however, that either or both of the respective lenders will, after completing its foreclosure action, file a lawsuit seeking to collect from us the difference between the value of the mortgaged property and the amount due under the loan. If such an action is brought, the outcome, and our ultimate liability, if any, cannot be predicted at this time. In addition, we are currently not receiving, directly or indirectly, any cash flow from Oxnard Factory Outlet and were not receiving any cash flow from Phase I of the Bellport Outlet Center prior to the loss of control of such project. We account for our interests in (i) Phases I of the Bellport Outlet Center and (ii) the Oxnard Factory Outlet in accordance with the equity method of accounting. As of September 30, 2003, we had no carrying value for our investment in these properties. Page - (40) Guarantees and Guarantees of Indebtedness of Others HGP Guarantees On July 15, 2002, Horizon Group Properties, Inc. and its affiliates ("HGP") announced they had refinanced a secured credit facility (the "HGP Secured Credit Facility") through a series of new loans aggregating $32,500. Prior to the refinancing, we were a guarantor under the HGP Secured Credit Facility in the amount of $10,000. In connection with the refinancing, our guarantee was reduced to a maximum of $4,000 as security for a $3,000 mortgage loan and a $4,000 mortgage loan (collectively, the "HGP Monroe Mortgage Loan") secured by HGP's outlet shopping center located in Monroe, Michigan. In the event the HGP Monroe Mortgage Loan was reduced to $5,000 or less through repayments then our guarantee would be extinguished. In August 2003, HGP repaid $2,000 of the HGP Mortgage Loan and our guarantee obligation was satisfied. Additionally, we were a guarantor with respect to certain mortgage indebtedness (the "HGP Office Building Mortgage") in the amount of $2,129 on HGP's corporate office building and related equipment located in Norton Shores, Michigan. However, the HGP Office Building Mortgage was refinanced in August 2003 and our guarantee obligation was thus, removed. Prime/Estein Venture Guarantees We indirectly have a 30% ownership interest in the Prime/Estein Venture which owns three outlet centers (collectively, the "Prime/Estein Properties"). The Prime/Estein Properties consist of Prime Outlets at Birch Run (the "Birch Run Center"), Prime Outlets at Hagerstown (the "Hagerstown Center") and Prime Outlets at Williamsburg (the "Williamsburg Center"). Pursuant to Prime/Estein Venture-related documents to which affiliates of ours are parties, we are obligated to provide to, or obtain for, the Prime/Estein Venture fixed-rate financing at an annual rate of 7.75% (the "Interest Rate Subsidy Agreement") for the Prime/Estein Venture Properties. In August 2001, we, through affiliates, completed a refinancing of $63,000 of first mortgage loans secured by the Birch Run Center. The refinanced loan (the "Birch Run First Mortgage") (i) has a term of 10-years, (ii) bears interest at an effective rate of 8.12% and (iii) requires monthly payments of principal and interest pursuant to a 25-year amortization schedule. Pursuant to the Interest Rate Subsidy Agreement, we are required to pay to the Prime/Estein Venture the difference between the cost of the financing at an assumed rate of 7.75% and the actual cost of such financing at the annual rate of 8.12% (the "Interest Rate Subsidy Obligation"). The net present value of the Interest Rate Subsidy Obligation (included in accounts payable and other liabilities in the Consolidated Balance Sheet) was $1,354 as of September 30, 2003. In October 2001, we, through affiliates, completed the refinancing of a $32,500 first mortgage loan secured by the Williamsburg Center. The new first mortgage loan (the "Williamsburg First Mortgage") (i) has a term of 10-years, (ii) bears interest at a fixed-rate of 7.69% and (iii) requires monthly payments of principal and interest pursuant to a 25-year amortization schedule. Pursuant to the Interest Rate Subsidy Agreement, the Prime/Estein Venture is required to pay to us the difference between the cost of the financing at an assumed rate of 7.75% and the actual cost of such financing at the annual rate of 7.69%. Page - (41) On January 11, 2002, we sold the Hagerstown Center to the Prime/Estein Venture. In connection with the sale, the Prime/Estein Venture assumed the Hagerstown First Mortgage in the amount of $46,862; however, our guarantee of such indebtedness remains in place. Additionally, we are obligated to refinance the Hagerstown First Mortgage on behalf of the Prime/Estein Venture on or before June 1, 2004, the date on which such indebtedness matures. Additionally, the Prime/Estein Venture's cost of the Hagerstown First Mortgage and any refinancing of it are fixed at an annual rate of 7.75% for a period of 10 years. If the actual cost of such indebtedness should exceed 7.75% at any time during the 10-year period, we will be obligated to pay the difference to the Prime/Estein Venture. If the actual cost of such indebtedness is less than 7.75% at any time during the 10-year period, however, the Prime/Estein Venture will be obligated to pay the difference to us. The actual cost of the Hagerstown First Mortgage is 30-day LIBOR plus 1.50%, or 2.62% as of September 30, 2003. Because the Hagerstown First Mortgage bears interest at a variable rate, we are exposed to the impact of interest rate changes. We have not recorded any liability related to our guarantee of the Hagerstown First Mortgage; however, in connection with the sale of the Hagerstown Center, we established a reserve for estimated refinancing costs in the amount of $937, which is included in accounts payable and other liabilities in the Consolidated Balance Sheet as of September 30, 2003. See Note 3 - "Property Dispositions" of the Notes to Consolidated Financial Statements for additional information. Second Horizon First Mortgage Loan In April 1998, Horizon consummated an agreement with Castle & Cooke Properties, Inc. ("CCP") which released Horizon from future obligations under a long-term lease of the Dole Cannery outlet center in Honolulu, Hawaii. In connection with an amendment of the Second Horizon Group Limited Partnership ("Second Horizon") agreement (the "Amended Partnership Agreement"), Horizon transferred to an affiliate of CCP (the "CCP Affiliate") substantially all of Horizon's economic interest, but not legal title, in an outlet center (the "Lake Elsinore Center") in Lake Elsinore, California. The Lake Elsinore Center is one of five properties owned by Second Horizon which jointly and severally secure a non-recourse, first mortgage loan (the "Second Horizon Mortgage Loan"). As a result of our merger with Horizon in June 1998, we own the economic interests of the other four properties (the "Prime Properties") and legal title to all five entities. The outstanding balance of the Second Horizon Mortgage Loan as of September 30, 2003 was $94,586, of which $66,330 was allocated to the Prime Properties and is included in notes payable in our Consolidated Balance Sheet as of that date. The remaining $28,034 outstanding as of September 30, 2003 was allocated to the Lake Elsinore Center. We, through our affiliates, assumed certain obligations under the Amended Partnership Agreement with respect to the Second Horizon Mortgage Loan in connection with our merger with Horizon in June 1998. Specifically, we are obligated to contribute sufficient capital to Second Horizon (i) for certain operating expenses associated with the Prime Properties and (ii) to satisfy the outstanding balances of the allocated loan amounts for the Prime Properties under the Second Horizon Mortgage Loan (including any associated expenses) to enable the Second Horizon Mortgage Loan to be repaid in full at its optional prepayment date of October 11, 2006. CCP Affiliate and its parent company are similarly obligated with respect to the Lake Elsinore Center. No claims have been made with respect to these obligations and we have not recorded any liability related to these obligations as of September 30, 2003. Page - (42) Mandatory Redemption Obligation On July 26, 2002, we sold the Bridge Properties to the PFP Venture. In connection with the sale, we guaranteed FRIT PRT Bridge Acquisition LLC ("FRIT"), a third-party joint venture partner, (i) a 13% return on its initial $17,236 of invested capital and (ii) the full return of its invested capital (the "Mandatory Redemption Obligation") by December 31, 2003. As of September 30, 2003, our Mandatory Redemption Obligation with respect to the full return of FRIT's invested capital was $14,489 (included in accounts payable and other liabilities in the Consolidated Balance Sheet). See "Going Concern" for additional information. Going Concern Our liquidity depends on cash provided by operations and potential capital raising activities such as funds obtained through borrowings, particularly refinancing of existing debt, and cash generated through asset sales. Although we believe that estimated cash flows from operations and potential capital raising activities will be sufficient to satisfy our scheduled debt service and other obligations and sustain our operations for the next year, there can be no assurance that we will be successful in obtaining the required amount of funds for these items or that the terms of the potential capital raising activities, if they should occur, will be as favorable as we have experienced in prior periods. As of September 30, 2003, our Mega Deal Loan had an outstanding principal balance of $261,259. The Mega Deal Loan had an optional prepayment date of November 11, 2003 and an outstanding principal balance of $260,681 on such date. As discussed below, certain restrictions have been placed upon us with respect to refinancing the Mega Deal Loan. The Mega Deal Loan was not repaid on the optional prepayment date and as a result the interest rate shall be increased by up to 5.0% to 12.782%. Additionally, commencing on November 11, 2003 the lender may retain all excess cash flow from the 13 properties which secure the Mega Deal Loan. Any excess cash flow retained by the lender can be applied to principal after payment of interest. The aforementioned increase in the Mega Deal Loan's interest rate and the potential loss of excess cash flow from the 13 properties could have severe consequences on our ability to fund our operations. We currently believe a shortfall could occur with respect to refinancing the Mega Deal Loan because we may be unable to place mortgage indebtedness at commercially reasonable terms on all of the properties in the current collateral pool. We are actively marketing for sale several of the collateral properties because their sale could alleviate some or all of any potential shortfall. We also continue to evaluate other capital raising activities, such as the placement of mezzanine level debt on certain of the collateral properties. We caution that our assumptions regarding the refinancing and sale of the collateral properties are based on current market conditions and, therefore, are subject to various risks and uncertainties, including changes in economic conditions which may adversely impact our ability to refinance the Mega Deal Loan at favorable rates or in a timely and orderly fashion and which may adversely impact our ability to consummate various asset sales or other capital raising activities. Page - (43) On July 8, 2003, an affiliate of The Lightstone Group, LLC ("Lightstone") and the Company entered into a merger agreement (the "Merger Agreement") pursuant to which the Company would be acquired by such affiliate (the "Merger" or the "Transaction"). (See Note 10 - "Merger Agreement" of the Notes to Consolidated Financial Statements for additional information.) In connection with the execution of the Merger Agreement, certain restrictions were placed on us with respect to the refinancing of the Mega Deal Loan. Specifically, we were restricted from negotiating or discussing the refinancing of the properties securing the Mega Deal Loan with any lenders until September 15, 2003, at which time we were permitted to discuss refinancing of the Mega Deal Loan with certain enumerated lenders. However, we are precluded from closing any loans relating to the refinancing of the Mega Deal Loan until January 11, 2004. Lightstone is obligated to (i) pay (A) one-half of the additional interest incurred by us between November 11, 2003 and December 31, 2003, and (B) all of the additional interest incurred by us between January 1, 2004 and January 11, 2004 with respect to the Mega Deal Loan and (ii) loan us, at a rate of 7% and for a term of not less than one year, an amount equal to any excess cash flow retained by the lender and applied to principal under the Mega Deal Loan commencing on November 11, 2003 and through January 11, 2004. In addition to the restrictions with respect to the refinancing of the Mega Deal Loan discussed above, pursuant to the terms of the Merger Agreement, we have also agreed to certain conditions pending the closing of the Transaction. These conditions provide for certain restrictions with respect to our operating and refinancing activities (see Note 10 - "Merger Agreement" for additional information). These restrictions could adversely affect our liquidity in addition to our ability to refinance the Mega Deal Loan in a timely and orderly fashion. If the Merger Agreement is terminated under certain circumstances, we would be required to make payments to Lightstone ranging from $3,500 to $6,000 which would adversely affect our liquidity. See Note 10 - "Merger Agreement" of the Notes to Consolidated Financial Statements for additional information. In connection with the completion of the sale of the Bridge Properties in July 2002, we guaranteed to FRIT (i) a 13% return on its $17,236 of invested capital, and (ii) the full return of the Mandatory Redemption Obligation by December 31, 2003. As of September 30, 2003, the Mandatory Redemption Obligation (included in accounts payable and other liabilities in the Consolidated Balance Sheet) was $14,489. We continue to seek to generate additional liquidity to repay the Mandatory Redemption Obligation through the placement of additional indebtedness on the Bridge Properties. There can be no assurance that we will be able to complete such capital raising activities by December 31, 2003 or that such capital raising activities, if they should occur, will generate sufficient proceeds to repay the Mandatory Redemption Obligation in full. Failure to repay the Mandatory Redemption Obligation by December 31, 2003 would constitute a default, which would enable FRIT to exercise its rights with respect to the collateral pledged as security to the guarantee, including some of our partnership interests in the 13 properties which secure the Mega Deal Loan. Because the Mandatory Redemption Obligation is secured by some of our partnership interests in the 13 properties which secure the Mega Deal Loan, we may be required to repay the Mandatory Redemption Obligation before, or in connection with, the refinancing of the Mega Deal Loan. Additionally, any change in control with respect to us accelerates the Mandatory Redemption Obligation. In connection with the execution of the Merger Agreement, Lightstone has agreed to provide sufficient financing, if necessary, to repay the Mandatory Redemption Obligation in full at its maturity. The new financing would be at substantially similar economic terms and conditions as those currently in place for the Mandatory Redemption Obligation and would have a one-year term. See Note 10 - "Merger Agreement" of the Notes to Consolidated Financial Statements for additional information. Page - (44) We have fixed rate tax-exempt revenue bonds collateralized by properties located in Chattanooga, Tennessee (the "Chattanooga Bonds") which contain (i) certain covenants, including a minimum debt-service coverage ratio financial covenant (the "Financial Covenant") and (ii) cross-default provisions with respect to certain of our other credit agreements. Based on the operations of the collateral properties, we were not in compliance with the Financial Covenant for the quarters ended June 30, September 30 and December 31, 2002. In the event of non-compliance with the Financial Covenant or default, the holders of the Chattanooga Bonds (the "Bondholders") had the ability to put such obligations to us at a price equal to par plus accrued interest. On January 31, 2003, we entered into an agreement (the "Forbearance Agreement") with the Bondholders. The Forbearance Agreement provides amendments to the underlying loan and other agreements that enable us to be in compliance with various financial covenants, including the Financial Covenant. So long as we continue to comply with the provisions of the Forbearance Agreement and are not otherwise in default of the underlying loan and other documents through December 31, 2004, the revised financial covenants will govern. Additionally, certain quarterly tested financial covenants and other covenants become effective June 30, 2004. Pursuant to the terms of the Forbearance Agreement, in February 2003 we funded $1,000 into an escrow account to be used for the potential conversion of certain of the retail space to office space in the collateral properties and agreed that an event of default with respect to the other debt obligations related to the collateral properties would also constitute a default under the Chattanooga Bonds. The outstanding balance of the Chattanooga Bonds was $17,920 as of September 30, 2003. With respect to the Chattanooga Bonds, based on our current projections, we believe we will not be in compliance with certain quarterly tested financial covenants when they become effective on June 30, 2004 which would enable the Bondholders to elect to put the Chattanooga Bonds to us at their par amount plus accrued interest. We continue to explore opportunities to (i) obtain alternative financing from other financial institutions, (ii) sell the properties securing the Chattanooga Bonds and (iii) explore other possible capital transactions in order to generate cash to repay the Chattanooga Bonds. There can be no assurance that we will be able to complete any such activity sufficient to repay the amount outstanding under the Chattanooga Bonds in the event the Bondholders are able and elect to exercise their put rights. These conditions raise substantial doubt about our ability to continue as a going concern. The financial statements contained herein do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties. Dividends and Distributions To qualify as a real estate investment trust ("REIT") for federal income tax purposes, we are required to pay distributions to our common and preferred shareholders of at least 90% of our REIT taxable income in addition to satisfying other requirements. Although we intend to make distributions, if necessary, to remain qualified as a REIT under the Code, we also intend to retain such amounts as we consider necessary from time to time for our capital and liquidity needs. Our policy remains to pay distributions only to the extent necessary to maintain our status as a REIT for federal income tax purposes. During 2002, we were not required to pay any distributions in order to maintain our status as a REIT and based on our current federal income tax projections, we do not expect to pay any distributions during 2003. On November 15, 2003 we will be in arrears on 16 quarters of preferred stock distributions due February 15, 2000 through November 15, 2003, respectively. Page - (45) We may not make distributions to our common shareholders or our holders of common units of limited partnership interests in the Operating Partnership unless we are current with respect to distributions to our preferred shareholders. As of September 30, 2003, unpaid dividends for the period beginning on November 16, 1999 September 30, 2003 on our Series A Senior Cumulative Preferred Stock ("Series A Senior Preferred Stock") and Series B Cumulative Convertible Participating Preferred Stock ("Series B Convertible Preferred Stock") aggregated $23,395 and $64,460, respectively. The annualized dividends on our 2,300,000 shares of Series A Senior Preferred Stock and 7,828,125 shares of Series B Convertible Preferred Stock outstanding as of September 30, 2003 are $6,037 ($2.625 per share) and $16,635 ($2.125 per share), respectively. Merger Agreement In June 2002, we selected Houlihan Lokey Howard & Zukin Capital to assist us in exploring recapitalization, restructuring, financing and other strategic alternatives designed to strengthen our financial position and address our long-term capital requirements. Costs incurred related to such activities are reflected in corporate general and administrative expense in the accompanying Consolidated Statements of Operations. We are currently a party to the Merger Agreement (dated as of July 8, 2003 and as amended by that first amendment dated as of September 3, 2003, and as otherwise amended) with Prime Outlets Acquisition Company, LLC (the "Buyer"), a Delaware limited liability company which is an affiliate of Lightstone, a New Jersey-based real estate company, which provides for us to be merged with and into the Buyer. Consummation of the Transaction is subject to a number of conditions including the approval of the Transaction and the Merger Agreement by the holders of at least 66 2/3% of both our Series A Senior Preferred Stock and Series B Convertible Preferred Stock, each voting separately as a class, and the approval of a majority of our common stockholders voting as a separate class, as well as other customary approvals. The Transaction, which will result in aggregate consideration of $115,514 payable to our stockholders and unit holders, has a total value of approximately $638,000, including debt expected to be assumed by the Buyer. Under the terms of the Merger Agreement, each holder of our Series A Senior Preferred Stock will receive cash in the amount of $18.40 per share, each holder of our Series B Convertible Preferred Stock will receive cash in the amount of $8.169 per share, and each holder of our common stock will receive cash in the amount of $0.17 per share. Pursuant to the terms of the Merger Agreement, the Buyer and the Company have agreed to certain conditions pending the closing of the Transaction. These conditions provide for certain restrictions with respect to our operating and refinancing activities, including our refinancing of the Mega Deal Loan (see Note 4 - "Debt" of the Notes to Consolidated Financial Statements for additional information). Our board of directors, as well as a special committee comprised of disinterested members of the board of directors (the "Special Committee"), have approved the Transaction and the Merger Agreement and recommended that the stockholders vote in favor of the Transaction. Because our charter does not address the allocation of consideration among our various classes of capital stock in the Transaction, such allocation was determined by the Special Committee and approved by the board of directors. Houlihan Lokey Howard & Zukin Capital acted as financial advisor to the Special Committee and Houlihan Lokey Howard & Zukin Financial Advisors, Inc., an affiliate of Houlihan Lokey Howard & Zukin Capital, has provided an opinion to the Special Committee and our board of directors that the consideration to be received by each of the classes of our stock, considered independently, is fair to such respective classes, from a financial point of view. Formal documentation relating to the Transaction and the Merger Agreement has been filed with the Securities and Exchange Commission and sent to our stockholders and limited partners. Page - (46) Concurrent with the consummation of the Transaction, the agreement of limited partnership of the Operating Partnership will be amended and restated (the "Amended Partnership Agreement") pursuant to which holders of common units in the Operating Partnership (other than common units held by us) will have the opportunity to exchange all, but not less than all, of their units for a like number of preferred units in the Operating Partnership ("Preferred Unit"). Each holder of Preferred Units will be entitled to require the Operating Partnership to redeem all of such holder's Preferred Units for an amount per unit equal to $0.17 (the consideration paid for a share of common stock of the Company in the Transaction) plus accrued and unpaid distributions at the rate of 6% per annum. In addition, the Amended Partnership Agreement contains certain tax related provisions that, subject to certain exceptions, will benefit holders of Preferred Units for a period of seven years including restrictions on the sale of properties and requirements to allocate debt in a certain manner. We have agreed to pay the Buyer a termination fee of $4,500, plus expenses of up to $1,500, if the Transaction is not completed under certain circumstances, including our election to pursue an alternative transaction. In certain other circumstances in which the Transaction has not been completed, including the failure to obtain the stockholder approval of the Transaction, a termination fee will not be payable but we have agreed to reimburse the Buyer for its expenses up to $3,500. As collateral for these obligations, we also entered into an agreement with Lightstone providing for the assignment of our rights to, and interest in, an escrow of $2,800 which was established in connection with our sale of Prime Outlets of Puerto Rico in December 2002 to an affiliate of Lightstone. The special meeting of stockholders (the "Special Meeting") for the purpose of, among other things, voting on the Transaction was originally scheduled for Thursday, October 30, 2003. On October 30, 2003, we announced that the Special Meeting had been adjourned to November 4, 2003 and later announced on November 4, 2003 that the Special Meeting had been adjourned again until Tuesday, November 18, 2003 to provide stockholders with additional time to cast their vote on the Transaction. Before the adjournment of the Special Meeting on October 30, 2003, our common stockholders approved an amendment to our charter to reduce the required vote of the common stockholders to approve a merger from two-thirds to a majority. There can be no assurance as to the timing, terms or completion of the Transaction. Settlement of Tenant Matters During 2002, we entered into settlement agreements with respect to certain tenant matters providing for aggregate payments of $2,760. Through December 31, 2002, we made approximately $2,607 of such required payments. The 2002 payments were principally made from certain funds escrowed under a mezzanine loan, which was repaid in full in December 2002. The remaining payment of $153 was made in January 2003 with cash from operations. These settlement agreements did not have a material impact on our financial condition or our results from operations. We had previously established reserves aggregating $5,000 for the settlement of such matters. Development Activities and Capital Expenditures During 2003, we will continue to explore potential international opportunities and will selectively consider expansion and/or redevelopment of certain of our existing outlet centers. We do not currently expect such activities to have a significant impact on our liquidity or financial condition. Additionally, we expect to incur costs during the remainder of 2003 (i) in connection with releasing space to new tenants and (ii) for repairs and maintenance of our properties. However, we do not expect such expenditures to have a significant impact on our liquidity or financial condition because reserves for such costs are paid monthly into escrow accounts under many of our loans. Page - (47) Recent Accounting Pronouncements In December 2002, the Financial Accounting Standards Board ("FASB") issued Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the disclosures to be made by a guarantor in interim and annual financial statements about the obligations under certain guarantees. FIN No. 45 also clarifies that a guarantor is required to recognize, at the inception of the guarantee, an initial liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN No. 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. We adopted the disclosure provisions of FIN No. 45 effective December 31, 2002. The initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. We did not issue or modify any guarantees during the nine months ended September 30, 2003. See "Guarantees and Guarantees of Indebtedness of Others" contained in Note 4 - "Debt" of the Notes to Consolidated Financial Statements for additional information. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 requires the consolidation of an entity by an enterprise (i) if that enterprise, known as a "primary beneficiary", has a variable interest that will absorb a majority of the entity's expected losses if they occur, receive a majority of the entity's expected residual returns if they occur, or both and (ii) if the entity is a variable interest entity, as defined by FIN No. 46. We did not create any variable interest entities during the nine months ended September 30, 2003. We plan to adopt FIN No. 46 in the fourth quarter of 2003 and do not believe that this adoption will have a significant impact on our financial statements for our existing investments in unconsolidated joint ventures. In May 2003, the FASB issued FAS No 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." FAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of these instruments were previously classified as equity. In October 2003, the FASB decided to indefinitely delay the effective date of the provisions of FAS No. 150 related to finite life entities and also indicated that it may modify other guidance in FAS No. 150. In its original form, we did not anticipate FAS No. 150 having a significant impact on our financial statements. However, that assessment may change if the FASB modifies the guidance in FAS No. 150. Risk Management Activities We are subject to various market risks and uncertainties, including, but not limited to, the effects of current and future economic conditions, and the resulting impact on our tenants' sales and our revenue; the effects of increases in market interest rates from current levels (see below); the risks associated with existing vacancy rates or potential increases in vacancy rates because of, among other factors, tenant bankruptcies and store closures, and the resulting impact on our revenue; and risks associated with refinancing our current debt obligations or obtaining new financing under terms less favorable than we have experienced in prior periods. Page - (48) Interest Rate Risk In the ordinary course of business, we are exposed to the impact of interest rate changes. We employ established policies and procedures to manage our exposure to interest rate changes. Historically, we have used a mix of fixed and variable-rate debt to (i) limit the impact of interest rate changes on our results from operations and cash flows and (ii) lower our overall borrowing costs. In certain cases, we have used derivative financial instruments such as interest rate protection agreements to manage interest rate risk associated with variable-rate indebtedness. Nevertheless, as of September 30, 2003, all of our outstanding indebtedness bore interest at fixed rates. See Item 3 - "Quantitative and Qualitative Disclosures About Material Risk" for additional information. Also see "Guarantees of Debt and Indebtedness of Others" for additional information. Economic Conditions In general, the leases relating to our outlet centers have terms of three to five years and most contain provisions that somewhat mitigate the impact of inflation. Such provisions include clauses providing for increases in base rent and clauses enabling us to receive percentage rents for annual sales in excess of certain thresholds based on merchants' gross sales. In addition, lease agreements generally provide for (i) the recovery of a merchant's proportionate share of actual costs of common area maintenance ("CAM"), refuse removal, insurance, and real estate taxes, (ii) a contribution for advertising and promotion and (iii) an administrative fee. CAM includes items such as utilities, security, parking lot cleaning, maintenance and repair of common areas, capital replacement reserves, landscaping, seasonal decorations, public restroom maintenance and certain administrative expenses. We continually monitor our lease provisions in light of current and expected economic conditions and other factors. In this regard, we may consider alternative lease provisions (e.g., fixed CAM) where appropriate. Funds from Operations Industry analysts generally consider funds from operations ("FFO"), as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), an alternative non-GAAP measure of performance of an equity REIT. In 1991, NAREIT adopted its definition of FFO. This definition was clarified in 1995, 1999 and 2002. FFO is currently defined by NAREIT as net income or loss (computed in accordance with GAAP), excluding gains or losses from provisions for asset impairment and sales of depreciable operating property, plus depreciation and amortization (other than amortization of deferred financing costs and depreciation of non-real estate assets) and after adjustment for unconsolidated partnerships and joint ventures and discontinued operations. FFO includes non-recurring events, except for those that are defined as "extraordinary items" in accordance with GAAP. FFO excludes the earnings impact of "cumulative effects of accounting changes" as defined by GAAP. Effective January 1, 2002, FFO related to assets held for sale, sold or otherwise transferred and included in results of discontinued operations (in accordance with the requirements of FAS No. 144) should continue to be included in FFO. Previously, we excluded provisions for asset impairment from our reported FFO computations in accordance with guidelines established by NAREIT; however, because of recent guidance issued by the Securities and Exchange Commission ("SEC"), we now include provisions for asset impairment in our FFO computations. Accordingly, the provision for asset impairment of $6,590 incurred in the second quarter of 2003 is included in the FFO computation for the nine months ended September 30, 2003 and the FFO for the quarter and nine months ended September 30, 2002 have been restated to include provisions for asset impairment aggregating $97,176 (of which $15,557 is included in discontinued operations) and $109,376 (of which $27,757 is included in discontinued operations), respectively. Page - (49) We believe that FFO is an important and widely used non-GAAP measure of the operating performance of REITs, which provides a relevant basis for comparison to other REITs. Therefore, FFO is presented to assist investors in analyzing our performance. Our FFO is not comparable to FFO reported by other REITs that do not define the term using the current NAREIT definition or that interpret the current NAREIT definition differently than we do. Therefore, we caution that the calculation of FFO may vary from entity to entity and, as such the presentation of FFO by us may not be comparable to other similarly titled measures of other reporting companies. We believe that to facilitate a clear understanding of our operating results, FFO should be examined in conjunction with net income determined in accordance with GAAP. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of our performance or to cash flows as a measure of liquidity or ability to make distributions. FFO was $3,914 for the three months ended September 30, 2003 compared to $(90,286) for the same period in 2002. The FFO results for the third quarter of 2003 include $1,224 of net interest expense (the "Defeased Interest Expense") attributable to mortgage indebtedness that was defeased in December 2002. This net interest expense had no impact on our operating cash flow during 2003 because such payments were made from previously established escrows. The FFO results for the third quarter of 2002 reflect an aggregate provision for asset impairment of $97,176 (of which $15,557 is included in discontinued operations). Excluding the impact of (i) the Defeased Interest Expense and (ii) the provision for asset impairment, FFO for the third quarter of 2003 and 2002 was $5,138 and $6,890, respectively. This decrease in our FFO results for the third quarter of 2003 compared to our FFO results for the same period in 2002 is attributable to (i) the impact of reduced weighted-average portfolio occupancy during the 2003 period, (ii) the impact of changes in economic rental rates, (iii) legal, financial advisory and proxy costs associated with the Transaction during the 2003 period and (iv) the loss of net operating income resulting from dispositions of properties primarily during 2002. Partially offsetting these items were interest savings resulting from the repayment of indebtedness. FFO was $8,466 for the nine months ended September 30, 2003 compared to $(93,267) for the same period in 2002. The FFO results for the nine months ended September 30, 2003 include $3,177 of Defeased Interest Expense. The FFO results for the nine months ended September 30, 2003 also reflect a provision for asset impairment of $6,590 and the FFO results for the nine months ended September 30, 2002 reflect an aggregate provision for asset impairment of $109,376 (of which $27,757 is included in discontinued operations). Excluding the impact of (i) the Defeased Interest Expense and (ii) the provisions for asset impairment, FFO for the nine months ended September 30, 2003 and 2002 was $18,233 and $16,109, respectively. This increase in our FFO results during the nine months ended September 30, 2003 compared to our FFO results for the same period in 2002 was attributable to (i) interest savings resulting from the repayment of indebtedness, (ii) the previously discussed non-recurring charge of $3,000 in the second quarter of 2002 and (iii) reduced bad debt expense. These items were partially offset by (i) the impact of reduced weighted-average portfolio occupancy during the 2003 period, (ii) the impact of changes in economic rental rates, (iii) legal, financial advisory and proxy costs associated with the Transaction during the 2003 period and (iv) the loss of net operating income resulting from dispositions of properties primarily during 2002. Page - (50) TABLE 8 provides a reconciliation of loss from continuing operations to FFO for the three and nine months ended September 30, 2003 and 2002. Table 8 - Funds from Operations

Page - (51) Item 3. Quantitative and Qualitative Disclosures of Market Risk Market Risk Sensitivity We are subject to various market risks and uncertainties, including, but not limited to, the effects of current and future economic conditions, and the resulting impact on our revenue; the effects of increases in market interest rates from current levels (see below); the risks associated with existing vacancy rates or potential increases in vacancy rates because of, among other factors, tenant bankruptcies and store closures, and the resulting impact on our revenue; and risks associated with refinancing our current debt obligations or obtaining new financing under terms less favorable than we have experienced in prior periods. Interest Rate Risk In the ordinary course of business, we are exposed to the impact of interest rate changes. We employ established policies and procedures to manage our exposure to interest rate changes. Historically, we have used a mix of fixed and variable-rate debt to (i) limit the impact of interest rate changes on our results from operations and cash flows and (ii) lower our overall borrowing costs. Nevertheless, as of September 30, 2003, all of our outstanding indebtedness bore interest at fixed rates. The following table summarizes (A) scheduled principal maturities of our debt, excluding (i) unamortized debt premiums of $6,091, (ii) $24,919 of aggregate non-recourse mortgage indebtedness in default and (iii) defeased notes payable in the amount of $74,046, which was paid in full on November 11, 2003, and (B) the related average contractual interest rates by year of maturity as of September 30, 2003. See Note 4 - "Debt" of the Notes to Consolidated Financial Statements contained herein for additional information.

We sold Prime Outlets at Hagerstown (the "Hagerstown Center") on January 11, 2002 to an existing joint venture partnership (the "Prime/Estein Venture"). In connection with the sale, the Prime/Estein Venture assumed the first mortgage loan on the Hagerstown Center (the "Hagerstown First Mortgage") in the amount of $46,862; however, our guarantee of such indebtedness remains in place. Additionally, we are obligated to refinance the Hagerstown First Mortgage on behalf of the Prime/Estein Venture on or before June 1, 2004, the date on which such indebtedness matures. The Prime/Estein Venture's cost of the Hagerstown First Mortgage and any refinancing of it are fixed at an annual rate of 7.75% for a period of 10 years. If the actual cost of such indebtedness should exceed 7.75% at any time during the 10-year period, we will be obligated to pay the difference to the Prime/Estein Venture. If the actual cost of such indebtedness is less than 7.75% at any time during the 10-year period, however, the Prime/Estein Venture will be obligated to pay the difference to us. The actual cost of the Hagerstown First Mortgage is 30-day LIBOR plus 1.50%, or 2.62% as of September 30, 2003. Because the Hagerstown First Mortgage bears interest at a variable rate, we are exposed to the impact of interest rate changes. At September 30, 2003, a hypothetical 100 basis point move in the LIBOR rate would impact our interest rate agreement by $469. See Note 4 - "Debt" of the Notes to Consolidated Financial Statements for additional information. Page - (52) Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures We have conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report on Form 10-Q, which was conducted with the participation of our Chairman and Chief Executive Officer along with our President, Chief Financial Officer and Treasurer, Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. However, based upon the evaluation, the Company's Chairman and Chief Executive Officer along with the Company's President, Chief Financial Officer and Treasurer concluded that, subject to the limitations described above, the Company's disclosure controls and procedures are effective. In addition, they concluded that there were no significant deficiencies in the design or operations of internal controls, which could significantly affect our ability to record, process, summarize and report financial data. (b) Changes in Internal Controls There was no significant change in our internal controls over financial reporting that occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. Page - (53) PART II: OTHER INFORMATION Item 1. Legal Proceedings For a description of legal proceedings involving us and our properties, please see Part I, Item 3 - "Legal Proceedings" of our Annual Report on Form 10-K for the year ended December 31, 2002 and Note 6 - "Legal Proceedings" of the Notes to Consolidated Financial Statements contained herein. The following information updates such disclosure. Certain tenants in our and our affiliates' outlet centers have made or may make allegations concerning overcharging for common area maintenance ("CAM") and promotion fund charges because of varying clauses in their leases pursuant to which they claim under various circumstances that they were not required to pay some or all of the pass-through charges. Such claims if asserted and found meritorious, could have a material affect on our financial condition. Determination of whether liability would exist to us would depend on interpretation of various lease clauses within a tenant's lease and all of the other leases at each center collectively. To date such issues have been raised and resolved with various tenants, some of which at one time or another were the subject of litigation, or threatened litigation with us. Additionally, on April 9, 2003, Gap Inc. notified us that it believes it is entitled to a refund of certain pass-through charges as a result of certain clauses in its leases. The Company and Gap, Inc. are in discussions concerning the claims of Gap, Inc. In the second quarter of 2002, we recorded a non-recurring charge to establish a reserve in the amount of $3,000 for resolution of these matters. This reserve was estimated in accordance with our established policies and procedures concerning loss contingencies for additional information. The balance of the unused reserve (which is included in the accounts payable and other liabilities in the Consolidated Balance Sheet) is $2,240 as of September 30, 2003. Based on presently available information, we believe it is probable the remaining reserve will be utilized over the next several years in resolving claims relating to the pass-through and promotional fund provisions contained in our leases, inclusive of amounts that may be owed, if any, to Gap Inc. We caution, however, that given the inherent uncertainties of litigation and the complexities associated with a large number of leases and other factual questions at issue, actual costs may vary from this estimate. No other such tenant, however, has filed a suit or indicated to us that it intends to file a suit. Nevertheless, it is too early to make any predictions as to whether we or our affiliates may be found liable with respect to other tenants, or to predict damages should liability be found. Page - (54) Several entities (the "eOutlets Plaintiffs") filed or stated an intention to file lawsuits (collectively, the "eOutlets Lawsuits") against us and our affiliates arising out of our on-line venture, primeoutlets.com. inc., also known as eOutlets, an affiliate of ours. primeoutlets.com, inc. filed for protection under Chapter 7 of the United States Bankruptcy Code in November of 2000 under the name E-Outlets Resolution Corp. (the "Debtor"). The eOutlets Plaintiffs sought to hold us and our affiliates responsible under various legal theories for liabilities incurred by primeoutlets.com, inc., including the theories that we guaranteed the obligations of eOutlets and that we were the "alter-ego" of eOutlets. Other than the suit filed on November 5, 2002 and discussed below, these eOutlets Lawsuits against us have been resolved or are now barred by the applicable statute of limitations or otherwise. On November 5, 2002, the bankruptcy trustee for the Debtor brought suit against Prime Retail, L.P., Prime Retail, Inc., and Prime Retail E-Commerce, Inc. (the "Entity Defendants") and certain former directors of the Debtor (the "Individual Defendants"). Motions to dismiss the suit were filed by all Defendants and a hearing was held on September 29, 2003. After the hearing, the Trustee's remaining claims involve promissory estoppel, breach of contract, breach of fiduciary duty, tortious interference with prospective business advantage, and preferences against the Entity Defendants, and breach of fiduciary duty and gross negligence against the individual defendants. We have tendered the suit, both as to the Entity Defendants and Individual Defendants, to the Directors' and Officers' insurance carrier. All Defendants believe the suit is without merit and plan on defending it vigorously. Nevertheless, the outcome of this lawsuit, and the ultimate liability of us, if any, cannot be predicted at this time. On August 29, 2003, the Company received notice of a purported class action lawsuit against the Company, the Company's board of directors, Prime Outlets Acquisition Company, LLC and The Lightstone Group, LLC (collectively, "Lightstone") filed by four related series A preferred stockholders (the "Plaintiffs"), in the Circuit Court for Baltimore City, Maryland (the "Court") on August 12, 2003 concerning the Company's merger with Lightstone (the "Merger"). The lawsuit alleges, among other things, that the Company's directors breached their fiduciary duties in approving the Merger, that the consideration payable in respect of the series A preferred stock is unfair and inadequate and that the information made available by the Company in connection with the transaction is deficient. The plaintiffs sought, among other things, that the transaction contemplated by the Merger Agreement be enjoined or, in the event such transaction is consummated, that it be rescinded and damages be awarded to class members. On September 29, 2003, the defendants filed a motion to dismiss the original complaint. In response, on October 8, 2003, the Plaintiffs filed a Verified First Amended Class Action Complaint along with a motion for expedited proceedings and subsequent preliminary injunction hearing. After a court conference, the Plaintiffs converted their motion for a preliminary injunction into one for a temporary restraining order seeking to enjoin the special meeting for and the scheduled vote on the transaction. The Court held a hearing on the defendants' motion to dismiss and the motion for temporary restraining order on October 24 and 28, 2003. On October 28, 2003, the Plaintiffs announced that they were withdrawing their request for injunctive relief, and would not seek to prevent the special meeting from occurring. The Court ruled that it would dismiss the First Amended Complaint, but allow the Plaintiffs 30 days to file a second amended complaint. Item 3. Defaults Upon Senior Securities We are currently in arrears in the payment of distributions on our 10.5% Series A Senior Cumulative Preferred Stock ("Series A Senior Preferred Stock") and 8.5% Series B Cumulative Participating Convertible Preferred Stock ("Series B Convertible Preferred Stock"). As of September 30, 2003, the aggregate arrearage on the Series A Senior Preferred Stock and the Series B Convertible Preferred Stock was approximately $23.4 million and approximately $64.6 million, respectively. Page - (55) Item 4. Submission of Matters to a Vote of Security Holders On October 30, 2003 at a special meeting, our common stockholders approved an amendment to our charter which reduced the required vote to approve a merger from two-thirds to a majority. 23,377,680 shares voted for the amendment, 4,345,594 shares voted against the amendment, and 214,241 shares abstained. See Note 10 - "Merger Agreement" of the Notes to Consolidated Financial Statements contained herein for additional information. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are included in this Quarterly Report on Form 10-Q: Exhibit 3.1 Charter Amendment Exhibit 31.1 Certification of Glenn D. Reschke pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 13, 2003. Exhibit 31.2 Certification of Robert A. Brvenik pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 13, 2003. Exhibit 32.1 Certification of Glenn D. Reschke pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, dated as of November 13, 2003. Exhibit 32.2 Certification of Robert A. Brvenik pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, dated as of November 13, 2003. Reports on Form 8-K: On August 14, 2003, we filed a Current Report on Form 8-K dated August 14, 2003 announcing our second quarter financial results pursuant to Item 12., Results of Operations and Financial Condition, under Item 9., Regulation FD Disclosure, in accordance with the Securities and Exchange Commission's interim filing guidance set forth in Release No. 34-47583. On September 4, 2003, we filed a Current Report on Form 8-K dated September 3, 2003, under Item 5, Other Events, relating to the joint announcement between us and The Lightstone Group, LLC ("Lightstone"), a New Jersey-based real estate company, that they amended the merger agreement (the "Merger Agreement") entered into on July 8, 2003 between Prime Outlets Acquisition Company, LLC (the "Buyer), a Delaware limited liability company which is an affiliate of Lightstone, and us, which provides for us to be merged with and into the Buyer. The amendment increases the aggregate consideration payable to our shareholders and unit holders from $115.0 million to $115.5 million and reflects a revised allocation of the consideration among our classes of capital stock. The filing included as exhibits: (i) a copy of the amendment to the Merger Agreement and (ii) a copy of the joint press release issued by us and Lightstone regarding the amendment of the Merger Agreement.* * Pursuant to General Instruction B of Form 8-K, the report submitted to the Securities and Exchange C ommission under Item 9, Regulation FD Disclosure, is not deemed to be "filed" for purpose of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act"), and we are not subject to the liabilities of that section with respect to such reports. We are not incorporating, and will not incorporate by reference, such report into filings under the Securities Act of 1933 or the Exchange Act. Page - (56) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PRIME RETAIL, INC. Registrant Date: November 13, 2003 /s/ Robert A. Brvenik ---------------------------------- Robert A. Brvenik President, Chief Financial Officer and Treasurer

PRIME RETAIL INC/BD/ 10-Q