EXHIBIT 99.1
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
Crown American Realty Trust:
We have audited the accompanying consolidated balance sheets of Crown American
Realty Trust (a Maryland real estate investment trust) and subsidiaries as of
December 31, 2002 and 2001, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December31, 2002. Our audits also included the financial
statement schedules listed in the Index in Part IV of the Form 10-K. These
consolidated financial statements and schedules are the responsibility of the
management of Crown American Realty Trust. Our responsibility is to express an
opinion on these consolidated financial statements and schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Crown
American Realty Trust as of December 31, 2002 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Notes 2 and 18 of the Notes to the Consolidated Financial
Statements, in 2002 the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long Lived
Assets." Also, as discussed in Notes 2 and 18 of the Notes to the Consolidated
Financial Statements, on January 1, 2003, the Company adopted Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statement No. 4, 44,
and 64, Amendment of FASB No. 13, and Technical Corrections". As discussed in
Note 5 of the Notes to the Consolidated Financial Statements, in 2001 the
Company adopted Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities".
/s/ ERNST & YOUNG LLP
McLean, Virginia
March 28, 2003
Except for Note 18, as to which the date is June 9, 2003
CROWN AMERICAN REALTY TRUST
Consolidated Statements of Operations
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
(in thousands, except per share data)
Rental operations:
Revenues:
Minimum rent $ 114,180 $ 110,639 $ 103,904
Percentage rent 6,650 6,980 7,982
Property operating cost recoveries 36,976 34,666 35,479
Temporary and promotional leasing 11,842 10,625 10,345
Utility redistribution income 13,915 13,819 14,173
Miscellaneous income 2,441 1,874 1,303
--------- --------- ---------
186,004 178,603 173,186
========= ========= =========
Property operating costs:
Recoverable operating costs 49,546 46,675 45,122
Property administrative costs 3,410 2,696 2,546
Other operating costs 2,956 3,093 2,331
Utility redistribution expense 10,844 10,413 10,574
Depreciation and amortization 44,375 46,888 45,425
--------- --------- ---------
111,131 109,765 105,998
========= ========= =========
74,873 68,838 67,188
Other expenses:
General and administrative 6,822 5,393 5,093
Restructuring costs 369
Interest, net 50,736 52,702 54,306
Loss on early extinguishment of debt 4,314 243
--------- --------- ---------
61,872 58,095 60,011
========= ========= =========
13,001 10,743 7,177
Property sales:
Gain on sale of outparcel land 369 437 924
Gain (loss) on asset sales (224)
--------- --------- ---------
369 437 700
Minority interest in Operating Partnership (5,351) (4,999) (664)
Income from continuing operations 8,019 6,181 7,213
Discontinued operations:
Loss from operations (729) (975) (1,234)
Gain on asset sale 425
--------- --------- ---------
(304) (975) (1,234)
========= ========= =========
Net income 7,715 5,206 5,979
Dividends on preferred shares (13,613) (13,613) (13,695)
Net loss allocable to common shares $ (5,898) $ (8,407) $ (7,716)
Per common share information:
Basic and Diluted EPS
Loss from continuing operations before
discontinued operations, net of
preferred dividends $ (0.19) $ (0.28) $ (0.25)
Loss from discontinued operations (0.01) (0.04) (0.04)
--------- --------- ---------
Net loss $ (0.20) $ (0.32) $ (0.29)
========= ========= =========
Weighted average shares outstanding - basic and diluted (000) 29,480 26,208 26,208
The accompanying notes are an integral part of these statements.
CROWN AMERICAN REALTY TRUST
Consolidated Balance Sheets
December 31,
------------
2002 2001
---- ----
(in thousands, except share and per share data)
Assets
Income-producing properties:
Land $ 156,338 $ 139,958
Buildings and improvements 1,072,366 988,250
Deferred leasing and other charges 43,038 42,909
----------- -----------
1,271,742 1,171,117
=========== ===========
Accumulated depreciation and amortization (481,284) (441,640)
790,458 729,477
Minority interest in Operating Partnership 3,265 3,303
Other Assets:
Investment in joint venture 3,114 3,705
Cash and cash equivalents, unrestricted 14,122 16,999
Restricted cash and escrow deposits 8,969 7,656
Tenant and other receivables 14,813 14,283
Deferred charges and other assets 19,384 19,369
Assets from discontinued operations 25,307 31,988
----------- -----------
$ 879,432 $ 826,780
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Debt on income-producing properties $ 737,566 $ 694,913
Accounts payable and other liabilities 44,569 40,362
Liabilities from discontinued operations 13,952 26,382
----------- -----------
796,087 761,657
=========== ===========
Commitments and contingencies
Shareholders' equity:
Non-redeemable senior preferred shares,
11.00% cumulative, $.01 par value,
2,500,000 shares authorized and issued
at both December 31, 2002 and 2001 25 25
Common shares, par value $.01 per share,
120,000,000 shares authorized, 33,572,694
and 27,742,317 shares issued at December 31,
2002 and 2001, respectively 335 277
Additional paid-in capital 365,247 317,450
Accumulated deficit (266,554) (235,980)
----------- -----------
99,053 81,772
=========== ===========
Less common shares held in treasury
at cost, 1,534,398 shares at both
December 31, 2002 and 2001 (14,652) (14,652)
Less preferred shares held in treasury
at cost, 25,000 shares at both
December 31, 2002 and 2001 (929) (929)
Accumulated other comprehensive loss (127) (1,068)
----------- -----------
83,345 65,123
=========== ===========
$ 879,432 $ 826,780
The accompanying notes are an integral part of these statements.
CROWN AMERICAN REALTY TRUST
Consolidated Statements of Cash Flows
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income $ 7,715 $ 5,206 $ 5,979
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in Operating Partnership 5,351 4,999 664
Equity earnings in joint venture (452) (344) (210)
Depreciation and amortization 47,605 50,043 51,508
Operating loss from discontinued operations 729 975 1,234
(Gain) loss on asset sales (425) (25)
Loss on early extinguishment of debt 4,314 243
Restructuring costs 369
Net cash provided by discontinued operations 754 1,031 725
Net changes in:
Tenant and other receivables (530) 2,832 (1,952)
Restricted cash and escrow deposits (592) 279 93
Deferred charges and other assets (2,069) (907) 1,818
Accounts payable and other liabilities 5,149 4,278 (2,160)
--------- --------- ---------
Net cash provided by operating activities 67,549 68,392 58,286
========= ========= =========
Cash flows from investing activities:
Investment in income properties (14,423) (23,128) (45,607)
Acquisitions of enclosed shopping malls (90,583)
Change in investing escrow deposits (255) 209 5,967
Net proceeds from asset sales 5,354 4,670
Distributions from joint venture 674 694 472
(Investments in) proceeds from asset sales related to discontinued operations 158 (257) 3,873
--------- --------- ---------
Net cash used in investing activities (99,075) (22,482) (30,625)
========= ========= =========
Cash flows from financing activities:
Proceeds from issuance of debt, net of loan deposits and
prepayment penalties 144,154 16,918 63,916
Cost of issuance of debt (1,353) (79) (2,159)
Debt repayments (106,097) (16,923) (42,490)
Dividends and distributions paid on common shares and
partnership units (33,115) (30,287) (29,926)
Dividends paid on senior preferred shares (13,613) (13,613) (13,695)
Net proceeds from common share issuance, exercise
of stock options and under the Dividend Reinvestment Plan 47,867
Purchase of senior preferred shares held in treasury (929)
Cash flow support payments 3,125 3,067 2,902
Debt repaid on discontinued operations (12,319) (2,607) (7,838)
--------- --------- ---------
Net cash provided by (used in) financing activities 28,649 (43,524) (30,219)
========= ========= =========
Net (decrease) increase in cash and cash equivalents (2,877) 2,386 (2,558)
Cash and cash equivalents, beginning of year 16,999 14,613 17,171
Cash and cash equivalents, end of year $ 14,122 $ 16,999 $ 14,613
Supplemental Disclosures:
Interest paid $ 48,978 $ 50,945 $ 52,120
Interest cost capitalized $ $ 38 $ 839
Other comprehensive income (loss) - hedging activities $ 941 $ (1,068) $
The accompanying notes are an integral part of these statements.
CROWN AMERICAN REALTY TRUST
Consolidated Statements of Shareholders' Equity
Senior Accumulated
Common Preferred Other
Common Senior Additional Shares Shares Comprehensive
Shares Preferred Common Paid-in Accumulated Held in Held in Income
Outstanding Shares Shares Capital Deficit Treasury Treasury (Loss) Total
- ----------- ------ ------ ------- ------- -------- -------- ------ -----
(in thousands) (in thousands)
26,208 Balance, December 31, 1999 $25 $277 $316,421 $(176,220) $(14,652) $ $ $(125,851)
Preferred shares (25) purchased
and held in treasury (929) (929)
Transfer in (out) of limited
partner's interest in the
Operating Partnership (57) (57)
Capital contributions from
Crown Investments Trust:
Cash flow support 1,111 1,111
Net income 5,979 5,979
Dividends paid or accrued:
Preferred shares (13,695) (13,695)
Common shares (21,688) (21,688)
26,208 Balance, December 31, 2000 25 277 317,475 (205,624) (14,652) (929) 96,572
Comprehensive loss:
Net income 5,206 5,206
Net loss on cash-flow
hedging activities (1,068) (1,068)
Total comprehensive income 5,206 (1,068) 4,138
Transfer in (out) of limited
partner's interest in the
Operating Partnership (25) (25)
Dividends paid or accrued:
Preferred shares (13,613) (13,613)
Common shares (21,949) (21,949)
26,208 Balance, December 31, 2001 25 277 317,450 (235,980) (14,652) (929) (1,068) 65,123
Comprehensive income:
Net income 7,715 7,715
Net income on cash-flow
hedging activities 941 941
Total comprehensive income 7,715 941 8,656
5,830 Issuance of common shares 58 47,809 47,867
Transfer in (out) of limited
partner's interest in the
Operating Partnership (12) (12)
Dividends paid or accrued:
Preferred shares (13,613) (13,613)
Common shares (24,676) (24,676)
32,038 Balance, December 31, 2002 $25 $335 $365,247 $(266,554) $(14,652) $(929) $ (127) $ 83,345
The accompanying notes are an integral part of these statements.
CROWN AMERICAN REALTY TRUST
Notes to Consolidated Financial Statements
NOTE 1 - ORGANIZATION, NATURE OF OPERATIONS, AND BASIS OF PRESENTATION
Organization
Crown American Realty Trust (the "Company") was formed on May 14, 1993 as a
Maryland real estate investment trust (a "REIT") to acquire and operate
substantially all of the enclosed shopping mall properties and two office
buildings (the "Initial Properties") owned by Crown American Associates ("Crown
Associates"), formerly Crown American Corporation. Crown Associates is a
wholly-owned subsidiary of Crown Holding Company ("Crown Holding"), which is
controlled by Mark Pasquerilla, Chairman of the Board of Trustees and CEO of the
Company. Crown Associates, which was founded in 1950, was engaged principally in
the development, acquisition, ownership and management of enclosed shopping
malls and, to a lesser extent, strip shopping centers, hotels and office
buildings. The Company raised approximately $405 million in equity through an
initial public offering of approximately 25.5 million shares, which occurred on
August 17, 1993, and used the proceeds to purchase an initial 78.00% general
partnership interest in Crown American Properties, L.P. (the "Operating
Partnership"), a partnership which was formed just prior to consummation of the
offering to own and operate the Initial Properties. These proceeds, along with
new borrowings, were used by the Operating Partnership to retire debt related to
the Initial Properties.
Simultaneously with the public offering, Crown Associates and an affiliate
transferred the Initial Properties and the management operations into either the
Company, the Operating Partnership, or Crown American Financing Partnership (the
"Financing Partnership").
The limited partnership interest in the Operating Partnership and the 1.6
million shares in the Company received for two malls transferred in 1993 are
currently held by Crown Investments Trust ("Crown Investments") and by Crown
American Investment Company (a subsidiary of Crown Investments). Crown
Investments is a wholly-owned indirect subsidiary of Crown Holding. While the
Company, as general partner, has broad rights and authority to conduct the
business, the Operating Partnership agreement provides that the consent of Crown
Investments is required for certain actions, including among others, merger,
consolidation, dissolution, liquidation, or sale of all or substantially all of
the assets of the Operating Partnership.
As described in Note 6 to the Consolidated Financial Statements, in July 1997
the Company completed an offering of 2,500,000 11.00% non-convertible senior
preferred shares at an initial public offering price of $50.00 per share.
As described in Note 15 to the Consolidated Financial Statements, in June 2002
the Company completed a public offering of 5,750,000 of its common shares of
beneficial interest at a public offering price of $8.75 per share.
As described in Note 18 to the Consolidated Financial Statements, on May 13,
2003 the Company entered into an agreement to merge with Pennsylvania Real
Estate Investment Trust ("PREIT").
Nature of Operations
The Company operates in one business segment - real estate. The Company provides
leasing, management, acquisition, development, construction and tenant-related
services for its portfolio. The Company does not have any foreign operations.
The Company evaluates performance based upon net operating income from the
combined properties in the segment.
The Company's revenues are primarily derived under real estate leases with
national, regional and local department store and other specialty retailers.
Approximately 58% of the Company's revenues were derived from malls located in
Pennsylvania. The Company's top five tenants in terms of 2002 total revenues are
as follows:
Percent of Total Revenues
-------------------------
2002 2001
---- ----
Sears Roebuck and Co. 4.9% 5.3%
J C Penney, Inc. 4.1% 4.2%
The Limited 3.8% 4.5%
Gap, Inc. 3.0% 3.3%
The Bon-Ton Stores, Inc. 2.8% 3.0%
The properties owned by the Company through the Operating Partnership and its
subsidiaries (the "Properties") currently consist of: (1) 27 wholly-owned
enclosed shopping malls, including Oak Ridge Mall sold on March 31, 2003 as
described in Note 18, (and adjacent outparcels and strip centers at certain of
the enclosed malls) located in Pennsylvania, New Jersey, Maryland, Tennessee,
North Carolina, West Virginia, Virginia, Alabama, Wisconsin and Georgia, (2) a
50% general partnership interest in Palmer Park Mall Venture, which owns Palmer
Park Mall located in Easton, Pennsylvania, (3) Pasquerilla Plaza, an office
building in Johnstown, Pennsylvania, which serves as the headquarters of the
Company and is partially leased to other parties, and (4) a parcel of land and
building improvements located in Pennsylvania (with a purchase option)
sub-leased to a department store chain ("the Anchor Pad"). The Company also owns
approximately 67 acres of land in the vicinity of certain of the mall
properties, which are held for development, ground lease, or sale to third
parties.
As the owner of real estate, the Company is subject to risks arising in
connection with the underlying real estate, including defaults under or
non-renewal of tenant leases, tenant bankruptcies, competition, inability to
rent unleased space, failure to generate sufficient income to meet operating
expenses, as well as debt service, capital expenditures and tenant improvements,
environmental matters, financing availability and changes in real estate and
zoning laws. The success of the Company also depends upon certain key personnel,
the Company's ability to maintain its qualification as a REIT, compliance with
the terms and conditions of debt instruments, and trends in the national and
local economy, including interest rates, income tax laws, governmental
regulations and legislation, and population trends.
Basis of Presentation
The accompanying consolidated financial statements of the Company include all
accounts of the Company, its wholly-owned subsidiaries, and its majority-owned
subsidiary, the Operating Partnership and its subsidiaries. All significant
intercompany amounts have been eliminated. Other than its ownership interests in
its subsidiaries, the Company owns no other assets and has no other business
activities.
The Company is the sole general partner in the Operating Partnership, and at
December 31, 2002 the Company held 100% of the preferred partnership interests
(see Note 6 to the Consolidated Financial Statements) and 76.29% of the common
partnership interests. As of December 31, 2002, the Operating Partnership
directly owns six malls, including Oak Ridge Mall, the 50% joint venture
interest in Palmer Park Mall, Pasquerilla Plaza, and the Anchor Pad. All
remaining properties are owned by eight partnerships and limited liability
companies that are either 99.5% or 100.0% owned by the Operating Partnership;
the remaining 0.5% interests in these second-tier entities are owned by the
Company through various wholly-owned subsidiaries. The Operating Partnership
owns 100% of Crown American Services Corporation formed in 2002 as a taxable
REIT subsidiary to provide labor and other services to the Operating Partnership
with respect to certain operating activities. The Operating Partnership also
owns 100% of Crown American GC, Inc. formed in 2001 as a taxable REIT subsidiary
to sell gift certificates to shoppers at properties owned by the Company. Only
the Operating Partnership and Crown American Services Corporation have paid
employees. The Operating Partnership manages all properties except the Palmer
Park Mall and the Anchor Pad, and also manages other properties for third party
owners and provides construction management and other services for third
parties.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Some of these estimates and assumptions include judgments on income producing
properties, revenue recognition, estimates for income recoveries of common area
maintenance and real estate taxes, provisions for uncollectible revenues, losses
under the Company's self-insurance program, and the treatment of certain costs
as capital or expense. The Company's significant accounting policies are
described in more detail in Note 2 to the Consolidated Financial Statements.
As described in Notes 2 and 18 to the Consolidated Financial Statements, the
financial statements for 2002 and 2000, as originally filed on Form 10-K for the
year ended December 31, 2002, have been reclassified in 2003 to present losses
on early extinguishment of debt in those years from extraordinary items to
income from continuing operations, as required by SFAS No. 145 "Recession of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". As described in Note 14 to the Consolidated Financial
Statements, the financial statements for 2000 and 2001 were reclassified in 2002
to present Carlisle Plaza Mall, which was sold in 2002, as discontinued
operations in accordance with SFAS 144, "Accounting for the Impairment or
Disposal of Long Lived Assets." As described in Note 18 to the Consolidated
Financial Statements, the financial statements for 2000, 2001 and 2002, as
originally filed on Form 10K for the year ended December 31, 2002, have been
reclassified in 2003 in this amendment to Form 10-K to present Oak Ridge Mall,
which was sold on March 31, 2003, as discontinued operations in accordance with
SFAS 144, "Accounting for the Impairment or Disposal of Long Lived Assets."
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Income-Producing Properties
Income-producing properties are recorded at cost net of depreciation, adjusted
for impairment. With respect to assets held for the long-term production of
income, the Company assesses impairment based on whether the estimated future
net cash flows expected to be generated by the asset (undiscounted and without
interest) is in excess of the net book value of the asset. If a property held
for long term production of income is impaired, its basis is adjusted to fair
value. With respect to assets held for sale, the Company assesses impairment
based on whether the net realizable value (estimated fair value sales price less
direct cost to sell) is in excess of the net book value of the asset. If a
property held for sale is impaired, its net book value is adjusted to fair value
less estimated direct cost to sell. The Company assesses impairment of assets
held for long-term production of income at the property or mall level, where a
separately identifiable cash flow stream exists.
Substantially all of the income-producing properties have been pledged to secure
the Company's currently outstanding debt and lines of credit.
Depreciation on buildings and improvements is provided on individual components,
using the straight-line method over estimated useful lives of 10 to 45 years
resulting in an average composite life of approximately 30 years. Depreciation
on tenant improvements and deferred leasing costs is provided using the
straight-line method over the initial term of the related leases. Unamortized
balances of tenant improvement costs and deferred leasing costs are fully
written off as additional amortization expense in the period in which a tenant
vacates or terminates its lease.
Capitalized Real Estate Costs, Lease Acquisition Costs, and Improvements and
Replacements
Costs related to the development, construction and improvement of
income-producing properties are capitalized in accordance with SFAS 67,
"Accounting for Costs and Initial Rental Operations of Real Estate Projects"
("SFAS 67"). Costs include direct construction costs, tenant improvement costs
and allowances, and indirect costs including interest during the construction
periods and allocated internal costs pursuant to SFAS 67. Internal and external
costs incurred to obtain signed permanent leases (in excess of one year
duration) are capitalized based on the estimated actual costs (see Note 7 to the
Consolidated Financial Statements). Internal and external costs incurred on
leases that do not get signed are expensed.
Certain improvements and replacements to income-producing properties are
capitalized when they extend the useful life, increase capacity, or improve the
efficiency of the asset. All other repair and maintenance items are expensed as
incurred. Total expensed repairs and maintenance costs were $10.8 million, $10.7
million, and $10.6 million for the years ended December 31, 2002, 2001, and
2000, respectively. Capitalized improvements and replacements, including tenant
improvements and allowances, were $14.4 million, $23.1 million and $45.6 million
for the years ended December 31, 2002, 2001, and 2000, respectively.
Revenue Recognition
The Company, as a lessor, has retained substantially all of the risks and
benefits of ownership and accounts for its tenant leases as operating leases
under SFAS 13, "Accounting for Leases". Minimum rents are recognized on a
straight-line basis over the initial term of the related lease. Property
operating cost recoveries from tenants of common area maintenance, real estate
taxes, and other recoverable costs are recognized in the period the qualifying
costs and expenses are incurred. These recoveries also include certain capital
expenditures that are recovered from the tenants in the period the depreciation
is recognized. Percentage rent is recognized at the point in time a specific
tenant's sales breakpoint is achieved. Lease termination fees received from
tenants are recognized as income in the period received.
Reserves have been established for estimated uncollectible receivables related
to billed minimum rents, billed and accrued percentage rents and cost recovery
income, and accrued straight-line rent receivables. These receivables may become
uncollectible primarily due to tenant bankruptcies or early terminations. These
reserves in the aggregate were $2.3 million and $2.1 million at December 31,
2002 and 2001, respectively.
Interest and Financing Costs
Interest costs are capitalized related to income-producing properties under
construction, to the extent such assets qualify for capitalization. Total
interest capitalized was zero in 2002, $0.04 million in 2001 and $0.8 million in
2000. Interest expense includes amortization of deferred financing costs related
to completed financings (see Note 3 to the Consolidated Financial Statements)
and is net of miscellaneous interest income on cash and escrow deposit balances
aggregating $0.4 million, $ 0.8 million, and $1.2 million, for the years ended
December 31, 2002, 2001, and 2000, respectively. Deferred financing costs are
based on actual costs incurred in obtaining the financing and are amortized as
part of interest expense over the term of the related debt instrument. Costs
incurred for financings which are not completed are expensed as part of interest
costs. Unamortized financing costs related to debt that is extinguished early
are written off as an extraordinary item.
Investment in Joint Venture
The Company's 50% joint venture investment in Palmer Park Mall Venture, which
owns Palmer Park Mall (not managed by the Company), is accounted for under the
equity method. The Company's 50% share of the joint venture's net income is
reflected in miscellaneous income in the period earned and distributions
received from the joint venture are reflected as a reduction in the carrying
amount of the investment. The investment amount in excess of the underlying net
assets, net of accumulated amortization, is $2.8 million at December 31, 2002,
with a remaining amortization period of approximately 8 years. Amortization
expense was $0.4 million in each of the three years ended December 31, 2002. The
Company has certain limited guarantees related to its $9.3 million share of the
$18.6 million in mortgage debt owed by Palmer Park Mall Venture.
Minority Interest
Minority interest represents the common ownership interests in the Operating
Partnership held by Crown Investments and its subsidiary. At December 31, 2002
Crown Investments and its subsidiary owned 9,956,398 common partnership units,
or a 23.71% common partnership interest. Crown American Realty Trust owns the
remaining 76.29%. The minority interest balance, as reflected in the Company's
consolidated financial statements, is adjusted each year for Crown Investments'
and its subsidiary's proportionate share of net income (loss) of the Operating
Partnership (after deducting preferred unit distributions), common partnership
unit distributions, and additional capital contributions. Primarily because the
distributions on common partnership units have been larger than the Operating
Partnership's income (loss) after preferred unit distributions, the minority
interest account on the consolidated balance sheets has been declining each
year. The balance was reduced below zero in the second quarter of 2000. Under
GAAP, when the minority partner's share of the Operating Partnership's net
income (loss) and the minority partner's cash distributions and capital
contributions, would cause the minority interest balance to be less than zero,
such balance must be reported at zero unless there is an obligation of the
minority partner to reimburse the Operating Partnership for such excess amounts.
The Support Agreement provides for such obligation by the minority partner in
the form of cash flow support payments. (See Note 8 to the Consolidated
Financial Statements.) Accordingly, since the minority interest account was
reduced below zero, and there was an obligation of the minority partner to make
additional cash contributions to the Operating Partnership, the minority
interest balance at December 31, 2002 was shown on the Consolidated Balance
Sheet as an asset. This asset balance at December 31, 2002 was limited to $3.3
million, the estimated amount of cash flow support to be received over the next
twelve months. As a result of the amendments to the Support Agreement made
during the first and second quarters of 2003 which reduced the minority
partner's obligation under the Support Agreement, as described in Note 18 to the
Consolidated Financial Statements, the minority interest amount was reduced to
$0.5 million in the first quarter of 2003, and reduced to zero in the second
quarter of 2003. An additional amount of $5.5 million, representing the excess
losses and distributions over and above the cash flow support, has been absorbed
by the Company in its share of loss from the Operating Partnership for the year
ended December 31, 2002. On a cumulative basis, $14.1 million of such losses
have been absorbed by the Company, through December31, 2002.
Cash and Cash Equivalents
Cash and cash equivalents includes all unrestricted cash and cash equivalent
investments with original maturities of three months or less.
Income Taxes
The Company elected to be taxed as a Real Estate Investment Trust (REIT) under
Sections 856 through 860 of the Internal Revenue Code of 1986 (the "Code"),
commencing with its first taxable year ended December 31, 1993, and intends to
conduct its operations so as to continue to qualify as a REIT under the Code. As
a REIT, the Company generally will not be subject to Federal or state income tax
on its net income that it currently distributes to shareholders. Qualification
and taxation as a REIT depends on the Company's ability to meet certain dividend
distribution tests, share ownership requirements, and various qualification
tests prescribed in the Code.
During 2001 and 2002, two taxable REIT subsidiaries were formed to conduct
certain business activities. A Taxable REIT subsidiary is subject to federal and
state income taxes on its net taxable income. The amount of net taxable income
and related income taxes from the Company's two taxable REIT subsidiaries was
insignificant during 2001 and 2002.
The Company's consolidated taxable income (before the dividends paid deduction)
for the years ended December31, 2002, 2001, and 2000, was approximately $10.4
million, $16.2 million, and $8.7 million, respectively. These amounts differ
significantly from net income (loss) as reported in the Company's consolidated
financial statements for the same periods. In order to maintain REIT status, the
Company must distribute to its common and preferred shareholders at least 90% of
its taxable income in the form of deductible dividends (had been 95% for years
2000 and earlier). This required distribution is significantly less than the
amounts actually distributed each year since 1993 when the Company elected REIT
status.
If the Company fails to qualify as a REIT in any taxable year, the Company will
be subject to Federal and state income taxes (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates. Even
if the Company qualifies for taxation as a REIT, the Company may be subject to
certain state and local taxes on its income and property and to Federal income
and excise taxes on its undistributed income.
The annual amount and the federal tax treatment of dividends paid on common
shares were as follows:
Total Paid Current Non-Taxable
Per Common Taxable Return of
Share Dividends Capital
Year ended December 21, 2002 $0.8475 0% 100%
Year ended December 31, 2001 $0.8375 30% 70%
Year ended December 31, 2000 $0.8275 0% 100%
During the years ended December 31, 2002, 2001, and 2000, the Company paid
dividends of $5.50 per preferred share. The 2002 preferred dividends were 95%
taxable income and 5% return of capital, the 2001 preferred dividends were 100%
taxable income and 0% return of capital, and the 2000 preferred dividends were
80% taxable income and 20% return of capital.
Net Income (Loss) Per Share
During 1997 the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share". Under SFAS 128, basic income (loss) per
common share is computed by dividing net income (loss) applicable to common
shares, as shown in the Consolidated Statements of Operations, by the weighted
average number of common shares outstanding for the year. Diluted income (loss)
per share is computed the same way except that the weighted average number of
common shares outstanding is increased, using the treasury stock method, for the
assumed exercise of options under the Company's share incentive plans. Because
no anti-dilution is permitted under SFAS 128, diluted and basic loss per common
share are identical in each year ended December 31, 2002, 2001, and 2000.
The number of outstanding options to purchase common shares for which the option
exercise prices exceeded the average market price of the common shares
aggregated approximately 56,000, 569,000, and 941,000, for the years ended
December 31, 2002, 2001, and 2000, respectively. These options were excluded
from the computation of diluted earnings per share under the treasury stock
method.
The calculation of diluted earnings per share for 2002, 2001, and 2000 would
have included approximately 311,000 shares, 133,000 shares, and 16,000 shares,
respectively, for the assumed exercise of options under the Company's share
incentive plans, except that no anti-dilution is permitted under SFAS No. 128.
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") which supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121") and the accounting and
reporting provisions of APB No. 30, "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" for the disposal of
a segment of a business. SFAS 144 retains many of the fundamental provisions of
SFAS 121, but resolves certain implementation issues associated with that
Statement. The Company adopted the provisions of SFAS 144 during the third
quarter of fiscal 2001 and applied its provisions to the sale of Carlisle Plaza
Mall as further described in Note 14 to the Consolidated Financial Statements
herein and to the sale of Oak Ridge Mall to Crown Investments, as described in
Note 18 to the Consolidated Financial Statements.
See Note 18 to the Consolidated Financial Statements concerning the Company's
adoption effective January 1, 2003 of SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections."
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities", ("SFAS
146") which addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." Among other
provisions, SFAS 146 eliminates the definition and requirements for recognition
of exit costs in EITF Issue 94-3 and requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred which can differ from the commitment date of the plan. This Statement
also establishes that fair value is the objective for initial measurement of the
liability. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company adopted SFAS 146 beginning January 1, 2003 and believes
that the implementation of this Statement will not have a material impact on the
Company's results of operations or financial position.
The Company adopted the disclosure provisions of FASB Interpretation No. (FIN)
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Direct Guarantees of Indebtedness of Others," in the fourth quarter of
2002. The Company adopted the initial recognition and initial measurement
provisions on a prospective basis for all guarantees issued or modified after
December 31, 2002. Under FIN 45, at the inception of guarantees issued after
December 31, 2002, the fair value of the guarantee is recorded as a liability,
with the offsetting entry recorded based on the circumstances in which the
guarantee was issued. Fundings under the guarantee are accounted for as a
reduction of the liability. After funding has ceased, the remaining liability is
recognized in the income statement on a straight-line basis over the remaining
term of the guarantee. Adoption of FIN 45 will have no impact to the Company's
financial statements through December 31, 2002 as existing guarantees are not
subject to the measurement provisions of FIN 45. The impact on financial
statements after December 31, 2002 will depend on the nature and extent of
issued guarantees but is not expected to have a material impact to the Company.
(See Note 5 to the Consolidated Financial Statements.)
FIN 46, "Consolidation of Variable Interest Entities," is effective for all
enterprises with variable interests in variable interest entities created after
January 31, 2003. FIN 46 provisions must be applied to variable interests in
variable interest entities created before February 1, 2003 from the beginning of
the third quarter of 2003. If an entity is determined to be a variable interest
entity, it must be consolidated by the enterprise that absorbs the majority of
the entity's expected losses if they occur, receives a majority of the entity's
expected residual returns if the occur, or both. Where it is reasonably possible
that an enterprise will consolidate or disclose information about a variable
interest entity, the enterprise must disclose the nature, purpose, size and
activity of the variable interest entity and the enterprise's maximum exposure
to loss as a result of its involvement with the variable interest entity in all
financial statements issued after January 31, 2003. The Company does not believe
that the adoption of FIN 46 will result in consolidation of any previously
unconsolidated entities. The adoption of FIN 46 may result in additional
disclosures which are not expected to be significant.
NOTE 3 - DEFERRED CHARGES AND OTHER ASSETS
Deferred charges, net of amortization, and other assets are summarized as
follows (in thousands):
December 31, December 31,
2002 2001
------------ ------------
Deferred financing costs $ 6,786 $ 7,372
Prepaid expenses and miscellaneous receivables 5,681 5,075
Furniture, fixtures, equipment, and other 6,917 6,922
------- -------
$19,384 $19,369
======= =======
Deferred Financing Costs
Deferred financing costs, net of accumulated amortization, at December 31, 2002,
consists of approximately $3.1 million related to the $465 million mortgage debt
refinancing with General Electric Capital Corporation ("GECC") in August 1998,
approximately $1.9 million related to the GECC line of credit entered into in
1997 and the modifications and expansions thereto in 1999 and 2000, and $1.8
million for other debt. Amortization of deferred financing costs was $1.8
million, $1.7 million, and $2.2 million for the years ended December 31, 2002,
2001, and 2000, respectively. Deferred financing costs written off as part of
losses on early extinguishment of debt were $0.2 million, $0.0 million, and $0.2
million for the years ended December 31, 2002, 2001, and 2000, respectively.
Deferred financing costs incurred and capitalized were $1.5 million, $0.1
million, and $2.2 million for the years ended December 31, 2002, 2001, and 2000,
respectively.
Deferred Operating Covenant Costs
During 1991 and 1992, approximately $27 million was paid to three anchor tenants
with respect to leases at ten of the malls in order to obtain operating
covenants (a covenant requiring the anchor, among other things, to maintain
operations in certain of the Properties for the duration of the lease period)
and to extend the terms of their leases. These costs were capitalized and were
amortized over the life of the operating covenants with the amortization
recorded as a reduction of minimum rent. Amortization was $2.6 million for the
year ended December 31, 2000, and as of December 31, 2000, these deferred costs
were fully amortized.
In addition, one of these tenants has exercised its option to require the
Company to expand and renovate certain of the leased premises, at the Company's
expense, and to reimburse the tenant for fixtures allowances, which together
aggregated approximately $9.0 million. All of these costs had been incurred by
2000 and are capitalized in the consolidated financial statements and are being
amortized over the expected lives of the assets.
NOTE 4 - RESTRUCTURING COSTS
During the first and third quarters of 1999 and the first quarter of 2000, the
Company recorded restructuring charges of $1.0 million, $1.2 million, and $0.4
million, respectively, related to severance and related costs for employees
affected by three reductions in the number of corporate office staff together
with reductions in other corporate office-related expenses. The restructurings
involved approximately forty-seven home office employees whose positions were
terminated and who represented a cross-section of management, clerical, and
secretarial employees.
NOTE 5 - DEBT ON INCOME-PRODUCING PROPERTIES
Debt on income-producing properties consisted of the following (in thousands):
December 31, 2002 December 31, 2001
----------------- -----------------
GECC Mortgage Loan $450,422 $457,195
Permanent loans 163,116 87,690
Secured lines of credit 124,028 150,028
-------- --------
$737,566 $694,913
======== ========
GECC Mortgage Loan
On August 28, 1998, the Company closed a $465 million 10-year mortgage loan with
GECC. The gross proceeds from this loan (the "GECC Mortgage Loan") were
primarily used to refinance the $280.6 million remaining balance of the Kidder
Mortgage Loans, which were originated at the time of the Company's initial
public offering, a $110.0 million interim mortgage, and a $30.0 million secured
term loan. The GECC Mortgage Loan has a fixed stated interest rate of 7.43% and
is secured by cross-collateralized mortgages on 15 of the malls owned by
separate special purpose partnerships (see below). The loan provided for payment
of interest only during the first two years and interest and principal
amortization, based on 25 year amortization, during the last eight years. Crown
Investments has guaranteed $250 million of the GECC Mortgage Loan.
Permanent Loans
At December 31, 2002, permanent loans consisted of six loans secured by six
properties held by the Operating Partnership or its subsidiaries, as follows:
(1) a $27.6 million mortgage loan secured by Schuylkill Mall due December 2008
with a fixed interest rate of 7.25%, (2) a $13.7 million mortgage loan secured
by Crossroads Mall due July 2008 with a fixed interest rate of 7.39% (3) a $53.3
million mortgage loan secured by Capital City Mall due January 2012 with a fixed
interest rate of 7.61%, (4) a $1.5 million Urban Development Action Grant
("UDAG") loan secured by the Company's headquarters office building due October
2006 with 0% interest, (5) a $37.0 million mortgage loan secured by Valley View
Mall due October 2009 with a fixed interest rate of 6.15%, and (6) a $30.0
million mortgage loan secured by Wiregrass Commons Mall due November 2005
(excludes two one-year extensions that may be available) with a variable
interest rate of LIBOR plus 2.0%. All the loans except the loans on Capital City
Mall, Valley View Mall, and Crossroads Mall are fully guaranteed by either the
Company or the Operating Partnership.
The proceeds from the $53.3 million loan on Capital City Mall, which closed in
January 2002, were used to repay $42.5 million on the former mortgage loan
(included a $4.1 prepayment penalty) and $1.7 million of loan closing costs and
various loan reserves. The $4.1 million prepayment penalty together with $0.2
million of unamortized deferred financing costs on the previous loan were
recorded as a loss on early extinguishment of debt in the Company's Consolidated
Statement of Operations.
On November 7, 2002, the Company and its lender executed agreements to extend
and modify the terms of its mortgage loan on Schuylkill Mall, Frackville, PA.
Under the previous terms, the loan bore interest at a fixed rate of 8.375%, the
annual debt service payment was $3.62 million, and the loan matured on December
1, 2004. The new terms, effective November 1, 2002, include interest at a fixed
rate of 7.25%, annual debt service of $3.32 million and a maturity date of
December 1, 2008. In connection with this extension and modification of terms,
the Company made a cash payment of $5.0 million to reduce the principal balance
from $32.9 million to $27.9 million. The loan was and remains fully guaranteed
by the Operating Partnership.
At December 31, 2002 and 2001, $13.6 million and $15.5 million, respectively, of
mortgage debt on Oak Ridge Mall was outstanding. This debt was reclassified to
"Liabilities from discontinued operations" in the current financial statements
as a result of the sale on March 31, 2003. This loan was paid off on March 31,
2003 in connection with the sale, primarily using funds drawn from the Company's
line of credit.
Secured Lines of Credit
In September 2000 the Company executed a three-year extension and other
modifications to its secured revolving credit facility with GECC. The maturity
date on the line was extended from November17, 2001 to November 17, 2004. The
interest rate on the loan was reduced from LIBOR plus 2.95% to LIBOR plus 2.25%.
The maximum potential availability under the line was increased from the former
maximum amount of $150 million to $175 million due to the addition of Washington
Crown Center to the collateral base in the fourth quarter of 2000. Actual
availability under the line is based on the level of operating income generated
at the six properties; at December 31, 2002, total borrowing capacity was
approximately $155.3 million. The revolving credit facility is currently secured
by cross-collateralized mortgages on six of the Company's enclosed malls. The
facility also includes pre-defined release provisions should the Company sell
certain of the malls to third parties. The facility currently is prepayable,
subject to an exit fee of approximately $0.8 million, which has been accrued in
deferred financing costs and is being amortized over the loan term. Borrowings
under this credit facility totaled $124.0 million at December 31, 2002.
In addition to the above facility, the Company has a $6.0 million line with a
bank secured by a mortgage on Pasquerilla Plaza, the Company's headquarters
office building, bearing interest at LIBOR plus 2.25%. The maturity date on this
line has been extended to April 30, 2004. There were no borrowings outstanding
under this line as of December 31, 2002.
Covenants and Restrictions
Some of the above loans and lines of credit contain certain
financial covenants and other restrictions, including limitations on the ratios,
as defined, of total Company debt to EBITDA, EBITDA to fixed charges, and
floating rate debt to total debt; the failure to observe such covenants would
constitute events of default under the loans and if not cured by the Company
would give the lenders additional rights, including to receive all cash flows
from the properties or to require the loan(s) to be repaid immediately. The
Company was in compliance with all loan covenants as of and during the year
ended December 31, 2002 and through the date hereof. There are ongoing
requirements under the GECC Mortgage Loan, the GECC line of credit, the $53.3
million loan on Capital City Mall, and the $37.0 million loan for Valley View
Mall to have insurance policies in place with insurance companies that have
certain minimum credit ratings, as defined in the respective loan agreements.
Two of the major insurance carriers used by the Company, for general liability,
workers' compensation, automobile, excess liability and property coverage, had
been down-graded by certain rating agencies. On March 6, 2002, the lenders
approved the continued use of these insurance carriers provided no further
rating downgrades occur. In September 2002, the major insurance carrier for
general liability coverage was replaced with an insurance company that exceeded
the minimum credit ratings as required in the loan documents. In October 2002,
two rating agencies further down-graded the remaining insurance carrier and, as
of November 12, 2002, all lenders had approved the continued use of this
insurance carrier until the April 2003 (property) and September 2003 (workers'
compensation, automobile and excess liability) policy renewal dates. Following
an expansive marketing effort, management made the decision to renew property
coverage with the existing carrier and as of March3, 2003, all lenders had
approved the continuation of property insurance coverage with the downgraded
insurance company, provided no further rating downgrades occur, until the time
of the next annual policy renewal period in April 2004. The Company has not yet
determined what insurance company to use for workers' compensation, automobile
and excess liability coverage when those policies renew in September 2003. If
further rating downgrades were to occur in the future, the Company may be
required to replace the insurance coverage prior to the scheduled renewal dates
in September 2003 (workers' compensation, automobile and excess liability) and
April 2004 (property). While management believes that it would be able to
replace the downgraded insurance company as part of the normal renewal cycles in
September 2003 and April 2004, or sooner if so required due to any future rating
downgrades if not waived by lenders, there is no assurance it can do so, because
future conditions may prevent the Company from securing such insurance. In
addition, the premiums paid may increase significantly from those paid under
current insurance policies.
Twenty-one of the Company's malls are owned or ground leased by special purpose
consolidated subsidiaries of the Company. The sole business purpose of the
special purpose subsidiaries, as an ongoing covenant under the related loan
agreements, is the ownership and operation of the properties. The mortgaged
malls and related assets owned by these special purpose subsidiaries are
restricted under the loan agreements for the payment of the related mortgage
loans and are not available to pay other debts of the consolidated Company.
However, so long as the loans are not under an event of default, as defined in
the loan agreements, the cash flows from these properties, after debt service
and reserve payments are made are available for the general use of the Company.
Interest Rates and Swap Agreements
The GECC Mortgage Loan and five of the permanent loans with an aggregate
principal balance of $618.5 million at December 31, 2002 have fixed interest
rates ranging from 6.15% to 7.61% (excluding the UDAG loan which is interest
free). The weighted average interest rate on this fixed-rate debt at December
31, 2002 and 2001 was 7.42% and 7.56%, respectively. The weighted average
interest rate during the years ended December 31, 2002, 2001, and 2000 was
7.52%, 7.60%, and 7.60%, respectively. All of the remaining loans with an
aggregate principal balance of $119.0 million at December31, 2002 have variable
interest rates based on spreads ranging from 2.00% to 2.25% above 30 day LIBOR.
The weighted average interest rate on the variable rate debt at December31,
2002, 2001, and 2000 was 3.61%, 4.18%, and 7.85%, respectively. The weighted
average interest rate on the variable rate debt during the years ended December
31, 2002, 2001, and 2000 was 3.94%, 6.39%, and 7.86%, respectively. For purposes
of determining the amounts of fixed and variable rate debt and the related
interest rate disclosures, the $35.0 million of variable rate debt that was in
effect converted to fixed rate debt by the interest rate swaps described in the
following paragraph was considered to be fixed rate debt for the periods of time
the swap agreements were in effect.
In the first quarter of 2001, the Company entered into swap agreements on a
notional amount of $35 million of the Company's floating rate debt. The
effective LIBOR swap rate on the two agreements is 5.197% and their terms
expired on February 1, 2003. The Company had designated this transaction as a
cash flow hedge of a floating-rate liability and applied the guidance set forth
in Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities" to the swap agreements. The fair
value of these transactions is recorded in the balance sheet, with the offset to
Accumulated Other Comprehensive Loss. As of December 31, 2002, there was a
cumulative mark to market loss on the swap agreements of $0.1 million which has
been reflected in accounts payable and other liabilities, and in accumulated
other comprehensive loss.
Debt Maturities
As of December 31, 2002, the scheduled principal payments on all debt are as
follows (in thousands).
Year Ending
December 31,
- ------------
2003 $ 9,218
2004 134,572
2005 41,769
2006 12,546
2007 13,193
Thereafter 526,268
--------
$737,566
========
NOTE 6 - PREFERRED SHARE OFFERING AND TREASURY SHARES
The Company completed an offering of 2,500,000 11.00% non-convertible senior
preferred shares on July3, 1997. The initial offering price was $50.00 per
share. The preferred shares are non-callable by the Company until July 31, 2007.
On or after July 31, 2007, the Company, at its option, may redeem the preferred
shares for cash at the redemption price per share set forth below:
Redemption
Price
Redemption Period Per Share
- ----------------- ---------
July 31, 2007 through July 30, 2009 $52.50
July 31, 2009 through July 30, 2010 $51.50
On or after July 31, 2010 $50.00
The net proceeds from the offering were $118.7 million after underwriter's
commission and other offering expenses. The net proceeds were contributed by the
Company to the Operating Partnership in exchange for 2,500,000 preferred
Partnership Units. The terms of the preferred partnership units generally
parallel those of the Company's preferred shares as to distributions and
redemption rights. In turn, the Operating Partnership used the proceeds received
from the Company primarily to repay $58.3 million of debt, to repurchase $12.2
million of common shares held in treasury under a common share repurchase
program approved by the Board of Trustees, and to acquire Valley Mall for $32.0
million in November 1997.
As stipulated in the Prospectus Supplement, additional dividends shall be paid
quarterly to the holders of the preferred shares if the Company's total debt (as
defined) exceeds the product of 6.50 times EBITDA, as defined, (the "Leverage
Ratio") without the consent of the holders of at least 50% of the preferred
shares outstanding at the time. The Leverage Ratio was 5.91 to 1 as of December
31, 2002. If required to be paid, additional dividends will be for an amount per
preferred share equal to 0.25% of the Preferred Liquidation Preference Amount
(defined below) on an annualized basis for the first quarter with respect to
which an additional dividend is due. For each quarter thereafter that the
Company continues to exceed the permitted Leverage Ratio, the additional
dividend will increase by an amount per preferred share equal to an additional
0.25% of the Preferred Liquidation Preference Amount on an annualized basis.
However, the maximum total dividend on the preferred shares, including any
additional dividends, will not at any time exceed 13.00% of the Preferred
Liquidation Preference Amount per annum. The Preferred Liquidation Preference
Amount is equal to the sum of $50.00 per share plus an amount equal to any
accrued and unpaid dividends thereon (including any additional dividends) and
whether or not earned or declared to the date of payment.
From time to time the Company's Board of Trustees has authorized the Company to
make open market purchases of the Company's common and preferred shares. During
1998 and 1997, the Company repurchased 1,534,398 common shares for an aggregate
purchase price of $14.7 million, and during 2000, 25,000 preferred shares were
repurchased for an aggregate purchase price of $0.9 million. The Company
currently has outstanding 2,475,000 preferred shares. All repurchased shares are
currently held as treasury shares. Additional repurchases of common and
preferred shares will require approval by the Board. In connection with such
repurchases, the Operating Partnership redeemed from the Company an equivalent
number of common and preferred partnership units for the equivalent repurchase
costs, thus maintaining a 1.0 to 1.0 relationship between the number of the
Company's outstanding common and preferred shares of beneficial interest and the
number of common and preferred Partnership Units in the Operating Partnership
that are owned by the Company.
NOTE 7 - LEASING ACTIVITIES
The Company is primarily a lessor of shopping malls and the concentration of
tenants are in the retail industry. Leases are generally noncancelable and
expire on various dates through approximately the year 2021. The future minimum
lease payments to be received under existing leases as of December 31, 2002, are
as follows (in thousands):
Year Ending
December 31,
- ------------
2003 $115,184
2004 105,498
2005 95,213
2006 80,540
2007 66,414
Thereafter 202,560
--------
$665,409
========
The future minimum lease payments above do not include payments from tenants
which are due based upon a percentage of their gross sales or payments for the
tenants' share of common area maintenance costs and real estate taxes.
Total direct costs incurred by the Company to obtain leases, which are deferred
and amortized over the life of the lease, are as follows (in thousands):
Beginning Ending
Year Ended Balance, Net Additions Amortization Other Balance, Net
---------- ------------ --------- ------------ ----- ------------
December 31, 2002 $13,583 $ 1,690 $ 3,478 $ 618 $12,413
December 31, 2001 14,199 2,719 3,335 - 13,583
December 31, 2000 14,802 2,625 3,086 (142) 14,199
NOTE 8 - RELATED PARTY TRANSACTIONS
Crown Rights
Pursuant to the Operating Partnership Agreement, Crown Investments, and its
subsidiary, Crown American Investment Company, have certain rights (the "Crown
Rights"), which enable them to require the Operating Partnership to redeem part
or all of their common partnership units for a price equal to the equivalent
value of the common shares of the Company (on a one-for-one basis). Crown
Investments currently owns 8,169,939 common partnership units and Crown American
Investment Company owns 1,786,459 common partnership units. The obligation to
redeem these common partnership units may be assumed by the Company in exchange
for, at the Company's election, either common shares (on a one-for-one basis) or
the cash equivalent thereof, provided that the Company may not pay for such
redemption with common shares to the extent that it would result in Crown
Investments and its affiliates beneficially or constructively owning more than
16.0% of the outstanding common shares. Crown Investments and its affiliates may
require the Company to assume the obligation to pay for such redemption with
common shares to the extent that Crown Investments and its affiliates own less
than 16.0% of the outstanding common shares. Crown Investments and its
subsidiary have pledged substantially all their partnership units (the "Pledged
Units") as collateral for two loans made by unrelated third parties. In June
1995 and in August 1999 the Company filed Registration Statements on Form
S-3with the Securities and Exchange Commission relating to the Pledged Units. If
at the time of any such permitted exchange the Registration Statement is not
effective, the Company is obligated to purchase a specified portion of the
Pledged Units. The Company also has the right to purchase the Pledged Units in
lieu of effecting an exchange.
Management Agreements
The Company managed certain retail properties for Crown Associates and its
affiliate pursuant to a management agreement. For its services, the Company
receives management and leasing fees which amounted to $0 million, $0.02
million, and $0.04 million, for the years ended December 31, 2002, 2001, and
2000, respectively.
In addition, Crown Investments, Crown Associates, and their affiliates have
agreed to pay the Company sales commissions up to 15% of the net sales price for
its services in selling certain land and other assets owned by these parties.
Total commissions earned were $0.1 million, $0.1 million, and $0.4 million, for
the years ended December31, 2002, 2001, and 2000, respectively, and are included
in miscellaneous income.
Support Agreement
In connection with the Company's formation, Crown Investments entered into a
cash flow support agreement (the "Support Agreement"), which was subsequently
amended in 1997 and 1994, with the Operating Partnership and the Financing
Partnership with respect to Mount Berry Square, Martinsburg Mall, Oak Ridge Mall
and Bradley Square, all of which were opened in 1991 and were in various stages
of initial lease-up, with mall store occupancy rates below 75%.
The Support Agreement provides that Crown Investments will guarantee, on a
quarterly basis, up to an aggregate maximum of $1.0 million per quarter, that
each of these four malls will generate a stipulated amount of base rents. The
quarterly amounts due under the Support Agreement are calculated as the
difference between the aggregate amount of actual base rents earned in the
quarter at each mall and the stipulated aggregate amount of base rents. The 1997
amendment provided that the quarterly support amounts after 1997 shall be
reduced by 2.5% of the gross sales price of any sales of outparcel land that
occur after 1997, which is intended to approximate the base rents that could
have been earned had such outparcel land been leased or developed, rather than
sold. Crown Investments was also obligated to fund any tenant improvement and
leasing costs associated with an initial fixed amount of shortfall space, as
defined. The obligations of Crown Investments under the Support Agreement will
terminate as to a mall when the aggregate base rents at such mall achieve the
stipulated amount over four consecutive quarters (as determined by the
independent trustees of the Company). Crown Investments' support obligation
ceased for Mt. Berry Square (Rome, GA) at the end of the second quarter 2001. At
December 31, 2002, Crown Investments was required to make cash flow support
payments with respect to three malls. As described in Note 18 to the
Consolidated Financial Statements, the Support Agreement was amended
significantly in connection with the sale of Oak Ridge Mall on March 31, 2003,
and was further amended on May 13, 2003 in connection with the agreement to
merge with PREIT. As a result of these amendments, no cash flow support payments
are required for periods after May 13, 2003.
Total cash flow support earned by the Company was $3.1 million, $3.1 million,
and $2.9 million, for the years ended December 31, 2002, 2001, and 2000,
respectively. Earned support payments and funded tenant improvements under the
Support Agreement are accounted for as capital contributions made by the
minority owner in the Operating Partnership. The Company had a receivable of
$0.8 million from Crown Investments at December31, 2002 related to the Support
Agreement.
Crown Associates Lease at Pasquerilla Plaza
Approximately 14,600 square feet of Pasquerilla Plaza is leased to Crown
Associates and an affiliate for annual base rent of approximately $0.28 million.
The rent was determined based on rental rates being paid by existing third party
tenants and on the fact that Crown Associates' lease includes certain
furnishings and equipment and allows Crown Associates use of certain facilities
in the building not available to other third party tenants. The lease with Crown
Associates ends July 31, 2008. The lease with the affiliate ends March 31, 2009,
but the affiliate has the right to cancel the lease at the end of March 31,
2004. Total rent earned by the Company for the years ended December31, 2002,
2001, and 2000 was $0.29 million for each year.
Amounts due to or from Crown Associates and Crown Investments
In addition to the above items, the Company allocates a portion of the costs
related to its administration, communications, MIS, legal, and risk management
departments to Crown Associates based on estimated usage. These allocated costs
aggregated $0.7 million for each of the years ended December31, 2002, 2001, and
2000, respectively. Conversely, Crown Associates and its affiliates charge the
Company for use of their hotel and dining services. Such costs totaled $0.2
million for each of the years ending December 31, 2002, 2001, and 2000. There
were no amounts due to or from Crown Associates and Crown Holding at December31,
2002 as a result of the above transactions.
Other Related Party Transactions
The Company has a $6.0 million line of credit with Ameriserv Financial, Inc., a
Johnstown, Pennsylvania bank. Mark E. Pasquerilla, the Company's Chairman, CEO
and President owns stock in Ameriserv and serves on its Board of Directors and
its Executive Committee. The line of credit is secured by a mortgage on
Pasquerilla Plaza, the Company's headquarters office building. The Company
believes that the interest rate on the line (LIBOR plus 2.25%) and all other
provisions relating to the line of credit represent the current market for such
loan transactions. There were no borrowings outstanding under this line as of
December 31, 2002.
As described in Note 18 to the Consolidated Financial Statements, Oak Ridge Mall
was sold to Crown Investments in March 31, 2003.
NOTE 9 - LEASES
The Company is the lessee under third-party ground leases for Shenango Valley
Mall, Crossroads Mall, and Wiregrass Commons Mall and is the lessee under two
third-party ground leases for Uniontown Mall. Crossroads Mall and Wiregrass
Commons Mall are owned partially in fee and partially under a third-party
leasehold. The Shenango Valley Mall lease expires on July24, 2017. The
Crossroads lease expires in October, 2027 with a 49 year option period. The
lease for Wiregrass Commons Mall expires in May 31, 2044. One lease for
Uniontown Mall expires on March 30, 2038 with up to seven five-year renewal
options and the other lease expires on April 30, 2039 with up to four five-year
renewal options. All five leases require fixed annual payments. Fixed rental
expense related to these leases for the years ended December 31, 2002, 2001, and
2000 was $0.19 million, $0.17 million, and $0.23 million, respectively. Future
minimum lease payments on these leases are $0.25 million for 2003, $0.26 million
for each of the years 2004 through 2007, and $10.0 million for all years
thereafter.
Under the Uniontown and Shenango Mall leases additional rents are paid based on
mall tenant percentage rents. These additional rents were $0.10 million for each
of the years ended December 31, 2002, 2001, and 2000, respectively.
Capital and Operating Leases
Assets under capital leases, primarily office and mall equipment, are
capitalized using interest rates appropriate at the inception of each lease.
Capital lease obligations amounted to $3.0 million and $2.6 million at
December31, 2002 and 2001, respectively, and are included in accounts payable
and other liabilities.
In addition to the capital leases mentioned above, the Company has numerous
operating leases for various computer, office, and mall equipment. Total amounts
expensed for operating leases were $2.7 million, $2.7 million, and $1.9 million
for the years ended December 31, 2002, 2001, and 2000, respectively.
NOTE 10 - RETIREMENT SAVINGS, SHARE INCENTIVE AND EXECUTIVE INCENTIVE PLANS
Retirement Savings Plan and Savings Restoration Plan
The Crown American Realty Trust Retirement Savings Plan (the "Retirement Savings
Plan") was established pursuant to Section 401(k) of the Internal Revenue Code.
Employees who have completed at least one year of service, working 1,000 hours
per year, and have attained age 21 are eligible to participate in the Retirement
Savings Plan.
A percentage of each eligible employee's base pay (the "Supplemental Employer
Contribution") is contributed to the Retirement Savings Plan on behalf of each
eligible employee. The Supplemental Employer Contribution is 2% of base pay if
the employee is under 35 years of age, 3% if 35 to 49 years of age, and 5% if 50
years of age or older. In addition, employees may elect to contribute between 1%
and (subject to certain restrictions) 15%. Employee contributions are matched
(the "Matching Contribution") by the Company up to 50% of the first 3% of the
participant's compensation.
The receipt of benefits attributable to the Matching Contribution and
Supplemental Employer Contribution is subject to the vesting and forfeiture
provisions of the Retirement Savings Plan. Supplemental Employer Contributions
become 100% vested after five years of service is credited to the employee.
Matching Contributions become vested 20% after two years of service and an
additional 20% becomes vested per year thereafter. Other amounts are fully
vested at all times. All amounts not vested ("forfeitures") are retained by the
Company. Total plan costs for the years ended December 31, 2002, 2001, and 2000
were $0.66 million, $0.39 million, and $0.57 million, respectively.
In 2002, the Company amended its Retirement Savings Plan to include the changes
brought about by the Economic Growth and Tax Relief Reconciliation Act which,
among other provisions, provided for increased retirement plan contribution
limits and catch-up contributions for employees of age 50 and above.
In late 1996 the Company adopted The Savings Restoration Plan which is designed
to allow eligible employees to defer current compensation in amounts that exceed
the limits that can be deferred under The Retirement Savings Plan. The plan
became effective January 1, 1997, and $0.08 million, $0.06 million, and $0.09
million was deferred in 2002, 2001, and 2000, respectively, under the plan.
Amounts deferred are charged to expense in the current period; accordingly, all
compensation expense under the above plans is being fully recognized as it is
earned.
Share Incentive Plans
Prior to the initial public offering, the shareholders of the Company approved
the 1993 Crown American Realty Option Plan (the "Employee Option Plan"), and the
1993 Crown American Realty Trustees' Option Plan (the "Trustees' Option Plan").
Under the Employee Option Plan, options to purchase a total of 2,200,000 common
partnership units ("Units") of the Operating Partnership are currently available
for grant to officers and employees. The partnership units can be converted to
common shares on a one-to-one basis. The Company's Chairman and CEO currently
does not participate in any share incentive plan. Under the Employee Option
Plan, options are to be granted at not less than the market value of the common
shares on the date of grant.
Under the Employee Option Agreements, prior to August 7, 2001 an option first
becomes exercisable to the extent of 20% of the total number of Units subject to
the option on each of the second, third, fourth, fifth and sixth anniversaries
of the date of the grant of the option. If employment is terminated after the
option has partially or fully vested, the option may be exercised to the extent
it was exercisable at the time of termination of employment. There are certain
limitations on the timing of exercise of the option after termination of
employment. All the Option Agreements provided that options expire five years
after the date they first become exercisable. In order to improve the
effectiveness of the program, the Compensation Committee of the Board of
Trustees changed the vesting schedule for any options granted after August 7,
2001 to vest and be exercisable immediately and to remain outstanding for 5
years from date of grant.
In January 2003, certain Employee Option Agreements aggregating 108,000 options
were amended by extending the January 3, 2003 expiration date to January 3,
2004. This amendment constituted a new measurement date, and the related
compensation expense of $0.1 million will be recorded in January 2003.
Option transactions under the Employee Option Plan and Trustee's Option Plan are
as follows:
Year Ended December 31,
2002 2001 2000
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Units Price Units Price Units Price
Employee Option Plan:
- ---------------------
Options outstanding,
beginning of period 1,243,595 $7.04 1,208,595 $7.00 968,095 $8.12
Granted 109,000 8.16 111,000 7.51 532,500 5.48
Canceled (2,000) 8.09 (76,000) 7.03 (292,000) 7.96
Exercised (13,930) 7.62 - - - -
Options outstanding,
end of period 1,336,665 $7.12 1,243,595 $7.04 1,208,595 $7.00
Range of option exercise prices $5.19 to 9.94 $5.19 to 9.25 $5.19 to 9.25
Weighted average fair value of
options granted during the
year (per option) $ 0.41 $ 0.59 $ 0.09
Weighted average contractual life
at end of period (in years) 4.3 5.3 6.1
Options exercisable at period end 819,765 501,195 368,076
Total compensation expense
recognized during the period $ 0 $ 0 $ 0
Trustees' Option Plan:
- ----------------------
Options outstanding,
beginning of period 100,000 $7.17 81,000 $7.01 62,000 $7.58
Granted 20,000 9.20 20,000 7.80 20,000 5.31
Expired/Canceled - - (1,000) 7.50 (1,000) 7.87
Exercised - - - - - -
Options outstanding,
end of period 120,000 $7.51 100,000 $7.17 81,000 $7.01
Range of option exercise prices $5.31 to 9.94 $5.31 to 9.94 $5.31 to 9.94
Weighted average fair value of
options granted during the
year (per option) $ 0.47 $ 0.82 $ 0.13
Weighted average contractual life
at end of period (in years) 2.67 3.03 3.50
Options exercisable at period end 120,000 100,000 81,000
Total compensation expense
recognized during the period $ 0 $ 0 $ 0
The Trustees' Option Plan was amended and restated effective as of December 30,
1997 and further amended on February 5, 2003. As amended, options to purchase a
total of 150,000 common shares of beneficial interest of the Company are
available to non-employee Trustees. Each non-employee Trustee automatically is
granted on the last business day of each year an option to purchase 5,000 common
shares having an exercise price equal to 100% of the fair market value of the
shares at the date of grant. The amended Trustees' Option Plan also provides for
an automatic grant of 5,000 options to purchase common shares with an exercise
price equal to 100% of the fair market value of the shares at the date of grant
upon the appointment or election of each new non-employee Trustee to the Board.
To date, all options granted to the Trustees under the Trustees' Option Plan
have been exercisable immediately upon grant. Options under the Trustees' Option
Plan expire five years from the date of grant. In December 2002 certain Trustee
Option Agreements aggregating 20,000 options were amended by extending their
December 31, 2002 and April 29, 2003 expiration dates to December 31, 2003. This
amendment constituted a new measurement date, and the related compensation
expense was approximately $4,000.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2002, 2001, and 2000, respectively: dividend
yield of 10.38%, 11.32%, and 14.67%; expected volatility of 21%, 31%, and 23%;
risk-free interest rates of 4.3%, 5.2%, and 6.4% for Employee options and 2.7%,
5.1%, and 5.1% for Trustee options; and expected lives of 5.0 years, 8.5 years,
and 9.0 years, for Employee options and 5.0 years for all Trustee options.
The Company measures compensation expense in accordance with Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees".
Accordingly, at the time the options are granted no compensation cost was
recognized in the accompanying Consolidated Financial Statements. Had
compensation cost for the Company's option plans been determined based on the
fair value at the grant dates for awards under those plans consistent with the
method of SFAS 123, the Company's net income for the year ended December 31,
2002 would have been reduced by approximately $.08 million or $.003 per share.
For the years ended December 31, 2001 and 2000, the Company's net income would
have been (reduced by) increased by ($0.03) million and $0.04 million,
respectively, or $(0.001) and $0.002 per share, respectively.
Executive Incentive Plan
Twelve of the Company's executives were eligible for an incentive award in 2002,
2001, and 2000 under the Executive Incentive Plan, which was adopted in 1993.
Employees have the option of either receiving this incentive award in cash or
deferring all or part of the award into a trust account maintained at a local
bank. All amounts deferred are fully funded by the Company. The assets in the
Trust are shown on the Company's balance sheet in Deferred Charges and Other
Assets; the obligation to the employees is reflected on the Company's balance
sheet in Accounts Payable and Other Liabilities. The incentives earned under the
Executive Incentive Plan are based on a percentage of the excess of actual
performance of the Company's Funds from Operations ("FFO") and other performance
metrics over specific target levels determined at the beginning of the year. The
aggregate amounts payable under the Plan are allocated to participating
executives based on annual salary levels and performance during the year and are
charged to expense in the year such incentives are earned. Amounts expensed
under the Plan aggregated $0.8 million, $0.6 million and $0.9 million for the
years ended December 31, 2002, 2001 and 2000, respectively; such amounts are
typically paid by the Company in the early part of the following year.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS AND MARKET RISKS
Statement of Financial Accounting Standards No. 107, "Fair Value of Financial
Instruments", requires disclosures about fair value for all financial
instruments. At December 31, 2002, the carrying amount of the Company's $618.5
million of fixed rate debt had an estimated fair value of $667.9 million. The
remaining $119.0 million of debt, and the $13.6 million of debt related to Oak
Ridge Mall, is at floating interest rates which approximate current rates
available to the Company for such debt, and accordingly the fair value of such
floating rate debt approximates the current carrying amount.
At December 31, 2001, the fair value of the Company's $579.9 million of fixed
rate debt has an estimated fair value of $594.1 million. The remaining $115.0
million of debt, and the $15.5 million of debt related to Oak Ridge Mall, was at
floating rates which approximated current rates then available to the Company,
and accordingly the fair value of such floating rate debt approximated the
carrying amount at that date.
Accounts receivable and accounts payable carrying amounts approximate the fair
value of accounts receivable and accounts payable balances, respectively, at
both December 31, 2002 and 2001.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company obtains insurance for workers' compensation, automobile, general
liability, property damage, and medical claims. However, the Company has elected
to retain a portion of expected losses for property damage, general liability
and medical claims through the use of deductibles which generally range up to
$0.25 million per occurrence. Provisions for losses expected under these
programs are recorded based on estimates, provided by consultants who utilize
the Company's historical claims experience and actuarial assumptions, of the
aggregate liability for claims incurred and claims incurred but not reported.
The total estimated liability for these losses at December 31, 2002, 2001 and
2000 was $5.4 million, $4.7 million, and $4.3 million, respectively, and is
included in Accounts Payable and Other Liabilities.
The Company believes that the Properties are in compliance in all material
respects with all federal, state and local ordinances and regulations regarding
hazardous or toxic substances. The Company is not aware of any environmental
condition which the Company believes would have a material adverse effect on the
Company's business, assets or results of operations (before consideration of any
potential insurance coverage). Nevertheless, it is possible that there are
material environmental liabilities of which the Company is unaware. Moreover, no
assurances can be given that (i) future laws, ordinances or regulations will not
impose any material environmental liability or (ii) the current environmental
condition of the Properties have not been or will not be affected by tenants and
occupants of the Properties, by the condition of properties in the vicinity of
the Properties or by third parties unrelated to the Company, tenants or
occupants.
The Company and its subsidiaries from time to time are subject to litigation and
claims, both asserted and unasserted, incidental to their businesses, some of
which may be substantial. For example, these claims may include, but are not
limited to, damages asserted by other owners of real estate, regulatory
agencies, customers, tenant disputes over lease provisions including billings
for reimbursement of operating costs and real estate taxes, and various other
matters that may arise in the normal course of business. After consultations
with legal counsel and other advisors, management believes that the Company has
recognized adequate provisions for probable and reasonably estimable liabilities
associated with these matters. While these matters may impact quarterly or
annual results of operations and cash flows when resolved in future periods,
based upon information currently available, management does not believe that the
ultimate resolution of these claims and litigation will have a material adverse
effect on the financial position of the Company.
Commitments
The Company has various purchase commitments in the normal course of business.
The Company also has commitments under signed leases with tenants to make future
cash allowances and/or to construct tenant premises, which aggregate
approximately $2.8 million as of December 31, 2002, and are recorded in accounts
payable and other liabilities.
NOTE 13 - MALL ACQUISITIONS, EXPANSIONS AND MANAGEMENT CONTRACTS
In late September 2002, the Company completed the acquisition of Valley View
Mall, an enclosed regional shopping mall, located in La Crosse, Wisconsin, from
The Equitable Life Assurance Society of the United States. Valley View Mall
comprises 586,000 square feet of gross leasable area ("GLA"), which includes
37,000 square feet of GLA in a detached strip center. The mall is anchored by
Sears, JC Penney, Marshall Fields and Herberger's. The stores occupied by Sears,
Marshall Fields and Herberger's, aggregating 256,000 square feet of GLA,
together with related parking areas are owned by their anchor occupants. The
purchase price, excluding closing costs and expenses, was $49.92 million and was
financed by a $37.0 million seven-year fixed rate mortgage loan bearing interest
at 6.15%, with the balance funded from the Company's line of credit with GECC.
As described in Note 15, in June 2002, the Company raised $47.2 million net
proceeds from a common share secondary offering and used those proceeds
initially to pay down its line of credit with GECC with the intent of later
re-borrowing from the line of credit for acquisitions or for other general
corporate purposes.
On November 19, 2002, the Company completed the acquisition of Wiregrass Commons
Mall, an enclosed regional shopping mall, located in Dothan, Alabama from
Metropolitan Life Insurance Company. The mall comprises 633,000 square feet of
GLA, of which approximately 230,000 square feet of mall shop space is owned GLA
with the remaining GLA, together with related parking areas, owned by their
anchor occupants. The mall is anchored by Dillard's, JC Penney, McRae's and
Parisian. The purchase price also includes approximately 60 acres of vacant land
some of which can be used for expansion or outparcel development or sale. The
purchase price, excluding closing costs and expenses, was $40.25 million and was
financed by a $30.0 million floating rate mortgage loan bearing interest at
LIBOR plus 2.00% with the balance funded from cash and borrowings from the
Company's line of credit with GECC.
During 2000, the Company completed construction of an expansion and
redevelopment of Washington Crown Center in Washington, Pennsylvania and an
expansion at Valley Mall in Hagerstown, Maryland. The total cost of the two
projects, including capitalized construction department costs, interest, and
tenant allowances, approximated $33 million and $35 million, respectively. The
Washington Crown Center expansion was largely financed under a bank construction
loan that was refinanced in December 2000 when this mall was added to GECC line
of credit. The Valley Mall expansion was largely financed under the line of
credit with GECC as further described in Note 5 to the Consolidated Financial
Statements.
In October 2001, the Company entered into a two-year contract to manage and
lease Laurel Mall located in Laurel, Maryland, which is owned by an unrelated
third party. Total management and leasing fees earned by the Company in 2002
were approximately $0.4 million. In connection with this management contract,
the Company issued to the mall owner a warrant to purchase up to 100,000 common
shares of the Company at an exercise price of $9.00 per share. The holder shall
be entitled to purchase the warrant shares only if the Company is retained as
the property manager for at least two years or if the Company resigns or is
terminated for cause. The warrant shall expire and shall no longer be
exercisable five business days after December 31, 2006. In the event of the
Company's termination, the warrant must be exercised within 30 days of such
termination.
NOTE 14 - MALL DISPOSITION
Carlisle Plaza Mall, an enclosed shopping mall with a small adjacent strip
center aggregating 342,000 square feet of gross leaseable area located in
Carlisle, PA, had been under a contract of sale. During the third quarter of
2002, the buyer, Carlisle Realty Partners L.P., an unrelated third party, made
sufficient progress in completing its due diligence and other matters such that
this asset became classified as held for sale as of September 30, 2002. Carlisle
Plaza Mall was sold on October 29, 2002 for $5.8 million, less $0.4 million in
closing costs and expenses, resulting in a gain on sale of approximately $0.4
million after sale costs and expenses, which was recorded in the fourth quarter.
A mortgage loan of approximately $6.0 million was paid off as a part of the sale
of this asset, and $0.8 million of Industrial Development bonds related to
Carlisle Plaza Mall were paid off in December 2002. An extraordinary loss on the
early extinguishment of debt of approximately $0.08 million was recorded in the
fourth quarter which is included in the loss from discontinued operations. As
required by Statement of Financial Accounting Standards ("SFAS") No. 144, the
operating results of Carlisle Plaza Mall have been shown in the accompanying
statements as discontinued operations, and the financial statements for 2000 and
2001 were reclassified in 2002 to present Carlisle Plaza Mall as discontinued
operations.
The following represents certain condensed financial statement information on
Carlisle Plaza Mall for the applicable periods presented in the financial
statements (thousands of dollars):
Year ended December 31,
2002 2001 2000
---- ---- ----
Total revenues $ 1,634 $ 2,006 $ 2,134
Operating (loss) $ (142) $ (190) $ (157)
December 31,
2002 2001
---- ----
Total assets (net) $ - $ 5,456
Total liabilities $ - $ 10,490
NOTE 15 - COMMON SHARE OFFERING
On June 7, 2002, the Company completed a public offering of 5,000,000 of its
common shares of beneficial interest, par value $0.01, at a public offering
price of $8.75 per share. On June 20, 2002, the Company sold another 750,000
common shares at $8.75 per share with respect to the underwriters'
over-allotment options.
The net proceeds to the Company (after deducting underwriting discounts and
offering expenses) was approximately $47.2 million. The proceeds of the offering
were used to pay down the Company's line of credit with GECC. Approximately
$17.5 million was subsequently re-borrowed from the line of credit to supplement
the purchase price in connection with the Company's acquisition of the Valley
View Mall in September 2002 and Wiregrass Commons Mall in November 2002. (See
Note 13 to the Consolidated Financial Statements.)
NOTE 16 - SHAREHOLDER RIGHTS PLAN
In January 2000, the Company's Board of Trustees adopted a Shareholder Rights
Plan (the "Rights Plan") designed to protect shareholders and to assure that
they receive fair treatment in the event of any proposed takeover of the
Company. The intent of the Rights Plan is to encourage negotiation with the
Company's Board of Trustees prior to any takeover attempt and to give the Board
increased leverage in such negotiations. The Plan was not adopted in response to
any specific offer or takeover threat.
In connection with the Rights Plan, the Company distributed one Preferred Share
Purchase Right (a "Right") for each outstanding common share to common
shareholders of record at the close of business on February 4, 2000. Each Right
initially entitled the holder to buy one one-hundredth of a share of a new
Series A Junior Participating Preferred Shares at an exercise price of $20.00.
The Rights will become exercisable after a person or group has acquired twenty
percent or more of the Company's outstanding common shares or has announced a
tender offer that would result in the acquisition of twenty percent or more of
the Company's outstanding common shares. The Company's Board of Trustees has the
option to redeem the Rights for $0.001 per Right prior to their becoming
exercisable.
Assuming the Rights have not been redeemed, after a person or group has acquired
twenty percent or more of the Company's outstanding common shares, each Right
(other than those owned by a holder of twenty percent or more of the common
shares) will entitle its holder to purchase, at the Right's then current
exercise price, that number of the Company's common shares having a market value
at that time of twice the Right's exercise price. In addition, at any time after
the Rights become exercisable and prior to the acquisition by the acquiring
party of fifty percent or more of the outstanding common shares, the Company's
Trustees may exchange the Rights (other than those owned by the acquiring person
or its affiliates) for common shares of the Company at an exchange ratio of one
share per Right, or for Series A Junior Preferred Shares of the Company at an
exchange ratio of one one-hundredth of such preferred share per Right.
Initially, the Rights will not be exercisable and certificates will not be
issued. The Rights will be evidenced by and trade with the Company's common
shares until they become exercisable and are separated from the common shares
upon the occurrence of certain future events. Until that time, one Right will
also be issued with respect to each new common share that shall become
outstanding. The Rights will expire on January 20, 2010 unless they are earlier
exchanged or redeemed.
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly unaudited financial data for 2002 and 2001 is shown below
(in thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
Year ended December 31, 2002:
Revenues $ 44,615 $ 43,975 $ 44,475 $ 52,939
Operating income before interest, and
asset sales and adjustments 16,261 16,436 15,390 19,964
Income (loss) before minority interest
in Operating Partnership (783) 3,522 2,764 7,563
Net (loss) income allocated to common shares $ (5,641) $ (1,182) $ (1,993) $ 2,918
Net (loss) income per share:
Basic $ (0.22) $ (0.04) $ (0.06) $ 0.09
Diluted $ (0.22) $ (0.04) $ (0.06) $ 0.09
Year ended December 31, 2001:
Revenues $ 45,073 $ 42,902 $ 42,660 $ 47,968
Operating income before interest, and
asset sales and adjustments 15,364 13,828 15,357 18,896
Income (loss) before minority interest
in Operating Partnership 1,668 305 1,877 6,335
Net (loss) income allocated to common shares $ (3,050) $ (4,239) $ (2,891) $ 1,773
Net (loss) income per share:
Basic $ (0.12) $ (0.16) $ (0.11) $ 0.07
Diluted $ (0.12) $ (0.16) $ (0.11) $ 0.07
Quarterly amounts have been reclassified to present the results of Carlisle
Plaza Mall, which was sold in October 2002, and Oak Ridge Mall, which was sold
in March 2003, as discontinued operations - held for sale.
Earnings per share amounts for each quarter are required to be computed
independently, and therefore, may not equal the amount computed for the year.
NOTE 18 - ADOPTION OF SFAS NO. 145, SALE OF OAK RIDGE MALL, AND PROPOSED MERGER
WITH PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
o Adoption of SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections"
-----------------------------------------------------------------------
Effective January 1, 2003, the Company adopted SFAS No. 145 and, therefore, has
reclassified for all periods presented in the accompanying consolidated
statements of operations, selected financial data, and management's discussion
and analysis of financial condition and results of operations those items which
no longer qualify as extraordinary items to income from continuing operations.
The Company reclassified $4.3 million in 2002, $0.2 million in 2000, and $22.5
million in 1998 of losses on early debt extinguishments from extrarodinary to
income from continuing operations. Please refer to the related disclosures in
Notes 2 and 5 to the Consolidated Financial Statements for further discussions
on this reclassification. The adoption of SFAS No. 145 had no impact on net
income previously reported.
- Sale of Oak Ridge Mall
----------------------
In May 2002 the Company's Board of Trustees approved an agreement to sell Oak
Ridge Mall ("Oak Ridge"), located in Oak Ridge, Tennessee, to an unrelated third
party. The independent members of the Board of Trustees ("Independent Trustees")
concurrently approved an amendment of the Support Agreement (see Note 8 to the
Consolidated Financial Statements) regarding the cash flow support obligations
of Crown Investments with respect to Oak Ridge. However, the effectiveness of
this proposed amendment was expressly conditioned upon the completion of the
sale. The purchase agreement with the third party was extended and amended
several times since May 2002 (including a reduction of the purchase price from
$12.0 million to $10.6 million), and a variety of conditions required for
closing with the third party continued to be unsatisfied.
Consequently, on March 28, 2003 the Independent Trustees instead approved the
sale of Oak Ridge to Crown Investments, an entity which is owned by Mark E.
Pasquerilla, the Company's CEO and President, for estimated fair value of $11.4
million, which closed March 31, 2003. The $11.4 million purchase price was
satisfied through issuance of a promissory note by Crown Investments; such
promissory note was distributed in a non-liquidating distribution to Crown
American Investment Company ("CAIC"), and effectively reduced CAIC's common
percentage ownership interest in the Operating Partnership equivalent to
1,159,794 common partnership units. CAIC is a wholly-owned subsidiary of Crown
Investments and is a minority limited partner in the Operating Partnership. In
connection with the sale, the Company paid off the $13.4 million mortgage loan
balance on Oak Ridge and assigned to Crown Investments the existing agreement of
sale with the third party, as amended. Crown Investments agreed that it will pay
to the Company an amount equal to 90% of the amount, if any, by which the net
proceeds received on the sale to any unrelated third party of Oak Ridge by Crown
Investments concluded within six years of the purchase by Crown Investments
exceeds Crown Investments' total investment in Oak Ridge (defined to include
$11.4 million plus the aggregate amount of all additional investments made by
Crown Investments in Oak Ridge plus an 8% return compounded annually on this
sum).
The sale of Oak Ridge resulted in a loss on sale for financial reporting
purposes of $13.8 million which was recorded by the Company in the first quarter
of 2003. The reduction in the minority partner's percentage ownership interest,
valued at $11.4 million, was recorded in shareholders' equity in the
consolidated balance sheet.
The financial statements for 2000, 2001 and 2002, as originally filed on Form
10K for the year ended December31, 2002, have been reclassified to present Oak
Ridge Mall as discontinued operations in accordance with SFAS 144. Oak Ridge was
previously classified as held for operating purposes at December 31, 2002 under
SFAS 144 "Accounting for the Impairment or Disposal of Long Lived Assets".
The following represents certain condensed financial statement information on
Oak Ridge Mall for the applicable periods presented in the financial statements
(thousands of dollars):
Year ended December 31,
2002 2001 2000
---- ---- ----
Total revenues $ 3,420 $ 4,277 $ 6,024
Operating loss $ (587) $ (785) $(1,077)
December 31,
2002 2001
---- ----
Total assets (net) $25,309 $26,539
Total liabilities $13,952 $15,892
In connection with the foregoing, the Independent Trustees also approved
amendments to the Support Agreement and to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership. The amendment to the Support
Agreement released Oak Ridge from Crown Investments' future obligations under
the Support Agreement and reduced the maximum quarterly amount of support
payments for the remaining two properties in the Agreement from $1,000,000 to
$300,000. Approximately 81% of the $3.1 million in cash flow support for the
year ended December 31, 2002 related to Oak Ridge. The amendment to the Limited
Partnership Agreement provided for a special allocation of 100 percent of the
net tax loss from the sale of Oak Ridge to Crown Investments to the extent of
Crown Investments' obligation under the Support Agreement related to Oak Ridge;
the remaining tax loss from the sale will be allocated to the partners in
accordance with their ownership interests. It is expected that the tax loss
should result in a significant portion of the Company's common dividends that
may be paid in 2003 being treated as non-taxable return of capital.
As a result of these amendments to the Support Agreement, Crown Investments'
percentage ownership interest in the Operating Partnership was reduced by an
amount equivalent to 2,600,000 common partnership units. The minority partner's
reduction in its ownership interest had a value of approximately $25.6 million,
based on the closing price of the Company's common shares on March 27, 2003
(which was $9.84). Amounts owed under the Support Agreement for Oak Ridge Mall
from January 1 to March 31, 2003 of $0.67 million, were paid by Crown
Investments to the Operating Partnership, and the Operating Partnership made a
cash distribution to Crown Investments with respect to the 2,600,000 units for
the quarter ended March 31, 2003 equal to $0.56 million. As the minority
partner, Crown Investments' obligations to make payments to the Operating
Partnership under the Support Agreement have been contingent on the future
performance of the subject properties and accordingly have been recorded in the
Company's consolidated financial statements as earned.
The Company's 32,071,965 outstanding common partnership units as of March 31,
2003, remained unchanged as a result of the above transactions related to Oak
Ridge. However, the common percentage ownership interests of the partners in the
Operating Partnership changed, as summarized in the following table:
Before After
General and Majority Partner:
Crown American Realty Trust (the Company) 76.31% 83.81%
Limited Minority Partners:
Crown Investments Trust 19.44 14.55
Crown American Investment Company 4.25 1.64
Totals 100.00% 100.00%
o Proposed Merger with Pennsylvania Real Estate Investment Trust
--------------------------------------------------------------
On May 13, 2003, the Company entered into a definitive merger agreement with
Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust (NYSE:
PEI) ("PREIT"), under which the Company agreed to merge into PREIT. The Boards
of Trustees of PREIT and the Company have unanimously approved the merger.
Under the terms of the merger agreement, PREIT will issue to the Company's
common shareholders 0.3589 PREIT common shares in exchange for each outstanding
common share of the Company in a tax-free, share-for-share transaction. The
exchange ratio was determined based on the trailing 20 day average closing
prices as of May 12, 2003, and is not subject to change and there is no "collar"
or minimum trading price for the shares.
As part of the merger, PREIT will issue new preferred shares to the current
holders of the Company's outstanding non-convertible senior preferred shares.
The terms of the new PREIT preferred shares will be substantially the same as
the existing preferred shares of the Company. In addition, PREIT has agreed to
assume the Company's mortgage debt, described in Note 5 to the Consolidated
Financial Statements. PREIT currently expects to repay the Company's secured
revolving credit facility with GECC with proceeds from additional debt financing
which PREIT is currently negotiating with prospective lenders together with
additional borrowings under PREIT's existing line of credit.
On the effective date of the merger, PREIT's board of trustees will be increased
by two. Mark E. Pasquerilla, the Company's Chairman, Chief Executive Officer and
President, and one other member of the Company's current Board of Trustees to be
selected by PREIT will serve on PREIT's board of trustees as the two additional
members.
The merger is expected to close in the fourth quarter of 2003. The merger is
subject to approval by the common shareholders of the Company and PREIT and
other customary closing conditions, including consents of the lenders of the
Company and PREIT. The Company and PREIT intend to file a joint registration
statement on Form S-4 (which will include a joint proxy statement/prospectus and
other relevant documents) with the United States Securities and Exchange
Commission (the "SEC") concerning the merger. Crown expects to call a meeting of
its shareholders to approve the proposed merger and will mail the joint proxy
statement/prospectus to its shareholders in connection with the merger. Certain
of the Company's trustees and executive officers, including Mark E. Pasquerilla,
have agreed to vote in favor of the merger.
Under the terms of the merger agreement, a termination fee of up to $20 million
will be payable to either the Company or PREIT by the other party if the merger
is not completed in certain specified circumstances.
Prior to the closing of the merger, the Company intends to continue to pay its
quarterly dividends to its common and preferred shareholders.
In connection with entering into the merger agreement with PREIT, the Company's
Independent Trustees approved another amendment to the Support Agreement under
which Crown Investment's percentage ownership in the Operation Partnership was
further reduced by an amount equivalent to 500,000 common partnership units
effective on May 13, 2003. In consideration of this reduction in its ownership
interest, Crown Investments is no longer obligated to make payments under the
Support Agreement after May 13, 2003. The reduction in ownership interest had a
value of approximately $5.3 million, based on the closing price of the Company's
common shares on May 12, 2003 (which was $10.69). Amounts owed to the Company
under the Support Agreement for the period from April 1 to May 13, 2003 were
$0.08 million and were paid by Crown Investments to the Operating Partnership;
the Operating Partnership made a non-pro-rata cash distribution to Crown
Investments with respect to the 500,000 units for the period from January 1 to
May 13, 2003 of $0.16 million.
As a result of the May 13, 2003 amendment to the Support Agreement and the
related reduction in Crown Investments' ownership interest, the common ownership
interests of the partners in the Operating Partnership changed as summarized in
the following table:
Before After
General and Majority Partner:
Crown American Realty Trust (the Company) 83.81% 84.92%
Limited Minority Partners:
Crown Investments Trust 14.55% 13.42%
Crown American Investment Company 1.64% 1.66%
Totals 100.00% 100.00%
As a result of the reductions in the percentage ownership interests held by
Crown Investments and Crown American Investment Company in the Operating
Agreement, on the effective date of the merger, PREIT has agreed to issue 0.2053
of its operating partnership units in exchange for each outstanding partnership
unit of the Company's Operating Partnership held by Crown Investments and Crown
American Investment Company.
Schedule II
CROWN AMERICAN REALTY TRUST
Valuation and Qualifying Accounts and Reserves
(Dollars in Thousands)
Additions
Beginning Charged to Ending
Description Balance Expense Other Deductions Balance
December 31, 2002:
Allowance for doubtful accounts $ 2,070 $ 1,199 $ $ (944) $ 2,325
Restructuring costs 137 (118) 19
December 31, 2001:
Allowance for doubtful accounts 2,529 1,535 (1,994) 2,070
Restructuring costs 231 (94) 137
December 31, 2000:
Allowance for doubtful accounts 895 2,201 (567) 2,529
Restructuring costs 664 369 (802) 231
Schedule III
CROWN AMERICAN REALTY TRUST
Consolidated Real Estate and Accumulated Depreciation as of December 31, 2002
(Dollars in Thousands)
Costs Capitalized
Initial Cost Subsequent To Acquisition
Buildings Buildings
and Land and
Encum- Improve- Improve- Improve- Carrying
Properties brances Land ments ments ments Costs Land
(A) (B) (B) (C)
Bradley Square
Cleveland, TN $11,162 (D) $ 7,012 $ 29,385 $ (281) $ 3,643 $ 0 $ 6,731
Capital City
Harrisburg, PA 53,250 1,580 11,269 (193) 13,152 216 1,387
Chambersburg
Chambersburg, PA 19,373 (E) 2,363 14,063 38 13,632 271 2,401
Crossroads
Beckley, WV 13,741 2,732 19,941 8 4,299 0 2,740
Francis Scott Key
Frederick, MD 33,903 (E) 3,784 12,170 (636) 23,275 100 3,148
Jacksonville
Jacksonville, NC 27,286 (D) 11,062 26,835 1430 3,198 0 12,492
Logan Valley
Altoona, PA 55,213 (E) 2,138 954 2,086 80,483 7,411 4,224
Lycoming
Williamsport, PA 33,903 (E) 2,110 14,204 (33) 19,804 638 2,077
Martinsburg
Martinsburg, WV 16,951 (E) 8,375 37,547 (653) 4,122 22 7,722
Mt. Berry Square
Rome, GA 16,124 (D) 6,260 37,434 (795) 7,115 0 5,465
New River Valley
Christiansburg, VA 16,467 (E) 3,923 27,094 38 8,574 0 3,961
Nittany
State College, PA 29,059 (E) 6,683 6,204 (891) 34,230 5,834 5,792
North Hanover
Hanover, PA 19,373 (E) 1,272 1,325 594 17,273 194 1,866
Pasquerilla Plaza
Johnstown, PA 1,476 3,289 23,010 4 1,331 0 3,293
Patrick Henry
Newport News, VA 48,917 (E) 3,953 22,432 (599) 20,289 541 3,354
Phillipsburg
Phillipsburg, NJ 29,059 (E) 11,169 50,368 36 9,038 0 11,205
Schuylkill
Frackville, PA 27,649 10,332 24,843 102 12,437 5 10,434
Shenango Valley
Sharon, PA 11,163 (D) 0 6,403 22 9,996 151 22
South
Allentown, PA 14,530 (E) 3,465 2,331 23 16,154 0 3,488
Uniontown
Uniontown, PA 23,248 (E) 0 6,635 1,384 34,791 2,540 1,384
Valley Mall
Hagerstown, MD 39,689 (D) 12,036 19,945 3,022 33,468 40 15,058
Valley View Mall 37,000 10,760 39,244 (384) 10,760
Lacrosse, WI
Viewmont
Scranton, PA 29,059 (E) 1,696 4,602 6,836 42,127 7,701 8,532
Washington Crown Ctr
Washington, PA 18,604 (D) 2,977 3,915 4,266 46,059 355 7,243
West Manchester
York, PA 26,154 (E) 7,694 24,122 931 24,853 777 8,625
Westgate Anchor Pad
Bethlehem, PA 0 0 3,219 42 8 0 42
Wiregrass Commons 30,000 6,213 34,162 3 6,213
Dothan, AL
Wyoming Valley
Wilkes-Barre, PA 55,213 (E) 6,825 52,057 (146) 6,875 12 6,679
Total $737,566 $139,703 $555,713 $16,635 $489,845 $26,808 $156,338
[RESTUBBED TABLE]
Gross Amounts at Which Carried
at Close of Period
Buildings
and Date
Improve- Accum. Date of Ac-
Land ments Total Deprec. Construction quired
Bradley Square
Cleveland, TN $ 6,731 $ 33,028 $ 39,759 $(14,552) 1991
Capital City
Harrisburg, PA 1,387 24,637 26,024 (15,230) 1974
Chambersburg
Chambersburg, PA 2,401 27,966 30,367 (16,467) 1982
Crossroads
Beckley, WV 2,740 24,240 26,980 (6,737) 1998
Francis Scott Key
Frederick, MD 3,148 35,545 38,693 (21,082) 1978
Jacksonville
Jacksonville, NC 12,492 30,033 42,525 (8,490) 1998
Logan Valley
Altoona, PA 4,224 88,848 93,072 (32,141) 1965, 1995-96
Lycoming
Williamsport, PA 2,077 34,646 36,723 (20,440) 1978, 1990
Martinsburg
Martinsburg, WV 7,722 41,691 49,413 (18,222) 1991
Mt. Berry Square
Rome, GA 5,465 44,549 50,014 (19,208) 1991
New River Valley
Christiansburg, VA 3,961 35,668 39,629 (13,879) 1988
Nittany
State College, PA 5,792 46,268 52,060 (22,216) 1968, 1970, 1991
North Hanover
Hanover, PA 1,866 18,792 20,658 (12,989) 1967
Pasquerilla Plaza
Johnstown, PA 3,293 24,341 27,634 (10,396) 1989
Patrick Henry
Newport News, VA 3,354 43,262 46,616 (17,776) 1987
Phillipsburg
Phillipsburg, NJ 11,205 59,406 70,611 (26,330) 1989
Schuylkill
Frackville, PA 10,434 37,285 47,719 (22,847) 1980
Shenango Valley
Sharon, PA 22 16,550 16,572 (11,040) 1967, 1995
South
Allentown, PA 3,488 18,485 21,973 (8,378) 1980
Uniontown
Uniontown, PA 1,384 43,966 45,350 (26,032) 1969, 1984 1989
Valley Mall
Hagerstown, MD 15,058 53,453 68,511 (12,458) 2000 1997
Valley View Mall 10,760 38,860 49,620 (587) 2002
Lacrosse, WI
Viewmont
Scranton, PA 8,532 54,430 62,962 (24,394) 1968, 1994-95
Washington Crown Ctr
Washington, PA 7,243 50,329 57,572 (19,310) 1969, 2000
West Manchester
York, PA 8,625 49,752 58,377 (22,077) 1981, 1995
Westgate Anchor Pad
Bethlehem, PA 42 3,227 3,269 (1,355) 1988
Wiregrass Commons 6,213 34,165 40,378 (153) 2002
Dothan, AL
Wyoming Valley
Wilkes-Barre, PA 6,679 58,944 65,623 (26,673) 1972 1995
Total $156,338 $1,072,366 $1,228,704 $(451,459)
See following page for note references (A) to (E).
Schedule III (continued)
CROWN AMERICAN REALTY TRUST
Consolidated Real Estate and Accumulated Depreciation as of December 31, 2002
(Dollars in Thousands)
Depreciation and amortization of the Company's investment in buildings and
improvements reflected in the statements of operations are calculated over the
estimated useful lives of the assets as follows:
Base Building 45 years
Building Components 10 - 20 years
Tenant Improvements Terms of Leases or useful lives, whichever is shorter
The aggregate cost for Federal income tax purposes was approximately $1,191
million at December 31, 2002.
The changes in total real estate assets and accumulated depreciation and
amortization for the years ended December 31, 1998, 1999, 2000, 2001, and 2002
are as follows:
Total Real Estate Assets
Years ended December 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Balance, beginning of period $1,128,207 $1,114,963 $1,078,509 $1,031,657 $ 927,408
Additions and improvements 13,463 20,821 43,612 49,065 56,388
Acquisitions 89,998 65,602
Cost of real estate sold (719) (192) (5,414) (482) (16,270)
Other writeoffs (2,245) (7,385) (1,744) (1,731) (1,471)
---------- ---------- ---------- ---------- ----------
Balance, end of period $1,228,704 $1,128,207 $1,114,963 $1,078,509 $1,031,657
========== ========== ========== ========== ==========
Accumulated Depreciation & Amortization
Years ended December 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Balance, beginning of period $ 413,230 $ 377,296 $ 337,506 $ 300,673 $ 271,024
Depreciation and amortization 39,734 43,319 41,878 38,564 36,880
Acquisitions 740
Cost of real estate sold (344) (5,760)
Other writeoffs (2,245) (7,385) (1,744) (1,731) (1,471)
---------- ---------- ---------- ---------- ----------
Balance, end of period $ 451,459 $ 413,230 $ 377,296 $ 337,506 $ 300,673
========== ========== ========== ========== ==========
(A) Initial cost for constructed malls is cost at end of first complete fiscal
year subsequent to opening and includes carrying costs on initial
construction.
(B) Improvements are reported net of dispositions.
(C) Carrying costs consist of capitalized construction period interest and taxes
on expansions and major renovations subsequent to initial construction of
the mall.
(D) Shenango Valley, Mt. Berry Square, Bradley Square, Jacksonville, Washington
Crown Center, and Valley Mall are mortgaged to secure the $175.0 million
GECC working capital line of credit. These six properties are cross-
defaulted and cross-collateralized. Amounts shown for each property
represent the allocated amount of the loan agreement. These amounts do not
represent the loan release amounts should the properties be sold.
(E) Thirteen malls in the Financing Partnership and Logan Valley and Wyoming
Valley Malls are all cross-defaulted and cross-collateralized under the $465
million mortgage loan with GECC. Amounts shown for each property represent
the allocated amount of the total loan outstanding.