Exhibit 99.2
CROWN AMERICAN REALTY TRUST
Consolidated Balance Sheets
September 30, 2003 December 31, 2002
------------------ -----------------
(Unaudited)
(in thousands, except share and per share data)
Assets
Income-producing properties:
Land $ 156,177 $ 156,338
Buildings and improvements 1,091,514 1,072,366
Deferred leasing and other charges 39,999 43,038
---------- ----------
1,287,690 1,271,742
Accumulated depreciation and amortization (510,903) (481,284)
---------- ----------
776,787 790,458
Minority interest in Operating Partnership - 3,265
Investment in joint venture 2,681 3,114
Cash and cash equivalents, unrestricted 11,849 14,122
Restricted cash and escrow deposits 7,454 8,967
Tenant and other receivables 14,870 14,813
Deferred charges and other assets 17,762 19,384
Assets from discontinued operations - 25,309
---------- ----------
$ 831,403 $ 879,432
========== ==========
Liabilities and Shareholders' Equity
Debt on income-producing properties $ 754,435 $ 737,566
Accounts payable and other liabilities 42,973 44,569
Liabilities from discontinued operations - 13,952
---------- ----------
797,408 796,087
Commitments and contingencies
Shareholders' equity:
Non-redeemable senior preferred shares, 11% cumulative,
$.01 par value, 2,500,000 shares authorized and issued
at both September 30, 2003 and December 31, 2002 25 25
Common shares, par value $.01 per share, 120,000,000 shares
authorized, 34,069,224 and 33,572,694 shares issued at
September 30, 2003 and December 31, 2002, respectively 340 335
Additional paid-in capital 368,893 365,247
Accumulated deficit (319,682) (266,554)
---------- ----------
49,576 99,053
Less common shares held in treasury at cost; 1,534,398
shares at both September 30, 2003 and December 31, 2002 (14,652) (14,652)
Less preferred shares held in treasury at cost; 25,000 shares at
both September 30, 2003 and December 31, 2002 (929) (929)
Accumulated other comprehensive loss - (127)
---------- ----------
33,995 83,345
---------- ----------
$ 831,403 $ 879,432
========== ==========
The accompanying notes are an integral part of these statements.
CROWN AMERICAN REALTY TRUST
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands, except per share data)
Rental operations:
Revenues:
Minimum rent $ 31,396 $ 28,043 $ 92,410 $ 83,899
Percentage rent 1,209 1,259 4,361 4,303
Property operating cost recoveries 11,455 10,127 33,981 29,987
Temporary and promotional leasing 2,435 2,044 7,256 6,263
Utility redistribution income 3,665 3,680 10,561 10,400
Miscellaneous income 821 410 2,320 1,514
-------- -------- -------- --------
50,981 45,563 150,889 136,366
======== ======== ======== ========
Property operating costs:
Recoverable operating costs 14,747 13,112 44,383 38,698
Property administrative costs 774 710 2,320 2,145
Other operating costs 958 667 2,859 2,010
Utility redistribution expense 3,013 3,056 8,148 8,259
Depreciation and amortization 12,209 11,207 35,964 32,880
31,701 28,752 93,674 83,992
-------- -------- -------- --------
19,280 16,811 57,215 52,374
======== ======== ======== ========
Other expenses:
General and administrative 2,511 1,419 8,489 4,289
Interest 12,763 12,398 38,174 37,715
Loss on early extinguishment of debt - - - 4,314
-------- -------- -------- --------
15,274 13,817 46,663 46,318
4,006 2,994 10,552 6,056
======== ======== ======== ========
Property sales, disposals and adjustments:
Gain on sale of outparcel land 191 - 274 94
-------- -------- -------- --------
191 - 274 94
======== ======== ======== ========
Minority interest in Operating Partnership (1,229) (1,354) (7,572) (4,110)
Income from continuing operations 2,968 1,640 3,254 2,040
Discontinued operations:
Loss from discontinued operations - (230) (235) (647)
Loss on asset sales - - (13,787) -
-------- -------- -------- --------
- (230) (14,022) (647)
======== ======== ======== ========
Net income (loss) 2,968 1,410 (10,768) 1,393
======== ======== ======== ========
Dividends on preferred shares (3,403) (3,403) (10,209) (10,209)
======== ======== ======== ========
Net loss applicable to common shareholders $ (435) $ (1,993) $(20,977) $ (8,816)
======== ======== ======== ========
Per common share information:
Basic and Diluted EPS:
Loss from continuing operations before discontinued
operations, net of preferred dividends $ (0.01) $ (0.05) $ (0.21) $ (0.29)
======== ======== ======== ========
Loss from discontinued operations - (0.01) (0.44) (0.02)
======== ======== ======== ========
Net loss $ (0.01) $ (0.06) $ (0.65) $ (0.31)
======== ======== ======== ========
Weighted average shares outstanding - (000) 32,505 31,984 32,243 28,625
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
CROWN AMERICAN REALTY TRUST
Consolidated Statement of Shareholders' Equity
(Unaudited)
Common
Senior Additional Shares
Preferred Common Paid in Accumulated Held in
Shares Shares Capital Deficit Treasury
--------- ------ ---------- ----------- ----------
(in thousands)
Balance, December 31, 2002 $ 25 $ 335 $ 365,247 $(266,554) $ (14,652)
========= ====== ========= ========= =========
Comprehensive income:
Net loss (10,768)
Net income on cash-flow hedging activities -
Total comprehensive loss (10,768)
Issuance of common shares and DRIP purchases 5 3,780
Transfer in of limited partner's
interest in the Operating Partnership (134)
Reduction in minority partner's ownership interest
related to purchase of Oak Ridge Mall (11,412)
Dividends paid and accrued:
Preferred shares (10,209)
Common shares (20,739)
--------- ------ --------- --------- ---------
Balance, September 30, 2003 $ 25 $ 340 $ 368,893 $(319,682) $ (14,652)
========= ====== ========= ========= =========
Senior
Preferred
Shares Accumulated
Held in Other Comprehensive
Treasury Loss Total
---------- -------------------------
(in thousands)
Balance, December 31, 2002 $ (929) $ (127) $ 83,345
========= ========= =========
Comprehensive income:
Net loss - (10,768)
Net income on cash-flow hedging activities 127 127
Total comprehensive loss 127 (10,641)
Issuance of common shares and DRIP purchases 3,785
Transfer in of limited partner's
interest in the Operating Partnership (134)
Reduction in minority partner's ownership interest
related to purchase of Oak Ridge Mall (11,412)
Dividends paid and accrued:
Preferred shares (10,209)
Common shares (20,739)
--------- --------- ---------
Balance, September 30, 2003 $ (929) $ - $ 33,995
========= ========= =========
The accompanying notes are an integral part of these statements.
CROWN AMERICAN REALTY TRUST
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------------------
2003 2002
--------- ---------
(in thousands)
Cash flows from operating activities:
Net (income) loss $ (10,768) $ 1,393
Adjustments to reconcile net loss to net cash provided by operating activities:
Minority interest in Operating Partnership 7,572 4,110
Equity earnings in joint venture (379) (326)
Depreciation and amortization 38,471 35,291
Operating loss from discontinued operations 235 647
Loss on asset sales 13,787 -
Loss on early extinguishment of debt - 4,314
Net cash used in discontinued operations (319) 621
Net changes in:
Tenant and other receivables (44) 1,993
Deferred charges and other assets (864) (4,757)
Restricted cash and escrow deposits 1,355 470
Accounts payable and other liabilities (1,645) (9,371)
--------- ---------
Net cash provided by operating activities 47,401 34,385
========= =========
Cash flows from investing activities:
Investment in income-producing properties (22,043) (10,941)
Acquisition of enclosed shopping mall - (50,004)
Change in investing escrow deposits (844) (342)
Distributions from joint venture 535 260
Capital investments in discontinued operations - 171
--------- ---------
Net cash used in investing activities (22,352) (60,856)
========= =========
Cash flows from financing activities:
Proceeds from issuance of debt, net of loan deposits and prepayment penalties 27,694 105,888
Cost of issuance of debt - (1,140)
Debt repayments (9,831) (94,915)
Dividends and distributions paid on common shares and partnership units (26,022) (24,196)
Dividends paid on senior preferred shares (10,209) (10,209)
Cash flow support payments 871 2,357
Net proceeds from the issuance of common shares and from exercise of stock options 3,785 47,622
Debt repaid on discontinued operations (13,610) (5,379)
--------- ---------
Net cash (used in) provided by financing activities (27,322) 20,028
========= =========
Net decrease in cash and cash equivalents (2,273) (6,443)
========= =========
Cash and cash equivalents, beginning of period 14,122 16,999
========= =========
Cash and cash equivalents, end of period $ 11,849 $ 10,556
========= =========
Supplemental Cash Flow Data:
Interest paid $ 36,786 $ 36,409
========= =========
Other comprehensive income - hedging activities $ 127 $ 639
========= =========
The accompanying notes are an integral part of these statements.
CROWN AMERICAN REALTY TRUST
Notes to Consolidated Financial Statements
(Unaudited)
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% 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 the
Company, the Operating Partnership, or Crown American Financing Partnership (the
"Financing Partnership"), a partnership which is 99.5% owned by the Operating
Partnership and 0.5% owned by the Company.
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 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.
Proposed Merger
As disclosed in Note 7, on May 13, 2003, the Company entered into a definitive
merger agreement with Pennsylvania Real Estate Investment Trust ("PREIT").
Nature of Operations
The Company operates in one business segment - real estate. The Company's
revenues are primarily derived under real estate leases with national, regional
and local department stores and other specialty retailers. 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.
As of September 30, 2003, the Properties consist of: (1) 26 wholly-owned
enclosed shopping malls (together with adjoining outparcels and undeveloped
land) located in Pennsylvania, New Jersey, Maryland, Tennessee, North Carolina,
West Virginia, Virginia, Georgia, Wisconsin and Alabama (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 (under a purchase option) sub-leased to a
department store chain ("Westgate anchor pad").
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 the GECC Mortgage Loans (described below) and other
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
September 30, 2003 the Company held 100% of the preferred partnership interests
and 85.1% of the common partnership interests in the Operating Partnership. The
Operating Partnership directly owns five malls, 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.
In the opinion of management, the accompanying unaudited consolidated interim
financial statements include all adjustments of a normal recurring nature
necessary for a fair presentation of the financial position and results of
operations of the Company. These consolidated interim financial statements and
the accompanying notes should be read in conjunction with the audited
consolidated financial statements of the Company for the year ended December 31,
2002, which are included in its Annual Report on Form 10-K as amended on Form
8-K, dated June 9, 2003. The results of operations for interim periods are not
necessarily indicative of results to be expected for the year.
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.
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation. Carlisle Plaza Mall, which was sold in October 2002,
and Oak Ridge Mall, which was sold in March 2003, are shown as discontinued
operations in the accompanying financial statements with all prior periods
reclassified. (See Note 6 to the interim Consolidated Financial Statements.) In
addition, as described in Note 3 to the interim Consolidated Financial
Statements, the Company adopted SFAS 145 effective January 1, 2003 and
accordingly reclassified losses on early debt extinguishments that occurred in
prior periods from extraordinary losses to income from continuing operations.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Minority Interest
Minority interest represents the common partnership units in the Operating
Partnership that are owned by Crown Investments and its subsidiary. At September
30, 2003 Crown Investments and its subsidiary owned 14.9% of the total common
partnership units outstanding. Crown American Realty Trust owns the remaining
85.1%. The minority interest balance 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 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 had been declining
each year. The balance was reduced below zero in the second quarter of 2000.
Under accounting principles generally accepted in the United States, when the
minority partner's share of the Operating Partnership's net income (loss)
applicable to common shareholders 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 a legal
obligation of the minority partner to reimburse the Operating Partnership for
such excess amounts. The partnership agreement had provided for such obligation
by the minority partner in the form of cash flow support payments on three of
the Company's malls that were in the lease-up phase at the time of the Company's
IPO in 1993. Accordingly, since the minority interest account was reduced below
zero, and there was a legal 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 then estimated amount of cash flow support to be received over the
next twelve months. As described in Note 6 to the interim Consolidated Financial
Statements in 2003, the Cash Flow Support Agreement (the "Support Agreement")
was amended significantly in connection with the sale of Oak Ridge Mall and due
to the Merger Agreement (as described in Note 7 to the interim Consolidated
Financial Statements). As a result of these amendments the minority partner has
no further obligation to make cash flow support payments to the Operating
Partnership and the minority interest balance was reduced to zero as of May 13,
2003 and currently remains at zero. An additional amount of $10.9 million,
representing the excess losses and distributions over the cash flow support, has
been absorbed by the Company in its share of loss from the Operating Partnership
for the first nine months of 2003. On a cumulative basis, $25.0 million of such
losses and excess distributions have been absorbed by the Company, through and
including September 30, 2003.
Net Income (Loss) Per Share
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. The calculation of diluted earnings per share for the
nine months ended September 30, 2003 and 2002 would have included approximately
309,000 shares and 308,000 shares respectively, for the assumed exercise of
options under the Company's share incentive plans, except that no anti-dilution
is permitted as a result of losses reported by the Company. Because no
anti-dilution is permitted, diluted and basic EPS are identical.
The calculation of pro forma earnings (loss) per share, computed in accordance
with FASB statement No. 148 "Accounting for Stock-Based Compensation" is show in
the table below:
Nine Months ended September 30,
-------------------------------
2003 2002
-------- --------
(thousands of dollars, except per share data)
Net loss allocable to common shares, as reported $(20,977) $ (8,816)
Add: Stock-based employee compensation expense included in net income - -
Deduct: Stock-based employee compensation expense determined
under fair value based method for all awards (31) (78)
-------- --------
Pro forma net loss allocable to common shares $(21,008) $ (8,894)
-------- --------
Loss per common share:
Basic and diluted, as reported $ (0.65) $ (0.31)
-------- --------
Basic and diluted, pro forma $ (0.65) $ (0.31)
-------- --------
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145 "Recission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). Among other items, SFAS 145 rescinds FASB Statement No. 4
"Reporting of Gains and Losses from Extinguishment of Debt" and "Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements". As a result, gains and
losses from extinguishment of debt should be classified as extraordinary items
only if they meet the criteria of APB Opinion 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". The
Company has adopted the provisions of SFAS 145 in the first quarter of 2003 and,
consequently, has reclassified the $4.3 million loss on the early extinguishment
of debt, which occurred in the first quarter of 2002, from an extraordinary loss
to income from continuing operations.
In July 2002, the FASB issued Statement of 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, the Statement eliminates the definition and requirements for
recognition of exit costs in 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 implementation of this Statement has had no 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 will apply 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
December31, 2002, the Company will record the fair value of the guarantee as a
liability, with the offsetting entry being recorded based on the circumstances
in which the guarantee was issued. The Company will account for any fundings
under the guarantee as a reduction of the liability. After funding has ceased,
the Company will recognize the remaining liability 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 historical financial statements as existing
guarantees are not subject to the measurement provisions of FIN 45. The impact
on future financial statements will depend on the nature and extent of issued
guarantees but is not expected to have a material impact to the Company. (See
Note 4 to the interim 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 they occur, or both. Where it is reasonably
possible that the Company will consolidate or disclose information about a
variable interest entity, the Company must disclose the nature, purpose, size
and activity of the variable interest entity and the Company'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 has adopted this
requirement as of January 31, 2003, and no variable interest entities were
identified.
FASB Statement No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure", amends the disclosure provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation", and APB Opinion No. 28, "Interim
Financial Reporting", to require disclosure in the summary of significant
accounting policies of the effects of an entity's policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. SFAS 148 is effective for financial
reports containing condensed consolidated financial statements for interim
periods beginning after December 15, 2002, and the required disclosures are
contained in Note 2 herein.
FASB Statement No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities", amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under FASB No. 133. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003, with
limited exceptions, and its provisions are to be applied prospectively. The
Company does not believe that the adoption of SFAS 149 will have any impact on
its results of operations or its financial position, as the Company does not
currently have any derivatives or hedging activities.
FASB Statement No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", establishes standards for how
an issuer classifies and measures certain financial instruments that have
characteristics of both liabilities and equity. Certain financial instruments
which had previously been classified as equity may now have to be classified as
a liability if they meet the provisions of SFAS 150. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003, except for mandatorily redeemable financial instruments of nonpublic
entities. The Company believes that the implementation of this Statement will
not have a material impact on the Company's results of operations or financial
position.
NOTE 4 - DEBT ON INCOME-PRODUCING PROPERTIES
Debt on income-producing properties, excluding debt on discontinued operations,
consisted of the following (in thousands):
September 30, 2003 December 31, 2002
GECC Mortgage Loan $445,020 $450,422
Permanent loans 161,687 163,116
Secured lines of credit 147,728 124,028
$754,435 $737,566
GECC Mortgage Loan
On August 28, 1998, the Company closed a $465 million 10-year mortgage with
General Electric Capital Corporation ("GECC"). The gross proceeds from the new
loan (the "GECC Mortgage Loan") were used to refinance $420.6 million of
existing mortgage loans ("Old Mortgage Loans"). The remaining proceeds were used
largely to establish escrows to fund the remaining expansion and redevelopment
costs of Patrick Henry Mall and Nittany Mall, and to fund closing costs, initial
loan reserves and prepayment penalties with respect to $230.0 million of the Old
Mortgage Loans that were pre-paid prior to their maturity dates. 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. The loan provides 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 September 30, 2003, permanent loans consisted of six loans secured by six
properties held by the Operating Partnership or its subsidiaries, as follows:
(1) a $26.6 million mortgage loan secured by Schuylkill Mall due December 2008
with a fixed interest rate of 7.25%, (2) a $13.6 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 $1.2 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 permanent 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
initially recorded as an extraordinary loss in the Company's Consolidated
Statement of Operations during the first quarter of 2002, and have now been
reclassified to continuing operations, as required by SFAS 145.
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, $13.6 million of mortgage debt on Oak Ridge Mall was
outstanding. This loan was reclassified to "Liabilities from discontinued
operations" in the current financial statements as a result of the sale of Oak
Ridge Mall on March 31, 2003 as described in Note 6 to the interim Consolidated
Financial Statements. This loan was paid off on March31, 2003 in connection with
the sale, primarily using funds drawn from the Company's secured lines 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 modified 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 limit of $150 million to $175 million due to the addition of a sixth
mall 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
properties securing the line of credit; at September 30, 2003, total borrowing
capacity was approximately $159 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 $147.7 million at September
30, 2003.
In addition to the above facility, the Company has a $6.0 million line of credit
with a bank secured by a mortgage on the Company's headquarters office building
bearing interest at LIBOR plus 2.25%. The maturity date on this loan was
extended to April 30, 2004. There were no amounts outstanding under this line as
of September 30, 2003.
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 earnings before interest, tax, depreciation and
amortization ("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 or had received appropriate lender waivers as of and during
the period ended September30, 2003 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, and one of these two insurance
companies has been downgraded three times. The Company has replaced the
downgraded insurance company that had provided general liability coverage with
an insurance company whose ratings currently exceed the loan requirements. With
respect to the other insurance company, in each instance all lenders have
approved the continued use of the insurance carrier provided no further rating
downgrades occur. The current lender approvals are effective until the insurance
renewal dates in April 2004 (for property coverage) and September 2004 (for
workers' compensation, automobile and excess liability coverages). If a further
rating downgrade were to occur in the future, the Company may be required to
replace the insurance coverage prior to the scheduled policy renewal dates in
April and September 2004. While management believes that it would be able to
replace the downgraded insurance company as part of the normal policy renewal
cycles, or sooner if so required due to any future rating downgrade 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
consolidated Company.
Interest Rates and Swap Agreements
The GECC Mortgage Loan on the Financing Partnership properties and five of the
permanent loans with an aggregate principal balance of $576.7 million at
September 30, 2003 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 September 30, 2003 and 2002 was 7.42% and 7.48%,
respectively. All of the remaining loans with an aggregate principal balance of
$177.7 million at September 30, 2003 have variable interest rates based on
spreads ranging from 2.00% to 2.25% above 30 day LIBOR. The weighted average
interest rates on the variable rate debt at September 30, 2003 and 2002 were
3.33% and 4.07%, respectively. The weighted average interest rates on variable
rate debt during the nine months ended September 30, 2003 and 2002 were 3.47%
and 4.11%, respectively.
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 was 5.197% and their terms
expired on February 1, 2003. The Company designated this transaction as a cash
flow hedge of a floating-rate liability and applied the guidance set forth in
SFAS No. 133 (Accounting for Derivative Instruments and Hedging Activities) to
this transaction. The fair value of these transactions was recorded in the
balance sheet, with the offset to Accumulated Other Comprehensive Loss. The
current year impact of the mark to market adjustment was to record comprehensive
income of $0.1 million for the nine months ended September 30, 2003.
Debt Maturities
As of September 30, 2003, the scheduled principal payments on all debt are as
follows (in thousands):
Period Ending December 31,
- --------------------------
2003 (three months) $ 2,387
2004 (year) 158,272
2005 (year) 41,769
2006 (year) 12,546
2007 (year) 13,193
Thereafter 526,268
$754,435
NOTE 5 - ACQUISITIONS
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 8, 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.
NOTE 6 - DISPOSITIONS
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, which resulted in a gain on sale of approximately
$0.4 million after sale costs and expenses, which was recorded in the fourth
quarter of 2002. 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. 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 all prior periods have been reclassified.
Oak Ridge Mall ("Oak Ridge"), located in Oak Ridge Tennessee, was sold on March
31, 2003, to Crown Investments Trust ("Crown Investments"), an entity which is
owned by Mark E. Pasquerilla, the Company's CEO and President. In connection
with the sale, the Cash Flow Support Agreement ("Support Agreement") between the
Company and Crown Investments as it relates to Oak Ridge was also amended.
In May 2002 the Company's Board of Trustees approved an agreement to sell Oak
Ridge, to an unrelated third party. The independent members of the Board of
Trustees ("Independent Trustees") concurrently approved an amendment of the
Support Agreement 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 for estimated fair value of $11.4
million. The $11.4 million purchase price was satisfied through issuance of a
promissory note by Crown Investments. The promissory note was then distributed
in a nonliquidating distribution to Crown American Investment Company ("CAIC"),
effectively reducing 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 current $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. The Company will manage Oak Ridge for a fee on behalf of Crown
Investments. 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.
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 December31, 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 would have 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 common
partnership units for the quarter ended March31, 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 March31,
2003, were unchanged as a result of the above transactions. However, the common
percentage ownership interests of the partners in the Operating Partnership did
change, 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%
As required by SFAS No. 144, the operating results of Oak Ridge Mall and
Carlisle Plaza Mall have been shown in the accompanying statement as
discontinued operations, and all prior periods have been reclassified.
The following represents certain condensed financial statement information on
Oak Ridge Mall and Carlisle Plaza Mall for the applicable periods presented in
the financial statements (in thousands of dollars):
Nine Months Ended September 30,
-------------------------------
2003 2002
---- ----
Oak Ridge Mall:
Total revenues $ 748 $ 2,563
Operating loss $ (235) $ (632)
Loss on asset sale $(13,787) $ -
Carlisle Plaza Mall:
Total revenues $ - $ 1,454
Operating income (loss) $ - $ (15)
September 30, December 31,
------------- ------------
2003 2002
---- ----
Oak Ridge Mall:
Total assets (net) $ - $ 25,309
Total liabilities $ - $ 13,952
NOTE 7 - 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 4 to the interim
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.
After 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 Donald F. Mazziotti, a current Trustee of the
Company, 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. PREIT filed a registration statement on Form S-4 (which
included a joint proxy statement/prospectus and other relevant documents) with
the United States Securities and Exchange Commission (the "SEC") concerning the
merger on August 12, 2003. The Company has established November 11, 2003 as the
meeting date of its shareholders to approve the proposed merger and has
commenced mailing 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.
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 CAIC 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 CAIC.
For the quarter and nine months ended September 30, 2003, the Company incurred
$0.9 million and $3.8 million, respectively, in costs related to the merger.
These costs were expensed as incurred, and related mainly to legal, accounting,
tax and other advisory fees. The Company expects to incur significant merger
related costs upon completion of the merger, which is currently expected to
occur in the fourth quarter of 2003. These costs, which will be charged to
expense, are expected to include employee severance costs, fees payable to the
Company's financial advisor, fees payable to lenders, proxy printing and
solicitation costs, costs related to the special shareholder meeting, and
ongoing legal, accounting, tax and other advisory fees. In addition, as
described in the Merger Agreement and related documents, in connection with and
contingent upon the closing of the Merger, Pasquerilla Plaza, an office building
in Johnstown, PA owned by the Company and which serves as the Company's
corporate headquarters, will be transferred to Crown Investments in exchange for
out-parcels of land adjacent to three of the Company's malls which are currently
owned by Crown Investments. The exchange will be based on appraised values as
determined by a third party appraiser, with any difference to be settled in
cash. The appraised value of Pasquerilla Plaza is approximately $9 million less
than its current net book value and such excess amount will be charged to
expense if and when the exchange occurs just prior to the closing of the merger.
The aggregate amount of all the foregoing costs and expenses related to the
merger (exclusive of the Pasquerilla Plaza Exchange) that could be incurred in
the fourth quarter 2003 could approximate $20 million.
NOTE 8 - 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. In addition to the shares issued above, 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
estimated expenses) of the common offering was approximately $47.2 million. The
proceeds from the offering were initially used to pay down the Company's line of
credit with GECC; part of these funds were later re-borrowed to supplement the
purchases of Valley View Mall and Wiregrass Commons Mall as described in Note 5
to the interim Consolidated Financial Statements.
NOTE 9 - CONTINGENCIES AND COMMITMENTS
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 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 September 30, 2003 and December 31, 2002
was $5.6 million and $5.4 million, respectively, and is included in Accounts
Payable and Other Liabilities.
Based on environmental studies completed on the Properties, management believes
any exposure related to environmental clean-up will not have a significant
adverse impact on the Company's results of operations or its financial
condition.
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 related to the operations of their
mall assets in the normal course of business which are not material to the
financial position or liquidity of the Company. The Company also has commitments
under signed leases with open tenants to make future cash allowances and/or to
construct tenant premises, which aggregate approximately $2.6 million as of
September 30, 2003.
NOTE 10 - SUBSEQUENT EVENT
In October 2003, in connection with the proposed Merger and in recognition of
restrictions that have been imposed on five officers relative to exercising
existing options, the Compensation Committee of the Board of Trustees authorized
amendments to certain option agreements held by five executive officers and one
independent trustee. The amendments extended the expiration dates related to
150,000 options held by the trustee and the five officers from December 31, 2003
and January 3, 2004, respectively, to a date equal to six months from the
effective date of the merger. In addition, certain option agreements for the
five officers aggregating 548,000 shares, that were currently vested and
exercisable, were amended to allow the officers to pay the option exercise price
and withholding taxes in exchange for common shares of the Company currently
owned by such officers, or shares that would be acquired from exercise of the
options, or with cash. These amendments resulted in new measurement dates and
variable plan accounting, respectively. Accordingly, $0.6 million in
compensation expense will be recorded in the fourth quarter related to the
extension of the expiration dates. Approximately $1.1 million in additional
compensation expense will be recorded in the fourth quarter from applying
variable plan accounting to a portion of those options which can be satisfied by
surrendering shares to the Company.