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Exhibit 99.1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended December 31, 2002
Commission file number: 1-12216
CROWN AMERICAN REALTY TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 25-1713733
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
PASQUERILLA PLAZA
JOHNSTOWN, PENNSYLVANIA 15901 (814) 536-4441
(Address of principal executive offices) (Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
COMMON SHARES OF BENEFICIAL INTEREST, PAR VALUE $.01 PER SHARE
11.00% SENIOR PREFERRED SHARES, PAR VALUE $.01 PER SHARE ($50.00 LIQUIDATION
PREFERENCE)
(Title of Class)
NEW YORK STOCK EXCHANGE
(Name of Exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for at least the past 90 days. Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2). Yes X No .
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On June 28, 2002, the last business day of the registrant's most
recently completed second quarter, the aggregate market value of the shares of
Common Shares of Beneficial Interest held by non-affiliates of the registrant
was approximately $273.1 million based upon the closing price of Common Shares
of Beneficial Interest on the New York Stock Exchange composite tape on such
date.
As of February 28, 2003, 32,052,571 Common Shares of Beneficial
Interest and 2,475,000 11.00% Senior Preferred Shares of the registrant were
issued and outstanding. The registrant estimates that as of February 28, 2003
the aggregate market value of the voting common shares held by non-affiliates of
the registrant was approximately $279.1 million based on the closing price on
the New York Stock Exchange for such stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the registrant's 2003 Annual
Meeting of Shareholders are incorporated by reference into Part III of this Form
10-K.
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Exhibit Index on pages 65 to 67
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TABLE OF CONTENTS
<Table>
<Caption>
ITEM NO. PAGE NO.
- -------- --------
PART I
1. Business........................................................... 1
2. Properties......................................................... 8
3. Legal Proceedings.................................................. 15
4. Submission of Matters to a Vote of Security Holders................ 15
Executive Officers of the Company.................................. 15
PART II
5. Market for Registrant's Common Shares of Beneficial
Interest and Related Shareholder Matters........................... 17
6. Selected Financial Data............................................ 18
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 21
7.(a) Quantitative and Qualitative Disclosures about Market Risk......... 36
8. Financial Statements and Supplementary Data........................ 38
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................ 64
PART III
10. Directors and Executive Officers of the Registrant................. 64
11. Executive Compensation............................................. 64
12. Security Ownership of Certain Beneficial Owners and
Management......................................................... 64
13. Certain Relationships and Related Transactions..................... 64
PART IV
14. Controls and Procedures............................................ 64
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 64
Signatures......................................................... 68
Certifications..................................................... 69 - 70
</Table>
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PART I
All references to "the Company", "we" or "us" in this Annual Report on Form 10-K
mean Crown American Realty Trust and its consolidated subsidiaries, unless
otherwise specified.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as
amended. When used, statements which are not historical in nature, including
those containing words such as "anticipate", estimate", "should", "expect",
"believe", "intend" and similar expressions are intended to identify
forward-looking statements. These forward-looking statements are subject to
various risks and uncertainties, including those relating to:
o financial stability of the Company's retail tenants,
o the Company's ability to refinance maturing indebtedness,
o current economic and credit market conditions,
o the rate of revenue increases versus expense increases,
o the impact of competition,
o financing and development risks,
o expansion risks,
o consumer buying trends,
o the level and volatility of interest rates,
o impact of significant acquisitions and sales of assets,
o construction and lease-up delays,
o resolution of significant litigation or contingent matters,
and
o effects of recent and any future terrorist attacks and
results of the war on terrorism.
Other risks, uncertainties and factors, including those discussed elsewhere in
this Annual Report on Form 10K or described in reports that the Company files
from time to time with the Securities and Exchange Commission could cause its
actual results to differ materially from those projected in any forward-looking
statements that it makes. The Company is not obligated to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 1. BUSINESS.
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The Company is a fully-integrated, self-administered and
self-managed real estate investment trust ("REIT") primarily engaged in the
ownership, development and management of enclosed shopping malls. The Company's
revenues are primarily derived from real estate leases with national, regional
and local department stores and other retail companies. The Company also
performs a limited amount of property management, construction management,
leasing and other services for third parties.
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GENERAL DEVELOPMENT OF THE BUSINESS
Crown American Realty Trust was formed on May 14, 1993 as a
Maryland 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 was formed in 1993 and is a wholly-owned
subsidiary of Crown Holding Company, which is controlled by Mark E. Pasquerilla,
Chairman of the Board of Trustees and Chief Executive Officer of the Company.
On August 17, 1993 the Company completed its initial public
offering and raised net proceeds of approximately $405 million in equity from
issuing approximately 25.5 million common shares, including the subsequent
exercise of the underwriters' over-allotment option. The Company 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 referred to above. As further
discussed below, the remaining minority limited common partnership interests in
the Operating Partnership are held by Crown Investments Trust ("Crown
Investments") and by Crown American Investment Company, a wholly-owned
subsidiary of Crown Investments, both of which are wholly-owned subsidiaries of
Crown Holding Company. The funds raised in the initial public offering were used
by the Operating Partnership to retire debt related to the Initial Properties.
As described in Note 6 to the Consolidated Financial Statements, the Company
also holds 100% of the preferred partnership interests in the Operating
Partnership issued in connection with the Company's issuance of preferred shares
in July 1997.
Simultaneous with the initial public offering, Crown
Associates and an affiliate transferred the Initial Properties and the
management operations related to the Initial Properties to the Company, the
Operating Partnership, or Crown American Financing Partnership (the "Financing
Partnership"), a partnership owned 99.5% by the Operating Partnership and 0.5%
by the Company.
OWNERSHIP AND GOVERNANCE OF THE COMPANY AND THE OPERATING
PARTNERSHIP
The Company conducts all of its business activities, and owns
directly or indirectly all of its properties, through the Operating Partnership
and its subsidiaries. The Operating Partnership is organized as a Delaware
limited partnership.
As of December 31, 2002, the Company owned 76.29% of the
general common partnership interests and 100% of the preferred partnership
interests in the Operating Partnership. Crown Investments and Crown American
Investment Company, which are subsidiaries of Crown Holding Company, own the
remaining 23.71% minority limited common partnership interests in the Operating
Partnership. Although the Company initially held a 78.00% partnership interest
in the Operating Partnership and Crown Investments held the remaining 22.00%
interest in 1993, since that time, the ownership interests have changed as
required under the terms of the partnership agreement dated August 17, 1993, as
amended. Since 1993, the percentage partnership interest that the Company holds
in the Operating Partnership has changed due to (i) the issuance by the Company
of additional common shares for cash, under its option plans, and under its
dividend reinvestment plan, (ii) the issuance of additional common partnership
interests as partial consideration for the purchase of Wyoming Valley and
Middletown Malls and Greater Lewistown Plaza in 1998, (iii) the issuance of
preferred partnership interests in exchange for cash contributed by the Company
to the Operating Partnership in connection with the Company's 1997 offering and
sale of senior preferred shares, (iv) the redemption of common and preferred
partnership interests in connection with the Company's repurchase in the open
market of its common and preferred shares, and (v) the issuance of common shares
through a public offering by the Company completed in June 2002, as further
described in Note 15 to the Consolidated Financial Statements. As described in
Note 18 to the Consolidated Financial Statements, the percentage ownership
interests will change significantly when the approved sale of Oak Ridge Mall to
Crown Investments and a related amendment to the Support Agreement (see below)
occur.
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The number of common and preferred Partnership Units
outstanding at December 31, 2002 were as follows:
<Table>
HELD BY COMMON UNITS PREFERRED UNITS
- ------- ------------ ---------------
NUMBER % NUMBER %
------ - ------ -
Crown American Realty Trust 32,038,296 76.29% 2,475,000 100.00%
Crown Investments and its subsidiary,
Crown American Investment Company 9,956,398 23.71% - -
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Totals 41,994,694 100.00% 2,475,000 100.00%
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</Table>
Under the partnership agreement of the Operating Partnership,
the Company, as the sole general partner of the Operating Partnership, has full,
exclusive and complete responsibility and discretion in the management and
control of the Operating Partnership. However, Crown Investments has substantial
influence over the management of the Company and the Operating Partnership as a
result of its minority ownership interests in the Company, its ability to redeem
part or all of the common partnership units of the Operating Partnership that
Crown Investments owns for the Company's common shares and Crown Investment's
ability as a limited partner to approve certain major decisions relating to the
Company and the Operating Partnership. Specifically, as the general partner of
the Operating Partnership, the Company must obtain the prior consent of Crown
Investments in connection with certain major decisions including any merger or
combination of the Company or any transfer or sale of all or substantially all
of the assets of the Operating Partnership.
CASH FLOW SUPPORT AGREEMENT
In connection with the Company's initial public offering in
August 1993, the Company entered into a cash flow support agreement with Crown
Investments with respect to Mount Berry Square Mall, Martinsburg Mall, Oak Ridge
Mall and Bradley Square Mall (the "Support Agreement"). The Support Agreement
provides that Crown Investments will guarantee, on a quarterly basis up to a
maximum of $1.0 million per quarter, that each of these malls will generate a
stipulated aggregate 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. In 1997, the Company amended the Support
Agreement to provide that the quarterly support amounts after 1997 will 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 with respect to a mall when that mall equals or exceeds the stipulated
amount of aggregate base rents over four consecutive quarters (as determined by
the Company's Independent Trustees). Mount Berry Square Mall achieved these
amounts in 2001. As described in Note 18 to the Consolidated Financial
Statements, the Support Agreement will be amended significantly in connection
with the planned sale of Oak Ridge Mall.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in one segment - real estate. The Company
does not have any foreign operations. See the Consolidated Financial Statements
and Notes thereto referred to in Item 8 of this Annual Report on Form 10-K for
financial information relating to the Company's business segment.
CURRENT PROPERTIES
Through its ownership interests in the Operating Partnership
and its subsidiaries (the "Partnerships"), as of December 31, 2002 the Company
owns in fee or through leasehold interests: (i) 27 wholly-owned enclosed
shopping malls and a 50% partnership interest in Palmer Park Mall (an enclosed
shopping mall), (collectively, the "Malls"), (ii) an office building in
Johnstown, Pennsylvania with approximately 102,500 gross leasable square feet,
which serves as the headquarters of the Company and also is leased to Crown
Associates, to an affiliated company and to unrelated third parties
("Pasquerilla Plaza"), (iii) an option to purchase a parcel of land with an
approximate 108,000 square foot building sub-leased to an anchor department
store at Westgate Mall, a mall owned by an unaffiliated third party (the "Anchor
Pad"), and (iv) approximately 67 acres of outparcels and developable land, the
majority of which adjoins or is in the vicinity of certain of the Malls
(hereinafter all such real
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estate assets to be referred to as the "Properties"). The Operating
Partnership manages the 27 wholly-owned Malls and Pasquerilla Plaza (the
"Managed Properties"); the Anchor Pad and Palmer Park Mall are managed by
non-affiliated third party property managers.
BUSINESS OBJECTIVES
The Company's business objective is to achieve long-term
capital appreciation in the value of its common shares and to pay current
dividends to its shareholders. The Company strives to achieve this objective by
growing its "Funds from Operations" or "FFO". The National Association of Real
Estate Investment Trusts ("NAREIT") defines " Funds from Operations " as net
income (or loss) (computed in accordance with generally accepted accounting
principles in the United States ("GAAP")), excluding gains (or losses) from
extraordinary items and sales of properties, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. In calculating its Funds from Operations, the
Company excludes gains or losses on sales from previously depreciated properties
and includes gains (or losses) from the sale of peripheral land, and includes
earned cash flow support under the Support Agreement. The Company's Funds from
Operations may not be directly comparable to similarly titled measures reported
by other real estate investment trusts. As further described in Item 6, Funds
from Operations do not represent cash flow from operating activities in
accordance with GAAP and should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of the Company's
financial performance or to cash flow from operating activities (determined in
accordance with GAAP) as a measure of its liquidity, nor is Funds from
Operations indicative of funds available to fund the Company's cash needs,
including its ability to make cash distributions.
The Company's strategy to achieve growth in Funds from
Operations is based on maximizing cash flow from its malls, from accretive
acquisitions of new properties and, to a lesser extent, from managing properties
owned by third parties and from selling existing assets with limited growth
prospects or which are not consistent with or essential to the Company's long
term growth strategies.
The Company's strategy to maximize cash flows from its
existing properties is based on increasing total occupancy levels, raising the
base rent levels of the Company's tenants, increasing revenues from temporary
and seasonal tenants, controlling operating costs and financing costs, and
renovating and expanding the Malls to attract new tenants.
The Company renovates and expands its properties in
circumstances where management believes that the Company can achieve higher
rental rates and occupancy levels. The Company monitors opportunities for
renovation, expansion and reconfiguration from time to time to capitalize on
such opportunities in part through utilizing its relationships with existing
tenants and its extensive contacts within the retail community. The Company
intends to undertake development activities as opportunities arise from time to
time.
The Company did not incur any significant costs for renovation
or expansion activities in 2002.
ACQUISITIONS AND DISPOSITIONS
The Company's primary acquisition strategy is to acquire
existing malls in desirable areas and to improve their performance through a
comprehensive program of leasing, renovation, expansion, reconfiguration,
re-merchandising and controlling operating expenses. A criterion for new
investments will be that they offer the potential for growth in cash flow and in
Funds from Operations. The Company anticipates that new real estate investments
will be located primarily in the Eastern United States, but the Company may also
consider purchasing properties in other regions of the United States. The
Company expects that any single investment in a property would not exceed 10% of
its assets. The Company's policy is to acquire assets primarily for income and
long-term appreciation in value through the implementation of its asset
management and operating strategies.
The Company may dispose of certain of its properties from time
to time, if, based upon the periodic review of its mall portfolio, its Board of
Trustees determines that such action would be in the best interests of the
Company's shareholders. The Company regularly evaluates property dispositions in
order to recycle capital for future investment opportunities, to lower leverage
levels, or to enhance cash flows and liquidity. It is possible that the net
sales proceeds for some properties, if sold in the future, could be lower than
their current net book value, which would result in a loss upon such possible
future sale.
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In connection with this strategy, the Company acquired two enclosed
regional malls in 2002 as described in Note 13 to the Consolidated Financial
Statements and sold one enclosed regional mall in 2002 and expects to sale
one mall in 2003, as described in Notes 14 and 18 to the Consolidated
Financial Statements.
FINANCING STRATEGY
The Company's financing strategy is to obtain the lowest financing
cost for its loans given its level of debt leverage, the recourse provisions
and other terms and conditions associated with its loans and to maintain a
manageable refinancing debt maturity schedule. The Company maintains working
capital and lines of credit that it believes are adequate for the current
conduct of its business and investments in the ordinary course.
At December 31, 2002, the Company had the following loans in place,
secured by its 27 wholly-owned Malls, with an aggregate amount outstanding of
$751.2 million (excluding its share of a $18.6 million mortgage loan to
Palmer Park Mall Venture, a joint venture in which it owns a 50% equity
interest)
o revolving line of credit with GECC with a balance of $124.0
million secured by cross-collateralized mortgages on six of the
Malls (as further discussed in Item 7 and Note 5 to the
Consolidated Financial Statements, the borrowing availability
under this line is adjusted quarterly based on the operating
income of the six malls that secure the line and was approximately
$155.3 million at December 31, 2002);
o a line of credit of up to $6.0 million secured by a mortgage on
Pasquerilla Plaza with no amounts outstanding as of December 31,
2002;
o permanent loans consisting of seven loans in the principal
aggregate amount of $176.7 million secured by mortgages on six
of the Malls and Pasquerilla Plaza; and
o mortgage loan of $450.4 million with State Street Bank & Trust
Co., as trustee successor to GECC, secured by
cross-collateralized mortgages on fifteen of the Malls.
Note 5 to the Consolidated Financial Statements further describes the existing
debt on the Company's income producing properties.
During 2002 and as further described below, the Company's principal
financing activities included:
o additional borrowings of $142.7 million (net of escrow deposits
and issuance costs) under mortgage loans and its lines of credit
with GECC primarily to fund the Company's acquisition of Valley
View Mall and Wiregrass Commons Mall and refinance existing
loans;
o the payment of $118.3 million for debt payments related to
refinanced loans, paydowns on loans and the lines of credit,
and scheduled debt amortization;
o the payment of $46.7 million in dividends and distributions to
holders of the common shares and partnership units and preferred
shares;
o the receipt of $3.1 million under the Support Agreement; and
o the receipt of $47.9 million in net proceeds from the Company's
common share offering in June 2002, the exercise of stock
options, and from the Company's dividend reinvestment program.
On January 3, 2002 the Company closed a $53.3 million loan with a
lender secured by its Capital City Mall located in Harrisburg, Pennsylvania
with only limited recourse to the Company. The loan bears interest at a
stated annual fixed rate of 7.61%. The Company is required to pay interest
only during the first two years of the term of the loan. Principal and
interest will be paid during the last eight years of the term of the loan
based on a 28-year amortization schedule. Of the total proceeds from the new
loan, $42.5 million was used to prepay an existing 8.27% mortgage loan on
Capital City Mall, which included a $4.1 million yield maintenance prepayment
penalty.
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This prepayment penalty, together with $0.2 million of unamortized deferred
financing costs, was recorded as an extraordinary loss in January 2002. The
remaining proceeds were used for loan closing costs and various loan reserves
aggregating $1.7 million, with the balance of $9.1 million of net proceeds
available for general corporate purposes for the Company.
On May 1, 2002, the Company paid down an existing mortgage loan on
Carlisle Plaza Mall from $9.3 million to $6.0 million in connection with a
one-year extension of the maturity of the loan to May 1, 2003. This loan was
fully paid off in connection with the sale of Carlisle Plaza Mall in October
2002.
In June 2002, the Company completed a public offering of 5,750,000
of its common shares of beneficial interest (including over-allotments), par
value $0.01, at a public offering price of $8.75 per share. The net proceeds
to the Company (after deducting underwriting discounts and offering expenses)
were approximately $47.2 million. The proceeds from the offering were used
initially to pay down the Company's line of credit with GECC. The Company
later re-borrowed funds under the line of credit with GECC to fund its
acquisitions of Valley View Mall and Wiregrass Commons Mall in 2002.
On November 7, 2002, the Company executed an agreement with a
lender to extend and modify the terms of a mortgage loan on Schuylkill Mall,
located in Frackville, Pennsylvania. 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. Repayment of this loan was and remains guaranteed
by the Operating Partnership.
The Company may raise additional funds through a variety of ways
including infusions of equity (public or private), debt financing or
retention of cash flow by reducing the amount of its dividend per share
(subject to limitations regarding the taxability of undistributed real estate
investment trust income), or any combination of these methods. The Company's
indebtedness may be in the form of purchase money obligations to sellers of
properties, publicly or privately placed debt, financing from banks,
institutional investors or other lenders. This indebtedness may be secured or
unsecured by the pledge of a particular property, several of the Company's
properties or all of its properties. Given the Company's current level of
indebtedness, and given the uncertainties concerning future equity and debt
capital markets and interest rates, there is no assurance that the Company
will be able to secure such future infusions of equity and/or debt financing
when needed, or at rates or terms that will permit the Company to use the
proceeds raised to increase net income or funds from operations.
COMPETITIVE POSITION
The Malls are generally located in middle markets where there are
relatively few other enclosed malls, making most of them the dominant
enclosed mall in their respective trade areas; 24 Malls are the largest
enclosed malls in their primary trade areas, of which 14 are the only
enclosed mall in their primary trade areas.
Fifteen Malls are located in the state of Pennsylvania and one is
located in New Jersey near the Pennsylvania border. Two of the Malls are
located in Virginia, two in Maryland, two in West Virginia, two in eastern
Tennessee, one in eastern North Carolina, one in northwestern Georgia, one in
southeastern Alabama and one in southwestern Wisconsin.
The Company, and its predecessor, have continually expanded and
renovated its Malls to maintain their competitive position. Twenty-three of
the Malls have had at least one expansion or renovation since they were
completed, and 19 of the Malls have been expanded more than once.
Approximately 1.9 million square feet of remaining expansion capacity is
available, and can be used to maintain and enhance the quality of the Malls
and their competitive position in their trade areas, subject to compliance
with certain conditions.
Although management believes the Malls can compete effectively
within their trade areas, the Company must also compete with other owners,
managers and developers of retail shopping centers and malls. Many of its
competitors may be at an advantage to the extent they can utilize working
capital and retained earnings to finance projects while the Company is required
to satisfy the REIT qualification requirements under the Internal Revenue Code
of 1986 (the "Code"), which include a requirement to distribute at least 90% of
its annual taxable income, as defined in the Code. In addition, retailers at the
Malls face increasing competition from discount
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shopping centers, outlet malls, shopping clubs, direct mail, shopping through
the Internet, telemarketing and home shopping television networks.
EMPLOYEES
As of December 31, 2002, the Operating Partnership and its
wholly-owned subsidiary, Crown American Services Corporation had 626
full-time employees in the following operational areas:
<Table>
<Caption>
Number of
Employees
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Asset and property management (including on-site) 534
Leasing and lease administration 16
Development and construction services 12
Financial, accounting, MIS and legal services 43
Executive management and corporate administration 21
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626
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</Table>
None of the employees are currently represented by any union. The
Company, the Financing Partnership and other partnerships do not have any
paid employees, but officers of the Operating Partnership are also officers
of the Company and the other Partnerships. The Company's management considers
its relations with the employees of the Operating Partnership and Crown
American Services Corporation to be satisfactory.
SEASONALITY
The enclosed shopping mall industry is seasonal in nature, with
anchor and mall shop tenant sales highest in the fourth quarter due to the
Christmas season, and with lesser, though still significant, sales
fluctuations associated with the Easter holiday and back-to-school events.
While minimum rents and expense recoveries are generally not subject to
seasonal factors, many leases are scheduled to expire in the first calendar
quarter, and the majority of new stores open in the second half of the year
in anticipation of the Christmas selling season. Accordingly, revenues and
occupancy levels are generally lowest in the first quarter and highest in the
fourth quarter.
BUSINESS ISSUES AND RISKS
As a fully-integrated, self-administered and self-managed REIT
primarily engaged in the ownership, development and management of enclosed
shopping malls, the Company is subject to various risks arising in connection
with the ownership of its Properties and the operation of its business. These
risks include defaults under or non-renewal of tenant leases; bankruptcy of
tenants; competition; inability to rent unleased space; failure to generate
sufficient cash flow from operations to pay operating expenses, dividends to
holders of common and preferred shares or payments of principal or interest
on the Company's indebtedness; inability to refinance part or all of the
Company's existing indebtedness; increases in interest rates; failure to
generate sufficient cash flow from operations to make capital expenditures
and tenant improvements; risks relating to environmental matters; 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 Company`s current
indebtedness and designation of the terms of the preferred shares, trends in
the national and local economy, increases in interest rates and changes in
income tax laws, governmental regulations and legislation and population trends.
INCOME TAXES
The Company elected to be taxed as a REIT under Sections 856
through 860 of 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 and state income taxes on its net taxable 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.
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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.
ENVIRONMENTAL MATTERS
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.
Many of the Malls contain, or at one time contained, underground
and/or above ground storage tanks used to store waste oils or other petroleum
products primarily related to the operation of auto service center
establishments at such Malls, and one Mall was constructed on a site a
portion of which had been previously used as a municipal landfill. In some
cases, underground storage tanks have been abandoned in place, filled in with
inert materials or removed and replaced with above ground tanks. Historical
records indicate that soil and groundwater contamination from underground
tanks and, in one case, a hydraulic lift, requiring remediation has occurred
at five of the Properties, and subsurface investigations (Phase II
assessments) and remediation work are either ongoing or scheduled to be
conducted by the Company at three of such Properties; the Company has
obtained PA Department of Environmental Protection Act II Closures at two of
the Properties. The costs of remediation with respect to such matters have
not been significant to date and are not expected to have a significant
adverse impact on the Company's future results of operations or it financial
condition.
There are also minor amounts of asbestos-containing materials
("ACM") in most of the Properties, primarily in the form of floor tiles,
mastics and roofing materials, which are generally in good condition.
Fireproofing and insulation containing asbestos is also present in certain
Properties in non-public areas, such as mechanical rooms. The Company
believes that the presence of these ACM does not violate current law. In
addition, the Company has an ongoing program of reviewing spaces that have
been vacated by tenants and occupants of the Properties for the presence of
ACM, and removing any ACM discovered in such spaces before reletting the same
to new tenants or occupants.
Two Malls also contain waste water treatment facilities which treat
waste water at the Malls before discharge into local streams. Operation of
such facilities is subject to federal and state regulation. All necessary
permits have been obtained and the Company's management believes such
facilities are in compliance with current law.
AVAILABLE INFORMATION
The Company's executive offices are located at Pasquerilla Plaza,
Johnstown, Pennsylvania 15901. Its telephone number is (814) 536-4441, and
its Internet web-site is www.crownamerican.com. The Company makes available
free of charge on or through its Internet web site the Company's Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, and, if applicable, amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") as soon as reasonably practicable after the
Company electronically files such material with, or furnishes it to, the
Securities and Exchange Commission.
ITEM 2. PROPERTIES.
----------
(a) THE MALLS
Through its ownership interests in the Partnerships, the Company
owns the Malls, which consist of 27 wholly-owned enclosed shopping malls and
a 50% partnership interest in Palmer Park Mall (an enclosed
8
<Page>
shopping mall). As described in the table on the following pages, each mall
has department stores and other large space users as anchor tenants (the
"Anchors"). All of the Malls have numerous diversified retail stores, and in
some instances, a few office or non-retail tenants (the "Mall Stores"),
located along enclosed malls connecting the Anchors and additional
freestanding retail stores and ground lease properties (the "Freestanding
Stores") located along the perimeter of the parking areas at 17 of the Malls.
Unless otherwise indicated, the information provided in this Item 2 is stated
as of December 31, 2002.
The Company, through the Partnerships, owns all of the properties
in fee, except Palmer Park Mall, Shenango Valley Mall, Uniontown Mall,
Crossroads Mall, and Wiregrass Commons Mall. Palmer Park Mall Venture, in
which the Company has a 50% general partnership interest, holds title in fee
to Palmer Park Mall. Shenango Valley Mall and Uniontown Mall has leasehold
title pursuant to third-party ground leases. Crossroads Mall and Wiregrass
Commons Mall are owned partially in fee and partially under a third-party
leasehold.
The total gross leasable area ("GLA") of the Malls, including the
Anchor Pad, is approximately 17.2 million square feet, including Anchors,
Mall Stores and Freestanding Stores. As used herein, GLA of a Mall includes
the GLA attributable to all Anchors, including twenty anchor locations owned
by their occupants or other entities. Anchors, Mall Stores and Freestanding
Stores account for approximately 61%, 35% and 4%, respectively, of the total
GLA of the Malls. Excluding Freestanding Stores, the enclosed Malls range in
size from approximately 265,000 to 850,000 square feet of GLA with an average
size of approximately 583,000 square feet of GLA.
At December 31, 2002, 98% of the Company-owned Anchor GLA was
leased and occupied, and all twenty non-owned Anchor stores were occupied.
Vacant non-revenue generating Anchor premises at December 31, 2002 consist of
a former Proffitt's store at Oak Ridge Mall which closed in 1999, a former
Kmart store at Phillipsburg Mall which closed in 2002 and two former Phar Mor
stores at Schuylkill Mall and South Mall, respectively, which closed in 2002.
Kohls has signed a non-binding Letter of Intent to open a store in 2004 in
the former Kmart location at Phillipsburg Mall. A temporary furniture store
currently occupies the Phar Mor store at South Mall. Ames Department Stores,
which had been operating in Chapter XI of the United States Bankruptcy Code
since August 2001, closed its 84,000 square foot store at Washington Crown
Center in October 2002. The lease was officially rejected by the bankruptcy
court on January 27, 2003. The Company has signed a lease with Gander
Mountain to occupy this space with an expected opening in early fall 2003.
Mall Store GLA was 87% leased at December 31, 2002, and
Freestanding Store GLA was 85% leased at December 31, 2002. All references
herein to occupancy rates and to leased space for Mall Store tenants include
signed leases with tenants that have not yet taken occupancy.
The industry classifies retail shopping centers by size and
marketing strategy. Retail shopping centers of 100,000 square feet to 400,000
square feet of GLA are considered "community" shopping centers, and those in
excess of 400,000 square feet to 800,000 square feet of GLA are considered
"regional" shopping centers, and those having in excess of 800,000 square
feet of GLA are considered "super-regional" shopping centers. For purposes of
this classification, the Company has excluded Freestanding Stores.
Twenty-five of the Malls are considered regional shopping centers, two are
super-regional shopping centers, and one is a community shopping center.
The Malls generally are located in middle markets where there are
relatively few other enclosed shopping malls. The Company's management
believes that the Malls have strong competitive positions because 24 are the
largest enclosed shopping malls in their respective trade areas, of which 14
are the only enclosed regional shopping malls in their respective primary
trade areas. No one Mall accounted for more than 5.3% of the total GLA of the
Malls or more than 6.6% of total revenues of the Company for the year ended
December 31, 2002.
A substantial portion of the income from the Malls consists of rent
received under long-term leases. Generally, the leases provide for tenants to
pay rent comprised of two elements. The first element is fixed base rent,
which typically increases according to a schedule agreed upon at the time of
lease inception. The second element is percentage rent, which is based on a
percentage of gross sales in excess of a specified minimum annual amount. In
some cases tenants only pay fixed base rent or only pay percentage rent.
Most of the leases for Mall Stores contain provisions allowing the
Company to recover certain costs for common area maintenance, property taxes
and other expenditures related to the day-to-day operations of the Malls. In
addition, most of the Mall Store leases include provisions that allow the
Company to recover costs
9
<Page>
associated with roof and parking lot repairs and other capital expenditures.
Most Anchors also contribute to certain of these costs.
Some of the leases relating to Anchors contain covenants
that require the Anchor, among other things, to maintain operations at the
applicable mall for the duration of the lease.
Unless otherwise noted, the following table sets forth certain
information regarding the Malls as of December 31, 2002:
<Table>
<Caption>
% OF GLA LEASE OR OPERATING
LEASED AS OF EASEMENT COVENANT
PROPERTY/LOCATION (1) SQUARE FEET OF GLA (1) DECEMBER 31, 2002 (2) ANCHORS EXPIRATION EXPIRATION
- --------------------- ---------------------- --------------------- ------- ---------- ----------
PENNSYLVANIA
Capital City Mall Mall 239,205 98.0% Sears 2004
Harrisburg, PA Anchor 324,462 100.0% J.C. Penney 2010 Nov-05
Freestanding 46,158 100.0% Hecht's (8) 2093
------- ------
Total GLA 609,825 99.2%
Chambersburg Mall Mall 212,886 93.8% Bon Ton 2005
Chambersburg, PA Anchor 241,690 100.0% Value City 2007
------- ------
Total GLA 454,576 97.1% Sears 2010
J.C. Penney 2012 Mar-07
Logan Valley Mall Mall 329,369 93.0% Kaufmann's 2005 Jan-05
Altoona, PA Anchor 453,643 100.0% Sears 2016 Oct-06
------- ------
Total GLA 783,012 97.1% J.C. Penney 2017 Jan-07
Lycoming Mall Mall 314,845 86.0% J.C. Penney 2005
Williamsport, PA Anchor 453,936 100.0% Bon Ton 2006
Freestanding 25,857 99.9% Sears 2008
------- ------
Total GLA 794,638 94.5% Value City 2008
Kaufmann's (3) 2093
Nittany Mall Mall 210,511 88.2% Bon-Ton 2008 Sep-04
State College, PA Anchor 317,316 100.0% J.C. Penney 2005
Freestanding 3,568 100.0% Sears 2005
------- ------
Total GLA 531,395 95.3% Kaufmann's (3) 2097 Mar-09
North Hanover Mall Mall 132,328 89.3% J.C. Penney 2006
Hanover, PA Anchor 288,932 100.0% Sears 2004
Freestanding 28,836 49.3% Bon Ton 2006
------- ------
Total GLA 450,096 93.6% Black Rose
Antiques (5) -
Palmer Park Mall Mall 133,031 85.0% Bon-Ton 2014
Easton, PA Anchor 314,235 100.0% Boscov's 2018
Freestanding 684 100.0%
------- ------
Total GLA 447,950 95.5%
Schuylkill Mall Mall 275,512 64.5% Kmart 2005
Frackville, PA Anchor 407,906 85.7% Sears 2005 Oct-05
Freestanding 43,673 94.8% Vacant (18) -
------- ------
Total GLA 727,091 78.2% Bon-Ton (8) 2032
Black Diamond
Antiques (12) -
</Table>
(1), (2), (3), (5), (8), (12), (18) - See pages 13 and 14 for explanation.
10
<Page>
<Table>
<Caption>
% OF GLA LEASE OR OPERATING
LEASED AS OF EASEMENT COVENANT
PROPERTY/LOCATION (1) SQUARE FEET OF GLA (1) DECEMBER 31, 2002 (2) ANCHORS EXPIRATION EXPIRATION
- --------------------- ---------------------- --------------------- ------- ---------- ----------
PENNSYLVANIA (continued)
Shenango Valley Mall Mall 106,067 77.5% J.C. Penney 2004
Sharon, PA Anchor 385,276 100.0% Sears 2005
Freestanding 22,140 12.0% Kaufmann's 2006
------- ------
Total GLA 513,483 91.5%
South Mall Mall 76,328 98.1% Bon-Ton 2005
Allentown, PA Anchor 188,737 74.0% Stein Mart 2006 Oct-03
Freestanding 138,851 91.9% Vacant (18) -
------- ------
Total GLA 403,916 84.7%
Uniontown Mall Mall 229,517 78.6% Value City 2007
Uniontown, PA Anchor 420,937 100.0% Sears 2008
Freestanding 45,978 100.0% Roomful Express
------- ------
Total GLA 696,432 92.9% Furniture 2005
J.C. Penney 2005
Teletech 2005
Bon-Ton 2006
Viewmont Mall Mall 205,332 99.0% J.C. Penney 2005
Scranton, PA Anchor 532,058 100.0% Sears 2005
Freestanding 31,848 99.1% Kaufmann's (8) 2050
------- ------
Total GLA 769,238 99.7%
Washington Crown Center Mall 226,478 82.9% Ames (19) 2006
Washington, PA Anchor 439,569 100.0% Sears 2009
Freestanding 3,132 100.0% Bon-Ton 2010 Oct-09
------- ------
Total GLA 669,179 94.2% Hollywood
Theaters 2019
Kaufmann's (8) 2048 Oct-09
Anchor Pad Mall - 0.0% Bon-Ton (4) 2005
Bethlehem, PA Anchor 108,100 100.0%
Freestanding - 0.0%
------- ------
Total GLA 108,100 100.0%
West Manchester Mall Mall 296,782 75.8% Bon-Ton 2007
York, PA Anchor 407,366 100.0% Value City 2011
------- ------
Total GLA 704,148 89.8% Wal-Mart 2014
Hecht's (3) 2094
Wyoming Valley Mall Mall 236,135 93.0% Bon-Ton 2007
Wilkes-Barre, PA Anchor 585,676 100.0% J.C. Penney 2007
Freestanding 86,311 90.1% Kaufmann's (6) 2007
------- ------
Total GLA 908,122 97.2% Kaufmann's (6) 2007
Sears 2006
</Table>
(1), (2), (3), (4), (6), (8), (18), (19) - See Pages 13 and 14 for explanation.
11
<Page>
<Table>
<Caption>
% of GLA Lease or Operating
Leased as of Easement Covenant
Property/Location(1) Square Feet of GLA(1) December 31, 2002(2) Anchors Expiration Expiration
-------------------- --------------------- -------------------- ------- ---------- ----------
MARYLAND
Francis Scott Key Mall Mall 272,866 95.9% J.C. Penney(14) 2006
Frederick, MD Anchor 431,063 100.0% Sears 2008
Freestanding 2,417 100.0% Value City 2010
------- -----
Total GLA 706,346 98.4% Hecht's(8) 2043
Valley Mall Mall 254,162 98.7% J.C. Penney 2009 Oct-09
Hagerstown, MD Anchor 595,866 100.0% Bon Ton 2014 Nov-09
Freestanding 48,762 99.9% R/C Theaters 2020
------- -----
Total GLA 898,790 99.6% Sears (8)(13) 2044 Oct-09
Hecht's(8) 2049 Oct-09
NEW JERSEY
Phillipsburg Mall Mall 230,292 78.9% Sears 2009
Phillipsburg, NJ Anchor 306,541 73.0% Bon-Ton 2010 Sep-04
Freestanding 15,065 76.8% J.C. Penney 2010
------- -----
Total GLA 551,898 75.6% Vacant(17) -
NORTH CAROLINA
Jacksonville Mall Mall 172,127 99.8% J.C. Penney 2005
Jacksonville, NC Anchor 242,121 100.0% Belk Rhodes 2011
------- -----
Total GLA 414,248 99.9% Sears 2011
VIRGINIA
New River Valley Mall Mall 187,849 84.6% Belk Rhodes 2008
Christiansburg, VA Anchor 240,753 100.0% J.C. Penney 2008
------- -----
Total GLA 428,602 93.3% Sears 2008 Aug-03
Peebles 2009 May-03
Patrick Henry Mall Mall 234,651 97.7% Dillard's(7) 2008 Mar-08
Newport News, VA Anchor 407,644 100.0% Dillard's(7) 2013 Nov-08
------- -----
Total GLA 642,295 99.2% J.C. Penney 2015 Oct-10
Hecht's(8) 2048 Nov-08
GEORGIA
Mt. Berry Square Mall 208,811 73.3% J.C. Penney 2006
Rome, GA Anchor 269,868 100.0% Belk Rhodes 2011 Feb-06
------- -----
Total GLA 478,679 88.3% Sears 2011
Proffitt's 2012 Jan-12
TENNESSEE
Bradley Square Mall 147,838 67.5% Sears 2005
Cleveland, TN Anchor 258,684 100.0% J.C. Penney 2006
------- -----
Total GLA 406,522 88.2% Proffitt's 2006
Kmart 2012
</Table>
(1), (2), (7), (8), (13), (14), (17) - See Pages 13 and 14 for explanation.
12
<Page>
<Table>
<Caption>
% of GLA Lease or Operating
Leased as of Easement Covenant
Property/Location(1) Square Feet of GLA(1) December 31, 2002(2) Anchors Expiration Expiration
-------------------- --------------------- -------------------- ------- ---------- ----------
TENNESSEE (continued)
Oak Ridge Mall (20) Mall 226,869 26.7% Sears 2005
Oak Ridge, TN Anchor 467,460 88.6% J.C. Penney 2007
Freestanding 197,146 73.5% Proffitt's 2013
---------- -----
Total GLA 891,475 69.5% Wal-Mart(8)
(10) 2099
Vacant(11) -
WEST VIRGINIA
Crossroads Mall Mall 191,960 88.7% J.C. Penney 2006
Beckley, WV Anchor 256,248 100.0% Sears 2006
---------- -----
Total GLA 448,208 95.2% Belk Rhodes 2008 Nov-08
Martinsburg Mall Mall 165,182 78.6% J.C. Penney 2011
Martinsburg, WV Anchor 391,218 100.0% Sears 2011
---------- -----
Total GLA 556,400 93.7% Wal-Mart 2011
Bon-Ton 2012
ALABAMA
Wiregrass Commons Mall 229,767 77.9% Dillard's(8) 2037
Mall (16) Anchor 403,163 100.0% J.C. Penney(8) 2014
---------- -----
Dothan, AL Total GLA 632,930 92.0% McRaes(8) 2037
Parisian, Inc.(8) 2037
WISCONSIN
Valley View Mall(15) Mall 197,565 92.2% Dayton's(8) 2005
La Crosse, WI Anchor 350,953 100.0% Herberger's(8) 2005
Freestanding 37,266 95.3% J.C. Penney 2005
---------- -----
Total GLA 585,784 97.1% Sears(8) 2005
TOTALS FOR ALL MALLS Mall Stores 5,944,265 87.1%
AND THE ANCHOR PAD Anchor 10,491,421(9) 97.7%
Freestanding
Stores 777,692 85.3%
---------- -----
Total GLA 17,213,378 93.5%
========== =====
</Table>
(1) The location stated is the major city or town nearest to the
property, and is not necessarily the local jurisdiction in which the
property is located. GLA includes the total square footage of the
Anchors, Mall Stores and Freestanding Stores.
(2) Occupancy includes both tenants in occupancy and tenants that have
signed leases but have not yet taken occupancy as of December 31, 2002.
(3) Tenant currently holds a long-term ground lease with an option to
purchase the related store and parking area at a nominal purchase
price. These locations are deemed owned by their Anchor occupants as
they only pay a nominal rent.
(4) Refer to description of Anchor Pad in Other Properties.
(5) Black Rose Antiques is the name given to a former anchor space now
substantially leased on a month-to-month basis to approximately 160
antique dealers. This space is considered to be occupied in the
accompanying occupancy statistics.
13
<Page>
(6) Kaufmann's (a division of May Department Stores) operates two stores
at Wyoming Valley Mall; one for women's and children's apparel and
home furnishings and one for men's apparel.
(7) Dillards operates two stores: one for women's apparel and one for men's
and children's apparel.
(8) Tenant owns its store and the land under the store, and in some cases
adjacent parking, and operates under a reciprocal easement agreement.
The expiration date reflects the expiration of the easement agreement.
(9) Includes 2,296,000 square feet of space related to 20 stores that are
owned or deemed owned under long-term lease purchase agreements by
their Anchor occupants, which are noted under (3), (4) and (8) above.
(10) In July 2000 Wal-Mart purchased its store and 15.4 acres of land.
(11) In August 1999 Proffitt's lease on its 50,000 square foot store
expired, and the store was vacated. This store remained vacant at
December 31, 2002. Proffitt's continues to operate its other store in
this mall.
(12) Black Diamond Antiques is the name given to the former anchor space
now substantially leased on a month-to-month basis to approximately
82 antique dealers. This space is considered to be occupied in the
accompanying occupancy statistics.
(13) In April 2001, Sears acquired the land and building formerly owned by
Montgomery Wards, and Sears assumed the existing Reciprocal
Construction Operation and Reciprocal Easement Agreement.
(14) An amendment agreement allowing J.C. Penney to expand and renovate
their premises to extend the term of their lease to September 30,
2006 and to add an additional seven five-year option term has been
fully executed.
(15) On September 23, 2002, the Company completed the acquisition of Valley
View Mall, an enclosed regional mall located in La Crosse, Wisconsin,
from the Equitable Life Assurance Society of the United States.
(16) On November 19, 2002, the Company completed the acquisition of the
Wiregrass Commons Mall, an enclosed regional shopping mall located in
Dothan, Alabama, from Metropolitan Life Insurance Company.
(17) Kohls has signed a non-binding Letter of Intent to open a store in
2004 in the former 83,000 square foot Kmart location. Kmart, which
had declared Chapter XI bankruptcy under the United States Bankruptcy
Code, formally rejected the Phillipsburg lease in August 2002.
(18) Phar-Mor had formerly occupied the 58,000 square foot store at
Schuylkill Mall and the 49,000 square foot store at South Mall.
Phar-Mor, which had declared Chapter XI bankruptcy under the United
States Bankruptcy Code, formally rejected the Schuylkill lease on
August 31, 2002 and the South Mall lease on September 30, 2002.
Permanent replacement tenants are being sought.
(19) Ames Department Stores, which had been operating in Chapter XI of the
United States Bankruptcy Code since August 2001, closed this 84,000
square foot store in October 2002. At December 31, 2002, this 84,000
square foot store was reported as occupied because the lease was not
rejected by the bankruptcy court as of that date. The lease was
officially rejected by the bankruptcy court on January 27, 2003. In
March 2003, the Company signed a lease with Gander Mountain to occupy
this space.
(20) As described in Note 18 to the Consolidated Financial Statements, Oak
Ridge Mall has been approved for sale to Crown Investments.
(b) OTHER PROPERTIES
The Company also owns Pasquerilla Plaza and has an option to
purchase the Anchor Pad, as described below, and also owns a total of
approximately 67 acres of developable land in the vicinity of certain of the
Malls which is available for development, lease or sale to tenants or others.
Pasquerilla Plaza is a five-story building located in Johnstown,
Pennsylvania, built in 1989, and contains 102,500 square feet of leasable
area. The Company, as owner of Pasquerilla Plaza, uses approximately 74,000
square feet as its headquarters space. Approximately 14,600 square feet is
leased to Crown Associates and affiliates for annual base rent of
approximately $279,000. Approximately 13,700 square feet is currently leased
to third parties. Net rental revenue from Pasquerilla Plaza from tenants
other than Crown Associates and affiliates was $243,000 for the year ended
December 31, 2002.
The Anchor Pad is located at Westgate Mall in Bethlehem,
Pennsylvania. Westgate Mall is owned by a third party unaffiliated with the
Company, and the Anchor Pad had been ground leased to the Company but is
subject to an option to purchase between such third party and the Company.
The site encompasses 10 acres with approximately 108,100 gross square foot
Anchor store and a detached freestanding building of 5,000 square feet.
Bon-Ton subleases the Anchor store and the freestanding building from the
Company. The ground lease expired on November 22, 2000; the Company attempted
to exercise its option to purchase the land fee interest for $500,000. In
2000, the Company commenced an action in the Court of Common Pleas of Lehigh
County, PA to compel the
14
<Page>
ground lessor to complete the purchase. An appeal taken by the ground lessor
to a pre-trial order entered by the lower court in favor of the Company has
been denied by both the Pennsylvania Superior and Supreme Courts. The case is
currently pending before the Lehigh County Court. Rental revenue from the
Anchor sublease was $307,003 in 2002.
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. The contract began in December 2001 and represented the
Company's only mall management contract for a third party.
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 can exercise the
right to purchase the warrant shares only if the Company is retained as the
property manager of the Laurel Mall 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 holder must exercise the right to purchase the
warrant shares within 30 days of such termination.
(c) PROPERTY INSURANCE
The Company's management believes that all Properties
described herein under Items 2(a) and 2(b) which are owned by the Company, in
whole or in part, are adequately covered by insurance. Refer to Note 5 to the
Consolidated Financial Statements for additional information concerning
insurance policy requirements under certain of the Company's loan agreements.
ITEM 3. LEGAL PROCEEDINGS
-----------------
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
No matters were submitted to a vote of security holders of the
Company during the fiscal quarter ended December 31, 2002.
EXECUTIVE OFFICERS OF THE COMPANY
- ---------------------------------
The following table sets forth certain information with
respect to the executive officers of the Company as of February 28, 2003.
<Table>
<Caption>
NAME AGE OFFICE WITH THE COMPANY
---- --- -----------------------
Mark E. Pasquerilla 43 Chairman of the Board of Trustees, Chief Executive Officer, and President
Nicholas O. Antonazzo 65 Executive Vice President, Development
Thomas Stephenson 61 Executive Vice President, Asset Management
Terry L. Stevens 54 Trustee, Executive Vice President, Chief Financial Officer
Donato B. Zucco 62 Trustee, Senior Vice President, Chief Administrative Officer
Robert J. Griffith 56 Senior Vice President, Real Estate Leasing
</Table>
Mark E. Pasquerilla, Chairman, Chief Executive Officer and
President, directs all operational activities, establishes corporate policy
and provides overall strategic direction for the Company. Mr. Pasquerilla was
named President in 1990, Vice Chairman in 1998 and Chairman, CEO and President
in 1999. Mr. Pasquerilla was a member of the Governor of Pennsylvania's
Economic Development Partnership Council from 1987 to 1995, and is a
15
<Page>
former Fullbright-Hayes Scholar. Mr. Pasquerilla is a member and Trustee of
the International Council of Shopping Centers (ICSC), and is a member of the
National Association of Real Estate Investment Trusts (NAREIT). In addition,
Mr. Pasquerilla is a member of the Board of Directors and the Executive
Committee of AmeriServ Financial, Inc., and a member of the Board of Directors
of Concurrent Technologies Corporation.
Nicholas O. Antonazzo became Executive Vice President,
Development, of the Company upon its formation. Mr. Antonazzo directs the
expansion and redevelopment of regional malls and anchor department store
relations. He has also served as Executive Vice President of Development of
Crown Associates from 1987 to August 16, 1993. Mr. Antonazzo is a former state
director for the International Council of Shopping Centers and is admitted to
practice law before the Pennsylvania Supreme and Superior Courts.
Thomas Stephenson became Executive Vice President, Asset
Management, upon joining the Company in April 1994. Mr. Stephenson is
responsible for directing the operations of the Company's regional shopping
mall portfolio. He served as Senior Vice President of Operations for The Hahn
Company (a shopping center developer and manager) from 1987 to 1994 and as
Vice President of Operations from 1983 to 1987. Previously, he was with Trizec
Corporation, Ltd. (a shopping center developer and manager) from 1971 to 1983
as Vice President of Operations. Mr. Stephenson is a CPA.
Terry L. Stevens is Trustee, Executive Vice President and
Chief Financial Officer of the Company. He is responsible for all finance and
treasury functions including debt and equity financing, property acquisitions
and dispositions, all accounting, reporting, and MIS functions, and is also
actively involved in investor relations. Mr. Stevens joined the Company in May
1994 as Vice President and Chief Accounting Officer, and he was promoted to
Senior Vice President in February 1995, to CFO in September 1998, and was named
Trustee and Executive Vice President in May 1999. Prior to joining the Company
Mr. Stevens was Director of Financial Systems at AlliedSignal, Inc., a large
multi-national manufacturer, from 1990 to 1994. He also spent 18 years with
Price Waterhouse, an international accounting firm, including seven years as an
audit partner. Mr. Stevens is a CPA.
Donato B. Zucco, Ph.D., is Trustee, Senior Vice President
and Chief Administrative Officer of the Company. He is responsible for a wide
variety of administrative activities that support the Company's business
units, which include Facilities Planning, Human Resources, Corporate
Communications, Legal and Risk Management. Dr. Zucco joined the Company in
January 1991 as Senior Vice President and Chief Administrative Officer and was
named Trustee in October 1999. He also serves as a member of the Board of
Directors of First National Bank of Pennsylvania. Dr. Zucco presides as the
Mayor of the City of Johnstown.
Robert J. Griffith became Senior Vice President, Real Estate
Leasing in 1995. Mr. Griffith is responsible for all aspects of the Company's
mall shop leasing program. He has over twenty-five years of experience in the
leasing field. Mr. Griffith is an active member of the International Council
of Shopping Centers and is licensed by the Real Estate Commission of
Pennsylvania.
The executive officers are elected annually by the Board of
Trustees at an organization meeting which is held immediately after each Annual
Meeting of Shareholders. The executive officers of the Company serve in the
identical offices in each of the Partnerships.
16
<Page>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES OF BENEFICIAL INTEREST
------------------------------------------------------------
AND RELATED SHAREHOLDER MATTERS
-------------------------------
The Company's common shares are listed on the New York Stock
Exchange (symbol: CWN). As of February 28, 2003, there were 32,052,571 common
shares issued and outstanding, held by approximately 2,700 holders of record.
The high and low sales price of the common shares and dividends paid per common
share during each quarter in 2002 and 2001 were as follows:
<Table>
<Caption>
2002 2001
----------------------------------- ---------------------------------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
---- --- -------- ---- --- --------
Quarter ended March 31 $9.80 $7.65 $0.2100 $6.95 $5.25 $0.2075
Quarter ended June 30 $10.40 $8.61 $0.2125 $8.72 $6.61 $0.2100
Quarter ended September 30 $9.85 $6.65 $0.2125 $8.70 $6.60 $0.2100
Quarter ended December 31 $9.60 $7.95 $0.2125 $8.10 $6.81 $0.2100
</Table>
The Company pays regular quarterly dividends on its common
shares in amounts determined in the discretion of its Board of Trustees. In
determining the amount of the dividend, the Board of Trustees considers the
requirements under the Code that the Company must pay dividends equal to at
least 90% of its taxable income before deductions of dividends paid and
excluding net capital gains in order to maintain its status as a REIT for
federal income tax purposes, the Company's cash flow from operations, capital
expenditures, the Company's financial condition and such other factors that the
Board of Trustees may deem relevant. Payments of dividends on the Company's
common shares are subject to any preferential rights which might be provided for
under the rights of any of its outstanding preferred shares.
The Company has not established a minimum dividend payment
level. There can be no assurance that the Company will continue to pay dividends
on its common shares in the future, or that its future dividend rate will equal
or exceed our historical dividend rate. No assurances can be given regarding the
portion of future common dividends which will constitute return of capital for
federal income tax purposes.
The Company has also adopted a dividend reinvestment and share
purchase plan to allow shareholders to acquire additional common shares by
automatically reinvesting cash dividends. Common shares are acquired at a price
equal to the prevailing market price of our common shares, without payment of
brokerage commission or service charge. The plan allows participating
shareholders, at their election, to make additional cash contributions and
purchase additional common shares on the same terms in amounts of not less than
$100 and not more than $5,000 per calendar quarter.
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------
The number of common shares of the Company that may be issued
upon the exercise of outstanding options, warrants and rights under the
Company's equity compensation plans at December 31, 2002, the weighted average
exercise price of such options, warrants and rights, and the number of shares
remaining available for future issuance under such plans are shown in the
following table:
<Table>
<Caption>
(a) (b) (c)
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
ISSUABLE UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
------------- ------------------- ------------------- ------------------------
Equity compensation plans
approved by security holders 1,455,700 $ 7.155 864,800
Equity compensation plans not
approved by security holders 0 0 0
--------------- --------- ------------
17
<Page>
Total 1,455,700 $ 7.155 864,800
========= ======= =======
</Table>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following table sets forth selected consolidated financial
data for the Company, its wholly-owned subsidiaries, and its majority-owned
subsidiary (the Operating Partnership) and its subsidiaries. The selected
financial data should be read in conjunction with the Consolidated Financial
Statements and Notes thereto in Item 8, and Management's Discussion and Analysis
of Financial Condition and Results of Operations ("MD & A") in Item 7 in this
Annual Report on Form 10-K.
The Company's net income and statement of cash flows have been
prepared in accordance with GAAP. The Company has also included measures of its
financial performance and economic profitability based on its "Funds from
Operations" or "FFO" and "Earnings Before Interest, Taxes, Depreciation, and
Amortization" or "EBITDA", each of which is a non-GAAP measure. The Company
believes that FFO and EBITDA provide useful financial information to investors.
FFO is an important and widely used financial measure of the
operating performance of REITs, which is not specifically defined by GAAP.
However, FFO provides a relevant basis for comparison among REITs.
NAREIT defines "Funds from Operations" as net income (or loss)
(computed in accordance with GAAP), excluding gains (or losses) from
extraordinary items and sales of properties, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. In calculating its Funds from Operations, the
Company excludes gains or losses on sales from previously depreciated properties
and includes gains (or losses) from the sale of peripheral land and earned cash
flow support under the Support Agreement. In 2002, NAREIT clarified that FFO
related to assets held for sale, sold or otherwise transferred and included in
results of discontinued operations should continue to be included in
consolidated FFO. The Company adopted this clarification in 2002 with its
accounting treatment for Carlisle Plaza Mall as discontinued operations. A
reconciliation of net income determined in conformity with GAAP to its Funds
from Operations is included in the Selected Financial Data table in this Item 6.
Management believes that Funds from Operations is an
appropriate and valuable measure of the Company's operating performance because
real estate generally appreciates over time or maintains a residual value to a
much greater extent than personal property and, accordingly, reductions for real
estate depreciation and amortization charges are not meaningful in evaluating
the operating results of the Properties.
EBITDA is a second important and widely used financial measure
of assessing the performance of real estate operations. The Company defines
EBITDA as revenues and gain on sales of outparcel land, less mall operating
costs and corporate general and administrative expenses, but before interest,
and all depreciation and amortization. A reconciliation of net income determined
in conformity with GAAP to EBITDA is included in Item 7 - MD & A. Management
believes that EBITDA provides a meaningful measure of operating performance
because (i) it is industry practice to evaluate the performance of real estate
properties based on net operating income (or NOI), which is generally equivalent
to EBITDA except that EBITDA is reduced for corporate general and administrative
expenses; and (ii) both NOI and EBITDA are unaffected by the capital structure
of the property owner.
Funds from Operations and EBITDA (i) do not represent cash
flow from operations as defined by generally accepted accounting principles,
(ii) are not necessarily indicative of cash available to fund all cash flow
needs, (iii) should not be considered as an alternative to net income (loss)
determined in conformity with GAAP for purposes of evaluating the Company's
operating performance, and (iv) should not be considered as an alternative to
cash flows as a measure of liquidity.
Other data that management believes is important in
understanding trends in its business and properties are also included in the
following table.
18
<Page>
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------- -----------
(10) (10) (10) (10)
(in thousands, except per share data)
OPERATING DATA:
Total revenues $ 189,424 $ 182,880 $ 179,210 $ 167,168 $ 155,314
Operating costs:
Property operating costs (68,651) (64,979) (63,952) (60,212) (58,374)
Depreciation and amortization (45,555) (48,452) (47,348) (43,994) (41,390)
General and administrative expenses (6,850) (5,426) (5,133) (4,717) (5,027)
Restructuring costs - - (369) (2,251) -
------------ ------------ ------------ ------------- ------------
Operating income before interest 68,368 64,023 62,408 55,994 50,523
Interest (51,640) (54,065) (56,065) (50,024) (44,268)
Gain on sale of property 369 437 700 1,761 1,210
Minority interest in Operating Partnership (5,351) (4,999) (664) 1,734 8,363
------------ ------------ ------------ ------------- ------------
Income from continuing operations before
extraordinary items and discontinued operations 11,746 5,396 6,379 9,465 15,828
Cumulative effect of change in accounting method - - - - (1,703)
Extraordinary loss on early extinguishment of debt (4,314) - (243) - (22,512)
Gain (loss) from discontinued operations 283 (190) (157) (190) (252)
------------ ------------ ------------ ------------- ------------
Net income (loss) 7,715 5,206 5,979 9,275 (8,639)
Dividends on preferred shares (13,613) (13,613) (13,695) (13,750) (13,750)
------------ ------------ ------------ ------------- ------------
Net (loss) applicable to common shares $ (5,898) $ (8,407) $ (7,716) $ (4,475) $ (22,389)
============ ============ ============ ============= ============
Per share data (after minority interest): (1)
Basic and diluted EPS:
Loss from continuing operations before
extraordinary items and discontinued operations $ (0.06) $ (0.31) $ (0.28)$ (0.16)$ (0.17)
Cumulative effect of change in accounting method - - - - (0.05)
Extraordinary items (0.15) - (0.01) - (0.62)
Gain (loss) from discontinued operations 0.01 (0.01) - (0.01) (0.01)
------------ ------------ ------------ ------------- ------------
Net (loss) $ (0.20) $ (0.32) $ (0.29) $ (0.17) $ (0.85)
============ ============ ============ ============= ============
OTHER DATA:
EBITDA (2 & 4) $ 117,836 $ 116,731 $ 117,080 $ 108,288 $ 98,499
============ ============ ============ ============= ============
Funds from Operations (FFO): (3, 4, & 5)
Net income (loss) $ 7,715 $ 5,206 $ 5,979 $ 9,275 $ (8,639)
Adjustments:
Minority interest in Operating Partnership 5,351 4,999 664 (1,734) (8,363)
Less gain (loss) on asset sales other than outparcels (425) 224 (1,290)
Depreciation and amortization 45,555 48,452 47,348 43,994 41,390
Depreciation in JV and other line items 1,804 1,734 1,673 1,619 1,280
Operating covenant amortization - - 2,623 2,630 2,630
Cash flow support earned (11) 3,125 3,067 2,902 2,973 3,784
Cumulative effect of change in accounting method - - - - 1,703
Depreciation from discontinued operations 297 439 406 312 322
Extraordinary loss on early extinguishment of debt 4,314 - 243 - 22,512
------------ ------------ ------------ ------------- ------------
Funds from Operations before allocations to
preferred shares and minority interest 67,736 63,897 62,062 57,779 56,619
Less:
Amounts allocable to preferred shares 13,613 13,613 13,695 13,750 13,750
Amounts allocable to minority interest 13,485 13,722 13,316 12,121 11,653
------------ ------------ ------------ ------------- ------------
Funds from Operations applicable to
common shares $ 40,638 $ 36,562 $ 35,051 $ 31,908 $ 31,216
Weighted average common shares outstanding -
basic and diluted 29,480 26,208 26,208 26,208 26,393
============ ============ ============ ============= ============
Weighted average common shares and Operating
Partnership units outstanding - basic and diluted 39,436 36,164 36,164 36,164 36,317
============ ============ ============ ============= ============
CASH FLOWS:
Net cash provided by operating activities $ 67,549 $ 68,392 $ 58,286 $ 56,939 $ 56,984
Net cash (used in) investing activities (99,075) (22,482) (30,625) (49,683) (104,725)
Net cash (used in) provided by financing activities 28,649 (43,524) (30,219) (3,597) 51,781
</Table>
(1), (2), (3), (4), (5), (10), (11) - See page 20 for explanation.
19
<Page>
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
<Table>
<Caption>
DECEMBER 31,
-------------------------------------------------------------------
Balance Sheet Data: 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ -----------
(10) (10) (10) (10)
Income-producing properties (before accumulated
depreciation and amortization) $ 1,317,267 $ 1,216,658 $ 1,203,833 $ 1,173,212 $ 1,123,672
Total assets 879,432 826,780 855,501 875,208 869,288
Total debt and liabilities 796,087 761,657 758,929 746,630 708,047
Minority interest (debit) credit (3,265) (3,303) (3,050) 2,727 11,724
Shareholders' equity 83,345 65,123 96,572 125,851 149,517
PORTFOLIO PROPERTY DATA (6):
Number of retail properties at end of year 28 26 26 27 27
Total GLA at end of year (000 sq. ft.) (7) 17,213 16,008 15,923 16,036 15,606
Mall shop GLA at end of year (000 sq. ft.) 5,944 5,529 5,506 5,637 5,592
Comparable store mall shop tenant sales per square foot (8) $ 270 $ 270 $ 266 $ 260 $ 244
Mall shop occupancy percentage at year end (9) 87% 88% 87% 85% 82%
</Table>
- --------------------------------------------------------------------------------
(1) All per share data are based on the weighted average common shares
outstanding shown for the respective periods.
(2) EBITDA represents revenues and gain on sales of outparcel land, less
mall operating costs and corporate general and administrative expenses,
but before interest, and all depreciation and amortization. A
reconciliation of EBITDA to net income is shown in Item 7 (c) herein.
As a REIT, the Company is generally not subject to federal or state
income taxes.
(3) Funds from Operations is defined on page 18.
(4) EBITDA and Funds from Operations (i) do not represent cash flow from
operations as defined by generally accepted accounting principles,
(ii) are not necessarily indicative of cash available to fund all cash
flow needs, (iii) should not be considered as an alternative to net
income (loss) in conformity with GAAP for purposes of evaluating the
Company's operating performance, and (iv) should not be considered as
an alternative to cash flows as a measure of liquidity.
(5) The Company adopted NAREIT's 2002 changes in its definition of FFO
and, accordingly, results from discontinued operations related to
Carlisle Plaza Mall are included in FFO on the preceding page.
(6) The above data reflects the impact of the Valley Mall acquisition
completed in November 1997, the acquisition of Crossroads and
Jacksonville Malls and Greater Lewistown Plaza in May 1998, the sale
of Middletown Mall in July 1998, the sale of Greater Lewistown Plaza
in June 2000, the acquisitions of Valley View Mall and Wiregrass
Commons Mall in September 2002 and November 2002, respectively, and
the sale of Carlisle Plaza Mall in October 2002. See Notes 13 and 14
to the Consolidated Financial Statements. This data also includes
Palmer Park Mall, an enclosed mall managed by a third party owner.
(7) Total GLA includes anchor stores (company-owned and tenant-owned), mall
shops, and freestanding space.
(8) Total sales for all mall shop tenants, excluding freestanding space,
movie theaters, and supermarkets, amounted to $1,061 million, $1,040
million, $1,036 million, $999 million, and $898 million for 2002 to
1998, respectively. Sales reported for 2002 to 1998 for all owned
anchor stores were $1,199 million, $ 1,227 million, $1,224 million,
$1,276 million, and $1,237 million, respectively. The Company owns 92
of 112 anchor store premises as of December 31, 2002.
(9) Includes both tenants in occupancy and tenants that have signed leases but
have not yet taken occupancy as of the dates indicated.
(10) Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
(11) The cash flow support agreement is with Crown Investments, as discussed
in more detail in Item 1 "Business" and Notes 8 and 18 to the
Consolidated Financial Statements.
20
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
the Selected Financial Data in Item 6 and the Consolidated Financial
Statements and Notes thereto in Item 8 in this Annual Report on Form 10-K.
The Note references in this item can be found on pages 43 to 63. Historical
results set forth in the Selected Financial Data and the Consolidated
Financial Statements of Crown American Realty Trust (the "Company") are not
necessarily indicative of future financial position and results of operations
of the Company.
(a) GENERAL BACKGROUND
The Company is a fully-integrated, self-administered and
self-managed REIT primarily engaged in the ownership, development and
management of enclosed shopping malls. The Company's revenues are primarily
derived from real estate leases with national, regional and local department
stores and other retail companies. The Company also performs a limited amount
of property management and leasing services for several retail properties
owned by third parties.
As of December 31, 2002, the Company owned the following
properties:
o 27 wholly-owned enclosed shopping malls (together with
adjoining outparcels and approximately 67 acres of
undeveloped land) located in Pennsylvania, New Jersey,
Maryland, Tennessee, North Carolina, West Virginia,
Virginia, Georgia, Wisconsin and Alabama;
o a 50% general partnership interest in Palmer Park Mall
Venture, which owns Palmer Park Mall located in
Easton, Pennsylvania;
o Pasquerilla Plaza, an office building in Johnstown,
Pennsylvania, which serves as the headquarters of the
Company and is partially leased to other parties; and
o a parcel of land under a purchase option improved with a
building leased to a department store chain ("Anchor
Pad").
The Company sold Carlisle Plaza Mall to a third party on
October 29, 2002. Accordingly, the Company has reported the operations of
Carlisle Plaza Mall as "discontinued operations - held for sale" status in
the accompanying financial statements and statistics presented herein, with
all prior periods reclassified. (See Note 14 to the Consolidated Financial
Statements.) As described in Note 18 to the Consolidated Financial
Statements, Oak Ridge Mall has been approved for sale to Crown Investments.
(b) FUNDS FROM OPERATIONS
A reconciliation of net income (loss) determined in conformity
with GAAP to Funds from Operations is included in the table of Selected
Financial Data in Item 6 for each of the five years ended December 31, 2002.
YEAR ENDED DECEMBER 31, 2002 VERSUS YEAR ENDED DECEMBER 31,
2001
Total FFO for 2002 (before allocations to minority interest
and to preferred shareholders) was $67.7 million compared to $63.9 million in
2001, an increase of $3.8 million, or 6%. FFO allocable to common shares
increased from $36.6 million in 2001 to $40.6 million in 2002, an improvement
of 11%. Average common shares outstanding increased from 26,208,000 in 2001
to 29,480,000 in 2002 due to the Company's common share offering in June 2002.
The increase in FFO of $3.8 million before allocations to
minority interest and to preferred shareholders was due primarily to the
following: (i) $1.3 million contributed by the two acquisition properties,
net of interest expense; (ii) $2.4 million increase in mall shops and anchor
base rents, consisting of a $2.7 million increase in mall shop base rents due
primarily to higher average rental rates, offset by a $0.3 million decrease
in anchor base rents due to a Kmart closing and two Phar-Mor closings; (iii)
$1.1 million in higher temporary, promotional, and sponsorship income due to
higher rental rates and to the efficient utilization of vacant space
throughout the portfolio; (iv) $3.2 million in lower interest expense due to
lower LIBOR rates on our variable-rate debt and to the pay down of
approximately $47.2 million of line of credit debt from the proceeds of the
Company's common share offering in
21
<Page>
June 2002 (approximately $17.5 million of this pay down was subsequently
re-borrowed to help fund the two acquired properties); and (v) $0.2 million
in higher straight-line rents, miscellaneous mall revenues, and cash flow
support payments. These positive variances were partially offset by (vi) $0.4
million of lower percentage rents from anchors and mall shops due to lower
sales from certain anchor tenants and certain national mall stores; (vii)
$0.3 million in higher property operating costs, net of tenant
reimbursements; (viii) $1.0 million in lower lease buyout income due to
higher buyouts which occurred in 2001; (ix) $0.4 million in lower net
construction income due to a construction contract with an anchor tenant, the
final portion of which was recognized as income in 2001; and (x) $2.1 million
of higher general and administrative costs, of which $0.6 million was due to
lower capitalizations to leasing and construction activities, $0.8 million
was due to higher gross spending, and $0.7 million was due to expensing of
costs associated with the Company's on-going evaluation of strategic
alternatives which is continuing in 2003. The $0.8 million increase in gross
general and administrative costs was primarily the result of higher
compensation costs, directors and officers insurance, trustee fees, and
outside legal fees.
YEAR ENDED DECEMBER 31, 2001 VERSUS YEAR ENDED DECEMBER 31,
2000
The total FFO for 2001 (before allocations to minority
interest and to preferred shareholders) was $63.9 million compared to $62.1
million in 2000, a 3.0% increase. FFO allocable to common shares increased from
$35.1 million in 2000 to $36.6 million in 2001, an improvement of $1.5 million.
Average common shares outstanding during both 2001 and 2000 were approximately
26,208,000. The number of properties were the same for both years, except for
Greater Lewistown Shopping Plaza, a non-enclosed shopping center, which was sold
in June 2000.
The increase in FFO of $1.8 million before allocations to
minority interest and to preferred dividends versus 2000 was due primarily to
the following: (i) a net $1.0 million increase in mall shop and anchor base and
percentage rents, consisting of a $2.2 million increase in mall shop base rents
due to a slightly higher occupancy and higher average rents; a $0.2 million
decrease in anchor base rents; and a $1.0 million decrease in mall shop and
anchor percentage rents due to lower sales volume; (ii) $1.2 million in higher
lease buyout income due to lease termination fees received from tenants; (iii)
$0.7 million in higher straight-line rents; (iv) $2.0 million in lower interest
expense, primarily as a result of lower LIBOR rates on floating-rate debt; (v)
$0.3 million in higher temporary and seasonal leasing income; (vi) $0.2 million
in higher cash flow support payments; and (vii) $0.1 million in higher net
construction income and miscellaneous mall income. These positive variances were
partially offset by (viii) $2.8 million in higher property operating costs, net
of tenant reimbursements comprised of $2.2 million in higher property operating
costs including $0.3 million of accrued environmental remediation costs, and a
slightly lower rate of cost recovery from tenants; (ix) $0.5 million in lower
gain on the sale of outparcel land; (x) $0.3 million in lower fees on the sale
of non-REIT assets; and (xi) $0.1 million in higher general and administrative
expenses, offset by $0.4 million in restructuring costs that occurred in 2000.
22
<Page>
(c) EBITDA - EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND
AMORTIZATION
The following is a reconciliation of EBITDA to net income for
the years ended December 31, 2002, 2001, and 2000 ($000):
<Table>
<Caption>
Year Ended December 31,
-----------------------------------------
2002 2001 2000
---- ---- ----
Net income $ 7,715 $ 5,206 $ 5,979
Minority interest in Operating Partnership 5,351 4,999 664
------------ ------------ ------------
Income before minority interest 13,066 10,205 6,643
(Gain) loss on sale of depreciable operating assets (425) - 224
Interest 51,640 54,065 56,065
Depreciation and amortization 45,555 48,452 47,348
Restructuring costs - - 369
Extraordinary items 4,314 - 243
Depreciation from discontinued operations 297 439 406
Interest from discontinued operations 679 949 997
Operating covenant amortization included
as a reduction of minimum rent - - 2,623
Depreciation in G & A, in recoverable costs 1,491 1,424 1,318
Interest on 50% joint venture 660 655 329
Depreciation on 50% joint venture 559 542 515
------------ ------------ -------------
Total EBITDA, as reported $117,836 $116,731 $117,080
============ ============ =============
</Table>
YEAR ENDED DECEMBER 31, 2002 VERSUS YEAR ENDED DECEMBER 31,
2001
Total EBITDA for the year ended December 31, 2002 was $117.8
million, an increase of $1.1 million, or 1%, over that of 2001. This increase
was primarily attributable to higher mall shop base rents, higher temporary and
seasonal revenues, and to the contribution from the two newly acquired
properties.
YEAR ENDED DECEMBER 31, 2001 VERSUS YEAR ENDED DECEMBER 31,
2000
Total EBITDA for the year ended December 31, 2001 was $116.7
million, a slight decrease from 2000's reported EBITDA of $117.1 million. This
decrease was primarily the result of higher property operating costs, net of
recoveries, and lower gain on outparcel sales, offset by higher mall shop base
rents, higher lease buyout income, higher temporary and seasonal rents, and
higher straight-line rents.
(d) PROPERTY OPERATING RESULTS AND TRENDS
AGGREGATE TENANT SALES VOLUME
Over the long term, the level of anchor and mall shop tenant
sales is the single most important determinant of revenues of the Company as
anchor and mall shop tenants provide over 90% of total revenues and because
tenant sales determine the amount of rent, percentage rent and recoverable
expenses (together, total occupancy costs) that tenants can afford to pay.
However, levels of tenant sales are considerably more volatile in the short run
than total occupancy costs.
Total reported sales for all tenants that reported sales for
the applicable years are shown below ($ in millions):
<Table>
<Caption>
2002 2001 2000
---- ---- ----
Anchors (owned locations) $ 1,199 $ 1,227 $ 1,224
Mall shop tenants, excluding
Freestanding, theater, and
Supermarkets 1,061 1,040 1,036
23
<Page>
</Table>
The above data excludes sales from all seasonal and temporary
tenants who generally do not report their sales to the Company. The Company
owned 92 of 112 anchor store locations at December 31, 2002.
In a period of increasing sales, rents on new leases will tend
to rise as tenants' expectations of future growth become more optimistic. In
periods of declining sales, rents on new leases tend to grow more slowly.
However, revenues generally increase as older leases roll over or are terminated
early and replaced with new leases negotiated at current rental rates that are
usually higher than the average rates for existing leases.
Average base rents per square foot for mall shop tenants at
quarter end for the last three years are shown in the following table. The
increase in average base rent during these three years results primarily from
renewing existing leases at higher base rents, from leasing vacant space at
higher base rents, and from elimination of lower paying tenants that closed
during these periods.
<Table>
<Caption>
2002 2001 2000
---- ---- ----
March 31 $ 20.37 $ 19.73 $ 19.01
June 30 20.46 19.77 19.19
September 30 20.74 19.93 19.44
December 31 20.77 19.96 19.60
</Table>
COMPARABLE MALL STORE SALES AND OCCUPANCY COST
Management believes that over long periods of time the ability
of tenants to pay occupancy costs and earn profits increases as sales per square
foot increase, whether through inflation or real growth in customer spending.
Occupancy costs are comprised of base fixed rents, percentage rents, and expense
recoveries - pro rata share of real estate taxes and common area maintenance and
other costs pertaining to the property. Because most mall shop tenants have
certain fixed expenses, the occupancy costs that they can afford to pay and
still be profitable is a higher percentage of sales at higher sales per square
foot. While such increased occupancy costs as a percentage of sales cannot grow
indefinitely for any one tenant, management believes that it is possible to
increase the percentage paid by all tenants as a group by aggressively working
to replace under-performing tenants with better performing ones.
Comparable mall store sales per square foot in each reporting
period is based on sales reported by mall store tenants (excludes anchors and
certain other large space users) that occupied space in both the current and
immediately preceding reporting period. Comparable mall store sales per square
foot for the last three years are set out below. Also shown below is the
percentage of mall shop tenants' occupancy costs as a percentage of their annual
sales. The tenants' occupancy cost percentages listed below is evidence that the
Company's malls remain affordable for tenants.
<Table>
<Caption>
2002 2001 2000
---- ---- ----
Comparable mall store sales per square foot $270.49 $269.61 $264.58
Occupancy cost percentage at period end 10.1% 10.1% 10.2%
</Table>
SEASONALITY AND OCCUPANCY
The enclosed shopping mall industry is seasonal in nature,
with anchor and mall shop tenant sales highest in the fourth quarter due to the
Christmas season, and with lesser, though still significant, sales fluctuations
associated with the Easter holiday and back-to-school events. While minimum
rents and expense recoveries are generally not subject to seasonal factors, many
leases are scheduled to expire in the first calendar quarter, and the majority
of new stores open in the second half of the year in anticipation of the
Christmas selling season. Accordingly, revenues and occupancy levels are
generally lowest in the first quarter and highest in the fourth quarter.
The aggregate mall shop occupancy percentage, defined as the
ratio of total mall shop space that is leased (including both tenants occupying
space and tenants that have signed leases but have not yet taken occupancy) to
the total mall shop space gross leasable area ("GLA") at quarter-end for the
last three years is set out below.
24
<Page>
<Table>
<Caption>
2002 2001 2000
---- ---- ----
March 31 86% 86% 85%
June 30 86% 85% 86%
September 30 87% 86% 86%
December 31 87% 88% 87%
</Table>
At December 31, 2002, anchor occupancy was 97.7% and total
portfolio occupancy (anchors, mall stores and freestanding) was 93.5%.
(e) RESULTS OF OPERATIONS
Components of minimum rents and percentage rents for the years
ended December 31, 2002, 2001, and 2000 are as follows ($000):
<Table>
<Caption>
Year Ended December 31,
-----------------------------------------------
2002 2001 2000
-------------- --------------- --------------
COMPONENTS OF MINIMUM RENTS:
Anchors - base rents $ 24,217 $ 24,483 $ 24,713
Mall shops & freestanding - base rents 85,576 81,111 79,716
Mall shops & freestanding - percentage rent in
lieu of fixed base rent 2,986 3,037 2,505
Straight line rental income 895 767 75
Ground leases - base rents 2,332 2,308 1,943
Lease buyout income 682 1,736 538
Operating covenant amortization - - (2,623)
-------------- --------------- --------------
Total minimum rents $116,688 $113,442 $106,867
============== =============== ==============
COMPONENTS OF PERCENTAGE/OVERAGE RENTS:
Anchors $ 2,573 $ 2,724 $ 3,235
Mall shops, freestanding, and ground leases 4,102 4,306 4,816
-------------- --------------- --------------
Total Percentage/Overage Rents $ 6,675 $ 7,030 $ 8,051
============== =============== ==============
</Table>
YEAR ENDED DECEMBER 31, 2002 VERSUS YEAR ENDED DECEMBER 31,
2001
Total revenues in 2002 were $189.4 million, an increase of
$6.5 million, or 3.6%, over 2001 revenues of $182.9 million. The primary
reasons for the revenue growth of $6.5 million in 2002 were higher base rents
from mall shops, higher temporary and seasonal leasing, higher operating cost
recoveries from tenants, and higher straight-line rents. These positive
impacts on revenues were partially offset by lower percentage rents, lower
base rents from anchor tenants, lower construction income, and lower lease
termination fees (buyout income).
Property operating and administrative costs, including utility
redistribution costs, but excluding depreciation and amortization, increased
from $65.0 million in 2001 to $68.7 million in 2002, or 6%. Approximately $1.0
million of this increase was attributable to the two properties acquired in
2002. Most of the remaining increase was attributable to higher insurance costs,
higher salary and wage costs, and higher security expense.
Depreciation and amortization expense decreased by $2.9
million in 2002, primarily as a result of lower amortization of tenant
improvement costs due to fewer tenant closings in 2002 compared to 2001.
General and administrative expenses, net of capitalized
amounts, increased by $1.4 million in 2002 compared to 2001. Gross spending was
higher in 2002 due to higher compensation costs, directors and officers
insurance, and trustee fees. In addition, $0.7 million was due to costs
associated with the Company's ongoing evaluation of strategic alternatives,
which is continuing in 2003.
Interest expense (net of capitalized amounts and interest
income) for 2002 was $51.6 million, a decrease of $2.4 million compared to 2001.
Most of this decrease was attributable to: (i) a reduction in the average LIBOR
rate in 2002 compared to 2001, which impacted interest expense on all
variable-rated debt; and (ii) lower
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<Page>
average outstanding debt balances due to the pay down of debt from the common
share offering proceeds in June 2002.
The gain on sale of outparcel land was $0.4 million in 2002 or
the same as 2001.
The net income for 2002 was $7.7 million, or $2.5 million
higher than 2001's net income of $5.2 million. The net income for 2002 includes
an extraordinary loss on the early extinguishment of debt of $4.3 million
related to the refinancing of Capital City Mall in January 2002.
After deducting preferred stock dividends, there was a net
loss applicable to common shareholders in 2002 of $5.9 million compared to a net
loss applicable to common shareholders in 2001 of $8.4 million.
The net loss for 2002 includes $5.5 million of absorption of
the minority partner's deficit balance compared to an absorption of $6.0 million
during 2001. (See Note 2 to the Consolidated Financial Statements.)
YEAR ENDED DECEMBER 31, 2001 VERSUS YEAR ENDED DECEMBER 31,
2000
Total revenues were $182.9 million in 2001, an increase of
$3.7 million, or 2.0%, over 2000's revenues of $179.2 million. Revenues
increased in 2001 primarily due to higher base rents due to higher occupancy and
higher average rents, higher temporary and seasonal leasing, higher lease
termination fees, and higher straight-line rents.
Property operating and administrative costs, including utility
redistribution costs, but excluding depreciation and amortization, increased
$1.0 million in 2001, a 1.6% increase over 2000. 2000 contained a $1.2 million
of construction expense incurred for an anchor tenant. Most of the increase in
2001 was attributable to higher operating costs at the properties, including
maintenance costs, insurance, security, food court, and property administrative
expenses.
Depreciation and amortization expense increased by $1.1
million in 2001, primarily as a result of higher amortization of tenant
improvement costs.
General and administrative expenses, net of capitalized
amounts, increased by $0.3 million in 2001 compared to 2000. Gross spending was
$0.5 million lower in 2001 due to the continuation of the Company's cost
containment efforts. This reduction was largely offset by lower capitalization
of construction overhead because most construction projects were completed.
Interest expense (net of capitalized amounts and interest
income) for 2001 was $54.1 million, a $2.0 million decrease compared to 2000.
Most of this decrease was attributable to (i) numerous decreases throughout 2001
in LIBOR rates, impacting interest expense on variable-rated debt, and (ii)
lower amortization of deferred financing costs.
Gain on sale of outparcel land was $0.4 million in 2001,
compared to $0.9 million in 2000, as a result of fewer outparcel sales in 2001.
The net income for 2001 was $5.2 million compared to $6.0
million in 2000. After deducting preferred stock dividends, there was a net loss
applicable to common shareholders in 2001 of $8.4 million compared to a net loss
applicable to common shareholders in 2000 of $7.7 million.
The net loss for 2001 includes $6.0 million of absorption of
the minority partners' deficit balance compared to an absorption of $2.6 million
in 2000. (See Note 2 to the Consolidated Financial Statements for a discussion
on Minority Interest.)
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company's financial
condition and results of operations is based on the Company's Consolidated
Financial Statements, which have been prepared in accordance with GAAP. When the
Company prepares its financial statements, the Company selects certain
accounting policies and methods and makes certain assumptions, estimates and
judgments relating to its operations, financial condition and disclosures, which
require management's subjective and complex consideration of a variety of
matters, including
26
<Page>
estimates, assumptions and judgments regarding income-producing properties,
revenue recognition, estimates for common area maintenance and real estate
recovery income accruals, the determination of contingency reserves,
provisions for uncollectible accounts and for losses under the Company's
self-insurance program, and the treatment of certain costs as capital or
expense.
The Company's actual results and financial condition could be
significantly different if management used different assumptions, estimates and
judgments. The following is a brief discussion of the significant assumptions,
estimates and judgments that management applied in preparing the Company's
Consolidated Financial Statements. If the Company's actual results differ
significantly from any of these assumptions, estimates or judgments, the
Company's financial condition and results of operations could be materially and
adversely effected. For further details on the accounting policies used in this
report and the Company's Consolidated Financial Statements, see the Notes to the
Company's Consolidated Financial Statements.
- INCOME-PRODUCING PROPERTIES
Income-producing properties are recorded at cost net of
depreciation, adjusted for impairment. Included in such costs are acquisition,
development, construction, tenant improvements and allowances, interest incurred
during construction, certain capitalized improvements and replacements and
certain allocated overhead. 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.
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.
- REVENUE RECOGNITION
The Company's leases are accounted for as operating leases
under SFAS 13, "Accounting for Leases". The leases generally entitle the Company
to (i) base rent, which is recognized on a straight-line basis over the lease
term, (ii) percentage rent, which is recorded when tenant sales points are
achieved and (iii) cost reimbursements which are recognized as qualifying costs
and expenses are incurred.
The recognition of percentage rent income requires management
to make certain estimates with regard to tenants' sales levels. The majority of
the Company's mall shop tenants report sales on a monthly basis which provides
the Company with a reasonable basis upon which to record percentage rent income.
The monthly sales amounts, however, are unaudited and are subject to change when
the tenant reports its final sales after the end of the lease year. In addition,
leases sometimes permit the exclusion of certain types of sales or services from
the calculation of percentage rent due.
Anchor tenants, unlike mall shop tenants, are only required to
report sales on an annual basis at the end of the lease year. The Company
obtains confirmations from most of its anchor tenants at year-end to confirm
sales amounts for each store from the inception of the lease year to December
31. For anchor tenants who do not respond to the Company's sales information
request at year end, and for estimating percentage rents at the end of the
Company's first, second and third quarters, the Company uses sales estimates
based on past sales patterns, reported national sales trends of the anchors, and
specific information reported informally by tenant store managers. Adjustments
required to the Company's estimated accrued percentage rents of either mall
shops or anchor tenants, as a result of receiving final sales information from
tenants, have not been significant in past years.
Percentage rents have comprised 3.5%, 3.8%, and 4.5% of total
revenues for the years ended December 31, 2002, 2001, and 2000, respectively.
Approximately 15% of the Company's tenants pay percentage
27
<Page>
rents. Because sales can vary more significantly for specific tenants than for
all tenants in the portfolio, percentage rents tend to be more volatile on a
percentage basis than minimum rents. Overall, the ratio of percentage rents to
total revenues has declined over the last two years due to the weaker sales
environment impacting certain anchor tenant sales and certain national and
regional mall shop tenants.
Property operating cost recoveries from tenants (or cost
reimbursements) are determined on a lease-by-lease basis. The most common types
of cost reimbursements in the Company's leases are common area maintenance
("CAM") and real estate taxes, where the tenant pays its pro-rata share of mall
operating and administrative expenses and real estate taxes; and security
charges, where the tenant reimburses the Company for providing mall security
services.
The computation of cost reimbursements from tenants for CAM
and real estate taxes is complex and involves numerous judgments including
interpretation of terms and other tenant lease provisions. Leases are not
uniform in dealing with such cost reimbursements and there are hundreds of
variations in the computations dealing with such matters as: which costs are
includable or not includable for reimbursement, what is the square footage of
the overall property space to determine the pro-rata percentages, and the
applicability of cost limitation provisions, among other things. Most tenants
make monthly fixed payments of CAM, real estate taxes and other cost
reimbursement items. The Company records these payments as income each month.
The Company also makes adjustments, positive or negative, to cost recovery
income to adjust the recorded amounts to the Company's best estimate of the
final amounts to be billed and collected with respect to the cost
reimbursements. After the end of the calendar year, the Company computes each
tenant's final cost reimbursements and issues a bill or credit for the full
amount, after considering amounts paid by the tenants during the year. The
differences between the amounts billed, less previously received payments and
the accrual adjustment are recorded as increases or decreases to cost recovery
income when the final bills are prepared, usually beginning in March and
completed by June or July. The net amounts of any such adjustments have not been
material in any of the years ended December 31, 2001, 2000 and 1999. Final
adjustments for the year ended December 31, 2002 have not yet been determined.
Tenant reimbursement income, as a percentage of recoverable
operating costs, has been 73.2%, 72.8%, and 77.0%, for the years ending December
31, 2002, 2001, and 2000, respectively. Based on the level of recoverable
operating expenses that existed for 2002, each 1% change in the recovery rate
would equate to a difference of approximately $500,000 in associated revenue.
- CAPITALIZED REAL ESTATE COSTS, LEASE ACQUISITION COSTS AND
IMPROVEMENTS AND REPLACEMENTS
Capital expenditures associated with 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") and depreciated as real estate. Specific
tenant improvements and allowances and direct costs to originate leases are
deferred and amortized on the straight-line method over the specific lease term.
The amounts of both construction-related costs and
lease-related costs which are capitalized are proportionately affected by the
volume of construction projects in process and the volume of leases signed in
any given year.
The Company capitalizes internal or external costs for signed
permanent leases based on estimated actual costs incurred to secure signed
leases, while internal and external leasing costs incurred on leases that do not
get signed are expensed. These estimates require judgments as to the extent of
effort incurred for successful leasing versus unsuccessful leasing.
With regard to the Company's construction and development
activities, the Company capitalizes direct costs related to the project and a
portion of indirect costs, such as construction period interest and allocated
overhead costs. Allocated overhead costs are computed primarily on the basis of
time spent by certain departments in various operations associated with the
construction or development activity.
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
$11.1 million, $11.1 million, and $10.9 million for the years ended December 31,
2002, 2001, and 2000, respectively. Capitalized improvements
28
<Page>
and replacements, including tenant improvements and allowances, were $14.5
million, $23.2 million and $45.6 million for the years ended December 31,
2002, 2001, and 2000, respectively.
- CONTINGENCIES/RESERVES
The Company has recorded reserves for uncollectible
receivables, deductible liabilities under insurance policies, and cost
reimbursement billings.
- UNCOLLECTIBLE RECEIVABLES
The Company has established reserves for uncollectible
receivables in two primary areas: (i) straight-line rents, and (ii) for billed
base rent, billed and accrued percentage rent and billed and accrued cost
reimbursement income.
As explained in the "Revenue Recognition" section, the Company
recognizes base rent from its tenants on a straight-line basis over the term of
its leases. Since many tenant leases provide for increases in the cash payment
at certain times during the lease term, use of the straight-line method usually
results in the Company recording a receivable during the first portion of the
lease term for the excess of the straight line rent income over the lower amount
being received in cash from the tenant. During the latter portion of a lease,
the cash to be received will be higher that the straight line income and the
excess cash is applied to reduce the receivable balance recorded for the tenant.
This straight line rental receivable arises from the straight line accounting
convention and typically is not a legally enforceable claim against the tenant
at any point in time. Accordingly, if a tenant terminates its lease prior to the
end of the term, or becomes bankrupt and the Company is unable to recover the
straight line rent receivable for that tenant, it will need to write it off to a
reserve for straight line rents. The Company makes a regular provision to the
straight line rent reserve each month with an offsetting reduction in straight
line rent income. In addition, the Company regularly evaluates the reserve for
straight line rent receivables based on the perceived credit quality of the
tenants that comprise such receivable and makes further adjustments, positive or
negative, as considered necessary in the circumstances to reflect the straight
line receivables, net of the reserve, at estimated recoverable amounts.
The second reserve relates to all other tenant billings and
accrued tenant income for regular base rents, percentage rents, and cost
reimbursement billings and accruals. Reserves are necessary to provide for
losses that may be incurred due to tenant bankruptcies, disputed billings for
cost reimbursements that can arise from a wide number of matters that enter into
the cost reimbursement billing process, as previously described, potential
over-accruals of percentage rents if estimated tenant sales turn out to be too
high, and other matters. The Company regularly evaluates its billed and accrued
receivables and adjusts reserves, positively or negatively, as considered
necessary in the circumstances so that all tenant receivables are recorded, net
of the reserves, at estimated recoverable amounts.
The Company's reserves for uncollectible receivables in the
aggregate and as a percentage of its total accounts receivable balances were as
follows:
<Table>
<Caption>
December 31,
-----------------------------------
2002 2001 2000
---- ---- ----
Reserve for Uncollectible Receivables ($000) $ 2,388 $ 2,117 $ 2,571
----- ----- -----
As a % of Related Receivables Balance 14.2% 13.5% 14.6%
----- ----- -----
</Table>
- INSURANCE POLICY DEDUCTIBLES
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 $250,000 per occurrence. Provisions for losses expected
under these programs are recorded based upon estimates, provided by consultants
who utilize the Company's claims experience and acturial assumptions, of the
aggregate liability for claims incurred but not reported.
Since provisions for losses expected under these programs are
based upon many estimates, there is no assurance that the ultimate settlement of
these losses will not result in amounts that differ from what the Company has
recorded as a liability at the balance sheet date.
29
<Page>
The total estimated liabilities for losses under these claims
recorded in the balance sheet at December 31, 2002, 2001, and 2000 were $5.4
million, $4.7 million, and $4.3 million, respectively.
- ACCOUNTING FOR 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 is reduced below zero, and there is an obligation of the minority
partner to make additional cash contributions to the Operating Partnership, the
minority interest balance at December 31, 2002 is shown on the Consolidated
Balance Sheet as an asset. This asset balance at December 31, 2002 has been
limited to $3.3 million, the estimated amount of cash flow support to be
received over the next twelve months. As described in Note 18 to the
Consolidated Financial Statements, the Support Agreement will be amended
significantly in connection with the approved sale of Oak Ridge Mall. 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 December 31, 2002.
- 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 approved sale of Oak Ridge Mall to Crown
Investments, as described in Note 18 to the Consolidated Financial Statements.
In April 2002, the FASB issued Statement of Financial
Accounting Standards ("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". Under SFAS 145, gains and losses from
early extinguishment of debt will 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 expects that gains and losses related to debt transactions after SFAS
145 is adopted generally will be classified in income from continuing operations
rather than as extraordinary items. In addition, the extraordinary losses from
early debt extinguishments recorded by the Company in prior periods will be
reclassified, when SFAS 145 is adopted, to income from continuing operations;
prior period Funds from Operations will also be restated to include such losses.
SFAS 145 is effective for fiscal years beginning after May 15, 2002 and the
Company will adopt SFAS 145 beginning January 1, 2003.
30
<Page>
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 will adopt 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 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 December 31, 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 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 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 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.
(f) CASH FLOWS, LIQUIDITY AND CAPITAL RESOURCES
For the years ended December 31, 2002, 2001, and 2000, the
Company generated $67.5 million, $68.4 million, and $58.3 million, respectively,
in cash from operating activities, as shown in the accompanying Consolidated
Statements of Cash Flows in Item 8 hereto.
2002 CASH FLOWS
During 2002, the Company generated $67.5 million in cash flows
from operating activities, which includes a positive impact of $1.8 million from
changes in receivables, restricted cash and escrow deposits, deferred charges
and other assets, and accounts payable and other liabilities. The Company had
$99.1 million of investing cash flows during 2002, of which $90.6 million was
associated with its two new mall acquisitions; the net remainder included $8.0
million in tenant allowances and capitalized leasing costs and $6.5 million in
operational capital expenditures, net of $5.4 million of net proceeds from the
sale of Carlisle Plaza Mall and $0.7 million in cash distributions from the
Palmer Park Joint Venture. The Company generated $28.6 million from financing
activities during 2002, which included (i) $47.2 million from its common stock
offering in June 2002; (ii) $144.2 million in additional borrowings, of which
$84.5 million related to mortgage loans and line of credit borrowings on its two
acquisitions; (iii) $108.0 million of loan amortization and debt repayments,
which include a $38.4 million payoff of the old loan on Capital City Mall in
connection with its refinancing in January 2002 and a $47.2 million pay down of
its line of credit debt from the common stock proceeds in June 2002; (iv) $46.7
million of common and preferred dividends and distributions; (v) $3.1 million of
cash flow support payments (see Note 8 to the Consolidated
31
<Page>
Financial Statements); (vi) $10.3 million of net cash used in discontinued
operations related to the sale of Carlisle Plaza Mall in October 2002; (vii)
$1.5 million in costs associated with new debt obtained during 2002; and
(viii) $0.7 million of proceeds from the Company's dividend reinvestment
program and from the exercise of stock options.
2001 CASH FLOWS
During 2001, the Company generated $68.4 million in cash flows
from operating activities, which includes a positive impact of $6.4 million from
changes in receivables, restricted cash and escrow deposits, deferred charges
and other assets, and accounts payable and other liabilities. The Company had
$22.5 million in net investing activities in 2001 which included $10.4 million
in tenant allowances, $3.3 million in the expansion of Phillipsburg Mall to
accommodate an H & M store, and $9.5 million in various other operational
capital expenditures. The Company used $43.5 million in its financing
activities, which included (i) additional borrowings of $16.8 million, net of
escrow deposits and issuance costs; (ii) $19.5 million of loan amortization and
debt repayments; (iii) $43.9 million of common and preferred dividends and
distributions; and (iv) $3.1 million of cash flow support (see Note 8 to the
Consolidated Financial Statements).
2000 CASH FLOWS
During 2000, the Company generated $58.3 million in cash flows
from operating activities, which is net of an aggregate $2.7 million negative
impact from changes in receivables, restricted cash and escrow deposits,
deferred charges and other assets, and accounts payable and other liabilities.
The Company had $30.6 million in net investing activities in 2000 which included
$13.0 million in the Valley Mall redevelopment project, $9.3 million in the
expansion/renovation of Washington Crown Center, and $12.9 million in mall shop
tenant allowances. The Company received $8.9 million in net proceeds from the
sale of the Greater Lewistown Shopping Plaza and from the sale of an anchor
store to its owner-occupant. The Company used a net $30.2 million in its
financing activities, which included (i) additional borrowings of $26.1 million,
net of debt issuance costs, (ii) $14.7 million of loan amortization and debt
repayments, (iii) $43.6 million of common and preferred dividends, (iv) $2.9
million of Cash Flow Support (see Note 8 to the Consolidated Financial
Statements), and (v) $0.9 million to repurchase preferred shares.
LIQUIDITY AND CAPITAL RESOURCES
The Company has significant ongoing capital requirements. The
Company believes that its cash generated from property operations and funds
obtained from its lines of credit, property financings and general corporate
borrowings will provide the necessary funds on a short-term and long-term basis
for its operating expenses, debt service on outstanding indebtedness and
recurring capital expenditures and tenant allowances, and dividends to its
preferred and common shareholders at a level necessary to satisfy the REIT
dividend distribution requirements under the Internal Revenue Code (see Note 2
to the Consolidated Financial Statements). The amount of dividends required to
be paid in order to maintain REIT status for 2002 was $9.3 million. This is
significantly less than the total $46.7 million in dividends paid on preferred
and common shares in 2002. The Company intends to pay regular quarterly
dividends to its shareholders. However, the Company's ability to pay dividends
is affected by several factors, including cash flow from operations, capital
expenditures, and its ability to refinance its maturing debt as described below.
Dividends by the Company will be at the discretion of the Board of Trustees and
will depend on the cash available to the Company, its financial condition,
capital and other requirements, and such other factors as the Trustees may
consider. Payments of dividends on the Company's common shares are subject to
any preferential rights which might be provided for under the rights of any of
its outstanding preferred shares.
As described in Note 5 to the Consolidated Financial
Statements, the borrowing capacity under the Company's line of credit with GE
Capital Corporation ("GECC") is increased or decreased based on the level of
underwritten net operating income, as defined, for the six malls that are
mortgaged to secure the line of credit. Underwritten net operating income is
calculated quarterly, and the borrowing capacity adjusted up or down
accordingly. Underwritten net operating income can increase or decrease
depending on the performance of the six malls, and is also reduced for any
anchor tenant that declares bankruptcy, even if the tenant continues to operate
its store and pay rent. At December 31, 2002 the borrowing capacity was
approximately $155 million. As also described in Note 5, twenty-one malls are
owned by or ground leased to special purpose consolidated subsidiaries, as
required under various loan agreements. The mortgaged malls and related assets
owned or ground leased by these special purpose consolidated subsidiaries are
restricted under the loan agreements for the debt service and others payments
under 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
32
<Page>
from these properties, after debt service and reserve payments are made, are
available for the general use of the Company.
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 March 3, 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.
Sources of capital for non-recurring capital expenditures,
such as major building renovations and expansions, acquisitions, and for balloon
payments on maturing outstanding indebtedness, are expected to be obtained from
additional Company or property financings and refinancings, sale of
non-strategic assets, additional equity raised in the public or private markets,
and from retained internally generated cash flows, or from combinations thereof.
Given the Company's current level of indebtedness, and given the uncertainties
concerning future equity and debt capital markets and interest rates, there is
no assurance that the Company will be able to secure such future infusions of
equity and/or debt financing and refinancings when needed, or at rates or terms
that will permit the Company to use the proceeds raised to increase earnings or
Funds from Operations. There are no major expansions or renovations planned to
occur in 2003, other than construction of a multi-screen theater under a lease
with a tenant at Jacksonville Mall, and the expansion of an anchor department
store and reduction in mall shop space at West Manchester Mall.
- FINANCING ACTIVITIES
On January 3, 2002 the Company closed a $53.3 million loan
with a lender secured by its Capital City Mall in Harrisburg, PA with only
limited recourse to the Company. The loan bears interest at a stated annual
fixed rate of 7.6%, and is interest-only during the first two years, and then
amortizes during the last eight years based on a 28-year amortization schedule.
Of the total proceeds from the new loan, $42.5 million was used to prepay an
existing 8.27% mortgage loan on Capital City Mall, which included a $4.1 million
yield maintenance prepayment penalty. This prepayment penalty, together with
$0.2 million of unamortized deferred financing costs, was recorded as an
extraordinary loss (non-FFO) in January 2002. The remaining proceeds were used
for loan closing costs and various loan reserves aggregating $1.7 million, with
the balance of $9.1 million of net proceeds available for general corporate
purposes for the Company.
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,
33
<Page>
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
guaranteed by the Operating Partnership.
On May 1, 2002, the Company paid down the mortgage loan on
Carlisle Plaza Mall from $9.3 million to $6.0 million in connection with a
one-year extension to May 1, 2003. This loan was fully paid off in connection
with sale of Carlisle Plaza Mall in October 2002.
In June 2002, the Company completed a public offering of
5,750,000 of its common shares of beneficial interest (including
over-allotments), par value $0.01, at a public offering price of $8.75 per
share. The net proceeds to the Company (after deducting underwriting discounts
and offering expenses) were approximately $47.2 million. The proceeds from the
offering were used initially to pay down the Company's line of credit with GECC.
The Company later re-borrowed funds under the line of credit to fund its
acquisitions of Valley View Mall and Wiregrass Commons Mall in 2002.
As of December 31, 2002, the scheduled principal payments on
all outstanding debt are $10.5 million, $135.8 million, $52.8 million, $12.5
million, and $13.2 million for the years ended December 31, 2003 through 2007,
respectively, and $526.3 million thereafter. The Company expects to refinance or
extend the majority of the maturities over the next five years through
additional Company financings and from refinancing the maturing loans. The
Company's ability to refinance or extend these loans on or before their due
dates depends on the level of income generated by the properties, prevailing
interest rates, credit market trends, and other factors that may be in effect at
the time of such refinancings or extensions and there is no assurance that such
refinancings or extensions will be executed. The ratios of the Company's EBITDA
to interest paid on total indebtedness (exclusive of capitalized interest and
interest income) for the years ended December 31, 2002, 2001, and 2000 were 2.33
to 1, 2.20 to 1, and 2.14 to 1, respectively.
- PROPERTY ACQUISITIONS AND DISPOSITIONS
In September 2002, the Company completed the acquisition of
Valley View Mall, an enclosed shopping mall, located in LaCrosse, Wisconsin. The
purchase price, excluding closing costs and expenses, of the mall was $49.92
million, and was funded partially by a $37.0 million mortgage loan and partially
from the Company's line of credit. See Note 13 to the Consolidated Financial
Statements.
In November 2002, the Company completed the acquisition of
Wiregrass Commons Mall located in Dothan, Alabama, located in the southeastern
corner of Alabama adjacent to Georgia and the Florida panhandle. The purchase
price excluding closing costs and expenses, was $40.25 million and was financed
by a $30.0 million floating rate mortgage loan $4.5 million of borrowings from
the Company's line of credit, and the balance in cash. See Note 13 to the
Consolidated Financial Statements.
With regard to the Company's disposition strategy, the Company
will dispose of any of the Properties, if, based upon management's periodic
review of the Company's portfolio, the Board of Trustees determines that such
action would be in the best interests of the Company. The Company regularly
evaluates property dispositions in order to recycle capital for future
investment opportunities, to reduce debt leverage, or to enhance cash flows and
liquidity. It is possible that the net sales proceeds for some properties, if
sold in the future, could be lower than their current net book value, which
would result in a loss upon possible future sale.
As further described in Note 14 to the Consolidated Financial
Statements, on October 29, 2002, the Company sold Carlisle Plaza Mall to an
unrelated party for $5.8 million. In connection with the sale, the mortgage loan
of $6.0 million was repaid in full. In addition, $0.8 million of Industrial
Development Authority bonds related to Carlisle were paid off prior in December
2002.
As described in Note 18 to the Consolidated Financial
Statements, in March 2003 Oak Ridge Mall has been approved for sale to Crown
Investments. Oak Ridge Mall ("Oak Ridge"), located in Oak Ridge, Tennessee, was
classified as held for operating purposes at December 31, 2002 under SFAS 144.
Oak Ridge had an aggregate net real estate carrying value of $25.2 million and
debt of $13.6 million as of December 31, 2002. In March 2003, Oak Ridge was
classified as held for sale and is expected to be sold on or about March 31,
2003 to Crown Investments, a related party, as described further below.
34
<Page>
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 (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 for estimated fair
value of $11.4 million, which is expected to close on or about March 31, 2003.
The $11.4 million purchase price will be satisfied through issuance of a
promissory note by Crown Investments; such promissory note will be distributed
in a non-liquidating distribution to Crown American Investment Company ("CAIC"),
and effectively reduce 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 approved sale, the Company
will pay off the approximate current $13.4 million mortgage loan balance on Oak
Ridge and will also assign 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 will result in a loss on sale for
financial reporting purposes of approximately $13.7 million which will be
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, will
be 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, both to
be effective when Oak Ridge is sold to Crown Investments. The amendment to the
Support Agreement will release Oak Ridge from Crown Investments' future
obligations under the Support Agreement and will reduce 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 will provide 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, Crown Investments' percentage
ownership interest in the Operating Partnership will be 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 recent closing price of the Company's common shares.
Amounts owed under the Support Agreement for Oak Ridge Mall from January 1 to
the date of sale, estimated at approximately $0.67 million, will be paid by
Crown Investments to the Operating Partnership, and the Operating Partnership
will make 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 28, 2003, will remain unchanged as a result of the above
transactions. However, the common percentage ownership interests of the partners
in the Operating Partnership will change, as summarized in the following table:
<Table>
<Caption>
Before After
------------------ ------------------
General and Majority Partner:
35
<Page>
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%
------------------ ------------------
</Table>
The Independent Trustees concluded that selling Oak Ridge to
Crown Investments, including the related amendment to the Cash Flow Support
Agreement, would be in the best interests of the Company for several reasons,
including the following: (i) modest increases in net income per share and net
cash flows; (ii) ongoing financial and other benefits resulting from improving
the quality of the Company's overall property portfolio by disposing of Oak
Ridge, an under performing property that continues to deteriorate; (iii)
certainty of closing as compared to the prior efforts to sell Oak Ridge to the
third party; (iv) better positioning the Company with respect to its ongoing
evaluation of strategic alternatives; and (v) permitting management to devote
time and resources to properties with more growth potential than Oak Ridge.
As further described in Note 8 to the Consolidated Financial
Statements, Crown Investments and its subsidiary have been granted rights,
subject to certain restrictions, whereby they may redeem part or all of their
common partnership units for common shares, on a one-to-one basis, or cash at a
price equal to the value of the Company's common shares. Crown Investments has
pledged substantially all of its limited partnership units as collateral for two
loans it has received from unrelated third parties.
(g) ECONOMIC TRENDS
Because inflation has remained relatively low during the last
three years it has had little impact on the operations of the Company during
this period. Tenant leases also provide, in part, a mechanism to help protect
the Company during highly inflationary periods. As operating costs increase,
most leases permit the Company to recover from its tenants a significant portion
of the common area maintenance and other operating costs, including real estate
taxes and insurance, and therefore, the tenants will absorb part of this
increased operating cost. Most of the leases provide for percentage rent after a
certain minimum sales level is achieved. Thus, during highly inflationary
periods, when retail sales at the Malls increase, the Company should receive
additional rental income through percentage rent increases, partially offsetting
the effect of inflation.
In periods of an economic slowdown, and in light of the
current hostilities with Iraq, the Company may be subject to additional risks
arising in connection with the underlying real estate, including defaults under
or non-renewal of tenant leases, bankruptcy of tenants, competition, inability
to rent unleased space, lower tenant sales resulting in reduced percentage
rents, and higher energy and other operating costs, all of which can have an
adverse effect on the Company's operating results and financial condition.
The use of the Internet for retail sales is growing rapidly,
but at present is a very minor component of total retail sales distribution in
the United States, and particularly of the types of products typically sold in
enclosed regional malls. Management of the Company does not foresee that
Internet retailing will have a significant effect on tenant sales or occupancy
levels in the next few years.
ITEM 7 (a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Market risk is the exposure to loss resulting from changes in
interest rates, foreign currency exchange rates, commodity prices and equity
prices. In the ordinary course of business, the Company is exposed to risks that
increases in interest rates may adversely affect interest costs associated with
$132.6 million of variable-rate debt, which represents 18% of total long-term
debt, and costs when refinancing maturing fixed-rate debt. The following table
presents debt principal cash flows and related weighted average interest rates
by expected maturity dates (dollars in millions):
<Table>
<Caption>
YEAR ENDING DECEMBER 31,
--------------------------------------------------------------------- 2008 AND
2003 2004 2005 2006 2007 THEREAFTER
---- ---- ---- ---- ---- ----------
36
<Page>
Long-term debt
Fixed rate debt $ 9.2 $ 45.5 $ 11.8 $ 12.5 $ 13.2 $526.3
Average interest rate 7.17% 7.39% 7.18% 7.26% 7.43% 7.43%
Variable rate debt $ 1.3 $ 90.3 $ 41.0 - - -
Average interest rate 3.42% 3.66% 3.42% - - -
</Table>
Interest rate risk for the Company increased in 2002 due to an
increase in variable rate debt from $115.0 million at December 31, 2001 to
$132.6 million at December 31, 2002. The Company's variable rate debt is based
primarily on LIBOR, and the Company will incur increasing interest costs if
LIBOR increases. 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 sentences) 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 was 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. A
hypothetical change of 10% in LIBOR, on which the Company's variable interest
rates are based, would increase or decrease interest expense by approximately
$0.2 million based on the level of variable rate debt outstanding at December
31, 2002.
Accounts receivable and accounts payable carrying amounts
approximate the fair value of the accounts receivable and accounts payable
balances, respectively, at December 31, 2002.
37
<Page>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 December 31, 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 Note 2 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 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
38
<Page>
<Table>
<Caption>
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 $ 116,688 $ 113,442 $ 106,867
Percentage rent 6,675 7,030 8,051
Property operating cost recoveries 37,314 35,135 35,994
Temporary and promotional leasing 12,109 10,910 10,640
Utility redistribution income 14,191 14,133 14,533
Miscellaneous income 2,447 2,230 3,125
------------ ------------ -------------
189,424 182,880 179,210
------------ ------------ -------------
Property operating costs:
Recoverable operating costs 50,993 48,262 46,753
Property administrative costs 3,425 2,713 2,566
Other operating costs 3,053 3,235 3,662
Utility redistribution expense 11,180 10,769 10,971
Depreciation and amortization 45,555 48,452 47,348
------------ ------------ -------------
114,206 113,431 111,300
------------ ------------ -------------
75,218 69,449 67,910
------------ ------------ -------------
OTHER EXPENSES:
General and administrative 6,850 5,426 5,133
Restructuring costs -- -- 369
Interest, net 51,640 54,065 56,065
------------ ------------ -------------
58,490 59,491 61,567
------------ ------------ -------------
16,728 9,958 6,343
------------ ------------ -------------
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 BEFORE EXTRAORDINARY
ITEMS AND DISCONTINUED OPERATIONS 11,746 5,396 6,379
Extraordinary loss on early extinguishment of debt (4,314) -- (243)
------------ ------------ -------------
INCOME FROM CONTINUING OPERATIONS 7,432 5,396 6,136
------------ ------------ -------------
DISCONTINUED OPERATIONS:
Loss from operations (142) (190) (157)
Gain on asset sale 425 -- --
------------ ------------ -------------
283 (190) (157)
------------ ------------ -------------
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 extraordinary
items and discontinued operations, net of
preferred dividends $ (0.06) $ (0.31) $ (0.28)
Extraordinary items (0.15) -- (0.01)
Gain (loss) from discontinued operations 0.01 (0.01) --
------------ ------------ -------------
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.
</Table>
39
<Page>
<Table>
<Caption>
CROWN AMERICAN REALTY TRUST
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------------
2002 2001
------------- -------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
ASSETS
INCOME-PRODUCING PROPERTIES:
Land $ 163,751 $ 147,371
Buildings and improvements 1,108,733 1,024,609
Deferred leasing and other charges 44,783 44,678
------------- -------------
1,317,267 1,216,658
Accumulated depreciation and amortization (502,216) (461,453)
------------- -------------
815,051 755,205
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 9,123 7,877
Tenant and other receivables 15,232 14,648
Deferred charges and other assets 19,525 19,587
Assets from discontinued operations -- 5,456
------------- -------------
$ 879,432 $ 826,780
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Debt on income-producing properties $ 751,176 $ 710,436
Accounts payable and other liabilities 44,911 40,731
Liabilities from discontinued operations -- 10,490
------------- -------------
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.
</Table>
40
<Page>
<Table>
<Caption>
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 48,864 51,712 53,588
Operating loss from discontinued operations 142 190 157
(Gain) loss on asset sales (425) - 224
Extraordinary loss on early extinguishment of debt 4,314 - 243
Restructuring costs - - 369
Net cash provided by discontinued operations 200 280 12
Net changes in:
Tenant and other receivables (584) 3,284 (2,282)
Restricted cash and escrow deposits (746) 279 1,431
Deferred charges and other assets 1,962) (1,013) (39)
Accounts payable and other liabilities 5,132 3,799 (1,850)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 67,549 68,392 58,286
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in income properties (14,463) (23,160) (45,553)
Acquisitions of enclosed shopping malls (90,583) - -
Change in investing escrow deposits (34) 201 6,120
Net proceeds from asset sales 5,354 - 8,898
Distributions from joint venture 674 694 472
Capital investments in discontinued operations (23) (217) (562)
------------ ------------ ------------
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 (1,466) (79) (2,159)
Debt repayments (108,010) (18,901) (49,750)
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 (10,293) (629) (578)
------------ ------------ ------------
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 $ 49,822 $ 52,231 $ 53,797
============ ============ ===========
Interest cost capitalized $ - $ 38 $ 839
============ ============ ===========
Other comprehensive income (loss) - hedging activities $ 941 $ (1,068) $ -
============ ============ ===========
</Table>
The accompanying notes are an integral part of these statements.
41
<Page>
<Table>
<Caption>
CROWN AMERICAN REALTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SENIOR
COMMON PREFERRED
COMMON SENIOR ADDITIONAL SHARES SHARES
SHARES PREFERRED COMMON PAID-IN ACCUMULATED HELD IN HELD IN
OUTSTANDING SHARES SHARES CAPITAL DEFICIT TREASURY TREASURY
- -------------- --------- ------ ---------- ----------- -------- ---------
(IN THOUSANDS) (IN THOUSANDS)
26,208 BALANCE, DECEMBER 31, 1999 $ 25 $ 277 $ 316,421 $ (176,220) $ (14,652) $ -
Preferred shares (25) purchased
and held in treasury (929)
Transfer in (out) of limited
partner's interest in the
Operating Partnership (57)
Capital contributions from
Crown Investments Trust:
Cash flow support 1,111
Net income 5,979
Dividends paid or accrued:
Preferred shares (13,695)
Common shares (21,688)
------ --------- --------- ----------- ----------- ---------- -------
26,208 BALANCE, DECEMBER 31, 2000 25 277 317,475 (205,624) (14,652) (929)
Comprehensive loss:
Net income 5,206
Net loss on cash-flow
hedging activities
-----------
Total comprehensive income 5,206
-----------
Transfer in (out) of limited
partner's interest in the (25)
Operating Partnership
Dividends paid or accrued:
Preferred shares (13,613)
Common shares (21,949)
------ --------- --------- ----------- ----------- ---------- -------
26,208 BALANCE, DECEMBER 31, 2001 25 277 317,450 (235,980) (14,652) (929)
Comprehensive income:
Net income 7,715
Net income on cash-flow
hedging activities
-----------
Total comprehensive income 7,715
-----------
5,830 Issuance of common shares 58 47,809
Transfer in (out) of limited
partner's interest in the
Operating Partnership (12)
Dividends paid or accrued:
Preferred shares (13,613)
Common shares (24,676)
------ --------- --------- ----------- ----------- ---------- -------
32,038 BALANCE, DECEMBER 31, 2002 $ 25 $ 335 $ 365,247 $ (266,554) $ (14,652) $ (929)
=========== ========= ========= =========== =========== ========== =======
[here]
<Caption>
CROWN AMERICAN REALTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED
OTHER
COMMON COMPREHENSIVE
SHARES INCOME
OUTSTANDING (LOSS) TOTAL
- -------------- ------------- ------------
(IN THOUSANDS)
26,208 BALANCE, DECEMBER 31, 1999 $ - $ (125,851)
Preferred shares (25) purchased
and held in treasury (929)
Transfer in (out) of limited
partner's interest in the
Operating Partnership (57)
Capital contributions from
Crown Investments Trust:
Cash flow support 1,111
Net income 5,979
Dividends paid or accrued:
Preferred shares (13,695)
Common shares (21,688)
------ --------- -----------
26,208 BALANCE, DECEMBER 31, 2000 - 96,572
Comprehensive loss:
Net income 5,206
Net loss on cash-flow
hedging activities (1,068) (1,068)
--------- ----------
Total comprehensive income (1,068) 4,138
--------- ----------
Transfer in (out) of limited
partner's interest in the (25)
Operating Partnership
Dividends paid or accrued:
Preferred shares (13,613)
Common shares (21,949)
------ --------- -----------
26,208 BALANCE, DECEMBER 31, 2001 (1,068) 65,123
Comprehensive income:
Net income 7,715
Net income on cash-flow
hedging activities 941 941
--------- ----------
Total comprehensive income 941 8,656
--------- ----------
5,830 Issuance of common shares 47,867
Transfer in (out) of limited
partner's interest in the
Operating Partnership (12)
Dividends paid or accrued:
Preferred shares (13,613)
Common shares (24,676)
------ --------- -----------
32,038 BALANCE, DECEMBER 31, 2002 $ (127) $ 83,345
=========== ========= ===========
</Table>
The accompanying notes are an integral part of these statements.
42
<Page>
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 further 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.
Also, 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.
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 57% 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:
43
<Page>
<Table>
<Caption>
PERCENT OF TOTAL REVENUES
-------------------------
2002 2001
---- ----
Sears Roebuck and Co. 5.0% 5.3%
J C Penney, Inc. 4.1% 4.2%
The Limited 3.7% 4.3%
Gap, Inc. 2.9% 3.2%
The Bon-Ton Stores, Inc. 2.7% 2.9%
</Table>
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 (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. The Operating Partnership directly owns six 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.
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
44
<Page>
expense. The Company's significant accounting policies are described in more
detail in Note 2 to the Consolidated Financial Statements.
Revenues and expenses for 2000 and 2001 have been reclassified to be consistent
with the current year presentation due to Carlisle Plaza Mall being presented as
discontinued operations due to its sale in October 2002. (See Note 14 to the
Consolidated Financial Statements.)
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 $11.1 million, $11.1
million, and $10.9 million for the years ended December 31, 2002, 2001, and
2000, respectively. Capitalized improvements and replacements, including tenant
improvements and allowances, were $14.5 million, $23.2 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.
45
<Page>
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 $2.4 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 (see Note 8 to the Consolidated Financial Statements)
requires Crown Investments to pay cash flow support payments. Accordingly, since
the minority interest account is reduced below zero, and there is an obligation
of Crown Investments to make additional cash contributions to the Operating
Partnership, the minority interest balance at December 31, 2002 is shown on the
Consolidated Balance Sheet as an asset. This asset balance at December 31, 2002
has been limited to $3.3 million, the estimated amount of cash flow support to
be received over the next twelve months by the Company from Crown Investments.
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 calendar
year ended December 31, 2002. On a cumulative basis, $14.1 million of such
losses have been absorbed by the Company, through December 31, 2002. As
described in Note 18 to the Consolidated Financial Statements, the Support
Agreement will be amended significantly in connection with the approved sale of
Oak Ridge Mall.
46
<Page>
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 December 31, 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:
<Table>
<Caption>
TOTAL PAID CURRENT
PER COMMON TAXABLE NON-TAXABLE
SHARE DIVIDENDS RETURN OF 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%
</Table>
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.
47
<Page>
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 approved sale of Oak Ridge Mall to Crown Investments, as
described in Note 18 to the Consolidated Financial Statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
("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". Under SFAS 145, gains and losses from early
extinguishment of debt will 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
expects that gains and losses related to debt transactions after SFAS 145 is
adopted generally will be classified in income from continuing operations rather
than as extraordinary items. In addition, the extraordinary losses from early
debt extinguishments recorded by the Company in prior periods will be
reclassified, when SFAS 145 is adopted, to income from continuing operations;
prior period Funds from Operations will also be restated to include such losses.
SFAS 145 is effective for fiscal years beginning after May 15, 2002 and the
Company will adopt SFAS 145 beginning January 1, 2003.
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 will adopt 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 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
December 31, 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
48
<Page>
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 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 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 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):
<Table>
<Caption>
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
Deferred financing costs $ 6,881 $ 7,414
Prepaid expenses and miscellaneous receivables 5,698 5,204
Furniture, fixtures, equipment, and other 6,946 6,969
------ -------
$ 19,525 $ 19,587
====== ======
</Table>
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 $1.9
million for other debt. Amortization of deferred financing costs was $1.8
million, $1.8 million, and $2.3 million for the years ended December 31, 2002,
2001, and 2000, respectively. Deferred financing costs written off as part of
extraordinary 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-
49
<Page>
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):
<Table>
<Caption>
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
GECC Mortgage Loan $ 450,422 $ 457,195
Permanent loans 176,726 103,213
Secured lines of credit 124,028 150,028
------- -------
$ 751,176 $ 710,436
======= =======
</Table>
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 seven loans secured by seven
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
$13.6 million mortgage loan secured by Oak Ridge Mall due July 2005 with a
variable interest rate of LIBOR plus 2.00% (as described in Note 18 to the
Consolidated Financial Statements, Oak Ridge Mall was approved for sale to Crown
Investments, and this loan will be fully paid-off by the Company when sold), (4)
a $53.3 million mortgage loan secured by Capital City Mall due January 2012 with
a fixed interest rate of 7.61%, (5) a $1.5 million Urban Development Action
Grant ("UDAG") loan secured by the Company's headquarters office building due
October 2006 with 0% interest, (6) a $37.0 million mortgage loan secured by
Valley View Mall due October 2009 with a fixed interest rate of 6.15%, and (7) 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 an extraordinary loss 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.
50
<PagE>
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 November 17, 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 March 3, 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.
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<Page>
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 7.61%, respectively. All of the remaining loans with an
aggregate principal balance of $132.6 million at December 31, 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 December 31,
2002, 2001, and 2000 was 3.59%, 4.18%, and 8.81%, 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 9.02%, 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).
<Table>
<Caption>
YEAR ENDING
DECEMBER 31,
------------
2003 $ 10,492
2004 135,847
2005 52,831
2006 12,546
2007 13,193
Thereafter 526,267
-------
$ 751,176
=======
</Table>
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 July 3, 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:
<Table>
<Caption>
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
</Table>
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
52
<Page>
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):
<Table>
<Caption>
YEAR ENDING
DECEMBER 31,
------------
2003 $ 117,209
2004 107,465
2005 97,075
2006 82,008
2007 67,786
Thereafter 211,395
-------
$ 682,938
=======
</Table>
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):
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<Page>
<Table>
<Caption>
BEGINNING ENDING
YEAR ENDED BALANCE, NET ADDITIONS AMORTIZATION OTHER BALANCE, NET
---------- ------------ --------- ------------ ----- ------------
December 31, 2002 $ 14,026 $ 1,722 $ 3,602 $ 618 $ 12,764
December 31, 2001 14,747 2,731 3,452 - 14,026
December 31, 2000 15,488 2,646 3,245 (142) 14,747
</Table>
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-3
with 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 December 31, 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,
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<Page>
GA) at the end of the second quarter 2001. Crown Investments is currently
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 will be amended significantly in connection with the approved sale
of Oak Ridge Mall.
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 December 31, 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 December 31, 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 December 31, 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 December
31, 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 approved for sale to Crown Investments.
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 July 24, 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.
55
<Page>
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
December 31, 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 $0.67 million, $0.40 million, and $0.58
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
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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:
<Table>
<Caption>
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
</Table>
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
57
<Page>
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 $132.6 million of debt 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 $605.7 million of fixed
rate debt has an estimated fair value of $619.9 million. The remaining $115.0
million of debt at December 31, 2001 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,
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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.
59
<Page>
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 all prior periods have been
reclassified.
The following represents certain condensed financial statement information on
Carlisle Plaza Mall for the applicable periods presented in the financial
statements (thousands of dollars):
<Table>
<Caption>
Year ended December 31,
-------------------------------------------------------
2002 2001 2000
---- ---- ----
Total revenues $ 1,634 $ 2,006 $ 2,134
Operating (loss) $ (142) $ (190) $ (157)
</Table>
<Table>
<Caption>
December 31,
----------------------------------
2002 2001
---- ----
Total assets (net) $ - $ 5,456
Total liabilities $ - $ 10,490
</Table>
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
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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):
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
YEAR ENDED DECEMBER 31, 2002:
Revenues $ 45,501 $ 44,824 $ 45,303 $ 53,796
Operating income before interest,
asset sales and adjustments, and
extraordinary items 16,340 16,522 15,409 20,097
Extraordinary (losses) (4,314) - - -
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) $ (0.05) $ 0.11
Diluted $ (0.22) $ (0.04) $ (0.05) $ 0.11
</Table>
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<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
YEAR ENDED DECEMBER 31, 2001:
Revenues $ 46,138 $ 43,847 $ 43,586 $ 49,309
Operating income before interest,
asset sales and adjustments, and
extraordinary items 15,450 13,856 15,388 19,329
Income before minority interest in
Operating Partnership 1,668 305 1,877 6,355
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
</Table>
Quarterly amounts have been reclassified to present the results of Carlisle
Plaza Mall, which was sold in October 2002, 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 - SUBSEQUENT EVENT - APPROVAL OF SALE OF OAK RIDGE MALL
Oak Ridge Mall ("Oak Ridge"), located in Oak Ridge, Tennessee, was classified as
held for operating purposes at December 31, 2002 under SFAS 144. Oak Ridge had
an aggregate net real estate carrying value of $25.2 million and debt of $13.6
million as of December 31, 2002. In March 2003, Oak Ridge was classified as held
for sale and is expected to be sold on or about March 31, 2003 to Crown
Investments, a related party, as described further below.
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 (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 for estimated fair value of $11.4
million, which is expected to close on or about March 31, 2003. The $11.4
million purchase price will be satisfied through issuance of a promissory note
by Crown Investments; such promissory note will be distributed in a
nonliquidating distribution to Crown American Investment Company ("CAIC"), and
effectively reduce 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 approved sale, the Company
will pay off the approximate current $13.4 million mortgage loan balance on Oak
Ridge and will also assign 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 will result in a loss on sale for financial reporting
purposes of approximately $13.7 million which will be 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, will be 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, both to be
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<Page>
effective when Oak Ridge is sold to Crown Investments. The amendment to the
Support Agreement will release Oak Ridge from Crown Investments' future
obligations under the Support Agreement and will reduce 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 will provide 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, Crown Investments' percentage ownership
interest in the Operating Partnership will be 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 recent closing price of the Company's common shares. Amounts owed under the
Support Agreement for Oak Ridge Mall from January 1 to the date of sale,
estimated at approximately $0.67 million, will be paid by Crown Investments to
the Operating Partnership, and the Operating Partnership will make 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 28,
2003, will remain unchanged as a result of the above transactions. However, the
common percentage ownership interests of the partners in the Operating
Partnership will change, as summarized in the following table:
<Table>
<Caption>
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%
------------------ ------------------
</Table>
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As reported on Form 8-K dated May 17, 2002, the Company dismissed Arthur
Andersen LLP as its independent auditors and appointed Ernst & Young LLP as
its independent auditors on May 14, 2002.
PART III
ITEMS 10 THROUGH 13.
In accordance with the provisions of General Instruction G (3) to Form
10-K, the information required by Item 10 (Directors and Executive Officers
of the Registrant), Item 11 (Executive Compensation), Item 12 (Security
Ownership of Certain Beneficial Owners and Management) and Item 13 (Certain
Relationships and Related Transactions) is not set forth herein (except for
the information concerning "Executive Officers of the Company" which appears
at the end of Part I hereof) because the Company's definitive Proxy Statement
for its 2003 Annual Meeting of Shareholders, which includes such information,
will be filed with the Commission not later than 120 days after the end of
the fiscal year covered by this annual report. Such information is
incorporated in this annual report by reference, except for the information
required to be included in the Proxy Statement by paragraphs (k) and (l) of
Item 402 of Regulation S-K.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's periodic filings with the Securities
and Exchange Commission.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of such evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The financial statements, financial statement schedules and exhibits
listed below are filed as part of this annual report:
(a) (1) FINANCIAL STATEMENTS PAGE NO.
-------------------- --------
Report of Independent Auditors 38
Consolidated Statements of Operations of Crown American
Realty Trust for the years ended December 31, 2002,
2001 and 2000 39
Consolidated Balance Sheets of Crown American Realty Trust as of 40
December 31, 2002 and 2001
Consolidated Statements of Cash Flows of Crown American
Realty Trust For the years ended December 31, 2002,
2001 and 2000 41
Consolidated Statements of Shareholders' Equity of Crown
American Realty Trust for the years ended December 31,
2002, 2001, and 2000 42
Notes to Consolidated Financial Statements 43-63
64
(2) FINANCIAL STATEMENT SCHEDULES
Schedule II- Valuation and Qualifying Accounts and Reserves 71
Schedule III - Consolidated Real Estate and Accumulated Depreciation 72-73
(b) REPORTS ON FORM 8-K
During the quarter ended December 31, 2002, the Company filed the
following current reports on Form 8-K with the Securities and Exchange
Commission:
o On October 28, 2002, the Company filed a report on Form
8-K dated October 28, 2002 to furnish information required
under Item 9 - Regulation FD Disclosure relating to its
Third Quarter 2002 Results and Supplemental Financial and
Operational Information Package. The text of the
Supplemental Financial and Operational Information Package
was included in the report.
o On December 2, 2002, the Company filed a report on Form
8-K dated November 19, 2002 to report information required
under Item 2 - Acquisitions and Dispositions relating to
its acquisition of the Valley View Mall on September 23,
2002 and Wiregrass Commons Mall on November 19, 2002. The
Company also filed copies of the agreements and press
releases related to the acquisitions as exhibits under
Item 7.
o On December 4, 2002, the Company filed a report on Form
8-K dated December 4, 2002 to furnish information required
under Item 9 - Regulation FD Disclosure, relating to a
presentation made by Company management on December 4,
2002 at an Investor Conference held by Friedman, Billings
and Ramsey in New York, New York. A copy of the text of
the presentation was included.
o On January 30, 2003 the Company filed an amendment to
current report on Form 8-K dated November 19, 2002 and
filed on December 2, 2002 to file financial statements and
pro forma financial information required by Item 7 with
respect to the acquisitions of Valley View Mall on
September 23, 2002 and Wiregrass Commons Mall on November
19, 2002.
(c) EXHIBITS
3.1 Second Amended and Restated Declaration of Trust of the Company. (c)
3.2 Bylaws of the Company. (c)
4.1 See Second Amended and Restated Declaration of Trust of the Company, (Exhibit 3.1). (c)
4.2 Articles Supplementary Classifying and Designating a Series of Preferred Shares (filed as Exhibit 4.4
to the Company's Amendment No. 2 to Registration Statement on Form S-3, filed on June 27, 1997)
4.3 Form of Preferred Share Certificate (filed as Exhibit 4.5 to the Company's Amendment No. 2 to
Registration
Statement of Form S-3, filed on June 27, 1997)
10.1 Amended and Restated Agreement of Limited Partnership of Crown American Properties, L.P. (b)
10.2 (a) First Amendment to Amended and Restated Agreement of Limited Partnership of Crown American Properties,
L.P. (b)
10.2 (b) Second Amendment to Amended and Restated Agreement of Limited Partnership of Crown
American Properties, L.P. (a)
10.2 (c) Third Amendment to Amended and Restated Agreement of Limited Partnership of Crown
American Properties, L.P. (a)
10.2 (d) Fourth Amendment to Amended and Restated Agreement of Limited Partnership of Crown American
Properties, L.P. (f)
10.2 (e) Fifth Amendment to Amended and Restated Agreement of Limited Partnership of Crown American
Properties, L.P. (g)
10.2 (f) Sixth Amendment to Amended and Restated Agreement of Limited Partnership of Crown American
Properties, L.P. (g)
10.2 (g) Amendment dated September 10, 1998, to the Sixth Amendment to Amended and Restated Agreement of
Limited Partnership of Crown American Properties, L.P. (g)
10.3 Amended and Restated Partnership Agreement of Crown American Financing Partnership. (b)
65
10.4 Certificate of Incorporation and Bylaws of Crown American Financing Corporation. (b)
10.5 Real Estate Management Agreements between the Operating Partnership and the following entities:
(a) Financing Partnership (g)
(b) Crown American Associates (b)
(h) Crown American WL Associates, L.P., as amended (g)
(i) Crown American Acquisition Associates I, L.P. (f)
(j) Crown American Lewistown Associates, L.P. (g)
(k) Crown American Acquisition Associates II, L.P. (g)
(l) Crown American Crossroads LLC (g)
(m) Washington Crown Center Associates, L.P. (g)
(n) Crown American Capital City Associates, L.P. (n)
(o) Crown American Valley View Associates, L.P. (n)
10.6 Key Executive Bonus Incentive Plan. (c) #
10.6 (a) Amended and Restated Key Executive Capital Incentive Plan dated July 25, 2000. (i) #
10.7 Retirement Savings Plan. (c) #
10.8 Sample Indemnification Agreement between the Company and its Trustees and officers (together with a
schedule identifying the other agreements not being filed and material differences therein). (b)
10.9 Permanent Loan Agreement between Crown American Financing, L.P. and Crown American W L Associates,
L.P. and General Electric Capital Corporation. (g)
10.10 Amended and Restated Credit Agreement with General Electric Capital Corporation
September 8, 1999. (h)
10.10 (a) Second Amended and Restated Credit Agreement with General Electric Capital Corporation dated
December 4, 2000. (i)
10.11 Amended and Restated Cash Flow Support Agreement, dated May 9, 1994 (a)
10.11(a) Amendment dated December 3, 1997, to the Amended and Restated Cash Flow Support Agreement
dated May 9, 1994. (f)
10.11 (b) Second Amendment to the Amended and Restated Cash Flow Support Agreement, dated May 17, 2002 (m)
10.12 1993 Crown American Realty Option Plan. (c) #
10.13 Amended and Restated Crown American Realty Trustees' Option Plan, as of December 30, 1997. (f) #
10.14 Sample Option Agreement for Employees (together with a schedule identifying the other agreements not
being filed and material differences therein). (b) #
10.14 (a) Amended Sample Option Agreement for Employees. (j)
10.15 Sample Option Agreement for Trustees (together with a schedule identifying the other agreements not
being filed and material differences therein). (b)#
10.16 Not used
10.17 Registration Rights Agreement, dated as of August 13, 1999 between the Company and PNC Bank
National Association (h)
10.17 (a) Third Amended and Restated Registration Rights Agreement (j)
10.18 Exchange Agreement, dated as of August 13, 1999, among PNC Bank, National Association, the Company,
Crown American Properties, L.P., Crown Investments Trust, and Crown American Investment Company. (h)
10.18 (a) Second Amended and Restated Exchange Agreement (j)
10.19 Crown American Properties L.P. Savings Restoration Plan. (e) #
10.20 (a) Form of Employment Continuation Agreement dated as of February 25, 2002 between Crown American
Properties, L.P. and Mark E. Pasquerilla, Terry L. Stevens, and Donato B. Zucco (k)
10.20 (b) Form of Employment Continuation Agreement dated as of February 25, 2002 between Crown American
Properties, L.P. and Thomas Stephenson, Nicholas O. Antonazzo, John A. Washko, Ronald P. Rusinak, and
Robert J. Griffith (k)
10.21 Employment agreement dated as of January 1, 2002, by and between Crown American Properties, L.P. and
Terry L. Stevens, Executive Vice President and Chief Financial Officer (k)
10.22 Underwriting Agreement by and among the Company, Crown American Properties, L.P., Friedman, Billings,
Ramsey & Co., Inc., Ferris, Baker Watts, Incorporated, J.J.B. Hilliard, W.L. Lyons, Inc. and Stifel
Nicolaus & Company, Incorporated, dated June 3, 2002, with respect to the issuance and sale of up to
5,750,000 shares of the Company's common shares of beneficial interest (l)
21 List of subsidiaries of the Company. (g)
21 (a) Amended List of subsidiaries of the Company (n)
23 Consent of Ernst & Young LLP (n)
24 Powers of Attorney (n)
99.1 Certifications (n)
(a) Filed as an Exhibit to the Company's Report on Form 10K for the year ended December 31, 1994.
66
(b) Filed as an Exhibit to the Company's Report on Form 10K for the period ended December 31, 1993.
(c) Filed as an Exhibit to the Company's Registration Statement on Form S-11, effective as of August 9,
1993.
(d) Filed as an Exhibit to Amendment No. 1 to the Company's Registration Statement on Form S 3,
Registration
No. 33-91880, effective as of June 9, 1995.
(e) Filed as an Exhibit to the Company's report on Form 10K for the year ended December 31, 1996.
(f) Filed as an Exhibit to the Company's report on Form 10K for the year ended December 31, 1997.
(g) Filed as an Exhibit to the Company's report on Form 10K for the year ended December 31, 1998.
(h) Filed as an Exhibit to the Company's report on Form 10K for the year ended December 31, 1999.
(i) Filed as an Exhibit to the Company's report on Form 10K for the year ended December 31, 2000.
(j) Filed as an Exhibit to the Company's report on Form 10K for the year ended December 31, 2001.
(k) Filed as an Exhibit to the Company's report on Form 10Q for the quarter ended March 31, 2002.
(l) Filed as an Exhibit to the Company's report on Form 8K on June 6, 2002.
(m) Filed as an Exhibit to the Company's report on Form 10Q for the quarter ended June 30, 2002.
(n) Filed herewith
# Indicates management contract or compensatory plan or arrangement.
67
<Page>
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CROWN AMERICAN REALTY TRUST
By /s/ Mark E. Pasquerilla
------------------------
Mark E. Pasquerilla
Chief Executive Officer & President
Date: March 31, 2003
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Company in the capacities indicated and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
- --------- ----- -----
/s/ Mark E. Pasquerilla Trustee, Chairman of the Board, March 31, 2003
- ----------------------- CEO and President
Mark E. Pasquerilla
/s/ Terry L. Stevens Trustee, Executive Vice President March 31, 2003
- ----------------------- And Chief Financial Officer
Terry L. Stevens
/s/ Donato B. Zucco Trustee, Senior Vice President March 31, 2003
- ----------------------- And Chief Administrative Officer
Donato B. Zucco
/s/ John A. Washko Vice President and March 31, 2003
- ----------------------- Chief Accounting Officer
John A. Washko
* Trustee March 31, 2003
- -----------------------
Clifford A. Barton
* Trustee March 31, 2003
- -----------------------
Donald F. Mazziotti
* Trustee March 31, 2003
- -----------------------
Peter J. Siris
* Trustee March 31, 2003
- -----------------------
Zachary L. Solomon
*By: /s/ Terry L. Stevens
---------------------
Terry L. Stevens
as Attorney-in-Fact
</Table>
68
<Page>
CERTIFICATION
I, Mark E. Pasquerilla, certify that:
1. I have reviewed this annual report on Form 10-K of Crown American Realty
Trust.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Mark E. Pasquerilla
- ------------------------------
Name: Mark E. Pasquerilla
Title: Chief Executive Officer
69
<Page>
CERTIFICATION
I, Terry L. Stevens, certify that:
1. I have reviewed this annual report on Form 10-K of Crown American Realty
Trust.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Terry L. Stevens
- ------------------------
Name: Terry L. Stevens
Title: Chief Financial Officer
70
<Page>
SCHEDULE II
CROWN AMERICAN REALTY TRUST
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
ADDITIONS
------------------------------
BEGINNING CHARGED TO ENDING
DESCRIPTION BALANCE EXPENSE OTHER DEDUCTIONS BALANCE
- ---------------------------------------- ------------ ------------ ------------ ------------ -------------
DECEMBER 31, 2002:
Allowance for doubtful accounts $ 2,117 $ 1,230 $ - $ (959) $ 2,388
Restructuring costs 137 - - (118) 19
DECEMBER 31, 2001:
Allowance for doubtful accounts 2,571 1,547 - (2,001) 2,117
Restructuring costs 231 - - (94) 137
DECEMBER 31, 2000:
Allowance for doubtful accounts 962 2,210 - (601) 2,571
Restructuring costs 664 369 - (802) 231
</Table>
71
<Page>
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:
<Table>
Base Building 45 years
Building Components 10 - 20 years
Tenant Improvements Terms of Leases or useful lives, whichever is shorter
</Table>
The aggregate cost for Federal income tax purposes was approximately
$1,234 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:
<Table>
<Caption>
TOTAL REAL ESTATE ASSETS
-----------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------- -------------- ------------- ------------ ------------
Balance, beginning of period $ 1,171,979 $ 1,158,715 $ 1,129,534 $ 1,081,723 $ 974,671
Additions and improvements 13,471 20,841 43,720 50,212 59,889
Acquisitions 89,998 - - - 65,602
Cost of real estate sold (719) (192) (12,795) (482) (16,270)
Other writeoffs (2,245) (7,385) (1,744) (1,919) (2,169)
-------------- -------------- ------------- ------------- ------------
Balance, end of period $ 1,272,484 $ 1,171,979 $ 1,158,715 $ 1,129,534 $ 1,081,723
============== ============== ============= ============= ============
</Table>
<Table>
<Caption>
ACCUMULATED DEPRECIATION & AMORTIZATION
-----------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------- -------------- ------------- ------------ ------------
Balance, beginning of period $ 432,223 $ 394,845 $ 356,009 $ 317,552 $ 286,727
Depreciation and amortization 40,786 44,763 43,638 40,376 38,754
Acquisitions 740 - - - -
Cost of real estate sold - - (3,058) - (5,760)
Other writeoffs (2,245) (7,385) (1,744) (1,919) (2,169)
-------------- -------------- ------------- ------------- ------------
Balance, end of period $ 471,504 $ 432,223 $ 394,845 $ 356,009 $ 317,552
============== ============== ============= ============= ============
</Table>
(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 total loan outstanding
based on their relative net operating income at December 31, 2002, as
defined in 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.
73