<Page>
Exhibit 99.4
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): June 9, 2003
CROWN AMERICAN REALTY TRUST
(Exact Name of Registrant as Specified in its Charter)
MARYLAND
(State or Other Jurisdiction of Incorporation)
1-12216 25-1713733
(Commission File Number) (IRS Employer Identification No.)
PASQUERILLA PLAZA, JOHNSTOWN, PENNSYLVANIA, 15901
(Address of Principal Executive Offices)
(814)-536-4441
(Registrant's Telephone Number Including Area Code)
<Page>
CROWN AMERICAN REALTY TRUST
FORM 8-K
FOR THE PERIOD ENDED DECEMBER 31, 2002
ITEM 5. OTHER EVENTS
Exhibits 99.2, 99.3, 99.4 and 99.5 to this Current Report on
Form 8-K, which are incorporated by reference herein, represent restatements of
Item 6 - Selected Financial Data, Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations, Item 7(a) - Quantitative and
Qualitative Disclosures About Market Risk, and Item 8 - Financial Statements and
Supplementary Data, respectively, from the Company's Annual Report on Form 10-K
for the year ended December 31, 2002. The restatements relate to the following
three matters:
- Certain reclassifications necessary to present losses from
early extinguishment of debt recorded in 2002, 2000, and
1998 as part of income from continuing operations in
accordance with SFAS No. 145 "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections".
- Certain reclassifications necessary to present one of the
Company's malls - Oak Ridge Mall in Oak Ridge, Tennessee -
as discontinued operations in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" as a
result of its sale on March 31, 2003.
- The May 13, 2003 definitive merger agreement between the
Company and Pennsylvania Real Estate Investment Trust, a
Pennsylvania business Trust (NYSE: PEI) ("PREIT"), under
which the Company agreed to merge into PREIT. The Boards
of Trustees of PREIT and the Company have unanimously
approved the merger. This merger agreement was publicly
announced on May 14, 2003.
The items discussed above did not affect net income for any of
the five years in the period ended December 31, 2002.
Except as otherwise expressly noted, the financial statement
disclosures, management estimates and forward looking statements contained in
this Current Report on Form 8-K have not been updated to reflect any
developments subsequent to December 31, 2002.
2
<Page>
ITEM 7. FINANCIAL STATEMENTS, PROFORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits
<Table>
23.1 Consent of Ernst & Young LLP (n)
99.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350,
as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (n)
99.2 Selected Financial Data (n)
99.3 Management's Discussion and Analysis of Financial Condition
and Results of Operations (n)
99.4 Quantitative and Qualitative Disclosures About Market Risk (n)
99.5 Financial Statements and Supplementary Data (n)
(n) Filed herewith
</Table>
3
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: June 19, 2003 CROWN AMERICAN REALTY TRUST
/s/ MARK E. PASQUERILLA
-----------------------------------
MARK E. PASQUERILLA
CHAIRMAN OF THE BOARD OF TRUSTEES,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Date: June 19, 2003 CROWN AMERICAN REALTY TRUST
/s/ TERRY L. STEVENS
------------------------------------
TERRY L. STEVENS
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Date: June 19, 2003 CROWN AMERICAN REALTY TRUST
/s/ JOHN A. WASHKO
------------------------------------
JOHN A. WASHKO
VICE PRESIDENT AND
CHIEF ACCOUNTING OFFICER
4
<Page>
CERTIFICATION
I, Mark E. Pasquerilla, certify that:
1. I have reviewed this Current Report on Form 8-K of Crown American Realty
Trust, amending certain items of the Company's Annual Report on Form 10-K
for the year ended December 31, 2002.
2. Based on my knowledge, this Form 8-K 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 Form
8-K;
3. Based on my knowledge, the financial statements, and other financial
information included in this Form 8-K, 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 Form 8-K;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-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 Form 8-K 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
Form 8-K (the "Evaluation Date"); and
(c) presented in this Form 8-K 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 officer 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 officer and I have indicated in this Form
8-K 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: June 19, 2003
/s/ MARK E. PASQUERILLA
- -----------------------------------
Name: Mark E. Pasquerilla
Title: Chief Executive Officer
5
<Page>
CERTIFICATION
I, Terry L. Stevens, certify that:
1. I have reviewed this Current Report on Form 8-K of Crown American Realty
Trust, amending certain items of the Company's Annual Report on Form 10-K
for the year ended December 31, 2002.
2. Based on my knowledge, this Form 8-K 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 Form
8-K;
3. Based on my knowledge, the financial statements, and other financial
information included in this Form 8-K, 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 Form 8-K;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-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 Form 8-K 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
Form 8-K (the "Evaluation Date"); and
(c) presented in this Form 8-K 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 officer 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 officer and I have indicated in this Form
8-K 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: June 19, 2003
/s/ TERRY L. STEVENS
- -------------------------------
Name: Terry L. Stevens
Title: Chief Financial Officer
6
<Page>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- --------------------
23.1 Consent of Ernst & Young LLP
99.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2003
99.2 Selected Financial Data
99.3 Management's Discussion and Analysis of Financial
Condition and Results of Operations
99.4 Quantitative and Qualitative Disclosures About Market Risk
99.5 Financial Statements and Supplementary Data
</Table>
7
<Page>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated March 28, 2003, included in the Form
10-K of Crown American Realty Trust for the year ended December 31, 2002, with
respect to the consolidated financial statements and schedules, as amended,
incorporated by reference in this Form 8-K.
ERNST & YOUNG LLP
McLean, Virginia
June 19, 2003
8
<Page>
EXHIBIT 99.1
CERTIFICATIONS
Pursuant to 18 U.S.C. Section 1350, the undersigned officer for Crown American
Realty Trust (the "COMPANY"), hereby certifies that the Company's Annual Report
on Form 10-K for the year ended December 31, 2002 (the "REPORT") fully complies
with the requirements of Section 13 (a) or 15 (d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
By: /s/ MARK E. PASQUERILLA
------------------------------------
Mark E. Pasquerilla
President & Chief Executive Officer
Dated: June 19, 2003
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY 18 U.S.C. SECTION 1350
HAS BEEN PROVIDED TO THE COMPANY AND WILL BE RETAINED BY THE COMPANY AND
FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.
Pursuant to 18 U.S.C. Section 1350, the undersigned officer for Crown American
Realty Trust (the "COMPANY"), hereby certifies that the Company's Annual Report
on Form 10-K for the year ended December 31, 2002 (the "REPORT") fully complies
with the requirements of Section 13 (a) or 15 (d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
By: /s/ TERRY L. STEVENS
-----------------------------------
Terry L. Stevens
Executive Vice President and Chief
Financial Officer
Dated: June 19, 2003
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY 18 U.S.C. SECTION 1350
HAS BEEN PROVIDED TO THE COMPANY AND WILL BE RETAINED BY THE COMPANY AND
FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.
<Page>
EXHIBIT 99.2
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
amendment to the Company's Annual Report on Form 10-K for the year end December
31, 2002.
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 with respect to
Carlisle Plaza Mall and Oak Ridge Mall which were sold in 2002 and 2003,
respectively, as further described in Notes 14 and 18 to the Consolidated
Financial Statements. As further described in Note 2 to the Consolidated
Financial Statements, the Company adopted SFAS 145 effective January 1, 2003 and
accordingly reclassified losses on early debt extinguishments that occurred in
prior periods from "extraordinary losses" to "income from continuing
operations". The calculation of Funds from Operations, or FFO, has also been
changed to reflect this reclassification. 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.
1
<Page>
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- ------------
(10) (10) (10) (10) (10)
(in thousands, except per share data)
OPERATING DATA:
Total revenues $ 186,004 $ 178,603 $ 173,186 $ 162,170 $ 151,196
Operating costs:
Property operating costs (66,756) (62,877) (60,573) (57,839) (56,074)
Depreciation and amortization (44,375) (46,888) (45,425) (41,010) (39,291)
General and administrative expenses (6,822) (5,393) (5,093) (4,663) (4,971)
Restructuring costs - - (369) (2,251) -
----------- ----------- ----------- ----------- ------------
Operating income before interest 68,051 63,445 61,726 55,407 50,860
Interest (50,736) (52,702) (54,306) (47,955) (42,325)
Loss on early extinguishment of debt (4,314) - (243) - (22,512)
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 (loss) from continuing operations before change
in accounting method and discontinued operations 8,019 6,181 7,213 10,947 (4,404)
Cumulative effect of change in accounting method - - - - (1,659)
Loss from discontinued operations (304) (975) (1,234) (1,672) (2,576)
----------- ----------- ----------- ----------- ------------
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:
Income (loss) from continuing operations before
extraordinary items and discontinued operations $ (0.19) $ (0.28) $ (0.25) $ (0.10) $ (0.69)
Cumulative effect of change in accounting method (0.06)
Loss from discontinued operations (0.01) (0.04) (0.04) (0.07) (0.10)
----------- ----------- ----------- ----------- ------------
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 44,375 46,888 47,348 42,010 39,291
Depreciation in JV and other line items 1,785 1,715 1,673 1,598 1,251
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 1,496 2,022 406 2,317 2,450
----------- ----------- ----------- ----------- ------------
Funds from Operations before allocations to
preferred shares and minority interest 63,422 63,897 61,819 57,779 34,107
Less:
Amounts allocable to preferred shares 13,613 13,613 13,695 13,750 13,750
Amounts allocable to minority interest 12,412 13,722 13,249 12,121 5,533
----------- ----------- ----------- ----------- ------------
Funds from Operations applicable to
common shares $ 37,397 $ 36,562 $ 34,875 $ 31,908 $ 14,824
=========== =========== =========== =========== ============
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 following page for explanation.
2
<Page>
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
<Table>
<Caption>
DECEMBER 31,
-------------------------------------------------------------------------
BALANCE SHEET DATA: 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(10) (10) (10) (10) (10)
Income-producing properties (before accumulated
depreciation and amortization) $ 1,271,742 $ 1,171,117 $ 1,157,998 $ 1,120,071 $ 1,071,564
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 27 25 25 26 26
Total GLA at end of year (000 sq. ft.) (7) 16,322 15,120 14,993 15,161 14,730
Mall shop GLA at end of year (000 sq. ft.) 5,717 5,302 5,279 5,366 5,343
Comparable store mall shop tenant sales per square
foot (8) $ 272 $ 271 $ 267 $ 262 $ 245
Mall shop occupancy percentage at year end (9) 89% 89% 89% 86% 84%
</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 1 of this Exhibit 99.2.
(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 and Oak Ridge 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, the sale of
Carlisle Plaza Mall in October 2002 and the sale of Oak Ridge Mall in
March 2003. See Notes 13, 14 and 18 to the Consolidated Financial
Statements. This data also includes Palmer Park Mall, and 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 $1,055 million, $1,031
million, $1,026 million, $985 million, and $885 million for 2002 to
1998, respectively. Sales reported for 2002 to 1998 for all owned anchor
stores were $1,174 million, $ 1,201 million, $1,200 million, $1,197
million, and $1,159 million, respectively. The Company owns 88 of 107
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 as described in Notes 2, 14 and 18
to the Consolidated Financial Statements.
(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.
3
<Page>
EXHIBIT 99.3
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 amendment to the Company's Annual Report on
Form 10-K for the year ended December 31, 2002. The Note references in this item
refer to the Consolidated Financial Statements and notes thereto in Item 8 filed
as Exhibit 99.5 hereto. 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, including Oak
Ridge Mall sold on March 31, 2003, (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 was sold to Crown Investments on March 31, 2003 and is now
reported as "discontinued operations - held for sale" status in the accompanying
financial statements and statistics presented herein, with all prior periods
reclassified in accordance with SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets".
(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.
FFO for the years ended December 31, 2002, 2000 and 1998 have
been restated to classify losses on early extinguishments of debt that occurred
in those years in "income from continuing operations." These losses previously
were classified in accordance with GAAP as "extraordinary items." The
reclassifications were made in accordance with SFAS No. 145 which the Company
adopted as of January 1, 2003 (see Note 18 to the Consolidated Financial
Statements).
Page 1
<Page>
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 $63.4 million compared to $63.9 million in
2001, a decrease of $0.5 million. FFO allocable to common shares increased from
$36.6 million in 2001 to $37.4 million in 2002, an improvement of 2%. 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 decrease in FFO of $0.5 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) $2.7 million increase in mall shops and anchor base
rents, consisting of a $3.0 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) $2.7 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
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) $4.3 million
from the reclassification of the 2002 loss on debt refinancing described above,
(vii) $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; (viii)
$0.3 million in higher property operating costs, net of tenant reimbursements;
(ix) $1.0 million in lower lease buyout income due to higher buyouts which
occurred in 2001; (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 ongoing
evaluation of strategic alternatives and proposed merger with Pennsylvania Real
Estate Investment Trust, as further described in Note 18 to the Consolidated
Financial Statements. 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 $61.8
million in 2000, a 3.4% increase. FFO allocable to common shares increased from
$34.9 million in 2000 to $36.6 million in 2001, an improvement of $1.7 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 $2.1 million before allocations to
minority interest and to preferred dividends versus 2000 was due primarily to
the following: (i) a net $1.2 million increase in mall shop and anchor base and
percentage rents, consisting of a $2.4 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) $1.6 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) $0.4 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.
Page 2
<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 50,736 52,702 54,306
Depreciation and amortization 44,375 46,887 45,425
Restructuring costs - - 369
Loss on early extinguishment of debt 4,314 - 243
Depreciation from discontinued operations 1,496 2,023 2,350
Interest from discontinued operations 1,583 2,312 2,756
Operating covenant amortization included
as a reduction of minimum rent - - 2,623
Depreciation in G & A, in recoverable costs 1,472 1,405 1,297
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 $117.1 million. This
decrease was primarily the result of higher property operating costs, net of
recoveries, and lower gain on outparcel sales, offset by higher mall shop base
rents, higher lease buyout income, higher temporary and seasonal rents, and
higher straight-line rents.
(d) PROPERTY OPERATING RESULTS AND TRENDS
AGGREGATE TENANT SALES VOLUME
Over the long term, the level of anchor and mall shop tenant sales is
the single most important determinant of revenues of the Company as anchor and
mall shop tenants provide over 90% of total revenues and because tenant sales
determine the amount of rent, percentage rent and recoverable expenses
(together, total occupancy costs) that tenants can afford to pay. However,
levels of tenant sales are considerably more volatile in the short run than
total occupancy costs.
Page 3
<Page>
Total reported sales for all tenants that reported sales for
the applicable years are shown below ($ in millions):
<Table>
<Caption>
2002 2001 2000
---- ---- ----
Anchors (owned locations) $ 1,174 $ 1,201 $ 1,200
Mall shop tenants, excluding
Freestanding, theater, and
Supermarkets 1,055 1,031 1,026
</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 88 of 107 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 $ 20.44 $ 19.81 $ 19.08
June 30 20.54 19.84 19.26
September 30 20.63 19.99 19.51
December 31 20.84 20.01 19.67
</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 $271.57 $270.94 $267.32
Occupancy cost percentage at period end 10.1% 10.1% 10.2%
</Table>
Page 4
<Page>
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.
<Table>
<Caption>
2002 2001 2000
---- ---- ----
March 31 88% 88% 87%
June 30 89% 87% 87%
September 30 89% 88% 88%
December 31 89% 89% 89%
</Table>
At December 31, 2002, anchor occupancy was 98.1% and total
portfolio occupancy (anchors, mall stores and freestanding) was 94.6%.
(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 $ 23,604 $ 23,880 $ 23,979
Mall shops & freestanding - base rents 84,016 79,229 77,563
Mall shops & freestanding - percentage rent in
lieu of fixed base rent 2,904 2,949 2,405
Straight line rental income 863 747 115
Ground leases - base rents 2,121 2,103 1,943
Lease buyout income 672 1,731 522
Operating covenant amortization - - (2,623)
-------------- --------------- ---------------
Total minimum rents $114,180 $110,639 $103,904
============== =============== ===============
COMPONENTS OF PERCENTAGE/OVERAGE RENTS:
Anchors $ 2,551 $ 2,674 $ 3,168
Mall shops, freestanding, and ground leases 4,099 4,306 4,814
-------------- --------------- ---------------
Total Percentage/Overage Rents $ 6,650 $ 6,980 $ 7,982
============== =============== ===============
</Table>
YEAR ENDED DECEMBER 31, 2002 VERSUS YEAR ENDED DECEMBER 31,
2001
Total revenues in 2002 were $186.0 million, an increase of
$7.4 million, or 4.1%, over 2001
revenues of $178.6 million. The primary reasons for the revenue growth of $7.4
million in 2002 were higher base rents from mall shops, higher temporary and
seasonal leasing, higher operating cost recoveries from tenants, and
Page 5
<Page>
higher straight-line rents. These positive impacts on revenues were partially
offset by lower percentage rents, lower base rents from anchor tenants, and
lower lease termination fees (buyout income).
Property operating and administrative costs, including utility
redistribution costs, but excluding depreciation and amortization, increased
from $62.9 million in 2001 to $66.7 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 $2.5
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 and
proposed merger with Pennsylvania Real Estate Investment Trust, as further
described in Note 18 to the Consolidated Financial Statements.
Interest expense (net of capitalized amounts and interest
income) for 2002 was $50.7 million, a decrease of $2.0 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 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
a 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 $178.6 million in 2001, an increase of
$5.4 million, or 3.1%, over 2000's revenues of $173.2 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
$2.3 million in 2001, a 3.8% increase over 2000. 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 $1.5
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.
Page 6
<Page>
Interest expense (net of capitalized amounts and interest
income) for 2001 was $52.7 million, a $1.6 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 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.
Page 7
<Page>
- 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 3.6%, 3.9%, and 4.6% of total
revenues for the years ended December 31, 2002, 2001, and 2000, respectively.
Approximately 15% of the Company's tenants pay percentage 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 74.6%, 74.3%, and 78.6%, 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.
Page 8
<Page>
- 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
$10.8 million, $10.7 million, and $10.6 million for the years ended December 31,
2002, 2001, and 2000, respectively. Capitalized improvements and replacements,
including tenant improvements and allowances, were $14.4 million, $23.1 million
and $45.6 million for the years ended December 31, 2002, 2001, and 2000,
respectively.
- 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.
Page 9
<Page>
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) $ 2,325 $ 2,070 $ 2,529
----- ----- -----
As a % of Related Receivables Balance 14.2% 13.6% 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.
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 was reduced below zero, and there was an obligation of the minority
partner to make additional cash contributions to the Operating Partnership, the
minority interest balance at December 31, 2002 was shown on the Consolidated
Balance Sheet as an asset. This asset balance at December 31, 2002 was limited
to $3.3 million, the estimated amount of cash flow support to be received over
the next twelve months. As a result of the amendments to the Support Agreement
made during the first and second quarters of 2003, which reduced the minority
partner's future obligations under the Support
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Agreement, as described in Note 18 to the Consolidated Financial Statements, the
minority interest amount was reduced to $0.5 million in the first quarter of
2003 and reduced to zero in the second quarter of 2003. An additional amount of
$5.5 million, representing the excess losses and distributions over and above
the cash flow support, has been absorbed by the Company in its share of loss
from the Operating Partnership for the year ended December 31, 2002. On a
cumulative basis, $14.1 million of such losses have been absorbed by the
Company, through 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 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."
SFAS 145 is effective for fiscal years beginning after May 15, 2002 and the
Company adopted SFAS 145 beginning January 1, 2003. Accordingly, the Company
expects that gains and losses related to debt extinguishments after January 1,
2003, generally will be classified in income from continuing operations rather
than as extraordinary items. In addition, extraordinary losses from early debt
extinguishments recorded by the Company in prior periods have been reclassified
to income from continuing operations; prior period Funds from Operations have
been restated to include such losses. (See Note 18 to the Consolidated Financial
Statements.)
In July 2002, the FASB issued Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities", ("SFAS 146") which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." Among other provisions, SFAS 146 eliminates the definition
and requirements for recognition of exit costs in EITF Issue 94-3 and requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred which can differ from the commitment
date of the plan. This Statement also establishes that fair value is the
objective for initial measurement of the liability. The provisions of SFAS 146
are effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. The Company adopted SFAS 146
beginning January 1, 2003 and believes that the implementation of this Statement
will not have a material impact on the Company's results of operations or
financial position.
The Company adopted the disclosure provisions of FASB
Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Direct Guarantees of Indebtedness of Others," in the
fourth quarter of 2002. The Company adopted the initial recognition and initial
measurement provisions on a prospective basis for all guarantees issued or
modified after December 31, 2002. Under FIN 45, at the inception of guarantees
issued after December 31, 2002, the fair value of the guarantee is recorded as a
liability, with the offsetting entry recorded based on the circumstances in
which the guarantee was issued. Fundings under the guarantee are accounted for
as a reduction of the liability. After funding has ceased, the remaining
liability is
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recognized in the income statement on a straight-line basis over the remaining
term of the guarantee. Adoption of FIN 45 will have no impact to the Company's
financial statements through December 31, 2002 as existing guarantees are not
subject to the measurement provisions of FIN 45. The impact on financial
statements after December 31, 2002 will depend on the nature and extent of
issued guarantees but is not expected to have a material impact to the Company.
(See Note 5 to the Consolidated Financial Statements.)
FIN 46, "Consolidation of Variable Interest Entities," is
effective for all enterprises with variable interests in variable interest
entities created after January 31, 2003. FIN 46 provisions must be applied to
variable interests in variable interest entities created before February 1, 2003
from the beginning of the third quarter of 2003. If an entity is determined to
be a variable interest entity, it must be consolidated by the enterprise that
absorbs the majority of the entity's expected losses if they occur, receives a
majority of the entity's expected residual returns if the occur, or both. Where
it is reasonably possible that an enterprise will consolidate or disclose
information about a variable interest entity, the enterprise must disclose the
nature, purpose, size and activity of the variable interest entity and the
enterprise's maximum exposure to loss as a result of its involvement with the
variable interest entity in all financial statements issued after January 31,
2003. The Company does not believe that the adoption of FIN 46 will result in
consolidation of any previously unconsolidated entities. The adoption of FIN 46
may result in additional disclosures which are not expected to be significant.
(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 $2.0 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 $6.4 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) $106.1 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 Financial
Statements); (vi) $12.3 million of net cash used in discontinued operations
related to the sale of Carlisle Plaza Mall in October 2002 and Oak Ridge Mall in
March 2003; (vii) $1.4 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 $6.5 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 $9.4 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).
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2000 CASH FLOWS
During 2000, the Company generated $58.3 million in cash flows
from operating activities, which is net of an aggregate $2.2 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 $4.7 million in net proceeds from the
sale of the Greater Lewistown Shopping Plaza. The Company used a net $30.2
million in its financing activities, which included (i) additional borrowings of
$61.7 million, net of debt issuance costs, (ii) $50.3 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 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
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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.
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.
- 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, 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.
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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 $9.2 million, $134.6 million, $41.8 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 2.30
to 1, 2.17 to 1, and 2.12 to 1, respectively.
- PROPERTY ACQUISITIONS
VALLEY VIEW MALL - 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.
WIREGRASS COMMONS MALL - 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.
- PROPERTY DISPOSITIONS
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.
CARLISLE PLAZA MALL - 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.
OAK RIDGE MALL - In May 2002 the Company's Board of Trustees
approved an agreement to sell Oak Ridge Mall ("Oak Ridge"), located in Oak
Ridge, Tennessee, to an unrelated third party. The independent members of the
Board of Trustees ("Independent Trustees") concurrently approved an amendment of
the Support Agreement (see Note 8 to the Consolidated Financial Statements)
regarding the cash flow support obligations of Crown Investments with respect to
Oak Ridge. However, the effectiveness of this proposed amendment was expressly
conditioned upon the completion of the sale. The purchase agreement with the
third party was extended
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and amended several times since May 2002 (including a reduction of the purchase
price from $12.0 million to $10.6 million), and a variety of conditions required
for closing with the third party continued to be unsatisfied.
Consequently, on March 28, 2003 the Independent Trustees
instead approved the sale of Oak Ridge to Crown Investments, an entity which is
owned by Mark E. Pasquerilla, the Company's CEO and President, for estimated
fair value of $11.4 million, which closed March 31, 2003. The $11.4 million
purchase price was satisfied through issuance of a promissory note by Crown
Investments; such promissory note was distributed in a non-liquidating
distribution to Crown American Investment Company ("CAIC"), and effectively
reduced CAIC's common percentage ownership interest in the Operating Partnership
equivalent to 1,159,794 common partnership units. CAIC is a wholly-owned
subsidiary of Crown Investments and is a minority limited partner in the
Operating Partnership. In connection with the sale, the Company paid off the
$13.4 million mortgage loan balance on Oak Ridge and assigned to Crown
Investments the existing agreement of sale with the third party, as amended.
Crown Investments agreed that it will pay to the Company an amount equal to 90%
of the amount, if any, by which the net proceeds received on the sale to any
unrelated third party of Oak Ridge by Crown Investments concluded within six
years of the purchase by Crown Investments exceeds Crown Investments' total
investment in Oak Ridge (defined to include $11.4 million plus the aggregate
amount of all additional investments made by Crown Investments in Oak Ridge plus
an 8% return compounded annually on this sum). On June 12, 2003, Crown
Investments sold Oak Ridge Mall, except for the free standing multi-screen
theater, to a third party for $6.0 million. The buyer has an option for six
months to acquire the theater parcel.
The sale of Oak Ridge resulted in a loss on sale for financial
reporting purposes of $13.8 million which was recorded by the Company in the
first quarter of 2003. The reduction in the minority partner's percentage
ownership interest, valued at $11.4 million, was recorded in shareholders'
equity in the consolidated balance sheet.
Oak Ridge was classified as held for operating purposes at
December 31, 2002 under SFAS 144. The financial statements for 2000, 2001 and
2002, as originally filed on Form 10K for the year ended December 31, 2002, have
been reclassified to present Oak Ridge Mall as discontinued operations in
accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long
Lived Assets."
In connection with the foregoing, the Independent Trustees
also approved amendments to the Support Agreement and to the Amended and
Restated Agreement of Limited Partnership of the Operating Partnership. The
amendment to the Support Agreement released Oak Ridge from Crown Investments'
future obligations under the Support Agreement and reduced the maximum quarterly
amount of support payments for the remaining two properties in the Agreement
from $1,000,000 to $300,000. Approximately 81% of the $3.1 million in cash flow
support for the year ended December 31, 2002 related to Oak Ridge. The amendment
to the Limited Partnership Agreement provided for a special allocation of 100
percent of the net tax loss from the sale of Oak Ridge to Crown Investments to
the extent of Crown Investments' obligation under the Support Agreement related
to Oak Ridge; the remaining tax loss from the sale will be allocated to the
partners in accordance with their ownership interests. It is expected that the
tax loss should result in a significant portion of the Company's common
dividends that may be paid in 2003 being treated as non-taxable return of
capital.
As a result of these amendments to the Support Agreement,
Crown Investments' percentage ownership interest in the Operating Partnership
was reduced by an amount equivalent to 2,600,000 common partnership units. The
minority partner's reduction in its ownership interest had a value of
approximately $25.6 million, based on the closing price of the Company's common
shares on March 27, 2003 (which was $9.84). Amounts owed under the Support
Agreement for Oak Ridge Mall from January 1 to March 31, 2003 of $0.67 million,
were paid by Crown Investments to the Operating Partnership, and the Operating
Partnership made a cash distribution to Crown Investments with respect to the
2,600,000 units for the quarter ended March 31, 2003 equal to $0.56 million. As
the minority partner, Crown Investments' obligations to make payments to the
Operating Partnership under the Support Agreement have been contingent on the
future performance of the subject properties and accordingly have been recorded
in the Company's consolidated financial statements as earned.
The Company's 32,071,965 outstanding common partnership units
as of March 28, 2003, remained unchanged as a result of the above transactions
related to Oak Ridge. However, the common percentage ownership interests of the
partners in the Operating Partnership changed, as summarized in the following
table:
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<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>
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.
PROPOSED MERGER WITH PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
On May 13, 2003, the Company entered into a definitive merger
agreement with Pennsylvania Real Estate Investment Trust, a Pennsylvania
business trust (NYSE: PEI) ("PREIT"), under which the Company agreed to merge
into PREIT. The Boards of Trustees of PREIT and the Company have unanimously
approved the merger.
Under the terms of the merger agreement, PREIT will issue to
the Company's common shareholders 0.3589 PREIT common shares in exchange for
each outstanding common share of the Company in a tax-free, share-for-share
transaction. The exchange ratio was determined based on the trailing 20 day
average closing prices as of May 12, 2003, and is not subject to change and
there is no "collar" or minimum trading price for the shares.
As part of the merger, PREIT will issue new preferred shares
to the current holders of the Company's outstanding non-convertible senior
preferred shares. The terms of the new PREIT preferred shares will be
substantially the same as the existing preferred shares of the Company. In
addition, PREIT has agreed to assume the Company's mortgage debt, described in
Note 5 to the Consolidated Financial Statements. PREIT currently expects to
repay the Company's secured revolving credit facility with GECC with proceeds
from additional debt financing which PREIT is currently negotiating with
prospective lenders together with additional borrowings under PREIT's existing
line of credit.
On the effective date of the merger, PREIT's board of trustees
will be increased by two. Mark E. Pasquerilla, the Company's Chairman, Chief
Executive Officer and President, and one other member of the Company's current
Board of Trustees to be selected by PREIT will serve on PREIT's board of
trustees as the two additional members.
The merger is expected to close in the fourth quarter of 2003.
The merger is subject to approval by the common shareholders of the Company and
PREIT and other customary closing conditions, including consents of the lenders
of the Company and PREIT. The Company and PREIT intend to file a joint
registration statement on Form S-4 (which will include a joint proxy
statement/prospectus and other relevant documents) with the United States
Securities and Exchange Commission (the "SEC") concerning the merger. Crown
expects to call a meeting of its shareholders to approve the proposed merger and
will mail the joint proxy statement/prospectus to its shareholders in connection
with the merger. Certain of the Company's trustees and executive officers,
including Mark E. Pasquerilla, have agreed to vote in favor of the merger.
Under the terms of the merger agreement, a termination fee of
up to $20 million will be payable to either the Company or PREIT by the other
party if the merger is not completed in certain specified circumstances.
Page 17
<Page>
Prior to the closing of the merger, the Company intends to
continue to pay its quarterly dividends to its common and preferred
shareholders.
In connection with entering into the merger agreement with
PREIT, the Company's Independent Trustees approved another amendment to the
Support Agreement under which Crown Investment's percentage ownership in the
Operation Partnership was further reduced by an amount equivalent to 500,000
common partnership units effective on May 13, 2003. In consideration of this
reduction in its ownership interest, Crown Investments is no longer obligated to
make payments under the Support Agreement after May 13, 2003. The reduction in
ownership interest had a value of approximately $5.3 million, based on the
closing price of the Company's common shares on May 12, 2003 (which was $10.69).
Amounts owed to the Company under the Support Agreement for the period from
April 1 to May 13, 2003 were $0.08 million and were paid by Crown Investments to
the Operating Partnership; the Operating Partnership made a non-pro-rata cash
distribution to Crown Investments with respect to the 500,000 units for the
period from January 1 to May 13, 2003 of $0.16 million.
As a result of the May 13, 2003 amendment to the Support
Agreement and the related reduction in Crown Investments' ownership interest,
the common ownership interests of the partners in the Operating Partnership
changed as summarized in the following table:
<Table>
<Caption>
Before After
------------------ ------------------
General and Majority Partner:
Crown American Realty Trust (the Company) 83.81% 84.92%
Limited Minority Partners:
Crown Investments Trust 14.55 13.42
Crown American Investment Company 1.64 1.66
------------------ ------------------
Totals 100.00% 100.00%
------------------ ------------------
</Table>
As a result of the reductions in the percentage ownership
interests held by Crown Investments and Crown American Investment Company in the
Operating Agreement, on the effective date of the merger, PREIT has agreed to
issue 0.2053 of its operating partnership units in exchange for each outstanding
partnership unit of the Company's Operating Partnership held by Crown
Investments and Crown American Investment Company.
(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.
Page 18
<Page>
EXHIBIT 99.4
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
$119.0 million of variable-rate debt, which represents 16% 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
---- ---- ---- ---- ---- ----------
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 $ - $ 89.0 $ 30.0 - - -
Average interest rate - 3.67% 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
$119.0 million at December 31, 2002 (excluding $13.6 million and $15.5 million,
respectively, of variable rate secured debt related to Oak Ridge Mall). 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.
Page 19
<Page>
EXHIBIT 99.5
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 Notes 2 and 18 of the Notes to the Consolidated Financial
Statements, in 2002 the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long Lived
Assets." Also, as discussed in Notes 2 and 18 of the Notes to the Consolidated
Financial Statements, on January 1, 2003, the Company adopted Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statement No. 4, 44,
and 64, Amendment of FASB No. 13, and Technical Corrections". As discussed in
Note 5 of the Notes to the Consolidated Financial Statements, in 2001 the
Company adopted Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities".
/s/ ERNST & YOUNG LLP
McLean, Virginia
March 28, 2003
Except for Note 18, as to which the date is
June 9, 2003
Page 1
<Page>
CROWN AMERICAN REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000
------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RENTAL OPERATIONS:
Revenues:
Minimum rent $ 114,180 $ 110,639 $ 103,904
Percentage rent 6,650 6,980 7,982
Property operating cost recoveries 36,976 34,666 35,479
Temporary and promotional leasing 11,842 10,625 10,345
Utility redistribution income 13,915 13,819 14,173
Miscellaneous income 2,441 1,874 1,303
-------------- -------------- --------------
186,004 178,603 173,186
-------------- -------------- --------------
Property operating costs:
Recoverable operating costs 49,546 46,675 45,122
Property administrative costs 3,410 2,696 2,546
Other operating costs 2,956 3,093 2,331
Utility redistribution expense 10,844 10,413 10,574
Depreciation and amortization 44,375 46,888 45,425
-------------- -------------- --------------
111,131 109,765 105,998
-------------- -------------- --------------
74,873 68,838 67,188
-------------- -------------- --------------
OTHER EXPENSES:
General and administrative 6,822 5,393 5,093
Restructuring costs - - 369
Interest, net 50,736 52,702 54,306
Loss on early extinguishment of debt 4,314 - 243
-------------- -------------- --------------
61,872 58,095 60,011
-------------- -------------- --------------
13,001 10,743 7,177
-------------- -------------- --------------
PROPERTY SALES:
Gain on sale of outparcel land 369 437 924
Gain (loss) on asset sales - - (224)
-------------- -------------- --------------
369 437 700
-------------- -------------- --------------
MINORITY INTEREST IN OPERATING PARTNERSHIP (5,351) (4,999) (664)
-------------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS 8,019 6,181 7,213
-------------- -------------- --------------
DISCONTINUED OPERATIONS:
Loss from operations (729) (975) (1,234)
Gain on asset sale 425 - -
-------------- -------------- --------------
(304) (975) (1,234)
-------------- -------------- --------------
NET INCOME 7,715 5,206 5,979
DIVIDENDS ON PREFERRED SHARES (13,613) (13,613) (13,695)
-------------- -------------- --------------
NET LOSS ALLOCABLE TO COMMON SHARES $ (5,898) $ (8,407) $ (7,716)
============== ============== ==============
PER COMMON SHARE INFORMATION:
BASIC AND DILUTED EPS
---------------------
LOSS FROM CONTINUING OPERATIONS BEFORE
DISCONTINUED OPERATIONS, NET OF
PREFERRED DIVIDENDS $ (0.19) $ (0.28) $ (0.25)
LOSS FROM DISCONTINUED OPERATIONS (0.01) (0.04) (0.04)
-------------- -------------- --------------
NET LOSS $ (0.20) $ (0.32) $ (0.29)
============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND
DILUTED (000) 29,480 26,208 26,208
</Table>
The accompanying notes are an integral part of these statements.
Page 2
<Page>
CROWN AMERICAN REALTY TRUST
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
-------------------------
2002 2001
----------- ----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
ASSETS
INCOME-PRODUCING PROPERTIES:
Land $ 156,338 $ 139,958
Buildings and improvements 1,072,366 988,250
Deferred leasing and other charges 43,038 42,909
----------- -----------
1,271,742 1,171,117
Accumulated depreciation and amortization (481,284) (441,640)
----------- -----------
790,458 729,477
MINORITY INTEREST IN OPERATING PARTNERSHIP 3,265 3,303
OTHER ASSETS:
Investment in joint venture 3,114 3,705
Cash and cash equivalents, unrestricted 14,122 16,999
Restricted cash and escrow deposits 8,969 7,656
Tenant and other receivables 14,813 14,283
Deferred charges and other assets 19,384 19,369
Assets from discontinued operations 25,307 31,988
----------- -----------
$ 879,432 $ 826,780
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Debt on income-producing properties $ 737,566 $ 694,913
Accounts payable and other liabilities 44,569 40,362
Liabilities from discontinued operations 13,952 26,382
----------- -----------
796,087 761,657
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Non-redeemable senior preferred shares, 11.00% cumulative, $.01 par value,
2,500,000 shares authorized and issued at both
December 31, 2002 and 2001 25 25
Common shares, par value $.01 per share, 120,000,000 shares authorized,
33,572,694 and 27,742,317 shares issued at December 31, 2002 and 2001,
respectively 335 277
Additional paid-in capital 365,247 317,450
Accumulated deficit (266,554) (235,980)
----------- -----------
99,053 81,772
Less common shares held in treasury at cost, 1,534,398 shares
at both December 31, 2002 and 2001 (14,652) (14,652)
Less preferred shares held in treasury at cost, 25,000 shares at both
December 31, 2002 and 2001 (929) (929)
Accumulated other comprehensive loss (127) (1,068)
----------- -----------
83,345 65,123
----------- -----------
$ 879,432 $ 826,780
=========== ===========
</Table>
The accompanying notes are an integral part of these statements.
Page 3
<Page>
CROWN AMERICAN REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
---------- ---------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,715 $ 5,206 $ 5,979
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in Operating Partnership 5,351 4,999 664
Equity earnings in joint venture (452) (344) (210)
Depreciation and amortization 47,605 50,043 51,508
Operating loss from discontinued operations 729 975 1,234
(Gain) loss on asset sales (425) - (25)
Loss on early extinguishment of debt 4,314 - 243
Restructuring costs - - 369
Net cash provided by discontinued operations 754 1,031 725
Net changes in:
Tenant and other receivables (530) 2,832 (1,952)
Restricted cash and escrow deposits (592) 279 93
Deferred charges and other assets (2,069) (907) 1,818
Accounts payable and other liabilities 5,149 4,278 (2,160)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 67,549 68,392 58,286
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in income properties (14,423) (23,128) (45,607)
Acquisitions of enclosed shopping malls (90,583) - -
Change in investing escrow deposits (255) 209 5,967
Net proceeds from asset sales 5,354 - 4,670
Distributions from joint venture 674 694 472
(Investments in) proceeds from asset sales related to
discontinued operations 158 (257) 3,873
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (99,075) (22,482) (30,625)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt, net of loan deposits and
prepayment penalties 144,154 16,918 63,916
Cost of issuance of debt (1,353) (79) (2,159)
Debt repayments (106,097) (16,923) (42,490)
Dividends and distributions paid on common shares and
partnership units (33,115) (30,287) (29,926)
Dividends paid on senior preferred shares (13,613) (13,613) (13,695)
Net proceeds from common share issuance, exercise
of stock options and under the Dividend Reinvestment Plan 47,867 - -
Purchase of senior preferred shares held in treasury - - (929)
Cash flow support payments 3,125 3,067 2,902
Debt repaid on discontinued operations (12,319) (2,607) (7,838)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 28,649 (43,524) (30,219)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,877) 2,386 (2,558)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 16,999 14,613 17,171
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 14,122 $ 16,999 $ 14,613
========= ========= =========
SUPPLEMENTAL DISCLOSURES:
INTEREST PAID $ 48,978 $ 50,945 $ 52,120
--------- --------- ---------
INTEREST COST CAPITALIZED $ - $ 38 $ 839
--------- --------- ---------
OTHER COMPREHENSIVE INCOME (LOSS) - HEDGING ACTIVITIES $ 941 $ (1,068) $ -
--------- --------- ---------
</Table>
The accompanying notes are an integral part of these statements.
Page 4
<Page>
CROWN AMERICAN REALTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<Table>
<Caption>
SENIOR ACCUMULATED
COMMON PREFERRED OTHER
COMMON SENIOR ADDITIONAL SHARES SHARES COMPREHENSIVE
SHARES PREFERRED COMMON PAID-IN ACCUMULATED HELD IN HELD IN INCOME
OUTSTANDING SHARES SHARES CAPITAL DEFICIT TREASURY TREASURY (LOSS) TOTAL
- ------------- --------- ------ ---------- ----------- --------- -------- ------------- ----------
(IN THOUSANDS) (IN THOUSANDS)
26,208 BALANCE, DECEMBER 31, 1999 $ 25 $ 277 $ 316,421 $ (176,220) $(14,652) $ - $ - $(125,851)
Preferred shares (25)
purchased and held in
treasury (929) (929)
Transfer in (out) of limited
partner's interest in the
Operating Partnership (57) (57)
Capital contributions from
Crown Investments Trust:
Cash flow support 1,111 1,111
Net income 5,979 5,979
Dividends paid or accrued:
Preferred shares (13,695) (13,695)
Common shares (21,688) (21,688)
- ------------- --------- ------ ---------- ----------- --------- -------- ------------- ----------
26,208 BALANCE, DECEMBER 31, 2000 25 277 317,475 (205,624) (14,652) (929) - 96,572
Comprehensive loss:
Net income 5,206 5,206
Net loss on cash-flow
hedging activities (1,068) (1,068)
----------- ------------ ----------
Total comprehensive
income 5,206 (1,068) 4,138
----------- ------------ ----------
Transfer in (out) of limited
partner's interest in the (25) (25)
Operating Partnership
Dividends paid or accrued:
Preferred shares (13,613) (13,613)
Common shares (21,949) (21,949)
- ------------ --------- ------ ---------- ----------- --------- -------- ------------- ----------
26,208 BALANCE, DECEMBER 31, 2001 25 277 317,450 (235,980) (14,652) (929) (1,068) 65,123
Comprehensive income:
Net income 7,715 7,715
Net income on cash-flow
hedging activities 941 941
----------- ------------ ----------
Total comprehensive income 7,715 941 8,656
----------- ------------ ----------
5,830 Issuance of common shares 58 47,809 47,867
Transfer in (out) of limited
partner's interest in the
Operating Partnership (12) (12)
Dividends paid or accrued:
Preferred shares (13,613) (13,613)
Common shares (24,676) (24,676)
- ----------- --------- ------ ---------- ----------- --------- -------- ------------- ----------
32,038 BALANCE, DECEMBER 31, 2002 $ 25 $ 335 $ 365,247 $ (266,554) $(14,652) $ (929) $ (127) $ 83,345
=========== ========= ====== ========== =========== ========= ======== ============= ==========
</Table>
The accompanying notes are an integral part of these statements.
Page 5
<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 described in Note 6 to the Consolidated Financial Statements, in July 1997
the Company completed an offering of 2,500,000 11.00% non-convertible senior
preferred shares at an initial public offering price of $50.00 per share.
As described in Note 15 to the Consolidated Financial Statements, in June 2002
the Company completed a public offering of 5,750,000 of its common shares of
beneficial interest at a public offering price of $8.75 per share.
As described in Note 18 to the Consolidated Financial Statements, on May 13,
2003 the Company entered into an agreement to merge with Pennsylvania Real
Estate Investment Trust ("PREIT").
NATURE OF OPERATIONS
The Company operates in one business segment - real estate. The Company provides
leasing, management, acquisition, development, construction and tenant-related
services for its portfolio. The Company does not have any foreign operations.
The Company evaluates performance based upon net operating income from the
combined properties in the segment.
The Company's revenues are primarily derived under real estate leases with
national, regional and local department store and other specialty retailers.
Approximately 58% of the Company's revenues were derived from malls located in
Pennsylvania. The Company's top five tenants in terms of 2002 total revenues are
as follows:
Page 6
<Page>
<Table>
<Caption>
PERCENT OF TOTAL REVENUES
2002 2001
---- ----
Sears Roebuck and Co. 4.9% 5.3%
J C Penney, Inc. 4.1% 4.2%
The Limited 3.8% 4.5%
Gap, Inc. 3.0% 3.3%
The Bon-Ton Stores, Inc. 2.8% 3.0%
</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, including Oak Ridge Mall sold on March 31, 2003 as
described in Note 18, (and adjacent outparcels and strip centers at certain of
the enclosed malls) located in Pennsylvania, New Jersey, Maryland, Tennessee,
North Carolina, West Virginia, Virginia, Alabama, Wisconsin and Georgia, (2) a
50% general partnership interest in Palmer Park Mall Venture, which owns Palmer
Park Mall located in Easton, Pennsylvania, (3) Pasquerilla Plaza, an office
building in Johnstown, Pennsylvania, which serves as the headquarters of the
Company and is partially leased to other parties, and (4) a parcel of land and
building improvements located in Pennsylvania (with a purchase option)
sub-leased to a department store chain ("the Anchor Pad"). The Company also owns
approximately 67 acres of land in the vicinity of certain of the mall
properties, which are held for development, ground lease, or sale to third
parties.
As the owner of real estate, the Company is subject to risks arising in
connection with the underlying real estate, including defaults under or
non-renewal of tenant leases, tenant bankruptcies, competition, inability to
rent unleased space, failure to generate sufficient income to meet operating
expenses, as well as debt service, capital expenditures and tenant improvements,
environmental matters, financing availability and changes in real estate and
zoning laws. The success of the Company also depends upon certain key personnel,
the Company's ability to maintain its qualification as a REIT, compliance with
the terms and conditions of debt instruments, and trends in the national and
local economy, including interest rates, income tax laws, governmental
regulations and legislation, and population trends.
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company include all
accounts of the Company, its wholly-owned subsidiaries, and its majority-owned
subsidiary, the Operating Partnership and its subsidiaries. All significant
intercompany amounts have been eliminated. Other than its ownership interests in
its subsidiaries, the Company owns no other assets and has no other business
activities.
The Company is the sole general partner in the Operating Partnership, and at
December 31, 2002 the Company held 100% of the preferred partnership interests
(see Note 6 to the Consolidated Financial Statements) and 76.29% of the common
partnership interests. As of December 31, 2002, the Operating Partnership
directly owns six malls, including Oak Ridge Mall, the 50% joint venture
interest in Palmer Park Mall, Pasquerilla Plaza, and the Anchor Pad. All
remaining properties are owned by eight partnerships and limited liability
companies that are either 99.5% or 100.0% owned by the Operating Partnership;
the remaining 0.5% interests in these second-tier entities are owned by the
Company through various wholly-owned subsidiaries. The Operating Partnership
owns 100% of Crown American Services Corporation formed in 2002 as a taxable
REIT subsidiary to provide labor and other services to the Operating Partnership
with respect to certain operating activities. The Operating Partnership also
owns 100% of Crown American GC, Inc. formed in 2001 as a taxable REIT subsidiary
to sell gift certificates to shoppers at properties owned by the Company. Only
the Operating Partnership and Crown American Services Corporation have paid
employees. The Operating Partnership manages all properties except the Palmer
Park Mall and the Anchor Pad, and also manages other properties for third party
owners and provides construction management and other services for third
parties.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Some of these estimates and assumptions include judgments on income producing
properties, revenue recognition, estimates for income recoveries of common area
maintenance and real estate taxes, provisions for uncollectible
Page 7
<Page>
revenues, losses under the Company's self-insurance program, and the treatment
of certain costs as capital or expense. The Company's significant accounting
policies are described in more detail in Note 2 to the Consolidated Financial
Statements.
As described in Notes 2 and 18 to the Consolidated Financial Statements, the
financial statements for 2002 and 2000, as originally filed on Form 10-K for the
year ended December 31, 2002, have been reclassified in 2003 to present losses
on early extinguishment of debt in those years from extraordinary items to
income from continuing operations, as required by SFAS No. 145 "Recession of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". As described in Note 14 to the Consolidated Financial
Statements, the financial statements for 2000 and 2001 were reclassified in 2002
to present Carlisle Plaza Mall, which was sold in 2002, as discontinued
operations in accordance with SFAS 144, "Accounting for the Impairment or
Disposal of Long Lived Assets." As described in Note 18 to the Consolidated
Financial Statements, the financial statements for 2000, 2001 and 2002, as
originally filed on Form 10K for the year ended December 31, 2002, have been
reclassified in 2003 in this amendment to Form 10-K to present Oak Ridge Mall,
which was sold on March 31, 2003, as discontinued operations in accordance with
SFAS 144, "Accounting for the Impairment or Disposal of Long Lived Assets."
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
INCOME-PRODUCING PROPERTIES
Income-producing properties are recorded at cost net of depreciation, adjusted
for impairment. With respect to assets held for the long-term production of
income, the Company assesses impairment based on whether the estimated future
net cash flows expected to be generated by the asset (undiscounted and without
interest) is in excess of the net book value of the asset. If a property held
for long term production of income is impaired, its basis is adjusted to fair
value. With respect to assets held for sale, the Company assesses impairment
based on whether the net realizable value (estimated fair value sales price less
direct cost to sell) is in excess of the net book value of the asset. If a
property held for sale is impaired, its net book value is adjusted to fair value
less estimated direct cost to sell. The Company assesses impairment of assets
held for long-term production of income at the property or mall level, where a
separately identifiable cash flow stream exists.
Substantially all of the income-producing properties have been pledged to secure
the Company's currently outstanding debt and lines of credit.
Depreciation on buildings and improvements is provided on individual components,
using the straight-line method over estimated useful lives of 10 to 45 years
resulting in an average composite life of approximately 30 years. Depreciation
on tenant improvements and deferred leasing costs is provided using the
straight-line method over the initial term of the related leases. Unamortized
balances of tenant improvement costs and deferred leasing costs are fully
written off as additional amortization expense in the period in which a tenant
vacates or terminates its lease.
CAPITALIZED REAL ESTATE COSTS, LEASE ACQUISITION COSTS, AND IMPROVEMENTS AND
REPLACEMENTS
Costs related to the development, construction and improvement of
income-producing properties are capitalized in accordance with SFAS 67,
"Accounting for Costs and Initial Rental Operations of Real Estate Projects"
("SFAS 67"). Costs include direct construction costs, tenant improvement costs
and allowances, and indirect costs including interest during the construction
periods and allocated internal costs pursuant to SFAS 67. Internal and external
costs incurred to obtain signed permanent leases (in excess of one year
duration) are capitalized based on the estimated actual costs (see Note 7 to the
Consolidated Financial Statements). Internal and external costs incurred on
leases that do not get signed are expensed.
Certain improvements and replacements to income-producing properties are
capitalized when they extend the useful life, increase capacity, or improve the
efficiency of the asset. All other repair and maintenance items are expensed as
incurred. Total expensed repairs and maintenance costs were $10.8 million, $10.7
million, and $10.6 million for the years ended December 31, 2002, 2001, and
2000, respectively. Capitalized improvements and replacements, including tenant
improvements and allowances, were $14.4 million, $23.1 million and $45.6 million
for the years ended December 31, 2002, 2001, and 2000, respectively.
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REVENUE RECOGNITION
The Company, as a lessor, has retained substantially all of the risks and
benefits of ownership and accounts for its tenant leases as operating leases
under SFAS 13, "Accounting for Leases". Minimum rents are recognized on a
straight-line basis over the initial term of the related lease. Property
operating cost recoveries from tenants of common area maintenance, real estate
taxes, and other recoverable costs are recognized in the period the qualifying
costs and expenses are incurred. These recoveries also include certain capital
expenditures that are recovered from the tenants in the period the depreciation
is recognized. Percentage rent is recognized at the point in time a specific
tenant's sales breakpoint is achieved. Lease termination fees received from
tenants are recognized as income in the period received.
Reserves have been established for estimated uncollectible receivables related
to billed minimum rents, billed and accrued percentage rents and cost recovery
income, and accrued straight-line rent receivables. These receivables may become
uncollectible primarily due to tenant bankruptcies or early terminations. These
reserves in the aggregate were $2.3 million and $2.1 million at December 31,
2002 and 2001, respectively.
INTEREST AND FINANCING COSTS
Interest costs are capitalized related to income-producing properties under
construction, to the extent such assets qualify for capitalization. Total
interest capitalized was zero in 2002, $0.04 million in 2001 and $0.8 million in
2000. Interest expense includes amortization of deferred financing costs related
to completed financings (see Note 3 to the Consolidated Financial Statements)
and is net of miscellaneous interest income on cash and escrow deposit balances
aggregating $0.4 million, $ 0.8 million, and $1.2 million, for the years ended
December 31, 2002, 2001, and 2000, respectively. Deferred financing costs are
based on actual costs incurred in obtaining the financing and are amortized as
part of interest expense over the term of the related debt instrument. Costs
incurred for financings which are not completed are expensed as part of interest
costs. Unamortized financing costs related to debt that is extinguished early
are written off as an extraordinary item.
INVESTMENT IN JOINT VENTURE
The Company's 50% joint venture investment in Palmer Park Mall Venture, which
owns Palmer Park Mall (not managed by the Company), is accounted for under the
equity method. The Company's 50% share of the joint venture's net income is
reflected in miscellaneous income in the period earned and distributions
received from the joint venture are reflected as a reduction in the carrying
amount of the investment. The investment amount in excess of the underlying net
assets, net of accumulated amortization, is $2.8 million at December 31, 2002,
with a remaining amortization period of approximately 8 years. Amortization
expense was $0.4 million in each of the three years ended December 31, 2002. The
Company has certain limited guarantees related to its $9.3 million share of the
$18.6 million in mortgage debt owed by Palmer Park Mall Venture.
MINORITY INTEREST
Minority interest represents the common ownership interests in the Operating
Partnership held by Crown Investments and its subsidiary. At December 31, 2002
Crown Investments and its subsidiary owned 9,956,398 common partnership units,
or a 23.71% common partnership interest. Crown American Realty Trust owns the
remaining 76.29%. The minority interest balance, as reflected in the Company's
consolidated financial statements, is adjusted each year for Crown Investments'
and its subsidiary's proportionate share of net income (loss) of the Operating
Partnership (after deducting preferred unit distributions), common partnership
unit distributions, and additional capital contributions. Primarily because the
distributions on common partnership units have been larger than the Operating
Partnership's income (loss) after preferred unit distributions, the minority
interest account on the consolidated balance sheets has been declining each
year. The balance was reduced below zero in the second quarter of 2000. Under
GAAP, when the minority partner's share of the Operating Partnership's net
income (loss) and the minority partner's cash distributions and capital
contributions, would cause the minority interest balance to be less than zero,
such balance must be reported at zero unless there is an obligation of the
minority partner to reimburse the Operating Partnership for such excess amounts.
The Support Agreement provides for such obligation by the minority partner in
the form of cash flow support payments. (See Note 8 to the Consolidated
Financial Statements.) Accordingly, since the minority interest account was
reduced below zero, and there was an obligation of the minority partner to make
additional cash contributions to the Operating Partnership, the minority
interest balance at December 31, 2002 was shown on the Consolidated Balance
Sheet as an asset. This asset balance at
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December 31, 2002 was limited to $3.3 million, the estimated amount of cash flow
support to be received over the next twelve months. As a result of the
amendments to the Support Agreement made during the first and second quarters of
2003 which reduced the minority partner's obligation under the Support
Agreement, as described in Note 18 to the Consolidated Financial Statements, the
minority interest amount was reduced to $0.5 million in the first quarter of
2003, and reduced to zero in the second quarter of 2003. An additional amount of
$5.5 million, representing the excess losses and distributions over and above
the cash flow support, has been absorbed by the Company in its share of loss
from the Operating Partnership for the year ended December 31, 2002. On a
cumulative basis, $14.1 million of such losses have been absorbed by the
Company, through December 31, 2002.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes all unrestricted cash and cash equivalent
investments with original maturities of three months or less.
INCOME TAXES
The Company elected to be taxed as a Real Estate Investment Trust (REIT) under
Sections 856 through 860 of the Internal Revenue Code of 1986 (the "Code"),
commencing with its first taxable year ended December 31, 1993, and intends to
conduct its operations so as to continue to qualify as a REIT under the Code. As
a REIT, the Company generally will not be subject to Federal or state income tax
on its net income that it currently distributes to shareholders. Qualification
and taxation as a REIT depends on the Company's ability to meet certain dividend
distribution tests, share ownership requirements, and various qualification
tests prescribed in the Code.
During 2001 and 2002, two taxable REIT subsidiaries were formed to conduct
certain business activities. A Taxable REIT subsidiary is subject to federal and
state income taxes on its net taxable income. The amount of net taxable income
and related income taxes from the Company's two taxable REIT subsidiaries was
insignificant during 2001 and 2002.
The Company's consolidated taxable income (before the dividends paid deduction)
for the years ended 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.
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NET INCOME (LOSS) PER SHARE
During 1997 the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share". Under SFAS 128, basic income (loss) per
common share is computed by dividing net income (loss) applicable to common
shares, as shown in the Consolidated Statements of Operations, by the weighted
average number of common shares outstanding for the year. Diluted income (loss)
per share is computed the same way except that the weighted average number of
common shares outstanding is increased, using the treasury stock method, for the
assumed exercise of options under the Company's share incentive plans. Because
no anti-dilution is permitted under SFAS 128, diluted and basic loss per common
share are identical in each year ended December 31, 2002, 2001, and 2000.
The number of outstanding options to purchase common shares for which the option
exercise prices exceeded the average market price of the common shares
aggregated approximately 56,000, 569,000, and 941,000, for the years ended
December 31, 2002, 2001, and 2000, respectively. These options were excluded
from the computation of diluted earnings per share under the treasury stock
method.
The calculation of diluted earnings per share for 2002, 2001, and 2000 would
have included approximately 311,000 shares, 133,000 shares, and 16,000 shares,
respectively, for the assumed exercise of options under the Company's share
incentive plans, except that no anti-dilution is permitted under SFAS No. 128.
NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") which supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121") and the accounting and
reporting provisions of APB No. 30, "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" for the disposal of
a segment of a business. SFAS 144 retains many of the fundamental provisions of
SFAS 121, but resolves certain implementation issues associated with that
Statement. The Company adopted the provisions of SFAS 144 during the third
quarter of fiscal 2001 and applied its provisions to the sale of Carlisle Plaza
Mall as further described in Note 14 to the Consolidated Financial Statements
herein and to the sale of Oak Ridge Mall to Crown Investments, as described in
Note 18 to the Consolidated Financial Statements.
See Note 18 to the Consolidated Financial Statements concerning the Company's
adoption effective January 1, 2003 of SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections."
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities", ("SFAS
146") which addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." Among other
provisions, SFAS 146 eliminates the definition and requirements for recognition
of exit costs in EITF Issue 94-3 and requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred which can differ from the commitment date of the plan. This Statement
also establishes that fair value is the objective for initial measurement of the
liability. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company adopted SFAS 146 beginning January 1, 2003 and believes
that the implementation of this Statement will not have a material impact on the
Company's results of operations or financial position.
The Company adopted the disclosure provisions of FASB Interpretation No. (FIN)
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Direct Guarantees of Indebtedness of Others," in the fourth quarter of
2002. The Company adopted the initial recognition and initial measurement
provisions on a prospective basis for all guarantees issued or modified after
December 31, 2002. Under FIN 45, at the inception of guarantees issued after
December 31, 2002, the fair value of the guarantee is recorded as a liability,
with the offsetting entry recorded based on the circumstances in which the
guarantee was issued. Fundings under the guarantee are accounted for as a
reduction of the liability. After funding has ceased, the remaining liability is
recognized in the income statement on a straight-line basis over the remaining
term of the guarantee. Adoption of FIN 45 will have no impact to the Company's
financial statements through December 31, 2002 as existing guarantees are not
subject to
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the measurement provisions of FIN 45. The impact on financial statements after
December 31, 2002 will depend on the nature and extent of issued guarantees but
is not expected to have a material impact to the Company. (See Note 5 to the
Consolidated Financial Statements.)
FIN 46, "Consolidation of Variable Interest Entities," is effective for all
enterprises with variable interests in variable interest entities created after
January 31, 2003. FIN 46 provisions must be applied to variable interests in
variable interest entities created before February 1, 2003 from the beginning of
the third quarter of 2003. If an entity is determined to be a variable interest
entity, it must be consolidated by the enterprise that absorbs the majority of
the entity's expected losses if they occur, receives a majority of the entity's
expected residual returns if the occur, or both. Where it is reasonably possible
that an enterprise will consolidate or disclose information about a variable
interest entity, the enterprise must disclose the nature, purpose, size and
activity of the variable interest entity and the enterprise's maximum exposure
to loss as a result of its involvement with the variable interest entity in all
financial statements issued after January 31, 2003. The Company does not believe
that the adoption of FIN 46 will result in consolidation of any previously
unconsolidated entities. The adoption of FIN 46 may result in additional
disclosures which are not expected to be significant.
NOTE 3 - DEFERRED CHARGES AND OTHER ASSETS
Deferred charges, net of amortization, and other assets are summarized as
follows (in thousands):
<Table>
<Caption>
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
Deferred financing costs $ 6,786 $ 7,372
Prepaid expenses and miscellaneous receivables 5,681 5,075
Furniture, fixtures, equipment, and other 6,917 6,922
------ -------
$ 19,384 $ 19,369
====== ======
</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 $1.8
million for other debt. Amortization of deferred financing costs was $1.8
million, $1.7 million, and $2.2 million for the years ended December 31, 2002,
2001, and 2000, respectively. Deferred financing costs written off as part of
losses on early extinguishment of debt were $0.2 million, $0.0 million, and $0.2
million for the years ended December 31, 2002, 2001, and 2000, respectively.
Deferred financing costs incurred and capitalized were $1.5 million, $0.1
million, and $2.2 million for the years ended December 31, 2002, 2001, and 2000,
respectively.
DEFERRED OPERATING COVENANT COSTS
During 1991 and 1992, approximately $27 million was paid to three anchor tenants
with respect to leases at ten of the malls in order to obtain operating
covenants (a covenant requiring the anchor, among other things, to maintain
operations in certain of the Properties for the duration of the lease period)
and to extend the terms of their leases. These costs were capitalized and were
amortized over the life of the operating covenants with the amortization
recorded as a reduction of minimum rent. Amortization was $2.6 million for the
year ended December 31, 2000, and as of December 31, 2000, these deferred costs
were fully amortized.
In addition, one of these tenants has exercised its option to require the
Company to expand and renovate certain of the leased premises, at the Company's
expense, and to reimburse the tenant for fixtures allowances, which together
aggregated approximately $9.0 million. All of these costs had been incurred by
2000 and are capitalized in the consolidated financial statements and are being
amortized over the expected lives of the assets.
NOTE 4 - RESTRUCTURING COSTS
During the first and third quarters of 1999 and the first quarter of 2000, the
Company recorded restructuring charges of $1.0 million, $1.2 million, and $0.4
million, respectively, related to severance and related costs for employees
affected by three reductions in the number of corporate office staff together
with reductions in other corporate
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office-related expenses. The restructurings involved approximately forty-seven
home office employees whose positions were terminated and who represented a
cross-section of management, clerical, and secretarial employees.
NOTE 5 - DEBT ON INCOME-PRODUCING PROPERTIES
Debt on income-producing properties consisted of the following (in thousands):
<Table>
<Caption>
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
GECC Mortgage Loan $ 450,422 $ 457,195
Permanent loans 163,116 87,690
Secured lines of credit 124,028 150,028
------- -------
$ 737,566 $ 694,913
======= =======
</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 six loans secured by six
properties held by the Operating Partnership or its subsidiaries, as follows:
(1) a $27.6 million mortgage loan secured by Schuylkill Mall due December 2008
with a fixed interest rate of 7.25%, (2) a $13.7 million mortgage loan secured
by Crossroads Mall due July 2008 with a fixed interest rate of 7.39% (3) a $53.3
million mortgage loan secured by Capital City Mall due January 2012 with a fixed
interest rate of 7.61%, (4) a $1.5 million Urban Development Action Grant
("UDAG") loan secured by the Company's headquarters office building due October
2006 with 0% interest, (5) a $37.0 million mortgage loan secured by Valley View
Mall due October 2009 with a fixed interest rate of 6.15%, and (6) a $30.0
million mortgage loan secured by Wiregrass Commons Mall due November 2005
(excludes two one-year extensions that may be available) with a variable
interest rate of LIBOR plus 2.0%. All the loans except the loans on Capital City
Mall, Valley View Mall, and Crossroads Mall are fully guaranteed by either the
Company or the Operating Partnership.
The proceeds from the $53.3 million loan on Capital City Mall, which closed in
January 2002, were used to repay $42.5 million on the former mortgage loan
(included a $4.1 prepayment penalty) and $1.7 million of loan closing costs and
various loan reserves. The $4.1 million prepayment penalty together with $0.2
million of unamortized deferred financing costs on the previous loan were
recorded as a loss on early extinguishment of debt in the Company's Consolidated
Statement of Operations.
On November 7, 2002, the Company and its lender executed agreements to extend
and modify the terms of its mortgage loan on Schuylkill Mall, Frackville, PA.
Under the previous terms, the loan bore interest at a fixed rate of 8.375%, the
annual debt service payment was $3.62 million, and the loan matured on December
1, 2004. The new terms, effective November 1, 2002, include interest at a fixed
rate of 7.25%, annual debt service of $3.32 million and a maturity date of
December 1, 2008. In connection with this extension and modification of terms,
the Company made a cash payment of $5.0 million to reduce the principal balance
from $32.9 million to $27.9 million. The loan was and remains fully guaranteed
by the Operating Partnership.
At December 31, 2002 and 2001, $13.6 million and $15.5 million, respectively, of
mortgage debt on Oak Ridge Mall was outstanding. This debt was reclassified to
"Liabilities from discontinued operations" in the current financial statements
as a result of the sale on March 31, 2003. This loan was paid off on March 31,
2003 in connection with the sale, primarily using funds drawn from the Company's
line of credit.
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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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INTEREST RATES AND SWAP AGREEMENTS
The GECC Mortgage Loan and five of the permanent loans with an aggregate
principal balance of $618.5 million at December 31, 2002 have fixed interest
rates ranging from 6.15% to 7.61% (excluding the UDAG loan which is interest
free). The weighted average interest rate on this fixed-rate debt at December
31, 2002 and 2001 was 7.42% and 7.56%, respectively. The weighted average
interest rate during the years ended December 31, 2002, 2001, and 2000 was
7.52%, 7.60%, and 7.60%, respectively. All of the remaining loans with an
aggregate principal balance of $119.0 million at 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 3.61%, 4.18%, and 7.85%, respectively. The weighted
average interest rate on the variable rate debt during the years ended December
31, 2002, 2001, and 2000 was 3.94%, 6.39%, and 7.86%, respectively. For purposes
of determining the amounts of fixed and variable rate debt and the related
interest rate disclosures, the $35.0 million of variable rate debt that was in
effect converted to fixed rate debt by the interest rate swaps described in the
following paragraph was considered to be fixed rate debt for the periods of time
the swap agreements were in effect.
In the first quarter of 2001, the Company entered into swap agreements on a
notional amount of $35 million of the Company's floating rate debt. The
effective LIBOR swap rate on the two agreements is 5.197% and their terms
expired on February 1, 2003. The Company had designated this transaction as a
cash flow hedge of a floating-rate liability and applied the guidance set forth
in Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities" to the swap agreements. The fair
value of these transactions is recorded in the balance sheet, with the offset to
Accumulated Other Comprehensive Loss. As of December 31, 2002, there was a
cumulative mark to market loss on the swap agreements of $0.1 million which has
been reflected in accounts payable and other liabilities, and in accumulated
other comprehensive loss.
DEBT MATURITIES
As of December 31, 2002, the scheduled principal payments on all debt are as
follows (in thousands).
<Table>
<Caption>
YEAR ENDING
DECEMBER 31,
------------
2003 $ 9,218
2004 134,572
2005 41,769
2006 12,546
2007 13,193
Thereafter 526,268
-------
$ 737,566
</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
Page 15
<Page>
held in treasury under a common share repurchase program approved by the Board
of Trustees, and to acquire Valley Mall for $32.0 million in November 1997.
As stipulated in the Prospectus Supplement, additional dividends shall be paid
quarterly to the holders of the preferred shares if the Company's total debt (as
defined) exceeds the product of 6.50 times EBITDA, as defined, (the "Leverage
Ratio") without the consent of the holders of at least 50% of the preferred
shares outstanding at the time. The Leverage Ratio was 5.91 to 1 as of December
31, 2002. If required to be paid, additional dividends will be for an amount per
preferred share equal to 0.25% of the Preferred Liquidation Preference Amount
(defined below) on an annualized basis for the first quarter with respect to
which an additional dividend is due. For each quarter thereafter that the
Company continues to exceed the permitted Leverage Ratio, the additional
dividend will increase by an amount per preferred share equal to an additional
0.25% of the Preferred Liquidation Preference Amount on an annualized basis.
However, the maximum total dividend on the preferred shares, including any
additional dividends, will not at any time exceed 13.00% of the Preferred
Liquidation Preference Amount per annum. The Preferred Liquidation Preference
Amount is equal to the sum of $50.00 per share plus an amount equal to any
accrued and unpaid dividends thereon (including any additional dividends) and
whether or not earned or declared to the date of payment.
From time to time the Company's Board of Trustees has authorized the Company to
make open market purchases of the Company's common and preferred shares. During
1998 and 1997, the Company repurchased 1,534,398 common shares for an aggregate
purchase price of $14.7 million, and during 2000, 25,000 preferred shares were
repurchased for an aggregate purchase price of $0.9 million. The Company
currently has outstanding 2,475,000 preferred shares. All repurchased shares are
currently held as treasury shares. Additional repurchases of common and
preferred shares will require approval by the Board. In connection with such
repurchases, the Operating Partnership redeemed from the Company an equivalent
number of common and preferred partnership units for the equivalent repurchase
costs, thus maintaining a 1.0 to 1.0 relationship between the number of the
Company's outstanding common and preferred shares of beneficial interest and the
number of common and preferred Partnership Units in the Operating Partnership
that are owned by the Company.
NOTE 7 - LEASING ACTIVITIES
The Company is primarily a lessor of shopping malls and the concentration of
tenants are in the retail industry. Leases are generally noncancelable and
expire on various dates through approximately the year 2021. The future minimum
lease payments to be received under existing leases as of December 31, 2002, are
as follows (in thousands):
<Table>
<Caption>
YEAR ENDING
DECEMBER 31,
------------
2003 $ 115,184
2004 105,498
2005 95,213
2006 80,540
2007 66,414
Thereafter 202,560
------------
$ 665,409
============
</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):
<Table>
<Caption>
BEGINNING ENDING
YEAR ENDED BALANCE, NET ADDITIONS AMORTIZATION OTHER BALANCE, NET
---------- ------------ --------- ------------ ----- ------------
December 31, 2002 $ 13,583 $ 1,690 $ 3,478 $ 618 $ 12,413
December 31, 2001 14,199 2,719 3,335 - 13,583
December 31, 2000 14,802 2,625 3,086 (142) 14,199
</Table>
Page 16
<Page>
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, GA) at the end of the second quarter 2001. At
December 31, 2002, Crown Investments was required to make cash flow support
payments with respect to three malls. As described in Note 18 to the
Consolidated Financial Statements, the Support Agreement was amended
significantly in connection with the sale of Oak Ridge Mall on March 31, 2003,
and was further amended on May 13, 2003 in connection with the agreement to
merge with PREIT. As a result of these amendments, no cash flow support payments
are required for periods after May 13, 2003.
Page 17
<Page>
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 sold to Crown Investments on March 31, 2003.
NOTE 9 - LEASES
The Company is the lessee under third-party ground leases for Shenango Valley
Mall, Crossroads Mall, and Wiregrass Commons Mall and is the lessee under two
third-party ground leases for Uniontown Mall. Crossroads Mall and Wiregrass
Commons Mall are owned partially in fee and partially under a third-party
leasehold. The Shenango Valley Mall lease expires on 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.
Page 18
<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 $0.66 million, $0.39 million, and $0.57 million, respectively.
In 2002, the Company amended its Retirement Savings Plan to include the changes
brought about by the Economic Growth and Tax Relief Reconciliation Act which,
among other provisions, provided for increased retirement plan contribution
limits and catch-up contributions for employees of age 50 and above.
In late 1996 the Company adopted The Savings Restoration Plan which is designed
to allow eligible employees to defer current compensation in amounts that exceed
the limits that can be deferred under The Retirement Savings Plan. The plan
became effective January 1, 1997, and $0.08 million, $0.06 million, and $0.09
million was deferred in 2002, 2001, and 2000, respectively, under the plan.
Amounts deferred are charged to expense in the current period; accordingly, all
compensation expense under the above plans is being fully recognized as it is
earned.
SHARE INCENTIVE PLANS
Prior to the initial public offering, the shareholders of the Company approved
the 1993 Crown American Realty Option Plan (the "Employee Option Plan"), and the
1993 Crown American Realty Trustees' Option Plan (the "Trustees' Option Plan").
Under the Employee Option Plan, options to purchase a total of 2,200,000 common
partnership units ("Units") of the Operating Partnership are currently available
for grant to officers and employees. The partnership units can be converted to
common shares on a one-to-one basis. The Company's Chairman and CEO currently
does not participate in any share incentive plan. Under the Employee Option
Plan, options are to be granted at not less than the market value of the common
shares on the date of grant.
Under the Employee Option Agreements, prior to August 7, 2001 an option first
becomes exercisable to the extent of 20% of the total number of Units subject to
the option on each of the second, third, fourth, fifth and sixth anniversaries
of the date of the grant of the option. If employment is terminated after the
option has partially or fully vested, the option may be exercised to the extent
it was exercisable at the time of termination of employment. There are certain
limitations on the timing of exercise of the option after termination of
employment. All the Option Agreements provided that options expire five years
after the date they first become exercisable. In order to improve
Page 19
<Page>
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 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.
Page 20
<Page>
To date, all options granted to the Trustees under the Trustees' Option Plan
have been exercisable immediately upon grant. Options under the Trustees' Option
Plan expire five years from the date of grant. In December 2002 certain Trustee
Option Agreements aggregating 20,000 options were amended by extending their
December 31, 2002 and April 29, 2003 expiration dates to December 31, 2003. This
amendment constituted a new measurement date, and the related compensation
expense was approximately $4,000.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2002, 2001, and 2000, respectively: dividend
yield of 10.38%, 11.32%, and 14.67%; expected volatility of 21%, 31%, and 23%;
risk-free interest rates of 4.3%, 5.2%, and 6.4% for Employee options and 2.7%,
5.1%, and 5.1% for Trustee options; and expected lives of 5.0 years, 8.5 years,
and 9.0 years, for Employee options and 5.0 years for all Trustee options.
The Company measures compensation expense in accordance with Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees".
Accordingly, at the time the options are granted no compensation cost was
recognized in the accompanying Consolidated Financial Statements. Had
compensation cost for the Company's option plans been determined based on the
fair value at the grant dates for awards under those plans consistent with the
method of SFAS 123, the Company's net income for the year ended December 31,
2002 would have been reduced by approximately $.08 million or $.003 per share.
For the years ended December 31, 2001 and 2000, the Company's net income would
have been (reduced by) increased by ($0.03) million and $0.04 million,
respectively, or $(0.001) and $0.002 per share, respectively.
EXECUTIVE INCENTIVE PLAN
Twelve of the Company's executives were eligible for an incentive award in 2002,
2001, and 2000 under the Executive Incentive Plan, which was adopted in 1993.
Employees have the option of either receiving this incentive award in cash or
deferring all or part of the award into a trust account maintained at a local
bank. All amounts deferred are fully funded by the Company. The assets in the
Trust are shown on the Company's balance sheet in Deferred Charges and Other
Assets; the obligation to the employees is reflected on the Company's balance
sheet in Accounts Payable and Other Liabilities. The incentives earned under the
Executive Incentive Plan are based on a percentage of the excess of actual
performance of the Company's Funds from Operations ("FFO") and other performance
metrics over specific target levels determined at the beginning of the year. The
aggregate amounts payable under the Plan are allocated to participating
executives based on annual salary levels and performance during the year and are
charged to expense in the year such incentives are earned. Amounts expensed
under the Plan aggregated $0.8 million, $0.6 million and $0.9 million for the
years ended December 31, 2002, 2001 and 2000, respectively; such amounts are
typically paid by the Company in the early part of the following year.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS AND MARKET RISKS
Statement of Financial Accounting Standards No. 107, "Fair Value of Financial
Instruments", requires disclosures about fair value for all financial
instruments. At December 31, 2002, the carrying amount of the Company's $618.5
million of fixed rate debt had an estimated fair value of $667.9 million. The
remaining $119.0 million of debt, and the $13.6 million of debt related to Oak
Ridge Mall, is at floating interest rates which approximate current rates
available to the Company for such debt, and accordingly the fair value of such
floating rate debt approximates the current carrying amount.
At December 31, 2001, the fair value of the Company's $579.9 million of fixed
rate debt has an estimated fair value of $594.1 million. The remaining $115.0
million of debt, and the $15.5 million of debt related to Oak Ridge Mall, was at
floating rates which approximated current rates then available to the Company,
and accordingly the fair value of such floating rate debt approximated the
carrying amount at that date.
Accounts receivable and accounts payable carrying amounts approximate the fair
value of accounts receivable and accounts payable balances, respectively, at
both December 31, 2002 and 2001.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company obtains insurance for workers' compensation, automobile, general
liability, property damage, and medical claims. However, the Company has elected
to retain a portion of expected losses for property damage, general liability
and medical claims through the use of deductibles which generally range up to
$0.25 million per occurrence. Provisions for losses expected under these
programs are recorded based on estimates, provided by
Page 21
<Page>
consultants who utilize the Company's historical claims experience and actuarial
assumptions, of the aggregate liability for claims incurred and claims incurred
but not reported. The total estimated liability for these losses at December 31,
2002, 2001 and 2000 was $5.4 million, $4.7 million, and $4.3 million,
respectively, and is included in Accounts Payable and Other Liabilities.
The Company believes that the Properties are in compliance in all material
respects with all federal, state and local ordinances and regulations regarding
hazardous or toxic substances. The Company is not aware of any environmental
condition which the Company believes would have a material adverse effect on the
Company's business, assets or results of operations (before consideration of any
potential insurance coverage). Nevertheless, it is possible that there are
material environmental liabilities of which the Company is unaware. Moreover, no
assurances can be given that (i) future laws, ordinances or regulations will not
impose any material environmental liability or (ii) the current environmental
condition of the Properties have not been or will not be affected by tenants and
occupants of the Properties, by the condition of properties in the vicinity of
the Properties or by third parties unrelated to the Company, tenants or
occupants.
The Company and its subsidiaries from time to time are subject to litigation and
claims, both asserted and unasserted, incidental to their businesses, some of
which may be substantial. For example, these claims may include, but are not
limited to, damages asserted by other owners of real estate, regulatory
agencies, customers, tenant disputes over lease provisions including billings
for reimbursement of operating costs and real estate taxes, and various other
matters that may arise in the normal course of business. After consultations
with legal counsel and other advisors, management believes that the Company has
recognized adequate provisions for probable and reasonably estimable liabilities
associated with these matters. While these matters may impact quarterly or
annual results of operations and cash flows when resolved in future periods,
based upon information currently available, management does not believe that the
ultimate resolution of these claims and litigation will have a material adverse
effect on the financial position of the Company.
COMMITMENTS
The Company has various purchase commitments in the normal course of business.
The Company also has commitments under signed leases with tenants to make future
cash allowances and/or to construct tenant premises, which aggregate
approximately $2.8 million as of December 31, 2002, and are recorded in accounts
payable and other liabilities.
NOTE 13 - MALL ACQUISITIONS, EXPANSIONS AND MANAGEMENT CONTRACTS
In late September 2002, the Company completed the acquisition of Valley View
Mall, an enclosed regional shopping mall, located in La Crosse, Wisconsin, from
The Equitable Life Assurance Society of the United States. Valley View Mall
comprises 586,000 square feet of gross leasable area ("GLA"), which includes
37,000 square feet of GLA in a detached strip center. The mall is anchored by
Sears, JC Penney, Marshall Fields and Herberger's. The stores occupied by Sears,
Marshall Fields and Herberger's, aggregating 256,000 square feet of GLA,
together with related parking areas are owned by their anchor occupants. The
purchase price, excluding closing costs and expenses, was $49.92 million and was
financed by a $37.0 million seven-year fixed rate mortgage loan bearing interest
at 6.15%, with the balance funded from the Company's line of credit with GECC.
As described in Note 15, in June 2002, the Company raised $47.2 million net
proceeds from a common share secondary offering and used those proceeds
initially to pay down its line of credit with GECC with the intent of later
re-borrowing from the line of credit for acquisitions or for other general
corporate purposes.
On November 19, 2002, the Company completed the acquisition of Wiregrass Commons
Mall, an enclosed regional shopping mall, located in Dothan, Alabama from
Metropolitan Life Insurance Company. The mall comprises 633,000 square feet of
GLA, of which approximately 230,000 square feet of mall shop space is owned GLA
with the remaining GLA, together with related parking areas, owned by their
anchor occupants. The mall is anchored by Dillard's, JC Penney, McRae's and
Parisian. The purchase price also includes approximately 60 acres of vacant land
some of which can be used for expansion or outparcel development or sale. The
purchase price, excluding closing costs and expenses, was $40.25 million and was
financed by a $30.0 million floating rate mortgage loan bearing interest at
LIBOR plus 2.00% with the balance funded from cash and borrowings from the
Company's line of credit with GECC.
During 2000, the Company completed construction of an expansion and
redevelopment of Washington Crown Center in Washington, Pennsylvania and an
expansion at Valley Mall in Hagerstown, Maryland. The total cost of
Page 22
<Page>
the two projects, including capitalized construction department costs, interest,
and tenant allowances, approximated $33 million and $35 million, respectively.
The Washington Crown Center expansion was largely financed under a bank
construction loan that was refinanced in December 2000 when this mall was added
to GECC line of credit. The Valley Mall expansion was largely financed under the
line of credit with GECC as further described in Note 5 to the Consolidated
Financial Statements.
In October 2001, the Company entered into a two-year contract to manage and
lease Laurel Mall located in Laurel, Maryland, which is owned by an unrelated
third party. Total management and leasing fees earned by the Company in 2002
were approximately $0.4 million. In connection with this management contract,
the Company issued to the mall owner a warrant to purchase up to 100,000 common
shares of the Company at an exercise price of $9.00 per share. The holder shall
be entitled to purchase the warrant shares only if the Company is retained as
the property manager for at least two years or if the Company resigns or is
terminated for cause. The warrant shall expire and shall no longer be
exercisable five business days after December 31, 2006. In the event of the
Company's termination, the warrant must be exercised within 30 days of such
termination.
NOTE 14 - MALL DISPOSITION
Carlisle Plaza Mall, an enclosed shopping mall with a small adjacent strip
center aggregating 342,000 square feet of gross leaseable area located in
Carlisle, PA, had been under a contract of sale. During the third quarter of
2002, the buyer, Carlisle Realty Partners L.P., an unrelated third party, made
sufficient progress in completing its due diligence and other matters such that
this asset became classified as held for sale as of September 30, 2002. Carlisle
Plaza Mall was sold on October 29, 2002 for $5.8 million, less $0.4 million in
closing costs and expenses, resulting in a gain on sale of approximately $0.4
million after sale costs and expenses, which was recorded in the fourth quarter.
A mortgage loan of approximately $6.0 million was paid off as a part of the sale
of this asset, and $0.8 million of Industrial Development bonds related to
Carlisle Plaza Mall were paid off in December 2002. An extraordinary loss on the
early extinguishment of debt of approximately $0.08 million was recorded in the
fourth quarter which is included in the loss from discontinued operations. As
required by Statement of Financial Accounting Standards ("SFAS") No. 144, the
operating results of Carlisle Plaza Mall have been shown in the accompanying
statements as discontinued operations, and the financial statements for 2000 and
2001 were reclassified in 2002 to present Carlisle Plaza Mall as discontinued
operations.
The following represents certain condensed financial statement information on
Carlisle Plaza Mall for the applicable periods presented in the financial
statements (thousands of dollars):
<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 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.)
Page 23
<Page>
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 $ 44,615 $ 43,975 $ 44,475 $ 52,939
Operating income before interest, and
asset sales and adjustments 16,261 16,436 15,390 19,964
Income (loss) before minority interest
in Operating Partnership (783) 3,522 2,764 7,563
Net (loss) income allocated to common shares $ (5,641) $ (1,182) $ (1,993) $ 2,918
Net (loss) income per share:
Basic $ (0.22) $ (0.04) $ (0.06) $ 0.09
Diluted $ (0.22) $ (0.04) $ (0.06) $ 0.09
</Table>
Page 24
<Page>
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
YEAR ENDED DECEMBER 31, 2001:
Revenues $ 45,073 $ 42,902 $ 42,660 $ 47,968
Operating income before interest, and
asset sales and adjustments 15,364 13,828 15,357 18,896
Income (loss) before minority interest
in Operating Partnership 1,668 305 1,877 6,335
Net (loss) income allocated to common shares $ (3,050) $ (4,239) $ (2,891) $ 1,773
Net (loss) income per share:
Basic $ (0.12) $ (0.16) $ (0.11) $ 0.07
Diluted $ (0.12) $ (0.16) $ (0.11) $ 0.07
</Table>
Quarterly amounts have been reclassified to present the results of Carlisle
Plaza Mall, which was sold in October 2002, and Oak Ridge Mall, which was sold
in March 2003, as discontinued operations - held for sale.
Earnings per share amounts for each quarter are required to be computed
independently, and therefore, may not equal the amount computed for the year.
NOTE 18 - ADOPTION OF SFAS NO. 145, SALE OF OAK RIDGE MALL, AND PROPOSED MERGER
WITH PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
- - ADOPTION OF SFAS NO. 145, "RESCISSION OF FASB STATEMENTS NO. 4, 44, AND
64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS"
Effective January 1, 2003, the Company adopted SFAS No. 145 and, therefore, has
reclassified for all periods presented in the accompanying consolidated
statements of operations, selected financial data, and management's discussion
and analysis of financial condition and results of operations those items which
no longer qualify as extraordinary items to income from continuing operations.
The Company reclassified $4.3 million in 2002, $0.2 million in 2000, and $22.5
million in 1998 of losses on early debt extinguishments from extrarodinary to
income from continuing operations. Please refer to the related disclosures in
Notes 2 and 5 to the Consolidated Financial Statements for further discussions
on this reclassification. The adoption of SFAS No. 145 had no impact on net
income previously reported.
- - SALE OF OAK RIDGE MALL
In May 2002 the Company's Board of Trustees approved an agreement to sell Oak
Ridge Mall ("Oak Ridge"), located in Oak Ridge, Tennessee, to an unrelated third
party. The independent members of the Board of Trustees ("Independent Trustees")
concurrently approved an amendment of the Support Agreement (see Note 8 to the
Consolidated Financial Statements) regarding the cash flow support obligations
of Crown Investments with respect to Oak Ridge. However, the effectiveness of
this proposed amendment was expressly conditioned upon the completion of the
sale. The purchase agreement with the third party was extended and amended
several times since May 2002 (including a reduction of the purchase price from
$12.0 million to $10.6 million), and a variety of conditions required for
closing with the third party continued to be unsatisfied.
Consequently, on March 28, 2003 the Independent Trustees instead approved the
sale of Oak Ridge to Crown Investments, an entity which is owned by Mark E.
Pasquerilla, the Company's CEO and President, for estimated fair value of $11.4
million, which closed March 31, 2003. The $11.4 million purchase price was
satisfied through issuance of a promissory note by Crown Investments; such
promissory note was distributed in a non-liquidating distribution to Crown
American Investment Company ("CAIC"), and effectively reduced CAIC's common
percentage ownership interest in the Operating Partnership equivalent to
1,159,794 common partnership units. CAIC is a wholly-owned subsidiary of Crown
Investments and is a minority limited partner in the Operating Partnership. In
connection with the sale, the Company paid off the $13.4 million mortgage loan
balance on Oak Ridge and assigned to Crown Investments the existing agreement of
sale with the third party, as amended. Crown Investments agreed that it will pay
to the Company an amount equal to 90% of the amount, if any, by which the net
proceeds received on the sale to any unrelated third party of Oak Ridge by Crown
Investments concluded within six years of the purchase by Crown Investments
exceeds Crown Investments' total investment in Oak Ridge (defined to
Page 25
<Page>
include $11.4 million plus the aggregate amount of all additional investments
made by Crown Investments in Oak Ridge plus an 8% return compounded annually on
this sum).
The sale of Oak Ridge resulted in a loss on sale for financial reporting
purposes of $13.8 million which was recorded by the Company in the first quarter
of 2003. The reduction in the minority partner's percentage ownership interest,
valued at $11.4 million, was recorded in shareholders' equity in the
consolidated balance sheet.
The financial statements for 2000, 2001 and 2002, as originally filed on Form
10K for the year ended December 31, 2002, have been reclassified to present Oak
Ridge Mall as discontinued operations in accordance with SFAS 144. Oak Ridge was
previously classified as held for operating purposes at December 31, 2002 under
SFAS 144 "Accounting for the Impairment or Disposal of Long Lived Assets".
The following represents certain condensed financial statement information on
Oak Ridge Mall for the applicable periods presented in the financial statements
(thousands of dollars):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2002 2001 2000
---- ---- ----
Total revenues $ 3,420 $ 4,277 $ 6,024
Operating loss $ (587) $ (785) $ (1,077)
</Table>
<Table>
<Caption>
DECEMBER 31,
----------------------------------------------------
2002 2001
---- ----
Total assets (net) $ 25,309 $ 26,539
Total liabilities $ 13,952 $ 15,892
</Table>
In connection with the foregoing, the Independent Trustees also approved
amendments to the Support Agreement and to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership. The amendment to the Support
Agreement released Oak Ridge from Crown Investments' future obligations under
the Support Agreement and reduced the maximum quarterly amount of support
payments for the remaining two properties in the Agreement from $1,000,000 to
$300,000. Approximately 81% of the $3.1 million in cash flow support for the
year ended December 31, 2002 related to Oak Ridge. The amendment to the Limited
Partnership Agreement provided for a special allocation of 100 percent of the
net tax loss from the sale of Oak Ridge to Crown Investments to the extent of
Crown Investments' obligation under the Support Agreement related to Oak Ridge;
the remaining tax loss from the sale will be allocated to the partners in
accordance with their ownership interests. It is expected that the tax loss
should result in a significant portion of the Company's common dividends that
may be paid in 2003 being treated as non-taxable return of capital.
As a result of these amendments to the Support Agreement, Crown Investments'
percentage ownership interest in the Operating Partnership was reduced by an
amount equivalent to 2,600,000 common partnership units. The minority partner's
reduction in its ownership interest had a value of approximately $25.6 million,
based on the closing price of the Company's common shares on March 27, 2003
(which was $9.84). Amounts owed under the Support Agreement for Oak Ridge Mall
from January 1 to March 31, 2003 of $0.67 million, were paid by Crown
Investments to the Operating Partnership, and the Operating Partnership made a
cash distribution to Crown Investments with respect to the 2,600,000 units for
the quarter ended March 31, 2003 equal to $0.56 million. As the minority
partner, Crown Investments' obligations to make payments to the Operating
Partnership under the Support Agreement have been contingent on the future
performance of the subject properties and accordingly have been recorded in the
Company's consolidated financial statements as earned.
The Company's 32,071,965 outstanding common partnership units as of March 31,
2003, remained unchanged as a result of the above transactions related to Oak
Ridge. However, the common percentage ownership interests of the partners in the
Operating Partnership changed, as summarized in the following table:
Page 26
<Page>
<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>
- - PROPOSED MERGER WITH PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
On May 13, 2003, the Company entered into a definitive merger agreement with
Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust (NYSE:
PEI) ("PREIT"), under which the Company agreed to merge into PREIT. The Boards
of Trustees of PREIT and the Company have unanimously approved the merger.
Under the terms of the merger agreement, PREIT will issue to the Company's
common shareholders 0.3589 PREIT common shares in exchange for each outstanding
common share of the Company in a tax-free, share-for-share transaction. The
exchange ratio was determined based on the trailing 20 day average closing
prices as of May 12, 2003, and is not subject to change and there is no "collar"
or minimum trading price for the shares.
As part of the merger, PREIT will issue new preferred shares to the current
holders of the Company's outstanding non-convertible senior preferred shares.
The terms of the new PREIT preferred shares will be substantially the same as
the existing preferred shares of the Company. In addition, PREIT has agreed to
assume the Company's mortgage debt, described in Note 5 to the Consolidated
Financial Statements. PREIT currently expects to repay the Company's secured
revolving credit facility with GECC with proceeds from additional debt financing
which PREIT is currently negotiating with prospective lenders together with
additional borrowings under PREIT's existing line of credit.
On the effective date of the merger, PREIT's board of trustees will be increased
by two. Mark E. Pasquerilla, the Company's Chairman, Chief Executive Officer and
President, and one other member of the Company's current Board of Trustees to be
selected by PREIT will serve on PREIT's board of trustees as the two additional
members.
The merger is expected to close in the fourth quarter of 2003. The merger is
subject to approval by the common shareholders of the Company and PREIT and
other customary closing conditions, including consents of the lenders of the
Company and PREIT. The Company and PREIT intend to file a joint registration
statement on Form S-4 (which will include a joint proxy statement/prospectus and
other relevant documents) with the United States Securities and Exchange
Commission (the "SEC") concerning the merger. Crown expects to call a meeting of
its shareholders to approve the proposed merger and will mail the joint proxy
statement/prospectus to its shareholders in connection with the merger. Certain
of the Company's trustees and executive officers, including Mark E. Pasquerilla,
have agreed to vote in favor of the merger.
Under the terms of the merger agreement, a termination fee of up to $20 million
will be payable to either the Company or PREIT by the other party if the merger
is not completed in certain specified circumstances.
Prior to the closing of the merger, the Company intends to continue to pay its
quarterly dividends to its common and preferred shareholders.
In connection with entering into the merger agreement with PREIT, the Company's
Independent Trustees approved another amendment to the Support Agreement under
which Crown Investment's percentage ownership in the Operation Partnership was
further reduced by an amount equivalent to 500,000 common partnership units
effective on May 13, 2003. In consideration of this reduction in its ownership
interest, Crown Investments is no longer obligated to make payments under the
Support Agreement after May 13, 2003. The reduction in ownership interest had a
value of approximately $5.3 million, based on the closing price of the Company's
common shares on May 12, 2003 (which was $10.69). Amounts owed to the Company
under the Support Agreement for the period from April 1 to May 13, 2003 were
$0.08 million and were paid by Crown Investments to the Operating Partnership;
the Operating Partnership made a non-pro-rata cash distribution to Crown
Investments with respect to the 500,000 units for the period from January 1 to
May 13, 2003 of $0.16 million.
Page 27
<Page>
As a result of the May 13, 2003 amendment to the Support Agreement and the
related reduction in Crown Investments' ownership interest, the common ownership
interests of the partners in the Operating Partnership changed as summarized in
the following table:
<Table>
<Caption>
BEFORE AFTER
------------------ ------------------
General and Majority Partner:
Crown American Realty Trust (the Company) 83.81% 84.92%
Limited Minority Partners:
Crown Investments Trust 14.55% 13.42%
Crown American Investment Company 1.64% 1.66%
------------------ ------------------
Totals 100.00% 100.00%
------------------ ------------------
</Table>
As a result of the reductions in the percentage ownership interests held by
Crown Investments and Crown American Investment Company in the Operating
Agreement, on the effective date of the merger, PREIT has agreed to issue 0.2053
of its operating partnership units in exchange for each outstanding partnership
unit of the Company's Operating Partnership held by Crown Investments and Crown
American Investment Company.
Page 28
<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 $ 2,070 $ 1,199 $ - $ (944) $ 2,325
Restructuring costs 137 - - (118) 19
DECEMBER 31, 2001:
Allowance for doubtful accounts 2,529 1,535 - (1,994) 2,070
Restructuring costs 231 - - (94) 137
DECEMBER 31, 2000:
Allowance for doubtful accounts 895 2,201 - (567) 2,529
Restructuring costs 664 369 - (802) 231
</Table>
Page 29
<Page>
SCHEDULE III
CROWN AMERICAN REALTY TRUST
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
Costs Capitalized
Initial Cost Subsequent To Acquisition
-------------------------- -------------------------------------------
Buildings Buildings
and Land and
Encum- Improve- Improve- Improve- Carrying
Properties brances Land ments ments ments Costs
- --------------------- ---------------- ----------- ---------- ----------- ------------ -----------
(A) (B) (B) (C)
Bradley Square
Cleveland, TN $ 11,162 (D) $ 7,012 $ 29,385 $ (281) $ 3,643 $ 0
Capital City
Harrisburg, PA 53,250 1,580 11,269 (193) 13,152 216
Chambersburg
Chambersburg, PA 19,373 (E) 2,363 14,063 38 13,632 271
Crossroads
Beckley, WV 13,741 2,732 19,941 8 4,299 0
Francis Scott Key
Frederick, MD 33,903 (E) 3,784 12,170 (636) 23,275 100
Jacksonville
Jacksonville, NC 27,286 (D) 11,062 26,835 1430 3,198 0
Logan Valley
Altoona, PA 55,213 (E) 2,138 954 2,086 80,483 7,411
Lycoming
Williamsport, PA 33,903 (E) 2,110 14,204 (33) 19,804 638
Martinsburg
Martinsburg,WV 16,951 (E) 8,375 37,547 (653) 4,122 22
Mt. Berry Square
Rome, GA 16,124 (D) 6,260 37,434 (795) 7,115 0
New River Valley
Christiansburg, VA 16,467 (E) 3,923 27,094 38 8,574 0
Nittany
State College, PA 29,059 (E) 6,683 6,204 (891) 34,230 5,834
North Hanover
Hanover, PA 19,373 (E) 1,272 1,325 594 17,273 194
Pasquerilla Plaza
Johnstown, PA 1,476 3,289 23,010 4 1,331 0
Patrick Henry
Newport News, VA 48,917 (E) 3,953 22,432 (599) 20,289 541
Phillipsburg
Phillipsburg, NJ 29,059 (E) 11,169 50,368 36 9,038 0
Schuylkill
Frackville, PA 27,649 10,332 24,843 102 12,437 5
Shenango Valley
Sharon, PA 11,163 (D) 0 6,403 22 9,996 151
South
Allentown, PA 14,530 (E) 3,465 2,331 23 16,154 0
Uniontown
Uniontown, PA 23,248 (E) 0 6,635 1,384 34,791 2,540
Valley Mall
Hagerstown, MD 39,689 (D) 12,036 19,945 3,022 33,468 40
Valley View Mall
Lacrosse, WI 37,000 10,760 39,244 (384)
Viewmont
Scranton, PA 29,059 (E) 1,696 4,602 6,836 42,127 7,701
Washington Crown Ctr
Washington, PA 18,604 (D) 2,977 3,915 4,266 46,059 355
West Manchester
York, PA 26,154 (E) 7,694 24,122 931 24,853 777
Westgate Anchor Pad
Bethlehem, PA 0 0 3,219 42 8 0
Wiregrass Commons
Dothan, AL 30,000 6,213 34,162 3
Wyoming Valley
Wilkes-Barre, PA 55,213 (E) 6,825 52,057 (146) 6,875 12
---------- ----------- ---------- ---------- ------------ ------------
Total $ 737,566 $ 139,703 $ 555,713 $ 16,635 $ 489,845 $ 26,808
========== =========== ========== ========== =========== ===========
<Caption>
Gross Amounts at Which Carried
at Close of Period
--------------------------------------------
Buildings
and Date
Improve- Accum. Date of Ac-
Properties Land ments Total Deprec. Construction quired
- --------------------- ----------- ------------ ----------- ----------- ----------------- ---------
Bradley Square
Cleveland, TN $ 6,731 $ 33,028 $ 39,759 $ (14,552) 1,991
Capital City
Harrisburg, PA 1,387 24,637 26,024 (15,230) 1974
Chambersburg
Chambersburg, PA 2,401 27,966 30,367 (16,467) 1,982
Crossroads
Beckley, WV 2,740 24,240 26,980 (6,737) 1,998
Francis Scott Key
Frederick, MD 3,148 35,545 38,693 (21,082) 1978
Jacksonville
Jacksonville, NC 12,492 30,033 42,525 (8,490) 1,998
Logan Valley
Altoona, PA 4,224 88,848 93,072 (32,141) 1965, 1995-96
Lycoming
Williamsport, PA 2,077 34,646 36,723 (20,440) 1978, 1990
Martinsburg
Martinsburg,WV 7,722 41,691 49,413 (18,222) 1,991
Mt. Berry Square
Rome, GA 5,465 44,549 50,014 (19,208) 1,991
New River Valley
Christiansburg, VA 3,961 35,668 39,629 (13,879) 1,988
Nittany
State College, PA 5,792 46,268 52,060 (22,216) 1968, 1970,
1,991
North Hanover
Hanover, PA 1,866 18,792 20,658 (12,989) 1,967
Pasquerilla Plaza
Johnstown, PA 3,293 24,341 27,634 (10,396) 1,989
Patrick Henry
Newport News, VA 3,354 43,262 46,616 (17,776) 1987
Phillipsburg
Phillipsburg, NJ 11,205 59,406 70,611 (26,330) 1,989
Schuylkill
Frackville, PA 10,434 37,285 47,719 (22,847) 1,980
Shenango Valley
Sharon, PA 22 16,550 16,572 (11,040) 1967, 1995
South
Allentown, PA 3,488 18,485 21,973 (8,378) 1,980
Uniontown
Uniontown, PA 1,384 43,966 45,350 (26,032) 1969, 1984
1,989
Valley Mall
Hagerstown, MD 15,058 53,453 68,511 (12,458) 2,000 1,997
Valley View Mall
Lacrosse, WI 10,760 38,860 49,620 (587) 2,002
Viewmont
Scranton, PA 8,532 54,430 62,962 (24,394) 1968, 1994-95
Washington Crown Ctr
Washington, PA 7,243 50,329 57,572 (19,310) 1969, 2000
West Manchester
York, PA 8,625 49,752 58,377 (22,077) 1981, 1995
Westgate Anchor Pad
Bethlehem, PA 42 3,227 3,269 (1,355) 1,988
Wiregrass Commons
Dothan, AL 6,213 34,165 40,378 (153) 2,002
Wyoming Valley
Wilkes-Barre, PA 6,679 58,944 65,623 (26,673) 1,972 1,995
------------ ------------ ------------ -----------
Total $ 156,338 $ 1,072,366 $ 1,228,704 $ (451,459)
============ ============ ============ ===========
</Table>
See following page for note references (A) to (E)
Page 30
<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
$1,191 million at December 31, 2002.
The changes in total real estate assets and accumulated depreciation and
amortization for the years ended December 31, 1998, 1999, 2000, 2001, and
2002 are as follows:
<Table>
TOTAL REAL ESTATE ASSETS
-----------------------------------------------------------------------------------
Years ended December 31,
-----------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Balance, beginning of period $ 1,128,207 $ 1,114,963 $ 1,078,509 $ 1,031,657 $ 927,408
Additions and improvements 13,463 20,821 43,612 49,065 56,388
Acquisitions 89,998 - - - 65,602
Cost of real estate sold (719) (192) (5,414) (482) (16,270)
Other writeoffs (2,245) (7,385) (1,744) (1,731) (1,471)
----------- ----------- ----------- ----------- -----------
Balance, end of period $ 1,228,704 $ 1,128,207 $ 1,114,963 $ 1,078,509 $ 1,031,657
=========== =========== =========== =========== ===========
</Table>
<Table>
<Caption>
ACCUMULATED DEPRECIATION & AMORTIZATION
-----------------------------------------------------------------------------------
Years ended December 31,
-----------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Balance, beginning of period $ 413,230 $ 377,296 $ 337,506 $ 300,673 $ 271,024
Depreciation and amortization 39,734 43,319 41,878 38,564 36,880
Acquisitions 740 - - - -
Cost of real estate sold - - (344) - (5,760)
Other writeoffs (2,245) (7,385) (1,744) (1,731) (1,471)
----------- ----------- ----------- ----------- -----------
Balance, end of period $ 451,459 $ 413,230 $ 377,296 $ 337,506 $ 300,673
=========== =========== =========== =========== ===========
</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.