<Page>
Exhibit 99.3
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission file number: 1-12216
CROWN AMERICAN REALTY TRUST
(Exact name of registrant as specified in its charter)
MARYLAND
(State or other jurisdiction of incorporation or organization)
25-1713733
(IRS Employer Identification No.)
PASQUERILLA PLAZA, JOHNSTOWN, PENNSYLVANIA 15901
(Address of principal executive offices)
(814) 536-4441
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
COMMON SHARES OF BENEFICIAL INTEREST, PAR VALUE $.01 PER SHARE
11.00% SENIOR PREFERRED SHARES, PAR VALUE $.01 PER SHARE
($50.00 LIQUIDATION PREFERENCE)
(Title of Class)
As of April 30, 2003, 32,077,961, Common Shares of Beneficial Interest and
2,475,000 11.00% Senior Preferred Shares of the registrant were issued and
outstanding.
NEW YORK STOCK EXCHANGE
(Name of Exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for at least the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes /X/ No / /
================================================================================
Page 1 of 33
<Page>
CROWN AMERICAN REALTY TRUST
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
INDEX
<Table>
<Caption>
PAGE
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002 3
Consolidated Statements of Operations for the three months ended
March 31, 2003 and 2002 4
Consolidated Statements of Shareholders' Equity for the three months ended
March 31, 2003 5
Consolidated Statements of Cash Flows for the three months ended
March 31, 2003 and 2002 6
Notes to Consolidated Financial Statements 7 - 16
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 16 - 26
Item 3: Quantitative and Qualitative Disclosures About Market Risk 26
Item 4: Controls and Procedures 26
PART II OTHER INFORMATION
Item 1: Legal Proceedings 26
Item 2: Changes in Securities 27
Item 3: Defaults Upon Senior Securities 27
Item 4: Submission of Matters to a Vote of Security Holders 27
Item 5: Other Information 27
Item 6: Exhibits and Reports on Form 8-K 29
Signatures 30
Certifications 31 - 33
</Table>
Page 2 of 33
<Page>
CROWN AMERICAN REALTY TRUST
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
MARCH 31, 2003 DECEMBER 31, 2002
-------------------- ---------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
Income-producing properties:
Land $ 156,004 $ 156,338
Buildings and improvements 1,077,249 1,072,366
Deferred leasing and other charges 39,056 43,038
-------------------- ---------------------
1,272,309 1,271,742
Accumulated depreciation and amortization (487,868) (481,284)
-------------------- ---------------------
784,441 790,458
Minority interest in Operating Partnership 525 3,265
Investment in joint venture 2,958 3,114
Cash and cash equivalents, unrestricted 8,886 14,122
Restricted cash and escrow deposits 10,232 8,967
Tenant and other receivables 15,489 14,813
Deferred charges and other assets 14,979 19,384
Assets from discontinued operations - 25,309
-------------------- ---------------------
$ 837,510 $ 879,432
==================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt on income-producing properties $ 753,705 $ 737,566
Accounts payable and other liabilities 36,548 44,569
Liabilities from discontinued operations - 13,952
-------------------- ---------------------
790,253 796,087
-------------------- ---------------------
Commitments and contingencies
Shareholders' equity:
Non-redeemable senior preferred shares, 11% cumulative,
$.01 par value, 2,500,000 shares authorized and issued
at both March 31, 2003 and December 31, 2002 25 25
Common shares, par value $.01 per share, 120,000,000 shares
authorized, 33,606,363 and 33,572,694 shares issued at
March 31, 2003 and December 31, 2002, respectively. 335 335
Additional paid-in capital 365,564 365,247
Accumulated deficit (303,086) (266,554)
-------------------- ---------------------
62,838 99,053
Less common shares held in treasury at cost; 1,534,398
shares at both March 31, 2003 and December 31, 2002 (14,652) (14,652)
Less preferred shares held in treasury at cost; 25,000 shares at
both March 31, 2003 and December 31, 2002 (929) (929)
Accumulated other comprehensive loss - (127)
-------------------- ---------------------
47,257 83,345
-------------------- ---------------------
$ 837,510 $ 879,432
==================== =====================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
Page 3 of 33
<Page>
CROWN AMERICAN REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
----------------------------------------
2003 2002
------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RENTAL OPERATIONS:
Revenues:
Minimum rent $ 30,550 $ 27,953
Percentage rent 1,716 1,537
Property operating cost recoveries 11,433 10,107
Temporary and promotional leasing 2,417 2,121
Utility redistribution income 3,541 3,361
Miscellaneous income 780 644
------------------ ------------------
50,437 45,723
------------------ ------------------
Property operating costs:
Recoverable operating costs 15,255 13,007
Property administrative costs 740 720
Other operating costs 998 797
Utility redistribution expense 2,602 2,503
Depreciation and amortization 11,671 10,994
------------------ ------------------
31,266 28,021
------------------ ------------------
19,171 17,702
------------------ ------------------
OTHER EXPENSES:
General and administrative 2,848 1,441
Interest 12,668 12,701
Loss on early extinguishment of debt - 4,314
------------------ ------------------
15,516 18,456
------------------ ------------------
3,655 (754)
------------------ ------------------
PROPERTY SALES:
Gain on sale of outparcel land 54 145
------------------ ------------------
54 145
------------------ ------------------
MINORITY INTEREST IN OPERATING PARTNERSHIP (4,593) (1,456)
------------------ ------------------
LOSS FROM CONTINUING OPERATIONS (884) (2,065)
------------------ ------------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations (235) (174)
Loss on asset sales (13,787) -
------------------ ------------------
(14,022) (174)
------------------ ------------------
NET LOSS (14,906) (2,239)
Dividends on preferred shares (3,402) (3,402)
------------------ ------------------
NET LOSS ALLOCABLE TO COMMON SHAREHOLDERS $ (18,308) $ (5,641)
================== ==================
PER COMMON SHARE INFORMATION:
BASIC AND DILUTED EPS:
LOSS FROM CONTINUING OPERATIONS BEFORE DISCONTINUED
OPERATIONS, NET OF PREFERRED DIVIDENDS $ (0.13) $ (0.21)
LOSS FROM DISCONTINUED OPERATIONS (0.44) (0.01)
------------------ ------------------
NET LOSS $ (0.57) $ (0.22)
================== ==================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC (000) 32,049 26,208
================== ==================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
Page 4 of 33
<Page>
CROWN AMERICAN REALTY TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<Table>
<Caption>
SENIOR ADDITIONAL
PREFERRED COMMON PAID IN ACCUMULATED
SHARES SHARES CAPITAL DEFICIT
------------ ------------ ------------ ------------
(IN THOUSANDS)
BALANCE, DECEMBER 31, 2002 $ 25 $ 335 $ 365,247 $ (266,554)
Comprehensive income:
Net loss (14,906)
Net income on cash-flow
hedging activities
------------
Total comprehensive loss (14,906)
------------
Issuance of common shares and
DRIP purchases 316
Transfer in of limited partner's
interest in the Operating Partnership 1
Reduction in minority partner's
ownership interest related to
purchase of Oak Ridge Mall (11,412)
Dividends paid and accrued:
Preferred shares (3,402)
Common shares (6,812)
------------ ------------ ------------ ------------
BALANCE, MARCH 31, 2003 $ 25 $ 335 $ 365,564 $ (303,086)
============ ============ ============ ============
<Caption>
SENIOR
COMMON PREFERRED ACCUMULATED
SHARES SHARES OTHER
HELD IN HELD IN COMPREHENSIVE
TREASURY TREASURY LOSS TOTAL
------------ ------------ -------------- ------------
(IN THOUSANDS)
BALANCE, DECEMBER 31, 2002 $ (14,652) $ (929) $ (127) $ 83,345
Comprehensive income:
Net loss (14,906)
Net income on cash-flow
hedging activities 127 127
------------ ------------
Total comprehensive loss 127 (14,779)
------------ ------------
Issuance of common shares and
DRIP purchases 316
Transfer in of limited partner's
interest in the Operating Partnership 1
Reduction in minority partner's
ownership interest related to
purchase of Oak Ridge Mall (11,412)
Dividends paid and accrued:
Preferred shares (3,402)
Common shares (6,812)
------------ ------------ ------------ ------------
BALANCE, MARCH 31, 2003 $ (14,652) $ (929) $ - $ 47,257
============ ============ ============ ============
</Table>
The accompanying notes are an integral part of these statements.
Page 5 of 33
<Page>
CROWN AMERICAN REALTY TRUST
Consolidated Statements of Cash Flows
(Unaudited)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------------ ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (14,906) $ (2,239)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Minority interest in Operating Partnership 4,593 1,456
Equity earnings in joint venture (127) (95)
Depreciation and amortization 12,525 11,763
Operating loss from discontinued operations 235 174
Loss on asset sales 13,787 -
Loss on early extinguishment of debt - 4,314
Net cash used in discontinued operations (319) (54)
Net changes in:
Tenant and other receivables (663) 2,216
Deferred charges and other assets 3,612 1,935
Restricted cash and escrow deposits (1,682) (2,187)
Accounts payable and other liabilities (8,069) (11,539)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,986 5,744
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in income-producing properties (5,567) (2,873)
Change in investing escrow deposits (613) (679)
Distributions from joint venture 190 100
Capital investments in discontinued operations - (4)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (5,990) (3,456)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt, net of loan deposits and prepayment penalties 19,532 48,681
Cost of issuance of debt (11) (834)
Debt repayments (2,361) (41,977)
Dividends and distributions paid on common shares and partnership units (9,487) (7,595)
Dividends paid on senior preferred shares (3,402) (3,402)
Cash flow support payments 791 765
Net proceeds from the Dividend Reinvestment Plan 316 -
Debt repaid on discontinued operations (13,610) (860)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (8,232) (5,222)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,236) (2,934)
Cash and cash equivalents, beginning of period 14,122 16,999
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,886 $ 14,065
============ ============
SUPPLEMENTAL CASH FLOW DATA:
INTEREST PAID $ 12,227 $ 12,337
============ ============
OTHER COMPREHENSIVE INCOME - HEDGING ACTIVITIES $ 127 $ 342
============ ============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
Page 6 of 33
<Page>
CROWN AMERICAN REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION
ORGANIZATION
Crown American Realty Trust (the "Company") was formed on May 14, 1993 as a
Maryland real estate investment trust (a "REIT") to acquire and operate
substantially all of the enclosed shopping mall properties and two office
buildings (the "Initial Properties") owned by Crown American Associates ("Crown
Associates"), formerly Crown American Corporation. Crown Associates is a
wholly-owned subsidiary of Crown Holding Company ("Crown Holding"), which is
controlled by Mark Pasquerilla, Chairman of the Board of Trustees and CEO of the
Company. Crown Associates, which was founded in 1950, was engaged principally in
the development, acquisition, ownership and management of enclosed shopping
malls and, to a lesser extent, strip shopping centers, hotels and office
buildings. The Company raised approximately $405 million in equity through an
initial public offering of approximately 25.5 million shares, which occurred on
August 17, 1993, and used the proceeds to purchase an initial 78% general
partnership interest in Crown American Properties, L.P. (the "Operating
Partnership"), a partnership which was formed just prior to consummation of the
offering to own and operate the Initial Properties. These proceeds, along with
new borrowings, were used by the Operating Partnership to retire debt related to
the Initial Properties.
Simultaneously with the public offering, Crown Associates and an affiliate
transferred the Initial Properties and the management operations into either the
Company, the Operating Partnership, or Crown American Financing Partnership (the
"Financing Partnership"), a partnership which is 99.5% owned by the Operating
Partnership and 0.5% owned by the Company.
The limited partnership interest in the Operating Partnership and the 1.6
million shares in the Company received for two malls transferred in 1993 are
currently held by Crown Investments Trust ("Crown Investments") and by Crown
American Investment Company (a subsidiary of Crown Investments). Crown
Investments is a wholly-owned subsidiary of Crown Holding. While the Company, as
general partner, has broad rights and authority to conduct the business, the
Operating Partnership agreement provides that the consent of Crown Investments
is required for certain actions, including among others, merger, consolidation,
dissolution, liquidation, or sale of all or substantially all of the assets of
the Operating Partnership.
NATURE OF OPERATIONS
The Company operates in one business segment - real estate. The Company's
revenues are primarily derived under real estate leases with national, regional
and local department stores and other specialty retailers. The Company provides
leasing, management, acquisition, development, construction and tenant-related
services for its portfolio. The Company does not have any foreign operations.
The Company evaluates performance based upon net operating income from the
combined properties in the segment.
As of March 31, 2003, the Properties consist of: (1) 26 wholly-owned enclosed
shopping malls (together with adjoining outparcels and undeveloped land) located
in Pennsylvania, New Jersey, Maryland, Tennessee, North Carolina, West Virginia,
Virginia, Georgia, Wisconsin and Alabama (2) a 50% general partnership interest
in Palmer Park Mall Venture, which owns Palmer Park Mall located in Easton,
Pennsylvania, (3) Pasquerilla Plaza, an office building in Johnstown,
Pennsylvania, which serves as the headquarters of the Company and is partially
leased to other parties, and (4) a parcel of land and building improvements
located in Pennsylvania (under a purchase option) sub-leased to a department
store chain ("Westgate anchor pad").
As the owner of real estate, the Company is subject to risks arising in
connection with the underlying real estate, including defaults under or
non-renewal of tenant leases, tenant bankruptcies, competition, inability to
rent unleased space, failure to generate sufficient income to meet operating
expenses, as well as debt service, capital expenditures and tenant improvements,
environmental matters, financing availability and changes in real estate and
zoning laws. The success of the Company also depends upon certain key personnel,
the Company's ability to maintain its qualification as a REIT, compliance with
the terms and conditions of the Mortgage Loans and other debt instruments, and
trends in the national and local economy, including interest rates, income tax
laws, governmental regulations and legislation and population trends.
BASIS OF PRESENTATION
Page 7 of 33
<Page>
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
March 31, 2003 the Company held 100% of the preferred partnership interests and
83.81% of the common partnership interests. The Operating Partnership directly
owns five malls, the 50% joint venture interest in Palmer Park Mall, Pasquerilla
Plaza, and the Anchor Pad. All remaining properties are owned by eight
partnerships and limited liability companies that are either 99.5% or 100.0%
owned by the Operating Partnership; the remaining 0.5% interests in these
second-tier entities are owned by the Company through various wholly-owned
subsidiaries. The Operating Partnership owns 100% of Crown American Services
Corporation formed in 2002 as a taxable REIT subsidiary to provide labor and
other services to the Operating Partnership with respect to certain operating
activities. The Operating Partnership also owns 100% of Crown American GC, Inc.
formed in 2001 as a taxable REIT subsidiary to sell gift certificates to
shoppers at properties owned by the Company. Only the Operating Partnership and
Crown American Services Corporation have paid employees. The Operating
Partnership manages all properties except the Palmer Park Mall and the Anchor
Pad, and also manages other properties for third party owners and provides
construction management and other services for third parties.
In the opinion of management, the accompanying unaudited consolidated interim
financial statements include all adjustments of a normal recurring nature
necessary for a fair presentation of the financial position and results of
operations of the Company. These consolidated interim financial statements and
the accompanying notes should be read in conjunction with the audited
consolidated financial statements of the Company for the year ended December 31,
2002, which are included in its Annual Report on Form 10-K. The results of
operations for interim periods are not necessarily indicative of results to be
expected for the year.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation. Carlisle Plaza Mall which was sold in October 2002
and Oak Ridge Mall which was sold in March 2003, are shown as discontinued
operations in the accompanying financial statements with all prior periods
reclassified. (See Note 6 to the interim Consolidated Financial Statements.) In
addition, as described in Note 3 to the interim Consolidated Financial
Statements, the Company adopted SFAS 145 effective January 1, 2003 and
accordingly reclassified losses on early debt extinguishments that occurred in
prior periods from extraordinary losses to income from continuing operations.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
MINORITY INTEREST
Minority interest represents the common partnership units in the Operating
Partnership that are owned by Crown Investments and its subsidiary. At March 31,
2003 Crown Investments and its subsidiary owned 16.19% of the total common
partnership units outstanding. Crown American Realty Trust owns the remaining
83.81%. The minority interest balance is adjusted each year for Crown
Investments' and its subsidiary's proportionate share of net income (loss) of
the Operating Partnership (after deducting preferred unit distributions), common
partnership distributions, and additional capital contributions. Primarily
because the distributions on common partnership units have been larger than the
Operating Partnership's income (loss) after preferred unit distributions, the
minority interest account on the consolidated balance sheets had been declining
each year. The balance was reduced below zero in the second quarter of 2000.
Under accounting principles generally accepted in the United States, when the
minority partner's share of the Operating Partnership's net income (loss)
applicable to common shareholders and the minority partner's cash distributions
and capital contributions, would cause the minority interest balance to be less
than zero, such balance must be reported at zero unless there is a legal
obligation of the minority partner to reimburse the Operating Partnership for
such excess amounts. The partnership agreement does provide for such obligation
by the minority partner in the form of cash flow support payments on two of the
Company's malls that were in the lease-up phase at the time of the Company's IPO
in 1993. Accordingly, since the minority interest account is reduced below zero,
and there is a legal obligation of the minority partner to make additional cash
contributions to the Operating Partnership, the minority interest balance at
March 31, 2003 is shown on the Consolidated Balance Sheet as an asset. This
asset balance at March 31, 2003 has been limited to $0.5 million, the estimated
amount of cash flow support to be received over the next twelve months.
Page 8 of 33
<Page>
An additional amount of $7.8 million, representing the excess losses and
distributions over the cash flow support, has been absorbed by the Company in
its share of loss from the Operating Partnership for the first three months of
2003. On a cumulative basis, $21.9 million of such losses have been absorbed by
the Company, through and including March 31, 2003. As described in Note 6 to the
interim Consolidated Financial Statements, the Cash Flow Support Agreement (the
"Support Agreement") was amended significantly in connection with the sale of
Oak Ridge Mall. A further amendment was made to the Support Agreement in
connection with the Merger Agreement (see Item 5 herein for further detail).
NET INCOME (LOSS) PER SHARE
Basic income (loss) per common share is computed by dividing net income (loss)
applicable to common shares, as shown in the Consolidated Statements of
Operations, by the weighted average number of common shares outstanding for the
year. Diluted income (loss) per share is computed the same way except that the
weighted average number of common shares outstanding is increased, using the
treasury stock method, for the assumed exercise of options under the Company's
share incentive plans. The calculation of diluted earnings per share for the
three months ended March 31, 2003 and 2002 would have included approximately
335,000 shares and 256,000 shares respectively, for the assumed exercise of
options under the Company's share incentive plans, except that no anti-dilution
is permitted as a result of losses reported by the Company. Because no
anti-dilution is permitted, diluted and basic EPS for the three months ended
March 31, 2003 and 2002 are identical.
The calculation of pro forma earnings (loss) per share, computed in accordance
with FASB statement No. 148 "Accounting for Stock-Based Compensation" is show in
the table below:
<Table>
<Caption>
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
(thousands of dollars, except per share data)
Net loss allocable to common shares, as reported $ (18,308) $ (5,641)
Add: Stock-based employee compensation expense included in
net income - -
Deduct: Stock-based employee compensation expense determined
under fair value based method for all awards (13) (39)
-------------------- --------------------
Pro forma net loss allocable to common shares $ (18,321) $ (5,680)
==================== ====================
Loss per common share:
Basic and diluted, as reported $ (0.57) $ (0.22)
-------------------- --------------------
Basic and diluted, pro forma $ (0.57) $ (0.22)
-------------------- --------------------
</Table>
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145 "Recission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). Among other items, SFAS 145 rescinds FASB Statement No. 4
"Reporting of Gains and Losses from Extinguishment of Debt" and "Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements". As a result, gains and
losses from extinguishment of debt should be classified as extraordinary items
only if they meet the criteria of APB Opinion No. 30 "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions". The
Company has adopted the provisions of SFAS 145 in the first quarter of 2003 and,
consequently, has reclassified the $4.3 million loss on the early extinguishment
of debt, which occurred in the first quarter of 2002, from extraordinary to
income from continuing operations.
In July 2002, the FASB issued Statement of Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities", ("SFAS 146")
which addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." Among other
provisions, the Statement eliminates the definition and requirements for
recognition of exit costs in Issue 94-3 and requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred which can differ from the commitment date of the plan. This Statement
also establishes that fair value is the objective for initial measurement of the
liability. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company believes that the implementation of this Statement will
not have a material impact on the Company's results of operations or financial
position.
Page 9 of 33
<Page>
The Company adopted the disclosure provisions of FASB Interpretation No. (FIN)
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Direct Guarantees of Indebtedness of Others," in the fourth quarter of
2002. The Company will apply the initial recognition and initial measurement
provisions on a prospective basis for all guarantees issued or modified after
December 31, 2002. Under FIN 45, at the inception of guarantees issued after
December 31, 2002, the Company will record the fair value of the guarantee as a
liability, with the offsetting entry being recorded based on the circumstances
in which the guarantee was issued. The Company will account for any fundings
under the guarantee as a reduction of the liability. After funding has ceased,
the Company will recognize the remaining liability in the income statement on a
straight-line basis over the remaining term of the guarantee. Adoption of FIN 45
will have no impact to the Company's historical financial statements as existing
guarantees are not subject to the measurement provisions of FIN 45. The impact
on future financial statements will depend on the nature and extent of issued
guarantees but is not expected to have a material impact to the Company. (See
Note 4 to the interim Consolidated Financial Statements.)
FIN 46, "Consolidation of Variable Interest Entities," is effective for all
enterprises with variable interests in variable interest entities created after
January 31, 2003. FIN 46 provisions must be applied to variable interests in
variable interest entities created before February 1, 2003 from the beginning of
the third quarter of 2003. If an entity is determined to be a variable interest
entity, it must be consolidated by the enterprise that absorbs the majority of
the entity's expected losses if they occur, receives a majority of the entity's
expected residual returns if the occur, or both. Where it is reasonably possible
that the Company will consolidate or disclose information about a variable
interest entity, the Company must disclose the nature, purpose, size and
activity of the variable interest entity and the Company's maximum exposure to
loss as a result of its involvement with the variable interest entity in all
financial statements issued after January 31, 2003. The Company does not believe
that the adoption of FIN 46 will result in consolidation of any previously
unconsolidated entities. The adoption of FIN 46 may result in additional
disclosures which are not expected to be significant.
FASB Statement No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure", amends the disclosure provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation", and APB Opinion No. 28, "Interim
Financial Reporting", to require disclosure in the summary of significant
accounting policies of the effects of an entity's policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. SFAS 148 is effective for financial
reports containing condensed consolidated financial statements for interim
periods beginning after December 15, 2002, and the required disclosures are
contained in Note 2 herein.
NOTE 4 - DEBT ON INCOME-PRODUCING PROPERTIES
Debt on income-producing properties, excluding debt on discontinued operations,
consisted of the following (in thousands):
<Table>
<Caption>
March 31, 2003 December 31, 2002
------------------ --------------------
GECC Mortgage Loan $ 448,534 $ 450,422
Permanent loans 162,643 163,116
Secured lines of credit 142,528 124,028
-------------- -------------
$ 753,705 $ 737,566
============== =============
</Table>
GECC MORTGAGE LOAN
On August 28, 1998, the Company closed a $465 million 10-year mortgage with
General Electric Capital Corporation ("GECC"). The gross proceeds from the new
loan (the "GECC Mortgage Loan") were used to refinance $420.6 million of
existing mortgage loans ("Old Mortgage Loans"). The remaining proceeds were used
largely to establish escrows to fund the remaining expansion and redevelopment
costs of Patrick Henry Mall and Nittany Mall, and to fund closing costs, initial
loan reserves and prepayment penalties with respect to $230.0 million of the Old
Mortgage Loans that were pre-paid prior to their maturity dates. The prepayment
penalties for the Old Mortgage Loans were approximately $16.6 million. In
addition, approximately $5.9 million of unamortized deferred financing costs
related to the Old Mortgage Loans were written off in the third quarter of 1998.
Both of these items were accounted for as an extraordinary loss on early
extinguishment of debt. The GECC Mortgage Loan has a fixed stated interest rate
of 7.43% and is secured by cross-collateralized mortgages on 15 of the malls.
The loan provides for payment of interest only during the first two years and
interest and principal amortization, based on 25 year amortization, during the
last eight years. Crown Investments has guaranteed $250 million of the GECC
Mortgage Loan.
PERMANENT LOANS
Page 10 of 33
<Page>
At March 31, 2003, permanent loans consisted of six loans secured by six
properties held by the Operating Partnership or its subsidiaries, as follows:
(1) a $27.3 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 $1.4 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
initially recorded as an extraordinary loss in the Company's Consolidated
Statement of Operations during the first quarter of 2002, and have now been
reclassified to continuing operations, as required by SFAS 145.
On November 7, 2002, the Company and its lender executed agreements to extend
and modify the terms of its mortgage loan on Schuylkill Mall, Frackville, PA.
Under the previous terms, the loan bore interest at a fixed rate of 8.375%, the
annual debt service payment was $3.62 million, and the loan matured on December
1, 2004. The new terms, effective November 1, 2002, include interest at a fixed
rate of 7.25%, annual debt service of $3.32 million and a maturity date of
December 1, 2008. In connection with this extension and modification of terms,
the Company made a cash payment of $5.0 million to reduce the principal balance
from $32.9 million to $27.9 million. The loan was and remains fully guaranteed
by the Operating Partnership.
At December 31, 2002, $13.6 million of mortgage debt on Oak Ridge Mall was
outstanding. This loan was reclassified to "Liabilities from discontinued
operations" in the current financial statements as a result of the sale of Oak
Ridge Mall on March 31, 2003 as described in Note 6 to the interim Consolidated
Financial Statements. This loan was paid off on March 31, 2003 in connection
with the sale, primarily using funds drawn from the Company's lines of credit.
SECURED LINES OF CREDIT
In September 2000 the Company executed a three-year extension and other
modifications to its secured revolving credit facility with GECC. The maturity
date on the modified line was extended from 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 limit of $150 million to $175 million due to the addition of a sixth
mall to the collateral base in the fourth quarter of 2000. Actual availability
under the line is based on the level of operating income generated at the
properties; at March 31, 2003, total borrowing capacity was approximately $153
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 $139.5 million at March 31, 2003.
In addition to the above facility, the Company has a $6.0 million line with a
bank secured by a mortgage on the Company's headquarters office building bearing
interest at LIBOR plus 2.25%. The maturity date on this loan was extended to
April 30, 2004. There was $3.0 million outstanding under this line as of March
31, 2003.
COVENANTS AND RESTRICTIONS
Some of the above loans and lines of credit contain certain financial covenants
and other restrictions, including limitations on the ratios, as defined, of
total Company debt to 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 period ended March 31, 2003 and through
the date hereof. There are ongoing requirements under the GECC Mortgage Loan,
the GECC line of credit, the $53.3 million loan on Capital City Mall, and the
$37.0 million loan for Valley View Mall to have insurance policies in place with
insurance companies that have certain minimum credit ratings, as defined in the
respective loan agreements. Two of the major insurance carriers used by the
Company, for general liability, workers' compensation, automobile, excess
liability and
Page 11 of 33
<Page>
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
consolidated Company.
INTEREST RATES AND SWAP AGREEMENTS
The GECC Mortgage Loan on the Financing Partnership properties and five of the
permanent loans with an aggregate principal balance of $581.2 million at March
31, 2003 have fixed interest rates ranging from 6.15% to 7.61% (excluding the
UDAG loan which is interest free). The weighted average interest rate on this
fixed-rate debt at March 31, 2003 and 2002 was 7.42% and 7.56%, respectively.
All of the remaining loans with an aggregate principal balance of $172.5 million
at March 31, 2003 have variable interest rates based on spreads ranging from
2.00% to 2.25% above 30 day LIBOR. The weighted average interest rates on the
variable rate debt at March 31, 2003 and 2002 were 3.55% and 4.13%,
respectively. The weighted average interest rates on variable rate debt during
the three months ended March 31, 2003 and 2002 were 3.55% and 4.11%,
respectively.
In the first quarter of 2001, the Company entered into swap agreements on a
notional amount of $35 million of the Company's floating rate debt. The
effective LIBOR swap rate on the two agreements is 5.197% and their terms
expired on February 1, 2003. The Company has designated this transaction as a
cash flow hedge of a floating-rate liability and has applied the guidance set
forth in SFAS No. 133 (Accounting for Derivative Instruments and Hedging
Activities) to this transaction. The fair value of these transactions is
recorded in the balance sheet, with the offset to Accumulated Other
Comprehensive Loss. The current year impact of the mark to market adjustment was
to record comprehensive income of $0.1 million for the three months ended March
31, 2003.
DEBT MATURITIES
As of March 31, 2003, the scheduled principal payments on all debt are as
follows (in thousands):
<Table>
<Caption>
Period Ending December 31,
- --------------------------
2003 (nine months) $ 6,857
2004 (year) 153,072
2005 (year) 41,769
2006 (year) 12,546
2007 (year) 13,193
Thereafter 526,268
--------------
$ 753,705
==============
</Table>
NOTE 5 - ACQUISITIONS
Page 12 of 33
<Page>
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 7, in June 2002, the Company raised $47.2 million net
proceeds from a common share secondary offering and used those proceeds
initially to pay down its line of credit with GECC with the intent of later
re-borrowing from the line of credit for acquisitions or for other general
corporate purposes.
On November 19, 2002, the Company completed the acquisition of Wiregrass Commons
Mall, an enclosed regional shopping mall, located in Dothan, Alabama from
Metropolitan Life Insurance Company. The mall comprises 633,000 square feet of
GLA, of which approximately 230,000 square feet of mall shop space is owned GLA
with the remaining GLA, together with related parking areas, owned by their
anchor occupants. The mall is anchored by Dillard's, JC Penney, McRae's and
Parisian. The purchase price also includes approximately 60 acres of vacant land
some of which can be used for expansion or outparcel development or sale. The
purchase price, excluding closing costs and expenses, was $40.25 million and was
financed by a $30.0 million floating rate mortgage loan bearing interest at
LIBOR plus 2.00% with the balance funded from cash and borrowings from the
Company's line of credit with GECC.
NOTE 6 - DISPOSITIONS
Carlisle Plaza Mall, an enclosed shopping mall with a small adjacent strip
center aggregating 342,000 square feet of gross leaseable area located in
Carlisle, PA, had been under a contract of sale. During the third quarter, the
buyer, Carlisle Realty Partners L.P., an unrelated third party, made sufficient
progress in completing its due diligence and other matters such that this asset
became classified as held for sale as of September 30, 2002. Carlisle Plaza Mall
was sold on October 29, 2002 for $5.8 million, less $0.4 million in closing
costs and expenses, which resulted in a gain on sale of approximately $0.4
million after sale costs and expenses, which was recorded in the fourth quarter
of 2002. A mortgage loan of approximately $6.0 million was paid off as a part of
the sale of this asset, and $0.8 million of Industrial Development bonds related
to Carlisle Plaza Mall were paid off in December 2002. As required by Statement
of Financial Accounting Standards ("SFAS") No. 144, the operating results of
Carlisle Plaza Mall have been shown in the accompanying statements as
discontinued operations, and all prior periods have been reclassified.
Oak Ridge Mall ("Oak Ridge"), located in Oak Ridge Tennessee, was sold on March
31, 2003, to Crown Investments Trust ("Crown Investments"), an entity which is
owned by Mark E. Pasquerilla, the Company's CEO and President. In connection
with the sale, the Cash Flow Support Agreement ("Support Agreement") between the
Company and Crown Investments as it relates to Oak Ridge was also amended.
In May 2002 the Company's Board of Trustees approved an agreement to sell Oak
Ridge, to an unrelated third party. The independent members of the Board of
Trustees ("Independent Trustees") concurrently approved an amendment of the
Support Agreement regarding the cash flow support obligations of Crown
Investments with respect to Oak Ridge. However, the effectiveness of this
proposed amendment was expressly conditioned upon the completion of the sale.
The purchase agreement with the third party was extended and amended several
times since May 2002 (including a reduction of the purchase price from $12.0
million to $10.6 million), and a variety of conditions required for closing with
the third party continued to be unsatisfied.
Consequently, on March 28, 2003 the Independent Trustees instead approved the
sale of Oak Ridge to Crown Investments for estimated fair value of $11.4
million. The $11.4 million purchase price was satisfied through issuance of a
promissory note by Crown Investments; such promissory note was then distributed
in a nonliquidating distribution to Crown American Investment Company ("CAIC"),
effectively reducing CAIC's common percentage ownership interest in the
Operating Partnership equivalent to 1,159,794 common partnership units. CAIC is
a wholly-owned subsidiary of Crown Investments and is a minority limited partner
in the Operating Partnership. In connection with the approved sale, the Company
paid off the current $13.4 million mortgage loan balance on Oak Ridge and
assigned to Crown Investments the existing agreement of sale with the third
party, as amended. The Company will manage Oak Ridge for a fee on behalf of
Crown Investments. Crown Investments agreed that it will pay to the Company an
amount equal to 90% of the amount, if any, by which the net proceeds received on
the sale to any unrelated third party of Oak Ridge by Crown Investments
concluded within six years of the purchase by Crown Investments exceeds Crown
Investments' total investment in Oak Ridge (defined to include $11.4 million
plus the aggregate amount of all additional investments made by Crown
Investments in Oak Ridge plus an 8% return compounded annually on this sum).
Page 13 of 33
<Page>
The sale of Oak Ridge resulted in a loss on sale for financial reporting
purposes of $13.8 million which was recorded by the Company in the first quarter
of 2003. The reduction in the minority partner's percentage ownership interest,
valued at $11.4 million, was recorded in shareholders' equity in the
consolidated balance sheet.
In connection with the foregoing, the Independent Trustees also approved
amendments to the Support Agreement and to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership. The amendment to the Support
Agreement released Oak Ridge from Crown Investments' future obligations under
the Support Agreement and reduced the maximum quarterly amount of support
payments for the remaining two properties in the Agreement from $1,000,000 to
$300,000. Approximately 81% of the $3.1 million in cash flow support for the
year ended 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 would have a value of approximately $25.6
million, based on the closing price of the Company's common shares on March 27,
3003 (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, were unchanged as a result of the above transactions. However, the common
percentage ownership interests of the partners in the Operating Partnership did
change, as summarized in the following table:
<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>
As required by SFAS No. 144, the operating results of Oak Ridge Mall and
Carlisle Plaza Mall have been shown in the accompanying statement as
discontinued operations, and all prior periods have been reclassified.
The following represents certain condensed financial statement information on
Oak Ridge Mall and Carlisle Plaza Mall for the applicable periods presented in
the financial statements (thousands of dollars):
<Table>
<Caption>
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
OAK RIDGE MALL:
Total revenues $ 748 $ 890
Operating loss $ (235) $ (233)
Loss on asset sale $ (13,787) $ -
CARLISLE PLAZA MALL:
Total revenues $ - $ 604
Operating income $ - $ 59
</Table>
Page 14 of 33
<Page>
<Table>
<Caption>
March 31, 2003 December 31, 2002
-------------- -----------------
OAK RIDGE MALL:
Total assets (net) $ - $ 25,309
Total liabilities $ - $ 13,952
</Table>
NOTE 7 - COMMON SHARE OFFERING
On June 7, 2002, the Company completed a public offering of 5,000,000 of its
common shares of beneficial interest, par value $0.01, at a public offering
price of $8.75 per share. In addition to the shares issued above, on June 20,
2002 the Company sold another 750,000 common shares at $8.75 per share with
respect to the underwriters' over-allotment options.
The net proceeds to the Company (after deducting underwriting discounts and
estimated expenses) of the common offering was approximately $47.2 million. The
proceeds from the offering were initially used to pay down the Company's line of
credit with GECC; part of these funds were later re-borrowed to supplement the
purchases of Valley View Mall and Wiregrass Commons Mall as described in Note 5
to the interim Consolidated Financial Statements.
NOTE 8 - CONTINGENCIES AND COMMITMENTS
The Company obtains insurance for workers' compensation, automobile, general
liability, property damage, and medical claims. However, the Company has elected
to retain a portion of expected losses for property damage, general liability
and medical claims through the use of deductibles which generally range up to
$0.25 million per occurrence. Provisions for losses expected under these
programs are recorded based on estimates, provided by consultants who utilize
the Company's claims experience and actuarial assumptions, of the aggregate
liability for claims incurred and claims incurred but not reported. The total
estimated liability for these losses at March 31, 2003 and December 31, 2002 was
$5.6 million and $5.4 million, respectively, and is included in Accounts Payable
and Other Liabilities.
Based on environmental studies completed on the Properties, management believes
any exposure related to environmental clean-up will not have a significant
adverse impact on the Company's results of operations or its financial
condition.
The Company and its subsidiaries from time to time are subject to litigation and
claims, both asserted and unasserted, incidental to their businesses, some of
which may be substantial. For example, these claims may include, but are not
limited to, damages asserted by other owners of real estate, regulatory
agencies, customers, tenant disputes over lease provisions including billings
for reimbursement of operating costs and real estate taxes, and various other
matters that may arise in the normal course of business. After consultations
with legal counsel and other advisors, management believes that the Company has
recognized adequate provisions for probable and reasonably estimable liabilities
associated with these matters. While these matters may impact quarterly or
annual results of operations and cash flows when resolved in future periods,
based upon information currently available, management does not believe that the
ultimate resolution of these claims and litigation will have a material adverse
effect on the financial position of the Company.
COMMITMENTS
The Company has various purchase commitments related to the operations of their
mall assets in the normal course of business which are not material to the
financial position or liquidity of the Company. The Company also has commitments
under signed leases with open tenants to make future cash allowances and/or to
construct tenant premises, which aggregate approximately $2.5 million as of
March 31, 2003.
NOTE 9 - SUBSEQUENT EVENT
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. 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,
which is further described in Note 4 to the consolidated financial statements in
Item 1 of this report. PREIT currently expects to repay the Company's line of
credit with General Electric Capital Corporation 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. The
merger is expected to close in the fourth quarter of 2003.
Page 15 of 33
<Page>
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. Please refer to Item 5 herein for a more complete
description of the proposed merger, including the amendment to the Cash Flow
Support Agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain of the following comments contain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Act of 1934, as amended. Such statements are based on
assumptions and expectations, which may not be realized and are inherently
subject to risks and uncertainties, many of which cannot be predicted with
accuracy. Future events and actual results, financial and otherwise, may differ
from the results discussed in the forward-looking statements. Risk and other
factors that might cause differences, some of which could be material, include,
but are not limited to, economic and credit market conditions, the ability to
refinance maturing indebtedness, the impact of competition, consumer buying
trends, financing and development risks, construction and lease-up delays, cost
overruns, the level and volatility of interest rates, the rate of revenue
increases versus expense increases and financial stability of tenants within the
retail industry, as well as other risks listed from time to time in the
Company's reports filed with the Securities and Exchange Commission or otherwise
publicly disseminated by the Company. Although management believes that the
assumptions made in connection with the forward-looking statements are
reasonable, there are no assurances that the assumptions and expectations will
prove to have been correct due to the foregoing and other factors.
SELECTED FINANCIAL DATA
The table on the following page sets forth selected financial data for the
Company for the three months ended March 31, 2003 and 2002. Management's
discussion and analysis of financial condition and results of operations should
be read in conjunction with this table and the interim Consolidated Financial
Statements on pages 3 to 16. As described in Note 6 to the interim Consolidated
Financial Statements herein, prior period financial statements have been
reclassified to reflect the presentation of Carlisle Plaza Mall and Oak Ridge
Mall as discontinued operations, as required by Statement of Financial
Accounting Standards ("SFAS") No 144. Prior period operating statistics have
also been restated to delete the impact of Carlisle and Oak Ridge from all
periods. In addition, as described in Note 3 to the interim Consolidated
Financial Statements, the Company adopted SFAS 145 effective January 1, 2003 and
accordingly reclassified losses on early debt extinguishments that occurred in
prior periods from extraordinary losses to income from continuing operations.
PERFORMANCE MEASUREMENT
The Company's net income and statement of cash flows have been prepared in
accordance with GAAP. The Company has also included measures of its financial
performance and economic profitability based on its "Funds from Operations" or
"FFO" and "Earnings Before Interest, Taxes, Depreciation, and Amortization" or
"EBITDA", each of which is a non-GAAP measure. The Company believes that FFO and
EBITDA provide useful financial information to investors.
FFO is an important and widely used financial measure of the operating
performance of REITs, which is not specifically defined by GAAP. However, FFO
provides a relevant basis for comparison among REITs.
NAREIT defines "Funds from Operations" as net income (or loss) (computed in
accordance with GAAP), excluding gains (or losses) from extraordinary items and
sales of properties, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures. In
calculating its Funds from Operations, the Company excludes gains or losses on
sales from previously depreciated properties and includes gains (or losses) from
the sale of peripheral land and earned cash flow support under the Support
Agreement. In 2002, NAREIT clarified that FFO related to assets held for sale,
sold or otherwise transferred and included in results of discontinued operations
should continue to be included in consolidated FFO. The Company adopted this
clarification in 2002. In addition, as described in Note 3 to the interim
Consolidated Financial Statements, the Company adopted SFAS 145 effective
January 1, 2003 and accordingly reclassified losses on early debt
extinguishments that occurred in prior periods from extraordinary losses to
income from continuing operations. Funds from Operations as previously reported
did not include extraordinary losses from early debt extinguishments, based on
NAREIT's definition. However, with the reclassification of such losses from
extraordinary losses to income from continuing operations, these losses are now
included in Funds from Operations. A reconciliation of net income (loss)
determined in conformity with GAAP to Funds from Operations is included on page
18 in Item 2 herein.
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
Page 16 of 33
<Page>
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 2 - 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.
The following discussion and analysis of the financial condition and results of
operations should be read in conjunction with the Selected Financial Data and
the accompanying consolidated interim financial statements and notes thereto.
Page 17 of 33
<Page>
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2003 2002
------------- -------------
(IN THOUSANDS)
SELECTED FINANCIAL DATA:
EBITDA (1 & 2) $ 29,020 $ 28,801
============= =============
Funds from Operations (FFO) (1& 2):
Net (loss) $ (14,906) $ (2,239)
Adjustments:
Minority interest in Operating Partnership 4,593 1,456
Loss on asset sales other than outparcels 13,787
Depreciation and amortization - real estate 11,671 10,994
Depreciation in JV and other line items 453 422
Depreciation from discontinued operations 387 400
Cash flow support 791 765
------------- -------------
Funds from Operations, before allocations to minority 16,776 11,798
interests and preferred shares
Less:
Amount allocable to preferred shares (3,402) (3,402)
Amount allocable to minority interest (3,117) (2,295)
------------- -------------
Funds from Operations applicable to common shares $ 10,257 $ 6,101
============= =============
Weighted average common shares outstanding - basic 32,049 26,208
============= =============
Weighted average common shares outstanding - diluted (3) 32,384 26,464
============= =============
Cash Flows:
Net cash provided by operating activities $ 8,986 $ 5,744
============= =============
Net cash (used in) investing activities $ (5,990) $ (3,456)
============= =============
Net cash (used in) financing activities $ (8,232) $ (5,222)
============= =============
</Table>
(1) Funds from Operations and EBITDA are defined on the preceding page.
(2) 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
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.
(3) Includes 335,000 and 256,000 shares for the three months ended March 31,
2003 and 2002, respectively, for the dilutive effect of stock options
under the Company's share incentive plans, computed using the treasury
stock method.
Page 18 of 33
<Page>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2003 TO THE CORRESPONDING PERIOD IN
2002
- - REVENUES
Total revenues for the first quarter of 2003 were $50.4 million, up $4.7
million, or 9 percent, from $45.7 million for the same period in 2002. $3.8
million of this increase (or 8%) is attributable to the two acquisitions
completed in 2002.
The composition of the remaining increase of $0.9 million is as follows: a) a
$0.6 million increase in mall shop and anchor-base minimum rents due to higher
rental rates; b) higher temporary and seasonal leasing revenues of $0.1 million,
c) higher recovery income of $0.1 million, d) higher miscellaneous revenues and
utility income of $0.2 million, e) higher percentage rents of $0.2 million,
offset by f) $0.2 million in lower lease buyout income and g) $0.1 million of
lower straight-line rents.
- - PROPERTY OPERATING COSTS:
Total recoverable and non-recoverable mall operating costs (excluding
depreciation and amortization) for the first quarter of 2003 were $19.6 million,
an increase of $2.6 million compared to the corresponding period in 2002. $1.3
million of this increase was attributable to the two acquisition properties. The
remainder of this increase compared to 2002 was primarily caused by higher
insurance, security, real estate taxes, and snow removal costs.
Depreciation and amortization expense for the first quarter of 2003 was $11.7
million, an increase of $0.7 million from the first quarter of 2002.
Depreciation and amortization on the acquisition properties totaled $1.1 million
in the first quarter of 2003.
- - GENERAL, ADMINISTRATIVE AND INTEREST EXPENSES:
For the first quarter of 2003, general and administrative expenses were $2.8
million, an increase of $1.4 million from the first quarter of 2002.
Substantially all of this increase relates to costs incurred associated with the
Company's ongoing evaluation of strategic alternatives.
Interest expense was $12.7 million in both the first quarter of 2003 and in the
first quarter of 2002. Interest related to the new loans on the acquisition
properties was $0.8 million; other interest costs were $0.8 million lower,
primarily due to lower rates on variable-rate debt and to the lower rate and
lower outstanding balance on the Schuylkill Mall loan that was amended in the
fourth quarter of 2002.
- - GAIN ON PROPERTY SALES AND DISPOSALS:
There was one outparcel sale in the first quarter of 2003 resulting in a gain of
$0.05 million. This compares to a gain of $0.15 million in the first quarter of
2002.
- - DISCONTINUED OPERATIONS AND LOSS ON SALE OF OAK RIDGE MALL
As described in Note 6 and in Item 2, Oak Ridge Mall was sold on March 31, 2003
at a loss of $13.8 million. The financial statements for the quarter and for
prior periods show Oak Ridge Mall as discontinued operations. Carlisle Plaza
Mall which was sold in October 2002 is also shown as discontinued operations in
the prior period statements.
- - NET LOSS:
The net loss for the first quarter of 2003 was $14.9 million compared to net
loss of $2.2 million in the first quarter of 2002. After deducting preferred
dividends, there was a net loss of $18.3 million applicable to common shares,
compared to a net loss of $5.6 million for the first quarter of 2002.
- - FUNDS FROM OPERATIONS:
For the quarter ended March 31, 2003, Funds from Operations ("FFO") before
allocations to minority interest and to preferred dividends was $16.8 million,
up from $11.8 million in the same quarter of 2002, as restated. FFO in first
quarter 2002 was restated to include a $4.3 million loss on the early
extinguishment of debt associated with a prepayment penalty and write-off of
deferred financing costs from the refinancing of Capital City Mall in January
2002. In 2002, this loss was classified in accordance with GAAP as an
"extraordinary item" and, as such, was added back for determining FFO, as
defined by NAREIT. This loss was reclassified to continuing operations in
accordance with SFAS No. 145 which became effective
Page 19 of 33
<Page>
on January 1, 2003. FFO including land sales allocable to common shares (after
minority interest and preferred dividends) was $10.3 million, compared to $6.1
million in the same quarter of 2002. The net increase in total FFO of $5.0
million was largely comprised of the following: a) $4.3 million from the
reclassification of the 2002 loss on debt refinancing described above, b) a $0.9
million increase in mall shop base and percentage rents as a result of higher
average rental rates on both new and renewal leases; c) $0.1 million in higher
temporary and seasonal leasing revenues; d) lower interest expense of $0.8
million primarily as a result of lower interest rates, e) a $1.7 million
contribution from the two acquisition properties, acquired in late 2002, net of
$0.8 million in mortgage interest; and f) $0.2 million of higher miscellaneous
mall revenues. These positive variances in FFO were partially offset by: g) $0.2
million in lower lease buyout income, h) $0.1 million in lower gain on outparcel
sales, i) $1.1 million in higher mall operating costs, net of recoveries, j)
$0.2 million in lower anchor base and percentage rents, k) $0.1 million in lower
straight-line rents, and l) $1.4 million in higher general and administrative
expenses.
EBITDA - EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
The computation of EBITDA is shown below for the three months ended March 31,
2003 and 2002 (000's):
<Table>
<Caption>
Three Months Ended
March 31,
------------------------
2003 2002
---------- ----------
Net (loss) $ (14,906) $ (2,239)
Minority interest in Operating Partnership 4,593 1,456
---------- ----------
Loss before minority interest (10,313) (783)
Interest 12,668 12,701
Depreciation and amortization - real estate 11,671 10,994
Loss on sale of Oak Ridge Mall 13,787 -
Loss on early extinguishment of debt - 4,314
Interest from discontinued operations 124 528
Depreciation from discontinued operations 387 400
Depreciation in G & A and in recoverable costs 391 342
Interest on 50% joint venture 165 165
Depreciation on 50% joint venture 140 140
---------- ----------
Total EBITDA, as reported $ 29,020 $ 28,801
========== ==========
</Table>
For the three months ended March 31, 2003, EBITDA was $29.0 million compared to
$28.8 million for the comparable period of 2002. EBITDA was largely impacted by
the same factors as FFO above, except for interest costs, loss on early
extinguishment of debt, and preferred share dividends, which are not included in
EBITDA, as defined.
STATEMENT ON ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 revenue
recognition, estimates for common area maintenance and real estate tax accruals,
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 significant accounting policies are described in more
detail in Note 2 to the financial statements included in the Company's 2002 Form
10-K.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145 "Recission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). Among other items, SFAS 145 rescinds FASB Statement No. 4
"Reporting of Gains and Losses from Extinguishment of Debt" and "Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements". As a result, gains and
losses from extinguishment of debt should be classified as extraordinary items
only if they meet the criteria of APB Opinion No. 30 "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions". The
Company has adopted the provisions of SFAS 145 in the first quarter of 2003 and,
consequently, has reclassified the $4.3 million loss on the early extinguishment
of debt, which occurred in the first quarter of 2002, from extraordinary to
income from continuing operations.
Page 20 of 33
<Page>
In July 2002, the FASB issued Statement of Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities", ("SFAS 146")
which addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." Among other
provisions, the Statement eliminates the definition and requirements for
recognition of exit costs in Issue 94-3 and requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred which can differ from the commitment date of the plan. This Statement
also establishes that fair value is the objective for initial measurement of the
liability. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company believes that the implementation of this Statement will
not have a material impact on the Company's results of operations or financial
position.
The Company adopted the disclosure provisions of FASB Interpretation No. (FIN)
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Direct Guarantees of Indebtedness of Others," in the fourth quarter of
2002. The Company will apply the initial recognition and initial measurement
provisions on a prospective basis for all guarantees issued or modified after
December 31, 2002. Under FIN 45, at the inception of guarantees issued after
December 31, 2002, the Company will record the fair value of the guarantee as a
liability, with the offsetting entry being recorded based on the circumstances
in which the guarantee was issued. The Company will account for any fundings
under the guarantee as a reduction of the liability. After funding has ceased,
the Company will recognize the remaining liability in the income statement on a
straight-line basis over the remaining term of the guarantee. Adoption of FIN 45
will have no impact to the Company's historical financial statements as existing
guarantees are not subject to the measurement provisions of FIN 45. The impact
on future financial statements will depend on the nature and extent of issued
guarantees but is not expected to have a material impact to the Company. (See
Note 4 to the interim Consolidated Financial Statements.)
FIN 46, "Consolidation of Variable Interest Entities," is effective for all
enterprises with variable interests in variable interest entities created after
January 31, 2003. FIN 46 provisions must be applied to variable interests in
variable interest entities created before February 1, 2003 from the beginning of
the third quarter of 2003. If an entity is determined to be a variable interest
entity, it must be consolidated by the enterprise that absorbs the majority of
the entity's expected losses if they occur, receives a majority of the entity's
expected residual returns if the occur, or both. Where it is reasonably possible
that the Company will consolidate or disclose information about a variable
interest entity, the Company must disclose the nature, purpose, size and
activity of the variable interest entity and the Company's maximum exposure to
loss as a result of its involvement with the variable interest entity in all
financial statements issued after January 31, 2003. The Company does not believe
that the adoption of FIN 46 will result in consolidation of any previously
unconsolidated entities. The adoption of FIN 46 may result in additional
disclosures which are not expected to be significant.
FASB Statement No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure", amends the disclosure provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation", and APB Opinion No. 28, "Interim
Financial Reporting", to require disclosure in the summary of significant
accounting policies of the effects of an entity's policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. SFAS 148 is effective for financial
reports containing condensed consolidated financial statements for interim
periods beginning after December 15, 2002, and the required disclosures are
contained in Note 2 herein.
MINORITY INTEREST
Minority interest represents the common partnership units in the Operating
Partnership that are owned by Crown Investments and its subsidiary. At March 31,
2003 Crown Investments and its subsidiary owned 16.19% of the total common
partnership units outstanding. Crown American Realty Trust owns the remaining
83.81%. The minority interest balance is adjusted each year for Crown
Investments' and its subsidiary's proportionate share of net income (loss) of
the Operating Partnership (after deducting preferred unit distributions), common
partnership distributions, and additional capital contributions. Primarily
because the distributions on common partnership units have been larger than the
Operating Partnership's income (loss) after preferred unit distributions, the
minority interest account on the consolidated balance sheets had been declining
each year. The balance was reduced below zero in the second quarter of 2000.
Under accounting principles generally accepted in the United States, when the
minority partner's share of the Operating Partnership's net income (loss)
applicable to common shareholders and the minority partner's cash distributions
and capital contributions, would cause the minority interest balance to be less
than zero, such balance must be reported at zero unless there is a legal
obligation of the minority partner to reimburse the Operating Partnership for
such excess amounts. The partnership agreement does provide for such obligation
by the minority partner in the form of cash flow support payments on two of the
Company's malls that were in the lease-up phase at the time of the Company's IPO
in 1993. Accordingly, since the minority interest account is reduced below zero,
and there is a legal obligation of the minority partner to make additional cash
contributions to the Operating Partnership, the minority interest balance at
March 31, 2003 is shown on the Consolidated Balance Sheet as an asset. This
asset balance at March 31,
Page 21 of 33
<Page>
2003 has been limited to $0.5 million, the estimated amount of cash flow support
to be received over the next twelve months. An additional amount of $7.8
million, representing the excess losses and distributions over the cash flow
support, has been absorbed by the Company in its share of loss from the
Operating Partnership for the first three months of 2003. On a cumulative basis,
$21.9 million of such losses have been absorbed by the Company, through and
including March 31, 2003. As described in Note 6 to the interim Consolidated
Financial Statements, the Cash Flow Support Agreement (the "Support Agreement")
was amended significantly in connection with the sale of Oak Ridge Mall. A
further amendment was made to the Support Agreement in connection with the
Merger Agreement (see Item 5 herein for further detail).
CASH FLOWS FOR THE QUARTER ENDED MARCH 31, 2003
For the three months ended March 31, 2003, the Company generated $9.0 million in
cash flows from operating activities, which includes a negative impact of $6.8
million from changes in receivables, restricted cash and escrow deposits,
deferred charges and other assets, and accounts payable and other liabilities.
Of this $6.8 million change in working capital items, $5.7 million was
attributable to the decrease in mall gift certificate cash balances relating to
the sale of gift certificates which peak during the Christmas season and then
get redeemed during the first few months of the following year. The Company
invested $6.0 million in its existing properties during the first three months
of 2003 which included $3.8 million in tenant allowances and associated leasing
costs and $1.8 million in various other capital expenditures. The Company used
$8.2 million in its financing activities, which included (i) additional
borrowings of $19.5 million, net of escrow deposits, issuance costs, and
prepayment penalties; (ii) $16.0 million of debt repayments and loan
amortization; (iii) $12.9 million of common and preferred dividends; (iv) $0.8
million of cash flow support payments and (v) $0.3 million of proceeds from the
Dividend Reinvestment Plan.
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
line 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 all dividends to the
shareholders necessary to satisfy the REIT dividend distribution requirements
under the Internal Revenue Code. 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.
As described in Note 4 to the interim Consolidated Financial Statements, the
borrowing capacity under the Company's line of credit with GE Capital
Corporation 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 March 31,
2003 the borrowing capacity was approximately $153 million and the balance
outstanding on the line of credit was $139.5 million. As also described in Note
4, 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 period ended March 31, 2003 and through
the date hereof. There are ongoing requirements under the GECC Mortgage Loan,
the GECC line of credit, the $53.3 million loan on Capital City Mall, and the
$37.0 million loan for Valley View Mall to have insurance policies in place with
insurance companies that have certain minimum credit ratings, as defined in the
respective loan agreements. Two of the major insurance carriers used by the
Company, for general liability, workers' compensation, automobile, excess
liability and
Page 22 of 33
<Page>
property coverage, had been down-graded by certain rating agencies. On March 6,
2002, the lenders approved the continued use of these insurance carriers
provided no further rating downgrades occur. In September 2002, the major
insurance carrier for general liability coverage was replaced with an insurance
company that exceeded the minimum credit ratings as required in the loan
documents. In October 2002, two rating agencies further down-graded the
remaining insurance carrier and, as of November 12, 2002, all lenders had
approved the continued use of this insurance carrier until the April 2003
(property) and September 2003 (workers' compensation, automobile and excess
liability) policy renewal dates. Following an expansive marketing effort,
management made the decision to renew property coverage with the existing
carrier and as of March 3, 2003, all lenders had approved the continuation of
property insurance coverage with the downgraded insurance company, provided no
further rating downgrades occur, until the time of the next annual policy
renewal period in April 2004. The Company has not yet determined what insurance
company to use for workers' compensation, automobile and excess liability
coverage when those policies renew in September 2003. If further rating
downgrades were to occur in the future, the Company may be required to replace
the insurance coverage prior to the scheduled renewal dates in September 2003
(workers' compensation, automobile and excess liability) and April 2004
(property). While management believes that it would be able to replace the
downgraded insurance company as part of the normal renewal cycles in September
2003 and April 2004, or sooner if so required due to any future rating
downgrades if not waived by lenders, there is no assurance it can do so, because
future conditions may prevent the Company from securing such insurance. In
addition, the premiums paid may increase significantly from those paid under
current insurance policies.
Sources of capital for non-recurring capital expenditures, such as major
building renovations and expansions, acquisitions, and for balloon payments on
maturing outstanding indebtedness, are expected to be obtained from additional
Company or property financings and refinancings, sale of non-strategic assets,
additional equity raised in the public or private markets, and from retained
internally generated cash flows, or from combinations thereof. Given the
Company's current level of indebtedness, and given the uncertainties concerning
future equity and debt capital markets and interest rates, there is no assurance
that the Company will be able to secure such future infusions of equity and/or
debt financing and refinancings when needed, or at rates or terms that will
permit the Company to use the proceeds raised to increase earnings or Funds from
Operations. There are no major expansions or renovations planned to occur in
2003 other than construction of a multi-screen theater under a lease with a
tenant at Jacksonville Mall, and the expansion of an anchor department store and
reduction in mall shop space at West Manchester Mall.
- FINANCING ACTIVITIES
On January 3, 2002 the Company closed a $53.3 million loan with a lender secured
by its Capital City Mall in Harrisburg, PA with only limited recourse to the
Company. The loan bears interest at a stated annual fixed rate of 7.6%, and is
interest-only during the first two years, and then amortizes during the last
eight years based on a 28-year amortization schedule. Of the total proceeds from
the new loan, $42.5 million was used to prepay an existing 8.27% mortgage loan
on Capital City Mall, which included a $4.1 million yield maintenance prepayment
penalty. This prepayment penalty, together with $0.2 million of unamortized
deferred financing costs, was recorded as a loss in January 2002. The remaining
proceeds were used for loan closing costs and various loan reserves aggregating
$1.7 million, with the balance of $9.1 million of net proceeds available for
general corporate purposes for the Company.
On 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.
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. On March 31, 2003 the Company paid off the $13.4 million
mortgage loan on Oak Ridge Mall in connection with its sale; funds for this loan
payoff were borrowed under the Company's line of credit.
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.
Page 23 of 33
<Page>
As of March 31, 2003, the scheduled principal payments on all outstanding debt
are $6.9 million, $153.1 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 2.33 to 1, 2.20 to 1,
and 2.14 to 1, respectively.
- PROPERTY ACQUISITIONS AND DISPOSITIONS
In September 2002, the Company completed the acquisition of Valley View Mall, an
enclosed shopping mall, located in LaCrosse, Wisconsin. The purchase price,
excluding closing costs and expenses, of the mall was $49.92 million, and was
funded partially by a $37.0 million mortgage loan and partially from the
Company's line of credit. See Note 5 to the interim Consolidated Financial
Statements.
In November 2002, the Company completed the acquisition of Wiregrass Commons
Mall located in Dothan, Alabama, located in the southeastern corner of Alabama
adjacent to Georgia and the Florida panhandle. The purchase price excluding
closing costs and expenses, was $40.25 million and was financed by a $30.0
million floating rate mortgage loan $4.5 million of borrowings from the
Company's line of credit, and the balance in cash. See Note 5 to the interim
Consolidated Financial Statements.
With regard to the Company's disposition strategy, the Company will dispose of
any of the Properties, if, based upon management's periodic review of the
Company's portfolio, the Board of Trustees determines that such action would be
in the best interests of the Company. The Company regularly evaluates property
dispositions in order to recycle capital for future investment opportunities, to
reduce debt leverage, or to enhance cash flows and liquidity. It is possible
that the net sales proceeds for some properties, if sold in the future, could be
lower than their current net book value, which would result in a loss upon
possible future sale.
As further described in Note 6 to the interim Consolidated Financial Statements,
on October 29, 2002, the Company sold Carlisle Plaza Mall to an unrelated party
for $5.8 million. In connection with the sale, the mortgage loan of $6.0 million
was repaid in full. In addition, $0.8 million of Industrial Development
Authority bonds related to Carlisle were paid off prior in December 2002.
As described in Note 6 to the interim Consolidated Financial Statements, in
March 2003 Oak Ridge Mall was sold to Crown Investments. Oak Ridge Mall ("Oak
Ridge"), located in Oak Ridge, Tennessee, was classified as held for operating
purposes at December 31, 2002 under SFAS 144. Oak Ridge had an aggregate net
real estate carrying value of $25.2 million and debt of $13.6 million as of
December 31, 2002.
In May 2002 the Company's Board of Trustees approved an agreement to sell Oak
Ridge, to an unrelated third party. The independent members of the Board of
Trustees ("Independent Trustees") concurrently approved an amendment of the
Support Agreement (see Note 6 to the interim Consolidated Financial Statements)
regarding the cash flow support obligations of Crown Investments with respect to
Oak Ridge. However, the effectiveness of this proposed amendment was expressly
conditioned upon the completion of the sale. The purchase agreement with the
third party was extended and amended several times since May 2002 (including a
reduction of the purchase price from $12.0 million to $10.6 million), and a
variety of conditions required for closing with the third party continued to be
unsatisfied.
Consequently, on March 28, 2003 the Independent Trustees instead approved the
sale of Oak Ridge to Crown Investments for estimated fair value of $11.4
million. The $11.4 million purchase price was be satisfied through issuance of a
promissory note by Crown Investments; such promissory note was then distributed
in a non-liquidating distribution to Crown American Investment Company ("CAIC"),
effectively reducing CAIC's common percentage ownership interest in the
Operating Partnership equivalent to 1,159,794 common partnership units. CAIC is
a wholly-owned subsidiary of Crown Investments and is a minority limited partner
in the Operating Partnership. In connection with the approved sale, the Company
paid off the current $13.4 million mortgage loan balance on Oak Ridge and
assigned to Crown Investments the existing agreement of sale with the third
party, as amended. The Company will manage Oak Ridge for a fee on behalf of
Crown Investments. Crown Investments agreed that it will pay to the Company an
amount equal to 90% of the amount, if any, by which the net proceeds received on
the sale to any unrelated third party of Oak Ridge by Crown Investments
concluded within six years of the purchase by Crown Investments exceeds Crown
Investments' total investment in Oak Ridge (defined to include $11.4
Page 24 of 33
<Page>
million plus the aggregate amount of all additional investments made by Crown
Investments in Oak Ridge plus an 8% return compounded annually on this sum).
The sale of Oak Ridge resulted in a loss on sale for financial reporting
purposes of $13.8 million which was recorded by the Company in the first quarter
of 2003. The reduction in the minority partner's percentage ownership interest,
valued at $11.4 million, was recorded in shareholders' equity in the
consolidated balance sheet.
In connection with the foregoing, the Independent Trustees also approved
amendments to the Support Agreement and to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership. The amendment to the Support
Agreement released Oak Ridge from Crown Investments' future obligations under
the Support Agreement and reduced the maximum quarterly amount of support
payments for the remaining two properties in the Agreement from $1,000,000 to
$300,000. Approximately 81% of the $3.1 million in cash flow support for the
year ended 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 would have a value of approximately $25.6
million, based on the closing price of the Company's common shares on March 27,
2003 (which was $9.84). Amounts owed under the Support Agreement for Oak Ridge
Mall from January 1 to March 31, 2003 of $0.67 million, were paid by Crown
Investments to the Operating Partnership, and the Operating Partnership made a
cash distribution to Crown Investments with respect to the 2,600,000 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, were unchanged as a result of the above transactions. However, the common
percentage ownership interests of the partners in the Operating Partnership did
change, as summarized in the following table:
<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.
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.
- PROPOSED MERGER AGREEMENT
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. Under the
terms of the merger agreement, PREIT will issue to the Company's common
shareholders 0.3589 PREIT common shares in
Page 25 of 33
<Page>
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, which is further described in Note 4 to the
consolidated financial statements in Item 1 of this report. PREIT currently
expects to repay the Company's line of credit with General Electric Capital
Corporation 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. 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. Please
refer to Item 5 herein for a more complete description of the proposed merger.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Accounts receivable and accounts payable carrying amounts approximate the fair
value of the accounts receivable and accounts payable balances, respectively, at
March 31, 2003.
In the ordinary course of business, the Company is exposed to risks that
increases in interest rates may adversely affect interest costs associated with
its $172.5 million of variable-rate debt, which represents 23% of total
long-term debt, and costs when refinancing maturing fixed-rate debt. The
following table presents principal cash flows and related weighted average
interest rates by expected maturity dates (dollars in millions):
<Table>
<Caption>
Period ending December 31,
--------------------------
2008 and
2003 2004 2005 2006 2007 thereafter
---- ---- ---- ---- ---- ----------
(nine months) (year) (year) (year) (year)
Long-term debt
Fixed rate debt $ 6.9 $ 10.5 $ 11.8 $ 12.5 $ 13.2 $ 526.3
Average rate debt 7.16% 7.20% 7.18% 7.26% 7.43% 7.43%
Variable rate debt - $ 142.5 $ 30.0 - - -
Average interest rate - 3.56% 3.31% - - -
</Table>
Interest rate risk for the Company increased during the three months ended March
31, 2003 due to an increase in variable rate debt from $132.6 million at
December 31, 2002 (including debt related to discontinued operations) to $172.5
million at March 31, 2003. The Company's variable rate debt is based primarily
on LIBOR, and the Company will incur increasing interest costs if LIBOR
increases.
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 March 31,
2003.
ITEM 4: CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer of the Company (its
principal executive officer and principal financial officer, respectively) have
concluded, based on their evaluation as of a date within 90 days prior to the
date of the filing of this Report, that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports filed or submitted by it under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
include controls and procedures designed to ensure that information required to
be disclosed by the Company in such reports is accumulated and communicated to
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
such evaluation.
PART II - OTHER INFORMATION
Page 26 of 33
<Page>
ITEM 1: LEGAL PROCEEDINGS
The Company and its subsidiaries from time to time are subject to litigation and
claims, both asserted and unasserted, incidental to their businesses, some of
which may be substantial. For example, these claims may include, but are not
limited to, damages asserted by other owners of real estate, regulatory
agencies, customers, tenant disputes over lease provisions including billings
for reimbursements of operating costs and real estate taxes, and various other
matters that may arise in the normal course of business. After consultations
with legal counsel and other advisors, management believes that the Company has
recognized adequate provisions for probable and reasonably estimable liabilities
associated with these matters. While these matters may impact quarterly or
annual results of operations and cash flows when resolved in future periods,
based upon information currently available, management does not believe that the
ultimate resolution of these claims and litigation will have a material adverse
effect on the financial position of the Company.
ITEM 2: CHANGES IN SECURITIES
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
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, which is further described in Note 4 to the
consolidated financial statements in Item 1 of this report. PREIT currently
expects to repay the Company's line of credit with General Electric Capital
Corporation 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 $20 million will
be payable to either the Company or PREIT if the merger is not completed in
certain specified circumstances.
Page 27 of 33
<Page>
Prior to the closing of the merger, the Company intends to continue to pay its
quarterly dividends to its common and preferred shareholders.
A copy of the merger agreement has been filed as Exhibit 2.1 to this report and
is incorporated herein by reference.
AMENDMENT TO THE CASH FLOW SUPPORT AGREEMENT AND THE PARTNERSHIP AGREEMENT OF
THE OPERATING PARTNERSHIP'S
In connection with their approval of the merger, the Company's Independent
Trustees also approved amendments to the Support Agreement and to the Operating
Partnership's partnership agreement, which were effective on May 13, 2003. Under
the terms of the amendments, the Company agreed to terminate Crown Investments'
obligations to make any further contributions to the Operating Partnership and
to terminate all of Crown Investments' remaining obligations under the Support
Agreement. As a result of these amendments, Crown Investments' percentage
ownership in the Operating Partnership was reduced by an amount equivalent to
500,000 common partnership units. In connection with the sale of Oak Ridge Mall
to Crown Investments (as further in Note 6 to the consolidated financial
statements in Item 1), Crown Investments' percentage ownership in the Operating
Partnership was reduced by an amount equal to 2,600,000 common partnership
units.
The Company's 32,077,961 outstanding common partnership units as of May 13,
2003, will remain unchanged as a result of the amendments. However, the common
percentage ownership interests of the partners in the Operating Partnership will
change, as summarized in the following table:
<Table>
<Caption>
Before After
---------- ----------
GENERAL AND MAJORITY PARTNER:
Crown American Realty Trust (the Company) 83.81% 84.92%
LIMITED MINORITY PARTNERS:
Crown Investments 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.
SHAREHOLDER PROPOSALS FOR THE 2003 ANNUAL MEETING OF SHAREHOLDERS
Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Act"),
requires that a shareholder intending to submit a proposal to be considered at a
company's annual meeting notify the company of such proposal not less than 120
calendar days before the date of the proxy statement that the company released
to shareholders the previous year, or, if the date of the annual meeting has
been changed by more than 30 days from the date of the previous year's meeting,
a reasonable time before the company begins to print and mail the proxy
statement for the current year's annual meeting. In addition, the advance notice
provisions in the Company's bylaws require that a shareholder intending to
submit a proposal to be considered at the Company's annual meeting must notify
the Company's secretary of such proposal at least 60 days but not more than 90
days prior to the first anniversary of the preceding year's annual meeting, or,
if the date of the current annual meeting has been delayed by more than 60 days
from the date of the preceding year's annual meeting, then notice by the
shareholder must be delivered to the Company's secretary by the later of the
60th day prior to the date of the current annual meeting or the tenth day
following the date on which the Company first publicly announces the date of its
current annual meeting.
As further described above, the Company has entered into a definitive merger
agreement to merge into PREIT, and the Company intends to call a meeting of its
shareholders to approve the proposed merger. In light of the proposed merger and
related meeting of shareholders to approve the proposed merger, the Company does
not intend to hold a separate annual meeting of shareholders in 2003.
Page 28 of 33
<Page>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Agreement and Plan of Merger dated as of May 13, 2003 among
Pennsylvania Real Estate Investment Trust, PREIT Associates,
L.P., Crown American Realty Trust and Crown American Properties,
L.P. (b)
2.2 Crown Partnership Distribution Agreement dated May 13, 2003
between Crown American Realty Trust and Crown American
Properties, L.P. (b)
2.3 Crown Partnership Contribution Agreement dated May 13, 2003
between Crown American Properties, L.P. and PREIT Associates L.P.
(b)
3.1 Second Amended and Restated Declaration of Trust of the Company
(a)
3.2 Bylaws of the Company (a)
4.1 See Second Amended and Restated Declaration of Trust of the
Company, (Exhibit 3.1) (a)
4.2 Articles Supplementary Classifying and Designating a Series of
Preferred Shares (filed as Exhibit 4.4 to the Company's Amendment
No. 2 to Registration Statement on Form S-3, filed on June 27,
1997)
4.3 Form of Preferred Share Certificate (filed as Exhibit 4.5 to the
Company's Amendment No. 2 to Registration Statement of Form S-3,
filed on June 27, 1997)
10.2(i) Eighth Amendment to Amended and Restated Agreement of Limited
Partnership of Crown American Properties, L.P. dated
May 13, 2003 (b)
10.11(d) Fourth Amendment to Amended and Restated Cash Flow Support
Agreement dated May 13, 2003 (b)
10.25 Amendment to Rights Agreement dated May 13, 2003 between Crown
American Realty Trust and American Stock Transfer and Trust
Company (b)
10.26 Agreement of Exchange dated May 13, 2003 between Crown
Investments Trust and Crown American Properties, L.P. (b)
10.27 Form of Voting Agreements for:
(a) Independent Trustees;
(b) Mark E. Pasquerilla; and
(c) Officers and Non-Independent Trustees (b)
99.1 Press release dated May 14, 2003
99.2 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 (b)
(a) Filed as an Exhibit to the Company's Registration Statement on
Form S-11, effective as of August 9, 1993
(b) Filed herewith
(b) REPORTS ON FORM 8-K
On May 14, 2003, the Company furnished to the Securities and Exchange
Commission on Form 8-K its regular quarterly earnings release and its First
Quarter 2003 Supplemental Financial and Operational Information Package for
analysts and investors.
Page 29 of 33
<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 thereunto duly authorized.
Date: May 15, 2003 CROWN AMERICAN REALTY TRUST
/s/ Mark E. Pasquerilla
---------------------------------------
MARK E. PASQUERILLA
CHAIRMAN OF THE BOARD OF TRUSTEES,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
(Authorized Officer of the Registrant
and Principal Executive and Operating Officer)
Date: May 15, 2003 CROWN AMERICAN REALTY TRUST
/s/ Terry L. Stevens
---------------------------------------
TERRY L. STEVENS
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Authorized Officer of the Registrant
and Principal Financial Officer)
Date: May 15, 2003 CROWN AMERICAN REALTY TRUST
/s/ John A. Washko
---------------------------------------
JOHN A. WASHKO
VICE PRESIDENT AND
CHIEF ACCOUNTING OFFICER
(Authorized Officer of the Registrant
and Principal Accounting Officer)
Page 30 of 33
<Page>
CERTIFICATION
I, Mark E. Pasquerilla, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Crown American Realty
Trust.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Mark E. Pasquerilla
- ---------------------------------
Name: Mark E. Pasquerilla
Title: Chief Executive Officer
Page 31 of 33
<Page>
CERTIFICATION
I, Terry L. Stevens, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Crown American Realty
Trust.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Terry L. Stevens
- ---------------------------------
Name: Terry L. Stevens
Title: Chief Financial Officer
Page 32 of 33
<Page>
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
Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (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.
Dated: May 15, 2003
/s/ Mark E. Pasquerilla
-----------------------------------------
Name: Mark E. Pasquerilla
Title: President & Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, the undersigned officer for Crown
American Realty Trust (the "COMPANY"), hereby certifies that the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (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.
Dated: May 15, 2003
/s/ Terry L. Stevens
-----------------------------------------
Name: Terry L. Stevens
Title: Executive Vice President and
Chief Financial Officer
Page 33 of 33