<Page>
Exhibit 99.5
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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 June 30, 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)
As of July 31, 2003, 32,493,861 Common Shares
of Beneficial Interest 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 / /
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<Page>
CROWN AMERICAN REALTY TRUST
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
INDEX
<Table>
<Caption>
PART I - FINANCIAL INFORMATION PAGE
Item 1: Financial Statements
Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 3
Consolidated Statements of Operations for the three and six months ended
June 30, 2003 and 2002 4
Consolidated Statements of Shareholders' Equity for the six months ended
June 30, 2003 5
Consolidated Statements of Cash Flows for the six months ended
June 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 7 - 17
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 17 - 28
Item 3: Quantitative and Qualitative Disclosures About Market Risk 29
Item 4: Controls and Procedures 29
PART II OTHER INFORMATION
Item 1: Legal Proceedings 29
Item 2: Changes in Securities 30
Item 3: Defaults Upon Senior Securities 30
Item 4: Submission of Matters to a Vote of Security Holders 30
Item 5: Other Information 30
Item 6: Exhibits and Reports on Form 8-K 30
Signatures 31
</Table>
Page 2 of 31
<Page>
CROWN AMERICAN REALTY TRUST
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
JUNE 30, 2003 DECEMBER 31, 2002
--------------- -------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
Income-producing properties:
Land $ 156,176 $ 156,338
Buildings and improvements 1,085,762 1,072,366
Deferred leasing and other charges 39,543 43,038
------------- -----------------
1,281,481 1,271,742
Accumulated depreciation and amortization (499,229) (481,284)
------------- -----------------
782,252 790,458
Minority interest in Operating Partnership - 3,265
Investment in joint venture 2,747 3,114
Cash and cash equivalents, unrestricted 11,437 14,122
Restricted cash and escrow deposits 11,102 8,967
Tenant and other receivables 13,200 14,813
Deferred charges and other assets 14,415 19,384
Assets from discontinued operations - 25,309
------------- -----------------
$ 835,153 $ 879,432
============= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt on income-producing properties $ 753,689 $ 737,566
Accounts payable and other liabilities 41,904 44,569
Liabilities from discontinued operations - 13,952
------------- -----------------
795,593 796,087
------------- -----------------
Commitments and contingencies
Shareholders' equity:
Non-redeemable senior preferred shares, 11% cumulative, $.01 par value,
2,500,000 shares authorized and issued at both June 30, 2003 and
December 31, 2002 25 25
Common shares, par value $.01 per share, 120,000,000 shares
authorized, 33,829,159 and 33,572,694 shares issued at June 30, 2003
and December 31, 2002, respectively. 338 335
Additional paid-in capital 367,038 365,247
Accumulated deficit (312,260) (266,554)
------------- -----------------
55,141 99,053
Less common shares held in treasury at cost; 1,534,398
shares at both June 30, 2003 and December 31, 2002 (14,652) (14,652)
Less preferred shares held in treasury at cost; 25,000 shares at
both June 30, 2003 and December 31, 2002 (929) (929)
Accumulated other comprehensive loss - (127)
------------- -----------------
39,560 83,345
------------- -----------------
$ 835,153 $ 879,432
============= =================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
Page 3 of 31
<Page>
CROWN AMERICAN REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RENTAL OPERATIONS:
Revenues:
Minimum rent $ 30,464 $ 27,903 $ 61,014 $ 55,856
Percentage rent 1,436 1,507 3,152 3,044
Property operating cost recoveries 11,093 9,753 22,526 19,860
Temporary and promotional leasing 2,404 2,098 4,821 4,219
Utility redistribution income 3,355 3,359 6,896 6,720
Miscellaneous income 719 460 1,499 1,104
------------ ------------ ------------ ------------
49,471 45,080 99,908 90,803
------------ ------------ ------------ ------------
Property operating costs:
Recoverable operating costs 14,381 12,579 29,636 25,586
Property administrative costs 806 715 1,546 1,435
Other operating costs 903 546 1,901 1,343
Utility redistribution expense 2,533 2,700 5,135 5,203
Depreciation and amortization 12,084 10,679 23,755 21,673
------------ ------------ ------------ ------------
30,707 27,219 61,973 55,240
------------ ------------ ------------ ------------
18,764 17,861 37,935 35,563
------------ ------------ ------------ ------------
OTHER EXPENSES:
General and administrative 3,130 1,429 5,978 2,870
Interest 12,743 12,616 25,411 25,317
Loss on early extinguishment of debt - - - 4,314
------------ ------------ ------------ ------------
15,873 14,045 31,389 32,501
------------ ------------ ------------ ------------
2,891 3,816 6,546 3,062
------------ ------------ ------------ ------------
PROPERTY SALES, DISPOSALS AND ADJUSTMENTS:
Gain (loss) on sale of outparcel land 29 (51) 83 94
------------ ------------ ------------ ------------
29 (51) 83 94
------------ ------------ ------------ ------------
MINORITY INTEREST IN OPERATING PARTNERSHIP (1,750) (1,300) (6,343) (2,756)
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 1,170 2,465 286 400
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations - (243) (235) (417)
Loss on asset sales - - (13,787) -
------------ ------------ ------------ ------------
- (243) (14,022) (417)
------------ ------------ ------------ ------------
NET INCOME (LOSS) 1,170 2,222 (13,736) (17)
Dividends on preferred shares (3,404) (3,404) (6,806) (6,806)
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (2,234) $ (1,182) $ (20,542) $ (6,823)
============ ============ ============ ============
PER COMMON SHARE INFORMATION:
BASIC AND DILUTED EPS:
LOSS FROM CONTINUING OPERATIONS BEFORE
DISCONTINUED OPERATIONS, NET OF PREFERRED
DIVIDENDS $ (0.07) $ (0.03) $ (0.20) $ (0.23)
LOSS FROM DISCONTINUED OPERATIONS - (0.01) (0.44) (0.02)
------------ ------------ ------------ ------------
NET LOSS $ (0.07) $ (0.04) $ (0.64) $ (0.25)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING - (000) 32,170 27,619 32,110 26,918
============ ============ ============ ============
</Table>
The accompanying notes are an integral part of these statements.
Page 4 of 31
<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 (13,736)
Net income on cash-flow
hedging activities -
---------------
Total comprehensive loss (13,736)
---------------
Issuance of common shares and
DRIP purchases 3 1,905
Transfer in of limited partner's
interest in the Operating Partnership (114)
Reduction in minority partner's
ownership interest related to
purchase of Oak Ridge Mall (11,412)
Dividends paid and accrued:
Preferred shares (6,806)
Common shares (13,752)
--------------- --------------- --------------- ---------------
BALANCE, JUNE 30, 2003 $ 25 $ 338 $ 367,038 $ (312,260)
=============== =============== =============== ===============
<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 (13,736)
Net income on cash-flow
hedging activities 127 127
--------------- ---------------
Total comprehensive loss 127 (13,609)
--------------- ---------------
Issuance of common shares and
DRIP purchases 1,908
Transfer in of limited partner's
(114)
Reduction in minority partner's
ownership interest related to
purchase of Oak Ridge Mall (11,412)
Dividends paid and accrued:
Preferred shares (6,806)
Common shares (13,752)
--------------- --------------- --------------- ---------------
BALANCE, JUNE 30, 2003 $ (14,652) $ (929) $ - $ 39,560
=============== =============== =============== ===============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
Page 5 of 31
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CROWN AMERICAN REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
------------ ------------
2003 2002
------------ ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (13,736) $ (17)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Minority interest in Operating Partnership 6,343 2,756
Equity earnings in joint venture (253) (191)
Depreciation and amortization 25,450 23,288
Operating loss from discontinued operations 235 417
Loss on asset sales 13,787 -
Loss on early extinguishment of debt - 4,314
Net cash used in discontinued operations (319) 332
Net changes in:
Tenant and other receivables 1,626 1,120
Deferred charges and other assets 3,795 2,441
Restricted cash and escrow deposits (2,088) (1,983)
Accounts payable and other liabilities (3,203) (12,877)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 31,637 19,600
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in income-producing properties (15,379) (7,006)
Change in investing escrow deposits (1,062) (557)
Distributions from joint venture 435 220
Capital investments in discontinued operations - (51)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (16,006) (7,394)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt, net of loan deposits
and prepayment penalties 24,707 48,797
Cost of issuance of debt - (967)
Debt repayments (7,576) (92,928)
Dividends and distributions paid on common shares
and partnership units (17,810) (15,283)
Dividends paid on senior preferred shares (6,806) (6,806)
Cash flow support payments 871 1,529
Net proceeds from the issuance of common shares and
the Dividend Reinvestment Plan 1,908 47,291
Debt repaid on discontinued operations (13,610) (4,702)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (18,316) (23,069)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,685) (10,863)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,122 16,999
============ ============
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,437 $ 6,136
============ ============
SUPPLEMENTAL CASH FLOW DATA:
INTEREST PAID $ 24,516 $ 24,562
============ ============
OTHER COMPREHENSIVE INCOME - HEDGING ACTIVITIES $ 127 $ 377
============ ============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
Page 6 of 31
<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 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 June 30, 2003, the Properties consist of: (1) 26 wholly-owned enclosed
shopping malls (together with adjoining outparcels and undeveloped land) located
in Pennsylvania, New Jersey, Maryland, Tennessee, North Carolina, West Virginia,
Virginia, Georgia, Wisconsin and Alabama (2) a 50% general partnership interest
in Palmer Park Mall Venture, which owns Palmer Park Mall located in Easton,
Pennsylvania, (3) Pasquerilla Plaza, an office building in Johnstown,
Pennsylvania, which serves as the headquarters of the Company and is partially
leased to other parties, and (4) a parcel of land and building improvements
located in Pennsylvania (under a purchase option) sub-leased to a department
store chain ("Westgate anchor pad").
As the owner of real estate, the Company is subject to risks arising in
connection with the underlying real estate, including defaults under or
non-renewal of tenant leases, tenant bankruptcies, competition, inability to
rent unleased space, failure to generate sufficient income to meet operating
expenses, as well as debt service, capital expenditures and tenant improvements,
environmental matters, financing availability and changes in real estate and
zoning laws. The success of the Company also depends upon certain key personnel,
the Company's ability to maintain its qualification as a REIT, compliance with
the terms and conditions of the GECC Mortgage Loans (described below) and other
debt instruments, and trends in the national and local economy, including
interest rates, income tax laws, governmental regulations and legislation and
population trends.
BASIS OF PRESENTATION
Page 7 of 31
<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
June 30, 2003 the Company held 100% of the preferred partnership interests and
85.01% of the common partnership interests in the Operating Partnership. The
Operating Partnership directly owns five malls, the 50% joint venture interest
in Palmer Park Mall, Pasquerilla Plaza, and the Anchor Pad. All remaining
properties are owned by eight partnerships and limited liability companies that
are either 99.5% or 100.0% owned by the Operating Partnership; the remaining
0.5% interests in these second-tier entities are owned by the Company through
various wholly-owned subsidiaries. The Operating Partnership owns 100% of Crown
American Services Corporation formed in 2002 as a taxable REIT subsidiary to
provide labor and other services to the Operating Partnership with respect to
certain operating activities. The Operating Partnership also owns 100% of Crown
American GC, Inc. formed in 2001 as a taxable REIT subsidiary to sell gift
certificates to shoppers at properties owned by the Company. Only the Operating
Partnership and Crown American Services Corporation have paid employees. The
Operating Partnership manages all properties except the Palmer Park Mall and the
Anchor Pad, and also manages other properties for third party owners and
provides construction management and other services for third parties.
In the opinion of management, the accompanying unaudited consolidated interim
financial statements include all adjustments of a normal recurring nature
necessary for a fair presentation of the financial position and results of
operations of the Company. These consolidated interim financial statements and
the accompanying notes should be read in conjunction with the audited
consolidated financial statements of the Company for the year ended December 31,
2002, which are included in its Annual Report on Form 10-K as amended on Form
8-K, dated June 19, 2003. The results of operations for interim periods are not
necessarily indicative of results to be expected for the year.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation. Carlisle Plaza Mall which was sold in October 2002
and Oak Ridge Mall which was sold in March 2003, are shown as discontinued
operations in the accompanying financial statements with all prior periods
reclassified. (See Note 6 to the interim Consolidated Financial Statements.) In
addition, as described in Note 3 to the interim Consolidated Financial
Statements, the Company adopted SFAS 145 effective January 1, 2003 and
accordingly reclassified losses on early debt extinguishments that occurred in
prior periods from extraordinary losses to income from continuing operations.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
MINORITY INTEREST
Minority interest represents the common partnership units in the Operating
Partnership that are owned by Crown Investments and its subsidiary. At June 30,
2003 Crown Investments and its subsidiary owned 14.99% of the total common
partnership units outstanding. Crown American Realty Trust owns the remaining
85.01%. 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 three of
the Company's malls that were in the lease-up phase at the time of the Company's
IPO in 1993. Accordingly, since the minority interest account was reduced below
zero, and there was a legal obligation of the minority partner to make
additional cash contributions to the Operating Partnership, the minority
interest balance at December 31, 2002 is shown on the Consolidated Balance Sheet
as an asset. This asset balance at December 31, 2002 was limited to $3.3
million, the estimated amount of cash flow support to be received over the next
twelve months. As described in Note 6 to the interim Consolidated Financial
Statements, the Cash Flow Support Agreement
Page 8 of 31
<Page>
(the "Support Agreement") was amended significantly in connection with the sale
of Oak Ridge Mall and due to the Merger Agreement (as described below). As a
result of these amendments the minority partner has no further obligation to
make cash flow support payments to the Operating Partnership and the minority
interest balance at June 30, 2003 is zero. An additional amount of $9.8 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 six months of 2003. On a cumulative basis, $23.9 million of such
losses have been absorbed by the Company, through and including June 30, 2003.
NET INCOME (LOSS) PER SHARE
Basic income (loss) per common share is computed by dividing net income (loss)
applicable to common shares, as shown in the Consolidated Statements of
Operations, by the weighted average number of common shares outstanding for the
year. Diluted income (loss) per share is computed the same way except that the
weighted average number of common shares outstanding is increased, using the
treasury stock method, for the assumed exercise of options under the Company's
share incentive plans. The calculation of diluted earnings per share for the six
months ended June 30, 2003 and 2002 would have included approximately 326,000
shares and 413,000 shares respectively, for the assumed exercise of options
under the Company's share incentive plans, except that no anti-dilution is
permitted as a result of losses reported by the Company. Because no
anti-dilution is permitted, diluted and basic EPS are identical.
The calculation of pro forma earnings (loss) per share, computed in accordance
with FASB statement No. 148 "Accounting for Stock-Based Compensation" is show in
the table below:
<Table>
<Caption>
Six Months ended June 30,
-------------------------
2003 2002
---- ----
(thousands of dollars, except per share data)
Net loss allocable to common shares, as reported $ (20,542) $ (6,823)
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 (22) (67)
---------- ---------
Pro forma net loss allocable to common shares $ 20,564 $ (6,890)
========== =========
Loss per common share:
Basic and diluted, as reported $ (0.64) $ (0.25)
========== =========
Basic and diluted, pro forma $ (0.64) $ (0.26)
========== =========
</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 an extraordinary loss
to income from continuing operations.
In July 2002, the FASB issued Statement of Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities", ("SFAS 146")
which addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." Among other
provisions, the Statement eliminates the definition and requirements for
recognition of exit costs in Issue 94-3 and requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred which can differ from the commitment date of the plan. This Statement
also establishes that fair value is the objective for initial measurement of the
liability. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The implementation of this Statement has had no impact on the
Company's results of operations or financial position.
Page 9 of 31
<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 they occur, or both. Where it is reasonably
possible that the Company will consolidate or disclose information about a
variable interest entity, the Company must disclose the nature, purpose, size
and activity of the variable interest entity and the Company's maximum exposure
to loss as a result of its involvement with the variable interest entity in all
financial statements issued after January 31, 2003. The Company has adopted this
requirement as of January 31, 2003, and no variable interest entities were
identified.
FASB Statement No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure", amends the disclosure provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation", and APB Opinion No. 28, "Interim
Financial Reporting", to require disclosure in the summary of significant
accounting policies of the effects of an entity's policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. SFAS 148 is effective for financial
reports containing condensed consolidated financial statements for interim
periods beginning after December 15, 2002, and the required disclosures are
contained in Note 2 herein.
FASB Statement No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities", amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under FASB No. 133. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003, with
limited exceptions, and its provisions are to be applied prospectively. The
Company does not believe that the adoption of SFAS 149 will have any impact on
its results of operations or its financial position, as the Company does not
currently have any derivatives or hedging activities.
FASB Statement No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", establishes standards for how
an issuer classifies and measures certain financial instruments that have
characteristics of both liabilities and equity. Certain financial instruments
which had previously been classified as equity may now have to be classified as
a liability if they meet the provisions of SFAS 150. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003, except for mandatorily redeemable financial instruments of nonpublic
entities. The Company believes that the implementation of this Statement will
not have a material impact on the Company's results of operations or financial
position.
NOTE 4 - DEBT ON INCOME-PRODUCING PROPERTIES
Debt on income-producing properties, excluding debt on discontinued operations,
consisted of the following (in thousands):
Page 10 of 31
<Page>
<Table>
<Caption>
June 30, 2003 December 31, 2002
------------- -----------------
GECC Mortgage Loan $ 446,794 $ 450,422
Permanent loans 162,167 163,116
Secured lines of credit 144,728 124,028
------------ ------------
$ 753,689 $ 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 GECC
Mortgage Loan has a fixed stated interest rate of 7.43% and is secured by
cross-collateralized mortgages on 15 of the malls. The loan provides for payment
of interest only during the first two years and interest and principal
amortization, based on 25 year amortization, during the last eight years. Crown
Investments has guaranteed $250 million of the GECC Mortgage Loan.
PERMANENT LOANS
At June 30, 2003, permanent loans consisted of six loans secured by six
properties held by the Operating Partnership or its subsidiaries, as follows:
(1) a $27.0 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 $1.3 million Urban Development Action Grant
("UDAG") loan secured by the Company's headquarters office building due October
2006 with 0% interest, (5) a $37.0 million mortgage loan secured by Valley View
Mall due October 2009 with a fixed interest rate of 6.15%, and (6) a $30.0
million mortgage loan secured by Wiregrass Commons Mall due November 2005
(excludes two one-year extensions that may be available) with a variable
interest rate of LIBOR plus 2.0%. All the permanent loans except the loans on
Capital City Mall, Valley View Mall, and Crossroads Mall are fully guaranteed by
either the Company or the Operating Partnership.
The proceeds from the $53.3 million loan on Capital City Mall, which closed in
January 2002, were used to repay $42.5 million on the former mortgage loan
(included a $4.1 prepayment penalty) and $1.7 million of loan closing costs and
various loan reserves. The $4.1 million prepayment penalty together with $0.2
million of unamortized deferred financing costs on the previous loan were
initially recorded as an extraordinary loss in the Company's Consolidated
Statement of Operations during the first quarter of 2002, and have now been
reclassified to continuing operations, as required by SFAS 145.
On November 7, 2002, the Company and its lender executed agreements to extend
and modify the terms of its mortgage loan on Schuylkill Mall, Frackville, PA.
Under the previous terms, the loan bore interest at a fixed rate of 8.375%, the
annual debt service payment was $3.62 million, and the loan matured on December
1, 2004. The new terms, effective November 1, 2002, include interest at a fixed
rate of 7.25%, annual debt service of $3.32 million and a maturity date of
December 1, 2008. In connection with this extension and modification of terms,
the Company made a cash payment of $5.0 million to reduce the principal balance
from $32.9 million to $27.9 million. The loan was and remains fully guaranteed
by the Operating Partnership.
At December 31, 2002, $13.6 million of mortgage debt on Oak Ridge Mall was
outstanding. This loan was reclassified to "Liabilities from discontinued
operations" in the current financial statements as a result of the sale of Oak
Ridge Mall on March 31, 2003 as described in Note 6 to the interim Consolidated
Financial Statements. This loan was paid off on March 31, 2003 in connection
with the sale, primarily using funds drawn from the Company's secured lines of
credit.
SECURED LINES OF CREDIT
In September 2000 the Company executed a three-year extension and other
modifications to its secured revolving credit facility with GECC. The maturity
date on the modified line was extended from 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
Page 11 of 31
<Page>
income generated at the properties securing the line of credit; at June 30,
2003, total borrowing capacity was approximately $163 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
$144.7 million at June 30, 2003.
In addition to the above facility, the Company has a $6.0 million line of credit
with a bank secured by a mortgage on the Company's headquarters office building
bearing interest at LIBOR plus 2.25%. The maturity date on this loan was
extended to April 30, 2004. There were no amounts outstanding under this line as
of June 30, 2003.
COVENANTS AND RESTRICTIONS
Some of the above loans and lines of credit contain certain financial covenants
and other restrictions, including limitations on the ratios, as defined, of
total Company debt to EBITDA, EBITDA to fixed charges, and floating rate debt to
total debt; the failure to observe such covenants would constitute events of
default under the loans and if not cured by the Company would give the lenders
additional rights, including to receive all cash flows from the properties or to
require the loan(s) to be repaid immediately. The Company was in compliance with
all loan covenants or had received appropriate lender waivers as of and during
the period ended June 30, 2003 and through the date hereof. There are ongoing
requirements under the GECC Mortgage Loan, the GECC line of credit, the $53.3
million loan on Capital City Mall, and the $37.0 million loan for Valley View
Mall to have insurance policies in place with insurance companies that have
certain minimum credit ratings, as defined in the respective loan agreements.
Two of the major insurance carriers used by the Company, for general liability,
workers' compensation, automobile, excess liability and property coverage, had
been down-graded by certain rating agencies, and one of these two insurance
companies has been downgraded three times. The Company has replaced the
downgraded insurance company that had provided general liability coverage with
an insurance company whose ratings currently exceed the loan requirements. With
respect to the other insurance company, in each instance all lenders have
approved the continued use of the insurance carrier provided no further rating
downgrades occur. The current lender approvals are effective until the insurance
renewal dates in April 2004 (for property coverage) and September 2004 (for
workers' compensation, automobile and excess liability coverages). If a further
rating downgrade were to occur in the future, the Company may be required to
replace the insurance coverage prior to the scheduled policy renewal dates in
April and September 2004. While management believes that it would be able to
replace the downgraded insurance company as part of the normal policy renewal
cycles, or sooner if so required due to any future rating downgrade not waived
by lenders, there is no assurance it can do so, because future conditions may
prevent the Company from securing such insurance. In addition, the premiums paid
may increase significantly from those paid under current insurance policies.
Twenty-one of the Company's malls are owned or ground leased by special purpose
consolidated subsidiaries of the Company. The sole business purpose of the
special purpose subsidiaries, as an ongoing covenant under the related loan
agreements, is the ownership and operation of the properties. The mortgaged
malls and related assets owned by these special purpose subsidiaries are
restricted under the loan agreements for the payment of the related mortgage
loans and are not available to pay other debts of the consolidated Company.
However, so long as the loans are not under an event of default, as defined in
the loan agreements, the cash flows from these properties, after debt service
and reserve payments are made, are available for the general use of the
consolidated Company.
INTEREST RATES AND SWAP AGREEMENTS
The GECC Mortgage Loan on the Financing Partnership properties and five of the
permanent loans with an aggregate principal balance of $579.0 million at June
30, 2003 have fixed interest rates ranging from 6.15% to 7.61% (excluding the
UDAG loan which is interest free). The weighted average interest rate on this
fixed-rate debt at June 30, 2003 and 2002 was 7.4% and 7.6%, respectively. All
of the remaining loans with an aggregate principal balance of $174.7 million at
June 30, 2003 have variable interest rates based on spreads ranging from 2.00%
to 2.25% above 30 day LIBOR. The weighted average interest rates on the variable
rate debt at June 30, 2003 and 2002 were 3.5% and 4.1%, respectively. The
weighted average interest rates on variable rate debt during the six months
ended June 30, 2003 and 2002 were 3.5% and 4.1%, respectively.
In the first quarter of 2001, the Company entered into swap agreements on a
notional amount of $35 million of the Company's floating rate debt. The
effective LIBOR swap rate on the two agreements was 5.197% and their terms
expired on February 1, 2003. The Company designated this transaction as a cash
flow hedge of a floating-rate liability and applied the guidance set forth in
SFAS No. 133 (Accounting for Derivative Instruments and Hedging Activities) to
this transaction. The fair value of these transactions was recorded in the
balance sheet, with the offset to Accumulated Other Comprehensive Loss. The
current
Page 12 of 31
<Page>
year impact of the mark to market adjustment was to record comprehensive income
of $0.1 million for the six months ended June 30, 2003.
DEBT MATURITIES
As of June 30, 2003, the scheduled principal payments on all debt are as follows
(in thousands):
<Table>
<Caption>
Period Ending December 31,
- --------------------------
2003 (six months) $ 4,641
2004 (year) 155,272
2005 (year) 41,769
2006 (year) 12,546
2007 (year) 13,193
Thereafter 526,268
------------
$ 753,689
============
</Table>
NOTE 5 - ACQUISITIONS
In late September 2002, the Company completed the acquisition of Valley View
Mall, an enclosed regional shopping mall, located in La Crosse, Wisconsin, from
The Equitable Life Assurance Society of the United States. Valley View Mall
comprises 586,000 square feet of gross leasable area ("GLA"), which includes
37,000 square feet of GLA in a detached strip center. The mall is anchored by
Sears, JC Penney, Marshall Fields and Herberger's. The stores occupied by Sears,
Marshall Fields and Herberger's, aggregating 256,000 square feet of GLA,
together with related parking areas are owned by their anchor occupants. The
purchase price, excluding closing costs and expenses, was $49.92 million and was
financed by a $37.0 million seven-year fixed rate mortgage loan bearing interest
at 6.15%, with the balance funded from the Company's line of credit with GECC.
As described in Note 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
Page 13 of 31
<Page>
effectiveness of this proposed amendment was expressly conditioned upon the
completion of the sale. The purchase agreement with the third party was extended
and amended several times since May 2002 (including a reduction of the purchase
price from $12.0 million to $10.6 million), and a variety of conditions required
for closing with the third party continued to be unsatisfied.
Consequently, on March 28, 2003 the Independent Trustees instead approved the
sale of Oak Ridge to Crown Investments for estimated fair value of $11.4
million. The $11.4 million purchase price was satisfied through issuance of a
promissory note by Crown Investments. The promissory note was then distributed
in a nonliquidating distribution to Crown American Investment Company ("CAIC"),
effectively reducing CAIC's common percentage ownership interest in the
Operating Partnership equivalent to 1,159,794 common partnership units. CAIC is
a wholly-owned subsidiary of Crown Investments and is a minority limited partner
in the Operating Partnership. In connection with the sale, the Company paid off
the current $13.4 million mortgage loan balance on Oak Ridge and assigned to
Crown Investments the existing agreement of sale with the third party, as
amended. The Company will manage Oak Ridge for a fee on behalf of Crown
Investments. Crown Investments agreed that it will pay to the Company an amount
equal to 90% of the amount, if any, by which the net proceeds received on the
sale to any unrelated third party of Oak Ridge by Crown Investments concluded
within six years of the purchase by Crown Investments exceeds Crown Investments'
total investment in Oak Ridge (defined to include $11.4 million plus the
aggregate amount of all additional investments made by Crown Investments in Oak
Ridge plus an 8% return compounded annually on this sum).
The sale of Oak Ridge resulted in a loss on sale for financial reporting
purposes of $13.8 million which was recorded by the Company in the first quarter
of 2003. The reduction in the minority partner's percentage ownership interest,
valued at $11.4 million, was recorded in shareholders' equity in the
consolidated balance sheet.
In connection with the foregoing, the Independent Trustees also approved
amendments to the Support Agreement and to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership. The amendment to the Support
Agreement released Oak Ridge from Crown Investments' future obligations under
the Support Agreement and reduced the maximum quarterly amount of support
payments for the remaining two properties in the Agreement from $1,000,000 to
$300,000. Approximately 81% of the $3.1 million in cash flow support for the
year ended 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 common
partnership 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.
Page 14 of 31
<Page>
The following represents certain condensed financial statement information on
Oak Ridge Mall and Carlisle Plaza Mall for the applicable periods presented in
the financial statements (in thousands of dollars):
<Table>
<Caption>
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
OAK RIDGE MALL:
Total revenues $ 748 $ 1,735
Operating loss $ (235) $ (466)
Loss on asset sale $ (13,787) $ -
CARLISLE PLAZA MALL:
Total revenues $ - $ 1,049
Operating income $ - $ 49
</Table>
<Table>
<Caption>
June 30, 2003 December 31, 2002
------------- -----------------
OAK RIDGE MALL:
Total assets (net) $ - $ 25,309
Total liabilities $ - $ 13,952
</Table>
- - PROPOSED MERGER WITH PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
On May 13, 2003, the Company entered into a definitive merger agreement with
Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust (NYSE:
PEI) ("PREIT"), under which the Company agreed to merge into PREIT. The Boards
of Trustees of PREIT and the Company have unanimously approved the merger.
Under the terms of the merger agreement, PREIT will issue to the Company's
common shareholders 0.3589 PREIT common shares in exchange for each outstanding
common share of the Company in a tax-free, share-for-share transaction. The
exchange ratio was determined based on the trailing 20 day average closing
prices as of May 12, 2003, and is not subject to change and there is no "collar"
or minimum trading price for the shares.
As part of the merger, PREIT will issue new preferred shares to the current
holders of the Company's outstanding non-convertible senior preferred shares.
The terms of the new PREIT preferred shares will be substantially the same as
the existing preferred shares of the Company. In addition, PREIT has agreed to
assume the Company's mortgage debt, described in Note 4 to the interim
Consolidated Financial Statements. PREIT currently expects to repay the
Company's secured revolving credit facility with GECC with proceeds from
additional debt financing which PREIT is currently negotiating with prospective
lenders together with additional borrowings under PREIT's existing line of
credit.
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. PREIT filed a registration statement on Form S-4 (which
included a joint proxy statement/prospectus and other relevant documents) with
the United States Securities and Exchange Commission (the "SEC") concerning the
merger on August 12, 2003. The Company expects to call a meeting of its
shareholders to approve the proposed merger and will mail the joint proxy
statement/prospectus to its shareholders in connection with the merger. Certain
of the Company's trustees and executive officers, including Mark E. Pasquerilla,
have agreed to vote in favor of the merger.
Under the terms of the merger agreement, a termination fee of up to $20 million
will be payable to either the Company or PREIT by the other party if the merger
is not completed in certain specified circumstances.
Prior to the closing of the merger, the Company intends to continue to pay its
quarterly dividends to its common and preferred shareholders.
Page 15 of 31
<Page>
In connection with entering into the merger agreement with PREIT, the Company's
Independent Trustees approved another amendment to the Support Agreement under
which Crown Investment's percentage ownership in the Operation Partnership was
further reduced by an amount equivalent to 500,000 common partnership units
effective on May 13, 2003. In consideration of this reduction in its ownership
interest, Crown Investments is no longer obligated to make payments under the
Support Agreement after May 13, 2003. The reduction in ownership interest had a
value of approximately $5.3 million, based on the closing price of the Company's
common shares on May 12, 2003 (which was $10.69). Amounts owed to the Company
under the Support Agreement for the period from April 1 to May 13, 2003 were
$0.08 million and were paid by Crown Investments to the Operating Partnership;
the Operating Partnership made a non-pro-rata cash distribution to Crown
Investments with respect to the 500,000 units for the period from January 1 to
May 13, 2003 of $0.16 million.
As a result of the May 13, 2003 amendment to the Support Agreement and the
related reduction in Crown Investments' ownership interest, the common ownership
interests of the partners in the Operating Partnership changed as summarized in
the following table:
<Table>
<Caption>
Before After
----------------------------
General and Majority Partner:
Crown American Realty Trust (the Company) 83.81% 84.92%
Limited Minority Partners:
Crown Investments Trust 14.55% 13.42%
Crown American Investment Company 1.64% 1.66%
----------------------------
Totals 100.00% 100.00%
----------------------------
</Table>
As a result of the reductions in the percentage ownership interests held by
Crown Investments and CAIC in the Operating Agreement, on the effective date of
the merger, PREIT has agreed to issue 0.2053 of its operating partnership units
in exchange for each outstanding partnership unit of the Company's Operating
Partnership held by Crown Investments and CAIC.
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 June 30, 2003 and December 31, 2002 was
$5.4 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
Page 16 of 31
<Page>
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 $3.0 million as of June
30, 2003.
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.
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with 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.
Page 17 of 31
<Page>
Management believes that Funds from Operations is an appropriate and valuable
measure of the Company's operating performance because real estate generally
appreciates over time or maintains a residual value to a much greater extent
than personal property and, accordingly, reductions for real estate depreciation
and amortization charges are not meaningful in evaluating the operating results
of the Properties.
EBITDA is a second important and widely used financial measure of assessing the
performance of real estate operations. The Company defines EBITDA as revenues
and gain on sales of outparcel land, less mall operating costs and corporate
general and administrative expenses, but before interest, and all depreciation
and amortization. A reconciliation of net income determined in conformity with
GAAP to EBITDA is included in Item 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.
Page 18 of 31
<Page>
The following information is provided to reconcile net income which the Company
believes is the most directly comparable GAAP number to FFO for the periods
indicated.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2003 2002 2003 2002
---------- ---------- ----------- ----------
(IN THOUSANDS)
Net income (loss) $ 1,170 $ 2,222 $ (13,736) $ (17)
Adjustments:
Minority interest in Operating Partnership 1,750 1,300 6,343 2,756
Loss on asset sales other than outparcels - - 13,787 -
Depreciation and amortization - real estate 12,084 10,679 23,755 21,673
Depreciation in JV and other line items 466 488 919 910
Depreciation from discontinued operations - 401 387 801
Cash flow support 80 764 871 1,529
---------- ---------- ----------- ----------
Funds from Operations, before allocations to minority
interests and preferred shares (1 & 2) 15,550 15,854 32,326 27,652
Less:
Amount allocable to preferred shares (3,404) (3,404) (6,806) (6,806)
Amount allocable to minority interest (1,855) (3,238) (4,972) (5,533)
---------- ---------- ----------- ----------
Funds from Operations applicable to common shares (1 & 2) $ 10,291 $ 9,212 $ 20,548 $ 15,313
========== ========== =========== ==========
Weighted average common shares outstanding - basic (3) 32,170 27,619 32,110 26,918
========== ========== =========== ==========
Cash Flows (from consolidated statement of cash flows):
Net cash provided by operating activities $ 22,651 $ 13,856 $ 31,637 $ 19,600
========== ========== =========== ==========
Net cash (used in) investing activities $ (10,016) $ (3,938) $ (16,006) $ (7,394)
========== ========== =========== ==========
Net cash (used in) financing activities $ (10,084) $ (17,847) $ (18,316) $ (23,069)
========== ========== =========== ==========
</Table>
(1) Funds from Operations is defined above.
(2) 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) Excludes 326,000 and 413,000 common shares for the six months ended June
30, 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 19 of 31
<Page>
COMPARISON OF THREE AND SIX MONTHS ENDED JUNE 30, 2003 TO THE CORRESPONDING
PERIOD IN 2002
- - REVENUES
Total revenues for the second quarter of 2003 were $49.5 million, up $4.4
million, or 10 percent, from $45.1 million for the same period in 2002. $3.8
million of this increase (or 8%) is attributable to the two mall acquisitions
completed in late 2002.
The composition of the remaining increase of $0.6 million is as follows: a) a
$0.5 million increase in mall shop and anchor-base minimum rents due to higher
occupancy and 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 $0.3 million, offset by e) $0.1 million in lower
lease buyout income, f) $0.2 million of lower straight-line rents, and g) $0.1
million in lower mall shop and anchor percentage rents.
Total revenues for the first six months of 2003 were $99.9 million compared to
$90.8 million for the comparable period of 2002, an increase of $9.1 million, or
10%. The two malls acquired in late 2002 accounted for $7.7 million (or 8.5%) of
this increase.
- - PROPERTY OPERATING COSTS:
Total recoverable and non-recoverable mall operating costs (excluding
depreciation and amortization) for the second quarter of 2003 were $18.6
million, an increase of $2.1 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 general wage increases.
Depreciation and amortization expense for the second quarter of 2003 was $12.1
million, an increase of $1.4 million from the second quarter of 2002.
Depreciation and amortization on the two malls acquired in 2002 totaled $1.2
million in the second quarter of 2003.
Total mall operating costs (excluding depreciation and amortization) for the
first six months of 2003 totaled $38.2 million compared to $33.6 million for the
comparable period of 2002, an increase of $4.6 million. The two mall
acquisitions accounted for $2.5 million of this increase with most of the
remaining increase being attributable to higher insurance, security, real estate
taxes, snow removal, and general wage increases.
Depreciation and amortization for the first six months of 2003 amounted to $23.8
million, or $2.1 million higher than the corresponding period of 2002.
Depreciation and amortization expense on the two malls acquired in 2002 totaled
$2.3 million for the first six months of 2003.
- - GENERAL, ADMINISTRATIVE AND INTEREST EXPENSES:
For the second quarter of 2003, general and administrative expenses were $3.1
million, an increase of $1.7 million from the second quarter of 2002.
Substantially all of this increase relates to costs associated with the
Company's proposed merger with PREIT.
Interest expense was $12.7 million in the second quarter of 2003 compared with
$12.6 million in the second quarter of 2002. Interest related to the new loans
on the acquisition properties was $0.8 million; other interest costs were $0.7
million lower, primarily due to lower rates on variable-rate debt and also due
to the lower rate and lower outstanding balance on the Schuylkill Mall loan that
was amended in the fourth quarter of 2002.
General and administrative expenses for the first six months of 2003 totaled
$6.0 million, or $3.1 million higher than the first six months of 2002.
Year-to-date through June 30, 2003, approximately $3.0 million has been expensed
relating primarily to legal, accounting, and financial advisory services for the
proposed merger with PREIT.
Interest expense for the first six months of 2003 were $25.4 million compared to
$25.3 million for the comparable period of 2002. Interest expense related to the
new loans on the acquisition properties was $1.7 million for the six months
ended June 30, 2003; other interest costs were $1.6 million lower in 2003,
primarily due to lower rates on variable-rate debt and due to a lower rate and
lower outstanding balance on the Schuylkill Mall loan that was amended in late
2002 and due to the scheduled amortization of the GECC Mortgage Loan.
Page 20 of 31
<Page>
- - GAIN ON PROPERTY SALES AND DISPOSALS:
The gain on the sale of outparcel land for the first six months of 2003 was $0.1
million, the same as the first six months of 2002.
- - DISCONTINUED OPERATIONS AND LOSS ON SALE OF OAK RIDGE MALL
As described in Note 6, 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 income for the second quarter of 2003 was $1.2 million compared to net
income of $2.2 million in the second quarter of 2002. After deducting preferred
dividends, there was a net loss of $2.2 million applicable to common shares,
compared to a net loss of $1.2 million for the second quarter of 2002.
For the first six months of 2003, the Company reported a net loss of $13.7
million compared to $0 net income for the first six months of 2002. The 2003
results include a $14.0 million loss from discontinued operations which
primarily relates to the $13.8 million loss on the sale of Oak Ridge Mall on
March 31, 2003. For the first six months of 2002, the loss from discontinued
operations amounted to $0.4 million and is associated with both Carlisle Plaza
Mall (sold in 2002) and Oak Ridge Mall (sold in 2003). After deducting preferred
dividends, there was a net loss applicable to common shares of $20.5 million for
the first six months of 2003 compared to a net loss of $6.8 million for the
comparable period of 2002.
- - FUNDS FROM OPERATIONS:
For the quarter ended June 30, 2003, Funds from Operations ("FFO") before
allocations to minority interest and to preferred dividends was $15.6 million,
down from $15.9 million in the same quarter of 2002. FFO including land sales
allocable to common shares (after minority interest and preferred dividends) was
$10.3 million, compared to $9.2 million in the same quarter of 2002. The net
decrease in total FFO of $0.3 million was largely comprised of the following: a)
a $1.0 million increase in mall shop base and percentage rents as a result of
higher average rental rates on both new and renewal leases; b) $0.1 million in
higher temporary and seasonal leasing revenues; c) lower interest expense of
$0.7 million primarily as a result of lower interest rates, d) a $1.7 million
contribution from the two acquisition properties, acquired in late 2002, net of
$0.8 million in mortgage interest; and e) $0.3 million of higher miscellaneous
mall revenues. These positive variances in FFO were offset by: f) $0.1 million
in lower lease buyout income, g) $0.8 million in higher mall operating costs,
net of recoveries, h) $0.5 million in lower anchor base and percentage rents, i)
$1.6 million in costs associated with the proposed merger with PREIT, j) $0.2
million in higher net general and administrative expenses, and k) $0.8 million
reduction in FFO due to the sale of Carlisle Plaza Mall in October 2002 and Oak
Ridge Mall in March 2003 and due to the elimination of the Cash Flow Support
obligation.
For the first six months of 2003, FFO before allocations to minority interest
and to preferred dividends was $32.3 million compared to $27.7 million for the
first six months of 2002. The primary composition of this increase in FFO
relates to: a) a $3.4 million contribution from the two mall acquisitions in
2002; b) $4.3 million loss on debt extinguishment in the first quarter of 2002;
c) $1.6 million in lower interest costs in 2003; d) $3.0 million in expenses
relating to the proposed merger with PREIT; and e) $1.2 million less in 2003
from lease buyout income and from the sale of Carlisle Plaza Mall and Oak Ridge
Mall and from the elimination of amounts received under the Support Agreement.
Page 21 of 31
<Page>
EBITDA - EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
The computation of EBITDA is shown below for the six months ended June 30, 2003
and 2002 (in thousands) and sets forth a reconciliation to net income (loss),
which the Company believes is the most directly comparable GAAP number to
EBITDA:
<Table>
<Caption>
Six Months Ended
June 30,
----------------------------
2003 2002
------------ ------------
Net (loss) $ (13,736) $ (17)
Minority interest in Operating Partnership 6,343 2,756
------------ ------------
(Loss) income before minority interest (7,393) 2,739
Interest 25,411 25,317
Depreciation and amortization - real estate 23,755 21,673
Loss on sale of Oak Ridge Mall 13,787 -
Loss on early extinguishment of debt - 4,314
Interest from discontinued operations 124 1,039
Depreciation from discontinued operations 387 801
Depreciation in G & A and in recoverable costs 770 749
Interest on 50% joint venture 330 330
Depreciation on 50% joint venture 280 280
------------ ------------
Total EBITDA, as reported $ 57,451 $ 57,242
============ ============
</Table>
For the six months ended June 30, 2003, EBITDA was $57.5 million compared to
$57.2 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 an extraordinary loss
to income from continuing operations.
In July 2002, the FASB issued Statement of Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities", ("SFAS 146")
which addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." Among other
provisions, the Statement eliminates the definition and requirements for
recognition of exit costs in Issue 94-3 and requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred which can differ from the commitment date of the plan. This Statement
also establishes that fair value is the objective for initial measurement of the
Page 22 of 31
<Page>
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 they occur, or both. Where it is reasonably
possible that the Company will consolidate or disclose information about a
variable interest entity, the Company must disclose the nature, purpose, size
and activity of the variable interest entity and the Company's maximum exposure
to loss as a result of its involvement with the variable interest entity in all
financial statements issued after January 31, 2003. The Company has adopted this
requirement as of January 31, 2003, and no variable interest entities were
identified.
FASB Statement No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure", amends the disclosure provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation", and APB Opinion No. 28, "Interim
Financial Reporting", to require disclosure in the summary of significant
accounting policies of the effects of an entity's policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. SFAS 148 is effective for financial
reports containing condensed consolidated financial statements for interim
periods beginning after December 15, 2002, and the required disclosures are
contained in Note 2 herein.
FASB Statement No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities", amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under FASB No. 133. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003, with
limited exceptions, and its provisions are to be applied prospectively. The
Company does not believe that the adoption of SFAS 149 will have any impact on
its results of operations or its financial position, as the Company does not
currently have any derivatives or hedging activities.
FASB Statement No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", establishes standards for how
an issuer classifies and measures certain financial instruments that have
characteristics of both liabilities and equity. Certain financial instruments
which had previously been classified as equity may now have to be classified as
a liability if they meet the provisions of SFAS 150. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003, except for mandatorily redeemable financial instruments of nonpublic
entities. The Company believes that the implementation of this statement will
not have a material impact on the Company's results of operations or financial
position.
MINORITY INTEREST
Minority interest represents the common partnership units in the Operating
Partnership that are owned by Crown Investments and its subsidiary, CAIC. At
June 30, 2003 Crown Investments and its subsidiary owned 14.99% of the total
common partnership units outstanding. Crown American Realty Trust owns the
remaining 85.01%. 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
Page 23 of 31
<Page>
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 three of the Company's malls that were in the lease-up phase at the
time of the Company's IPO in 1993. Accordingly, since the minority interest
account was reduced below zero, and there was a legal obligation of the minority
partner to make additional cash contributions to the Operating Partnership, the
minority interest balance at December 31, 2002 is shown on the Consolidated
Balance Sheet as an asset. This asset balance at December 31, 2002 was limited
to $3.3 million, the estimated amount of cash flow support to be received over
the next twelve months. As 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 and the
Merger Agreement. As a result of these amendments, the minority partner has no
further obligation to make cash flow support payments to the Operating
Partnership and the minority interest balance at June 30, 2003 is zero. An
additional amount of $9.8 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 six months of
2003. On a cumulative basis, $23.9 million of such losses have been absorbed by
the Company, through and including June 30, 2003.
2003 CASH FLOWS
For the six months ended June 30, 2003, the Company generated $31.6 million in
cash flows from operating activities. The Company invested $16.0 million in its
existing properties during the first six months of 2003 which included $11.8
million in tenant allowances and associated leasing costs and $4.2 million in
various other capital expenditures. The Company used $18.3 million in its
financing activities, which included (i) additional borrowings of $24.7 million,
net of escrow deposits, issuance costs, and prepayment penalties; (ii) $21.2
million of debt repayments and loan amortization; (iii) $24.6 million of common
and preferred dividends; (iv) $0.9 million of cash flow support payments and (v)
$1.9 million of proceeds from the Dividend Reinvestment Plan and issuance of
common shares.
LIQUIDITY AND CAPITAL RESOURCES
The Company has significant ongoing capital requirements. The Company believes
that its cash generated from property operations and funds obtained from its
lines of credit, property financings and general corporate borrowings will
provide the necessary funds on a short-term and long-term basis for its
operating expenses, debt service on outstanding indebtedness and recurring
capital expenditures and tenant allowances, and 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 June 30, 2003
the borrowing capacity was approximately $163 million and the balance
outstanding on the line of credit was $144.7 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
Page 24 of 31
<Page>
immediately. The Company was in compliance with all loan covenants or had
received appropriate lender waivers as of and during the period ended June 30,
2003 and through the date hereof. There are ongoing requirements under the GECC
Mortgage Loan, the GECC line of credit, the $53.3 million loan on Capital City
Mall, and the $37.0 million loan for Valley View Mall to have insurance policies
in place with insurance companies that have certain minimum credit ratings, as
defined in the respective loan agreements. Two of the major insurance carriers
used by the Company, for general liability, workers' compensation, automobile,
excess liability and property coverage, had been down-graded by certain rating
agencies, and one of these two insurance companies has been downgraded three
times. The Company has replaced the downgraded insurance company that had
provided general liability coverage with an insurance company whose ratings
currently exceed the loan requirements. With respect to the other insurance
company, in each instance all lenders have approved the continued use of the
insurance carrier provided no further rating downgrades occur. The current
lender approvals are effective until the insurance renewal dates in April 2004
(for property coverage) and September 2004 (for workers' compensation,
automobile and excess liability coverages). If a further rating downgrade were
to occur in the future, the Company may be required to replace the insurance
coverage prior to the scheduled policy renewal dates in April and September
2004. While management believes that it would be able to replace the downgraded
insurance company as part of the normal policy renewal cycles, or sooner if so
required due to any future rating downgrade not waived by lenders, there is no
assurance it can do so, because future conditions may prevent the Company from
securing such insurance. In addition, the premiums paid may increase
significantly from those paid under current insurance policies.
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 25 of 31
<Page>
As of June 30, 2003, the scheduled principal payments on all outstanding debt
are $4.6 million, $155.3 million, $41.8 million, $12.5 million, and $13.2
million for the years ended December 31, 2003 through 2007, respectively, and
$526.3 million thereafter. The Company expects to refinance or extend the
majority of the maturities over the next five years through additional Company
financings and from refinancing the maturing loans. The Company's ability to
refinance or extend these loans on or before their due dates depends on the
level of income generated by the properties, prevailing interest rates, credit
market trends, and other factors that may be in effect at the time of such
refinancings or extensions and there is no assurance that such refinancings or
extensions will be executed. The ratios of the Company's EBITDA to interest paid
on total indebtedness (exclusive of capitalized interest and interest income)
for the years ended December 31, 2002, 2001, and 2000 were 2.30 to 1, 2.17 to 1,
and 2.12 to 1, respectively.
- PROPERTY ACQUISITIONS
VALLEY VIEW MALL - In September 2002, the Company completed the acquisition of
Valley View Mall, an enclosed shopping mall, located in LaCrosse, Wisconsin. The
purchase price, excluding closing costs and expenses, of the mall was $49.92
million, and was funded partially by a $37.0 million mortgage loan and partially
from the Company's line of credit. See Note 5 to the interim Consolidated
Financial Statements.
WIREGRASS COMMONS MALL - In November 2002, the Company completed the acquisition
of Wiregrass Commons Mall located in Dothan, Alabama, located in the
southeastern corner of Alabama adjacent to Georgia and the Florida panhandle.
The purchase price excluding closing costs and expenses, was $40.25 million and
was financed by a $30.0 million floating rate mortgage loan $4.5 million of
borrowings from the Company's line of credit, and the balance in cash. See Note
5 to the interim Consolidated Financial Statements.
- PROPERTY DISPOSITIONS
With regard to the Company's disposition strategy, the Company will dispose of
any of its Properties, if, based upon management's periodic review of the
Company's portfolio, the Board of Trustees determines that such action would be
in the best interests of the Company. The Company regularly evaluates property
dispositions in order to recycle capital for future investment opportunities, to
reduce debt leverage, or to enhance cash flows and liquidity. It is possible
that the net sales proceeds for some properties, if sold in the future, could be
lower than their current net book value, which would result in a loss upon
possible future sale.
CARLISLE PLAZA MALL - As further described in Note 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 Plaza Mall were paid
off prior in December 2002.
OAK RIDGE MALL - 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 Mall
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 Mall, 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 Mall 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 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
Page 26 of 31
<Page>
third party of Oak Ridge by Crown Investments concluded within six years of the
purchase by Crown Investments exceeds Crown Investments' total investment in Oak
Ridge (defined to include $11.4 million plus the aggregate amount of all
additional investments made by Crown Investments in Oak Ridge plus an 8% return
compounded annually on this sum).
The sale of Oak Ridge resulted in a loss on sale for financial reporting
purposes of $13.8 million which was recorded by the Company in the first quarter
of 2003. The reduction in the minority partner's percentage ownership interest,
valued at $11.4 million, was recorded in shareholders' equity in the
consolidated balance sheet.
In connection with the foregoing, the Independent Trustees also approved
amendments to the Support Agreement and to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership. The amendment to the Support
Agreement released Oak Ridge from Crown Investments' future obligations under
the Support Agreement and reduced the maximum quarterly amount of support
payments for the remaining two properties in the Agreement from $1,000,000 to
$300,000. Approximately 81% of the $3.1 million in cash flow support for the
year ended 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 WITH PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
Page 27 of 31
<Page>
On May 13, 2003, the Company entered into a definitive merger agreement with
Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust (NYSE:
PEI) ("PREIT"), under which the Company agreed to merge into PREIT. The Boards
of Trustees of PREIT and the Company have unanimously approved the merger.
Under the terms of the merger agreement, PREIT will issue to the Company's
common shareholders 0.3589 PREIT common shares in exchange for each outstanding
common share of the Company in a tax-free, share-for-share transaction. The
exchange ratio was determined based on the trailing 20 day average closing
prices as of May 12, 2003, and is not subject to change and there is no "collar"
or minimum trading price for the shares.
As part of the merger, PREIT will issue new preferred shares to the current
holders of the Company's outstanding non-convertible senior preferred shares.
The terms of the new PREIT preferred shares will be substantially the same as
the existing preferred shares of the Company. In addition, PREIT has agreed to
assume the Company's mortgage debt, described in Note 4 to the interim
Consolidated Financial Statements. PREIT currently expects to repay the
Company's secured revolving credit facility with GECC with proceeds from
additional debt financing which PREIT is currently negotiating with prospective
lenders together with additional borrowings under PREIT's existing line of
credit.
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. PREIT filed a registration statement on Form S-4 (which
included a joint proxy statement/prospectus and other relevant documents) with
the United States Securities and Exchange Commission (the "SEC") concerning the
merger on August 12, 2003. Crown expects to call a meeting of its shareholders
to approve the proposed merger and will mail the joint proxy
statement/prospectus to its shareholders in connection with the merger. Certain
of the Company's trustees and executive officers, including Mark E. Pasquerilla,
have agreed to vote in favor of the merger.
Under the terms of the merger agreement, a termination fee of up to $20 million
will be payable to either the Company or PREIT by the other party if the merger
is not completed in certain specified circumstances.
Prior to the closing of the merger, the Company intends to continue to pay its
quarterly dividends to its common and preferred shareholders.
In connection with entering into the merger agreement with PREIT, the Company's
Independent Trustees approved another amendment to the Support Agreement under
which Crown Investment's percentage ownership in the Operation Partnership was
further reduced by an amount equivalent to 500,000 common partnership units
effective on May 13, 2003. In consideration of this reduction in its ownership
interest, Crown Investments is no longer obligated to make payments under the
Support Agreement after May 13, 2003. The reduction in ownership interest had a
value of approximately $5.3 million, based on the closing price of the Company's
common shares on May 12, 2003 (which was $10.69). Amounts owed to the Company
under the Support Agreement for the period from April 1 to May 13, 2003 were
$0.08 million and were paid by Crown Investments to the Operating Partnership;
the Operating Partnership made a non-pro-rata cash distribution to Crown
Investments with respect to the 500,000 units for the period from January 1 to
May 13, 2003 of $0.16 million.
As a result of the May 13, 2003 amendment to the Support Agreement and the
related reduction in Crown Investments' ownership interest, the common ownership
interests of the partners in the Operating Partnership changed as summarized in
the following table:
<Table>
<Caption>
Before After
----------------------------
General and Majority Partner:
Crown American Realty Trust (the Company) 83.81% 84.92%
Limited Minority Partners:
Crown Investments Trust 14.55% 13.42%
Crown American Investment Company 1.64% 1.66%
----------------------------
Totals 100.00% 100.00%
----------------------------
</Table>
As a result of the reductions in the percentage ownership interests held by
Crown Investments and Crown American Investment Company in the Operating
Agreement, on the effective date of the merger, PREIT has agreed to issue 0.2053
of its
Page 28 of 31
<Page>
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.
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
June 30, 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 $174.7 million of variable-rate debt, which represents 30% 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
---- ---- ---- ---- ---- ----------
(six months) (year) (year) (year) (year)
Long-term debt
Fixed rate debt $ 4.6 $ 10.6 $ 11.8 $ 12.5 $ 13.2 $ 526.3
Average rate debt 7.17% 7.20% 7.18% 7.26% 7.43% 7.43%
Variable rate debt - $ 144.7 $ 30.0 - - -
Average interest rate - 3.37% 3.12% - - -
</Table>
Interest rate risk for the Company increased during the six months ended June
30, 2003 due to an increase in variable rate debt from $132.6 million at
December 31, 2002 (including debt related to discontinued operations) to $174.7
million at June 30, 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 June 30,
2003.
ITEM 4: CONTROLS AND PROCEDURES
The Company's principal executive officer and principal financial officer have
evaluated the effectiveness of the Company's "disclosure controls and
procedures," as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") as of June 30, 2003.
Based upon their evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed by the Company in the reports filed or submitted by it
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms, and to provide
reasonable assurance that information required to be disclosed by the Company in
such reports is accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
There was no change in the Company's "internal control over financial reporting"
(as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred
during the quarter ended June 30, 2003, that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
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
Page 29 of 31
<Page>
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
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
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 on
Form S-3, filed on June 27, 1997)
31.1 Rule 13a-14 (a) Certification of Chief Executive Officer (b)
31.2 Rule 13a-14 (a) Certification of Chief Financial Officer (b)
32.1 Section 1350 Certification of Chief Executive Officer (b)
32.3 Section 1350 Certification of Chief Financial Officer (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
The Company filed or furnished the following Current Reports on Form
8-K during the quarter ended June 30, 2003, including the dates filed, the items
reported and listing any financial statements filed:
- dated and filed May 14, 2003, Item 9 - containing Regulation FD
disclosure; and
- dated June 9, 2003 and filed June 19, 2003, Items 5 and 7 -
restatements of the Company's Selected Financial Data, Management's
Discussion and Analysis of Financial Condition and Results of
Operations Quantitative and Qualitative Disclosures About Market
Risk and Financial Statements and Supplementary Data from the
Company's Annual Report on Form 10-K for the year ended December 31,
2002.
Page 30 of 31
<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: August 14, 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: August 14, 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: August 14, 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 31 of 31