Securities and Exchange Commission Washington, DC 20549 FORM 10-K x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission File Number 1-12002 MARK CENTERS TRUST (Exact name of registrant as specified in its charter) Maryland 23-2715194 (State of incorporation) (I.R.S. employer identification no.) 600 Third Avenue, Kingston PA 18704 (717) 288-4581 (Address of principal executive offices) (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: Common Shares of Beneficial Interest, $.001 par value (Title of Class) New York Stock Exchange (Name of exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES X NO The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $96,174,191 million based on the closing price on the New York Stock Exchange for such stock on March 24, 1997. The number of shares of the Registrant's Common Shares of Beneficial Interest outstanding was 8,548,817 on March 24, 1997. DOCUMENTS INCORPORATED BY REFERENCE Part III - Definitive proxy statement for the Annual Meeting of Shareholders presently scheduled to be held June 12, 1997, to be filed pursuant to Regulation 14A.
TABLE OF CONTENTS Form 10-K Report Item No. Page PART I 1. Business 3 2. Properties 10 3. Legal Proceedings 19 4. Submission of Matters to a Vote of Security Holders 20 PART II 5. Market for the Registrant's Common Equity and Related Shareholder Matters 20 6. Selected Financial Data 21 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 8. Financial Statements and Supplementary Data 33 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 33 PART III 10. Directors and Executive Officers of the Registrant 33 11. Executive Compensation 33 12. Security Ownership of Certain Beneficial Owners and Management 34 13. Certain Relationships and Related Transactions 34 PART IV 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 34 2
PART I Item 1. Business General Mark Centers Trust (the "Company") was formed on March 4, 1993 as a Maryland Real Estate Investment Trust ("REIT") to continue the business of its predecessor company, Mark Development Group ("MDG" or the "Predecessor"). The Company is a fully integrated, self-managed and self-administered equity REIT which owns, acquires, develops and operates primarily neighborhood and community shopping centers in the eastern and southeastern United States. The Company currently owns and operates 39 properties totalling approximately 7.2 million square feet of gross leasable area ("GLA"), consisting of thirty-four neighborhood and community shopping centers, three enclosed malls, and two mixed use (retail/office) properties located in ten states. The Company conducts substantially all of its activities through, and substantially all of its properties are owned by, Mark Centers Limited Partnership (the "Operating Partnership"), a Delaware limited partnership and its majority owned partnerships. The Company owns an 84% interest in the Operating Partnership as the sole general partner. Concurrently with the consummation of the Company's initial public offering (the "Offering") on June 1, 1993, the Operating Partnership acquired thirty-one properties from Marvin L. Slomowitz, the founder of MDG and the Company's Chairman and Chief Executive Officer (the "Principal Shareholder"), or from affiliates of the Principal Shareholder, in exchange for Operating Partnership Units ("OP Units") which are exchangeable on a one for one basis into the Company's Common Shares of Beneficial Interest ("Shares"). The properties had been developed directly or indirectly by the Principal Shareholder from 1964 through 1992 and were operated under MDG's direction. The Principal Shareholder owns in excess of 99% of the remaining 16% of the Operating Partnership in the form of OP Units. The remaining OP Units, which represent less than 1% ownership of the Operating Partnership, were issued by the Company in July 1995 to an unrelated entity in consideration for a property acquired by the Company. The Company at all times will be the general partner of and own no less than a 51% interest in the Operating Partnership. 3
The Company has transacted its affairs so as to qualify as, and has elected to be treated as, a real estate investment trust under sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). Under the Code, a real estate investment trust that meets applicable requirements is not subject to Federal income tax to the extent it distributes at least 95% of its REIT taxable income to its shareholders. The Company's executive offices are located at 600 Third Avenue, Kingston, Pennsylvania, and its telephone number is (717) 288- 4581. Business Objectives and Operating Strategy The Company intends to continue to specialize in neighborhood and community shopping centers strategically located in secondary markets where basic staple merchandise is not available in adequate supply. The Company intends to continue to expand its operations through leasing, property management, renovation and expansion of existing shopping centers and through the development of new centers and acquisition of additional centers. Operating and administrative functions such as leasing, property management, construction, finance and legal are provided by Company personnel, providing for fully integrated property management. In addition, management believes that the experience and tenant relationships developed through in-house leasing and property management staff enhance the Company's ability to attract and retain high quality tenants. Property operations are managed centrally at the Company's headquarters and are augmented by regional management and leasing offices at the Northwood Centre in Tallahassee, Florida, the Normandale Mall in Montgomery, Alabama and in Columbia, South Carolina. The Company also maintains property management offices at the Ledgewood Mall in Ledgewood, New Jersey, the Northside Mall in Dothan, Alabama, and the Searstown Mall in Titusville, Florida. As with other shopping center owners and operators, the general weakness in the retail sector has adversely impacted the Company's cash flow and income, particularly given the retail concentration of the Company's tenants. In a soft retail environment tenants may experience downturns in their business which may weaken their financial condition and, potentially, result in their bankruptcy. 4
In 1996, the Company was unfavorably impacted by the loss of anchor tenants at four locations following their bankruptcy proceedings. Jamesway, Rich's and Bradlees vacated a total of approximately 220,000 square feet during 1996 and Sugarman's vacated 45,000 square feet in September 1995. The soft retail environment has made releasing this vacant space challenging and has required the Company to incur tenant improvements for new tenants earlier than had been originally anticipated because of early termination of the prior leases. The Company believes it has begun to meet these challenges during the end of fiscal year 1996 and the beginning of fiscal year 1997 through new leasing activity, including releasing of previously vacated space, through expansion activities to increase existing space for current tenants, and through ongoing development activities designed to attract new tenants. The Company's ability to overcome these challenges will remain dependent on the general real estate uncertainties which affect the industry in general and the Company's tenants in particular, and on the Company's ability to finance its ongoing capital plans and tenant improvements to maintain and increase occupancy levels. As of December 31, 1996, the Company had leased approximately 150,000 square feet to two replacement anchor tenants (of which one anchor tenant was installed in 30,000 square feet during 1996) at two locations at market rental rates in excess of the rates paid by the former anchors. The Company has also signed major leases totalling 91,000 square feet related to planned expansion at three of its centers. In addition, the Company leased approximately 203,000 gross square feet of small store space, of which the majority of tenants took occupancy and commenced paying rent in 1996. The Company anticipates the majority of the space currently under lease but not yet occupied will be occupied and rent payment to commence during 1997. The Company's portfolio occupancy declined 3% to 86% as of December 31, 1996 from 89% as of December 31, 1995, primarily as a result of the loss of anchor tenants as previously discussed. However, as a result of space leased but not yet occupied related primarily to the replacement of anchors and expansion at existing centers, the Company's portfolio was 90% leased as of December 31, 1996. 5
During the year ended December 31, 1996, the Company installed three major tenants in three of its centers. In June 1996, a 48,000 square foot Home Place Store opened at the New Loudon Center in Latham, New York. In August 1996, Dunham's Sporting Goods opened in 30,000 square feet at the East End Centre located in Wilkes-Barre, Pennsylvania filling the majority of space vacated by Sugarman's following bankruptcy proceedings. An Old American Store opened in 30,000 square feet in November 1996 at the Wesmark Plaza in Sumter, South Carolina. Development In 1996, the Company completed development at one center and continued with scheduled development at a second. Pittston Plaza in Pittston, Pennsylvania, was completed in June 1996. This center, which is currently 97% leased, is anchored by a 59,000 square foot Insalaco's Supermarket which opened in December 1995. Phase I of the development at the Union Plaza located in New Castle, Pennsylvania was completed in October 1996 with the opening of both Sears and Hills Department Stores which total 193,000 square feet. Development of Phase II has commenced following the signing of a lease with Peebles Department Store in 1996 for 25,000 square feet. Upon completion of all phases, the Union Plaza is expected to total approximately 350,000 square feet. Acquisition Options - Development Properties Concurrent with the Offering, the Company obtained acquisition options ("Acquisition Options") to acquire six properties under development from the Principal Shareholder (the "Development Properties), which were in various stages of the development process. As of December 31, 1995, the Company had exercised three of these options for the Bradford Towne Centre in Towanda, Pennsylvania, the Route 6 Mall in Honesdale, Pennsylvania, and the Columbia Towne Centre in Hudson, New York. Development on the Columbia Towne Centre was suspended due to the bankruptcy of a former anchor tenant. Upon substantial completion of each Development Property the Company had agreed to pay the Principal Shareholder an amount (the "Contingent Payment Amount") equal to the (i) land acquisition costs, (ii) third-party development costs, (iii) allocated overhead expenses, (iv) leasing commissions for all tenant leases signed prior to the Offering and an incentive payment equal to 5% of construction costs (excluding engineering, architectural and other "soft costs"). The Contingent Payment Amount was to be reduced as necessary to 6
Acquisition Options - Development Properties, continued provide the Company with a minimum 13.5% return on its investment based on the annualized operating income from the property within two years after completion of construction. The Contingent Payment was to be made through the issuance of OP Units, unless such issuance would have resulted in the Company owning less than 51% of the Operating Partnership or would have jeopardized the Company's REIT status in which case, payment was to be made in cash. In February 1996, the Principal Shareholder and Board of Trustees ("Trustees") took certain actions in an effort to eliminate the appearance of potential conflicts of interest arising between the Principal Shareholder and the Company in the context of the Acquisition Options, and to eliminate potential disputes arising from the complex manner in which the reimbursement to the Principal Shareholder for the Development Properties was calculated. As a result, the Company and the Principal Shareholder executed the following agreements: - - The Trustees and the Principal Shareholder terminated all Acquisition Options (other than the Acquisition Option pertaining to the New Castle property which had been terminated in May 1995). - - The Principal Shareholder repurchased the Columbia Towne Centre from the Company for $3,065,000, which represented the total development costs incurred by the Company to the date of repurchase, and was greater than the value of the property as determined by an independent appraiser. - - The Company purchased the Union Plaza, located in New Castle, Pennsylvania, from the Principal Shareholder for $4,495,000 which represented the amount the Principal Shareholder had invested in the property less $378,000 of predevelopment costs previously advanced by the Company. This purchase price was less than the value of the property as determined by an independent appraiser. - - Upon completion of a review in June 1996 of the payments due the Principal Shareholder for the acquisition of the Route 6 Mall and the Bradford Towne Centre, for which development is complete and both are currently operating, the Company agreed to pay the Principal Shareholder $1,600,000, which included the conveyance of approximately two acres of land by the Principal Shareholder which became part of the Route 6 Mall. 7
Acquisition Options - Development Properties, continued - - The Company and Principal Shareholder also terminated all management agreements for properties owned by the Principal Shareholder. As a result of these transactions and to reflect the net result of the purchase and sales price for these properties, the Company issued a note payable to the Principal Shareholder for the principal sum of $3,030,000. The note, which bears interest at a rate equal to that charged by Fleet Bank, N.A. on the Company's revolving line of credit facility, is payable in full the earlier of (i) two years following the date the Union Plaza is completed or (ii) on June 12, 1999. Since the payment to the Principal Shareholder reflects, in part, land acquisition costs associated with the Union Plaza, the Company has agreed with the Principal Shareholder to prepay the principal sum with any construction loan proceeds specifically allocable for land acquisition. The financing with First Western Bank, N.A. did not provide any proceeds allocable to land acquisition. The Company currently holds an option to acquire 26 acres contiguous to the Plaza 15 in Lewisburg, Pennsylvania from the Principal Shareholder for $1,325,000 which represents the fair market value as established by an independent appraisal. Dispositions As part of a its ongoing strategic evaluation of its properties, the Company sold the Newberry Plaza, located in Newberry, South Carolina for $1,300,000 in March of 1997. The net proceeds of the sale were used by the Company to supplement its working capital. In 1995, Newberry Plaza was found to have petroleum related soil and ground water contamination. The Company is not obligated to reimburse the purchaser for any remediation costs it might incur and the purchaser has waived all claims it might have against the Company arising out of such contamination. Financing Strategies The Company intends to continue to finance acquisitions and development with the most appropriate sources of capital, which may include undistributed funds from operations (subject to provisions in the Code concerning taxability of undistributed REIT income), the issuance of equity and/or debt securities, the sale of properties, and bank and other institutional borrowing. Future borrowing by the Company may be either on a secured or unsecured basis. The Company intends to continue its practice of managing its exposure to floating rate debt primarily through the use of fixed-rate debt. 8
Environmental Matters Under various Federal, state and local laws, ordinances and regulations relating to the protection of the environment, a current or previous owner or operator of real estate may be liable for the cost of removal or remediation of certain hazardous or toxic substances disposed, stored, generated, released, manufactured or discharged from, on, at, under, or in a property. The Company believes that it is in compliance in all material respects with all Federal, state and local ordinances and regulations regarding hazardous or toxic substances. Other than as disclosed below and as otherwise relating to Newberry Plaza (which was sold in March 1997), the Company has not been notified by any government authority of any material non-compliance, liability or other claim in connection with any of the properties. Upon conducting environmental site inspections in connection with obtaining financing from Morgan Stanley Mortgage Capital, Inc. ("Morgan Stanley") during 1996, (see "Management's Discussion and Analysis of Financial Results of Operations") certain environmental contamination was identified at two of the properties which were to serve as collateral for the financing: soil contamination at the Troy Plaza in Troy, New York, and soil and ground water contamination at the Cloud Springs Plaza in Fort Oglethorpe, Georgia. In each case, the contamination was determined to have originated from former tenants. The Company has agreed to enter into a voluntary remedial agreement with the State of New York for remediation of the Troy Plaza. Environmental consultants estimate that the total cost of such remediation will be approximately $75,000. The Company has received notification from the State of Georgia that Cloud Springs Plaza will not be listed on the State's Hazardous Site Inventory because it has no reason to believe that contamination exceeding a reportable quantity has occurred at this property. As of December 31, 1996, Morgan Stanley held in escrow $563,000 of loan proceeds to be released upon final environmental remediation. Competition There are numerous commercial developers and real estate companies that compete with the Company in seeking land for 9
Competition, continued development, properties for acquisition and tenants for their properties. There are numerous shopping facilities that compete with the properties in attracting retailers to lease space. In addition, retailers at the Company's properties face increasing competition from outlet malls, discount shopping clubs, direct mail and telemarketing. Employees At December 31, 1996, the Company employed 67 persons, 35 of whom were located at the Company's headquarters in Kingston, Pennsylvania and the remainder located in the Company's regional offices. The Company believes that its relationships with its employees are good. Item 2. Properties Shopping Center Properties The Company currently owns and operates 39 properties totalling approximately 7.2 million square feet of (GLA), consisting of thirty-four neighborhood and community shopping centers, three enclosed malls, and two mixed use (retail/office) properties located in ten states. The Company's shopping centers offer day to day necessities and value-oriented merchandise rather than high priced luxury items. The Company has specialized, and intends to continue to specialize, in neighborhood and community shopping centers strategically located in underserved, secondary markets. The shopping centers are diverse in size, ranging from approximately 45,000 to 507,000 square feet with an average size of 184,000 square feet. The Company's portfolio was approximately 86% occupied and 90% leased at December 31, 1996. (See Business Objectives and Operating Strategy) The Company's shopping centers are typically anchored by a national or regional discount department store and/or supermarket. Typical department store tenants at the Company's properties are Kmart (nine), Ames (five), Hills (four), Sears (four), Marshalls (two), and one of each of the following: Bradlees, Montgomery Wards, Sports Authority, J.C. Penney, Sterns and Walmart. At December 31, 1996, twenty-six of the Company's properties were anchored by supermarkets including Price Chopper (six), Insalaco's (four), Acme (two), BI-LO (two), and one of each of the following: P&C, Giant, Winn-Dixie, Shaw's, Food Max, Publix, Weis, Shoprite, Food Lion, and Kroger's. Penn Traffic owns and operates all the Insalaco's, BI-LO and P&C grocery stores. 10
Properties, continued The Company currently has 566 leases of which approximately 58% are with national or regional tenants. A substantial portion of the income from the properties consists of rent received under long term leases. Most of these leases provide for the payment of fixed minimum rent monthly in advance and for the payment by tenants of a pro-rata share of the real estate taxes, insurance, utilities and common area maintenance of the shopping centers. Certain of the tenant leases permit tenants to exclude some or all of these expenses from their rental obligations. Minimum rents and expense reimbursements accounted for approximately 92% of the Company's rental revenues for the year ended December 31, 1996. Approximately 57% of the Company's existing leases also provide for the payment of percentage rents in addition to minimum rents. These arrangements generally provide for payment to the Company of a certain percentage of a tenant's gross sales in excess of a stipulated annual amount. Percentage rents accounted for approximately 6% of the total 1996 rental revenue of the Company. In 1996, approximately 10.8% of the Company's total revenue was derived from current leases of office space and specialized computer facilities with two agencies of the State of Florida at Northwood Centre in Tallahassee, the Florida Department of Health and Rehabilitative Services (6.3%) and the Florida Department of Business Professional Regulation (4.5%). Leases with these Florida agencies contain customary conditions, required under Florida law, permitting state agency tenants to cancel their leases upon six months' notice in the event that state-owned office facilities in the same county become available. These leases do not provide for early termination penalties. The exercise by either of these state agencies of these cancellation provisions would have an impact on the Company's revenues unless the Company could successfully relet the space once vacated. The Company is unaware of any such state owned facility currently available which would result in either of these agencies cancelling their leases. The Florida Department of Health and Rehabilitative Services lease term expires July 31, 1999, and it has five two-year renewal options. The Florida Department of Business and Professional Regulation lease term expires April 30, 1999. The Company would be adversely affected in the event that any current state agency tenants do not renew their leases or negotiate a new lease. 11
Properties, continued In 1996, the Company also received approximately 10.8% of its total revenues under leases with the Kmart Corporation at nine locations. The Company received no more than 4.8% of total revenues from any other single tenant. Six of the Company's shopping center properties are subject to long-term ground leases in which a third party owns and has leased the underlying land to the Company. The Company pays rent for the use of the land and is responsible for all costs and expenses associated with the building and improvements. The following sets forth more specific information with respect to each of the Company's properties at December 31, 1996: 12
<TABLE> <CAPTION> MARK CENTERS TRUST PROPERTY LIST YEAR LEASABLE % ANCHOR TENANTS SHOPPING CENTER CONSTRUCTED(C) OWNERSHIP LAND AREA AREA LEASED(4) CURRENT LEASE EXPIR PROPERTY LOCATION ACQUIRED(A) INTEREST (ACRES) SQ FT 12/31/96 LEASE OPTION EXPIR <S> <C> <C> <C> <C> <C> <C> <C> PENNSYLVANIA AMES PLAZA SHAMOKIN 1966(C) FEE 17.6 98,210 92% Ames 1998/2013 MARK PLAZA EDWARDSVILLE 1968(C) LI(1) 20.2 176,786 92% Kmart 1999/2049 MONROE PLAZA STROUDSBURG 1964(C) FEE(1) 7.8 130,569 100% Ames 1999/2019 Shoprite 2005/2023 VALMONT PLAZA WEST HAZLETON 1985(A) FEE 26.0 200,039 100% Hills 2007/2027 Insalaco's 2008/2027 CIRCLE PLAZA SHAMOKIN DAM 1978(C) FEE 21.0 92,171 100% Kmart 2004/2054 DUNMORE PLAZA DUNMORE 1975(A) FEE(5) 6.0 45,380 100% Price Chopper 2000/2020 Fay's Drug 2004/2019 LUZERNE STREET SCRANTON 1983(A) FEE 4.6 57,715 100% Price Chopper 2004/2024 SHOPPING CENTER Fay's Drug 2004/2019 TIOGA WEST TUNKHANNOCK 1965(C) FEE 17.2 122,338 100% Insalaco's 2014/2024 Ames 2000/2015 BLACKMAN PLAZA WILKES-BARRE 1968(C) FEE(2) 9.7 121,206 92% Kmart 1999/2049 13
<CAPTION> MARK CENTERS TRUST PROPERTY LIST YEAR LEASABLE % ANCHOR TENANTS SHOPPING CENTER CONSTRUCTED(C) OWNERSHIP LAND AREA AREA LEASED(4) CURRENT LEASE EXPIR PROPERTY LOCATION ACQUIRED(A) INTEREST (ACRES) SQ FT 12/31/96 LEASE OPTION EXPIR <S> <C> <C> <C> <C> <C> <C> <C> PENNSYLVANIA BIRNEY MALL MOOSIC 1968(C) FEE 28.3 193,899 99% Kmart 1999/2049 Consolidated Stores 1998/2008 PLAZA 15 LEWISBURG 1995(A) FEE 16.4 113,600 96% BI-LO 2001/2021 Ames 2001/2021 GREEN RIDGE SCRANTON 1986(C) FEE 16.1 197,292 99% Hills 2007/2037 PLAZA Insalaco's 2008/2017 EAST END CENTRE WILKES-BARRE 1986(C) FEE 40.3 304,754 93% Hills 2007/2037 PharMor 2003/2017 Price Chopper 2008/2028 Dunham's Sporting Goods 2007/2017 MOUNTAINVILLE ALLENTOWN 1983(A) FEE 11.4 114,801 97% Acme 1999/2028 SHOPPING CENTER Klings Handyman 1999/2009 PLAZA 422 LEBANON 1972(C) FEE 13.4 154,791 96% Hills 2001/2021 Giant Grocery 2004/2029 KINGSTON PLAZA KINGSTON 1982(C) FEE 13.7 64,824 100% Price Chopper 2006/2026 25TH STREET EASTON 1993(A) FEE 16.2 131,477 100% F.W.Woolworth's SHOPPING CENTER 1998/1998 BRADFORD TOWNE TOWANDA 1993(C) FEE 48.0 257,319 98% Kmart 2019/2069 CENTRE P&C 2014/2024 JC Penney 2009/2044 14
<CAPTION> MARK CENTERS TRUST PROPERTY LIST YEAR LEASABLE % ANCHOR TENANTS SHOPPING CENTER CONSTRUCTED(C) OWNERSHIP LAND AREA AREA LEASED(4) CURRENT LEASE EXPIR PROPERTY LOCATION ACQUIRED(A) INTEREST (ACRES) SQ FT 12/31/96 LEASE OPTION EXPIR <S> <C> <C> <C> <C> <C> <C> <C> PENNSYLVANIA SHILLINGTON READING 1994(A) FEE 20.3 150,742 100% Kmart 1999/2049 PLAZA Weiss Market 1999/2019 ROUTE 6 MALL HONESDALE 1994(C) FEE 23.0 175,482 100% Kmart 2020/2070 Fay's Drug 2011/2025 PITTSTON PLAZA PITTSTON 1994(C) FEE 10.2 79,568 97% Insalaco's 2015/2025 UNION PLAZA (PHASE I) NEW CASTLE 1996(C) FEE 118.0 192,940 100% Sears 2011/2031 Hills 2017/2026 FLORIDA SEARSTOWN MALL TITUSVILLE 1984(A) FEE 28.5 263,689 66% Sears 1998/2013 United Artist 2005/2015 NEW SMYRNA BEACH NEW SMYRNA 1983(A) FEE 9.6 100,430 97% DeMarsh Theater SHOPPING CENTER BEACH 2005/2015 NORTHWOOD CENTRE TALLAHASSEE 1985(A) FEE 34.1 499,718 89% FL Dept of HRS 1999/2009 FL Dept of Business and Professional Regulation 1999 Publix 2005/2025 ALABAMA NORMANDALE CENTRE MONTGOMERY 1985(A) FEE 30.0 295,591 75% Winn Dixie 2008/2033 MIDWAY PLAZA OPELIKA 1984(A) FEE 21.6 201,976 63% Crafts Plus 2005/2015 Carmike Cinema 2005/2015 15
<CAPTION> MARK CENTERS TRUST PROPERTY LIST YEAR LEASABLE % ANCHOR TENANTS SHOPPING CENTER CONSTRUCTED(C) OWNERSHIP LAND AREA AREA LEASED(4) CURRENT LEASE EXPIR PROPERTY LOCATION ACQUIRED(A) INTEREST (ACRES) SQ FT 12/31/96 LEASE OPTION EXPIR <S> <C> <C> <C> <C> <C> <C> <C> ALABAMA NORTHSIDE MALL DOTHAN 1986(A) FEE(1) 36.2 381,677 92% Walmart 1999/2029 Montgomery Ward 1999/2014 Goody's 2003/2018 SOUTH CAROLINA MARTINTOWN PLAZA N. AUGUSTA 1985(A) LI(1) 18.8 133,878 93% Belk Store 2004/2024 Foodmax 2010/2025 WESMARK PLAZA SUMTER 1986(A) FEE 26.0 215,198 65% Staples 2005/2015 Old America Store 2007/2012 NEW YORK NEW LOUDON LATHAM 1982(A) FEE 26.1 251,725 70% Price Chopper 2015/2035 CENTER Homeplace Stores 2011/2026 Marshalls 1999/2004 TROY PLAZA TROY 1982(A) FEE 12.3 128,479 97% Ames 2001/2016 Price Chopper 1999/2014 NEW JERSEY LEDGEWOOD MALL LEDGEWOOD 1983(A) FEE 46.0 507,080 89% Marshalls 2002/2017 Pharmhouse 1999/2014 The Sports' Authority 2007/2037 Stern's 2005/2030 MANAHAWKIN VILLAGE MANAHAWKIN 1993(A) FEE 20.6 143,737 97% Kmart 2019/2069 SHOPPING CENTER 16
<CAPTION> MARK CENTERS TRUST PROPERTY LIST YEAR LEASABLE % ANCHOR TENANTS SHOPPING CENTER CONSTRUCTED(C) OWNERSHIP LAND AREA AREA LEASED(4) CURRENT LEASE EXPIR PROPERTY LOCATION ACQUIRED(A) INTEREST (ACRES) SQ FT 12/31/96 LEASE OPTION EXPIR <S> <C> <C> <C> <C> <C> <C> <C> NEW JERSEY BERLIN SHOPPING BERLIN 1994(A) FEE 22.0 187,296 83% Kmart 1999/2049 CENTER Acme 2005/2015 MASSACHUSETTS CRESCENT PLAZA BROCKTON 1984(A) FEE(3) 22.5 216,095 97% Bradlees 2009/2027 Shaws 2012/2042 VIRGINIA KINGS FAIRGROUND DANVILLE 1992(A) LI(1) 15.2 118,535 100% Schewel Furniture 2001/2011 The Kroger Co 2002/2012 GEORGIA CLOUD SPRINGS FT. OGELTHORPE 1985(A) FEE 12.2 113,367 98% Food Lion 2011/2031 PLAZA Consolidated Stores 2000/2005 Badcock Furniture 2000/2010 MAINE AUBURN PLAZA AUBURN 1994(A) LI(1) 28.4 256,459 65% Hoyt Cinema 2005/2020 (Partial) Service Merchandise FEE 2011/2090 T.J. Maxx 2000/2015 TOTAL OPERATING PROPERTIES 7,190,833 90% 17
<FN> <F1> (1) The Company is ground lessee under long-term ground leases having at least 60 years remaining in term (including options) at existing rental rates. <F2> (2) The Company's interest in the land has been leased to, and a fee interest in the improvements is held by, an industrial development authority for the benefit of an affiliated entity subject to a mortgage to a third party. The Company's interest in the land is also subject to that mortgage. The Company manages the property and, after making debt service payments and paying a fixed fee to said entity, retains all remaining cash flow as ground rent. In accordance with the terms of the ground lease, the Company receives and accounts for most of its income from this property as percentage rent. <F3> (3) During the term of its lease, Bradlees has a right of first refusal in the event that the Company sells all or a portion of Crescent Plaza giving it the right to purchase on the same terms as a bona fide offer from a third party. <F4> (4) Includes space leased for which rent is being paid but which is not presently occupied or space that is leased but rent has not commenced. <F5> (5) The Company holds a fee interest in a portion of Dunmore Plaza and an equitable interest in the land on the remaining portion. The fee for this remaining portion is held by an industrial development authority and the equitable interest in the building on such remaining portion is held by an unrelated entity. The Company receives and accounts for most of its income from this property as percentage rent. </FN> </TABLE> 18
Item 3. Legal Proceedings On November 20, 1995, Mr. Wertheimer, the former President of the Company, filed a complaint against the Company, its Trustees including the Principal Shareholder, and the Company's in-house General Counsel and Chief Financial Officer in the United States District Court for the Middle District of Pennsylvania. The complaint, which was filed in connection with the termination of Mr. Wertheimer's employment, includes many of the allegations raised in a state court proceeding commenced by Mr. Wertheimer in November 1994. The Federal court complaint also includes a civil RICO action in which Mr. Wertheimer alleges that the Board of Trustees of the Company conspired with the Principal Shareholder to terminate Mr. Wertheimer's employment as part of the Principal Shareholder's breach of his duty of good faith and fair dealing. Further, Mr. Wertheimer alleges that the above defendants engaged in securities fraud in connection with the Offering and that the Principal Shareholder has defrauded or overcharged the Company in corporate transactions. The Federal complaint seeks treble damages under RICO, as well as damages arising from Mr. Wertheimer's alleged termination of employment, invasion of privacy, intentional infliction of emotional distress, fraud and misrepresentation. The Company and all defendants filed motions to dismiss the RICO and tort claims which the court, on December 9, 1996, granted in part and denied in part. Specifically, the court dismissed Mr. Wertheimer's claims for wrongful discharge, fraud and negligence misrepresentation, but declined to dismiss the remainder of the claims at this time. On January 23, 1997, the defendants filed an answer to Mr. Wertheimer's Complaint. In the answer, the defendants denied all allegations of wrongdoing, and intend to vigorously defend against all of the counts. The Company and the Principal Shareholder have also filed counterclaims against Mr Wertheimer alleging Mr. Wertheimer made material misrepresentations in connection with his hiring and breached his employment contract and fiduciary duties to the Company. The Company is involved in other various matters of litigation arising in the normal course of business. While the Company is unable to predict with certainty the amounts involved, the Company's management and counsel are of the opinion that, when such litigation is resolved, the Company's resulting liability, if any, will not have a significant effect on the Company's consolidated financial position. 19
Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of 1996. PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters (a) Market Information The following table shows, for the period indicated, the high and low sales price for the Shares as reported on the New York Stock Exchange (the "NYSE"), and cash dividends paid during the two years ended December 31, 1996 and 1995. Dividend Quarter Ended High Low Per Share March 31, 1996 12 3/4 10 1/2 $.36 June 30, 1996 11 9 3/4 .36 September 30, 1996 11 3/4 10 .36 December 31, 1996 11 1/4 9 3/4 .36(a) March 31, 1995 13 1/2 12 1/2 .36 June 30, 1995 14 1/8 12 1/4 .36 September 30, 1995 13 1/2 11 3/4 .36 December 31, 1995 12 3/4 9 3/4 .36 (a) The dividend for the quarter ended December 31, 1996 was declared on March 13, 1997 and is payable April 30, 1997 to shareholders of record as of March 28, 1997. At March 24, 1997, there were 283 holders of record of the Shares. (b) Dividends The Company has determined that 35.06% and 64.25% of the total dividends distributed to shareholders in fiscal years 1996 and 1995, respectively, represented ordinary income, while the remaining 64.94% and 35.75%, respectively, represented return of capital. The Company's cash flow is affected by a number of factors, including the revenues received from rental properties, the operating expenses of the Company, the interest expense on its borrowings, the ability of lessees to meet their obligations 20
(b) Dividends, continued to the Company and unanticipated capital expenditures. Future dividends paid by the Company will be at the discretion of the Trustees and will depend on the actual cash flow of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Trustees deem relevant. Item 6. Selected Financial Data The following table sets forth, on a historical basis, selected financial data for the Company and MDG which, for accounting purposes only, is considered the Predecessor entity to the Company. This information should be read in conjunction with the audited consolidated financial statements of the Company and Management's Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this Form 10-K. The historical selected financial data for the Company as of December 31, 1996, 1995 and 1994 have been derived from the audited financial statements of the Company. The historical selected financial data for MDG for the period from January 1, 1993 to May 31, 1993 and for the year ended December 31, 1992 have been derived from the audited financial statements of MDG. 21
<TABLE> <CAPTION> MARK CENTERS TRUST MARK DEVELOPMENT GROUP Seven Five Year Ended Year Ended Year Ended Months Ended Months Ended Year Ended 12/31/96 12/31/95 12/31/94 12/31/93 5/31/93 12/31/92 <S> <C> <C> <C> <C> <C> <C> OPERATING DATA: Revenue: Minimum rents $33,695 $32,740 $27,543 $12,971 $ 9,267 $22,971 Percentage rents 2,795 3,340 2,505 1,644 1,147 2,325 Expense reimbursements 6,559 6,431 5,220 2,629 1,687 4,049 Other 747 821 1,065 961 72 203 ------- ------- ------- ------- ------- ------ Total revenue 43,796 43,332 36,333 18,205 12,173 29,548 ------- ------- ------- ------- ------- ------ Operating expenses 18,260 16,374 14,797 7,718 5,182 12,607 Interest and other financing expense 12,733 10,598 5,763 2,094 5,172 13,046 Depreciation and amortization 13,398 11,820 9,066 3,945 2,934 7,793 ------- ------- ------- ------- ------- ------- 44,391 38,792 29,626 13,757 13,288 33,446 ------- ------- ------- ------- ------- ------- (Loss) income before reorganization costs, extraordinary items, gain on sale and minority interest (595) 4,540 6,707 4,448 (1,115) (3,898) Gain on sale of land 21 93 305 -- -- -- Reorganization costs -- -- -- (2,629) -- -- Extraordinary items (190) -- -- 194 -- -- ------- ------- ------- ------- ------- ------- Income (loss) before minority interest (764) 4,633 7,012 2,013 (1,115) (3,898) Minority Interest 40 (833) (1,222) (321) 39 53 ------- ------- ------- ------- ------- ------ Net income (loss) $(724) $3,800 $5,790 $1,692 ($1,076) ($3,845) ======= ======= ======= ======= ======= ======= 22
</TABLE> <TABLE> <CAPTION> MARK CENTERS TRUST MARK DEVELOPMENT GROUP Seven Five Year Ended Year Ended Year Ended Months Ended Months Ended Year Ended 12/31/96 12/31/95 12/31/94 12/31/93 5/31/93 12/31/92 <S> <C> <C> <C> <C> <C> <C> Net (loss) income per Common Share $(.08) $0.44 $0.68 $0.20 ======= ======= ======= ======= Weighted average number of Common Shares outstanding 8,560,415 8,563,466 8,563,529 8,490,114 ========= ========= ========= ========= Funds from Operations $12,372 $15,281 $14,831 $8,262 ======= ======= ======= ======= Funds from Operations per share(1) $1.22 $1.50 $ 1.46 $ 0.81 ======= ======= ======= ======= BALANCE SHEET DATA: Real estate before accumulated depreciation $307,411 $291,157 $278,611 $210,133 $163,095 $161,983 Total assets 258,517 249,515 242,483 180,083 127,968 130,531 Total mortgage indebtedness 172,823 151,828 124,410 61,578 150,392 151,771 Minority interest- Operating Partnership 10,752 13,228 14,827 16,049 -- -- Total equity (deficit) 56,806 69,779 78,183 84,606 (32,993) (31,790) <FN> <F1> (1) Includes OP units </FN> 23 </TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements of the Company (including the related notes thereto) appearing elsewhere in this Form 10-K. The Company effectively commenced its operations on June 1, 1993 with the completion of its initial public offering and the issuance of 8,350,000 Shares to the public at a price of $19.50 per share (the "Offering"). The proceeds of the Offering were primarily used to reduce indebtedness, establish a working capital reserve and to pay reorganization and Share issuance costs. RESULTS OF OPERATIONS Comparison of the year ended December 31, 1996 ("1996") to the year ended December 31, 1995 ("1995"). Total revenue increased $464,000, or 1% to $43.8 million in 1996 compared to $43.3 million in 1995. This increase was attributable to increases in minimum rents and expense reimbursements partially offset by decreases in percentage rents and other income. Minimum rents increased $955,000, or 3%, in 1996 primarily as a result of the inclusion of a full year of results from the acquisition of the Plaza 15 Shopping Center in July 1995 and the development of the Route 6 Mall opened in April 1995, and from the development of the Pittston Plaza completed in June 1996 and completion of Phase I of development at the Union Plaza. Expense reimbursements, which represent the pass- through of certain property expenses to the tenants, increased $128,000, or 2%, from $6.4 million in 1995 to $6.5 million in 1996. The increase was primarily due to increases in property operating expenses and real estate taxes. Percentage rents, representing the Company's participation in tenants' gross sales above predetermined thresholds, decreased $545,000, or 2%, to $2.8 million in 1996 compared to $3.3 million in 1995. This decrease was primarily attributable to timing differences effecting the period that tenant sales figures were received and percentage rent recognized. Additionally, 1996 revenues were unfavorably impacted by the loss of two anchor tenants during 1996 as a result of bankruptcies (Jamesway at the Ledgewood Mall, for which a replacement anchor tenant has been signed, and Rich's at the Auburn Plaza) which resulted in a decline in total revenues at the two properties totalling $984,000. 24
RESULTS OF OPERATIONS, continued Total 1996 operating expenses, including depreciation and amortization increased $3.1 million, or 11%, to $31.3 million compared to $28.2 million in 1995. Of this increase, a $1.4 million increase in depreciation expense was related to increased investments in properties as a result of acquisition, development and expansion activities. The remaining $1.7 million increase was a result of several factors including: (i) a $496,000 increase in real estate taxes due primarily to acquisition, development and expansion activities, (ii) increased winter related costs of $469,000 due to the extremely harsh winter experienced in the Northeast during the first quarter of 1996, (iii) the establishment of a $425,000 reserve for estimated environmental remediation costs and related consulting fees related to two properties (See "Business-Environmental Matters") and (iv) a $253,000 increase in bad debt expense primarily as a result of certain tenant bankruptcies offset by repair work completed at certain properties below initial insurance estimates. Net interest expense and financing fees increased $2.1 million, or 20%, to $12.7 million in 1996, compared to $10.6 million in 1995 primarily due to higher borrowing levels associated with acquisition, development, expansion and tenant replacement activities. As a result of the foregoing, and in addition to a $392,000 reduction in the carrying value of certain property held for sale in 1996 (See Note 13 to the consolidated financial statements), the loss before extraordinary item (write-off of deferred financing costs) and minority interest for 1996 was $574,000, representing a decrease of $5.2 million from income before minority interest of $4.6 million for 1995. Comparison of the twelve months ended December 31, 1995 ("1995") to the twelve months ended December 31, 1994 ("1994"). Total revenue increased approximately $7.0 million, or 19%, to $43.3 million in 1995 compared to $36.3 million in 1994. This increase was attributable to increases in minimum rents, percentage rents and expense reimbursements, and was partially offset by a $244,000 decrease in other income. Minimum rents increased $5.2 million, or 19%, in 1995 compared to 1994. This increase resulted primarily from the effect of acquiring four shopping centers (one of which was acquired in May 1994, two in October 1994 and one in July 1995), the commencement of minimum 25
RESULTS OF OPERATIONS, continued rents at three properties formerly under development in 1995 and during the end of the second quarter of 1994, and the Company's replacement of expiring leases and the renewal of existing leases at higher rents. Percentage rents, representing the Company's participation in tenants' gross sales above predetermined thresholds, increased $835,000 or 33% to $3.3 million in 1995 compared with $2.5 million in 1994. The increase was primarily attributable to percentage rent at the properties acquired and developed in 1995 and 1994 and the effect of certain tenants converting from paying minimum rent to paying percentage rent only without any thresholds. The increase in expense reimbursements, which rose 23% from $5.2 million in 1994 to $6.4 million in 1995, were primarily attributable to the properties acquired and developed in 1995 and 1994. Total 1995 operating expenses, including depreciation and amortization, increased approximately $4.3 million, or 18%, to $28.2 million compared to $23.9 million in 1994. Of this increase, $2.7 million is attributable to increased depreciation related to properties acquired, developed and tenant improvements placed in service, and increased amortization of deferred leasing costs offset by a decrease in amortization of deferred financing costs. Of the remaining $1.6 million, increases of $892,000 for real estate taxes and $740,000 in property operating expenses are primarily due to the acquisition and development of properties in 1995 and 1994. The remaining increase of $301,000 in property operating expenses and a corresponding decrease in general and administrative expenses relate to a reclassification of certain property-related expenses. Net interest expense and financing fees increased $4.8 million, or 84%, to $10.6 million in 1995, compared to $5.8 million in 1994. This increase is due to higher average outstanding borrowings related to the Company's acquisition, development and expansion activities and an increase in the weighted average interest rate of 8.2% for 1995, compared with 7.3% for 1994 primarily as a result of the rise in short-term interest rates during 1995 as compared with 1994. As a result of the foregoing, offset by a $212,000 decrease in the gain from sale of property in 1995 as compared to 1994, income before minority interest for 1995 was $4.6 million, representing a decrease of $2.4 million from $7.0 million for 1994. 26
LIQUIDITY AND CAPITAL RESOURCES During 1996, the Company invested $20.0 million in its property portfolio including $13.2 million for new development, $3.0 million for expansion, renovation and tenant replacement at existing centers, $3.4 million for deferred leasing and other charges and $415,000 for recurring capital expenditures at the properties. As a significant portion of the Company's funds from operations are distributed to shareholders in accordance with REIT requirements, the principal sources of funding for the Company's investment activity has historically been through permanent debt financing as well as short-term construction and line of credit borrowing from various lenders. Total debt outstanding at December 31, 1996 and 1995 was $172.8 million and $151.8 million, respectively. The $21.0 million increase in debt was primarily a result of funding the 1996 investment activity. At December 31, 1996, the Company's capitalization consisted of $172.8 million of debt and $103.0 million of market equity (based on a December 31, 1996 market price of $10.125 per share). Of the outstanding debt at December 31, 1996, $156.8 million, or 91%, was carried at a fixed rate and the remaining $16.0 million, or 9%, at variable rates. Accordingly, interest expense on only 9% of the Company's outstanding indebtedness would be adversely impacted during a period of rising interest rates. Mortgage Debt On December 20, 1996, the Company obtained $4.1 million in fixed rate financing from Anchor National Life Insurance Company. The mortgage loan is secured by one property, and requires payment of interest at 7.93% with principal amortized over a 22 year period, and matures January 1, 2004. On October 4, 1996 , the Company consummated a $45.9 million fixed rate financing from Morgan Stanley Mortgage Capital, Inc. ("Morgan Stanley"). The non-recourse loan, which matures in November 2021, is secured by mortgages on 17 of the Company's properties, bears interest at 8.84%, requires monthly payments of interest with principal amortized over 25 years, and requires the Company to comply with certain affirmative and negative covenants. Of the loan proceeds, $33.6 million was used to retire existing debt, $1.1 million for financing costs, $2.8 million was held in escrow as of December 31, 1996, and the remaining proceeds were used for property investment and working capital. On September 27, 1996 the Company consummated a construction loan with First Western Bank, N.A. in the maximum amount of $12.0 million. The loan is secured by a mortgage on the Union Plaza in 27
Mortgage Debt, continued New Castle, Pennsylvania. As of December 31, 1996, $4.0 million was outstanding on this facility with an additional $1.0 million available upon the execution of certain additional leases. The remaining $7.0 million will be made available upon the Company obtaining an irrevocable letter of credit for $7.0 million. During the construction period, the loan bears interest at the lender's prime rate plus 1%. Following the construction period, the Company has the option to convert the loan from a variable rate of interest to a fixed rate, upon which principal will be amortized on a monthly basis over a 15 year period. The loan matures on March 1, 2013. The Company is subject to certain affirmative and negative covenants. At December 31, 1996, other mortgage notes payable aggregated $102.8 million and were collateralized by 13 properties and related tenant leases. Interest rates ranged from 7.7% to 9.11%. Mortgage payments are due in monthly installments of principal and/or interest and mature at various dates through 2008. The loan agreements contain customary representations, covenants and events of default. Certain loan agreements require the Company to comply with certain affirmative and negative covenants, including the maintenance of certain debt service coverage ratios. Additionally, the Principal Shareholder has personally guaranteed the repayment of mortgage loans with the aggregate balance of $41.0 million at December 31, 1996 without consideration from the Company. Lines of Credit As a result of the Morgan Stanley financing, the Company amended its existing revolving credit facilities. The Company used $8.1 million of the proceeds of the Morgan Stanley facility to partially repay its facility with Fleet Bank of Massachusetts, N.A. ("Fleet Bank"). The Fleet Bank facility was then amended by reducing the maximum line of credit to $12.0 million, releasing three properties formerly mortgaged as security (which properties were then used to secure the Morgan Stanley loan) and modifying certain covenants. As of December 31, 1996, the Company had $10.2 million outstanding under the Fleet Bank facility which was secured by three properties and scheduled to mature May 31, 1997 (amounts outstanding to Fleet Bank were repaid in full in March 1997 in connection with new financing). The remaining $1.8 million under the facility was unavailable as it was subject to certain occupancy requirements at the Ledgewood Mall property. Advances under the facility bear interest at LIBOR plus 200 basis points or the prime rate established by Fleet Bank plus 1/4% and are recourse to the Company and are guaranteed by the Principal Shareholder without consideration from the Company. 28
Lines of Credit, continued Following the repayment of $16.6 million with proceeds from the Morgan Stanley financing, the Company's facility with Mellon Bank, N.A. ("Mellon Bank") was amended by reducing the available facility to $3.8 million with no additional obligation by Mellon Bank to advance any additional loan amounts, releasing five properties formerly mortgaged as security (which properties were then used to secure the Morgan Stanley loan), requiring the amortization of principal through the extended maturity date of April 2, 1998 and modifying certain affirmative and negative covenants. At December 31, 1996, $3.4 million was outstanding under the facility which bears interest at LIBOR plus 200 basis points or the prime rate established by Mellon Bank plus 1/2% and is secured by one property. Upon the repayment of $5.0 million, three properties formerly mortgaged as security for the Company's facility with Firstrust Bank were released (which properties were then used to secure the Morgan Stanley loan) and the maximum loan amount was reduced to $2.5 million. The facility bears interest at the higher of 8.75% or the prime rate established by Firstrust Bank plus 1/2%, requires the monthly payment of principal through the maturity date of June 30, 1997 and is secured by one property. In March 1997, the Company obtained additional working capital from two sources. On March 4, 1997, the Company consummated a $23.0 million fixed rate, non-recourse financing from Nomura Asset Capital Corporation ("Nomura"). The loan, which matures on March 11, 2022, bears interest at 9.02%, requires monthly payments of interest and principal amortized over 25 years, and requires the Company to comply with certain affirmative and negative covenants. $10.2 million of the proceeds were used to retire existing debt with Fleet Bank, $673,000 for financing costs, $3.1 million for escrows, and the remaining proceeds are available for investment and working capital. As part of the Company's ongoing strategic evaluation and realignment of its property portfolio, the Company completed the sale of the Newberry Plaza on March 5, 1997 for $1.3 million, collecting $1.2 million in net sales proceeds after closing costs and adjustments. The proceeds have been used to supplement working capital. 29
Lines of Credit, continued During 1996, the Company experienced a short-term cash shortfall as a result of the delay in obtaining construction financing for the Union Plaza in New Castle, Pennsylvania, and the Company's decision to continue to fund the development of the project with cash from operations in order to take advantage of certain construction cost economies and to meet certain tenant deadlines. This shortfall was significantly alleviated by the First Western and Nomura financings. The Company anticipates that cash flow from operating activities will continue to provide adequate capital for all debt service payments, recurring capital improvements, as well as dividend payments in accordance with REIT requirements. In addition, cash on hand, amounts currently escrowed with lenders, the use of construction financing as well as other debt and equity financing alternatives will provide the necessary capital to achieve continued growth. The Company currently estimates that capital outlays for tenant improvements, related renovations and other property improvements will require $8.1 million during 1997. The Company anticipates that capital outlays for property development will total $5.5 million. Of these capital outlays $4.7 is reflected in accounts payable and accrued expense balances at December 31, 1996. Industry analysts generally consider Funds from Operations to be a meaningful supplement to net income and an appropriate measure of the performance of an equity REIT. Funds from Operations is defined as net income (loss), excluding gains (losses) on sales of property, non-recurring charges and extraordinary items, adjusted for certain non-cash items, primarily depreciation and amortization. Funds from Operations does not represent cash generated by operating activities in accordance with generally accepted accounting principles and is not intended as the sole measure of cash generated by the Company nor of its dividend paying capacity. 30
MARK CENTERS TRUST FUNDS FROM OPERATIONS For the Years Ended December 31, 1996 and 1995 (in thousands except per share data) For the year ended December 31, 1996 1995 Revenue Minimum rents(a) $33,396 $32,456 Percentage rents 2,795 3,340 Expense reimbursements 6,559 6,431 Other 747 821 ------- ------- Total revenue 43,497 43,048 ------- ------- Expenses Property operating(b) 9,181 8,614 Real estate taxes 5,285 4,789 General and administrative 2,796 2,726 ------- ------- Total operating expenses 17,262 16,129 ------- ------- Operating income 26,235 26,919 Interest and financing expense 12,733 10,598 Amortization of deferred financing costs 915 827 Depreciation of non-real estate assets 215 213 ------- ------- Funds from operations $12,372 $15,281 ======= ======= Funds from operations per share (c) $ 1.22 $ 1.50 ======= ======= Reconciliation of funds from operations to net income determined in accordance with Generally Accepted Accounting Principles(GAAP) Funds from operations above $12,372 $15,281 Depreciation or real estate and amortization of leasing costs (12,268) (10,780) Straight-line rents and related write-offs (net) 164 107 Gain on sale of land 21 93 Reserve for environmental remediation costs (425) -- Adjustment to carrying value of property held for sale (392) -- Extraordinary item write-off of deferred financing costs (190) -- Minority interest 40 (833) Other non-cash adjustments (46) (68) ------- ------- Net (loss)income ($724) $3,800 ======= ======= Net (loss) income per share(d) ($0.08) $0.44 ======= ======= 31
(a) Excludes income from straight-lining of rents (b) Represents all expenses other than depreciation, amortization, write-off of unbilled rent receivables recognized on a straight-line basis and the non-cash charge for compensation expense related to the Company's restricted share plan. (c) Assumes full conversion of 1,623,000 OP Units into common shares of the Company for the years ended December 31, 1996 and 1995, respectively, for a total of 10,171,817 and 10,166,452 shares, respectively. (d) Net income per share is computed based on the weighted average number of shares outstanding for the years ended December 31, 1996 and 1995 of 8,560,415 and 8,563,466, respectively. Historical Cash Flow The following discussion of historical cash flow compares the Company's cash flows for the year ended December 31, 1996 ("1996") with the year ended December 31, 1995 ("1995"). Net cash provided by operating activities decreased $2.1 million to $14.1 million in 1996 from $16.2 million in 1995. This decrease was primarily attributable to a $3.0 million decrease in cash provided by net income before depreciation and amortization partially offset by a net increase of $770,000 in cash provided by changes in operating assets and liabilities for 1996. Investing activities used $20.0 million during 1996, a decrease of $4.9 million from $24.9 million for 1995 due primarily to an increase in accounts payable related to development costs as of December 31, 1996. Net cash provided by financing activities was $6.8 million for 1996, representing a $1.9 million decrease from net cash provided by financing activities of $8.7 million for 1995. This decrease is primarily attributable to a decrease in borrowings related to property investment in 1996. 32
Inflation The Company's long-term leases contain provisions designed to mitigate the adverse impact of inflation on the Company's net income. Such provisions include clauses enabling the Company to receive percentage rents based on tenants' gross sales, which generally increase as prices rise, and/or, in certain cases, escalation clauses, which generally increase rental rates during the terms of the leases. Such escalation clauses are often related to increases in the consumer price index or similar inflation indexes. In addition, many of the Company's leases are for terms of less than 10 years, which permit the Company to seek to increase rents upon re-rental at market rates if rents are below the then existing market rates. Most of the Company's leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data listed in items 14(a)(1) and 14(a)(2) hereof are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Company This item is incorporated by reference from the definitive proxy statement for the Annual Meeting of Shareholders presently scheduled to be held on June 12, 1997, to be filed pursuant to Regulation 14A. Item 11. Executive Compensation This item is incorporated by reference from the definitive proxy statement for the Annual Meeting of Shareholders presently scheduled to be held on June 12, 1997, to be filed pursuant to Regulation 14A. 33
Item 12. Security Ownership of Certain Beneficial Owners and Management This item is incorporated by reference from the definitive proxy statement for the Annual Meeting of Shareholders presently scheduled to be held on June 12, 1997, to be filed pursuant to Regulation 14A. Item 13. Certain Relationships and Related Transactions This item is incorporated by reference from the definitive proxy statement for the Annual Meeting of Shareholders presently scheduled to be held on June 12, 1997, to be filed pursuant to Regulation 14A. PART IV Item. 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K (a) 1. Financial Statements - Form 10-K The following consolidated financial Report Page information is included as a separate section of this annual report on Form 10-K MARK CENTERS TRUST INDEX OF FINANCIAL STATEMENTS Report of Independent Auditors F-2 Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3 Consolidated Statements of Operations for the year ended December 31, 1996, 1995 and 1994 F-4 Consolidated Statements of Shareholders' Equity for the year ended December 31, 1996, 1995 and 1994 F-5 Consolidated Statements of Cash Flows for the year ended December 31, 1996, 1995 and 1994 F-7 Notes to Consolidated Financial Statements F-10 2. Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation F-32 All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule. 34
3. Exhibits Exhibit No. 3.1 Declaration of Trust Incorporated by reference of the Company, as to the copy thereof filed as amended an exhibit to the Company's Form 10-K filed for the fiscal year ended December 31, 1994 3.2 By-Laws of the Company Incorporated by reference to the copy thereof filed as an exhibit to the Company's Form S-11 (File No.33-60008) ("Form S-11") 10.1 Agreement of Limited Incorporated by reference to Partnership of Mark the copy thereof filed as an Limited Partnership exhibit to Amendment No. 3 to the Company's Form S-11 10.2 Loan Agreement Incorporated by reference to between the Company the copy thereof filed as and Metropolitan exhibit to Amendment No. 3 Life Insurance to the Company's Form S-11 Company 10.3(a) Loan Agreement Incorporated by reference to between the Company the copy thereof filed as an and Fleet Bank of exhibit to Amendment No. 3 Massachusetts, N.A. to the Company's Form S-11 10.3(b) First Amended and Incorporated by reference to Restated Loan Agreement the copy thereof filed as an between the Company and exhibit to the Company's Form Fleet National Bank 10-K filed for the fiscal dated May 30, 1995 year ended December 31, 1995 10.3(c) Amended Number One to Incorporated by reference to the First Amended and the copy thereof filed as an Restated Assumption, exhibit to the Company's Form Extension and Loan 10-K filed for the fiscal Agreement between the year ended December 31, 1995 Company and Fleet National Bank dated December 6, 1995 35
10.3(d) Amendment Number Two Incorporated by reference to To First Amended and the copy thereof filed as an Restated Assumption, exhibit to the Company's Form Extension and Loan 10-Q filed for the quarter Agreement between the ended September 30, 1996 Company and Fleet National Bank 10.4 Acquisition Option Incorporated by reference to Agreement between the copy thereof filed as an the Company and exhibit to Amendment No. 3 Marvin L. Slomowitz to the Company's Form S-11 10.5(a) Option Agreement Incorporated by reference between the Company to the copy thereof filed and the Principal as an exhibit to Amendment Shareholder allowing No. 3 to the Company's Form the Company to acquire S-11 certain properties from the Principal Shareholder 10.5(b) Amendment to the Option Incorporated by reference Agreement between the to the copy thereof filed as Company and the an exhibit to the Company's Principal Shareholder Form 10-K filed for the fiscal year ended December 31, 1993 10.5(c) Agreement of Sale and Incorporated by reference to Purchase (Hudson, New the copy thereof filed as an York) between the exhibit to the Company's Company and Marvin L. Form 10-K filed for the fiscal Slomowitz dated year ended December 31, 1995 February 27, 1996 10.5(d) Agreement of Sale and Incorporated by reference to Purchase (New Castle, the copy thereof filed as an Pennsylvania) between exhibit to the Company's the Company and Form 10-K filed for the fiscal Marvin L. Slomowitz year ended December 31, 1995 dated February 19, 1996 10.5(e) Termination of Option Incorporated by reference to Agreements between the the copy thereof filed as an Company and the exhibit to the Company's Form Principal Shareholder 10-Q filed for the quarter to acquire certain ended June 30, 1996 properties 36
10.5(f) Option Agreement Incorporated by reference to between the Company the copy thereof filed as an and the Principal exhibit to the Company's Form Shareholder allowing 10-Q filed for the quarter the Company to acquire ended June 30, 1996 a certain property from the Principal Shareholder 10.5(g) First Amendment to Incorporated by reference to Agreement of Sale and the copy thereof filed as an Purchase (Hudson, NY) exhibit to the Company's Form between the Company 10-Q filed for the quarter and Marvin L. Slomowitz ended June 30, 1996 *10.6(a) Share Option Plan Incorporated by reference to the copy thereof filed as an exhibit to Amendment No. 3 to the Company's Form S-11 *10.6(b) Mark Centers Trust Incorporated by reference to 1994 Share Option the copy thereof filed as an Plan exhibit to the Company's Form S-8 filed August 17, 1995 *10.6(c) Mark Centers Trust Incorporated by reference to 1994 Non-Employee the copy thereof filed as an Trustees'Share Option exhibit to the Company's Form Plan S-8 filed August 17, 1995 *10.7 Restricted Share Plan Incorporated by reference to the copy thereof filed as an exhibit to Amendment No. 3 to the Company's Form S-8 filed June 15, 1994 *10.8 Noncompetition Incorporated by reference Agreement between to the copy thereof filed as Marvin L. Slomowitz an exhibit to Amendment No. 3 and the Company to the Company's Form S-11 *10.9 Form of Severance Incorporated by reference Agreement between the to the copy thereof filed Company and certain as an exhibit to Amendment executive officers No. 3 to the Company's Form S-11 37
10.10 Form of Lock-Up Incorporated by reference Agreement between the to the copy thereof filed as Company and its an exhibit to Amendment No. 3 Trustees and to the Company's Form S-11 executive officers 10.11 Form of Agreement Incorporated by reference of Purchase and Sale to the copy thereof filed as for the properties an exhibit to Amendment No. 3 to the Company's Form S-11 10.12 Form of Lease for Incorporated by reference to headquarters the copy thereof filed as an exhibit to Amendment No. 3 to the Company's Form S-11 10.13(a) Management Agreements Incorporated by reference to the copy thereof filed as an exhibit to Amendment No. 3 to the Company's Form S-11 10.13(b) Termination of Incorporated by reference to Management Agreements the copy thereof filed as an exhibit to the Company's Form 10-Q filed for the quarter ended June 30, 1996 10.14 Form of Registration Incorporated by reference Rights Agreement to the copy thereof filed as an exhibit to Amendment No. 4 to the Company's Form S-11 10.15 Agreement of Purchase Incorporated by reference and Sale between Mark to the copy thereof filed as Centers Limited an exhibit to the Company's Partnership, Form 8-K filed on a Delaware limited December 30, 1993 partnership and Manahawkin Route 72 L.P. dated November 23, 1993 38
10.16 Agreement of Purchase Incorporated by reference and Sale between Mark to the copy thereof filed as Centers Limited an exhibit to the Company's Partnership, a Form 8-K filed on Delaware limited December 30, 1993 partnership, and Twenty-Fifth Street Associates, L.P. dated November 23, 1993 10.17(a) Loan Agreement Incorporated by reference between the Company to the copy thereof filed as and Mellon Bank, N.A. an exhibit to the Company's Form 10-K filed for the fiscal year ended December 31, 1994 10.17(b) First Amendment to Incorporated by reference Revolving Credit Loan to the copy thereof filed as Agreement between the an exhibit to the Company's Company and Mellon Form 10-K filed for the fiscal Bank, N.A. dated year ended December 31, 1995 November 15, 1995 10.17(c) Second Amendment to Incorporated by reference Revolving Credit Loan to the copy thereof filed as Agreement between the an exhibit to the Company's Company and Mellon Form 10-K filed for the fiscal Bank, N.A. dated year ended December 31, 1995 February 29, 1996 10.17(d) Third Amendment To Incorporated by reference to Revolving Credit Loan the copy thereof filed as an Agreement between the exhibit to the Company's Form Company and Mellon 10-Q filed for the quarter Bank, N.A. ended September 30, 1996 10.18 Form of Loan Agreement Incorporated by reference together with Form of to the copy thereof filed as First Mortgage and an exhibit to the Company's Security Agreement Form 10-K filed for the fiscal between the Company and year ended December 31, 1995 John Hancock Mutual Life Insurance Company dated March 15, 1995 39
10.19 Construction Loan Incorporated by reference Agreement between the to the copy thereof filed as Company and Mellon Bank, an exhibit to the Company's N.A. dated November 15, Form 10-K filed for the fiscal 1995 year ended December 31, 1995 10.20(a) Loan Agreement between Incorporated by reference the Company and to the copy thereof filed as Firstrust Bank dated an exhibit to the Company's December 21, 1995 Form 10-K filed for the fiscal year ended December 31,1995 10.20(b) Amendment to Mortgage Incorporated by reference to and Assignments of the copy thereof filed as an Rents and Leases between exhibit to the Company's Form the Company and 10-Q filed for the quarter Firstrust Bank ended June 30, 1996 10.21(a) Promissory Note Incorporated by reference to Agreement between the the copy thereof filed as an Company and First exhibit to the Company's Form Federal Savings Bank 10-Q filed for the quarter of New Smyrna ended June 30, 1996 10.21(b) Mortgage Deed and Incorporated by reference to Security Agreement the copy thereof filed as an between the Company and exhibit to the Company's Form First Federal Savings 10-Q filed for the quarter Bank of New Smyrna ended June 30, 1996 10.22(a) Indenture of Mortgage, Incorporated by reference to Deed of Trust, Security the copy thereof filed as an Agreement, Financing exhibit to the Company's Form Statement, Fixture 10-Q filed for the quarter Filing and Assignment ended September 30, 1996 of Leases, Rents and Security Deposits between the Company and Morgan Stanley Mortgage Capital, Inc. 10.22(b) Mortgage Note between Incorporated by reference to the Company and Morgan the copy thereof filed as an Stanley Mortgage exhibit to the Company's Form Capital, Inc. 10-Q for the quarter ended September 30, 1996 40
10.23(a) Construction Loan Incorporated by reference to Agreement between the the copy thereof filed as an Company and First exhibit to the Company's Form Western Bank 10-Q filed for the quarter ended September 30, 1996 10.23(b) Mortgage Note between Incorporated by reference to the Company and First the copy thereof filed as an Western Bank exhibit to the Company's Form 10-Q filed for the quarter ended September 30, 1996 10.24(a) Open-End Mortgage, Security Agreement, Future Filing, Financing Statement and Assignment of Leases and Rents between the Company and Anchor National Life Insurance Company 10.24(b) Promissory Note between the Company and Anchor National Life Insurance Company 10.25 Agreement of Sale of Newberry Plaza between Mark Centers Limited Partnership, a Delaware limited partnership, and Ronnie W. Cromer, William B. Rush, Earl H. Berger, Jr. Rodney S. Griffin and William W. Reiser, Jr. 10.26(a) Loan Agreement dated March 4, 1997 by and between Mark Northwood Associates, Limited Partnership, a Florida limited partnership, and Nomura Asset Capital Corporation 41
10.26(b) Promissory Note dated March 4, 1997 between Mark Northwood Associates, Limited Partnership, a Florida limited partnership, and Nomura Asset Capital Corporation 10.26(c) Leasehold Mortgage, Assignment of Rents, Security Agreement and Fixture Filing by Mark Northwood Associates, Limited Partnership, a Florida limited partnership, to Nomura Asset Capital Corporation dated March 4, 1997 21 List of Subsidiaries of Mark Centers Trust 23 Consent of Independent Auditors to Form S-3 and Form S-8 27 Financial Data Schedule (EDGAR filing only) * Constitutes a compensatory plan or arrangement required to be filed as an exhibit to this Form. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company for the quarter ended December 31, 1996. 42
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. MARK CENTERS TRUST (Registrant) By: /s/ Marvin L. Slomowitz Marvin L. Slomowitz Chief Executive Officer Dated: March 24, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/Marvin L. Slomowitz Chief Executive Officer March 24, 1997 (Marvin L. Slomowitz)and Trustee (Principal Executive Officer) /s/Joshua Kane Senior Vice President March 24, 1997 (Joshua Kane) Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) /s/Harvey Shanus Trustee March 24, 1997 (Harvey Shanus) /s/Marvin J. Levine Trustee March 24, 1997 (Marvin J. Levine Esq) /s/Joseph L.Castle,II Trustee March 24, 1997 (Joseph L. Castle, II) /s/John Vincent Weber Trustee March 24, 1997 (John Vincent Weber) /s/Lawrence J. Longua Trustee March 24, 1997 (Lawrence J. Longua) 43
EXHIBIT INDEX The following is an index to all exhibits filed with the Annual Report on Form 10-K other than those incorporated by reference herein: Exhibit Number Description Page 10.24(a) Open-End Mortgage, Security Agreement, Future Filing, Financing Statement and Assignment of Leases and Rents between the Company and Anchor National Life Insurance Company 10.24(b) Promissory Note between the Company and Anchor National Life Insurance Company 10.25 Agreement of Sale between Mark Centers Limited Partnership, a Delaware limited partnership, and Ronnie W. Cromer, William B. Rush, Earl H. Berger, Jr. Rodney S. Griffin and William W. Reiser, Jr. 10.26(a) Loan Agreement dated March 4, 1997 by and between Mark Northwood Associates, Limited Partnership, a Florida limited partnership, and Nomura Asset Capital Corporation 44
10.26(b) Promissory Note dated March 4, 1997 between Mark Northwood Associates, Limited Partnership, a Florida limited partnership, and Nomura Asset Capital Corporation 10.26(c) Leasehold Mortgage, Assignment of Rents, Security Agreement and Fixture Filing by Mark Northwood Associates, Limited Partnership, a Florida limited partnership, to Nomura Asset Capital Corporation dated March 4, 1997 21 List of Subsidiaries of Mark Centers Trust 23 Consent of Independent Auditors to Form S-3 and Form S-8 27 Financial Data Schedule (EDGAR filing only) 45
MARK CENTERS TRUST INDEX TO FINANCIAL STATEMENTS I. MARK CENTERS TRUST Report of Independent Auditors F-2 Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 F-7 Notes to Consolidated Financial Statements F-10 Schedule III - Real Estate and Accumulated Depreciation F-32 F-1
REPORT OF INDEPENDENT AUDITORS To the Shareholders and Trustees of Mark Centers Trust We have audited the accompanying consolidated balance sheets of Mark Centers Trust (a Maryland Trust) and subsidiaries (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and the schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mark Centers Trust and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. ERNST & YOUNG LLP New York, New York March 5, 1997 F-2
MARK CENTERS TRUST CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except for per share amounts) December 31, ASSETS 1996 1995 Rental property-at cost Land $ 31,084 $ 25,270 Buildings and improvements 271,423 258,827 Construction in progress 4,904 7,060 -------- -------- 307,411 291,157 Less accumulated depreciation 72,956 61,269 -------- -------- Net rental property 234,455 229,888 Cash and cash equivalents 3,912 3,068 Rents receivable-less allowance for doubtful accounts of $544 and $509, respectively 4,956 5,200 Prepaid expenses 1,421 1,352 Due from related parties 203 384 Furniture, fixtures, and equipment, net 570 796 Deferred charges, net 9,034 4,905 Tenant security and other deposits 3,966 3,922 -------- -------- $258,517 $249,515 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage notes payable $156,772 $107,975 Lines of credit 16,051 43,853 Accounts payable and accrued expenses 9,397 7,058 Distributions payable 3,662 -- Payable to Principal Shareholder 3,050 6,156 Rents received in advance and tenant security deposits 2,027 1,466 -------- -------- Total Liabilities 190,959 166,508 -------- -------- Minority interest 10,752 13,228 Commitments and contingencies -- --
Shareholders' Equity: Common stock, $.001 par value, authorized 50,000,000 shares, issued and outstanding, 8,548,817 and 8,543,452 shares, respectively 9 9 Additional paid-in capital 57,521 69,770 Deficit (724) -- -------- -------- Total Shareholders' Equity 56,806 69,779 -------- -------- $258,517 $249,515 ======== ======== See accompanying notes F-3
MARK CENTERS TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) Year ended December 31, 1996 1995 1994 Revenue Minimum rents $ 33,695 $ 32,740 $ 27,543 Percentage rents 2,795 3,340 2,505 Expense reimbursements 6,559 6,431 5,220 Other 747 821 1,065 ------- ------- ------- Total revenue 43,796 43,332 36,333 ------- ------- ------- Expenses Property operating 9,772 8,834 7,793 Real estate taxes 5,285 4,789 3,897 Depreciation and amortization 13,398 11,820 9,066 General and administrative 2,811 2,751 3,107 ------- ------- ------- Total operating expenses 31,266 28,194 23,863 ------- ------- ------- Operating income 12,530 15,138 12,470 Interest and financing expense (12,733) (10,598) (5,763) Gain on sale of land 21 93 305 Adjustment to carrying value of property held for sale (392) -- -- ------- ------- ------- (Loss) income before extraordinary item and minority interest (574) 4,633 7,012 Extraordinary item-write-off of deferred financing costs (190) -- -- ------- ------- ------- (764) 4,633 7,012 Minority interest 40 (833) (1,222) ------- ------- ------- Net (loss) income $ (724) $ 3,800 $ 5,790 ======= ======= ======= Net (loss)income per common share: (Loss) income before extraordinary item $ (.06) $ .44 $ .68 Extraordinary item (.02) -- -- ------- ------- ------- Net (loss) income $ (.08) $ .44 $ .68 ======= ======= ======= See accompanying notes F-4
<TABLE> <CAPTION> MARK CENTERS TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands, except per share amounts) Shares of Retained Total Common Common Additional Paid Earnings Shareholders' Stock Stock in Capital (Deficit) Equity <S> <C> <C> <C> <C> <C> Balance, December 31, 1993 8,530,000 $9 $84,597 $ -- $84,606 Payments of additional share issuance costs -- -- (29) -- (29) Issuance of shares pursuant to the Company's restricted share plan 6,765 -- 100 -- 100 Income before minority interest -- -- -- 7,012 7,012 Distributions paid to the limited partner of the Operating Partnership -- -- -- (2,440) (2,440) Dividends paid from accumulated earnings ($0.39 per share) -- -- -- (3,350) (3,350) Dividends paid in excess of accumulated earnings ($1.05 per share) -- -- (8,938) -- (8,938) Minority interest's equity -- -- 2,444 (1,222) 1,222 ---------- --- ------- ------- ------- Balance, December 31, 1994 8,536,765 9 78,174 -- 78,183 Issuance of shares pursuant to the Company's restricted share plan 6,687 -- 93 -- 93 Issuance of Operating Partnership Units in connection with the acquisition of property -- -- (20) -- (20) Income before minority interest -- -- -- 4,633 4,633 Distributions paid to limited partners of the Operating Partnership -- -- -- (2,452) (2,452) Dividends paid from accumulated earnings ($0.16 per share) -- -- -- (1,348) (1,348) F-5
<CAPTION> MARK CENTERS TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands, except per share amounts) Shares of Total Common Common Additional Paid Retained Shareholders' Stock Stock in Capital Earnings Equity <S> <C> <C> <C> <C> <C> Dividends paid in excess of accumulated earnings ($1.28 per share) -- -- (10,949) -- (10,949) Minority interest's equity -- -- 2,472 (833) 1,639 ---------- --- ------- ------- ------- Balance, December 31, 1995 8,543,452 9 69,770 -- 69,779 Issuance of shares pursuant to the Company's restricted share plan 5,365 -- 57 -- 57 Loss before minority interest -- -- -- (764) (764) Distributions paid or declared to limited partners of the Operating Partnership -- -- (2,435) -- (2,435) Dividends paid or declared in excess of accumulated earnings ($1.44 per share) -- -- (12,306) -- (12,306) Minority interest's equity -- -- 2,435 40 2,475 ---------- --- ------- ------- ------- Balance, December 31, 1996 8,548,817 $9 $57,521 $(724) $56,806 ========== === ======= ======= ======= See accompanying notes F-6
<CAPTION> MARK CENTERS TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands, except per share amounts) YEAR ENDED DECEMBER 31, 1996 1995 1994 <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss)income $(724) $ 3,800 $ 5,790 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Gain on sale of land (21) (93) (305) Depreciation and amortization of leasing costs 12,483 10,993 8,162 Amortization of deferred financing costs 915 827 904 Write-off of deferred financing costs 190 -- -- Adjustment to carrying value of property held for sale 392 -- -- Minority interest (40) 833 1,222 Provision for bad debts 972 721 495 Other 57 93 100 ------- ------- ------- 14,224 17,174 16,368 Net changes in operating assets and liabilities: Rents receivable (580) (1,846) (1,806) Prepaid expenses (69) (387) 211 Due from related parties 31 408 (503) Tenant security and other deposits 645 (820) (84) Accounts payable and accrued expenses (756) 1,656 (1,193) Rents received in advance and tenants security deposits 561 51 491 ------- ------- ------- Net cash provided by operating activities 14,056 16,236 13,484 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for real estate and improvements (19,737) (19,260) (40,619) Acquisition of properties -- -- (24,049) Net change in accounts payable related to construction-in-progress 3,095 (2,411) 4,084 Payment to Principal Shareholder for acquisition of land -- (1,500) -- Deferred leasing and other charges (3,399) (1,650) (294) Expenditures for furniture, fixtures and equipment (4) (139) (535) Proceeds from sale of land 22 105 325 ------- ------- ------- Net cash used in investing activities (20,023) (24,855) (61,088) F-7
<CAPTION> MARK CENTERS TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) YEAR ENDED DECEMBER 31, 1996 1995 1994 <S> <C> <C> <C> CASH FLOWS FROM FINANCING ACTIVITIES: Net payment for debt service escrow (688) (2,014) -- Payment of underwriting fees and share issuance costs -- -- (29) Principal payments on mortgages (40,622) (49,491) (13,280) Payment of deferred finance costs (2,415) (770) (1,751) Proceeds received on mortgage notes 61,617 75,690 76,112 Dividends paid (9,229) (12,297) (12,288) Distributions paid to Principal Shareholder (1,852) (2,452) (2,440) ------- ------- ------- Net cash provided by financing activities 6,811 8,666 46,324 ------- ------- ------- Increase (decrease) in cash and cash equivalents 844 47 (1,280) Cash and cash equivalents, beginning of period 3,068 3,021 4,301 ------- ------- ------- Cash and cash equivalents, end of period $3,912 $3,068 $ 3,021 ======= ======= ======= Supplemental Disclosures of Cash Flow Information: Cash paid during the year for interest, net of amounts capitalized of $897, $978 and $1,065, respectively $12,950 $10,172 $ 5,155 ======= ======= ======= Supplemental disclosures of non-cash investing and financing activities: Distributions of $3,078 and Operating Partnership distributions of $584 had been declared but not paid as of December 31, 1996. F-8
<CAPTION> MARK CENTERS TRUST CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) In connection with the exercise of the Company's options to acquire and develop certain properties and the subsequent transactions as a result of certain resolutions with the Principal Shareholder, the following assets and liabilities were recorded: YEAR ENDED DECEMBER 31, 1996 1995 1994 <S> <C> <C> <C> Contingent liability due to Principal Shareholder $(6,156) $(8,133) $2,331 Establishment of note payable to the Principal Shareholder 3,031 -- -- ------- ------ ------- Net (decrease) increase in cost of property acquired $(3,125) $(8,133) $2,331 ======= ======= ======= <CAPTION> In connection with the acquisition of the Plaza 15 Shopping Center, the following assets and liabilities were recorded: <S> <C> Assumption of mortgage $1,219 Application of balance due the Company under the ground lease 196 Operating Partnership Units issued 20 Cash received (46) ------- Cost of property acquired $1,389 ======= See accompanying notes F-9 </TABLE>
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 1. Organization and Summary of Significant Accounting Policies, Formation of the Company, Initial Public Offering and Basis of Presentation Mark Centers Trust (the "Company") was formed as a Maryland Real Estate Investment Trust on March 4, 1993 by Marvin L. Slomowitz (the "Principal Shareholder"), the principal owner of Mark Development Group (the "Predecessor"), to continue the business of the Predecessor in acquiring, developing, renovating, owning and operating shopping center properties. The Company effectively commenced operations on June 1, 1993 with the completion of its initial public offering, whereby it issued 8,350,000 common shares to the public at an initial public offering price of $19.50 per share (the "Offering"). The proceeds from the Offering were used to repay certain property- related indebtedness, for costs associated with the Offering and the transfer of the properties to the Company and for working capital. The acquisition of the properties was recorded by the Company at the historical cost reflected in the Predecessor's financial statements since these transactions were conducted with entities deemed to be related parties. The Company currently owns and operates 39 properties consisting of 34 neighborhood and community shopping centers, three enclosed malls and two mixed- use (retail/office space) properties. All of the Company's assets are held by, and all of its operations are conducted through Mark Centers Limited Partnership (the "Operating Partnership") and its majority owned partnerships. The Company as of December 31, 1996 controlled, as the sole general partner, 84% of the Operating Partnership. The Company will at all times be the sole general partner of, and owner of a 51% or greater interest in, the Operating Partnership. In excess of 99% of the minority interest in the Operating Partnership is owned by the Principal Shareholder who is the principal limited partner of the Operating Partnership. Acquisition of Properties On July 14, 1995, the Company acquired the equitable interest in the building and other improvements constituting the Plaza 15 Shopping Center, located in Lewisburg, Pennsylvania. The equitable interest in the land had already been assigned to the Company by the Principal Shareholder in the Offering in exchange F-10
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) Acquisition of Properties, continues for Operating Partnership Units ("OP Units"). The Company paid $1,389 for the equitable interest in the building and improvements held by an unrelated third party under an industrial development authority installment sales agreement through the issuance of 2,000 OP Units, the assumption of $1,219 of mortgage debt and the application of other amounts due the Company. In May 1995, the Company and Principal Shareholder agreed to terminate an acquisition option which was obtained concurrent with the Offering to acquire property in New Castle, Pennsylvania. In lieu of the option the Company purchased the property from the Principal Shareholder in February 1996 for $4,495. On December 27, 1994, the Company exercised its option to acquire land in Pittston Township, Pennsylvania from the Principal Shareholder for $1,500. On October 6, 1994, the Company purchased two community shopping centers, the Shillington Plaza Shopping Center located in Reading, Pennsylvania, and the Auburn Plaza located in Auburn, Maine, for a total of $17,200. On May 25, 1994, the Company acquired the Berlin Shopping Center located in Berlin, New Jersey for $6,500. Had these properties been acquired as of January 1, 1994 the Company's net income for the year ended December 31, 1994 would have been approximately $6,154. On April 28, 1994, the Company exercised an option which was obtained concurrent with the Offering to acquire the Route 6 Mall in Honesdale, Pennsylvania from the Principal Shareholder. The Company had previously exercised two other options with the Principal Shareholder to acquire the Bradford Towne Centre in Towanda, Pennsylvania and the Columbia Towne Centre in Hudson, New York in 1993. In February of 1996, in an effort to eliminate the potential conflicts of interest between the Company and the Principal Shareholder in the context of these acquisition options, the Board of Trustees and Principal Shareholder terminated all acquisition options, the Principal Shareholder repurchased the Columbia Towne Centre from the Company for $3,065, and the Company paid a total of $1,600 for the Bradford Towne Centre and Route 6 Mall. (See note 4) F-11
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) Principles of Consolidation The consolidated financial statements of Mark Centers Trust include the accounts of the Company and its majority owned partnerships, including the Operating Partnership. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Properties Real estate assets are stated at cost less accumulated depreciation. Such carrying amounts would be adjusted, if necessary, to reflect any impairment in the value of the assets. Expenditures for acquisition, development construction and improvement of properties, as well as significant renovations are capitalized. Interest costs are capitalized until construction is substantially complete. Depreciation is computed on the straight-line method over estimated useful lives of thirty to forty years for buildings and the shorter of the useful life or lease term of improvements, furniture, fixtures and equipment. Expenditures for maintenance and repairs are charged to operations as incurred. Deferred Costs Fees and costs incurred in the successful negotiation of leases have been deferred and are being amortized on a straight-line basis over the terms of the respective leases. Fees and costs incurred in connection with obtaining financing have been deferred and are being amortized over the term of the related debt obligation. F-12
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) Revenue Recognition Leases with tenants are accounted for as operating leases. Minimum annual rentals are generally recognized on a straight- line basis over the term of the respective lease. As of December 31, 1996 and 1995, unbilled rents receivable were $1,476 and $1,359, respectively. Contingent rents based on percentage rents are accrued based on historical tenant sales. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash and cash equivalents. Minority Interest In excess of 99% of the minority interest represents the Principal Shareholder's 16% interest as a limited partner of the Operating Partnership. Such interest is held in the form of OP Units which are exchangeable on an equivalent basis with common shares. The remaining interest is the result of the issuance of OP Units to an unrelated third party related to the acquisition of a property. Income Taxes The Company has made an election to be taxed, and believes it qualifies as a real estate investment trust ("REIT) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. A REIT will generally not be subject to federal income taxation on that portion of its income that qualifies as REIT taxable income to the extent that it distributes at least 95% of its taxable income to its shareholders and complies with certain other requirements. Accordingly, no provision has been made for federal income taxes for the Company in the accompanying consolidated financial statements. The Company is subject to state income or franchise taxes in certain states in which some of its properties are located. These state taxes, which in total are not significant, are recorded as general and administrative expenses in the accompanying consolidated financial statements. F-13
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) Per Share Data Primary earnings per share for the years ended December 31, 1996, 1995 and 1994 are computed based upon 8,560,415, 8,563,466 and 8,563,529 shares outstanding, respectively, which represents the weighted average number of shares outstanding during the periods. Fully diluted earnings per share is based on an increased number of shares that would be outstanding assuming the exercise of share options at the market price at the end of the period. Since fully diluted earnings per share is not materially dilutive or anti-dilutive, such amounts are not presented. Reclassifications Certain 1995 and 1994 amounts were reclassified to conform with the 1996 presentation. 2. Deferred Charges Deferred charges consist of the following as of December 31, 1996 and 1995: 1996 1995 Deferred financing costs $5,822 $4,617 Deferred leasing costs 7,063 4,362 ------ ------ 12,885 8,979 Accumulated amortization (3,851) (4,074) ------ ------ $9,034 $4,905 ====== ====== F-14
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 3. Mortgage Loans Mortgage Notes Payable At December 31, 1996, mortgage notes payable aggregated $156,772 and were collateralized by 32 properties and related tenant leases. Interest rates ranged from 7.7% to 9.25%. Mortgage payments are due in monthly installments of principal and/or interest and mature at various dates through 2021. The loan agreements contain customary representations, covenants and events of default. Certain loan agreements require the Company to comply with certain affirmative and negative covenants, including the maintenance of certain debt service coverage and leverage ratios. Additionally, the Principal Shareholder has personally guaranteed the repayment of mortgage loans with an aggregate balance of $41,000 at December 31, 1996 without consideration from the Company. On December 20, 1996, the Company obtained $4,100 in fixed rate financing from Anchor National Life Insurance Company. The mortgage loan is secured by one property, requires payment of interest at 7.93% and principal amortized over a 22 year period, and matures January 1, 2004. On October 4, 1996 , the Company closed on $45,930 in fixed rate financing from Morgan Stanley Mortgage Capital, Inc. ("Morgan Stanley"). The non-recourse mortgage loan, which matures in November 2021, is secured by mortgages on 17 of the Company's properties, bears interest at 8.84%, requires monthly payments of interest and principal amortized over 25 years, and requires the Company to comply with certain affirmative and negative covenants. Of the proceeds from the financing, $33,616 was used to retire existing debt, $1,062 for financing costs, $2,847 was held in escrow as of December 31, 1996, and the remaining proceeds were used for property investment and working capital. On September 27, 1996 the Company completed a closing on a construction loan with First Western Bank, N.A. in the maximum amount of $12,000 which is secured by a mortgage on the Union Plaza in New Castle, Pennsylvania. As of December 31, 1996, the Company had $4,000 outstanding on this facility with an additional $1,000 available upon the execution of certain additional leases. The remaining $7,000 will be made available upon the Company issuing an irrevocable letter of credit for $7,000. During the construction period, the loan bears interest F-15
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) Mortgage Notes Payable, continued at the lender's prime rate plus 1%. Following the construction period, the Company has the option to convert the loan from a variable rate of interest to a fixed rate, upon which principal will be amortized on a monthly basis over a 15 year period. The loan matures on March 1, 2013. The Company is subject to certain affirmative and negative covenants. Lines of Credit As a result of the Morgan Stanley financing, the Company amended its existing revolving credit facilities. The Company used $8,105 of the proceeds of the Morgan Stanley facility to partially repay its facility with Fleet Bank of Massachusetts, N.A. ("Fleet Bank"). The Fleet Bank facility was then amended by reducing the maximum line of credit to $12,000, releasing three properties formerly mortgaged as security (which properties were then used to secure the Morgan Stanley loan) and modifying certain covenants. The Company currently has $10,155 outstanding under the Fleet Bank facility which is now secured by three properties and matures May 31, 1997. The remaining $1,845 under the facility is currently unavailable as it is subject to certain occupancy requirements at the Ledgewood Mall property. Advances under the facility bear interest at LIBOR plus 200 basis points or the prime rate established by Fleet Bank plus 1/4%, and are recourse to the Company and are guaranteed by the Principal Shareholder without consideration from the Company. Following the repayment of $16,555 with proceeds from the Morgan Stanley financing, the Company's facility with Mellon Bank, N.A. ("Mellon Bank") was amended by reducing the available facility to $3,812 with no additional obligation by Mellon Bank to advance any additional loan amounts, releasing five properties formerly mortgaged as security (which properties were then used to secure the Morgan Stanley loan), requiring the amortization of principal through the extended maturity date of April 2, 1998 and modifying certain affirmative and negative covenants. The Company currently has $3,396 outstanding under the facility which bears interest at LIBOR plus 200 basis points or the prime rate established by Mellon Bank plus 1/2% and is secured by one property.
Upon the repayment of $5,000, three properties formerly mortgaged as security for the Company's facility with Firstrust Bank were released (which properties were then used to secure the Morgan Stanley loan) and the maximum loan amount was reduced to the current outstanding balance of $2,500. The facility bears interest at the higher of 8.75% or the prime rate established by Firstrust Bank plus 1/2%, requires the monthly payment of principal through the maturity date of June 30, 1997 and is secured by one property. F-16
<TABLE> <CAPTION> MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) 3. Mortgage Loans, continued The following table summarizes lines of credit and mortgage indebtedness as of December 31, 1996 and 1995: Monthly December 31, December 31, Interest Maturity Properties Payment 1996 1995 Rate Date Encumbered Terms <S> <C> <C> <C> <C> <C> <C> Lines of credit-variable rate Fleet Bank of Massachusetts,NA $10,155 $17,808 LIBOR + 200 basis May 31, 1997 (1) (10) points/Prime+1/4% Mellon Bank, NA 3,396 22,295 LIBOR + 200 basis April 2, 1998 (2) (11) points/Prime+1/2% Firstrust Savings Bank 2,500 3,750 8.750%/Prime+1/2% June 30, 1997 ------- ------- Total-lines of credit 16,051 43,853 ------- ------- Construction loan-variable rate Mellon Bank, NA -- 2,191 First Western Bank, NA 4,000 -- 9.250% March 1, 2013 (4) (10) Mortgage notes payable-fixed rate Metropolitan Life Insurance Company 41,000 41,000 7.750% June 1, 2000 (5) (10) Morgan Stanley Mortgage Capital 45,845 -- 8.840% November 1, 2021 (6) $380 (11) Anchor National Life Insurance Company 4,100 -- 7.930% January 1, 2004 (7) $33 (10) Provident Mutual Life Insurance Company -- 1,075 Northern Life Insurance Company 3,829 4,016 7.700% December 1, 2008 (8) $41 (11) Bankers Security Life 2,641 2,770 7.700% December 1, 2008 (8) $28 (11) John Hancock Mutual Life Insurance Co. 55,357 55,754 9.110% April 1, 2000 (9) $455 (11) Roosevelt Bank -- 1,169 ------- ------- Total-mortgage notes payable 156,772 107,975 ------- ------- $172,823 $151,828 ======== ======== F-17
</TABLE> <TABLE> <CAPTION> MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) 3. Mortgage Loans, continued <S> <C> <C< Notes: (1) Searstown Mall (6) Midway Plaza (7) Pittston Plaza Wesmark Plaza Northside Mall Northwood Centre New Smyrna Beach (8) Manahawkin Shopping Center Cloud Springs Plaza (2) Auburn Plaza Troy Plaza (9) New Loudon Centre Martintown Plaza Ledgewood Mall (3) Mark Plaza Kings Fairgrounds Plaza 422 Shillington Plaza Berlin Shopping Center (4) Union Plaza Dunmore Plaza Route 6 Mall Kingston Plaza Tioga West (5) Valmont Plaza Twenty Fifth Street Shopping Center Bradford Towne Centre Luzerne Street Plaza Circle Plaza Green Ridge Plaza Mountainville Plaza (10) Interest only monthly Crescent Plaza Plaza 15 East End Centre Birney Plaza (11) Monthly principal Monroe Plaza and interest Ames Plaza F-18 </TABLE>
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 3. Mortgage Loans, continued The scheduled maturities of all mortgage indebtedness as of December 31, 1996 are as follows: 1997 $ 14,603 1998 4,336 1999 1,640 2000 96,139 2001 1,322 Thereafter 54,783 -------- $172,823 ======== Of the $14,603 scheduled to mature in 1997, $10,155 was repaid in March of 1997 in connection with new financing (see note 18). 4. Related Party Transactions As of December 31, 1996 and 1995 amounts due from related parties consisted of the following: December 31, 1996 1995 Accrued management fees due from the Principal Shareholder for certain operating properties owned by the Principal Shareholder $ -- $ 58 Accrued ground rent and management fees due from Blackman Plaza Partners 232 260 Other net amounts due (to) from Principal Shareholder (29) 66 ----- ----- $203 $384 ===== ===== Included in other income are management fees earned on properties owned by the Principal Shareholder or affiliates which for the years ended December 31, 1996, 1995 and 1994 aggregated $36, $166 and $228, respectively. Included in rental income is rent earned pursuant to a ground lease on Blackman Plaza, a limited partnership in which the Principal Shareholder is the sole general partner (owning a one percent economic interest), which for the years ended December 31, 1996, 1995 and 1994 aggregated $0, $140 and $140, respectively. The Company has not recognized income in 1996 due F-19
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 4. Related Party Transactions, continued to the lessee's inability to pay the ground rent as a result of insufficient cash flow from the property. The lease, which expires in the year 2051, provides the Company ("Lessor") with an option, exercisable between January 2, 1997 and August 2, 2001, to purchase the lessee's interests in the shopping center. In the event the Lessor's option is not exercised prior to August 2, 2001, the lessee may, until and including December 1, 2002, require the Lessor to purchase its interest in the shopping center, thereby terminating the ground lease. In addition, the ground lease provides the lessee with an option, exercisable at any time, to purchase the leased premises from the Lessor. The purchase price with respect to each of the above options is defined in the lease and is no less than the fair market value of the premises. Concurrent with the Offering, the Company obtained acquisition options ("Acquisition Options") to acquire six properties under development from the Principal Shareholder (the "Development Properties"), which were in various stages of the development process. As of December 31, 1995, the Company had exercised three of these options for the Bradford Towne Centre in Towanda, Pennsylvania, the Route 6 Mall in Honesdale, Pennsylvania, and the Columbia Towne Centre in Hudson, New York. Development on the Columbia Towne Centre was suspended due to the bankruptcy of a former anchor tenant. Upon substantial completion of each Development Property the Company had agreed to pay the Principal Shareholder an amount (the "Contingent Payment Amount") equal to the (i) land acquisition costs, (ii) third-party development costs, (iii) allocated overhead expenses, (iv) leasing commissions for all tenant leases signed prior to the Offering and an incentive payment equal to 5% of construction costs (excluding engineering, architectural and other "soft costs"). The Contingent Payment Amount was to be reduced as necessary to provide the Company with a minimum 13.5% return on its investment based on the annualized operating income from the property within two years after completion of construction. The Contingent Payment Amount was to be made through the issuance of OP Units, unless such issuance would have resulted in the Company owning less than 51% of the Operating Partnership or would have jeopardized the Company's REIT status, in which case, payment was to be made in cash. F-20
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 4. Related Party Transactions, continued The Company also provided certain services to the Principal Shareholder with regard to the Development Properties for which the Principal Shareholder was contractually obligated to reimburse the Company $31 quarterly per Development Property until such time as the Company exercised or declined to exercise the development options, subject to a minimum of $125 per Development Property for one year from the date of the Offering. For the year ended December 31, 1996, the Company did not provide any services nor was reimbursed for such by the Principal Shareholder. Reimbursements totalled $107 and $469 for the years ended December 31, 1995 and 1994, respectively. In February 1996, the Principal Shareholder and Board of Trustees ("Trustees") took certain actions in an effort to eliminate the appearance of potential conflicts of interest arising between the Principal Shareholder and the Company in the context of the Acquisition Options, and to eliminate potential disputes arising from the complex manner in which the reimbursement to the Principal Shareholder for the Development Properties was calculated. As a result, the Company and the Principal Shareholder executed the following agreements: The Trustees of the Company and the Principal Shareholder terminated all Acquisition Options (other than the Acquisition Option pertaining to the New Castle property which had been terminated in May 1995). The Principal Shareholder repurchased the Columbia Towne Centre from the Company for $3,065, which represented total development costs incurred by the Company to the date of repurchase, and was greater than the value of the property as determined by an independent appraiser. The Company purchased the Union Plaza, located in New Castle, Pennsylvania, from the Principal Shareholder for $4,495 which represented the amount the Principal Shareholder had invested in the property less $378 of predevelopment costs previously advanced by the Company in 1994. This purchase price was less than the value of the property as determined by an independent appraiser. F-21
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 4. Related Party Transactions, continued Upon completion of a review in June 1996 of the payments due the Principal Shareholder for the acquisition of the Route 6 Mall and the Bradford Towne Centre, for which development is completed and both are currently operating, the Company agreed to pay the Principal Shareholder $1,600 which included the conveyance of approximately two acres of land by the Principal Shareholder which became part of the Route 6 Mall. The Company and Principal Shareholder also terminated all management agreements for properties owned by the Principal Shareholder. As a result of these transactions and to reflect the net result of the purchase and sales price for these properties, the Company issued a note payable to the Principal Shareholder for the principal sum of $3,030. The note, which bears interest at a rate equal to that charged by Fleet Bank, N.A. on the Company's revolving line of credit facility, is payable in full the earlier of (i) two years following the date the Union Plaza is completed or (ii) on June 12, 1999. Since the payment to the Principal Shareholder reflects in part land acquisition costs associated with the Union Plaza, the Company has agreed with the Principal Shareholder to prepay the principal sum with any construction loan proceeds specifically allocable for land acquisition. The financing with First Western Bank, N.A. did not provide any proceeds allocable to land acquisition. Following is a summary of the liability to the Principal Shareholder as of December 31, 1996 and 1995 related to the Development Properties: Contingent payable to Principal Shareholder for the Bradford Towne Centre and the Route 6 Mall, December 31, 1995 $ 6,156 Termination of the Acquisition Options (6,156) Purchase price for the Union Plaza 4,495 Purchase price for the Bradford Towne Centre and the Route 6 Mall 1,600 Sale of the Columbia Towne Centre (3,065) Accrued interest 20 ------- Amount payable to Principal Shareholder, December 31, 1996 $ 3,050 ======= F-22
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 4. Related Party Transactions, continued On December 27, 1994, the Company exercised an option to acquire a parcel of land in Pittston, Pennsylvania for $1,500 from the Principal Shareholder which was paid in 1995. On May 21, 1996, the Company obtained an option to purchase approximately 27 acres of land adjacent to the Plaza 15 from the Principal Shareholder. The option has a term of three years requires annual option payments of $5 and establishes a purchase price of $1,325 reduced by all annual option payments made by the Company. The Company leases office space from the Principal Shareholder under the terms of a noncancellable ten year operating triple net lease which provides for annual rent of $104 for the first five years with annual escalations thereafter based on increases in the consumer price index. Rent expense, excluding escalations, for the years ended December 31, 1996, 1995 and 1994 was $104 each year. The Principal Shareholder is a member of the Board of Directors of a tenant which leases space in 12 of the properties. Rental income from this tenant for the years ended December 31, 1996, 1995 and 1994 aggregated $909, $929 and $635, respectively, of which $86 and $32 are receivable as of December 31, 1996 and 1995, respectively. Additionally, for the year ended December 31, 1995, the Company paid $1,050 for tenant improvements at three properties for this tenant. 5. Tenant Leases Space in the shopping centers and other properties is leased to various tenants under operating leases which usually grant tenants renewal options and generally provide for additional or contingent rents based on certain operating expenses as well as tenants' sales volume. Minimum future rentals to be received under noncancelable leases as of December 31, 1996 are summarized as follows: F-23
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 5. Tenant Leases, continued 1997 $ 31,853 1998 29,884 1999 24,876 2000 19,598 2001 17,471 Thereafter 133,840 -------- $257,522 ======== Minimum future rentals above include two tenants which filed for bankruptcy protection totalling $3,768. Neither of these leases have been rejected or affirmed. During the years ended December 31, 1996, 1995 and 1994, rental income representing 10% or more of combined annual rentals was earned from various governmental agencies of the State of Florida. These agencies have the right, under certain conditions, to cancel their leases upon three to six months written notice and are therefore not included in the above table of minimum future rentals. Rentals earned under these leases during the years ended December 31, 1996, 1995 and 1994 were $4,735, $4,389 and $4,499, respectively. During the year ended December 31, 1996, the Company also earned greater than 10% of its rental income from the Kmart Corporation. Rents earned under leases at nine locations for this tenant totaled $4,733, $4,180 and $2,190 for the years ended December 31, 1996, 1995 and 1994, respectively. 6. Lease Obligations The Company leases land at six of its shopping centers which are accounted for as operating leases and generally provide the Company with renewal options. One of the leases terminates in 2088, with no renewal options and a purchase option for $1,600, that expires in 1999. Six of the leases which terminate during the years 2006 to 2033 and provide the Company with options to renew the leases for additional terms aggregating from 20 to 60 years. Another ground lease which has no remaining renewal options, terminates in 2066. Additionally, the Company leases office space from the Principal Shareholder under a non- cancelable lease agreement for a term of ten years. Future minimum rental payments required for leases having remaining non- cancelable lease terms in excess of one year are as follows: F-24
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 6. Lease Obligations, continued 1997 $ 313 1998 313 1999 313 2000 313 2001 313 Thereafter 13,833 ------ $15,398 ======= 7. Share Option Plan On November 10, 1994, the Company terminated the original incentive and nonqualified share option plan and adopted two new share option plans effective as of that date, authorizing the issuance of 500,000 share options to employees and 100,000 share options to non-employee trustees, respectively. The Company has issued 100,000 share options to the Principal Shareholder and 57,000 to employees of the Company which vested 20% immediately and 20% for each of the four remaining years. The options are exercisable at the average fair market value as of the date preceding the grant date ($12.69 per share) for employees and 110% thereof ($13.96 per share) for the Principal Shareholder for a period of ten years. The Company has also issued a total of 60,000 share options to non-employee trustees which vest 20% immediately and 20% for each of the four remaining years, and are exercisable at the average fair market price as of the date preceding the grant date for a period of ten years. In addition each trustee is entitled to 1,000 share options on each January 1, subsequent to the initial grant date of November 10, 1994. The options issued to non-employee trustees are exercisable at prices ranging from $11.38 to $12.69 per share. Effective for the year ended December 31, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, ("FASB 123"), "Accounting for Stock-Based Compensation". In accordance with the provisions of FASB 123, the Trust applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its stock option plan and accordingly, does not recognize compensation expense. Had compensation expense for the Trust's stock option plan been determined based upon the fair value at the grant date for awards under the plan consistent with the methodology prescribed under FASB 123, the effect on reported net income and earnings per share would have been immaterial. F-25
Changes in the number of shares under all option arrangements are summarized as follows: Year ended December 31, 1996 1995 1994 Outstanding at beginning of period 234,500 234,500 84,000 Granted 5,000 5,000 284,500 Option price per share granted $11.38 $12.75 $12.69-$13.96 Cancelled 22,500 5,000 134,000 Exercisable at end of period 217,000 234,500 234,500 Exercised -- -- -- Expired -- -- -- Outstanding at end of period 217,000 234,500 234,500 Option prices per share outstanding $11.38-$13.96 $12.69-$13.96 $12.69-$13.96 8. Restricted Share Plan The Company has established a restricted share plan which originally granted to employees 47,722 restricted common shares. Restricted common shares aggregating 10,718 and 19,601 were granted, but not vested, as of December 31, 1996 and 1995, respectively. The restricted shares which were granted vest and are issued 20% per year over a five year period which began June 1, 1994. Each plan participant is entitled to receive additional compensation on a quarterly basis equal to the dividend declared on their respective restricted shares granted under the plan until such plan participants' restricted shares are vested. 9. Employee 401(k) Plan The Company maintains a 401(k) plan for employees under which the Company matches 50% of a plan participant's contribution. A plan participant may contribute up to a maximum of 15% of their compensation but not in excess of $9.5 for the year ended December 31, 1996. The Company contributed $67, $64 and $59 for the years ended December 31, 1996, 1995 and 1994, respectively. 10. Extraordinary Item - Write-off of Deferred Financing Costs The consolidated statement of operations for the year ended December 31, 1996 includes the write-off of $190 in net deferred financing fees as a result of the repayment of the related debt. F-26
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 11. Distributions payable On November 14, 1996, the Trustees declared a cash distribution of $0.36 per common share and OP Unit payable on January 31, 1997 to shareholders and limited partners of record as of November 26, 1996. The Company has determined that the cash distributed to the shareholders is characterized as follows for federal income tax purposes: 1996 1995 1994 Ordinary income 35% 64% 68% Return of capital 65% 36% 32% --- --- --- 100% 100% 100% ==== ==== ==== 12. Management Agreements The Company managed four properties in which the Principal Shareholder holds interests in and which are not owned by the Company. The Company received fees for these management services based on 4% of gross cash collections. The Company also managed a property for an unrelated party for which it receives a management fee based on 4% of the fixed minimum rents, excluding the minimum rent of the anchor tenant who is also the owner of the property. All of these management agreements were terminated in 1996. The Company continues to manage the Blackman Plaza and receives management fees based on 4% of gross cash collections. 13. Adjustment to Carrying Value of Property As a result of the Company's ongoing strategic evaluation of its portfolio of properties, it has entered into an agreement to sell the Newberry Plaza located in Newberry, South Carolina. As the property is held for sale as of December 31, 1996, the Company has recorded a $392 reduction in the carrying value to reflect the property at a fair value of $1,300, (the contract sales price less direct selling costs). 14. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107 "Disclosures About Fair Value of Financial Instruments", requires disclosure on the fair value of financial instruments. Certain of the Company's assets and liabilities are considered financial instruments. Fair value estimates, methods and assumptions are set forth below. F-27
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 14. Fair Value of Financial Instruments, continued Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Accrued Expenses The carrying amount of these assets and liabilities approximates fair value due to the short-term nature of such accounts. Mortgage Notes Payable As of December 31, 1996 and 1995, the Company has determined the estimated fair value of its mortgage notes payable are approximately $150,801 and $108,859, respectively, by discounting future cash payments utilizing a discount rate equivalent to the rate at which similar mortgage notes payable would be originated under conditions then existing. Lines of Credit The Company has determined the estimated fair value of its lines of credit are equal to the carrying value of such liabilities as such financial instruments provide for variable rates of interest which readjust as market conditions change. F-28
<TABLE> <CAPTION> MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 15. Summary of Quarterly Financial Information The unaudited results of operations of the Company for the years ended December 31, 1996, 1995 and 1994 are as follows: March 31, 1996 June 30, 1996 Sept 30,1996 Dec 31, 1996 Total for Year <S> <C> <C> <C> <C> <C> Revenue $11,235 $10,719 $10,497 $11,345 $43,796 Income (loss) before gain from sale, extraordinary item, and minority interest 186 18 (204) (595) (595) Net income (loss) 134 (4) (179) (675) (724) Net income (loss) per share $0.02 $0.00 $(0.02) $(0.08) $(0.08) Cash dividends declared per share .36 .36 .36 (a) $1.08 Weighted average shares outstanding 8,563,053 8,559,535 8,559,535 8,559,535 8,560,415 (a) The dividend for the quarter ended December 31, 1996 will be determined by the Trustees in March 1997. <CAPTION> March 31, 1995 June 30, 1995 Sept 30,1995 Dec 31, 1995 Total for Year <S> <C> <C> <C> <C> <C> Revenue $10,416 $10,631 $10,924 $11,361 $43,332 Income before gain from sale and minority interest 1,202 1,120 1,197 1,021 4,540 Net income 986 987 988 839 3,800 Net income per share $ 0.12 $ 0.12 $ 0.12 $ 0.08 $ 0.44 Cash dividends declared per share .36 .36 .36 .36 1.44 Weighted average shares outstanding 8,564,036 8,573,461 8,563,884 8,563,356 8,563,466 March 31, 1994 June 30, 1994 Sept 30,1994 Dec 31, 1994 Total for Year <S> <C> <C> <C> <C> <C> Revenue $ 8,610 $ 8,648 $ 8,785 $10,290 $36,333 Income before gain from sale and minority interest 1,760 1,718 1,912 1,317 6,707 Net income 1,465 1,405 1,584 1,336 5,790 Net income per share $ 0.17 $ 0.16 $ 0.19 $ 0.16 $ 0.68 Cash dividends declared per share .36 .36 .36 .36 1.44 Weighted average shares outstanding 8,564,121 8,563,816 8,565,502 8,563,686 8,563,529 F-29 </TABLE>
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 16. Legal Proceedings On November 20, 1995, Mr. Wertheimer, the former President of the Company, filed a complaint against the Company, its Trustees including the Principal Shareholder, and the Company's in-house General Counsel and Chief Financial Officer in the United States District Court for the Middle District of Pennsylvania. The complaint, which was filed in connection with the termination of Mr. Wertheimer's employment, includes many of the allegations raised in a state court proceeding commenced by Mr. Wertheimer in November 1994. The Federal court complaint also includes a civil RICO action in which Mr. Wertheimer alleges that the Board of Trustees of the Company conspired with the Principal Shareholder to terminate Mr. Wertheimer's employment as part of the Principal Shareholder's breach of his duty of good faith and fair dealing. Further, Mr. Wertheimer alleges that the above defendants engaged in securities fraud in connection with the Offering and that the Principal Shareholder has defrauded or overcharged the Company in corporate transactions. The Federal complaint seeks treble damages under RICO, as well as damages arising from Mr. Wertheimer's alleged termination of employment, invasion of privacy, intentional infliction of emotional distress, fraud and misrepresentation. The Company and all defendants filed motions to dismiss the RICO and tort claims which the court, on December 9, 1996, granted in part and denied in part. Specifically, the court dismissed Mr. Wertheimer's claims for wrongful discharge, fraud and negligence misrepresentation, but declined to dismiss the remainder of the claims at this time. On January 23, 1997, the defendants filed an answer to Mr. Wertheimer's Complaint. In the answer, the defendants denied all allegations of wrongdoing, and intends to vigorously defend against all of the counts. The Company and the Principal Shareholder have also filed counterclaims against Mr. Wertheimer alleging Mr. Wertheimer made material misrepresentations in connection with his hiring and breached his employment contract and fiduciary duties to the Company. The Company is involved in other various matters of litigation arising in the normal course of business. While the Company is unable to predict with certainty the amounts involved, the Company's management and counsel are of the opinion that, when such litigation is resolved, the Company's resulting liability, if any, will not have a significant effect on the Company's consolidated financial position. F-30
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 17. Contingencies Upon conducting environmental site inspections in connection with obtaining the Morgan Stanley financing, certain environmental contamination was identified at two of the collateral properties: soil contamination at the Troy Plaza in Troy, New York and soil and ground water contamination at the Cloud Springs Plaza in Fort Oglethorpe, Georgia. In each case, the contamination was determined to have originated from a former tenant. The Company will be entering into a voluntary remedial agreement with the State of New York for the remediation of the Troy Plaza. Environmental consultants estimate that the total cost of such remediation will be approximately $75. The Company has received notification from the State of Georgia that the Cloud Springs Plaza will not be listed on the State's Hazardous Site Inventory because it has no reason to believe that contamination exceeding a reportable quantity has occurred at this property. As of December 31, 1996, the Company has reserved a total of $425 for remediation costs at both properties for which Morgan Stanley holds $563 of loan proceeds in escrow to be released upon final environmental remediation. Management is not aware of any other environmental liability that they believe would have a material adverse impact on the Company's financial position or results of operations. Management is unaware of any instances in which it would incur significant environmental costs if any or all properties were sold, disposed of or abandoned. 18. Subsequent Events On March 4, 1997, the Company closed on $23,000 in fixed rate financing from Nomura Asset Capital Corporation. The mortgage loan, which matures on March 11, 2022, bears interest at 9.02%, requires monthly payments of interest and principal amortized over 25 years, and requires the Company to comply with certain affirmative and negative covenants. $10,155 of the proceeds were used to retire exist debt with Fleet Bank, $673 for financing costs, $3,105 million for escrows and the remaining proceeds were available for property investment and working capital. On March 5, 1997, the Company completed the sale of the Newberry Plaza for $1,300, collecting $1,177 in sales proceeds after closing costs and adjustments. F-31
<TABLE> <CAPTION> MARK CENTERS TRUST SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 (Dollars in Thousands) INITIAL COST TO COMPANY GROSS AMOUNTS AT WHICH CARRIED AT CLOSE OF PERIOD Costs Capitalized Date of Building & Subsequent Building & Accumulated Acquisition(A) Description Encumbrances Land Improvements to Acq Land Improvements Total Depreciation Construction(C) Shopping Centers <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Circle Plaza (2) $ -- $3,435 $ 13 $ 2 $ 3,446 $3,448 $1,119 1978(C) Shamokin Dam,PA Martintown Plaza (2) -- 4,625 1,289 -- 5,914 5,914 1,770 1985(A) N.Augusta,SC Newberry Plaza -- 254 2,297 (345) 254 1,952 2,206 905 1985(A) Newberry,SC Midway Plaza (2) 196 1,647 2,425 195 4,073 4,268 1,511 1984(A) Opelika,AL Northside Mall (2) 1,604 7,080 1,709 1,604 8,789 10,393 2,804 1986(A) Dothan,AL Searstown Mall (1) 491 4,854 3,105 491 7,959 8,450 3,217 1984(A) Titusville,FL New Smyrna Beach Shopping Center (2) 247 2,219 2,507 247 4,726 4,973 1,503 1983(A) New Smyrna Beach,FL Wesmark Plaza (1) 380 3,419 1,188 370 4,617 4,987 1,616 1986(A) Sumter,SC Kings Fairground (2) -- 1,426 3 -- 1,429 1,429 200 1992(A) Danville,VA Cloud Springs Plaza (2) 159 2,712 1,202 159 3,914 4,073 1,176 1985(A) Ft. Oglethorpe,GA Crescent Plaza 12,000 1,147 7,425 502 1,147 7,927 9,074 2,243 1984(A) Brocton,MA New Loudon Center(3) 505 4,161 9,627 505 13,788 14,293 2,680 1982(A) Latham,NY Ledgewood Mall (3) 619 5,434 25,515 619 30,949 31,568 8,961 1983(A) Ledgewood,NJ Troy Plaza (2) 479 1,976 812 479 2,788 3,267 1,257 1982(A) Troy,NY Birney Mall (2) 210 2,979 929 210 3,908 4,118 3,038 1968(C) Moosic,PA Dunmore Plaza (2) 100 506 123 100 629 729 271 1975(A) Dunmore,PA F-32
</TABLE> <TABLE> <CAPTION> MARK CENTERS TRUST SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 (Dollars in Thousands) INITIAL COST TO COMPANY GROSS AMOUNTS AT WHICH CARRIED AT CLOSE OF PERIOD Costs Capitalized Date of Building & Subsequent Building & Accumulated Acquisition(A) Description Encumbrances Land Improvements to Acq Land Improvements Total Depreciation Construction(C) Shopping Centers <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Mark Plaza 2,500 -- 4,268 999 -- 5,267 5,267 3,101 1968(C) Edwardsville,PA Kingston Plaza (2) 305 1,745 480 305 2,225 2,530 1,166 1982(C) Kingston,PA Luzerne St. Shopping Center 2,000 35 315 1,131 35 1,446 1,481 652 1983(A) Scranton,PA Blackman Plaza -- 120 -- -- 120 -- 120 -- 1968(C) Wilkes-Barre,PA East End Centre 14,200 1,086 8,661 3,181 1,086 11,842 12,928 3,897 1986(C) Wilkes-Barre,PA Green Ridge Plaza 6,700 1,335 6,314 596 1,335 6,910 8,245 2,154 1986(C) Scranton,PA Plaza 15 (2) 171 81 1,456 171 1,537 1,708 201 1976(C) Lewisburg,PA Plaza 422 (3) 190 3,004 429 190 3,433 3,623 1,760 1972(C) Lebanon,PA Tioga West (3) 48 1,238 3,376 48 4,614 4,662 1,652 1965(C) Tunkhannock,PA Mountainville (2) 420 2,390 454 420 2,844 3,264 1,207 1983(A) Shopping Center Allentown,PA Monroe Plaza (2) 70 2,083 51 70 2,134 2,204 830 1964(C) Stroudsburg,PA Ames Plaza (2) 57 1,958 198 57 2,156 2,213 1,560 1966(C) Shamokin,PA Route 6 Mall (3) -- -- 12,696 1,664 11,032 12,696 686 1995(C) Honesdale,PA Pittston Plaza 4,100 -- -- 7,162 1,521 5,641 7,162 174 1995(C) Pittston,PA Valmont Plaza 6,100 522 5,591 902 522 6,493 7,015 2,312 1985(A) W. Hazleton,PA Manahawkin Village 6,470 2,400 9,396 394 2,400 9,790 12,190 812 1993(A) Shopping Center Manahawkin,NJ F-33
</TABLE> <TABLE> <CAPTION> MARK CENTERS TRUST SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 (Dollars in Thousands) INITIAL COST TO COMPANY GROSS AMOUNTS AT WHICH CARRIED AT CLOSE OF PERIOD Costs Capitalized Date of Building & Subsequent Building & Accumulated Acquisition(A) Description Encumbrances Land Improvements to Acq Land Improvements Total Depreciation Construction(C) Shopping Centers <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> 25th St. Shopping Center (2) 2,280 9,276 183 2,280 9,459 11,739 995 1993(A) Easton,PA Berlin Shopping (3) -- -- 6,849 1,332 5,517 6,849 467 1994(A) Center Berlin,NJ Auburn Plaza 3,396 -- -- 13,287 2,644 10,643 13,287 798 1994(A) Auburn,ME Shillington Plaza (2) -- -- 4,109 809 3,300 4,109 250 1994(A) Reading,PA Union Plaza 4,000 -- -- 17,914 5,401 12,513 17,914 70 1996(C) New Castle,PA Bradford Towne (3) -- -- 16,091 816 15,275 16,091 1,247 1994(C) Centre Towanda,PA Mixed Use Properties Northwood (1) 1,209 6,204 17,598 1,189 23,822 25,011 10,005 1985(A) Centre Tallahassee,FL Normandale Centre -- 287 2,584 4,138 287 6,722 7,009 2,689 1985(A) Montgomery,AL Construction -- -- -- 4,904 -- 4,904 4,904 -- in Progress ------------------------------------------------------------------------------------------------ $172,823 $16,926 $121,303 $169,182 $31,084 $276,327 $307,411 $72,956 ================================================================================================ F-34 </TABLE>
MARK CENTERS TRUST NOTES TO SCHEDULE III DECEMBER 31, 1996 (Dollars in thousands) 1. These three properties serve as collateral for the line of credit with Fleet Bank of Massachusetts, N.A. 2. These seventeen properties serve as collateral for the financing with Morgan Stanley Mortgage Capital, Inc. 3. These seven properties serve as collateral for the financing with John Hancock Life Insurance. 4. Depreciation of investments in buildings and improvements reflected in the statements of operations is calculated over the estimated useful lives of the assets as follows: Buildings 30 to 40 years Improvements Shorter of lease term or useful life 5. The aggregate gross cost of property included above for Federal income tax purposes was $322,177 as of December 31, 1996. 6.(a)Reconciliation of Real Estate Properties: The following reconciles the real estate properties from January 1, 1994 to December 31, 1996: Year ended December 31, 1996 1995 1994 Balance at beginning of period $291,157 $278,611 $210,133 Additions during period Acquisitions through purchase -- -- 24,049 Acquisition through exercise of purchase option -- 1,446 1,500 Acquisitions and adjustments related to development options and establishment of note payable to the Principal Shareholder (3,125) (8,133) 2,331 Other improvements 19,380 19,242 40,618 Sale of land (1) (9) (20) -------- -------- -------- Balance at end of period $307,411 $291,157 $278,611 ======== ======== ======== F-35
MARK CENTERS TRUST NOTES TO SCHEDULE III DECEMBER 31, 1996 (Dollars in thousands) (b) Reconciliation of accumulated depreciation: The following table reconciles accumulated depreciation from January 1, 1994 to December 31, 1996: Balance at beginning of period $61,269 $51,002 $43,318 Depreciation related to real estate 11,687 10,267 7,684 ------- ------- ------- Balance at end of period $72,956 $61,269 $51,002 ======= ======= ======= F-36