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, 1997 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 $76,452,957 million based on the closing price on the New York Stock Exchange for such stock on March 31, 1998. The number of shares of the Registrant's Common Shares of Beneficial Interest outstanding was 8,554,177 on March 31, 1998. DOCUMENTS INCORPORATED BY REFERENCE Part III - Definitive proxy statement for the Annual Meeting of Shareholders presently scheduled to be held June 12, 1998, 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 25 8. Financial Statements and Supplementary Data 36 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 36 PART III 10. Directors and Executive Officers of the Registrant 36 11. Executive Compensation 36 12. Security Ownership of Certain Beneficial Owners and Management 36 13. Certain Relationships and Related Transactions 36 PART IV 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 37 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 7.3 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 is in the late stages of negotiation of a significant transaction which will provide additional properties and capital to the Company. If the transaction is completed in its current form, assuming execution of a definitive agreement (the "Agreement") and satisfaction of all conditions to the transaction, including approval by the Company's shareholders, the Company, through Mark Centers Limited Partnership, a Delaware limited partnership through which the Company conducts substantially all its activities ("the Operating Partnership"), and in exchange for approximately 11 million Operating Partnership Units ("OP Units"), will acquire substantially all of the ownership interests in twelve retail shopping centers and five multi-family apartment complexes controlled by a private New York real estate company. Under the current proposal, the Company will also receive a cash investment of $100 million in exchange for newly issued common shares of beneficial interest ("Shares") valued at a price of $7.50 per share. Upon completion of the transaction, it is contemplated that two senior executives of the New York real estate company will become Chief Executive Officer and President of the Company, respectively. Mr. Marvin Slomowitz, the current Chairman of the Board and Chief Executive Officer, will remain as a board member and is expected to continue as a consultant to the Company. The two new executives will serve on the board together with two designees of the real estate company and two designees (in addition to Mr. Slomowitz) of the existing board. 3
The transaction is subject to the completion of final negotiation and execution of the Agreement, receipt of a fairness opinion from Bear, Stearns & Co. Inc. (the Company's investment bankers), approval by the Company's Board of Trustees, evidence of the receipt by the real estate company of the necessary funds to make the cash investment and the completion of closing. The transaction is a complex one involving many parties and there can be no assurance that the Agreement will be executed or that the closing on this transaction will be completed. The transaction is subject to the approval by the shareholders of the Company at a meeting to be scheduled for that purpose if and when the Agreement is signed. The Company conducts substantially all of its activities through, and substantially all of its properties are owned by, the Operating Partnership and its majority owned partnerships. The Company currently 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 OP Units which are exchangeable on a one for one basis into the Company's 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. 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. 4
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 currently specializes 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 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. As previously discussed, the Company is also in the late stages of negotiation of a significant transaction which would provide additional properties and capital to the Company. 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 currently 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. 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. On March 28, 1997, Crafts Plus+, Inc., a 30,000 square foot single location tenant, filed for protection under Chapter 11 of the United Sates Bankruptcy laws. For the fiscal years ended December 31, 1997 and 1996, rental revenues from this tenant (including expense reimbursements) totalled $111,000 and $110,000, respectively. The lease was rejected and in January 1998, the Company installed a replacement tenant, Beall's Outlet, at a lower per square foot rent in the entire space. 5
On July 7, 1997, Montgomery Ward & Co., Incorporated filed for protection under Chapter 11 of the United States Bankruptcy laws. Montgomery Ward is currently a tenant at one retail location and related storage space in the Company's portfolio comprising approximately 77,000 square feet in total. For the fiscal years ended December 31, 1997 and 1996, rental revenues (including expense reimbursements and percentage rent) for this space totalled $154,000 and $142,000, respectively. The lease has been neither affirmed nor rejected and the Company continues to receive rent under its lease agreement. On August 11, 1997, Old America Stores, Inc. filed for protection under Chapter 11 of the United Sates Bankruptcy laws. Old America currently is a tenant at one location in the Company's portfolio comprising approximately 30,000 square feet. Rental revenues for the fiscal year ended December 31, 1997 (including expense reimbursements) from this tenant totalled $94,000. On January 21, 1998, the lease was assigned to KOB, LP in connection with KOB, LP's acquisition of substantially all of the assets of Old America Stores, Inc. As such, the Company continues to receive rent under its lease agreement. On January 2, 1998, Bruno's Inc. filed for protection under Chapter 11 of the United Sates Bankruptcy laws. Bruno's is a tenant at one location in the Company's portfolio comprising approximately 48,000 square feet. For the fiscal years ended December 31, 1997 and 1996, rental revenues (including expense reimbursements) from this tenant totalled $231,000 and $227,000, respectively. The lease was rejected March 18, 1998 and the Company signed a lease with Office Depot, Inc. on March 31, 1998 for 30,000 square feet of this space at a higher per square foot rent and is engaged in releasing efforts for the balance of the space. On January 5, 1998, HomePlace Stores, Inc. filed for protection under Chapter 11 of the United States Bankruptcy laws. Homeplace Stores is currently a tenant at one location in the Company's portfolio comprising approximately 48,000 square feet. For the fiscal years ended December 31, 1997 and 1996, rental revenues (including expenses reimbursements) for this tenant totalled $614,000 and $265,000, respectively. The lease has been neither affirmed nor rejected and the Company continues to receive rent under its lease agreement. The Company is currently in negotiation with the tenant to amend the terms of the lease which would include a reduction in rent. 6
Operating Strategy The Company believes it continued to make strides during fiscal 1997 in recovering from the unfavorable impact of the loss of anchor tenants at three locations following their bankruptcy filings in 1996 (Jamesway, Rich's and Bradlees vacated a total of approximately 220,000 square feet during 1996) as well as contending with the unfavorable impact of the above bankruptcy proceedings which commenced in fiscal 1997. The continuing soft retail environments within the secondary markets in which the Company operates 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'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. Leasing and Expansion The Company's leasing efforts during fiscal 1997 resulted in the opening and commencement of rent of a 25,000 square foot Goody's at the Wesmark Plaza, a 28,000 square foot Diversified Records at the Normandale Mall, an 18,000 square foot Dunham's Sporting Goods in the Valmont Plaza, a 29,000 square foot Office Depot in the Midway Plaza and a 13,000 square foot Factory Card Outlet in the East End Centre. In addition, the Company installed approximately 142,000 additional square feet of small store tenants for which rent also commenced. The Company also has signed leases totalling approximately 74,000 square feet for which the Company anticipates the tenants to occupy and commence paying rent during fiscal 1998. Furthermore, the Company has entered into an agreement to settle certain litigation with Pharmhouse Corp., a tenant at the Ledgewood Mall, which had obtained an injunction during fiscal 1997 against the installation of Walmart in the mall based on certain exclusive use provisions within Pharmhouse Corp.'s lease. The Company has agreed to pay the tenant approximately $1.7 million by May 1, 1998 after which the Company anticipates proceeding with the installation of Walmart in approximately 120,000 square feet. As part of this settlement, the Company has also agreed to amend certain terms of the lease with Pharmhouse Corp. including reductions in rent and the lease term and withdraw its appeal of 7
this case in return for Pharmhouse Corp.'s withdrawal of all legal actions against the installation of Walmart at the mall. The Company also commenced construction to expand one of its centers in fiscal 1997 and obtained the construction financing and commenced construction in February 1998 to expand another. Construction of a 52,825 square foot Redner's Supermarket at the Mark Plaza commenced in September 1997 with completion scheduled to occur during the second quarter of 1998. Financing has been obtained and construction has also commenced for a 32,000 square foot Hoyts Cinema at the Manahawkin Village Shopping Center. Development In fiscal 1997, the Company continued development of Phase II of the Union Plaza located in New Castle, Pennsylvania with the opening of Peebles Department Store on October 9, 1997, occupying 25,000 square feet. This followed the completion of Phase I in October 1996 and the opening of Sears and Hills Department Stores which totalled 193,000 square feet. Upon completion of all phases, the Union Plaza is expected to total approximately 350,000 square feet. Despite the unfavorable impact of the continuing soft retail markets within the secondary markets in which the Company operates, the Company held its portfolio occupancy stable at 86% as of December 31, 1997, the same as that of December 31, 1996, primarily as a result of the above development, leasing and installation efforts. Due to space leased but not yet occupied related primarily to anchor replacement and expansion at existing centers, the Company's portfolio was 89% leased as of December 31, 1997. Dispositions As part of the ongoing strategic evaluation of its properties, the Company sold the Newberry Plaza, located in Newberry, South Carolina for $1.3 million in March 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. 8
Financing Strategies The Company intends to continue to finance property development and tenant improvements with sources of capital determined by management to be the most appropriate based on, among other factors, availability, pricing and other commercial and financial terms. The sources of capital 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. 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 the 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 fiscal 1996, 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 entered into a voluntary remedial agreement with the State of New York for remediation of the Troy Plaza. Environmental consultants estimate 9
that the total cost of remediation for the Troy Plaza will be approximately $80,000. During fiscal 1997, the Company 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. Following this notification, Morgan Stanley released $375,000 previously held in escrow for the Cloud Springs Plaza. As of December 31, 1997, Morgan Stanley held $228,000 in escrow for the Troy Plaza which is 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 development, properties for acquisition and tenants for their properties. There are numerous shopping facilities that compete with the Company's 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, 1997, the Company employed 61 persons, 32 of whom were located at the Company's headquarters in Kingston, Pennsylvania and the remainder were 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 7.3 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 currently specializes in neighborhood and community shopping 10
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 186,000 square feet. The Company's portfolio was approximately 86% occupied and 89% leased at December 31, 1997. 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 (five), Sears (two), Marshalls (two), and one of each of the following: Bradlees, Montgomery Wards, Sports Authority, J.C. Penney, Sterns and Walmart. At December 31, 1997, twenty-three of the Company's properties were anchored by supermarkets including Price Chopper (six), BiLo (four), Acme (two), Weis Markets (two), and one of each of the following: P&C Foods, Winn-Dixie, Shaw's, Gerrity's, Publix, Shoprite, Bargain Town, Food Lion, and Kroger's. Penn Traffic owns and operates all the BiLo and P&C Foods grocery stores. The Company currently has 562 leases of which approximately 64% 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 93% of the Company's rental revenues for the year ended December 31, 1997. Approximately 57% of the Company's existing leases also provide for the payment of percentage rents either in addition to or in place of 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 7% of the total 1997 rental revenue of the Company. In 1997, approximately 11.3% of the Company's total rents were derived from current leases of office space and specialized computer facilities with two agencies of the State of Florida at 11
the Northwood Centre in Tallahassee, Florida; the Florida Department of Health and Rehabilitative Services (6.7%) and the Florida Department of Business Professional Regulation (4.6%). 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 unfavorable 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. Furthermore, the State of Florida tenants increased their leased space at the Northwood Centre during fiscal 1997 by approximately 19,000 square feet. 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. During fiscal 1997, the Company also received approximately 10.0% of its total rents under leases with the Kmart Corporation at nine locations. The Company received no more than 5.5% of its total rents 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, 1997: 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 12/31/97 LEASE OPTION EXPIR <S> <C> <C> <C> <C> <C> <C> <C> PENNSYLVANIA AMES PLAZA SHAMOKIN 1966(C) FEE 17.6 98,210 92% Ames 2000/2013 MARK PLAZA EDWARDSVILLE 1968(C) LI(1) 20.2 216,406 100% Kmart 1999/2049 Redner's Markets Inc(6) 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 26.0 200,164 98% Hills 2007/2027 BiLo 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 Eckerd Drug 2004/2019 LUZERNE STREET SCRANTON 1983(A) FEE 4.6 57,715 100% Price Chopper 2004/2024 SHOPPING CENTER Eckerd Drug 2004/2019 TIOGA WEST TUNKHANNOCK 1965(C) FEE 17.2 122,338 100% BiLo 2014/2024 Ames 2000/2015 BLACKMAN PLAZA WILKES-BARRE 1968(C) FEE(2) 9.7 121,206 97% 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 12/31/97 LEASE OPTION EXPIR <S> <C> <C> <C> <C> <C> <C> <C> PENNSYLVANIA BIRNEY MALL MOOSIC 1968(C) FEE 28.3 193,899 100% Kmart 1999/2049 Consolidated Stores 2003/2008 PLAZA 15 LEWISBURG 1995(A) FEE 16.4 113,530 98% Weis Market 2001/2021 Ames 2001/2021 GREEN RIDGE SCRANTON 1986(C) FEE 16.1 197,622 100% Hills 2007/2037 PLAZA BiLo 2008/2017 EAST END CENTRE WILKES-BARRE 1986(C) FEE 40.3 304,754 95% 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 95% Hills 2001/2021 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% CVS Inc. SHOPPING CENTER 2005/2010 BRADFORD TOWNE TOWANDA 1993(C) FEE 48.0 257,319 97% Kmart 2019/2069 CENTRE P&C Foods 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 12/31/97 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 Weis Market 1999/2019 ROUTE 6 MALL HONESDALE 1994(C) FEE 23.0 175,482 100% Kmart 2020/2070 Eckerd Drug 2011/2025 PITTSTON PLAZA PITTSTON 1994(C) FEE 10.2 79,568 97% BiLo 2015/2025 UNION PLAZA NEW CASTLE 1996(C) FEE 118.0 217,992 100% Sears 2011/2031 Hills 2017/2026 Peebles 2018/2026 FLORIDA SEARSTOWN MALL TITUSVILLE 1984(A) FEE 28.5 263,609 76% Sears 1998/2013 United Artist 2005/2015 NEW SMYRNA BEACH NEW SMYRNA 1983(A) FEE 9.6 100,430 85% DeMarsh Theater SHOPPING CENTER BEACH 2005/2015 NORTHWOOD CENTRE TALLAHASSEE 1985(A) FEE 34.1 499,636 90% 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 42% Winn Dixie 2008/2033 MIDWAY PLAZA OPELIKA 1984(A) FEE 21.6 207,538 74% Office Depot 2007/2022 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 12/31/97 LEASE OPTION EXPIR <S> <C> <C> <C> <C> <C> <C> <C> ALABAMA NORTHSIDE MALL DOTHAN 1986(A) FEE(1) 36.2 382,498 93% Wal-Mart 1999/2029 Montgomery Ward (7) 1999/2014 Goody's 2003/2018 SOUTH CAROLINA MARTINTOWN PLAZA N. AUGUSTA 1985(A) LI(1) 18.8 133,878 97% Belk's Store 2004/2024 Bargain Town 1999 WESMARK PLAZA SUMTER 1986(A) FEE 26.0 215,198 78% 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 (7) 2011/2026 Marshalls 2004 TROY PLAZA TROY 1982(A) FEE 12.3 128,479 93% 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 20.6143,737 95% 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 12/31/97 LEASE OPTION EXPIR <S> <C> <C> <C> <C> <C> <C> <C> NEW JERSEY BERLIN SHOPPING BERLIN 1994(A) FEE 22.0 187,296 85% Kmart 1999/2049 CENTER Acme 2005/2015 MASSACHUSETTS CRESCENT PLAZA BROCKTON 1984(A) FEE(3) 22.5 216,095 99% Bradlees (7) 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 96% Food Lion 2011/2031 PLAZA Consolidated Stores 2000/2005 Badcock Furniture 2000/2010 MAINE AUBURN PLAZA AUBURN 1994(A) LI(1) 28.4 259,218 61% Hoyt Cinema 2005/2020 (Partial) Service Merchandise FEE 2011/2090 T.J. Maxx 2000/2015 TOTAL OPERATING PROPERTIES 7,264,870 89% 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. <F6> (6) Leased premises is currently under construction. <F7> (7) The tenant is currently operating under Chapter 11 of the United States Bankruptcy laws and has neither affirmed nor rejected the lease. </FN> </TABLE> 18
Item 3. Legal Proceedings On November 20, 1995, Jack Wertheimer, the former President of the Company, filed a complaint against the Company, its Trustees including the Principal Shareholder, and the Company's former in-house General Counsel and current 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 1997. 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, 1997 and 1996. Dividend Quarter Ended High Low Per Share 1997 March 31, 1997 11 3/4 10 1/8 $.36 June 30, 1997 10 7/8 8 7/8 .20 September 30, 1997 9 9/16 8 15/16 .20 December 31, 1997 9 7/16 8 3/4 (1) 1996 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 (1) To be determined by the Trustees in 1998 At March 31, 1998, there were 239 holders of record of the Shares. (b) Dividends The Company has determined that 34.50% and 35.06% of the total dividends distributed to shareholders in fiscal years 1997 and 1996, respectively, represented ordinary income, while the remaining 65.50% and 64.94%, 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 flows 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. In the event that the transaction described in Item 1 is consummated, the Company's dividend policy would likely be affected. 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. 21
<TABLE> <CAPTION> MARK CENTERS TRUST MARK DEVELOPMENT GROUP Seven Five Year Ended Year Ended Year Ended Year Ended Months Ended Months Ended 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 5/31/93 <S> <C> <C> <C> <C> <C> <C> OPERATING DATA: Revenue: Minimum rents $33,669 $33,695 $32,740 $27,543 $12,971 $ 9,267 Percentage rents 3,183 2,795 3,340 2,505 1,644 1,147 Expense reimbursements 6,632 6,559 6,431 5,220 2,629 1,687 Other 1,014 747 821 1,065 961 72 ------- ------- ------- ------- ------- ------- Total revenue 44,498 43,796 43,332 36,333 18,205 12,173 ------- ------- ------- ------- ------- ------- Operating expenses 17,055 18,260 16,374 14,797 7,718 5,182 Interest and other financing expense 15,444 12,733 10,598 5,763 2,094 5,172 Depreciation and amortization 13,768 13,398 11,820 9,066 3,945 2,934 ------- ------- ------- ------- ------- ------- 46,267 44,391 38,792 29,626 13,757 13,288 ------- ------- ------- ------- ------- ------- (Loss) income before gain on sale, reorganization costs, extraordinary items and minority interest (1,769) (595) 4,540 6,707 4,448 (1,115) (Loss) gain on sale of land (12) 21 93 305 -- -- Reorganization costs -- -- -- -- (2,629) -- Extraordinary items -- (190) -- -- 194 -- ------- ------- ------- ------- ------- ------- (Loss) income before minority interest (1,781) (764) 4,633 7,012 2,013 (1,115) Minority interest 217 40 (833) (1,222) (321) 39 ------- ------- ------- ------- ------- ------- Net (loss) income $(1,564) $ (724) $ 3,800 $ 5,790 $ 1,692 $(1,076) ======= ======= ======= ======= ======= ======= 22
</TABLE> <TABLE> <CAPTION> MARK CENTERS TRUST MARK DEVELOPMENT GROUP Seven Five Year Ended Year Ended Year Ended Year Ended Months Ended Months Ended 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 5/31/93 <S> <C> <C> <C> <C> <C> <C> Net (loss) income per Common Share - basic and diluted $(0.18) $(.08) $0.44 $0.68 $0.20 ======= ======= ======= ======= ======= Weighted average number of Common Shares outstanding - basic 8,551,930 8,546,553 8,540,631 8,533,688 8,445,493 ========= ========= ========= ========= ========= - diluted (1) 8,551,930 8,546,553 8,563,466 8,563,529 8,490,114 ========= ========= ========= ========= ========= Funds from Operations (2) $10,827 $12,372 $15,281 $14,831 $8,262 ======= ======= ======= ======= ======= Funds from Operations per share(3) $ 1.06 $ 1.22 $ 1.50 $ 1.46 $ 0.81 ======= ======= ======= ======= ======= BALANCE SHEET DATA: Real estate before accumulated depreciation $311,688 $307,411 $291,157 $278,611 $210,133 $163,095 Total assets 254,500 258,517 249,515 242,483 180,083 127,968 Total mortgage indebtedness 183,943 172,823 151,828 124,410 61,578 150,392 Minority interest- Operating Partnership 9,244 10,752 13,228 14,827 16,049 -- Total equity (deficit) 48,800 56,806 69,779 78,183 84,606 (32,993) 23
<FN> <F1> (1) Due to a net loss for the years ended December 31, 1997 and 1996, the weighted average number of shares outstanding on a diluted basis is not presented as the inclusion of additional shares is anti- dilutive. <FN2> (2) The Company, along with most industry analysts, consider funds from operations("FFO") as defined by the National Association of Real Estate Investment Trusts ("NAREIT") as an appropriate supplemental measure of operating performance. However, FFO does not represent cash generated from operations as defined by generally accepted accounting principles and is not indicative of cash available to fund cash needs. It should not be considered as an alternative to net income for the purpose of evaluating the Company's performance or to cash flows as a measure of liquidity. Generally, NAREIT defines FFO as net income (loss) before gains (losses) on sales of property, non-recurring charges and extraordinary items, adjusted for certain non-cash charges, primarily depreciation and amortization of capitalized leasing costs. <FN3> (3) Includes OP units </FN> 24 </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. Certain statements made in this report may constitute "forward-looking statements" within the meaning of the federal securities laws. Such statements are inherently subject to risk and uncertainties which may cause the actual results to differ materially from the future results implied by such forward- looking statements. Factors which might cause such differences include general economic conditions, adverse changes in the real estate markets in general and in the geographic regions in which the Company's properties are located, changes in interest rates, potential bankruptcy of tenants and environmental requirements. RESULTS OF OPERATIONS Comparison of the year ended December 31, 1997 ("1997") to the year ended December 31, 1996 ("1996"). Total revenue increased $702,000, or 2%, to $44.5 million in 1997 compared to $43.8 million in 1996. In total, minimum rents of $33.7 million for 1997 were essentially unchanged from 1996. Increases in minimum rents of $757,000 and $102,000 were achieved in 1997 following the completion of the development of Phase I of the Union Plaza and completion of the initial lease-up of the Pittston Plaza following its construction in 1996, respectively. A $680,000 increase in minimum rents was realized throughout the remaining portfolio, except at those properties as noted below, primarily from rents received following the installation of new tenants in excess of rents lost due to vacating tenants. These increases were, however, offset by declines in minimum rent for 1997 of (i)$1.1 million at the Ledgewood Mall and Auburn Plaza following the loss of two anchor tenants during 1996 as well as certain remaining tenants at these two centers paying percentage rent in lieu of minimum rent pursuant to anchor cotenancy requirements, (ii)$338,000 at the Normandale Mall primarily as a result of the 25
State of Alabama Department of Public Health vacating its leased space following the expiration of its leases in April 1997 and (iii)$155,000 following the sale of the Newberry Plaza in March 1997. Percentage rents increased $388,000, or 14%, to $3.2 million for 1997 compared to $2.8 million for 1996 primarily as a result of tenants paying percentage rent in lieu of minimum rents at the Ledgewood Mall and Auburn Plaza as previously discussed. Expense reimbursements of $6.6 million for 1997, which represent the pass-through of certain property expenses to the tenants, were essentially unchanged from 1996. Increases relating to the pass-through of higher real estate taxes in 1997 were offset by a decline in expense reimbursements as a result of a decrease in other property operating expenses in 1997, and by a decrease in expense reimbursements following the loss of anchor tenants at the Ledgewood Mall and Auburn Plaza as previously discussed. Other income increased $267,000, or 36%, to $1.0 million for 1997 compared to $747,000 for 1996 primarily as a result of an increase in interest earned on mortgage escrows in connection with financings with Morgan Stanley Mortgage Capital, Inc. and Nomura Asset Capital Corporation. Total 1997 operating expenses decreased $443,000, or 1%, to $30.8 million compared to $31.3 million in 1996. Property operating expenses decreased $759,000, or 8%, to $9.0 million for 1997 from $9.8 million for 1996, primarily due to the establishment of a $425,000 reserve in 1996 for estimated environmental remediation costs and related consulting fees related to two properties (See "Business-Environmental Matters") and a decrease in winter related costs due to the comparatively mild winter experienced in the Northeast during 1997. Real estate taxes increased $406,000, or 8%, to $5.7 million for 1997 from $5.3 million for 1996 primarily due to the expiration of a ten-year development abatement at the Greenridge Plaza and increases in assessed property values as a result of recent development and expansion activities. 26
Depreciation and amortization increased $370,000, or 3%, to $13.8 million for 1997 from $13.4 million for 1996 primarily due to an increase in depreciation expense following the completion of the development of Phase I of the Union Plaza in October 1996. General and administrative expense decreased $460,000, or 16%, to $2.4 million for 1997 from $2.8 million for 1996 primarily due to the write-off during 1996 of non-recurring costs totalling $492,000 as a result of the Company's decision to terminate certain acquisition and development activities. Net interest expense increased $2.7 million, or 21%, to $15.4 million in 1997, compared to $12.7 million in 1996 due to higher borrowing levels primarily associated with development and tenant replacement activities. The loss before minority interest for 1997 was $1.8 million, representing an increased loss of $1.0 million compared to the loss before minority interest of $764,000 for 1996 due to the above items, as well as a $392,000 loss in 1996 on the reduction in the carrying value of certain property held for sale and $190,000 in extraordinary expense for 1996 related to certain 1996 refinancings. 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. 27
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 16%, 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. 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. 28
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) and extraordinary expenses of $190,000 related to the write-off of deferred financing costs in 1996, the loss before minority interest for 1996 was $764,000, representing a decrease of $5.4 million from income before minority interest of $4.6 million for 1995. LIQUIDITY AND CAPITAL RESOURCES The Company is in the late stages of negotiation of a significant transaction which will provide additional properties and capital to the Company. If the transaction as described in Item 1 is completed as anticipated in the current negotiations, the Company's liquidity and capital resources would be significantly impacted. During 1997, the Company invested $11.8 million in its property portfolio (of which $3.3 million was included in accounts payable as of December 31, 1996), including $6.5 million for new development, $3.5 million for renovation and tenant replacement at existing centers, $1.2 million for deferred leasing and other charges and $624,000 for non-revenue generating capital expenditures at the properties. As a significant portion of the Company's funds from operations are distributed to shareholders, 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, 1997 and 1996 was $183.9 million and $172.8 million, respectively. The $11.1 million increase in debt was primarily a result of funding the 1997 investment activity. At December 31, 1997, $174.2 million, or 95%, of the outstanding debt was carried at a fixed rate and the remaining $9.7 million, or 5%, at variable rates. Of the total outstanding debt, $100.6 million will mature by December 31, 2000, with scheduled maturities of $2.8 million in 1998, $2.9 million in 1999 and $94.9 million in 2000. As the Company currently does not anticipate having sufficient cash on hand to repay such indebtedness, it will need to refinance this indebtedness or select other alternatives based on market 29
conditions at that time. The Company believes that the current loan-to-value ratios on the collateral properties are at levels which would allow it to fully refinance these loans on commercially competitive terms. On September 18, 1997, the Company closed on a $5.5 million construction loan with Firstrust Savings Bank ("Firstrust") which refinanced and expanded the Company's existing $2.0 million credit facility with Firstrust. This construction loan, which is for the expansion of the Mark Plaza in Edwardsville, Pennsylvania, bears interest, payable monthly, at the Firstrust commercial reference rate plus 1% and matures in March 1999. On March 4, 1997, the Company closed on $23.0 million of fixed rate financing from Nomura Asset Capital Corporation. The loan, which matures in March 2022, is secured by a mortgage on one of the Company's properties, bears interest at 9.02% and requires monthly payments of interest and principal amortized over 25 years. Approximately $10.2 million of the proceeds were used to retire existing debt with Fleet Bank of Massachusetts, NA, $673,000 was used to pay financing costs, $3.0 million was deposited in escrows, and the remaining proceeds were used for working capital. The Company is subject to certain affirmative and negative covenants relating to this facility. At December 31, 1997, other mortgage notes payable aggregated $158.1 million and were collateralized by 35 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 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 ratios. Additionally, the Principal Shareholder has personally guaranteed the repayment of mortgage loans with an aggregate balance of $41.0 million at December 31, 1997 without consideration from the Company. At December 31, 1997, the Company's capitalization consisted of $183.9 million of debt and $91.6 million of market equity (based on a December 31, 1997 market price of $9.00 per share). As part of the Company's ongoing strategic evaluation and realignment of its property portfolio, the Company completed the 30
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 were used to supplement working capital. The Company currently estimates that capital outlays for tenant improvements, related renovations and other property improvements will require $12.4 million during 1998. Certain tenant improvement costs are being incurred earlier than anticipated because of early termination of leases due to tenant bankruptcies. Of these outlays, $1.4 million is reflected in accounts payable as of December 31, 1997. Furthermore, the Company has entered into an agreement whereby it has agreed to pay a tenant at the Ledgewood Mall $1.7 million to settle certain litigation (see "Business-Leasing and Expansion") so as to proceed with the installation of Walmart at the mall. 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. However, the Company may experience a cash shortfall in 1998 if there are delays in obtaining construction financing to fund the above capital outlays. Any delays in construction financing will increase the Company's short term reliance on cash from operations to meet these commitments. In order to meet part of its 1998 capital requirements, the Company obtained $3.5 million in construction financing on January 28, 1998 with Royal Bank of Pennsylvania for the construction of a theater at the Manahawkin Village Shopping Center. The loan, which is secured by the center, requires monthly payment of interest only at the lender's prime rate plus 150 basis points and matures in February 1999 with additional extension periods available through February 2000. In addition, certain amounts currently escrowed with lenders as well as other debt and equity financing alternatives are expected to provide the necessary capital to fund the installation of tenants and achieve continued future growth. The Company, along with most industry analysts, consider funds from operations("FFO") as defined by the National Association of Real Estate Investment Trusts ("NAREIT")as an appropriate supplemental measure of operating performance. However, FFO does not represent cash generated from operations as 31
defined by generally accepted accounting principles and is not indicative of cash available to fund cash needs. It should not be considered as an alternative to net income for the purpose of evaluating the Company's performance or to cash flows as a measure of liquidity. Generally, NAREIT defines FFO as net income (loss) before gains (losses) on sales of property, non-recurring charges and extraordinary items, adjusted for certain non-cash charges, primarily depreciation and amortization of capitalized leasing costs. 32
MARK CENTERS TRUST FUNDS FROM OPERATIONS For the Years Ended December 31, 1997 and 1996 (in thousands except per share data) For the year ended December 31, 1997 1996 Revenue Minimum rents(a) $33,360 $33,396 Percentage rents 3,183 2,795 Expense reimbursements 6,632 6,559 Other 1,014 747 ------- ------- Total revenue 44,189 43,497 ------- ------- Expenses Property operating(b) 9,113 9,181 Real estate taxes 5,691 5,285 General and administrative 2,339 2,796 ------- ------- Total operating expenses 17,143 17,262 ------- ------- Operating income 27,046 26,235 Interest expense 15,444 12,733 Amortization of deferred financing costs 567 915 Depreciation of non-real estate assets 208 215 ------- ------- Funds from operations $10,827 $12,372 ======= ======= Funds from operations per share (c) $ 1.06 $ 1.22 ======= ======= Reconciliation of funds from operations to net income determined in accordance with Generally Accepted Accounting Principles(GAAP) Funds from operations above $10,827 $12,372 Depreciation of real estate and amortization of leasing costs (12,993) (12,268) Straight-line rents and related write-offs (net) 176 164 (Loss) gain on sale of land (12) 21 Adjustment (reserve) for environmental remediation costs 245 (425) Adjustment to carrying value of property held for sale -- (392) Extraordinary item, write-off of deferred financing costs -- (190) Minority interest 217 40 Other non-cash adjustments (24) (46) ------- ------- Net loss $(1,564) $ (724) ======= ======= Net loss per share - basic and diluted (d) $ (0.18) $(0.08) ======= ======= 33
(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, 1997 and 1996, respectively, for a total of 10,177,177 and 10,171,817 shares, respectively. (d) Net loss per share (basic and diluted) is computed based on the weighted average number of shares outstanding for the years ended December 31, 1997 and 1996 of 8,551,930 and 8,546,553, respectively. Historical Cash Flow The following discussion of historical cash flow compares the Company's cash flows for the year ended December 31, 1997 ("1997") with the year ended December 31, 1996 ("1996"). Net cash provided by operating activities decreased $815,000 to $13.2 million in 1997 from $14.1 million in 1996. This decrease was primarily attributable to a $1.3 million decrease in cash provided by net income as adjusted for non-cash expenses including depreciation, amortization, property carrying value adjustment and the write-off of deferred financing costs. This was offset by a $525,000 increase in cash provided by changes in operating assets, primarily an increase in accounts payable related to operations in 1997. Investing activities used $10.5 million during 1997, a decrease of $9.5 million from $20.0 million for 1996 due primarily to greater development costs paid associated with the Union Plaza in New Castle, Pennsylvania in 1996. Net cash used in financing activities was $5.4 million for 1997, representing a $12.2 million decrease from net cash provided by financing activities of $6.8 million for 1996. This decrease is primarily attributable to a decrease in borrowings related to property investment in 1997. 34
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. Recently Issued Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for publicly-held business enterprises to report information about operating segments in annual financial statements and requires that these enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS 131 is effective for financial statements for years beginning after December 15, 1997. The Company plans to adopt SFAS 131 in 1998. Year 2000 Compliance The Company is in the process of evaluating its major information systems to verify that they are Year 2000 compliant. If these systems are not compliant, the appropriate upgrades will be purchased. The cost of any required upgrades are not anticipated to be significant. In addition, the Company is communicating with its customers, suppliers and service providers to determine whether they are actively involved in projects to ensure that their products and business systems will be Year 2000 compliant. The Company is not aware of any significant Year 2000 issues involving its customers, suppliers or service providers. 35
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, 1998, 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, 1998, to be filed pursuant to Regulation 14A. 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, 1998, 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, 1998, to be filed pursuant to Regulation 14A. 36
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, 1997 and 1996 F-3 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 F-7 Notes to Consolidated Financial Statements F-10 2. Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation F-31 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. 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") 37
10.1 Agreement of Limited Incorporated by reference to Partnership of Mark the copy thereof filed as an Centers Limited exhibit to Amendment No. 3 to Partnership 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) Amendment 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 10.3(d) Amendment Number Two Incorporated by reference to To the First Amended the copy thereof filed as an and 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 38
10.3(e) Amendment Number Three Incorporated by reference to to the First Amended the copy thereof filed as an and Restated Assumption, exhibit to the Company's Form Extension and Loan 10-Q filed for the quarter Agreement between the ended June 30, 1997 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 39
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 10.5(h) Option Purchase Agreement between the Company and the Principal Shareholder allowing the Company to acquire a certain property from the Principal Shareholder 10.5(i) Termination of Option to Purchase (Lewisburg) between the Company and the Principal Shareholder *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 exhibit to the Company's Form Option Plan S-8 filed August 17, 1995 40
*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 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 41
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 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 42
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 10.17(e) Fourth 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 June 30, 1997 10.17(f) Fifth Amendment to Revolving Credit Loan Agreement between the Company and Mellon Bank, N.A. 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 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 43
10.20(c) Construction and/or Incorporated by reference to Development Loan the copy thereof filed as an Agreement between exhibit to the Company's Form the Company and 10-Q filed for the quarter Firstrust Bank ended September 30, 1997 10.20(d) Open End Fee and Incorporated by reference to Leasehold Mortgage the copy thereof filed as an between the Company exhibit to the Company's Form and Firstrust Bank 10-Q for the quarter ended September 30, 1997 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 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 44
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, Incorporated by reference Security Agreement, to the copy thereof filed as Future Filing, Financing an exhibit to the Company's Statement and Assignment Form 10-K filed for the fiscal of Leases and Rents year ended December 31, 1996 between the Company and Anchor National Life Insurance Company 10.24(b) Promissory Note between Incorporated by reference the Company and Anchor to the copy thereof filed as National Life Insurance an exhibit to the Company's Company Form 10-K filed for the fiscal year ended December 31, 1996 10.25 Agreement of Sale Incorporated by reference of Newberry Plaza to the copy thereof filed as between Mark Centers an exhibit to the Company's Limited Partnership, Form 10-K filed for the fiscal a Delaware limited year ended December 31, 1996 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 Incorporated by reference March 4, 1997 by and to the copy thereof filed a between Mark Northwood an exhibit to the Company's Associates, Limited Form 10-K filed for the fiscal Partnership, a Florida year ended December 31, 1996 limited partnership, and Nomura Asset Capital Corporation 45
10.26(b) Promissory Note dated Incorporated by reference March 4, 1997 between to the copy thereof filed Mark Northwood as an exhibit to the Company's Associates, Limited Form 10-K filed for the fiscal Partnership, a Florida year ended December 31, 1996 limited partnership, and Nomura Asset Capital Corporation 10.26(c) Leasehold Mortgage, Incorporated by reference Assignment of Rents, to the copy thereof filed Security Agreement and as an exhibit to the Company's Fixture Filing by Mark Form 10-K filed for the fiscal Northwood Associates, year ended December 31, 1996 Limited Partnership, a Florida limited partnership, to Nomura Asset Capital Corporation dated March 4, 1997 10.27(a) Mortgage and Security Agreement between the Company and Royal Bank of Pennsylvania 10.27(b) Promissory Note between the Company and Royal Bank of Pennsylvania 21 List of Subsidiaries Incorporated by reference to of Mark Centers Trust the copy thereof filed as an exhibit to the Company's Form 10-K filed for the fiscal year ended December 31, 1996 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. 46
(b) Reports on Form 8-K No reports on Form 8-K were filed by the Company for the quarter ended December 31, 1997. 47
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: April 13, 1998 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 April 13, 1998 (Marvin L. Slomowitz)and Trustee (Principal Executive Officer) /s/Joshua Kane Senior Vice President April 13, 1998 (Joshua Kane) Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) /s/Harvey Shanus Trustee April 13, 1998 (Harvey Shanus) /s/Marvin J. Levine Trustee April 13, 1998 (Marvin J. Levine Esq) /s/Joseph L. Castle,II Trustee April 13, 1998 (Joseph L. Castle, II) /s/John Vincent Weber Trustee April 13, 1998 (John Vincent Weber) /s/Lawrence J. Longua Trustee April 13, 1998 (Lawrence J. Longua) 48
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 10.5(h) Option Purchase Agreement between the Company and the Principal Shareholder allowing the Company to acquire a certain property from the Principal Shareholder 10.5(i) Termination of Option to Purchase (Lewisburg) between the Company and the Principal Shareholder 10.17 (f) Fifth Amendment to Revolving Credit Loan Agreement between the Company and Mellon Bank, N.A. 10.27(a) Mortgage and Security Agreement between the Company and Royal Bank of Pennsylvania 10.27(b) Promissory Note between the Company and Royal Bank of Pennsylvania 23 Consent of Independent Auditors to Form S-3 and Form S-8 27 Financial Data Schedule (EDGAR filing only) 49
MARK CENTERS TRUST INDEX TO FINANCIAL STATEMENTS I. MARK CENTERS TRUST Report of Independent Auditors F-2 Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 F-7 Notes to Consolidated Financial Statements F-10 Schedule III - Real Estate and Accumulated Depreciation F-31 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, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 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. /s/ ERNST & YOUNG LLP New York, New York April 8, 1998 F-2
MARK CENTERS TRUST CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) December 31, ASSETS 1997 1996 ------- -------- Rental property, at cost: Land $ 30,855 $ 31,084 Buildings and improvements 274,165 271,423 Property under development 6,668 4,904 -------- -------- 311,688 307,411 Less: accumulated depreciation 83,326 72,956 -------- -------- Net rental property 228,362 234,455 Cash and cash equivalents 1,287 3,912 Cash in escrow 7,906 3,603 Rents receivable 4,802 4,956 Prepaid expenses 1,241 1,421 Due from related parties 177 203 Deferred charges, net 9,710 9,034 Other assets 1,015 933 -------- -------- $254,500 $258,517 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage notes payable $183,943 $160,168 Lines of credit -- 12,655 Accounts payable and accrued expenses 7,553 9,397 Distributions payable -- 3,662 Note payable to Principal Shareholder 3,050 3,050 Other liabilities 1,910 2,027 -------- -------- Total liabilities 196,456 190,959 -------- -------- Minority interest 9,244 10,752 -------- -------- Commitments and contingencies
Shareholders' equity: Common stock, $.001 par value, authorized 50,000,000 shares, issued and outstanding, 8,554,177 and 8,548,817 shares, respectively 9 9 Additional paid-in capital 51,073 57,521 Deficit (2,282) (724) -------- -------- Total shareholders' equity 48,800 56,806 -------- -------- $254,500 $258,517 ======== ======== See accompanying notes F-3
MARK CENTERS TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Year ended December 31, 1997 1996 1995 -------- -------- -------- Revenue Minimum rents $ 33,669 $ 33,695 $ 32,740 Percentage rents 3,183 2,795 3,340 Expense reimbursements 6,632 6,559 6,431 Other 1,014 747 821 -------- -------- -------- Total revenue 44,498 43,796 43,332 -------- -------- -------- Operating expenses Property operating 9,013 9,772 8,834 Real estate taxes 5,691 5,285 4,789 Depreciation and amortization 13,768 13,398 11,820 General and administrative 2,351 2,811 2,751 -------- -------- -------- Total operating expenses 30,823 31,266 28,194 -------- -------- -------- Operating income 13,675 12,530 15,138 Interest expense (15,444) (12,733) (10,598) (Loss) gain on sale of land (12) 21 93 Adjustment to carrying value of property held for sale -- (392) -- -------- -------- -------- (Loss) income before extraordinary item and minority interest (1,781) (574) 4,633 Extraordinary item - write-off of deferred financing costs -- (190) -- -------- -------- -------- (1,781) (764) 4,633 Minority interest 217 40 (833) -------- -------- -------- Net (loss) income $ (1,564) $ (724) $ 3,800 ======== ======== ======== Basic and diluted net (loss) income per common share: (Loss) income before extraordinary item $ (.18) $ (.06) $ .44 Extraordinary item -- (.02) -- -------- -------- -------- Basic and diluted net (loss) income per common share $ (.18) $ (.08) $ .44 ======== ======== ======== See accompanying notes F-4
<TABLE> <CAPTION> MARK CENTERS TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (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, 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) 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) F-5
<CAPTION> MARK CENTERS TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (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> 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 Issuance of shares pursuant to the Company's restricted share plan 5,360 -- 52 -- 52 Adjustment to minority interest -- -- -- 6 6 Loss before minority interest -- -- -- (1,781) (1,781) Distributions paid to limited partners of the Operating Partnership -- -- (1,285) -- (1,285) Dividends paid in excess of accumulated earnings ($0.76 per share) -- -- (6,500) -- (6,500) Minority interest's equity -- -- 1,285 217 1,502 ---------- --- ------- ------- ------- Balance, December 31, 1997 8,554,177 $ 9 $51,073 $(2,282) $48,800 ========== === ======= ======= ======= See accompanying notes F-6
<CAPTION> MARK CENTERS TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, except per share amounts) YEAR ENDED DECEMBER 31, 1997 1996 1995 <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss)income $(1,564) $ (724) $ 3,800 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Loss (gain) on sale of land 12 (21) (93) Depreciation and amortization of leasing costs 13,201 12,483 10,993 Amortization of deferred financing costs 567 915 827 Write-off of deferred financing costs -- 190 -- Adjustment to carrying value of property held for sale -- 392 -- Minority interest (217) (40) 833 Provision for bad debts 833 972 721 Other 52 57 93 ------- ------- ------- 12,884 14,224 17,174 Changes in assets and liabilities: Rents receivable (679) (580) (1,846) Prepaid expenses 180 (69) (387) Due from related parties 26 31 408 Other assets (290) 641 (959) Accounts payable and accrued expenses 1,233 (756) 1,656 Other liabilities (117) 561 51 ------- ------- ------- Net cash provided by operating activities 13,237 14,052 16,097 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for real estate and improvements, inclusive of payables related to construction activity (10,558) (16,642) (21,671) Payment to Principal Shareholder for acquisition of land -- -- (1,500) Payment of deferred leasing charges (1,205) (3,399) (1,650) Proceeds from sale of property 1,288 22 105 ------- ------- ------- Net cash used in investing activities (10,475) (20,019) (24,716) ------- ------- ------- F-7
<CAPTION> MARK CENTERS TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, except per share amounts) YEAR ENDED DECEMBER 31, 1997 1996 1995 <S> <C> <C> <C> CASH FLOWS FROM FINANCING ACTIVITIES: Net funding of escrows (4,303) (688) (2,014) Principal payments on mortgages (14,835) (40,622) (49,491) Payment of deferred finance costs (757) (2,415) (770) Proceeds received on mortgage notes 25,955 61,617 75,690 Dividends paid (9,577) (9,229) (12,297) Distributions paid to Principal Shareholder (1,870) (1,852) (2,452) ------- ------- ------- Net cash (used in) provided by financing activities (5,387) 6,811 8,666 ------- ------- ------- (Decrease) increase in cash and cash equivalents (2,625) 844 47 Cash and cash equivalents, beginning of period 3,912 3,068 3,021 ------- ------- ------- Cash and cash equivalents, end of period $ 1,287 $ 3,912 $ 3,068 ======= ======= ======= Supplemental Disclosures of Cash Flow Information: Cash paid during the year for interest, net of amounts capitalized of $569, $897, and $978, respectively $15,502 $12,950 $10,172 ======= ======= ======= F-8
<CAPTION> MARK CENTERS TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, except per share amounts) 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, 1997 1996 1995 <S> <C> <C> <C> Contingent liability due to Principal Shareholder $ -- $(6,156) $(8,133) Establishment of note payable to the Principal Shareholder -- 3,031 -- ------- ------ ------- Net decrease in cost of property acquired $ -- $(3,125) $(8,133) ======= ======= ======= <CAPTION> In connection with the acquisition of the Plaza 15 Shopping Center, the following assets and liabilities were recorded: <S> <C> <C> <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, Basis of Presentation and Summary of Significant Accounting Policies 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 (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, 1997 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. 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. F-10
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 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. In accordance with Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. During 1997 market events and circumstances and the requirement for significant capital expenditures indicated that $35,412 of real estate assets might be impaired. However, the Company's estimate of undiscounted cash flows indicated that such carrying amounts were expected to be recovered. Nonetheless, it is reasonably possible that the estimate of undiscounted cash flows may change in the near term resulting in the need to write-down those assets to fair value. F-11
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 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 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. Sale of Property On March 5, 1997, the Company completed the sale of the Newberry Plaza for $1,300. A $392 reduction in carrying value had been recorded as of December 31, 1996 to reflect the property at a fair value equal to the contract sales price less direct selling costs. 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. Revenue Recognition Leases with tenants are accounted for as operating leases. Minimum rents are recognized on a straight-line basis over the term of the respective leases. As of December 31, 1997 and 1996, unbilled rents receivable relating to straight-lining of rents were $1,652 and $1,476, respectively. Percentage rents, which are additional rents based on tenants' sales, are accrued based on historical tenant sales. Certain tenants pay percentage rent F-12
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) Revenue Recognition, continued in lieu of minimum rent pursuant to their leases. Reimbursements from tenants for real estate taxes, insurance and other property operating expenses are recognized as revenue in the period the expenses are incurred. An allowance for doubtful accounts has been provided against certain tenant accounts receivable which are estimated to be uncollectible. Rents receivable at December 31, 1997 and 1996 are shown net of an allowance for doubtful accounts of $972 and $544, respectively. 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. Cash in Escrow Cash in escrow consists principally of cash held for real estate taxes, property maintenance, insurance, lease renewals, environmental remediation and minimum occupancy requirements at specific properties as required by certain loan agreements. 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 in consideration for 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 F-13
MARK CENTERS TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Income Taxes, continued 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. Earnings Per Common Share In 1997, the Financial Accounting Standards Board issued Statement No. 128 (SFAS 128), Earnings Per Share. SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share (which were not separately presented historically as they were either anti- dilutive or not materially dilutive). All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS 128 requirements. For the years ended December 31, 1997, 1996 and 1995, basic earnings per share was determined by dividing net income (loss) applicable to common shareholders for the year by the weighted average number of common shares of beneficial interest ("Common Shares") outstanding during each year. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue Common Shares were exercised or converted into Common Shares or resulted in the issuance of Common Shares that then shared in the earnings of the Company. For the years ended December 31, 1997 and 1996 no additional shares were reflected as the impact would be anti-dilutive due to the net loss in such periods. For the year ended December 31, 1995 diluted earnings per share was determined by dividing net income applicable to common F-14
MARK CENTERS TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Earnings Per Common Share, continued shareholders for the year by the total of the weighted average number of shares of common stock outstanding plus the dilutive effect of the Company's nonvested restricted shares (which amounted to 22,835 additional shares). The Company's outstanding stock options were not considered for the purpose of computing diluted earnings per share because their assumed conversion is antidilutive. Segment Reporting In June, 1997 the Financial Accounting Standards Board issued Statement No. 131 (SFAS 131), Disclosure About Segments of an Enterprise and Related Information, which is effective for financial statements issued for periods beginning after December 15, 1997. SFAS 131 requires disclosures about segments of an enterprise and related information regarding the different types of business activities in which an enterprise engages and the different economic environments in which it operates. The Company does not believe that the implementation of SFAS 131 will have a material impact on its financial statements. Reclassifications Certain 1996 and 1995 amounts were reclassified to conform with the 1997 presentation. 2. Deferred Charges Deferred charges consist of the following as of December 31, 1997 and 1996: 1997 1996 Deferred financing costs $6,382 $5,822 Deferred leasing and other costs 8,054 7,063 ------ ------ 14,436 12,885 Accumulated amortization (4,726) (3,851) ------ ------ $9,710 $9,034 ====== ====== F-15
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 3. Mortgage Loans Mortgage Notes Payable At December 31, 1997, mortgage notes payable aggregated $183,943 and were collateralized by 37 properties and related tenant leases. Interest rates ranged from 7.7% to 9.50%. Mortgage payments are due in monthly installments of principal and/or interest and mature on various dates through 2022. 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, 1997 without consideration from the Company. On September 18, 1997, the Company closed on a $5,500 construction loan with Firstrust Savings Bank ("Firstrust") which refinanced and expanded the Company's existing $2,000 credit facility with Firstrust. This construction loan, which is for the expansion of the Mark Plaza in Edwardsville, Pennsylvania, bears interest, payable monthly, at the Firstrust commercial reference rate plus 1% (9.5% as of December 31, 1997) and matures in March 1999. On March 4, 1997, the Company closed on $23,000 of fixed rate financing from Nomura Asset Capital Corporation. The loan, which matures in March 2022, is secured by a mortgage on one of the Company's properties, bears interest at 9.02% and requires monthly payments of interest and principal amortized over 25 years. Approximately $10,155 of the proceeds were used to retire existing debt with Fleet Bank of Massachusetts, NA, $673 were used to pay financing costs, $3,015 was deposited in escrows, and the remaining proceeds were used for working capital. The Company is subject to certain affirmative and negative covenants related to this facility. 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, 1997 and 1996: Monthly December 31, December 31, Interest Maturity Properties Payment 1997 1996 Rate Encumbered Terms <S> <C> <C> <C> <C> <C> <C> Lines of credit-variable rate Fleet Bank of Massachusetts, NA $ -- $10,155 Firstrust Savings Bank -- 2,500 ------- ------- Total-lines of credit -- 12,655 ------- ------- Construction loans-variable rate Firstrust Savings Bank 2,954 -- Prime + 1% March 1999 (1) (11) First Western Bank, NA 4,000 4,000 Prime + 1% March 2013 (2) (11) Mortgage notes payable-variable rate Mellon Bank, NA 2,759 3,396 LIBOR + 200 basis April 1998 (3) (12) points/Prime+1/2% Mortgage notes payable-fixed rate Metropolitan Life Insurance Company 41,000 41,000 7.750% June 2000 (4) (11) Morgan Stanley Mortgage Capital 45,312 45,845 8.840% November 2021 (5) $380 (12) Anchor National Life Insurance Company 4,028 4,100 7.930% January 2004 (6) $33 (12) Northern Life Insurance Company 3,627 3,829 7.700% December 2008 (7) $41 (12) Bankers Security Life 2,501 2,641 7.700% December 2008 (7) $28 (12) John Hancock Mutual Life Insurance Co. 54,922 55,357 9.110% April 2000 (8)(9) $455 (12) Nomura Asset Capital Corporation 22,840 -- 9.020% March 2022 (10) $193 (12) ------- ------- Total-mortgage notes payable 183,943 160,168 ------- ------- $183,943 $172,823 ======== ======== 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) Mark Plaza (5) Midway Plaza (6) Pittston Plaza Northside Mall (2) Union Plaza New Smyrna Beach (7) Manahawkin Shopping Center Cloud Springs Plaza (3) Auburn Plaza Troy Plaza (8) New Loudon Centre Martintown Plaza Ledgewood Mall (4) Valmont Plaza Kings Fairgrounds Plaza 422 Luzerne Street Plaza Shillington Plaza Berlin Shopping Center Green Ridge Plaza Dunmore Plaza Route 6 Mall Crescent Plaza Kingston Plaza Tioga West East End Centre Twenty Fifth Street Shopping Center Bradford Towne Centre Circle Plaza Mountainville Plaza (9) The following two properties Plaza 15 are encumbered related to an Birney Plaza outstanding letter of credit Monroe Plaza held by the lender: Ames Plaza Wesmark Plaza Searstown Mall (10) Northwood Centre (11) Interest only monthly (12) Monthly principal and interest 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, 1997 are as follows: 1998 $ 4,506 1999 4,858 2000 96,423 2001 1,638 2002 1,784 Thereafter 74,734 -------- $183,943 ======== 4. Related Party Transactions As of December 31, 1997 and 1996 amounts due from related parties consisted of the following: December 31, 1997 1996 Accrued ground rent and management fees due from Blackman Plaza Partners $202 $232 Other net amounts due to Principal Shareholder (25) (29) ---- ---- $177 $203 ==== ==== Included in other income are management fees earned on properties owned by the Principal Shareholder or affiliates which for the years ended December 31, 1997, 1996 and 1995 aggregated $19, $36 and $166, respectively. Included in rental income for the year ended December 31, 1995 is $140 of rent earned pursuant to a ground lease on Blackman Plaza with Blackman Plaza Partners, a limited partnership ("Lessee") in which the Principal Shareholder is the sole general partner (owning a one percent economic interest). The Company has not recognized rental income for the years ended December 31, 1997 and 1996 due 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. F-19
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) Related Party Transactions, continued 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 (See Note 16). In 1996, the Company issued a note payable to the Principal Shareholder for $3,030 for the purchase of the Union Plaza, located in New Castle, Pennsylvania. The note, which bears interest payable monthly at a rate equal to that charged on the Mellon Bank, N.A. 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. The note payable balance in the accompanying balance sheet also reflects $20 of accrued interest as of December 31, 1997 and 1996. 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 was $104 for each of the years ended December 31, 1997, 1996 and 1995. 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, 1997, 1996 and 1995 aggregated $885, $909 and $929, respectively, of which $100, $86 and $32 are receivable as of December 31, 1997, 1996 and 1995, respectively. Additionally, for the year ended December 31, 1995, the Company paid $1,050 for tenant improvements as provided by the respective lease agreements, at three properties for this tenant. F-20
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 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 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, 1997 are summarized as follows: 1998 $ 27,213 1999 24,507 2000 21,146 2001 19,044 2002 17,271 Thereafter 115,717 -------- $224,898 ======== Minimum future rentals above include a total of $7,016 for six tenants which have filed for bankruptcy protection. None of these leases have been rejected or affirmed. During the years ended December 31, 1997, 1996 and 1995, rental income representing 10% or more of total revenues 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, 1997, 1996 and 1995 were $4,890, $4,735, and $4,389, respectively. During the year ended December 31, 1996, the Company also earned greater than 10% of its rental income from the Kmart Corporation at nine locations totaling $4,733. Rents from Kmart were less than 10% of total revenues for the years ended December 31, 1997 and 1995, totalling $4,348 and $4,180, 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, F-21
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 6. Lease Obligations, continued that expires in 1999. Six of the leases 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: 1998 $ 313 1999 313 2000 313 2001 313 2002 313 Thereafter 13,520 ------ $15,085 ======= 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 200,000 share options to the Principal Shareholder and 64,500 to employees of the Company which vested 20% on the grant date 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 ($11.19 to $12.69 per share) for a period of ten years. The Company has also issued a total of 65,000 share options to non-employee trustees which vested 20% on the grant date 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 ($10.13 to $12.75 per share) 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. F-22
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 7. Share Option Plan, continued The Company elected Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related interpretations in accounting for its employee stock options. Under APB 25, no compensation expense is recognized because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant. The alternative fair value accounting provided for under SFAS 123, Accounting for Stock-Based Compensation, is not applicable because it requires use of option valuation models that were not developed for use in valuing employee stock options. Proforma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value for these options was estimated at the date of the grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk free interest rates ranging from 6.14% to 6.49%, expected dividend yield of 8.95%, volatility factor of the expected market price of the Company's common stock based on historical results of .137; and an expected life of 4 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate, management believes the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The Company has elected not to present proforma information because the impact on the reported net income and earnings per share is immaterial. F-23
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 7. Share Option Plan, continued Changes in the number of shares under all option arrangements are summarized as follows: Year ended December 31, 1997 1996 1995 Outstanding at beginning of period 217,000 234,500 234,500 Granted 152,500 5,000 5,000 Option price per share granted $10.13-$11.19 $11.38 $12.75 Cancelled 40,000 22,500 5,000 Exercisable at end of period 181,100 127,200 92,800 Exercised -- -- -- Expired -- -- -- Outstanding at end of period 329,500 217,000 234,500 Option prices per share outstanding $10.13-$12.75 $11.38-$12.75 $12.75 As of December 31, 1997 the outstanding options had a weighted average remaining contractual life of approximately 7.8 years and a weighted average exercise price of $12.66. 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 3,800 and 10,718 were granted, but not vested, as of December 31, 1997 and 1996, 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. For the years ended December 31, 1997, 1996 and 1995, compensation expense related to such restricted shares vested in such periods amounted to $24, $46 and $68, respectively. 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 F-24
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 9. Employee 401(k) Plan, continued 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, 1997. The Company contributed $67, $67 and $64 for the years ended December 31, 1997, 1996 and 1995, respectively. 10. Distributions payable On November 14, 1996, the Trustees declared a cash distribution of $0.36 per common share and OP Unit which was subsequently paid on January 31, 1997. The Company has determined that the cash distributed to the shareholders is characterized as follows for federal income tax purposes: 1997 1996 1995 Ordinary income 34% 35% 64% Return of capital 66% 65% 36% --- --- --- 100% 100% 100% ==== ==== ==== 11. 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. 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, 1997 and 1996, the Company has determined the estimated fair value of its mortgage notes payable are approximately $206,491 and $153,668, 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. F-25
<TABLE> <CAPTION> MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 13. Summary of Quarterly Financial Information (unaudited) The separate results of operations of the Company for the years ended December 31, 1997 and 1996 are as follows: March 31, 1997 June 30, 1997 Sept 30,1997 Dec 31, 1997 Total for Year <S> <C> <C> <C> <C> <C> Revenue $11,124 $11,128 $10,874 $11,372 $44,498 Loss before minority interest (487) (260) (544) (490) (1,781) Net loss (416) (242) (472) (434) (1,564) Net loss per share- basic and diluted $ (0.05) $ (0.03) $ (0.06) $ (0.04) $ (0.18) Cash dividends declared per share $ 0.36 $ 0.20 $ 0.20 $ 0.00 (a) $ 0.76 Weighted average shares outstanding - basic and diluted (1) 8,548,817 8,550,466 8,554,177 8,554,177 8,551,930 (a) To be determined by the Trustees in 1998. <CAPTION> 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- basic and diluted $ 0.02 $ 0.00 $ (0.02) $ (0.08) $ (0.08) Cash dividends declared per share $ 0.36 $ 0.36 $ 0.36 $ 0.36 $ 1.44 Weighted average shares outstanding - basic 8,543,452 8,544,985 8,548,717 8,548,717 8,546,553 - diluted (1) 8,563,053 8,544,985 8,548,717 8,548,717 8,546,553 (1) Due to a net loss for the last three quarters in fiscal 1996 and all quarters in fiscal 1997, the weighted average number of shares on a diluted basis does not include additional incremental shares as they would be anti-dilutive. F-26 </TABLE>
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 14. Legal Proceedings On November 20, 1995, Jack Wertheimer, the former President of the Company, filed a complaint against the Company, its Trustees including the Principal Shareholder, and the Company's former in- house General Counsel and current 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. F-27
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 15. Contingencies Upon conducting environmental site inspections in connection with obtaining the Morgan Stanley financing during October 1996, 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 has entered 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 $80 for which the Company has recorded a reserve for as of December 31, 1997 and for which Morgan Stanley holds $228 in escrow to be released upon final environmental remediation at this property. 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 such, there is no reserve for remediation costs at this site recorded as of December 31, 1997. 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. 16. Subsequent Events On January 7, 1998, the Company exercised its option to purchase the Lessee's interests in the Blackman Plaza (See Note 4) with a closing date anticipated to occur during fiscal 1998. On January 28, 1998, the Company completed a closing on a construction loan with Royal Bank of Pennsylvania in the maximum amount of $3,500. The loan, which is secured by one of the Company's properties, requires monthly payment of interest only at the lender's prime rate plus 150 basis points and matures in February 1999 with additional extension periods through February 2000. F-28
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 16. Subsequent Events, continued On January 31, 1998, the Company entered into an agreement with Pharmhouse Corp. (the "Tenant") to settle certain litigation. During 1997, the Tenant had obtained an injunction against the installation of Walmart in the Ledgewood Mall based on certain exclusive use provisions within the Tenant's lease. The Company has agreed to pay the Tenant $1,675 on or before May 1, 1998, amend certain terms of the Tenant's lease including rent and the lease expiration date, and withdraw its appeal of this case in return for the Tenant's withdrawal of all legal actions against the installation of Walmart at the mall. On March 16, 1998, the Company and the Principal Shareholder agreed to terminate the option to purchase certain land owned by the Principal Shareholder in Lewisburg, Pennsylvania. 16.1 Event (Unaudited) Subsequent To Date of Report of Independent Auditors The Company is in the late stages of negotiation of a significant transaction which will provide additional properties and capital to the Company. If the transaction is completed in its current form, assuming execution of a definitive agreement (the "Agreement") and satisfaction of all conditions to the transaction, including approval by the Company's shareholders, the Company, through Mark Centers Limited Partnership, a Delaware limited partnership through which the Company conducts substantially all of its activities, and in exchange for approximately 11 million Operating Partnership Units, will acquire substantially all of the ownership interests in twelve retail shopping centers and five multi-family apartment complexes controlled by a private New York real estate company. Under the current proposal, the Company will also receive a cash investment of $100 million in exchange for newly issued common shares of beneficial interest valued at a price of $7.50 per share. Upon completion of the transaction, it is contemplated that two senior executives of the New York real estate company will become Chief Executive Officer and President of the Company, respectively. Mr. Marvin Slomowitz, the current Chairman of the Board and Chief Executive Officer, will remain as a board member and is expected to continue as a consultant to the Company. The two new executives will serve on the board together with two designees of the real estate company and two designees (in addition to Mr. Slomowitz) of the existing board. F-29
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 16.1 Event (Unaudited) Subsequent To Date of Report of Independent Auditors, continued The transaction is subject to the completion of final negotiation and execution of the Agreement, receipt of a fairness opinion from Bear, Stearns & Co. Inc. (the Company's investment bankers), approval by the Company's Board of Trustees, evidence of the receipt by the real estate company of the necessary funds to make the cash investment and the completion of closing. The transaction is a complex one involving many parties and there can be no assurance that the Agreement will be executed or that the closing on this transaction will be completed. The transaction is subject to the approval by the shareholders of the Company at a meeting to be scheduled for that purpose if and when the Agreement is signed. F-30 <TABLE> <CAPTION> MARK CENTERS TRUST SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (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 Acquis Land Improvements Total Depreciation Construction(C) Shopping Centers <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Circle Plaza (1) $ -- $3,435 $ 13 $ 2 $ 3,446 $3,448 $1,206 1978(C) Shamokin Dam,PA Martintown Plaza (1) -- 4,625 1,252 -- 5,877 5,877 1,981 1985(A) N.Augusta,SC Midway Plaza (1) 196 1,647 2,650 196 4,297 4,493 1,700 1984(A) Opelika,AL Northside Mall (1) 1,604 7,080 1,721 1,604 8,801 10,405 3,206 1986(A) Dothan,AL Searstown Mall (2) 491 4,854 3,155 491 8,009 8,500 3,529 1984(A) Titusville,FL New Smyrna Beach Shopping Center (1) 247 2,219 3,136 247 5,355 5,602 1,933 1983(A) New Smyrna Beach,FL Wesmark Plaza (2) 380 3,419 1,447 370 4,876 5,246 1,704 1986(A) Sumter,SC Kings Fairground (1) -- 1,426 171 -- 1,597 1,597 279 1992(A) Danville,VA Cloud Springs Plaza (1) 159 2,712 1,189 159 3,901 4,060 1,334 1985(A) Ft. Oglethorpe,GA Crescent Plaza 12,000 1,147 7,425 481 1,147 7,906 9,053 2,479 1984(A) Brocton,MA New Loudon Center (3) 505 4,161 9,630 505 13,791 14,296 3,229 1982(A) Latham,NY Ledgewood Mall (3) 619 5,434 25,472 619 30,906 31,525 10,755 1983(A) Ledgewood,NJ Troy Plaza (1) 479 1,976 812 479 2,788 3,267 1,359 1982(A) Troy,NY Birney Mall (1) 210 2,979 931 210 3,910 4,120 3,193 1968(C) Moosic,PA Dunmore Plaza (1) 100 506 182 100 688 788 296 1975(A) Dunmore,PA F-31
</TABLE> <TABLE> <CAPTION> MARK CENTERS TRUST SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (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 Acquis Land Improvements Total Depreciation Construction(C) Shopping Centers <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Mark Plaza 2,954 -- 4,268 999 -- 5,267 5,267 3,312 1968(C) Edwardsville,PA Kingston Plaza (1) 305 1,745 473 305 2,218 2,523 1,228 1982(C) Kingston,PA Luzerne St. Shopping Center 2,000 35 315 1,150 35 1,465 1,500 704 1983(A) Scranton,PA Blackman Plaza -- 120 -- -- 120 -- 120 -- 1968(C) Wilkes-Barre,PA East End Centre 14,200 1,086 8,661 3,164 1,086 11,825 12,911 4,367 1986(C) Wilkes-Barre,PA Green Ridge Plaza 6,700 1,335 6,314 595 1,335 6,909 8,244 2,373 1986(C) Scranton,PA Plaza 15 (1) 171 81 1,481 171 1,562 1,733 302 1976(C) Lewisburg,PA Plaza 422 (3) 190 3,004 429 190 3,433 3,623 1,866 1972(C) Lebanon,PA Tioga West (3) 48 1,238 3,414 48 4,652 4,700 1,849 1965(C) Tunkhannock,PA Mountainville (1) 420 2,390 491 420 2,881 3,301 1,324 1983(A) Shopping Center Allentown,PA Monroe Plaza (1) 70 2,083 67 70 2,150 2,220 903 1964(C) Stroudsburg,PA Ames Plaza (1) 57 1,958 219 57 2,177 2,234 1,615 1966(C) Shamokin,PA Route 6 Mall (3) -- -- 12,696 1,664 11,032 12,696 1,121 1995(C) Honesdale,PA Pittston Plaza 4,028 -- -- 7,167 1,521 5,646 7,167 398 1995(C) Pittston,PA Valmont Plaza 6,100 522 5,591 1,027 522 6,618 7,140 2,444 1985(A) W. Hazleton,PA Manahawkin Village 6,128 2,400 9,396 260 2,400 9,656 12,056 1,066 1993(A) Shopping Center Manahawkin,NJ F-32
</TABLE> <TABLE> <CAPTION> MARK CENTERS TRUST SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (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 Acquis Land Improvements Total Depreciation Construction(C) Shopping Centers <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> 25th St. Shopping Center (1) 2,280 9,276 184 2,280 9,460 11,740 1,331 1993(A) Easton,PA Berlin Shopping (3) -- -- 6,887 1,332 5,555 6,887 678 1994(A) Center Berlin,NJ Auburn Plaza 2,759 -- -- 13,287 2,644 10,643 13,287 1,153 1994(A) Auburn,ME Shillington Plaza (1) -- -- 4,109 809 3,300 4,109 362 1994(A) Reading,PA Union Plaza 4,000 -- -- 20,241 5,426 14,815 20,241 505 1996(C) New Castle,PA Bradford Towne (3) -- -- 16,087 816 15,271 16,087 1,806 1994(C) Centre Towanda,PA Mixed Use Properties Northwood 22,840 1,209 6,204 18,519 1,188 24,744 25,932 11,620 1985(A) Centre Tallahassee,FL Normandale Centre -- 287 2,584 4,154 287 6,738 7,025 2,816 1985(A) Montgomery,AL Construction -- -- -- 6,668 -- 6,668 6,668 -- in Progress ------------------------------------------------------------------------------------------------ $183,943 $16,672 $119,006 $176,010 $30,855 $280,833 $311,688 $83,326 ================================================================================================ See accompanying notes F-33 </TABLE>
MARK CENTERS TRUST NOTES TO SCHEDULE III DECEMBER 31, 1997 (Dollars in thousands) 1. These seventeen properties serve as collateral for the financing with Morgan Stanley Mortgage Capital, Inc. 2. These two properties serve as collateral for a letter of credit with Fleet Bank. 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 $326,412 as of December 31, 1997. 6.(a)Reconciliation of Real Estate Properties: The following reconciles the real estate properties from January 1, 1995 to December 31, 1997: Year ended December 31, 1997 1996 1995 Balance at beginning of period $307,411 $291,157 $278,611 Additions during period Acquisitions through purchase -- -- -- Acquisition through exercise of purchase option -- -- 1,446 Acquisitions and adjustments related to development options and establishment of note payable to the Principal Shareholder -- (3,125) (8,133) Other improvements 7,480 19,380 19,242 Fully depreciated assets written off (998) -- -- Sale of property (2,205) (1) (9) -------- -------- -------- Balance at end of period $311,688 $307,411 $291,157 ======== ======== ======== F-34
MARK CENTERS TRUST NOTES TO SCHEDULE III DECEMBER 31, 1997 (Dollars in thousands) (b) Reconciliation of accumulated depreciation: The following table reconciles accumulated depreciation from January 1, 1995 to December 31, 1997: 1997 1996 1995 Balance at beginning of period $72,956 $61,269 $51,002 Sale of property (905) -- -- Fully depreciated assets written off (998) -- -- Depreciation related to real estate 12,273 11,687 10,267 ------- ------- ------- Balance at end of period $83,326 $72,956 $61,269 ======= ======= ======= F-35