SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-12002 MARK CENTERS TRUST (Exact name of registrant in its charter) MARYLAND 23-2715194 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 THIRD AVENUE, KINGSTON, PENNSYLVANIA 18704 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (717) 288-4581 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of August 8, 1997, there were 8,554,177 common shares of beneficial interest, par value $.001 per share, outstanding.
MARK CENTERS TRUST FORM 10-Q INDEX Part I: Financial Information Page Item 1. Financial Statements (Unaudited) Consolidated balance sheets as of June 30, 1997 and as of December 31, 1996 1 Consolidated statements of operations for the three and six months ended June 30, 1997 and 1996 2 Consolidated statements of cash flows for the six months ended June 30, 1997 and 1996 3 Notes to consolidated financial statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II: Other Information Signatures 19
Part I. Financial Information Item 1. Financial Statements <TABLE> <CAPTION> MARK CENTERS TRUST CONSOLIDATED BALANCE SHEETS (in thousands, except for per share amounts) June 30, December 31, 1997 1996 (unaudited) <S> <C> <C> ASSETS Rental property - at cost: Land $ 30,855 $ 31,084 Buildings and improvements 271,209 271,423 Construction-in-progress 6,949 4,904 -------- -------- 309,013 307,411 Less: accumulated depreciation 77,725 72,956 -------- -------- Net rental property 231,288 234,455 Cash and cash equivalents 1,917 3,912 Rents receivable - less allowance for doubtful accounts of $714 and $544, respectively 3,979 4,956 Prepaid expenses 799 1,421 Due from related parties 168 203 Furniture, fixtures and equipment, net 471 570 Deferred charges 9,689 9,034 Mortgage escrows 9,203 3,578 Other assets 716 388 -------- -------- $258,230 $258,517 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage notes payable $179,090 $156,772 Lines of credit 5,267 16,051 Accounts payable and accrued expenses 6,264 9,397 Payable to Principal Shareholder 3,069 3,050 Distributions payable 2,035 3,662 Other liabilities 1,373 2,027 -------- -------- Total Liabilities 197,098 190,959 -------- -------- Minority Interest 9,721 10,752 -------- --------
<S> <C> <C> Shareholders' Equity: Common shares, $.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 52,783 57,521 Deficit (1,381) (724) -------- -------- Total Shareholders' Equity 51,411 56,806 -------- -------- $258,230 $258,517 ======== ======== See accompanying notes </TABLE> 1
<TABLE> <CAPTION> MARK CENTERS TRUST CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (in thousands except for per share amounts) Three months ended Six months ended 6/30/97 6/30/96 6/30/97 6/30/96 (unaudited) (unaudited) <S> <C> <C> <C> <C> Revenue: Minimum rents $ 8,306 $ 8,259 $16,750 $16,725 Percentage rents 841 614 1,525 1,216 Expense reimbursements 1,627 1,607 3,404 3,551 Other 354 239 573 462 ------- ------- ------- ------- Total revenue 11,128 10,719 22,252 21,954 ------- ------- ------- ------- Expenses: Property operating 2,129 2,274 4,692 5,091 Real estate taxes 1,414 1,368 2,853 2,666 Depreciation and amortization 3,365 3,269 6,689 6,471 General and administrative 570 714 1,107 1,472 ------- ------- ------- ------- Total operating expenses 7,478 7,625 15,341 15,700 ------- ------- ------- ------- Operating income 3,650 3,094 6,911 6,254 Loss on sale of property -- -- 12 -- Interest and financing expense 3,910 3,076 7,646 6,050 ------- ------- ------- ------- (Loss) income before minority interest (260) 18 (747) 204 Minority interest 18 (22) 89 (74) ------- ------- ------- ------- Net (loss) income $ (242) $ (4) $ (658) $ 130 ======= ======= ======= ======= Net (loss)income per common share $ (.03) $ .00 $ (.08) $ .02 ======= ======= ======= ======= See accompanying notes </TABLE> 2
<TABLE> <CAPTION> MARK CENTERS TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (in thousands) June 30, June 30, 1997 1996 (unaudited) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (658) $ 130 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of leasing costs 6,384 6,002 Amortization of deferred financing costs 305 469 Minority interest (89) 74 Provision for bad debts 287 574 Loss on sale of property 12 -- Other 52 56 ------- ------- 6,293 7,305 Changes in assets and liabilities: Rents receivable 689 (398) Prepaid expenses 622 530 Due to/from related parties 55 95 Other assets (328) 374 Accounts payable and accrued expenses 511 1,197 Other liabilities (654) (472) ------- ------- Net cash provided by operating activities 7,188 8,631 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for real estate and improvements (4,105) (11,305) (Decrease)increase in accounts payable related to construction in progress (3,645) 6,252 Net proceeds from sale of property 1,288 -- Payment of deferred leasing charges (401) (2,951) Expenditures for furniture, fixtures and equipment (6) -- ------- ------- Net cash used in investing activities (6,869) (8,004) ------- ------- 3
<S> <C> <C> CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on mortgages (11,467) (2,433) Proceeds received on mortgage notes 23,000 5,377 Net (increase) decrease in mortgage escrows (5,625) 1,791 Payment of deferred financing costs (866) (335) Dividends paid (6,155) (6,151) Distributions paid to Principal Shareholder (1,201) (1,212) ------- ------ Net cash used in financing activities (2,314) (2,963) ------- ------- DECREASE IN CASH AND CASH EQUIVALENTS (1,995) (2,336) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,912 3,068 ------ ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,917 $ 732 ======= ======= Supplemental Disclosures of Cash Flow Information: Cash paid during the period for interest, net of amounts capitalized of $261 and $449, respectively $ 7,390 $ 5,867 ======= ======= </TABLE> See accompanying notes 4
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except for per share amounts) 1. BASIS OF PRESENTATION The consolidated financial statements include the consolidated accounts of Mark Centers Trust (the "Company") and its majority owned partnerships, including Mark Centers Limited Partnership (the "Operating Partnership"), and have been prepared in accordance with generally accepted accounting principles for interim financial information and with instruction to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The information furnished in the accompanying consolidated financial statements reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the aforementioned consolidated financial statements for the interim periods. Operating results for the six month period ended June 30, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1997. The aforementioned consolidated financial statements should be read in conjunction with the notes to the aforementioned consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 2. ORGANIZATION AND FORMATION OF THE COMPANY The Company was formed as a Maryland Real Estate Investment Trust ("REIT") 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 an aggregate of 8,350,000 common shares of beneficial interest to the public at an initial public offering price of $19.50 per share (the "Offering"). The proceeds from the Offering were used to repay certain property- related indebtedness, for costs associated with the Offering and 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. 5
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) The Company currently owns and operates thirty-nine properties consisting of thirty-four neighborhood and community shopping centers, three enclosed malls and two mixed use (retail/office) properties. All of the Company's assets are held by, and all of its operations are conducted through, the Operating Partnership and its majority owned partnerships. As of June 30, 1997, the Company controlled 84% of the Operating Partnership as the sole general partner. The Company will at all times be the sole general partner of, and owner of a 51% or greater interest in, the Operating Partnership. The Principal Shareholder, who is the principal limited partner of the Operating Partnership, owns in excess of 99% of the minority interest in the Operating Partnership. 3. SHAREHOLDERS' EQUITY AND MINORITY INTEREST The following table summarizes the change in the shareholders' equity and minority interest since December 31, 1996: <TABLE> <CAPTION> Shareholders' Minority Equity Interest <S> <C> <C> Balance at December 31, 1996 $56,806 $10,752 Net loss for the period January 1 through June 30, 1997 (658) (89) Vesting of restricted shares 52 -- Distributions to Principal Shareholder -- (942) Dividends, $.56 per share (4,789) -- ------- ------- Balance at June 30, 1997 $51,411 $ 9,721 ======= ======= </TABLE> 4. RELATED PARTY TRANSACTIONS As of June 30, 1997 amounts due from related parties consisted of the following: Accrued ground rent due from Blackman Plaza Partners (a limited partnership in which the Principal Shareholder is a 1% general partner) $ 190 Other amounts (net) due to Principal Shareholder (22) ------- $ 168 ======= 6
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 5. MORTGAGE NOTES AND LINES OF CREDIT On June 4, 1997 , the Company extended the maturity date on its line of credit with Firstrust Bank to August 31, 1997. All other terms and conditions of the facility remain in effect. 6. PER SHARE DATA Primary earnings per share are computed based on 8,559,535 and 8,561,294 shares outstanding, which represent the weighted average number of shares outstanding (including restricted shares) during the six month periods ended June 30, 1997 and 1996, respectively. Fully diluted earnings per share is based on an increased number of shares that would be outstanding assuming the exercise of share options at the market price at the end of the period. Since fully diluted earnings per share is not materially dilutive or is anti-dilutive, such amounts are not presented. 7. NEW ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Early adoption is not permitted and the statement requires restatement of all prior-period earnings per share ("EPS") presented after the effective date. The Company will adopt FAS 128 effective with the year ending December 31, 1997 and does not expect the impact on EPS to be material. 8. DISTRIBUTIONS PAYABLE On June 17, 1997, the Trustees declared a cash distribution of $0.20 per common share and OP Unit payable on July 31, 1997 to shareholders and limited partners of record as of June 30, 1997. 7
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 9. ENVIRONMENTAL MATTERS Upon conducting environmental site inspections in connection with the 1996 financing with Morgan Stanley Mortgage Capital, Inc. ("Morgan Stanley"), certain environmental contamination was identified at the Cloud Springs Plaza in Fort Oglethorpe, Georgia (the "Property"), prompting Morgan Stanley to escrow $375,000 of the available loan proceeds to pay for estimated remediation costs. In March 1997, the Company received notice from the Georgia Department of Natural Resources that contamination exceeding a reportable quantity had not occurred and, therefore, the Property would not be listed on the State's Hazardous Site Inventory. Consequently, in July 1997, Morgan Stanley released $375,000 of the escrowed funds to the Company. As the Company expects no further remediation costs will be required by the State of Georgia, the $245,000 reserve for further environmental remediation costs at the Property has been reversed in the June 30, 1997 financial statements. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion is based on the consolidated financial statements of Mark Centers Trust (the "Company") as of June 30, 1997 and 1996 and for the three and six months then ended. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto. These financial statements include all adjustments which, in the opinion of management, are necessary to reflect a fair statement of the results for the interim periods presented, and all such adjustments are of a normal recurring nature. Operating results for the six month period ended June 30, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1997. RESULTS OF OPERATIONS Comparison of Three Months Ended June 30, 1997 to Three Months Ended June 30, 1996 Total revenue increased $409,000, or 4%, to $11.1 million for the quarter ended June 30, 1997 compared to $10.7 million for the quarter ended June 30, 1996. Minimum rents increased $47,000 for the quarter ended June 30, 1997 compared to the same period in 1996. Increases in minimum rents of $235,000 following the completion of Phase I at the Union Plaza in October 1996 and of $132,000 following the opening of HomePlace at the New Louden Center in June 1996 were offset by a decline in minimum rents at two centers resulting from the loss of two anchor tenants (Jamesway at the Ledgewood Mall and Rich's Department Store at the Auburn Plaza) as well as certain tenants at these two centers paying percentage rent in lieu of minimum rent pursuant to anchor cotenancy requirements subsequent to June 30, 1996. Further offsetting the above increases in minimum rent was the loss of $103,000 in minimum rent as a result of the State of Alabama Department of Public Health vacating its leased space at the Normandale Mall following the expiration of its leases in April 1997. Percentage rents, representing the Company's participation in tenants' gross sales above predetermined thresholds, increased $227,000, or 37%, to $841,000 for the quarter ended June 30, 1997 compared to $614,000 for the same period in 1996 primarily as a result of tenants paying percentage rent in lieu of minimum rent pursuant to anchor cotenancy requirements at the Ledgewood Mall and Auburn Plaza. 9
RESULTS OF OPERATIONS, continued Other income increased $115,000, or 48%, to $354,000 for the quarter ended June 30, 1997 from $239,000 for the same period in 1996 primarily as a result of an early lease termination payment of $75,000 received from a tenant at the Troy Plaza in June 1997 and interest earned on mortgage escrows for the quarter ended June 30, 1997. Total operating expenses of $7.5 million for the quarter ended June 30, 1997 decreased $147,000, or 2%, from $7.6 million for the quarter ended June 30, 1996. Property operating expenses decreased $145,000 for the quarter ended June 30, 1997 compared to the same period in 1996 primarily due to the reversal of a $245,000 reserve for previously estimated environmental remediation costs for the Cloud Springs Plaza in June 1997 (Reference Note 9 to the financial statements) offset by increased maintenance at various centers within the Company's portfolio. General and administrative expenses decreased $144,000, or 20%, to $570,000 for the quarter ended June 30, 1997 compared to $714,000 for the same period in 1996 primarily as a result of the write-off of certain non-recurring costs totalling $162,000 during the quarter ended June 30, 1996 as a result of the Company's decision to terminate the acquisition of a center. The foregoing decreases in operating expenses were partially offset by increases in real estate taxes and depreciation and amortization totalling $142,000 for the quarter ended June 30, 1997 primarily due to the Company's property development and expansion activities. Interest and financing expenses increased $834,000 for the quarter ended June 30, 1997 compared to the quarter ended June 30, 1996. This variance was primarily a result of higher average outstanding borrowings related to increased property development and expansion activities. Income before minority interest declined $278,000 to a loss of $260,000 for the quarter ended June 30, 1997 from income of $18,000 for the same period in 1996. 10
Comparison of Six Months Ended June 30, 1997 to Six Months Ended June 30, 1996 Total revenue increased approximately $298,000, or 1%, to $22.3 million for the six months ended June 30, 1997 compared to $22.0 million for the same period in 1996. Increases in minimum rents of $468,000 following the completion of Phase I at the Union Plaza in October 1996, of $263,000 following the opening of HomePlace at the New Louden Center in June 1996 and of $67,000 following the opening of Dunham's Sporting Goods at the East End Centre in August 1996 were offset by a decline in minimum rents at two centers resulting from the loss of two anchor tenants (Jamesway at the Ledgewood Mall and Rich's Department Store at the Auburn Plaza) as well as certain tenants at these two centers paying percentage rent in lieu of minimum rent pursuant to anchor cotenancy requirements subsequent to June 30, 1996. Further offsetting the above increases in minimum rent was the loss of $103,000 in minimum rent as a result of the State of Alabama Department of Public Health vacating its leased space at the Normandale Mall following the expiration of its leases in April 1997. Percentage rents increased $309,000, or 25%, to $1.5 million for the six months ended June 30, 1997 compared to $1.2 million for the same period in 1996 primarily as a result of tenants paying percentage rent in lieu of minimum rent pursuant to anchor cotenancy requirements at the Ledgewood Mall and Auburn Plaza. Other income increased $111,000, or 24%, to $573,000 for the six months ended June 30, 1997 from $462,000 for the same period in 1996 primarily as a result of an early lease termination payment of $75,000 received from a tenant at the Troy Plaza in June 1997 and interest earned on mortgage escrows for the six months ended June 30, 1997. Total operating expenses decreased $359,000, or 2%, to $15.3 million for the six months ended June 30, 1996 compared to $15.7 million for the same period in 1996. Property operating expenses decreased $399,000, or 8%, for the six months ended June 30, 1997 compared to the same period in 1996 primarily due to the reversal of the $245,000 reserve for environmental remediation costs for the Cloud Springs Plaza in June 1997 (Reference Note 9 to the financial statements) and a $352,000 reduction in snow removal costs as a result of the milder 1997 seasonal weather. These were partially offset by increased maintenance, landscaping and cleaning expenses at various centers within the Company's portfolio for the six months ended June 30, 1997. 11
RESULTS OF OPERATIONS, continued General and administrative expenses decreased $365,000, or 25%, to $1.1 million for the six months ended June 30, 1997 compared to $1.5 million for the same period in 1996 primarily as a result of the write-off of non-recurring costs totalling $269,000 following the Company's decision to terminate certain acquisition and development activities during the six months ended June 30, 1996. The foregoing decreases in operating expenses were partially offset by increases in real estate taxes and depreciation and amortization totalling $405,000 for the six months ended June 30, 1997 primarily due to the Company's property development and expansion activities. Net interest and related financing expenses increased approximately $1.6 million for the six months ended June 30, 1997 compared to the same period in 1996. This increase was attributable to higher average outstanding borrowings related to retenanting, acquisition, expansion and development activities. Income before minority interest for the six months ended June 30, 1997 decreased $951,000 to a loss of $747,000 from income before minority interest of $204,000 for the same period in 1996. Funds from Operations 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. 12
<TABLE> <CAPTION> FUNDS FROM OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (in thousands, except per share amounts) Three months ended Six months ended 6/30/97 6/30/96 6/30/97 6/30/96 <S> <C> <C> <C> <C> Revenue Minimum rents (a) $ 8,264 $ 8,168 $16,612 $16,574 Percentage rents 841 614 1,525 1,216 Expense reimbursements 1,627 1,607 3,404 3,551 Other 354 239 573 462 ------- ------- ------- ------- Total revenue 11,086 10,628 22,114 21,803 ------- ------- ------- ------- Expenses Property operating (b) 2,336 2,222 4,888 4,963 Real estate taxes 1,414 1,368 2,853 2,666 General and administrative 568 710 1,100 1,461 ------- ------- ------- ------- Total operating expenses 4,318 4,300 8,841 9,090 ------- ------- ------- ------- Operating income 6,768 6,328 13,273 12,713 Interest and financing expense 3,910 3,076 7,646 6,050 Amortization of deferred financing costs (156) (235) (305) (469) Depreciation of non-real estate assets (53) (54) (105) (111) ------- ------- ------- ------- Funds from operations $ 2,649 $ 2,963 $ 5,217 $ 6,083 ======= ======= ======= ======= Funds from operations per share (c) $ .26 $ .29 $ .51 $ .60 ======= ======= ======= ======= <CAPTION> Reconciliation of funds from Operations to Net Income determined in accordance with Generally Accepted Accounting Principles (GAAP) <S> <C> <C> <C> <C> Funds from operations above $ 2,649 $ 2,963 $ 5,217 $ 6,083 Depreciation and amortization of leasing costs (3,156) (2,980) (6,279) (5,891) Straight-line rents and related write-offs, net 8 42 100 34 Reversal of reserve for environmental remediation costs 245 -- 245 -- Minority interest 18 (22) 89 (74) Loss on sale of property -- -- (12) --
<S> <C> <C> <C> <C> Other non-cash adjustments (6) (7) (18) (22) ------- ------- ------- ------- Net (loss) income $ (242) $ (4) $ (658) $ 130 ======= ======= ======= ======= Net (loss) income per share (d) $ (.03) $ .00 $ (.08) $ .02 ======= ======= ======= ======= </TABLE> 13
(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 Operating Partnership Units into common shares of the Company for the six months ended June 30, 1997 and 1996 respectively, for a total of 10,177,177 and 10,171,817 shares, respectively. (d) Net income per share is computed based on the weighted average number of shares outstanding for the six months ended June 30, 1997 and 1996 of 8,559,535 and 8,561,294, respectively. 14
LIQUIDITY AND CAPITAL RESOURCES The Company has $2.2 million outstanding on its line of credit facility with Firstrust Savings Bank ("Firstrust"). The facility bears interest at the higher of 8.75% or the prime rate established by Firstrust Bank plus 1/2%, requires the monthly payment of principal through the maturity date of August 31, 1997 and is secured by the Mark Plaza. The Company has obtained a commitment from Firstrust to provide additional financing of $3.3 million for the expansion and renovation of the Mark Plaza (of which $3.0 million is included in the 1997 estimated capital outlays as discussed below), and convert the entire facility of $5.5 million to a construction loan to mature in 18 months following closing. The Company has additional mortgage indebtedness of $182.2 million outstanding which bears rates of interest ranging from 7.70% to 9.50% with maturities ranging from April 2, 1998 to November 1, 2021. At June 30, 1997, the Company's capitalization consisted of $184.4 million of debt and $98.0 million of market equity (using a June 30, 1997 market price of $9.625 per share). Of the total outstanding debt, $175.1 million, or 95%, is carried at fixed interest rates and the remaining $9.3 million, or 5%, is carried at variable rates. The Company currently estimates that capital outlays for property development, property expansion and tenant improvements associated with recent leasing activity will require $9.1 million during the remainder of 1997. At June 30, 1997, $652,000 of these outlays are reflected in accounts payable and accrued expense balances and $1.8 million in mortgage escrows. Historically, the principal sources for funding operations, renovations, expansion, development and acquisitions have been funds from operations, construction and permanent secured debt financings, as well as short term construction and line of credit borrowing from various lenders. Consistent with the Company's historical practice of funding certain property expansion and tenant improvements with internally generated cash, the Company believes it prudent to fund certain of the estimated 1997 capital outlays above in a similar manner. As a consequence, in June 1997 the Company reduced its dividend to an annual rate of $.80 per share. 15
LIQUIDITY AND CAPITAL RESOURCES, continued The Company anticipates that this dividend level will enable the funding of certain tenant improvements with internal cash while providing for a sustainable distribution level. Furthermore, the Company anticipates that cash flow from operating activities will continue to provide adequate capital for all debt service payments and recurring capital expenditures as well. This conservative dividend policy which allows for reinvestment in the Company's properties in conjunction with amounts currently escrowed with lenders and the use of construction financing as well as other debt and equity financing alternatives will provide the necessary capital to fund planned 1997 outlays for property development, property expansion and tenant improvements, and achieve continued growth. HISTORICAL CASH FLOW The following discussion of historical cash flow compares the Company's cash flow for the six months ended June 30, 1997 with the Company's cash flow for the six months ended June 30, 1996. Net cash provided by operating activities decreased from $8.6 million for the six months ended June 30, 1996 to $7.2 million for the six months ended June 30, 1997. This variance was primarily attributable to a $1.0 million decrease in cash provided from net income before changes in operating assets and liabilities and a $431,000 decrease in cash provided by changes in operating assets and liabilities for 1997. Investing activities used $6.9 million during the six months ended June 30, 1997, a $1.1 million decrease in cash used from the same period in 1996. This was due to a $2.6 million decrease in deferred leasing charges paid and the receipt of $1.3 million from the sale of the Newberry Plaza during the six months ended June 30, 1997. These amounts were partially offset by $2.7 million more cash used during the six months ended June 30, 1997 related to property development, expansion and retenanting activities (including the payment of accounts payable related thereto). Net cash used in financing activities was $2.3 million for the six months ended June 30, 1997 representing a $649,000 decrease from net cash used in financing activities of $3.0 million for the six months ended June 30, 1996 primarily attributable to financing obtained from Nomura Asset Capital Corporation ("Nomura") on March 4, 1997. 16
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 ten years, which permits 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. 17
PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.3 (e) Amendment Number Three to First Amended and Restated Assumption, Extension and Loan Agreement between the Company and Fleet National Bank 10.17(e) Fourth Amendment to Revolving Credit Loan Agreement between the Company and Mellon Bank, N.A. 27 Financial Data Schedule (EDGAR filing only) (b) Reports on Form 8-K None 18
SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has fully caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MARK CENTERS TRUST By: /s/ Marvin L. Slomowitz Marvin L. Slomowitz Chief Executive Officer and Trustee (Principal Executive Officer) /s/ Joshua Kane Joshua Kane Senior Vice President Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Date: August 14, 1997 19
INDEX OF EXHIBITS 10.3 (e) Amendment Number Three to First Amended and Restated Assumption, Extension and Loan Agreement between the Company and Fleet National Bank 10.17(e) Fourth Amendment to Revolving Credit Loan Agreement between the Company and Mellon Bank, N.A. 27 Financial Data Schedule (EDGAR filing only) 20