UNITED STATES 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, 1998 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 10, 1998, there were 8,557,977 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, 1998 and December 31, 1997 1 Consolidated Statements of Operations for the three and six months ended June 30, 1998 and 1997 2 Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997 3 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Part II:Other Information Signatures 21
Part I. Financial Information Item 1. Financial Statements <TABLE> <CAPTION> MARK CENTERS TRUST CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) June 30, December 31, 1998 1997 (unaudited) <S> <C> <C> ASSETS Real estate Land $ 31,560 $ 30,855 Buildings and improvements 277,410 274,165 Property under development 6,236 6,668 -------- -------- 315,206 311,688 Less: accumulated depreciation 86,232 83,326 -------- -------- Net real estate 228,974 228,362 Cash and cash equivalents 3,959 1,287 Cash in escrow 9,022 7,906 Rents receivable 3,979 4,802 Prepaid expenses 820 1,241 Due from related parties -- 177 Deferred charges, net 12,385 9,710 Other assets 774 1,015 -------- -------- $259,913 $254,500 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Mortgage notes payable $193,832 $183,943 Accounts payable and accrued expenses 5,710 7,553 Note payable to Principal Shareholder 3,050 3,050 Other liabilities 1,724 1,910 -------- -------- Total Liabilities 204,316 196,456 -------- -------- Minority Interest 8,862 9,244 -------- --------
<S> <C> <C> Shareholders' Equity: Common shares, $.001 par value, authorized 50,000,000 shares, issued and outstanding 8,557,977 and 8,554,177 shares, respectively 9 9 Additional paid-in capital 51,102 51,073 Deficit (4,376) (2,282) -------- -------- Total Shareholders' Equity 46,735 48,800 -------- -------- $259,913 $254,500 ======== ======== See accompanying notes </TABLE> 1
<TABLE> <CAPTION> MARK CENTERS TRUST CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (in thousands, except per share amounts) Three months ended Six months ended 6/30/98 6/30/97 6/30/98 6/30/97 (unaudited) (unaudited) <S> <C> <C> <C> <C> Revenues Minimum rents $ 8,509 $ 8,306 $16,973 $16,750 Percentage rents 524 841 1,089 1,525 Expense reimbursements 1,527 1,627 3,280 3,404 Other 189 354 358 573 ------- ------- ------- ------- Total revenues 10,749 11,128 21,700 22,252 ------- ------- ------- ------- Operating Expenses Property operating 2,263 2,129 4,555 4,692 Real estate taxes 1,403 1,414 2,831 2,853 Depreciation and amortization 3,512 3,365 6,985 6,689 General and administrative 589 570 1,045 1,107 Non-recurring merger- related charges 554 -- 554 -- ------- ------- ------- ------- Total operating expenses 8,321 7,478 15,970 15,341 ------- ------- ------- ------- Operating income 2,428 3,650 5,730 6,911 Loss on sale of property -- -- -- 12 Interest expense 3,996 3,910 7,919 7,646 ------- ------- ------- ------- Loss before extraordinary item and minority interest (1,568) (260) (2,189) (747) Extraordinary item - loss on extinguishment of debt (268) -- (268) -- ------ ------ ------ ------ (1,836) (260) (2,457) (747) Minority interest 275 18 363 89 ------- ------- ------- ------- Net loss $(1,561) $ (242) $ (2,094) $ (658) ======= ======= ======= =======
Basic and diluted net loss per common share: Loss before extraordinary item $ (.15) $ (.03) $ (.21) $ (.08) Extraordinary item (.03) -- (.03) -- ------ ------ ------ ------ Basic and diluted net loss per common share $ (.18) $ (.03) $ (.24) $ (.08) ======= ======= ======= ======= See accompanying notes </TABLE> 2
<TABLE> <CAPTION> MARK CENTERS TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (in thousands) June 30, June 30, 1998 1997 (unaudited) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (2,094) $ (658) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 6,985 6,689 Extraordinary item - loss on extinguishment of debt 268 -- Minority interest (363) (89) Provision for bad debt 578 287 Loss on sale of property -- 12 Other 29 52 ------- ------- 5,403 6,293 Changes in assets and liabilities: Rents receivable 245 689 Prepaid expenses 421 622 Due from related parties 177 55 Other assets 116 (334) Accounts payable and accrued expenses (686) 511 Other liabilities (186) (654) ------- ------- Net cash provided by operating activities 5,490 7,182 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for real estate and improvements (8,026) (7,750) Net proceeds from sale of property -- 1,288 Payment of deferred leasing charges (2,125) (401) ------- ------- Net cash used in investing activities (10,151) (6,863) ------- ------- 3
<S> <C> <C> CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on mortgages (9,730) (11,467) Proceeds received on mortgage notes 19,619 23,000 Net funding of escrows (1,091) (5,625) Payment of deferred financing and other costs (1,446) (866) Dividends paid -- (6,155) Distributions paid to Principal Shareholder (19) (1,201) ------- ------- Net cash provided by (used in) financing activities 7,333 (2,314) ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,672 (1,995) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,287 3,912 ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,959 $ 1,917 ======= ======= Supplemental Disclosures of Cash Flow Information: Cash paid during the period for interest, net of amounts capitalized of $342 and $261, respectively $ 7,807 $ 7,390 ======= ======= </TABLE> See accompanying notes 4
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 1. THE COMPANY Mark Centers Trust (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 Mark Centers Limited Partnership, (the "Operating Partnership") and its majority owned partnerships. As of June 30, 1998, 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. Marvin L. Slomowitz (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. The Company is operating as a real estate investment trust ("REIT") for federal income tax purposes. On April 15, 1998 the Company entered into a Contribution and Share Purchase Agreement (the "Agreement") which will provide additional properties and capital to the Company. Subject to the satisfaction of all conditions to the transaction, including approval by the Company's shareholders at a meeting scheduled to be held August 12, 1998, 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 11.1 million Operating Partnership Units and approximately 1.9 million newly issued common shares of beneficial interest, will acquire substantially all of the ownership interests in thirteen retail shopping centers, five multi-family apartment complexes, one redevelopment property, certain third party management contracts and certain promissory notes owned by real estate investment partnerships and related entities in which RD Capital, Inc., a Delaware corporation ("RD Capital"), or its affiliates serves as the general partner or in another similar management capacity. In addition, the Company will also receive a cash investment of $100 million from affiliates of RD Capital in exchange for approximately 13.3 million newly issued common shares of beneficial interest valued at a price of $7.50 per share. The Agreement also provides that Ross Dworman and Kenneth Bernstein of RD Capital will become 5
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 1. THE COMPANY, continued Chairman of the Board and 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 as a consultant to the Company. The two new executives will serve on the board together with two independent designees of RD Capital and two independent designees (in addition to Mr. Slomowitz) of the existing board. The Company will change its name to Acadia Realty Trust effective upon the closing of the transaction. The transaction is a complex one involving many parties and there can be no assurance that the closing on this transaction will be completed. The transaction is described in greater detail in the Company's proxy statement relating to the 1998 meeting of shareholders. The Company has incurred costs totalling $1,063 related to this transaction as of June 30, 1998 which are included in deferred charages in the accompanying financial statements. 2. BASIS OF PRESENTATION The consolidated financial statements include the consolidated accounts of the Company and its majority owned partnerships, including 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, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1998. For further information refer to the consolidated financial statements and accompanying footnotes included in the Company's Annual Report on Forms 10-K and 10-K/A for the year ended December 31, 1997. 6
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 3. SHAREHOLDERS' EQUITY AND MINORITY INTEREST The following table summarizes the change in the shareholders' equity and minority interest since December 31, 1997: <TABLE> <CAPTION> Shareholders' Minority Equity Interest <S> <C> <C> Balance at December 31, 1997 $48,800 $ 9,244 Net loss for the period January 1 through June 30, 1998 (2,094) (363) Vesting of restricted shares 29 -- Distributions to Principal Shareholder -- (19) ------- ------- Balance at June 30, 1998 $46,735 $ 8,862 ======= ======= </TABLE> 4. MORTGAGE LOANS On June 1, 1998, the Company closed on $20,700 in short-term financing with Credit Suisse First Boston Mortgage Capital LLC ("CS First Boston"). The facility, which bears interest at LIBOR plus 312 basis points through the original term ending December 1, 1998 and LIBOR plus 462 basis points during an extension period ending June 1, 1999, is secured by four of the Company's properties (the "Properties"). The loan agreement contains customary representations, events of default and certain affirmative and negative covenants. Of the loan proceeds, $2,000 was unfunded and held back for certain planned construction at one of the Properties as well as an additional $2,000 for an interest reserve and a ground lease at one of the Properties. Approximately $9,903 was used to refinance existing debt and pay for transaction costs, $986 was used to acquire building and other improvements constituting the Blackman Plaza, $326 was deposited into escrows and the remaining $5,485 was available for working capital. At closing, the Company paid $1,541 from this available working capital to Pharmhouse Corp., a tenant at the Ledgewood Mall who had obtained an injunction against the installation of Walmart at the mall based on certain exclusive use provisions within Pharmhouse Corp.'s lease. As a result of this settlement, the Company anticipates proceeding with the installation of Walmart in approximately 120,000 square feet at the property. 7
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 4. MORTGAGE LOANS, continued The Company intends on repaying this loan commensurate with the closing of the RD Capital transaction with the cash to be invested by affiliates of RD Capital. If the Company is unable to close on the RD Capital transaction as anticipated and the Company is unable to repay the loan by June 1, 1999, CS First Boston would then have the option to (a) foreclose on the Properties or (b) convert the facility to a permanent loan with a term of ten years and monthly payment of interest at a rate equal to the applicable U.S. Treasury rate plus 300 basis points and principal payments based on a thirty year amortization period. 5. RELATED PARTY TRANSACTIONS On June 1, 1998, the Company purchased for $1,372 the building and other improvements constituting the Blackman Plaza from Blackman Plaza Partners in which the Principal Shareholder is the sole general partner (owning a one percent economic interest). The Company was already the owner of the land. Payment for the building and other improvements was made with the proceeds from the CS First Boston financing and the application of ground rent in arrears totalling $496 due the Company. 6. PER SHARE DATA Basic earnings per share was determined by dividing the net loss applicable to common shareholders by the weighted average number of common shares of beneficial interest ("Common Shares") outstanding during each period consistent with the guidelines of the Financial Accounting Standards Board Statement No. 128. The weighted average number of Common Shares for the six months ended June 30, 1998 and 1997 totalled 8,554,810 and 8,549,642, respectively. 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 six months ended June 30, 1998 and 1997, no additional Common Shares were reflected as the impact would be anti-dilutive due to the net loss in each period. 8
MARK CENTERS TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 7. NEW ACCOUNTING PRONOUNCEMENT On May 21, 1998, the Emerging Issue Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus opinion on Issue No. 98-9 "Accounting for Contingent Rent in Interim Financial Periods" which requires the lessor to defer income recognition for contingent rents in interim periods until the specified target, or in the case of percentage rent, the tenant sales breakpoint, is met. The Company has traditionally recognized percentage rent in interim periods based on historical tenant sales which was in accordance with Generally Accepted Accounting Principles. The Company has adopted this EITF consensus on a prospective basis for the quarter ended June 30, 1998. Percentage rents as reported for the quarter ended June 30, 1998 were unfavorably impacted by $237 as a result of the adoption of this EITF consensus. 8. SUBSEQUENT EVENTS On July 2, 1998, the Principal Shareholder converted 800,000 Operating Partnership Units to 800,000 common shares of beneficial interest of the Company. 9
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, 1998 and 1997 and for the six months then ended. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto. Certain statements made in this report may constitute "forward- looking statements" within the meaning of 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 Three Months Ended June 30, 1998 ("1998") to Three Months Ended June 30, 1997 ("1997") Total revenues decreased $379,000, or 3%, to $10.7 million for 1998 compared to $11.1 million for 1997. Minimum rents increased $203,000, or 2%, to $8.5 million for 1998 compared to $8.3 million for 1997. Increases in minimum rents in 1998 resulted primarily from the May 1998 opening and payment of rent totalling $57,000 in 1998 from Redner's Supermarket, a $32,000 increase in rents following the acquisition of the Blackman Plaza on June 1, 1998, and the effect of Stern's at the Ledgewood Mall reverting to paying minimum rent of $138,000 in 1998. During 1997, Stern's was paying percentage rent in lieu of minimum rent pursuant to anchor cotenancy requirements with Jamesway which vacated the Ledgewood Mall in 1996. Increases in minimum rents were also experienced at certain centers in 1998 following the re-tenanting of space at increased market rates. These increases were partially offset by $48,000, reflecting the effect of Bruno's vacating its 48,000 square feet at the 10
RESULTS OF OPERATIONS, continued Martintown Plaza following its Chapter 11 bankruptcy filing on January 2, 1998. Office Depot, Inc. opened on June 21, 1998 in 30,000 square feet of this space at a higher per square foot rent. Further offsetting the above increases in minimum rent was a negotiated reduction in rent for Homeplace at the New Louden Center following its Chapter 11 bankruptcy filing on January 5, 1998. Although the Company has not yet received notification from Homeplace Stores that they are rejecting this lease, the tenant has notified the Company that it intends on vacating the space during 1998. Percentage rents decreased $317,000, or 38%, to $524,000 for 1998 compared to $841,000 for 1997. $237,000 of the decrease was the result of the adoption and implementation of the Emerging Issue Task Force ("EITF") Issue No. 98-9 "Accounting for Contingent Rent in Interim Financial Periods" as discussed in Note 7 to the accompanying financial statements. The remaining decrease was primarily from the effect of Stern's at the Ledgewood Mall paying minimum rent rather then percentage rent in 1998 as discussed above. Other income decreased $165,000 for 1998 primarily as a result of lease termination settlements paid by two tenants in 1997 and a decrease in interest earning assets for 1998. Total operating expenses of $8.3 million for 1998 increased $843,000, or 11%, from $7.5 million for 1997. Property operating expenses increased $134,000, or 6%, for 1998 compared to 1997 primarily due to the non-recurring impact of a reversal of a $245,000 reserve for environmental remediation costs for the Cloud Springs Plaza in 1997 following notification in March 1997 from the Georgia Department of Natural Resources that contamination exceeding a reportable quantity had not occurred. This was partially offset by an aggregate $139,000 decrease in repairs and maintenance expense in the portfolio in 1998. Depreciation and amortization increased $147,000 for 1998 primarily due to the Company's property development and expansion activities. Non-recurring charges of $554,000 are costs incurred specific to certain non-recurring events and represent the payment of retention bonuses to certain Company officers in 1998. 11
RESULTS OF OPERATIONS, continued Interest expense of $4.0 million for 1998 increased $86,000, or 2%, from $3.9 million for 1997 primarily as a result of higher average outstanding borrowings related primarily to increased property development and expansion activities. As a result of the foregoing and a $268,000 extraordinary loss on the extinguishment of certain debt following the financing with CS First Boston, the net loss before minority interest of $1.8 million for 1998 increased $1.6 million from a loss of $260,000 for 1997. Comparison of Six Months Ended June 30, 1998 ("1998") to Six Months Ended June 30, 1997 ("1997") Total revenues decreased $552,000, or 2%, to $21.7 million for 1998 compared to $22.3 million for the quarter ended June 30, 1997. Minimum rents increased $223,000, or 1%, to $17.0 million for 1998 compared to $16.8 million for 1997. Increases in minimum rents in 1998 resulted primarily from the May 1998 opening of Redner's Supermarket and acquisition of the Blackman Plaza as previously discussed under the three months ended June 30, 1998, as well as from re-tenanting efforts at certain centers resulting in most notably a $134,000 increase in rents at the East End Centre and a $97,000 increase in rents at the Northwood Centre. An increase in minimum rents was also experienced from the effect of Stern's at the Ledgewood Mall reverting to paying minimum rent of $277,000 in 1998 as previously discussed. These increases were partially offset by the effect of Bruno's vacating the Martintown Plaza and the negotiated reduction in rent for Homeplace at the New Louden Center as also mentioned above. The above increases were also partially offset by the $141,000 effect 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 and the $32,000 effect of the sale of the Newberry Plaza in March 1997. Percentage rents decreased $436,000, or 29%, to $1.1 million for 1998 compared to $1.5 million for 1997. $237,000 of the decrease was the result of the adoption and implementation of EITF No. 98- 9 and the remaining decrease was primarily from the effect of Stern's at the Ledgewood Mall paying minimum rent rather then percentage rent in 1998 as discussed above. 12
RESULTS OF OPERATIONS, continued Other income decreased $215,000 for 1998 primarily as a result of lease termination settlements paid by two tenants in 1997 and a decrease in interest earning assets in 1998. Total operating expenses of $16.0 million for 1998 increased $629,000, or 4%, from $15.3 million for 1997. Property operating expenses decreased $137,000 for 1998 compared to 1997 primarily due to a $261,000 decrease in winter related expenses following the comparatively mild weather experienced in the Northeast in 1998, a $160,000 decrease in repairs and maintenance expense and a $188,000 decrease in other property operating expenses. These were partially offset by a $203,000 increase in the provision for bad debt in 1998 and the non- recurring impact of the reversal of a $245,000 reserve for environmental remediation costs for the Cloud Springs Plaza in 1997 as previously discussed. Depreciation and amortization increased $296,000 for 1998 primarily due to the Company's property development and expansion activities. Non-recurring charges of $554,000 in 1998 are costs incurred specific to certain non-recurring events as previously discussed. Interest expense of $7.9 million for 1998 increased $273,000, or 3%, from $7.9 million for 1997 primarily as a result of higher average outstanding borrowings related primarily to increased property development and expansion activities. As a result of the foregoing and a $268,000 extraordinary loss on the extinguishment of certain debt, the net loss before minority interest of $2.5 million for 1998 increased $1.7 million from a loss of $747,000 for 1997. 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. 13
<TABLE> <CAPTION> FUNDS FROM OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (in thousands, except per share amounts) Three months ended Six months ended 6/30/98 6/30/97 6/30/98 6/30/97 <S> <C> <C> <C> <C> Revenues Minimum rents (a) $ 8,470 $ 8,264 $16,877 $16,612 Percentage rents 524 841 1,089 1,525 Expense reimbursements 1,527 1,627 3,280 3,404 Other 189 354 358 573 ------- ------- ------- ------- Total revenues 10,710 11,086 21,604 22,114 ------- ------- ------- ------- Operating Expenses Property operating (b) 2,101 2,336 4,363 4,888 Real estate taxes 1,403 1,414 2,831 2,853 General and administrative 578 568 1,025 1,100 ------- ------- ------- ------- Total operating expenses 4,082 4,318 8,219 8,841 ------- ------- ------- ------- Operating income 6,628 6,768 13,385 13,273 Interest expense 3,996 3,910 7,919 7,646 Amortization of deferred financing costs 179 156 324 305 Depreciation of non-real estate assets 54 53 101 105 ------- ------- ------- ------- Funds from operations $ 2,399 $ 2,649 $ 5,041 $ 5,217 ======= ======= ======= ======= Funds from operations per share (c) $ .24 $ .26 $ .50 $ .51 ======= ======= ======= ======= Funds from operations above$ 2,399 $ 2,649 $ 5,041 $ 5,217 Depreciation of real estate and amortization of leasing costs (3,279) (3,156) (6,560) (6,279) Straight-line rents and related write-offs, (net) (27) 8 1 100 Reserve for environmental remediation costs (88) 245 (88) 245 Non-recurring merger-related charges (554) -- (554) -- Minority interest 275 18 363 89 Loss on sale of property -- -- -- (12)
Other non-cash adjustments (19) (6) (29) (18) Extraordinary item - loss on extinguishment of debt (268) -- (268) -- ------- ------- ------- ------- Net loss $(1,561) $ (242) $ (2,094) $ (658) ======= ======= ======= ======= Net loss per share (d) $ (.18) $ (.03) $ (.24) $ (.08) ======= ======= ======= ======= </TABLE> 14
(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, non-cash charges for compensation expense related to the Company's restricted share plan and certain non-recurring expenses. (c) Assumes full conversion of 1,623,000 Operating Partnership Units into common shares of the Company for the six months ended June 30, 1998 and 1997 respectively. (d) Net loss per share (basic and diluted) is computed based on the weighted average number of shares outstanding for the six months ended June 30, 1998 and 1997 of 8,554,810 and 8,549,642, respectively. 15
LIQUIDITY AND CAPITAL RESOURCES As previously disclosed in a current report on Form 8-K filed on April 20, 1998, and as discussed in Note 1 in the accompanying financial statements, the Company has entered into a Contribution and Share Purchase Agreement with certain real estate investment partnerships and related entities in which RD Capital, ("RDC") or certain of its affiliates serves as the general partner or in another similar management capacity, which will provide additional properties and capital to the Company. This transaction is described in greater detail in the Company's proxy statement relating to its 1998 meeting of shareholders. Consummation of the transaction is subject to the satisfaction of a number of conditions, including, but not limited to approval by the Company's shareholders. If the transaction is completed as anticipated, the Company's liquidity and capital resources would be significantly impacted. Pursuant to the terms of the Agreement, the Company has agreed, among other things, not to declare or pay a dividend until the closing of the RDC transaction. After closing, the newly reconstituted Board of Trustees will reassess the Company's dividend policy in light of the new Company's REIT distribution requirements, cash flow and prospects. On June 1, 1998, the Company closed on $20.7 million in short- term financing with Credit Suisse First Boston Mortgage Capital LLC ("CS First Boston") which is expected to fund a significant portion of the Company's planned 1998 capital outlays for tenant improvements, related renovations and other property improvements. The facility, which bears interest at LIBOR plus 312 basis points through the original term ending December 1, 1998 and LIBOR plus 462 basis points during an extension period ending June 1, 1999, is secured by four of the Company's properties (the "Properties"). The loan agreement contains customary representations, events of default and certain affirmative and negative covenants. Of the loan proceeds, $2.0 million was unfunded and held back for certain planned construction at one of the Properties (which comprises $1.5 million of the Company's estimated 1998 capital outlays discussed below) as well as an additional $2.0 million for an interest reserve and a ground lease at one of the Properties. Approximately $9.9 million was used to refinance existing debt and pay for transaction costs, $986,000 was used to acquire the building and other improvements constituting the Blackman Plaza, $326,000 was deposited into escrows and the remaining $5.5 million was available for working capital. At closing, the Company paid $1.5 million from this available working capital to 16
LIQUIDITY AND CAPITAL RESOURCES, continued Pharmhouse Corp., a tenant at the Ledgewood Mall who had obtained an injunction against the installation of Walmart at the mall based on certain exclusive use provisions within Pharmhouse Corp.'s lease. As a result of this agreed settlement, the Company anticipates proceeding with the installation of Walmart in approximately 120,000 square feet at the property. The Company intends on repaying this loan commensurate with the closing of the RDC transaction with the cash to be invested by affiliates of RD Capital. If the Company is unable to close on the RDC transaction as anticipated and the Company is unable to repay the loan by June 1, 1999, CS First Boston would then have the option to (a) foreclose on the Properties or (b) convert the facility to a permanent loan with a term of ten years and monthly payment of interest at a rate equal to the applicable U.S. Treasury rate plus 300 basis points and principal payments based on a thirty year amortization period. As of June 30, 1998 interest on the Company's mortgage indebtedness ranged from 7.7% to 10.0% with maturities that ranged from September 1998 to November 2021. Of the total outstanding debt, $173.4 million, or 89%, was carried at fixed interest rates and the remaining $20.4 million, or 11%, carried at variable rates. Of the total outstanding debt, $115.4 million will become due by 2000, with scheduled maturities of $2.3 million in 1998, $16.7 million in 1999 and $96.4 million in 2000. As the Company 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 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. 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 borrowings from various lenders. The Company anticipates that cash flow from operating activities will continue to provide adequate capital for all debt service payments, recurring capital expenditures and REIT distribution requirements. Consistent with past practice, the Company anticipates that it will obtain construction financing related to its capital outlays for certain 17
LIQUIDITY AND CAPITAL RESOURCES, continued property development, property expansion and tenant improvements. However, the Company may experience a cash shortfall in 1998, in the absence of consummating the proposed RDC transaction, if there are delays in obtaining construction financing to fund its anticipated capital outlays. Any delays in construction financing will increase the Company's short term reliance on cash from operations to meet these commitments. The Company currently estimates that capital outlays of approximately $9.1 million will be required for tenant improvements, related renovations and other property improvements primarily as a result of executed leases under which the Company expects tenants to commence occupancy during the next 12 months. Of this amount, approximately $3.0 million will be provided through existing construction financing and through amounts held back from the financing with CS First Boston for certain planned construction at one of the Properties. The remaining planned costs are expected to be funded through existing working capital on hand as a result of the CS First Boston financing and future construction financing or alternative sources of capital. The Company's inability to obtain future financing or obtain alternative sources of capital would have an adverse effect on the Company's ability to fund current tenant installation activity. HISTORICAL CASH FLOW The following discussion of historical cash flow compares the Company's cash flow for the six months ended June 30, 1998 ("1998") with the Company's cash flow for the six months ended June 30, 1997 ("1997"). Net cash provided by operating activities decreased from $7.2 million for 1997 to $5.5 million for 1998. This variance was primarily attributable to a $1.2 million increase in cash used to pay accounts payable and accrued expenses for 1998. Investing activities used $10.2 million during 1998 representing a $3.3 million increase in cash of $6.9 million used during 1997. The Company received $1.7 million in sales proceeds in 1997 related to the sale of the Newberry Plaza. Cash used for deferred leasing costs increased in 1998 primarily as a result of the payment of $1.5 million to Pharmhouse Corp., a tenant at the Ledgewood Mall as previously discussed under "Liquidity and Capital Resources". 18
HISTORICAL CASH FLOW, continued Net cash provided by financing activities of $7.3 million increased $9.6 million compared to $2.3 million used during 1997. $7.3 million of the increase resulted from a reduction in dividends and distributions paid in 1998. The remaining increase was primarily attributable to an increase in net proceeds provided from refinancings. 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. 19
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 10.17(g) Sixth Amendment to Revolving Credit Loan Agreement between the Company and Mellon Bank, N.A. 10.22(c) First Amendment to the Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Leases, Rents and Security Deposits between the Company and GMAC Commercial Mortgage Corporation 10.28(a) Loan agreement between the Company and Credit Suisse First Boston Mortgage Capital, LLC 10.28(b) Mortgage note between the Company and Credit Suisse First Boston Mortgage Capital, LLC 21 List of Subsidiaries of Mark Centers Trust 27 Financial Data Schedule (EDGAR filing only) (b) Reports on Form 8-K A Form 8-K was filed on April 20, 1998 under Item 5 - Other Events, in which the Company reported that it had entered into a Contribution and Share Purchase with RD Capital, Inc. and certain affiliates. 20
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 10, 1998 21
INDEX OF EXHIBITS 10.17(g) Sixth Amendment to Revolving Credit Loan Agreement between the Company and Mellon Bank, N.A. 10.22(c) First Amendment to the Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Leases, Rents and Security Deposits between the Company and GMAC Commercial Mortgage Corporation 10.28(a) Loan agreement between the Company and Credit Suisse First Boston Mortgage Capital, LLC 10.28(b) Mortgage note between the Company and Credit Suisse First Boston Mortgage Capital, LLC 21 List of Subsidiaries of Mark Centers Trust 27 Financial Data Schedule (EDGAR filing only) 22