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
MARK CENTERS TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30, December 31,
1998 1997
(unaudited)
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
-------- --------
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
1
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)
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
2
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)
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
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
======= =======
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:
Shareholders' Minority
Equity Interest
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
======= =======
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
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
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)
======= ======= ======= =======
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