U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from __________________ to ________________
Commission file number 1-10641
MILESTONE PROPERTIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 65-0158204
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
150 E. Palmetto Park Rd. 4th Floor, Boca Raton, FL 33432
- ---------------------------------------------------- ------------------
(Address of Principal Executive Offices) (Zip Code)
(561) 394-9533
(Registrant's Telephone Number, Including Area Code)
(Former name, former address and former fiscal year, if changed since
last report)
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 May 8, 1998, 3,033,995 shares of the registrant's common stock, par value
$.01 per share, and 4,213,368 shares of the registrant's $.78 Convertible Series
A preferred stock, par value $.01 per share, were outstanding.
<PAGE>
Part I: Financial Information
Item 1. Financial Statements
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1998 (Unaudited) and December 31, 1997
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
---------------- -----------------
Assets:
Current Assets:
<S> <C> <C>
Cash and cash equivalents .................................................. $ 12,230,077 $ 13,435,237
Restricted Cash ............................................................ 222,000 222,000
Loans receivable ........................................................... 1,496,176 1,512,744
Accounts receivable ........................................................ 1,154,306 1,265,625
Accrued interest receivable ................................................ 1,870,514 8,465,528
Due from related party ..................................................... 469,805 391,851
Prepaid expenses and other ................................................. 978,399 1,034,613
------------- -------------
Total current assets .................................................. 18,421,277 26,327,598
Property, improvements and equipment, net .................................. 19,540,217 19,610,060
Wraparound notes, net ...................................................... 52,849,581 59,402,931
Deferred income tax asset, net ............................................. 4,586,209 4,058,358
Investments in preferred stock ............................................. 1,783,100 2,228,600
Management contract rights, net ............................................ 263,723 290,926
Goodwill and other, net .................................................... 743,068 304,639
------------- -------------
Total assets .......................................................... $ 98,187,175 $ 112,223,112
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ...................................... $ 615,417 $ 2,015,942
Accrued interest payable ................................................... 355,381 259,116
Master lease payable ....................................................... 3,439,381 13,637,564
Due to related party ....................................................... 100,680 0
Current portion of mortgages and notes payable ............................. 38,169,505 38,456,766
Income taxes payable ....................................................... 2,822,119 2,822,119
------------- -------------
Total current liabilities ............................................. 45,502,483 57,191,507
Mortgages and notes payable ................................................ 27,470,179 29,282,798
------------- -------------
Total liabilities ..................................................... 72,972,662 86,474,305
------------- -------------
Commitments and Contingencies
Stockholders' equity:
Common stock ...............................................................
($0.01 par value, 10,000,000 shares authorized, 4,905,959
issued and outstanding: 692,591 shares in treasury) .......... .......... 49,060 49,060
Preferred stock (Series A $0.01 par value, $10
liquidation preference 10,000,000 shares
authorized, 3,033,995 shares issued and
outstanding) ............................................................ 30,341 30,341
Additional paid-in surplus ................................................. 48,105,428 48,105,428
Accumulated deficit ........................................................ (19,529,898) (18,995,604)
Shares held in treasury - 692,591 shares at cost ........................... (3,440,418) (3,440,418)
------------- -------------
Total stockholders' equity ............................................ 25,214,513 25,748,807
------------- -------------
Total liabilities and stockholders' equity ............................ $ 98,187,175 $ 112,223,112
============= =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
1
<PAGE>
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES
(Unaudited)
For the Three Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
--------------- ---------------
REVENUES:
<S> <C> <C>
Rent ...................................................................... $ 2,745,805 $ 2,871,450
Interest income ........................................................... 2,240,556 3,376,327
Revenue from management company operations ................................ 195,842 200,691
Tenant reimbursements ..................................................... 257,384 357,989
Management and reimbursement income ....................................... 29,051 263,132
Percentage rent ........................................................... 109,248 70,076
Amortization of discount - available-for-sale securities .................. 0 89,300
Unrealized gain on treasury notes sold short .............................. 0 403,430
Gain on realization of wraparound notes ................................... 81,890 0
Loss on sale of available-for-sale securities ............................. 0 (784,122)
--------------- ---------------
Total revenues ............................................................ 5,659,776 6,848,273
--------------- ---------------
EXPENSES:
Master lease expense ...................................................... 3,445,833 3,531,826
Interest expense .......................................................... 1,519,598 2,263,277
Depreciation and amortization ............................................. 208,073 193,108
Salaries, general and administrative ...................................... 576,328 605,018
Property expenses ......................................................... 443,666 434,724
Expenses for management company operations ................................ 268,265 285,340
Professional fees ......................................................... 219,345 206,938
--------------- ---------------
Total expenses ............................................................ 6,681,108 7,520,231
--------------- ---------------
Loss before income taxes ....................................................... (1,021,332) (671,958)
Benefit for income taxes ....................................................... (487,038) (322,921)
--------------- ---------------
Net loss ....................................................................... $ (534,294) $ (349,037)
=============== ===============
Loss attributable to common stockholders ....................................... $ (0.13) $ (0.08)
=============== ===============
Weighted average common shares outstanding ..................................... 4,213,368 4,188,451
=============== ===============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
2
<PAGE>
MILESTONE PROPERTIES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
Common Stock Preferred Stock Treasury Stock
------------------ -------------------- --------------------
Shares Amount Shares Amount Shares Cost
-------- -------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1998 4,905,959 $ 49,060 3,033,995 $ 30,341 (692,591) (3,440,418)
Net loss for the three months ended
March 31, 1998
Balance March 30, 1998 4,905,959 $ 49,060 3,033,995 $ 30,341 (692,591) $(3,440,418)
========= ======== ========= ======= ========== ============
Additional
Paid-in Accumulated Stockholders'
Surplus Deficit Equity
------------- ------------ ------------
<S> <C> <C> <C>
Balance January 1, 1998 $48,105,428 $(18,995,604) $25,748,807
Net loss for the three months ended
March 31, 1998 (534,294) (534,294)
Balance March 30, 1998 $48,105,428 $(19,529,898) $25,214,513
=========== ============ ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
3
<PAGE>
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES .......................... March 31, 1998 March 31, 1997
----------------- -----------------
<S> <C> <C>
Net loss ...................................................... $ (534,294) $ (349,037)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization ............................ 208,073 193,108
Deferred income taxes ................................... (527,851) 280,032
Unrealized gain on treasury notes sold short ............. 0 (403,430)
Amortization of discount - available-for-sale securities . 0 (89,300)
Realized loss on sale of available-for-sale securities ... 0 784,122
Gain on realization of wraparound notes .................. 81,890 0
Change in operating assets and liabilities net:
Decrease in accounts receivable ........................ 111,319 437,000
Increase in due from related party ..................... (77,954) (239,786)
Decrease in accrued interest receivable ................ 6,595,014 7,231,812
Decrease (increase) in prepaid expenses and other ...... (400,786) 210,873
Decrease in accounts payable and accrued expenses ...... (1,400,525) (1,452,816)
Increase (decrease) in accrued interest payable ........ 96,265 (654,360)
Decrease in master lease payable ....................... (10,198,183) (10,735,449)
Decrease in income taxes payable ....................... 0 (645,724)
Increase (decrease) in due to related party ............ 100,680 (61,688)
----------------- -----------------
Net cash used in operating activities .................. (5,946,352) (5,494,643)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayments on loans receivable ................. 16,568 124,072
Principal repayments on wraparound notes ................. 5,061,340 4,727,683
Issuance of wraparound notes ............................. 15,000 0
Purchase of leasehold improvements ....................... (92,456) (9,965)
Proceeds from realization of wraparound notes ............ 75,000 0
Proceeds from the sale of available-for-sale securities .. 0 9,498,529
Proceeds from redemption of investments in preferred stock 445,500 394,333
Proceeds from redemption of reverse repurchase agreements 0 9,803,443
Purchase of treasury notes ............................... 0 (9,166,015)
----------------- -----------------
Net cash provided by investing activities .............. 5,520,952 15,372,080
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgages and notes payable ........ (779,760) (962,167)
Principal payments on loans payable ...................... 0 (6,533,401)
Amounts received on treasury notes payable ............... 0 403,430
----------------- -----------------
Net cash used in financing activities .................. (779,760) (7,092,138)
----------------- -----------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS .............................................. (1,205,160) 2,785,299
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................ 13,435,237 3,141,839
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................... $ 12,230,077 $ 5,927,138
================= =================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for interest ................. $ 1,423,333 $ 2,917,637
================= =================
Cash paid during the period for income taxes ............. $ 40,813 $ 64,823
================= =================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
MILESTONE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying consolidated financial statements of Milestone Properties, Inc
("Milestone") and its wholly owned subsidiaries (together with Milestone, the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 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. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The financial statements as of and for the
periods ended March 31, 1998 and 1997 are unaudited. The results of operations
for the interim periods are not necessarily indicative of the results of
operations for the fiscal year. Certain information for 1997 has been
reclassified to conform to the 1998 presentation. These consolidated financial
statements should be read in conjunction with the financial statements and
footnotes included thereto in Milestone's Annual Report on Form 10-K for the
year ended December 31, 1997.
1. Disposition and Acquisition of Real Estate Related Assets
On February 9, 1998, the Company realized its position in its wraparound note
that had a carrying value of $1,477,010 on the property located in Chili, New
York as a result of the assignment of the wraparound note on such property for
$75,000 in cash. The assignment resulted in the relief of a non-recourse
underlying mortgage on such property that had a principal balance outstanding of
$1,477,010.
On April 1, 1998, the Company completed the purchase of Regency Walk Shopping
Center, a 34,436 square foot shopping center located in Jacksonville, Florida
(Duval County), from Ashman, a Florida general partnership, for $2,150,000 in
cash. The shopping center is occupied by local tenants who are subject to
operating leases ranging from two to nine years with various renewal options and
is currently 92% occupied. Subsequently, on April 2, 1998, the Company secured a
$1,840,000 first mortgage loan from Secore Financial Corporation which bears
interest at a rate of 7.87%. Such first mortgage requires monthly principal and
interest payments of $13,335 based upon a 30 year self liquidating amortization
schedule, with a balloon payment of $1,643,670 due May 1, 2008.
On April 17, 1998, the Company completed the purchase of Orange Park Shopping
Center, a 21,509 square foot shopping center located in Orange Park, Florida
(Clay County), from Makela Development Group, a Florida general partnership, for
$1,500,000 in cash and debt financing. Simultaneously with the purchase, the
Company obtained a $1,300,000 first mortgage loan from Heller Financial, Inc.
The shopping center is occupied by local tenants who are subject to operating
leases ranging from two to six years with various renewal options and is
currently 95% occupied. The first mortgage bears interest at a rate of 7.39% and
requires monthly principal and interest payments of $8,992 based upon a 30 year
self liquidating amortization schedule, with a balloon payment of $1,147,640 due
April 1, 2008.
On April 17, 1998, the Company as the wraparound mortgagee, completed the
refinancing of Morgantown Plaza, located in Natchez, Mississippi, on behalf of
the wraparound mortgagor (i.e. the Partnership that owns the related property.)
The $2,200,000 first mortgage loan obtained from Secore Financial Corporation
bears interest at a rate of 7.59% and requires monthly principal and interest
payments of $15,519 based upon a 30 year self liquidating amortization schedule,
with a balloon payment of $1,951,893 due May 1, 2008. The Company also extended
the wraparound mortgage on such property to mature May 1, 2008. Such wraparound
mortgage will require cash flow payments beginning after December 31, 1998.
5
<PAGE>
On May 1, 1998 the Company secured a $1,160,000 first mortgage loan from Heller
Financial, Inc. on its Pine Oak property located in Sunrise Florida, which bears
interest at a rate of 7.48%. Such first mortgage requires monthly principal and
interest payments of $8,095 based upon a 30 year self liquidating amortization
schedule, with a balloon payment of $1,027,679 due May 1, 2008.
2. Legal Proceedings
As previously reported, on January 30, 1996 Milestone, its Board of Directors
and Concord Assets Group, Inc. ("Concord"), a New York corporation, the
executive officers and directors of which are also executive officers and
directors of Milestone, were named as defendants in a purported class action
lawsuit (the "Winston Action") which was brought by a Series A Preferred
Stockholder purporting to bring the action on behalf of himself and other
holders of the Company's $.78 Convertible Series A Preferred Stock (the "Series
A Preferred Stock"), par value $.01 per share, $10 liquidation preference, in
connection with (i) Milestone's acquisition in October 1995 of certain
wraparound notes, wraparound mortgages and fee properties from certain
affiliates of Concord, (ii) the transfer in August and October 1995 of 16 of
Milestone's retail properties to Union Property Investors, Inc. ("UPI"), a then
wholly-owned Delaware subsidiary of Milestone and (iii) the subsequent
distribution of all of the issued and outstanding shares of UPI's common stock
to Milestone's common stockholders on a share-for-share basis and for no
consideration (the events referred to in clauses (i) through (iii) above are
collectively referred to herein as the "Transactions").
Also as previously reported, on October 30, 1997, Milestone entered into a
Stipulation and Agreement of Settlement (the "Winston Settlement Agreement")
providing for the settlement (the "Winston Settlement") of the Winston Action.
If the Winston Settlement had been approved and consummated, the Winston Action
would have been dismissed, Milestone's stockholders would have released all
derivative claims arising in connection with the Transactions and the holders of
the Series A Preferred Stock between October 23, 1995 and the date on which the
Winston Settlement was consummated would have released any claims they may have
had against Milestone and the other named defendants arising out of the
Transactions. Each Series A Preferred Stockholder who did not opt out of the
Winston Settlement and who owned shares of the Series A Preferred Stock on the
date the Winston Settlement was consummated would have received $0.75 per share
in cash from the Company and one share of preferred stock of Concord Milestone
Preferred, Inc., a Delaware corporation affiliated with Concord ("CMP") ( the
"CMP" Preferred Stock), in exchange for each share of Series A Preferred Stock
surrendered. The CMP Preferred Stock would have had a liquidation preference of
$2.25 per share, would have been required to be redeemed by CMP at $2.25 per
share after five years, and would have had no voting or dividend rights; in
addition, the CMP Preferred Stock would have been subject to optional redemption
in accordance with a schedule during the five year period prior to mandatory
redemption. CMP's redemption obligations would have been secured by a letter of
credit. The Winston Settlement was subject to approval by the Delaware Court
after a hearing, and was also subject to a number of conditions which may have
been waived at the option of the Company and the other defendants, including the
condition that stockholders owning more than 10% of the Series A Preferred Stock
did not opt out of the Winston Settlement.
In April 1998, counsel for the plaintiff to the Winston Action advised the
Company that the plaintiff would not proceed with the Winston Settlement
Agreement and counsel for the Company advised the Court of Chancery of the State
of Delaware that the parties would resume litigation of the matter.
The foregoing description of the Winston Settlement and the Winston Settlement
Agreement is qualified in its entirety by reference to the Winston Settlement
Agreement, a copy of which was filed with the Securities and Exchange Commission
on November 12, 1997 as Exhibit 2 to Milestone's Form 8-K.
6
<PAGE>
As previously reported, on January 29, 1998, Milestone, along with certain of
its directors, commenced a lawsuit in the United States District Court for the
Southern District of New York against National Union and Stonewall. National
Union had issued a directors and officers insurance and company reimbursement
policy (the "National Policy") for Milestone and its directors with a limit of
$2,000,000. Stonewall had issued an excess directors and officers liability and
company reimbursement policy (the "Stonewall Policy") for Milestone and its
directors with a limit of $2,000,000. Pursuant to the Winston Settlement
Agreement, had the Winston Settlement been consummated, Milestone would have
paid approximately $2,225,000, plus the plaintiff's legal fees in an amount not
to exceed $650,000 and would have incurred other legal expenses. Milestone
believes that the amount it and certain of its directors would have paid
pursuant to the Winston Settlement Agreement and as a result of the litigation,
had the Winston Settlement been consummated, are covered losses under both the
National Union Policy and the Stonewall Policy. In addition, the Company has
incurred approximately $440,000 in legal fees in defending Milestone and its
directors in connection with the Winston Action, which it believes is a covered
loss under the National Union and Stonewall policies. National Union refused to
contribute to the Winston Settlement, as set forth in the Winston Settlement
Agreement, asserting that the Winston Settlement does not encompass any covered
loss (as defined in the National Policy). Stonewall also refused to contribute
to the Winston Settlement. In the complaint, the plaintiffs allege that National
Union and Stonewall wrongfully failed to contribute to the Winston Settlement
and seek reimbursement from National Union and Stonewall up to the limits of
their respective policies. National Union and Stonewall have both answered the
complaint and have denied liability. As a result of the termination of the
Winston Settlement Agreement, Milestone and its directors will request that the
United States District Court for the Southern District of New York put on the
suspense calendar the action against Stonewall and National Union. At this time,
the Company is not in a position to render an opinion as to the outcome of this
action.
3. Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and displaying of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 mandates that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed in equal prominence with
all other financial statements. It does not require a specific format for such
financial statements, but requires that an enterprise display an amount
representing total comprehensive income for the period in such a financial
statement. SFAS No. 130 is effective for both interim and annual periods
beginning after December 15, 1997. Comparative financial statements provided for
earlier periods are required to be reclassified to reflect the provisions of
SFAS No. 130.
The Company adopted SFAS No. 130 in the first quarter of 1998. There are no
components of comprehensive income for the three months ended March 31, 1998.
For the three months ended March 31, 1997 the Company had components of
comprehensive income, as defined in SFAS No. 130, of approximately $329,000 of
unrealized gains (net of tax of $72,795) on available-for-sale securities. Under
SFAS No. 130 the Company has a comprehensive loss of approximately $21,000.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
General
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Such forward-looking statements include
statements regarding the intent, belief or current expectations of Milestone
Properties, Inc. ("Milestone") and its wholly-owned subsidiaries (together,
Milestone with its subsidiaries is hereinafter referred to as the "Company") and
its management and involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, the following: general economic and
business conditions, which will, among other things, affect the demand for
retail space or retail goods, availability and creditworthiness of prospective
tenants, lease rents and the terms and availability of financing; adverse
changes in the real estate markets including, among other things, competition
with other companies; risks of real estate development and acquisition;
governmental actions and initiatives; and environment/safety requirements.
The Company is engaged in the business of owning, acquiring, managing,
developing and investing in commercial real estate and real estate related
assets.
Recent Developments
The Company and Societe Generale Securities Corporation ("SGSC") entered into an
agreement (the "SGSC Agreement") on January 9, 1998, effective as of December
24, 1997, pursuant to which the Company retained SGSC to act as a financial
advisor to the Company and two of its affiliates (the "Affiliates"), in
connection with any transaction involving a proposed sale (a "Proposed Sale") by
the Affiliates of certain shopping center properties and any proposed sale by
the Company of certain fee interest properties owned by the Company. The
shopping center properties to be sold by the Affiliates are subject to
wraparound notes (the "Wraparound Notes") and wraparound mortgages (the
"Wraparound Mortgages" and, together with the Wraparound Notes, the "Wrap Debt")
which are secured by commercial properties. Such Wrap Debt is held by the
Company and would need to be released prior to the consummation of any
transaction. The properties to be sold and the Wrap Debt to be repaid in
connection with a Proposed Sale could represent a substantial portion of the
Company's real estate related assets.
Neither the Company nor the Affiliates have entered into any commitment,
agreement or understanding with any prospective purchaser for a Proposed Sale,
and there can be no assurance that SGSC will be able to identify suitable
candidates to undertake a Proposed Sale, or that if identified, the Company and
the Affiliates will be willing and able to consummate a Proposed Sale on terms
acceptable to them.
On February 9, 1998, the Company realized its position in its wraparound note
that had a carrying value of $1,477,010 on the property located in Chili, New
York as a result of the assignment of the wraparound note on such property for
$75,000 in cash. The assignment resulted in the relief of a non-recourse
underlying mortgage on such property that had a principal balance outstanding of
$1,477,010.
On March 6, 1998, the Company entered into a contract in connection with the
contemplated sale of its Mountain View Mall property located in Bend, Oregon
(the "Bend Property"). Under the terms of the contract, the potential purchaser
has deposited a total of $400,000 as a good faith deposit of which $100,000 has
become non-refundable. The sale of the Bend Property, if consummated, would
represent approximately 17% of the Company's total assets and would relieve the
Company of approximately 23% of its total liabilities.
8
<PAGE>
On April 1, 1998, the Company completed the purchase of Regency Walk Shopping
Center, a 34,436 square foot shopping center located in Jacksonville, Florida
(Duval County), from Ashman, a Florida general partnership, for $2,150,000 in
cash. The shopping center is occupied by local tenants who are subject to
operating leases ranging from two to nine years with various renewal options and
is currently 92% occupied. Subsequently, on April 2, 1998, the Company secured a
$1,840,000 first mortgage loan from Secore Financial Corporation which bears
interest at a rate of 7.87%. Such first mortgage requires monthly principal and
interest payments of $13,335 based upon a 30 year self liquidating amortization
schedule with a balloon payment of $1,641,114 due May 1, 2008.
On April 17, 1998, the Company completed the purchase of Orange Park Shopping
Center, a 21,987 square foot shopping center located in Orange Park, Florida
(Clay County), from Makela Development Group, a Florida general partnership, for
$1,500,000 in cash and debt financing. Simultaneously with the purchase, the
Company obtained a $1,300,000 first mortgage loan from Heller Financial, Inc.
The shopping center is occupied by local tenants who are subject to operating
leases ranging from two to six years with various renewal options and is
currently 100% occupied. The first mortgage bears interest at a rate of 7.39%
and requires monthly principal and interest payments of $8,992 based upon a 30
year self liquidating amortization schedule with a balloon payment of $1,149,319
due April 1, 2008.
In April 1998, counsel for the plaintiff in a purported class action lawsuit
(John Winston v. Leonard S. Mandor, Robert A. Mandor, Joan LeVine, Harvey
Jacobson, Gregory McMahon, Geoffrey Aaronson, Milestone Properties, Inc. and
Concord Assets Group, Inc. ("Concord"), a New York corporation, the executive
officers and directors of which are also executive officers and directors of
Milestone), (the "Winston Action") brought in the Court of Chancery of the State
of Delaware (the "Delaware Court") by a holder of Milestone's $.78 Convertible
Series A Preferred Stock (the "Series A Preferred Stock"), par value $.01 per
share, $10 liquidation preference, on behalf of himself and other Series A
Preferred Stockholders against Milestone and certain of its directors (as
previously reported) advised the Company that the plaintiff would not proceed
with a certain Stipulation and Agreement of Settlement (the "Winston Settlement
Agreement") which had been entered into by the parties to the Winston Action on
October 30, 1997 (as previously reported). Counsel for the Company has advised
the Delaware Court that the parties will resume litigation of the matter. See
Part II-Other Information, Item 1. Legal Proceedings.
As a result of the termination of the Winston Settlement Agreement, the Company
and its directors will request that the United State District Court for the
Southern District of New York put on the suspense calendar the action brought by
Milestone and certain of its directors against National Union Fire Insurance
Company of Pittsburgh, Pa. ("National Union") and Stonewall Surplus Lines
Insurance Company ("Stonewall"), in connection with certain costs and expenses
associated with the Winston Action and the settlement of the Winston Action (as
previously reported). See Part II-Other Information, Item 1. Legal Proceedings.
The Company has received communications from the New York Stock Exchange (the
"Exchange") with respect to the Company's compliance with certain continued
listing criteria in connection with the Company's Common Stock, par value $.01
per share, and Preferred Stock. The Company's management and its counsel have
had a meeting with representatives of the Exchange with respect to such issues.
Although the Exchange has made no decision to delist any class of the Company's
stock at the present time, there can be no assurances that it will not do so in
the future.
9
<PAGE>
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
The Company recognized a net loss of $534,294 for the three months ended March
31, 1998 as compared to a net loss of $349,037 for the same period in 1997 due
to the following factors:
Revenues for the three months ended March 31, 1998 were $5,659,776, a decrease
of $1,188,497 or 17%, from $6,848,273 for the three months ended March 31, 1997.
Such decrease was primarily due to the net of: (1) a decrease in interest income
of $1,135,771 resulting primarily from (a) a decrease in the number of
properties with interest bearing wraparound notes to 27 for the three months
ended March 31, 1998 from 29 for the same period in 1997 resulting in a decrease
in interest income of approximately $132,000 and (b) a decrease in
available-for-sale securities held by the Company to none for the three months
ended March 31, 1998 from two for the same period in 1997 resulting in a
decrease in interest income of $915,580; (2) a decrease in management and
reimbursement income of $234,081 resulting primarily from the termination of the
Management Services Agreement between Union Property Investors and the Company
in February 1997; (3) no gain or loss on the sale of available-for-sale
securities for the three months ended March 31, 1998 compared to a loss of
$784,122 on the sale of available-for-sale securities for the same period in
1997; (4) no unrealized gain or loss on U.S. Treasury Notes sold short for the
three months ended March 31, 1998 compared to an unrealized holding gain of
$403,430 on U.S. Treasury Notes sold short for the same period in 1997; (5) a
gain on the realization of wraparound notes of $81,890 compared to no gain or
loss on the realization of wraparound notes for the same period in 1997; (6) a
net decrease in rental income of $125,645 resulting primarily from a net
decrease in the number of properties leased by the Company to 31 for the three
months ended March 31, 1998 from 32 for the same period in 1997 and (7) no
amortization of discount on available-for-sale securities for the three months
ended March 31, 1998 compared to amortization of $89,300 for the same period in
1997.
Operating expenses for the three months ended March 31, 1998 were $4,953,437, an
increase of $110,409, or 2%, from $5,063,846 for the three months ended March
31, 1997. Such increase was primarily due to the net of: (1) a decrease in
master lease expense of $85,993 due to a decrease in the number of properties
leased by the Company to 27 for the three months ended March 31, 1998 from 29
for the same period in 1997; (2) a decrease in salaries, general and
administrative expenses of approximately $28,690 due to a decrease in rental
expense for the three months ended March 31, 1998 compared to the same period in
1997; (3) a decrease in expenses for management company operations of $17,075
due to a decrease in the number of properties leased by the Company; and (4) an
increase in professional fees of $12,407 due to fees associated with the
reduction of real estate taxes for the leased properties.
Interest expense for the three months ended March 31, 1998 was $1,519,598, a
decrease of $743,679, or 33%, from $2,263,277 for the three months ended March
31, 1997. Such decrease was primarily due to a decrease in financing
arrangements related to the available-for-sale securities held by the Company to
none for the three months ended March 31, 1998 from two for the same period in
1997 resulting in a decrease in interest expense of approximately $599,000.
Depreciation and amortization for the three months ended March 31, 1998 was
$208,073, an increase of $14,965, or 8%, from $193,108 for the three months
ended March 31, 1997. Such increase was primarily due to approximately $353,153
of property improvement purchases made during 1997.
10
<PAGE>
Liquidity and Capital Resources
The Company, as the holder of 178,360 shares of Kranzco Series C Cumulative
Redeemable Preferred Shares as of March 31, 1998, is entitled to receive from
the redemption of such shares, in four equal installments over the next 10
months, an aggregate amount of cash equal to approximately $1,178,360, plus
interest at the rate of 8% per annum on the applicable outstanding balance of
such shares.
Milestone has no present intention to declare or pay cash dividends on the
Series A Preferred Stock or Common Stock in the foreseeable future. The
cumulative period relating to the payment of dividends on the Series A Preferred
Stock expired on September 30, 1995. If Milestone declares further dividends on
the Series A Preferred Stock or the Common Stock and the payment thereof
utilizes all, or substantially all, of its available cash flow after taxes and
expenses, the Company will require other sources of funding to allow it to
effect the contemplated purchases of additional commercial real estate and
accomplish its other long-term goals. Accordingly, no assurance can be given
that Milestone will declare or pay dividends on the Series A Preferred Stock or,
subject to the preference on the Series A Preferred Stock, the Common Stock, in
the future, and currently has no intention to do so. Any decision as to the
future payment of dividends on the Series A Preferred Stock or Common Stock will
depend on the results of operations, investment opportunities for available
funds, the financial condition of the Company and such other factors as
Milestone's Board of Directors deems relevant. See Part II-Other Information,
Item 5. Other Information.
Cash generated by the (i) redemption of the Kranzco Series C Cumulative
Redeemable Preferred Stock and (ii) financing of properties previously purchased
for cash as well as the cash on hand at March 31, 1998, may be used to fund (i)
the Company's real estate investment, acquisition and development activities,
(ii) ongoing legal fees including expenses relating to the Winston Action and
the terminated Winston Settlement Agreement and (iii) other general corporate
purposes. See Part II-Other Information, Item 1. Legal Proceedings for a
discussion of the Winston Action and the Winston Settlement Agreement.
The Company's existing borrowings and the encumbrances on the properties
securing those borrowings may inhibit or result in increased costs to the
Company in connection with its ability to incur future indebtedness and/or raise
substantial equity capital in the marketplace.
The Company has invested available funds in secure, short-term, interest bearing
investments. The Company believes that its levels of working capital, liquidity
and funds from operations are sufficient to support present operations and to
continue to fund future growth and business opportunities as the Company seeks
to maximize shareholder value.
Other than as described herein, management is not aware of any other trends,
events, commitments or uncertainties that will, or are likely to, materially
impact the Company's liquidity.
Cash Flows
Net cash used in operating activities of $5,946,352 for the three months ended
March 31, 1998 included (1) a net loss of $534,294; (2) adjustments for non-cash
items of $237,888 and (3) a net change in operating assets and liabilities of
$5,174,170, compared to net cash used in operating activities of $5,494,643 for
the three months ended March 31, 1997, which included (1) a net loss of
$349,037; (2) adjustments of $764,532 for non-cash items and (3) a net change of
$5,910,138 in operating assets and liabilities.
Net cash provided by investing activities of $5,520,952 for the three months
ended March 31, 1998 included (1) proceeds from principal repayments on loans
receivable and wraparound notes of $5,077,908; (2) the issuance of Wraparound
Notes of $15,000; (3) the purchase of leasehold improvements of $92,456; (4)
proceeds from redemption of investment in preferred stock of $445,500 and (5)
proceeds from the realization of wraparound notes of $75,000, compared to net
cash provided by investing activities of $15,372,080 for the three months ended
March 31, 1997, which included: (1) principal repayments of $4,851,755 on loans
receivable and wraparound notes; (2)
11
<PAGE>
proceeds of $394,333 from redemption of investment in preferred stock; (3)
proceeds of $9,498,529 from the sale of available-for-sale securities; (4)
purchase of U.S. Treasury Notes for $9,166,015; (5) proceeds of $9,803,443 from
the redemption of reverse repurchase agreements and (6) the purchase of
leasehold improvements of $9,965.
Net cash used in financing activities of $779,760 for the three months ended
March 31, 1998 included principal payments on mortgages and notes payable of
$779,760, compared to net cash used in financing activities of $7,092,138 for
the three months ended March 31, 1997, which included; (1) principal payments of
$962,167 on mortgages and notes payable; (2) principal payments of $6,533,401 on
loans payable and (3) $403,430 received on U.S. Treasury Notes payable.
See Part II-Other Information, Item 1. Legal Proceedings and Item 5. Other
Information for a description of certain transactions which occurred subsequent
to March 31, 1998 which may impact the Company's future cash flows.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Not applicable.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As previously reported, on January 30, 1996 Milestone, its Board of Directors
and Concord were named as defendants in the Winston Action which was brought by
a Series A Preferred Stockholder purporting to bring the action on behalf of
himself and other Series A Preferred Stockholders in connection with (i)
Milestone's acquisition in October 1995 of certain wraparound notes, wraparound
mortgages and fee properties from certain affiliates of Concord, (ii) the
transfer in August and October 1995 of 16 of Milestone's retail properties to
Union Property Investors, Inc.("UPI"), a then wholly-owned Delaware subsidiary
of Milestone and (iii) the subsequent distribution of all of the issued and
outstanding shares of UPI's common stock to Milestone's common stockholders on a
share-for-share basis and for no consideration (the events referred to in
clauses (i) through (iii) above are collectively referred to herein as the
"Transactions").
Also as previously reported, on October 30, 1997, Milestone entered into a
Stipulation and Agreement of Settlement (the "Winston Settlement Agreement")
providing for the settlement (the "Winston Settlement") of the Winston Action.
If the Winston Settlement had been approved and consummated, the Winston Action
would have been dismissed, Milestone's stockholders would have released all
derivative claims arising in connection with the Transactions and the holders of
the Series A Preferred Stock between October 23, 1995 and the date on which the
Winston Settlement was consummated would have released any claims they may have
had against Milestone and the other named defendants arising out of the
Transactions. Each Series A Preferred Stockholder who did not opt out of the
Winston Settlement and who owned shares of the Series A Preferred Stock on the
date the Winston Settlement was consummated would have received $0.75 per share
in cash from the Company and one share of preferred stock of Concord Milestone
Preferred, Inc., a Delaware corporation affiliated with Concord ("CMP") ( the
"CMP" Preferred Stock), in exchange for each share of Series A Preferred Stock
surrendered. The CMP Preferred Stock would have had a liquidation preference of
$2.25 per share, would have been required to be redeemed by CMP at $2.25 per
share after five years, and would have had no voting or dividend rights; in
addition, the CMP Preferred Stock would have been subject to optional redemption
in accordance with a schedule during the five year period prior to mandatory
redemption. CMP's redemption obligations would have been secured by a letter of
credit. The Winston Settlement was subject to approval by the Delaware Court
after a hearing, and was also subject to a number of conditions which may have
been waived at the option of the Company and the other defendants, including the
condition that stockholders owning more than 10% of the Series A Preferred Stock
did not opt out of the Winston Settlement.
In April 1998, counsel for the plaintiff to the Winston Action advised the
Company that the plaintiff would not proceed with the Winston Settlement
Agreement and counsel for the Company advised the Delaware Court that the
parties would resume litigation of the matter.
The foregoing description of the Winston Settlement and the Winston Settlement
Agreement is qualified in its entirety by reference to the Winston Settlement
Agreement, a copy of which was filed with the Securities and Exchange Commission
on November 12, 1997 as Exhibit 2 to Milestone's Form 8-K.
As previously reported, on January 29, 1998, Milestone, along with certain of
its directors, commenced a lawsuit in the United States District Court for the
Southern District of New York against National Union and Stonewall. National
Union had issued a directors and officers insurance and company reimbursement
policy (the "National Policy") for Milestone and its directors with a limit of
$2,000,000. Stonewall had issued an excess directors and officers liability and
company reimbursement policy (the "Stonewall Policy") for Milestone and its
directors with a limit of $2,000,000. Pursuant to the Winston Settlement
Agreement, had the Winston Settlement been consummated, Milestone would have
paid approximately $2,225,000, plus the plaintiff's legal fees in an amount not
to exceed $650,000 and would have incurred other legal expenses. Milestone
believes that the amount it and certain of its directors would have paid
pursuant to the Winston Settlement Agreement and as a result of the litigation,
had
13
<PAGE>
the Winston Settlement been consummated, are covered losses under both the
National Union Policy and the Stonewall Policy. In addition, the Company has
incurred approximately $440,000 in legal fees in defending Milestone and its
directors in connection with the Winston Action, which it believes is a covered
loss under the National Union and Stonewall policies. National Union refused to
contribute to the Winston Settlement, as set forth in the Winston Settlement
Agreement, asserting that the Winston Settlement does not encompass any covered
loss (as defined in the National Policy). Stonewall also refused to contribute
to the Winston Settlement. In the complaint, the plaintiffs allege that National
Union and Stonewall wrongfully failed to contribute to the Winston Settlement
and seek reimbursement from National Union and Stonewall up to the limits of
their respective policies. National Union and Stonewall have both answered the
complaint and have denied liability. As a result of the termination of the
Winston Settlement Agreement, Milestone and its directors will request that the
United States District Court for the Southern District of New York put on the
suspense calendar the action against Stonewall and National Union. At this time,
the Company is not in a position to render an opinion as to the outcome of this
action.
Item 5. Other Information.
Milestone's Board of Directors determined not to pay any dividends on the Series
A Preferred Stock during the years ended December 31, 1996 and 1997 and for the
quarter ended March 31, 1998. The last dividend declared by Milestone was for
the quarter ended December 31, 1995 and was paid on February 15, 1996 at $0.195
per share of Series A Preferred Stock.
After September 30, 1995, holders of the Series A Preferred Stock having a
liquidation preference of $10.00 per share, were no longer entitled to receive
dividends on a cumulative basis. Pursuant to the Certificate of Designations of
the Series A Preferred Stock, after such date, no cash dividend may be paid on
the Common Stock unless full dividends of $0.195 on all outstanding shares of
Series A Preferred Stock for the then current quarterly dividend period are
declared and either paid or sufficient sums for the payment thereof are set
apart. As a result of Milestone's Board of Directors' determination not to pay a
dividend for the quarter ended June 30, 1997, which was the sixth consecutive
quarter for which no dividend was paid, the number of persons entitled to serve
as directors on Milestone's Board of Directors has been increased by one, and
the holders of the Series A Preferred Stock, who currently elect one member of
the Board of Directors, are entitled to elect a second member of the Board of
Directors to fill such newly created directorship. Any decision as to the future
payment of dividends on the Series A Preferred Stock will depend on the results
of operations and the financial condition of the Company and such other factors
as Milestone's Board of Directors, in its discretion, deems relevant. See Part
I-Financial Information, Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation - Liquidity and Capital Resources.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a)The following exhibit is included herein:
Exhibit 27 - Financial Data Schedule Article 5 included for
Electronic Data Gathering, Analysis, and Retrieval (EDGAR)
purposes only. This Schedule contains summary financial
information extracted from the consolidated balance sheets and
consolidated statements of revenues and expenses of the Company
as of and for the three month period ended March 31, 1998, and is
qualified in its entirety by reference to such financial
statements.
(b)On January 15, 1998, a Form 8-K was filed with the Commission
reporting that the Company entered into an agreement with Societe
Generale Securities Corporation pursuant to which the Company
retained SGSC to act as financial advisor involving a proposed
sale of certain properties.
(c) On April 29, 1998, a Form 8-K was filed with the Commission
reporting that the plaintiff in the Winston Action will not
proceed with a previously announced settlement agreement.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
MILESTONE PROPERTIES, INC.
(Registrant)
Date: March 8, 1998 /s/ Robert A. Mandor
--------------------
Robert A. Mandor
President and Chief Financial Officer
Date: March 8, 1998 /s/ Patrick S. Kirse
--------------------
Patrick S. Kirse
Vice President of Accounting
(Principal Accounting Officer)
16
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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