SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934.
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 No.)
Incorporation or Organization)
150 E. Palmetto Park Rd. 4th Floor, Boca Raton, FL 33432
- -------------------------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (561) 394 - 9533
-------------------
(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 November 11, 1998, 4,251,042 shares of the registrant's common
stock, par value $.01 per share and 2,999,707 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
September 30, 1998 (Unaudited) and December 31, 1997
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------- -----------------
Assets:
Current Assets:
<S> ............................................................................ <C> <C>
Cash and cash equivalents .................................................. $ 13,199,644 $ 13,435,237
Restricted cash ............................................................ 222,000 222,000
Loans receivable ........................................................... 1,462,031 1,512,744
Accounts receivable ........................................................ 828,205 1,265,625
Accrued interest receivable ................................................ 5,557,352 8,465,528
Due from related party ..................................................... 651,976 391,851
Prepaid expenses and other ................................................. 2,026,246 1,034,613
------------------- ----------------
Total current assets .................................................. 23,947,454 26,327,598
Property, improvements and equipment, net .................................. 9,991,104 19,610,060
Wraparound notes, net ...................................................... 51,657,136 59,402,931
Deferred income tax asset, net ............................................. 5,572,999 4,058,358
Investments in preferred stock ............................................. 892,100 2,228,600
Management contract rights, net ............................................ 220,909 290,926
Goodwill and other, net .................................................... 793,614 304,639
------------------- ----------------
Total assets ..........................................................$ 93,075,316 $ 112,223,112
=================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ......................................$ 1,392,197 $ 2,015,942
Accrued interest payable ................................................... 299,182 259,116
Master lease payable ....................................................... 10,148,536 13,637,564
Current portion of mortgages and notes payable ............................. 20,539,980 38,456,766
Income taxes payable ....................................................... 2,822,119 2,822,119
------------------- ----------------
Total current liabilities ............................................. 35,202,014 57,191,507
Mortgages and notes payable ................................................ 33,323,838 29,282,798
------------------- ----------------
Total liabilities ..................................................... 68,525,852 86,474,305
------------------- ----------------
Commitments and Contingencies
Stockholders' equity:
Common stock ($0.01 par value, 10,000,000 shares
authorized, 4,943,633 and 4,905,959 issued and
outstanding in 1998 and 1997, respectively) ............................. 49,436 49,060
Preferred stock (Series A $0.01 par value, $10
liquidation preference 10,000,000 shares
authorized, 2,999,707 and 3,033,995 shares issued
and outstanding in 1998 and 1997, respectively) ......................... 29,999 30,341
Additional paid-in surplus ................................................. 48,105,394 48,105,428
Accumulated deficit ........................................................ (20,194,947 (18,995,604)
Shares held in treasury - 692,591 shares at cost ........................... (3,440,418 (3,440,418)
------------------- ----------------
Total stockholders' equity ............................................ 24,549,464 25,748,807
------------------- ----------------
Total liabilities and stockholders' equity ............................$ 93,075,316 $ 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 September 30, 1998 and 1997
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
REVENUES:
<S> <C> <C>
Rent ...................................................................... $ 2,414,928 $ 2,621,451
Interest income ........................................................... 2,216,211 3,301,217
Revenue from management company operations ................................ 143,012 166,223
Tenant reimbursements ..................................................... 200,322 228,049
Management and reimbursement income ....................................... 26,480 49,085
Percentage rent ........................................................... 46,050 87,090
Gain on sale of real estate and real estate related assets ................ 1,284,617 0
Amortization of discount - available-for-sale securities .................. 0 99,273
Unrealized (loss) on treasury notes sold short ............................ 0 (243,438)
------------------- ----------------
Total revenues ............................................................ 6,331,620 6,308,950
------------------- ----------------
EXPENSES:
Master lease expense ...................................................... 3,421,815 3,445,833
Interest expense .......................................................... 1,345,002 2,266,653
Depreciation and amortization ............................................. 87,881 221,518
Salaries, general and administrative ...................................... 583,014 641,704
Property expenses ......................................................... 348,797 388,318
Expenses for management company operations ................................ 242,988 244,578
Professional fees ......................................................... 298,491 119,512
------------------- ---------------
Total expenses ............................................................ 6,327,988 7,328,116
------------------- ----------------
Income (loss) before income taxes .............................................. 3,632 (1,019,166)
(Benefit) provision for income taxes ........................................... (367,821) 166,297
------------------- ----------------
Net Income (loss) ..............................................................$ 371,453 $ (1,185,463)
=================== ================
Income (loss) attributable to common stockholders ..............................$ 0.09 $ (0.28)
=================== ================
Weighted average common shares outstanding ..................................... 4,230,245 4,211,275
=================== ================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
2
<PAGE>
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES
(Unaudited)
For the Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
REVENUES:
<S> <C> <C>
Rent ......................................................................$ 7,759,148 $ 7,968,967
Interest income ........................................................... 6,684,142 9,970,738
Revenue from management company operations ................................ 358,016 450,665
Tenant reimbursements ..................................................... 733,924 786,783
Management and reimbursement income ....................................... 82,466 357,228
Percentage rent ........................................................... 357,057 288,528
Gain on sale of real estate and real estate related assets ................ 1,366,507 0
Amortization of discount - available-for-sale securities .................. 0 278,709
Unrealized loss on treasury notes sold short .............................. 0 (194,073)
Loss on sale of available-for-sale securities ............................. 0 (784,121)
------------------- ----------------
Total revenues ............................................................ 17,341,260 19,123,424
------------------- ----------------
EXPENSES:
Master lease expense ...................................................... 10,313,481 10,423,492
Interest expense .......................................................... 4,445,607 6,905,585
Depreciation and amortization ............................................. 493,902 602,434
Salaries, general and administrative ...................................... 1,787,370 1,924,738
Property expenses ......................................................... 1,261,268 1,281,214
Expenses for management company operations ................................ 766,288 812,622
Professional fees ......................................................... 826,130 555,294
------------------- ----------------
Total expenses ............................................................ 19,894,046 22,505,379
------------------- ----------------
Loss before income taxes ....................................................... (2,552,786) (3,381,955)
(Benefit) provision for income taxes ........................................... (1,353,443) 259,685
Net loss .......................................................................$ (1,199,343) $ (3,641,640)
=================== ================
Loss attributable to common stockholders .......................................$ (0.28 $ (0.87)
=================== ================
Weighted average common shares outstanding ..................................... 4,229,979 4,196,233
=================== ================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
3
<PAGE>
MILESTONE PROPERTIES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Nine Months Ended September 30, 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)
Conversion of preferred stock into common stock 37,674 376 (34,342) (342)
Net loss for the nine months ended September 30, 1998
Balance September 30, 1998 4,943,633 $ 49,436 2,999,653 $ 29,999 (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
Conversion of preferred stock into common stock (34)
Net loss for the nine months ended September 30, 1998 (1,199,343) (1,199,343)
Balance September 30, 1998 $ 48,105,394 $ (20,194,947) $ 24,549,464
============= ============== ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss ..................................................................................$ (1,199,343) $ (3,641,640)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ........................................................ 493,902 602,434
Deferred benefit taxes ............................................................... (1,514,641) 334,282
Unrealized gain on treasury notes sold short ......................................... 0 194,073
Amortization of discount-available-for-sale securities ............................... 0 (278,709)
Realized loss on sale of available-for-sale securities ............................... 0 784,122
Gain on sale of real estate and real estate related assets ........................... (1,366,507) 0
Change in operating assets and liabilities, net:
Decrease in accounts receivable .................................................... 437,420 386,047
(Increase) decrease in due from related party ...................................... (260,125) 282,621
Decrease in accrued interest receivable ............................................ 2,908,176 2,794,080
Increase in prepaid expenses and other ............................................. (1,536,320) (2,405)
Decrease in accounts payable and accrued expenses .................................. (542,624) (859,880)
Increase (decrease) in accrued interest payable .................................... 40,066 (648,716)
Decrease in master lease payable ................................................... (3,489,028) (4,021,859)
Decrease in income taxes payable ................................................... 0 (906,819)
Decrease in due to related party ................................................... 0 (61,688)
------------------ ----------------
Net cash used in operating activities .............................................. (6,029,024) (5,044,057)
------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayments on loans receivable ............................................. 50,713 155,601
Principal repayments on wraparound notes ............................................. 5,017,620 4,727,684
Investment in wraparound notes ....................................................... (108,838) 0
Purchase of building and land ........................................................ (6,825,000) (1,100,000)
Purchase of leasehold improvements ................................................... (302,465) (183,836)
Proceeds from realization of wraparound notes ........................................ 950,334 0
Proceeds from the sale of property ................................................... 319,230 0
Proceeds from the sale of available-for-sale securities .............................. 0 9,498,529
Proceeds from redemption of investments in preferred stock ........................... 1,336,500 1,285,334
Proceeds from redemption of reverse repurchase agreements ............................ 0 9,415,301
Purchase of treasury notes ........................................................... 0 (9,166,015)
------------------ ----------------
Net cash provided by investing activities .......................................... 438,094 14,632,598
------------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgages and notes payable ............................................ 9,180,000 0
Principal payments on mortgages and notes payable .................................... (3,824,663) (2,084,200)
Principal payment on loans payable ................................................... 0 (4,436,882)
Amounts received on treasury notes payable ........................................... 0 194,073
------------------ ----------------
Net provided by (cash used in) financing activities ................................ 5,355,337 (6,327,009)
------------------ ----------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ...................................... (235,593) 3,261,532
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................................ 13,435,237 3,141,839
------------------ ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................................$ 13,199,644 $ 6,403,371
================== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest ...........................................$ 4,405,541 $ 7,554,301
================== ================
Cash paid during the period for income taxes .......................................$ 185,472 $ 854,429
================== ================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
5
<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, Milestone with its
subsidiaries is hereinafter referred to as 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 September 30,
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 the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
The Company is engaged in the business of owning, acquiring, managing,
developing and investing in commercial real estate and real estate related
assets. Currently, the Company possesses 35 interests in commercial real estate
properties consisting of (i) 10 fee interests (the "Fee Properties") and (ii)
Wrap Debt (as defined herein) interests in 25 commercial real properties (the
"Underlying Properties"). At September 30, 1998 the Company possessed interests
in 33 commercial real estate properties consisting of (i) seven Fee Properties
and (ii) Wrap Debt interests in 26 Underlying Properties. At September 30, 1997,
the Company possessed interests in 32 commercial real estate properties
consisting of (i) four Fee Properties and (ii) Wrap Debt interests in 28
Underlying Properties. The Underlying Properties are secured by and subject to
wraparound notes (the "Wraparound Notes") and wraparound mortgages (the
"Wraparound Mortgages" and, together with the Wraparound Notes, the "Wrap
Debt"). Most of the Fee Properties are multi-tenanted as compared to the
Underlying Properties of which most are single-tenanted.
1. Acquisition and Disposition of Real Estate Related Assets
On November 10, 1998, the Company completed the purchase of Lincoln Park, a
46,190 square foot shopping center located in Davie, Florida (Broward County),
from an unrelated party for $3,840,000. In connection with the purchase, the
Company obtained a $3,219,000 first mortgage loan which bears interest at a rate
of 7.58% per annum. Such first mortgage requires monthly principal and interest
payments of $22,684 based upon a 30 year self liquidating amortization schedule,
with a balloon payment of approximately $2,800,000 due November 1, 2008. The
shopping center is currently 97% occupied by local tenants who are subject to
operating leases ranging from one to five years with various renewal options.
On October 27, 1998, the Company completed the purchase of Pine Crest, a 40,408
square foot shopping center located in Fort Lauderdale, Florida (Broward
County), from an unrelated party for $3,200,000. In connection with the
purchase, the Company obtained a $2,400,000 first mortgage loan which bears
interest at a rate of 7.0% per annum. Such first mortgage requires monthly
principal and interest payments of $15,967 based upon a 30 year self liquidating
amortization schedule, with a balloon payment of approximately $2,063,428 due
November 11, 2008. The shopping center is currently 97% occupied by local
tenants who are subject to operating leases ranging from one to 19 years with
various renewal options.
6
<PAGE>
On October 13, 1998, the Company completed the purchase of Mandarin Central, a
63,346 square foot shopping center located in Jacksonville, Florida (Duval
County), from an unrelated party for $4,650,000. In connection with the
purchase, the Company obtained a $3,950,000 first mortgage loan which bears
interest at a rate of 8.0% per annum. Such first mortgage requires monthly
principal and interest payments of $28,984 based upon a 30 year self liquidating
amortization schedule, with a balloon payment of approximately $3,542,488 due
October 1, 2008. The shopping center is currently 99% occupied by local tenants
who are subject to operating leases ranging from one to 16 years with various
renewal options.
On October 1, 1998, a wraparound note held by the Company on a 285,655 square
foot shopping center property located in South Williamson, Kentucky (the "South
Williamson Property"), was paid as a result of the sale of the South Williamson
Property by its owner, an affiliate of the Company (the partnership that owned
the South Williamson Property), to an unrelated party. In connection with the
sale of the South Williamson Property, the Company, as the master lessee on a
master lease on the South Williamson Property, canceled such master lease. The
negotiated sale price of the South Williamson Property was approximately
$14,873,655 which included acquiring the property subject to the $14,773,655
remaining balance of the underlying mortgage debt on the South Williamson
Property (which represented approximately 21% of the Company's total liabilities
at such time). The wraparound note on the South Williamson Property represented
approximately 13% of the Company's total assets at such time. As a result of the
sale of the South Williamson Property, the payment of the wraparound note and
the satisfaction of the underlying mortgage debt, the Company realized
approximately $100,000 in cash and will realize a book gain of approximately
$4,400,000 in the fourth quarter of 1998.
On September 21, 1998, a wraparound note held by the Company on a 35,946 square
foot shopping center property located in Vestivia Hills, Alabama (the "Vestivia
Hills Property"), was paid as a result of the sale of the Vestivia Hills
Property by its owner, an affiliate of the Company (the partnership that owned
the Vestivia Hills Property), to an unrelated party. In connection with the sale
of the Vestivia Hills Property, the Company, as the master lessee on a master
lease on the Vestivia Hills Property, canceled such master lease. The negotiated
sale price of the Vestivia Hills Property was approximately $1,640,000. Of the
gross proceeds, $722,638 was used to satisfy the underlying mortgage debt on the
Vestivia Hills Property (which represented approximately 1% of the Company's
total liabilities). The wraparound note on the Vestivia Hills Property
represented approximately 3% of the Company's total assets at such time. As a
result of the sale of the Vestivia Hills Property, the payment of the wraparound
note and the satisfaction of the underlying mortgage debt, the Company realized
net cash proceeds of approximately $875,000 and a book gain of approximately
$338,000 in the third quarter of 1998.
On September 11, 1998, the Company completed the purchase of Country Grove
Plaza, a 16,642 square foot shopping center located in West Palm Beach, Florida
(Palm Beach County), from an unrelated party for $1,100,000. In connection with
the purchase, the Company obtained a $880,000 first mortgage loan which bears
interest at a rate of 7.51% per annum. Such first mortgage requires monthly
principal and interest payments of $6,159 based upon a 30 year self liquidating
amortization schedule, with a balloon payment of approximately $780,150 due
September 1, 2008. The shopping center is currently 96% occupied by local
tenants who are subject to operating leases ranging from one to 13 years with
various renewal options.
7
<PAGE>
On July 15, 1998, the Company completed the purchase of Teeca Plaza, a 22,589
square foot shopping center located in Boca Raton, Florida (Palm Beach County),
from an unrelated party for $2,075,000. In connection with the purchase, the
Company obtained a $1,800,000 first mortgage loan which bears interest at a rate
of 7.39% per annum. Such first mortgage requires monthly principal and interest
payments of $12,450 based upon a 30 year self liquidating amortization schedule,
with a balloon payment of approximately $1,591,100 due July 1, 2008. The
shopping center is currently approximately 97% occupied by local tenants who are
subject to operating leases ranging from three to 28 years with various renewal
options.
On July 7, 1998, the Company completed the sale of its Mountain View Mall
property located in Bend, Oregon (the "Bend Property") to an unrelated party for
approximately $17,750,000. The Company realized cash net proceeds from the sale
of approximately $319,200, after paying off the balance of the underlying first
mortgage of $17,065,000 (which represented approximately 23% of the Company's
total liabilities at such time) and used a portion of the funds for closing
costs and net credits to the buyer. At the time of the sale, the Bend Property
represented approximately 17% of the Company's total assets with a carrying
value, net of accumulated depreciation, of approximately $16,482,000. As a
result of the sale, the Company realized a book gain of approximately $947,000
in the third quarter of 1998.
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 an unrelated party for $1,500,000. In connection with the
purchase, the Company obtained a $1,300,000 first mortgage loan which bears
interest at a rate of 7.39% per annum. Such first mortgage requires monthly
principal and interest payments of $8,992 based upon a 30 year self liquidating
amortization schedule, with a balloon payment of approximately $1,147,600 due
April 1, 2008. The shopping center is currently approximately 95% occupied by
local tenants who are subject to operating leases ranging from two to six years
with various renewal options.
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 an unrelated party for $2,150,000. On April 2, 1998, the
Company secured a $1,840,000 first mortgage loan on its Regency Walk property
which bears interest at a rate of 7.87% per annum. 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 approximately
$1,643,700 due May 1, 2008. The shopping center is currently approximately 92%
occupied by local tenants who are subject to operating leases ranging from two
to nine years with various renewal options.
On February 9, 1998, a wraparound note held by the Company on a 128,864 square
foot shopping center property located in Chili, New York (the "Chili Property"),
was assigned to an unrelated party for $75,000 in cash. The Company, as the
master lessee on a master lease on the Chili Property, terminated such master
lease on April 30, 1996. The assignment resulted in the relief of the underlying
mortgage debt, by the Company, on the Chili Property. As a result of the
assignment of the wraparound note on the Chili Property, the payment of the
wraparound note and the relief of the underlying mortgage debt, the Company
realized a book gain of approximately $82,000 in the first quarter of 1998.
8
<PAGE>
As previously reported, the Company and Societe Generale Securities Corporation
("SGSC") entered into an agreement on January 9, 1998, effective as of December
24, 1997, pursuant to which Milestone and certain of its affiliates retained
SGSC to act as a financial advisor to the Company and certain 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 Milestone of certain of the Fee Properties owned by
Milestone. The shopping center properties to be sold by the Affiliates are
subject to Wrap Debt secured by Underlying 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. In September 1998, certain negotiations in
connection with a Proposed Sale between the Company and the Affiliates on one
hand and an unrelated third party on the other hand terminated.
2. Legal Proceedings
As previously reported, on January 30, 1996, Milestone, certain former and
present members of its Board of Directors and executive officers, 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 and derivative lawsuit (the
"Winston Action") which was brought by a Series A Preferred Stockholder on
behalf of himself and purportedly on behalf of all holders of the Company's $.78
Convertible Series A Preferred Stock (the "Series A Preferred Stock"), par value
$.01 per share, $10 liquidation preference, and derivatively on behalf of
Milestone, 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").
On July 14, 1998, the Company announced that it had reached a settlement (the
"Winston Settlement") with plaintiff's counsel relating to the Winston Action.
On August 5, 1998, a Stipulation and Agreement of Settlement (the "Winston
Settlement Agreement") was entered into between the parties to the Winston
Action setting forth the terms of the Winston Settlement. Pursuant to the
Winston Settlement, if it is approved and consummated, (i) each holder of Series
A Preferred Stock eligible to participate in the Winston Settlement who does not
properly opt out of the Winston Settlement and who owns shares of the Series A
Preferred Stock on the date that the Winston Settlement is consummated would be
required to surrender each share of Series A Preferred Stock held by such
stockholder and release all claims he or she may have against Milestone and the
other named defendants in connection with the Transactions in exchange for $3.00
in cash, payable by Milestone, (ii) all of the Company's stockholders would
release all derivative claims against Milestone and the other named defendants
in connection with the Transactions, (iii) each holder of Series A Preferred
Stock between October 23, 1995 and the date on which the Winston Settlement is
consummated would release any claims he or she may have against Milestone and
the other name defendants in connection the Transaction and (iv) the Winston
Action would be dismissed. The defendants in the Winston Action and their
affiliates are not eligible to participate in the Winston Settlement. The
Winston Settlement is subject to approval by the Court of Chancery of the State
of Delaware after a hearing, and is also subject to a number of conditions which
may be waived at the option of Milestone and the other defendants, including the
condition that stockholders eligible to participate in the Winston Settlement
and owning more than 10% of the Series A Preferred Stock as of the close of
business on August 25, 1998 do not opt out of the Winston Settlement. The
ultimate consummation of the Winston Settlement is subject to numerous
conditions, some of which are not in the control of the Company, such as
approval by the Court of Chancery of the State of Delaware, and therefore is
inherently uncertain.
9
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The foregoing description of the Winston Settlement is qualified in its entirety
by reference to the Winston Settlement Agreement, a copy of which was filed as
Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1998.
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 Fire Insurance Company of
Pittsburgh, Pa. ("National Union") and Stonewall Surplus Lines Insurance Company
("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. As previously
reported, pursuant to an earlier proposed settlement of the Winston Action (the
"Initial Winston Settlement") which was never consummated because independent
counsel for the Series A Preferred Stockholders withdrew its support of such
earlier proposed settlement, Milestone would have paid approximately $2,225,000,
plus 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 initial proposed settlement and
as a result of the litigation, had such proposed settlement been consummated,
would have been covered losses under both the National Union Policy and the
Stonewall Policy. In addition, the Company incurred approximately $550,000 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 such proposed
settlement asserting that such proposed settlement did not encompass any covered
loss (as defined in the National Policy). Stonewall also refused to contribute
to such proposed settlement. In the complaint, the plaintiffs alleged that
National Union and Stonewall wrongfully failed to contribute to the initial
proposed settlement and sought reimbursement from National Union and Stonewall
up to the limits of their respective policies. National Union and Stonewall both
answered the complaint and denied liability. As a result of the termination of
the Initial Winston Settlement, Milestone, on one hand, and Stonewall and
National Union, on the other hand, agreed to dismiss such action without
prejudice and such action was dismissed on May 29, 1998 by the United States
District Court for the Southern District of New York. The Company has given
National Union and Stonewall notice of the Winston Settlement and has provided
each of them with a copy of the Winston Settlement Agreement. National Union has
reviewed the Winston Settlement Agreement and has informed the Company that its
basic position, denying coverage, has not changed and, therefore, it is likely
that the Company will assert a claim against National Union. If Stonewall also
asserts that the Winston Settlement is not a covered loss under the Stonewall
Policy, it is likely that the Company would assert a claim against Stonewall. At
this time, the Company is not in a position to render an opinion as to the
likelihood of success of any such action if one is commenced.
If the Winston Settlement is consummated and all of the holders of shares of the
Series A Preferred Stock eligible to participate in the Winston Settlement
participate in such settlement, the total amount of funds necessary for
Milestone to acquire such shares of Series A Preferred Stock would be
approximately $9,000,000. Additional expenses of approximately $1,400,000 are
anticipated to be incurred in connection with the Winston Settlement. The source
of such funds necessary to effectuate the Winston Settlement would be from the
Company's existing cash reserves and proceeds from the redemption of the Kranzco
Series C Cumulative Redeemable Preferred Stock.
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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 or nine months ended
September 30, 1998. For the three months ended September 30, 1997 the Company
had components of comprehensive income, as defined in SFAS No. 130, of
approximately $1,207,500 of unrealized gains (net of tax of $805,000) on
available-for-sale securities. Under SFAS No. 130 the Company had comprehensive
income of approximately $1,599,000 for the three months ended September 30,
1997. For the nine months ended September 30, 1997 the Company had components of
comprehensive income, as defined in SFAS No. 130, of approximately $2,113,000 of
unrealized gains (net of tax of $1,414,000) on available-for-sale securities.
Under SFAS No. 130 the Company had comprehensive income of approximately
$934,000 for the nine months ended September 30, 1997.
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, and Section 21E of the Securities Exchange Act of 1934, as amended.
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
environmental and safety requirements.
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The Company is engaged in the business of owning, acquiring, managing,
developing and investing in commercial real estate and real estate related
assets. Currently, the Company possesses 35 interests in commercial real estate
properties consisting of (i) 10 fee interests (the "Fee Properties") and (ii)
Wrap Debt (as defined herein) interests in 25 commercial real properties (the
"Underlying Properties"). At September 30, 1998, the Company possessed interests
in 33 commercial real estate properties consisting of (i) seven Fee Properties
and (ii) Wrap Debt interests in 26 Underlying Properties. At September 30, 1997,
the Company possessed interests in 32 commercial real estate properties
consisting of (i) four Fee Properties and (ii) Wrap Debt interests in 28
Underlying Properties. The Underlying Properties are secured by and subject to
wraparound notes (the "Wraparound Notes") and wraparound mortgages (the
"Wraparound Mortgages" and, together with the Wraparound Notes, the "Wrap
Debt"). Most of the Fee Properties are multi-tenanted as compared to the
Underlying Properties of which most are single-tenanted.
Year 2000 Compliance
Year 2000 compliance programs and information systems modifications were
initiated by the Company in early 1998 in an attempt to ensure that these
systems and key processes will remain functional. This objective is expected to
be achieved either by modifying present systems using existing internal and
external programming resources or by installing new systems, and by monitoring
supplier and other third party interfaces. Review of the systems affecting the
Company and its properties is progressing. The costs of the Company's Year 2000
program to date have not been material and the Company does not anticipate that
the costs of any required modifications to its information technology or
embedded technology systems will have a material adverse effect on its financial
position, results of operations or liquidity, although there can be no
assurances that this will be the case.
In the event that the Company or material third parties fail to complete their
Year 2000 compliance programs successfully and on time, the Company's ability to
operate its properties or to bill or collect its revenue in a timely manner
could be adversely affected. Management does not expect that any such failure
would have a material adverse effect on the financial position, results of
operations or liquidity of the Company, although there can be no assurance that
this will be the case. The Company has day-to-day operational contingency plans,
and management is in the process of updating these plans for possible Year 2000
specific operational requirements.
Recent Developments
On November 10, 1998, the Company completed the purchase of Lincoln Park, a
46,190 square foot shopping center located in Davie, Florida (Broward County),
from an unrelated party for $3,840,000. In connection with the purchase, the
Company obtained a $3,219,000 first mortgage loan which bears interest at a rate
of 7.58% per annum. Such first mortgage requires monthly principal and interest
payments of $22,684 based upon a 30 year self liquidating amortization schedule,
with a balloon payment of approximately $2,800,000 due November 1, 2008. The
shopping center is currently 97% occupied by local tenants who are subject to
operating leases ranging from one to five years with various renewal options.
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On October 28, 1998, the Company dismissed the accounting firm of Deloitte &
Touche LLP as the Company's independent auditor to audit the Company's financial
statements. The dismissal of Deloitte & Touche LLP was not the result of any
disagreements between the Company and Deloitte & Touche LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. On November 2, 1998, the Company retained the accounting
firm of Ahearn, Jasco + Company, P.A. as its new independent auditor to audit
the Company's financial statements for the fiscal year ending December 31, 1998.
The decision to change accounting firms as the Company's independent auditor to
audit the Company's financial statements was approved by the Audit Committee of
the Company's Board of Directors on October 27, 1998.
On October 27, 1998, the Company completed the purchase of Pine Crest, a 40,408
square foot shopping center located in Fort Lauderdale, Florida (Broward
County), from an unrelated party for $3,200,000. In connection with the
purchase, the Company obtained a $2,400,000 first mortgage loan which bears
interest at a rate of 7.0% per annum. Such first mortgage requires monthly
principal and interest payments of $15,967.26 based upon a 30 year self
liquidating amortization schedule, with a balloon payment of approximately
$2,063,428 due November 11, 2008. The shopping center is currently 97% occupied
by local tenants who are subject to operating leases ranging from one to 19
years with various renewal options.
On October 13, 1998, the Company completed the purchase of Mandarin Central, a
63,346 square foot shopping center located in Jacksonville, Florida (Duval
County), from an unrelated party for $4,650,000. In connection with the
purchase, the Company obtained a $3,950,000 first mortgage loan which bears
interest at a rate of 8.0% per annum. Such first mortgage requires monthly
principal and interest payments of $28,984 based upon a 30 year self liquidating
amortization schedule, with a balloon payment of approximately $3,542,488 due
October 1, 2008. The shopping center is currently 99% occupied by local tenants
who are subject to operating leases ranging from one to 16 years with various
renewal options.
On October 1, 1998, a wraparound note held by the Company on a 285,655 square
foot shopping center property located in South Williamson, Kentucky (the "South
Williamson Property"), was paid as a result of the sale of the South Williamson
Property by its owner, an affiliate of the Company (the partnership that owned
the South Williamson Property), to an unrelated party. In connection with the
sale of the South Williamson Property, the Company, as the master lessee on a
master lease on the South Williamson Property, canceled such master lease. The
negotiated sale price of the South Williamson Property was approximately
$14,873,655 which included acquiring the property subject to the $14,773,655
remaining balance of the underlying mortgage debt on the South Williamson
Property (which represented approximately 21% of the Company's total liabilities
at such time). The wraparound note on the South Williamson Property represented
approximately 13% of the Company's total assets at such time. As a result of the
sale of the South Williamson Property, the payment of the wraparound note and
the satisfaction of the underlying mortgage debt, the Company realized
approximately $100,000 in cash and will realize a book gain of approximately
$4,400,000 in the fourth quarter of 1998.
On September 21, 1998, a wraparound note held by the Company on a 35,946 square
foot shopping center property located in Vestivia Hills, Alabama (the "Vestivia
Hills Property"), was paid as a result of the sale of the Vestivia Hills
Property by its owner, an affiliate of the Company (the partnership that owned
the Vestivia Hills Property), to an unrelated party. In connection with the sale
of the Vestivia Hills Property, the Company, as the master lessee on a master
lease on the Vestivia Hills Property, canceled such master lease. The negotiated
sale price of the Vestivia Hills Property was approximately $1,640,000. Of the
gross proceeds, $722,638 was used to satisfy the underlying mortgage debt on the
Vestivia Hills Property (which represented approximately 1% of the Company's
total liabilities). The wraparound note on the Vestivia Hills Property
represented approximately 3% of the Company's total assets at such time. As a
result of the sale of the Vestivia Hills Property, the payment of the wraparound
note and the satisfaction of the underlying mortgage debt, the Company realized
net cash proceeds of approximately $875,000 and a book gain of approximately
$338,000 in the third quarter of 1998.
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On September 11, 1998, the Company completed the purchase of Country Grove
Plaza, a 16,642 square foot shopping center located in West Palm Beach, Florida
(Palm Beach County), from an unrelated party for $1,100,000. In connection with
the purchase, the Company obtained a $880,000 first mortgage loan which bears
interest at a rate of 7.51% per annum. Such first mortgage requires monthly
principal and interest payments of $6,159 based upon a 30 year self liquidating
amortization schedule, with a balloon payment of approximately $780,150 due
September 1, 2008. The shopping center is currently 96% occupied by local
tenants who are subject to operating leases ranging from one to 13 years with
various renewal options.
On July 15, 1998, the Company completed the purchase of Teeca Plaza, a 22,589
square foot shopping center located in Boca Raton, Florida (Palm Beach County),
from an unrelated party for $2,075,000. In connection with the purchase, the
Company obtained a $1,800,000 first mortgage loan which bears interest at a rate
of 7.39% per annum. Such first mortgage requires monthly principal and interest
payments of $12,450 based upon a 30 year self liquidating amortization schedule,
with a balloon payment of approximately $1,591,100 due July 1, 2008. The
shopping center is currently approximately 97% occupied by local tenants who are
subject to operating leases ranging from three to 28 years with various renewal
options.
On July 7, 1998, the Company completed the sale of its Mountain View Mall
property located in Bend, Oregon (the "Bend Property") to an unrelated party for
approximately $17,750,000. The Company realized cash net proceeds from the sale
of approximately $319,200, after paying off the balance of the underlying first
mortgage of $17,065,000 (which represented approximately 23% of the Company's
total liabilities at such time) and used a portion of the funds for closing
costs and net credits to the buyer. At the time of the sale, the Bend Property
represented approximately 17% of the Company's total assets with a carrying
value, net of accumulated depreciation, of approximately $16,482,000. As a
result of the sale, the Company realized a book gain of approximately $947,000
in the third quarter of 1998.
The New York Stock Exchange (the "Exchange") suspended trading in shares of the
Series A Preferred Stock and Common Stock prior to the market opening on July 6,
1998 because the Exchange had determined that Milestone had fallen below certain
of its continued listing criteria relating to net income and market value of
publicly held shares of the Series A Preferred Stock and Common Stock. The
Company has learned that on or about July 6, 1998, a market began to be made for
shares of the Series A Preferred Stock and Common Stock on the Over-The-Counter
Bulletin Board with the ticker symbols MPRPP and MPRP, respectively. The
Exchange subsequently applied to the Securities and Exchange Commission (the
"Commission") to delist the Series A Preferred Stock and Common Stock and on
September 10, 1998, the Commission issued an order granting the Exchange's
application to delist the Series A Preferred Stock and Common Stock. Effective
as of the opening of the trading session on September 11, 1998, the Series A
Preferred Stock and Common Stock were delisted from the Exchange.
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 an unrelated party for $1,500,000. In connection with the
purchase, the Company obtained a $1,300,000 first mortgage loan which bears
interest at a rate of 7.39% per annum. Such first mortgage requires monthly
principal and interest payments of $8,992 based upon a 30 year self liquidating
amortization schedule, with a balloon payment of approximately $1,147,600 due
April 1, 2008. The shopping center is currently approximately 95% occupied by
local tenants who are subject to operating leases ranging from two to six years
with various renewal options.
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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 an unrelated party for $2,150,000. On April 2, 1998, the
Company secured a $1,840,000 first mortgage loan on its Regency Walk property
which bears interest at a rate of 7.87% per annum. 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 approximately
$1,643,700 due May 1, 2008. The shopping center is currently approximately 92%
occupied by local tenants who are subject to operating leases ranging from two
to nine years with various renewal options.
On February 9, 1998, a wraparound note held by the Company on a 128,864 square
foot shopping center property located in Chili, New York (the "Chili Property"),
was assigned to an unrelated party for $75,000 in cash. The Company, as the
master lessee on a master lease on the Chili Property, terminated such master
lease on April 30, 1996. The assignment resulted in the relief of the underlying
mortgage debt, by the Company, on the Chili Property. As a result of the
assignment of the wraparound note on the Chili Property, the payment of the
wraparound note and the relief of the underlying mortgage debt, the Company
realized a book gain of approximately $82,000 in the first quarter of 1998.
As previously reported, the Company and Societe Generale Securities Corporation
("SGSC") entered into an agreement on January 9, 1998, effective as of December
24, 1997, pursuant to which Milestone and certain of its affiliates retained
SGSC to act as a financial advisor to the Company and certain 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 Milestone of certain of the Fee Properties owned by
Milestone. The shopping center properties to be sold by the Affiliates are
subject to Wrap Debt secured by Underlying 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. In September 1998, certain negotiations in
connection with a Proposed Sale between the Company and the Affiliates on one
hand and an unrelated third party on the other hand terminated.
Results of Operations
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
The Company recognized net income of $371,453 for the three months ended
September 30, 1998 as compared to a net loss of $1,185,463 for the same period
in 1997 due to the following factors:
Revenues for the three months ended September 30, 1998 were $6,331,620, an
increase of $22,670 or less than 1% from $6,308,950 for the three months ended
September 30, 1997. Such increase was primarily due to the net of: (1) a
decrease in rent revenue of $206,523 resulting primarily from the net of (a) a
decrease in rent revenue of approximately $419,000 from the sale of the Bend
Property on July 7, 1998 and (b) an increase in rent revenue of approximately
$248,000 from an increase in the number of Fee Properties owned by the Company
to seven for the three months ended September 30, 1998 from four for the same
period in 1997; (2) a decrease in interest income of $1,085,006 resulting
primarily from a decrease in the number of available-for-sale securities held by
the Company to none for the three months ended September 30, 1998 from two for
the same period in 1997; (3) a decrease in revenue from management company
operations of $23,211 due to the sale of the Bend Property on July 7, 1998; (4)
a decrease in tenant reimbursements of $27,727 resulting primarily from (a) the
sale of the Bend Property on July 7, 1998 and (b) an increase in the number of
Fee Properties owned by the Company to seven for the three months ended
September 30, 1998 from four for the same period in 1997; (5) a decrease in
percentage rent revenue of $41,040 due to the sale of the Bend Property on July
7, 1998; (6) a gain on the sale of real estate and real estate related assets of
$1,284,617 for the three months ended September 30, 1998
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compared to no gain or loss on the sale of real estate related assets for the
same period in 1997; (7) a decrease in amortization of discount on
available-for-sale securities of $99,273 for the three months ended September
30, 1998 due to a decrease in the number of available-for-sale securities held
to none for the three months ended September 30, 1998 from two for the same
period in 1997 and (8) no unrealized gain or loss on U.S. Treasury Notes sold
short for the three months ended September 30, 1998 compared to an unrealized
holding loss of $243,438 on U.S. Treasury Notes sold short for the same period
in 1997.
Operating expenses for the three months ended September 30, 1998 were
$4,895,105, an increase of $55,160, or 1% from $4,839,945 for the three months
ended September 30, 1997. Such increase was primarily due to the net of: (1) a
decrease in master lease expenses of $24,018 due to a decrease in the number of
properties leased by the Company to 26 for the three months ended September 30,
1998 from 28 for the same period in 1997; (2) a decrease in salaries, general
and administrative expenses of approximately $58,690 due primarily to (a) a
decrease in rental expense for the corporate offices of approximately $141,000
for the three months ended September 30, 1998 compared to the same period in
1997; (b) an increase in acquisition and financing costs of approximately
$27,000 for the three months ended September 30, 1998 compared to the same
period in 1997 due to the increase in the number of Fee Properties purchased by
the Company to two from one, respectively and (c) an increase of approximately
$54,000 in general operating expenses of the Company; (3) a decrease in property
expenses of $39,521 due to (a) an increase in the number of Fee Properties owned
by the Company to seven for the three months ended September 30, 1998 from four
in the same period in 1997 and (b) the sale of the Bend Property on July 7, 1998
and (4) an increase in professional fees of $178,979 due to fees associated with
the settlement (the "Winston Settlement") of a certain purported class action
and derivative lawsuit (the "Winston Action") brought against Milestone and
certain of its present and former directors and officers. See Part II-Other
Information, Item 1. Legal Proceedings for a discussion of the Winston Action
and Winston Settlement.
Interest expense for the three months ended September 30, 1998 was $1,345,002, a
decrease of $921,651, or 41% from $2,266,653 for the three months ended
September 30, 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 September 30, 1998 from two for the same period
in 1997 resulting in a decrease in interest expense of approximately $702,000.
Depreciation and amortization expense for the three months ended September 30,
1998 was $87,881, a decrease of $133,637, or 60% from $221,518 for the three
months ended September 30, 1997. Such decrease was primarily due to the sale of
the Bend Property on July 7, 1998 which represented approximately 17% of the
Company's total assets.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
The Company recognized a net loss of $1,199,343 for the nine months ended
September 30, 1998 as compared to a net loss of $3,641,640 for the same period
in 1997 due to the following factors:
Revenues for the nine months ended September 30, 1998 were $17,341,260, a
decrease of $1,782,164 or 9% from $19,123,424 for the nine months ended
September 30, 1997. Such decrease was primarily due to the net of: (1) a
decrease in rent revenue of $209,819 for the nine months ended September 30,
1998 resulting from the net of (a) a decrease in rent revenue of approximately
$633,000 as a result of various property sales as well as unit vacancies and (b)
an increase in rent revenue of approximately $423,000 due to an increase in the
number of fee properties owned at September 30, 1998 to seven from four for the
same period in 1997; (2) a decrease in interest income of $3,286,596 resulting
primarily from (a) a decrease in interest income of $2,835,963 resulting from a
decrease in the number of available-for-sale securities held by the Company to
none for the nine months ended September 30, 1998 from two for the same period
in 1997 and (b) a decrease in interest income of
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approximately $266,000 resulting primarily from a decrease in the number of
properties with interest bearing wraparound notes to 26 for the nine months
ended September 30, 1998 from 28 for the same period in 1997; (3) a decrease in
management and reimbursement income of $274,762 resulting primarily from the
termination of the Management Services Agreement between Union Property
Investors, Inc. and the Company in February 1997; (4) a gain on the sale of real
estate and real estate related assets of $1,366,507 for the nine months ended
September 30, 1998 compared to no gain or loss on the sale of real estate and
real estate related assets for the same period in 1997; (5) a decrease in
amortization of discount on available-for-sale securities of $278,709 for the
nine months ended September 30, 1998 due to a decrease in the number of
available-for-sale securities held by the Company to none for the nine months
ended September 30, 1998 from two for the same period in 1997; (6) no unrealized
gain or loss on U.S. Treasury Notes sold short for the nine months ended
September 30, 1998 compared to an unrealized holding loss of $194,073 on U.S.
Treasury Notes sold short for the same period in 1997 and (7) no gain or loss on
the sale of available-for-sale securities for the nine months ended September
30, 1998 compared to a loss of $784,122 on the sale of available-for-sale
securities for the nine months ended September 30, 1997.
Operating expenses for the nine months ended September 30, 1998 were
$14,954,537, a decrease of $42,823, or less than 1% from $14,997,360 for the
nine months ended September 30, 1997. Such decrease was primarily due to the net
of: (1) a decrease in master lease expense of $110,011 due to a decrease in the
number of properties leased by the Company to 26 for the nine months ended
September 30, 1998 from 28 for the same period in 1997; (2) a decrease in
salaries, general and administrative expenses of approximately $137,368 due to
the net of (a) a decrease in rental expense of approximately $422,000 for the
corporate offices for the nine months ended September 30, 1998 compared to the
same period in 1997; (b) an increase in acquisition and financing costs of
approximately $86,000 for the nine months ended September 30, 1998 compared to
the same period in 1997 due to the increase in the number of Fee Properties
purchased to four from one, respectively and (c) an increase of approximately
$197,000 in general operating expenses of the Company; (3) a decrease in
property expenses of $19,946 due to (a) the sale of the Bend Property in July of
1998 and (b) an increase in the number of Fee Properties owned by the Company to
seven for the nine months ended September 30, 1998 as compared to four for the
same period in 1997; (4) a decrease of $46,344 in expenses for management
company operations due to a decrease in general operating expenses and (5) an
increase in professional fees of $270,836 due to fees associated with the
Winston Settlement. See Part II-Other Information, Item 1. Legal Proceedings for
a discussion of the Winston Action and Winston Settlement.
Interest expense for the nine months ended September 30, 1998 was $4,445,607, a
decrease of $2,459,978, or 36% from $6,905,585 for the nine months ended
September 30, 1997. Such decrease was primarily due to: (1) a decrease in
interest expense of approximately $1,973,000 due to a decrease in financing
arrangements related to the available-for-sale securities held by the Company to
none for the nine months ended September 30, 1998 from two for the same period
in 1997 and (2) a decrease in interest expense of approximately $467,000 due to
(a) the sale of the Bend Property in July of 1998 and (b) an increase in the
number of Fee Properties owned by the Company to seven for the nine months ended
September 30, 1998 as compared to four for the same period in 1997.
Depreciation and amortization expense for the nine months ended September 30,
1998 was $493,902, a decrease of $108,532, or 18% from $602,434 for the nine
months ended September 30, 1997. Such decrease was primarily due to the sale of
the Bend Property in July of 1998 which represented approximately 17% of the
Company's total assets.
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Liquidity and Capital Resources
The Company, as the holder of 89,360 shares of Kranzco Series C Cumulative
Redeemable Preferred Shares as of September 30, 1998, is entitled to receive
from the redemption of such shares, in two equal installments over the next 4
months, an aggregate amount of cash equal to approximately $893,600, plus
interest at the rate of 8% per annum on the applicable outstanding balance of
such shares.
On July 1, 1998, the first mortgage loan on the Underlying Property located in
Quincy, Illinois, (the "Quincy Property") matured. The Company, as the
wraparound mortgagee, is seeking to realize its position in its Wrap Debt on the
Quincy property.
On May 1, 1998, the Company secured a $1,160,000 first mortgage loan on its
16,994 square foot shopping center located in Sunrise, Florida, which bears
interest at a rate of 7.48% per annum. 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 approximately $1,027,700 due
May 1, 2008.
On May 1, 1998, the first mortgage loan on the Fee Property located in
Zanesville, Ohio, (the "Zanesville Property") matured. The Company, as the owner
of the Zanesville Property, is seeking to extend the terms of the first mortgage
loan.
On April 17, 1998, the owner of the 92,646 square foot shopping center located
in Natchez, Mississippi (the "Natchez Property"), an affiliate of the Company
(the partnership that owns the Natchez Property), completed the refinancing of
the underlying mortgage debt on behalf of the Company. The $2,200,000 first
mortgage loan bears interest at a rate of 7.59% per annum, and requires monthly
principal and interest payments of $15,519 based upon a 30 year self liquidating
amortization schedule, with a balloon payment of approximately $1,951,900 due
May 1, 2008. The Company also extended the Wraparound Mortgage on such property
to mature May 1, 2008.
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.
Cash generated by the (i) redemption of the Kranzco Series C Cumulative
Redeemable Preferred Stock and (ii) the cash on hand at September 30, 1998, may
be used to fund (a) costs associated with the Winston Action and the Winston
Settlement of: (w) approximately $9,000,000, payable by Milestone to Series A
Preferred Stockholders (assuming all eligible stockholders participate in the
Winston Settlement and the Winston Settlement is consummated), (x) approximately
$750,000 in plaintiff attorney fees (if the Winston Settlement is consummated),
(y) approximately $500,000 in the Company's attorney fees and (z) approximately
$150,000 in accounting, printing, mailing and other miscellaneous fees and
expenses, (b) the Company's real estate investment, acquisition and development
activities (to the extent that funds are not used to pay the Winston Settlement
if consummated), and (c) other general corporate purposes. See Part II-Other
Information, Item 1. Legal Proceedings for a discussion of the Winston Action
and the Winston Settlement.
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, make any
payments required by the Winston Settlement and to continue to fund future
growth and business opportunities as the Company seeks to maximize shareholder
value.
18
<PAGE>
The Company believes that immediately subsequent to the consummation of the
Winston Settlement it would have sufficient cash to continue operating in the
ordinary course of business. However, the Company is considering opportunities
to acquire additional properties which would require it to raise funds through a
public or private sale of debt or equity securities, by conducting rights
offerings, by selling or realizing on assets (including, but not limited to
sales of its properties and interests in the Wraparound Notes), through
corporate borrowings, or by other means. Because of the current condition of the
domestic financial markets which, in the Company's belief, is not favorable to
other alternatives, the Company would probably conduct a rights offering if it
decided that it would be beneficial to raise additional capital. In a rights
offering, the Company would offer existing holders of shares of its Common Stock
rights to acquire additional shares of its Common Stock in exchange for monetary
consideration in order to obtain funds to be used to finance potential property
acquisitions. The foregoing is a forward looking statement and there can be no
assurances that the Company will be able to undertake successfully, if at all,
such a transaction. If the Company conducts a rights offering, it would need to
issue additional shares of Common Stock and to amend its Certificate of
Incorporation in order to authorize the issuance of such additional shares of
Common Stock. The Company's Certificate of Incorporation currently authorizes it
to issue up to 10,000,000 shares of Common Stock and, as of November 11, 1998,
4,251,042 shares thereof were outstanding. If the Company conducts such a
rights offering, holders of shares of the Company's Common Stock who do not
participate therein would have the aggregate value of their shares of Common
Stock, as well as their ownership interest in the Company, diluted.
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.
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 $6,029,024 for the nine months ended
September 30, 1998 included (1) a net loss of $1,199,343; (2) adjustments for
non-cash items of $2,387,246 and (3) a net change in operating assets and
liabilities of $2,442,435, compared to net cash used in operating activities of
$5,044,057 for the nine months ended September 30, 1997, which included (1) a
net loss of $3,641,640; (2) adjustments of $1,636,202 for non-cash items and (3)
a net change of $3,038,619 in operating assets and liabilities.
19
<PAGE>
Net cash provided by investing activities of $438,094 for the nine months ended
September 30, 1998 included (1) proceeds from principal repayments on loans
receivable and wraparound notes of $5,068,333; (2) investments in wraparound
notes of $108,838; (3) the purchase of building and land for $6,825,000; (4) the
purchase of leasehold improvements of $302,465; (5) proceeds from the
realization of wraparound notes of $950,334; (6) proceeds from the sale of
property of $319,320 and (6) proceeds from redemption of investments in
preferred stock of $1,336,500, compared to net cash provided by investing
activities of $14,632,598 for the nine months ended September 30, 1997, which
included: (1) principal repayments of $4,883,285 on loans receivable and
wraparound notes; (2) the purchase of building and land of $1,100,000; (3) the
purchase of leasehold improvements of $183,836; (4) proceeds of $9,498,529 from
the sale of available-for-sale securities; (5) proceeds of $1,285,334 from
redemption of investments in preferred stock; (6) proceeds of $9,415,301 from
the redemption of reverse repurchase agreements and (7) purchase of U.S.
Treasury Notes for $9,166,015.
Net cash provided by financing activities of $5,355,337 for the nine months
ended September 30, 1998 included (1) proceeds from mortgages and notes payable
of $9,180,000 and (2) principal payments on mortgages and notes payable of
$3,824,663, compared to net cash used in financing activities of $6,327,009 for
the nine months ended September 30, 1997, which included (1) principal payments
of $2,084,200 on mortgages and notes payable; (2) principal payments of
$4,436,882 on loans payable and (3) $194,073 received on U.S. Treasury Notes
payable.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Not applicable.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, on January 30, 1996, Milestone, certain former and
present members of its Board of Directors and executive officers, and 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 the
Winston Action which was brought by a Series A Preferred Stockholder on behalf
of himself and purportedly on behalf of all holders of the Series A Preferred
Stock, and derivatively on behalf of Milestone, 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").
On July 14, 1998, the Company announced that it had reached the Winston
Settlement with plaintiff's counsel relating to the Winston Action. On August 5,
1998, a Stipulation and Agreement of Settlement (the "Winston Settlement
Agreement") was entered into between the parties to the Winston Action setting
forth the terms of the Winston Settlement. Pursuant to the Winston Settlement,
if it is approved and consummated, (i) each holder of Series A Preferred Stock
eligible to participate in the Winston Settlement who does not properly opt out
of the Winston Settlement and who owns shares of the Series A Preferred Stock on
the date that the Winston Settlement is consummated would be required to
surrender each share of Series A Preferred Stock held by such stockholder and
release all claims he or she may have against Milestone and the other named
defendants in connection with the Transactions in exchange for $3.00 in cash,
payable by Milestone, and (ii) all of the Company's stockholders would release
all derivative claims against Milestone and the other named defendants in
connection with the Transactions, (iii) each holder of Series A Preferred Stock
between October 23, 1995 and the date on which the Winston Settlement is
consummated would release any claims he or she may have against Milestone and
the other named defendants in connection with the Transactions and (iv) the
Winston Action would be dismissed. The defendants in the Winston Action and
their affiliates are not eligible to participate in the Winston Settlement. The
Winston Settlement is subject to approval by the Court of Chancery of the State
of Delaware after a hearing, and is also subject to a number of conditions which
may be waived at the option of Milestone and the other defendants, including the
condition that stockholders eligible to participate in the Winston Settlement
and owning more than 10% of the Series A Preferred Stock as of the close of
business on August 25, 1998 do not opt out of the Winston Settlement. The
ultimate consummation of the Winston Settlement is subject to numerous
conditions, some of which are not in the control of the Company, such as
approval by the Court of Chancery of the State of Delaware, and therefore is
inherently uncertain.
The foregoing description of the Winston Settlement is qualified in its entirety
by reference to the Winston Settlement Agreement, a copy of which was filed as
Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1998.
21
<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 Fire Insurance Company of
Pittsburgh, Pa. ("National Union") and Stonewall Surplus Lines Insurance Company
("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. As previously
reported, pursuant to an earlier proposed settlement of the Winston Action (the
"Initial Winston Settlement") which was never consummated because independent
counsel for the Series A Preferred Stockholders withdrew its support of such
earlier proposed settlement, Milestone would have paid approximately $2,225,000,
plus 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 initial proposed settlement and
as a result of the litigation, had such proposed settlement been consummated,
would have been covered losses under both the National Union Policy and the
Stonewall Policy. In addition, the Company incurred approximately $550,000 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 such proposed
settlement asserting that such proposed settlement did not encompass any covered
loss (as defined in the National Policy). Stonewall also refused to contribute
to such proposed settlement. In the complaint, the plaintiffs alleged that
National Union and Stonewall wrongfully failed to contribute to the initial
proposed settlement and sought reimbursement from National Union and Stonewall
up to the limits of their respective policies. National Union and Stonewall both
answered the complaint and denied liability. As a result of the termination of
the Initial Winston Settlement, Milestone, on one hand, and Stonewall and
National Union, on the other hand, agreed to dismiss such action without
prejudice and such action was dismissed on May 29, 1998 by the United States
District Court for the Southern District of New York. The Company has given
National Union and Stonewall notice of the Winston Settlement and has provided
each of them with a copy of the Winston Settlement Agreement. National Union has
reviewed the Winston Settlement Agreement and has informed the Company that its
basic position, denying coverage, has not changed and, therefore, it is likely
that the Company will assert a claim against National Union. If Stonewall also
asserts that the Winston Settlement is not a covered loss under the Stonewall
Policy, it is likely that the Company would assert a claim against Stonewall. At
this time, the Company is not in a position to render an opinion as to the
likelihood of success of any such action if one is commenced.
If the Winston Settlement is consummated and all of the holders of shares of the
Series A Preferred Stock eligible to participate in the Winston Settlement
participate in such settlement, the total amount of funds necessary for
Milestone to acquire such shares of Series A Preferred Stock would be
approximately $9,000,000. Additional expenses of approximately $1,400,000 are
anticipated to be incurred in connection with the Winston Settlement. The source
of such funds necessary to effectuate the Winston Settlement would be from the
Company's existing cash reserves and proceeds from the redemption of the Kranzco
Series C Cumulative Redeemable Preferred Stock.
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 during
the nine months ended September 30, 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.
22
<PAGE>
After September 30, 1995, holders of the Series A Preferred Stock, which has 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 are generally entitled to elect
one member of the Board of Directors, became 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.
Item 6. Exhibits and Reports on Form 8-K
(a)The following exhibits are 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 nine month period ended September 30, 1998, and
is qualified in its entirety by reference to such financial
statements.
(b)Reports on Form 8-K:
On July 21, 1998, a Form 8-K was filed with the Commission
reporting; (i) the sale of the Mountain View Mall property
located in Bend, Oregon; (ii) the proposed Winston Settlement
with plaintiff's counsel relating to the Winston Action and (iii)
the suspension of trading of shares of the Series A Preferred
Stock and Common Stock by the New York Stock Exchange.
On October 16, 1998, a Form 8-K was filed with the Commission
reporting the sale of the South Williamson property located in
South Williamson, Kentucky.
On November 4, 1998, a Form 8-K was filed with the Commission
reporting changes in the Company's certifying accountant.
23
<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: November 16, 1998 By /s/ Robert A. Mandor
-------------------------------------
Robert A. Mandor
President and Chief Financial Officer
Date: November 16, 1998 By /s/ Patrick S. Kirse
-------------------------------------
Patrick S. Kirse
Vice President of Accounting
(Principal Accounting Officer)
24
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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