U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10641
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
------------------
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ---------------------------------- ------------------------
Common Stock, $.01 par value New York Stock Exchange
$.78 Convertible Series A
Preferred Stock, $.01 par value New York Stock Exchange
Indicate by check mark whether the Registrant (1) 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. x
Yes No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or by any
amendment to this Form 10-K. [x]
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the last sale price on March 20, 1998, was
approximately $ 1 9/16 for the Common Stock and $1 7/16 for the $.78 Convertible
Series A Preferred Stock.
The Registrant's revenues for the fiscal year ended December 31, 1997 were
$30,091,911.
As of March 20, 1998, 4,213,368 shares of the Registrant's Common Stock and
3,033,995 shares of the Registrant's $.78 Convertible Series A Preferred Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders is
hereby incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
PART I
Item 1. Business..............................................................1
Item 2. Description of Property..............................................10
Item 3. Legal Proceedings....................................................13
Item 4. Submission of Matters to a Vote of Security Holders..................15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.16
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................................18
Item 8. Financial Statements and Supplementary Data...........................24
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure......................................................24
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . 25
Item 11. Executive Compensation...............................................25
Item 12. Security Ownership of Certain Beneficial Owners and Management.......25
Item 13. Certain Relationships and Related Transactions.......................25
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K......26
SIGNATURES....................................................................31
Financial Statements.........................................................F-1
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PART I
Item 1. Business.
Introduction
Milestone Properties, Inc. ("Milestone"), directly and through
its wholly owned subsidiaries, is engaged in the business of owning, acquiring,
managing, developing and investing in commercial real estate and real estate
related assets. Milestone, together with its subsidiaries, is hereinafter
referred to as the "Company." The Company is primarily engaged in a single
business industry, commercial real estate, which currently involves the
ownership, operation and management of 32 interests in commercial real estate
properties consisting of (i) 4 fee interests (the "Fee Properties") and (ii)
wraparound notes (the "Wraparound Notes") and wraparound mortgages (the
"Wraparound Mortgages" and, together with the Wraparound Notes, the "Wrap Debt")
which are secured by 28 commercial real properties (the "Underlying Properties"
and, together with the Fee Properties, the "Properties"). The Company also
serves as the master lessee under individual leases on each of the Underlying
Properties. The Properties are broken out by type in the following table which
should be read in conjunction with Table 1. Summary of Properties and Underlying
Debt located at Item 2. Description of Property:
Property Type No. of Properties GLA (Sq.Ft.)
Fee Properties 4 537,189
Underlying Properties 28 2,104,859
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Totals 32 2,642,048
======= =========
The Company's objectives are to realize upon, maintain and
improve the value of the Company's real estate holdings and to generate cash
flow. To accomplish these objectives, the Company may (i) continue to operate
the Properties, (ii) sell some or all of the Properties, (iii) acquire
additional commercial properties to develop and/or hold for investment, (iv)
expand, improve or redevelop the Properties or properties owned by affiliates of
the Company or third parties through the acquisition and development of adjacent
parcels, (v) engage in management services for affiliates of the Company and/or
others, (vi) invest in real-estate backed or related securities, (vii) acquire
related businesses and/or (viii) engage in such other activities or businesses
as are consistent with the Company's overall objectives. In connection with its
activities, the Company may also consider selling one or more of its Fee
Properties and/or financing or refinancing one or more of the Properties or
additional properties acquired by the Company in order to fund its business
activities. In addition, the Company may enter into joint ventures or similar
arrangements with developers or owners of shopping centers or other commercial
properties. These ventures may take the form of joint ownership, participation
in general or limited partnerships, or other forms of investment, and may
provide for the payment of preferential distributions, guaranteed returns and/or
fees for services. The Company may also make secured real estate mortgage loans,
including mortgages junior to institutional or other indebtedness, in connection
with the acquisition, development, redevelopment or improvement of properties,
either to affiliated or unaffiliated parties.
The Company's business is operated as a single segment for
financial reporting purposes. For financial information regarding the Company
for the fiscal years ended December 31, 1997, 1996 and 1995, see the
consolidated financial statements and the notes thereto contained herein.
1
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Background
Milestone was incorporated on November 30, 1989 under the laws of
the State of Delaware. On December 18, 1990, Concord Milestone Income Fund, L.P.
("CMIF") and Concord Milestone Income Fund II, L.P. ("CMIF II") (collectively,
the "Predecessor Partnerships") were merged with and into Milestone (the
"Merger"). In the Merger, Milestone succeeded to the business and operations of
the Predecessor Partnerships and the partnership interests in the Predecessor
Partnerships were converted into shares of Milestone's common stock, par value
$.01 per share (the "Common Stock") and Milestone's $.78 Convertible Series A
preferred stock, par value $.01 per share, $10 liquidation preference (the
"Series A Preferred Stock").
In October 1995, the Company entered into various agreements with
affiliates of Concord Assets Group, Inc. ("Concord") pursuant to which the
Company acquired (the "Acquisition"), for approximately $700,000 in cash and
2,545,000 shares of Common Stock, certain of the Fee Properties and certain of
the Wrap Debt and certain other wraparound notes and wraparound mortgages.
Certain positions in the wraparound notes and wraparound mortgages (together,
the "Realized Wrap Debt") and interests in real property which were acquired in
the Acquisition have been realized since the Acquisition. Certain directors and
executive officers of Concord are also directors and executive officers of
Milestone and, at December 31, 1997, Concord beneficially owned approximately
69% of the Common Stock of the Company.
In October 1995, the Company also completed the transfer (the
"Transfer") of 16 of its retail properties (the "UPI Properties") to its then
wholly-owned subsidiary, Union Property Investors, Inc. ("UPI"). UPI was
recapitalized and spun-off in November 1995 when Milestone distributed all of
the outstanding shares of common stock of UPI to Milestone's Common Stockholders
(the "Distribution"). On February 27, 1997, UPI was merged (the "UPI Merger")
into a wholly-owned subsidiary of Kranzco Realty Trust, a Maryland real estate
investment trust ("Kranzco"). In connection with the UPI Merger, UPI terminated
its property management and management services agreements with the Company.
During 1997, the Company sold its remaining ownership of certain
issues of mortgage loan securitizations which were backed by mortgage loans on
commercial and multi-family dwellings. See Acquisition and Disposition of Real
Estate Related Assets.
Effective as of November 12, 1997 and December 17, 1997, the
Company entered into contracts in connection with contemplated purchases of
certain strip malls in the Jacksonville, Florida area. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation Recent
Developments.
Effective as of December 24, 1997, the Company entered into an
agreement with Societe Generale Securities Corporation ("SGSC") 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 (i) a proposed sale of certain shopping center properties owned by the
Affiliates on which the Company owns wraparound mortgages and (ii) certain of
the Company's Fee Properties, which together could represent a substantial
portion of the Company's real estate interests.
Effective as of March 6, 1998, the Company entered into an
agreement, subject to certain conditions, in connection with a contemplated sale
of its Mountain View Mall property located in Bend, Oregon. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Developments.
2
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The Wrap Debt
Certain material terms generally appearing in the Wrap Debt are
described below. Since the provisions of the Wrap Debt are complex and extensive
and provisions vary among the Wraparound Notes and Wraparound Mortgages, no
attempt has been made to describe in detail or to summarize all provisions of
the Wrap Debt.
Certain of the Wrap Debt and the Realized Wrap Debt were issued
by certain limited partnerships sponsored by Concord (the "Partnerships") to
affiliates of Concord which were formed for the purpose of (i) acquiring the
Underlying Properties and other commercial real properties which secured the
Realized Wrap Debt, (ii) selling such properties to the Partnerships for cash
and issuing certain of the Wrap Debt and the Realized Wrap Debt and (iii)
leasing the Underlying Properties and other commercial real properties which
secured the Realized Wrap Debt back from the Partnerships pursuant to Master
Leases (the "Master Leases"). Certain directors and officers of the Company are
also directors, officers and controlling stockholders of the General Partner of
each of the Partnerships. In October 1995, the Company acquired certain of the
Wrap Debt and became the lessee under the Master Leases in connection with the
Acquisition.
As the holder of the Wrap Debt, the Company is required to
satisfy the obligations under notes and mortgages held by lenders (typically
banks or other commercial lenders) on each Underlying Property with a priority
senior to that of the Company, including, without limitation, debt owed under
any purchase money notes issued by the Partnerships which own the Underlying
Property to the prior owner of such property in connection with the acquisition
of such Underlying Property (all such senior indebtedness being referred to
herein collectively as the "Underlying Debt"). See Table 1 in Item 2.
Description of Property. The Partnerships are obligated to the Company for the
Wrap Debt which wraps around and includes the obligation to pay the Underlying
Debt, and is secured by a mortgage on the Underlying Property. The Wrap Debt is
in a second priority position behind the Underlying Debt and, in some instances,
may be in a third priority position overall, behind a bank or commercial lender
and a seller or other second priority lender.
The Wraparound Notes
The Company is the holder of 40 Wraparound Notes relating to the
Underlying Properties. The maturity dates of the Wraparound Notes range from
1998 to 2017 . Each of the Wraparound Notes is a non-recourse obligation of the
issuing Partnership and includes the obligation to satisfy the Underlying Debt
for the corresponding Underlying Property. The Underlying Debt associated with
an Underlying Property in some instances consists of multiple notes and
mortgages which may have different priorities in relation to one another but all
of which are superior in right to the Wraparound Note and the Wraparound
Mortgage relating to an Underlying Property. A Wraparound Note may be prepaid by
the Partnership issuing such note by (i) the payment of the excess of (a) the
outstanding balance of a Wraparound Note, including accrued interest and any
discount element over (b) the then aggregate outstanding balance, including
accrued interest, of the Underlying Debt associated with the particular
Underlying Property, and (ii) the assumption of the borrower's obligations
pursuant to the Underlying Debt associated with the particular Underlying
Property. The wraparound mortgagor's (i.e., the Partnership owning the
Underlying Property) source of debt service payments on the Wraparound Note is
the rent it receives as lessor under the Master Leases. Additionally, any
percentage rent payable to the Partnership pursuant to the Master Leases will be
paid to the Company as the holder of the Wraparound Note as prepayment under the
Wraparound Note.
3
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A description of the current balances, interest rates, annual
debt service, maturity dates and amounts of any balloon payments with respect to
the Wraparound Notes is set forth in Table 2 in Item 2.Description of Property.
The Wraparound Mortgages
The Company is the holder of 40 Wraparound Mortgages relating to
the Underlying Properties. The Wraparound Mortgages provide that, on a
non-recourse basis, the Company, as the wraparound mortgagee, will pay, or cause
to be paid, all payments required by the Underlying Debt so long as the
wraparound mortgagor (i.e., the Partnership that owns the related Underlying
Property) makes all payments under the Wraparound Notes. If the Company fails to
make any payment required to be made by it within 30 days after the due date of
such payment, the wraparound mortgagor may make such payment and deduct the
amount of such payment from the next succeeding payments required to be made
under the Wraparound Note. The Partnerships, as wraparound mortgagors, are
obligated under the terms of the Wraparound Mortgages not to perform any act
which would constitute a breach of the mortgage(s) securing the applicable
Underlying Debt.
The Wraparound Mortgages provide that the wraparound mortgagor
(i.e., the Partnership that owns the Underlying Property) will maintain all
buildings, equipment and other improvements on the related Underlying Property.
In the event that the buildings and any other improvements are damaged or
destroyed, in whole or in part, or in the event of a taking of a portion of the
premises under the power of eminent domain, the wraparound mortgagor is required
to restore the same as nearly as possible to the condition they were in
immediately prior to the casualty or taking. Insurance proceeds and condemnation
awards will be made available, subject to the wraparound mortgagee's control,
and subject to the rights of the holders of the underlying mortgages, to the
extent necessary to comply with the foregoing. The wraparound mortgagee is
required to maintain property, casualty and public liability insurance on the
Underlying Property and cannot remove improvements or fixtures or structurally
alter any building.
Pursuant to the terms of the Wraparound Mortgages, the
outstanding balance of each corresponding Wraparound Note becomes due and
payable upon the occurrence of certain specified events, subject to grace
periods and cure rights, including, without limitation, (i) the failure of the
wraparound mortgagor to make any payment or perform any covenant required under
the related Wraparound Mortgage, (ii) the commencement of any action or
proceeding to foreclose any lien senior to the lien created by such Wraparound
Mortgage and (iii) the Partnerships, as wraparound mortgagor, becoming the
debtor in a bankruptcy or insolvency proceeding. In addition, after any default
by the wraparound mortgagor under a Wraparound Mortgage, the Company, as the
wraparound mortgagee, may exercise certain rights of the wraparound mortgagor
with respect to the management of the related Underlying Property.
The Company, as the wraparound mortgagee, has the right to
refinance, restructure, alter, increase, renew or rearrange the Underlying Debt
subject to certain terms and conditions, including, without limitation, that (i)
the refinanced portion of the Underlying Debt cannot increase the obligations of
the wraparound mortgagor, except in certain limited circumstances, (ii) the
rents payable on the Underlying Properties pursuant to the operating leases (the
"Operating Leases") on the related Underlying Properties should reasonably be
expected to satisfy the debt service obligations on the refinanced portion of
the Underlying Debt and (iii) the wraparound mortgagor is to cooperate in the
execution of documents necessary to effectuate the refinancing, so long as it is
not required to become obligated thereon.
See Item 3. Legal Proceedings, for a description of a motion
which has been filed to enforce a settlement agreement relating to the
Underlying Properties and the Wrap Debt.
4
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The Master Leases
Certain material terms generally appearing in the Master Leases
are described below. Since the provisions of the Master Leases are complex and
extensive, and provisions vary among the Master Leases, no attempt has been made
to describe in detail or to summarize all provisions of the Master Leases.
The Company is the Master Lessee under individual leases of each
of the Underlying Properties. As master lessee, the Company leases an entire
Underlying Property (i.e., a shopping center or single tenant commercial
property) from the owner and re-leases it under operating leases to the
tenant(s) who occupy such property.
The Master Leases were initially entered into by affiliates of
Concord, as tenants, and limited partnerships sponsored by Concord, as
landlords, and are coterminous with the Wraparound Notes and Wraparound
Mortgages. The rent payable by the lessee under each Master Lease for an
Underlying Property is approximately the same amount as the debt service due
under each Wraparound Note for such Underlying Property. The Company is both the
holder of each Wrap Debt and the lessee under the Master Leases relating to the
Underlying Properties. Prior to the Acquisition, certain of Concord's affiliates
and the lessor under the Master Leases (i.e., the Partnership that owns the
related Underlying Property) amended the Master Leases pursuant to which, among
other things, the rent payable under the Master Leases was reduced by the amount
of the fees, if any, payable by the lessor to the general partner of the lessor.
The Partnerships consented to and ratified such lease amendments. As the Master
Lessee and the wraparound mortgagee, the Company collects the rents under the
Operating Leases and applies such amounts to the operating expenses of the
Underlying Property and the Underlying Debt. The obligations of the lessee under
the Master Leases are guaranteed by Concord. Such guaranty was not affected by
the transfer and assignment of the lessee interest in the Master Leases to the
Company pursuant to the Acquisition and the Company is not obligated to
indemnify Concord with respect to such guaranty. The Master Leases are subject
and subordinate to the Underlying Debt.
As between the Company, as lessor, and the operating tenants, as
lessees, the tenants are generally responsible for payment of rents to the
Company and for all or a portion of their pro rata share of operating expenses
and, in some instances, for the maintenance and repair of the property.
Pursuant to the Master Leases, the Company, as lessee, (i) pays a
fixed base rent to the applicable Partnership, as lessor, (ii) is entitled to
receive the revenues payable under the Operating Leases and (iii) is responsible
for operating the Underlying Property. The Company is also obligated to pay
percentage rent to the lessor equal to certain percentages of net operating
income in excess of certain threshold amounts which are subject to adjustment.
The Partnership, as lessor under the Master Lease, is responsible
for the maintenance, repair and replacement of the physical property when
necessary. The Company, as lessee, can cause the lessor, subject to certain
limitations, to borrow additional Wrap Debt to finance improvements to the
related property.
Pursuant to each of the Master Leases, the Company, as lessee, is
responsible for compliance with all applicable laws and regulations and is
required to keep the property insured at certain minimum levels for certain
specified losses. The Company's management believes that the Properties are
adequately insured. The Master Leases also have termination and assignment
provisions.
5
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As of April 30, 1996, the Company terminated, by written notice,
the Master Lease ( the "Chili Lease") on the Property located in Chili, New York
(the "Chili Property"). As a result of the termination of the Chili Lease, the
Company, the tenant under such lease, assigned all of its rights, title and
interest in the Chili Property to Valley Plaza Associates ("VPA"), the landlord
under the Chili Lease, and VPA assumed all of the Company's related obligations
under the Chili Lease. Neither VPA nor the Company have made the full required
payment on the underlying mortgage loan for the Chili Property since May 1,
1996, however VPA has made certain partial payments thereon which have been
credited against the Wraparound Note associated with the Chili Property. On
February 9, 1998 the Wraparound Note was assigned, resulting in the relief of
the non-recourse underlying mortgage.
The amount of annual rents due with respect to each of the Master
Leases and the termination dates thereof are set forth in Table 2 in Item 2.
Description of Property.
Acquisition and Disposition of Real Estate Related Assets
In July 1996, the Underlying Debt of $2,325,000 associated with
the Property located in Prattville, Alabama (the "Prattville Property") came
due, and the mortgagor extended the balance due to December 1996. Although the
Underlying Debt associated with the Prattville Property had not been paid off,
regular monthly debt payments had been made by the Company through February
1997. On March 3, 1997, the mortgagor stated its intention to commence
foreclosure proceedings. During 1997, as a result of the foreclosure sale by the
bank, the Company realized its position in its wraparound note on the Prattville
Property. Such sale resulted in the relief of the non-recourse underlying
mortgage, which resulted in a book gain of approximately $120,000 to the
Company. In conjunction with the foreclosure sale, the Company, as the lessor on
the Master Lease on the Prattville Property, canceled such Master Lease.
On September 24, 1997, the Company completed the purchase of Pine
Oak Plaza, a 16,994 square foot shopping center located in Sunrise, Florida
(Broward County), from REC I Corporation for approximately $1,100,000 in cash.
The shopping center is occupied by local tenants subject to operating leases
ranging from 4 to 13 years with various renewal options and is currently 93.5%
occupied. This property can be classified as a neighborhood or community
unanchored strip center and is located in a secondary type market.
On October 30, 1997, the Company realized its position in its
wraparound note on a property located in Marion, Ohio (the "Marion Property") as
a result of the sale of the property by the owners. The sale price of the Marion
Property was approximately $2,750,000, which resulted in a book gain of
approximately $200,000 to the Company. In conjunction with the sale of the
Marion Property, the Company, as the lessor on the Master Lease on the Marion
Property, canceled such Master Lease.
From August 1994 to November 1997, the Company bought and
subsequently sold various issues of mortgage loan securitizations which were
backed by mortgage loans on commercial and multi-family dwellings ("CMBSs"). To
facilitate the purchase of such CMBSs, short term borrowing arrangements ("Loans
Payable") were entered into with the brokers from which CMBSs were purchased.
The Company engaged in a variety of interest rate management techniques in order
to attempt to manage the effective maturity and/or interest rate risks
associated with the CMBSs. Such techniques included selling short U.S. Treasury
Notes which were collateralized by reverse repurchase agreements.
The Company had $32,314,853 and $37,594,939 of CMBSs as of
December 31, 1996 and 1995, respectively; and $23,829,335 and $27,450,954 of
associated Loans Payable as of December 31, 1996 and 1995, respectively.
Additionally, the Company had $33,952,346 and $32,823,439 of U.S.
6
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Treasury Notes sold short as of December 31, 1996 and 1995, respectively; and
$34,718,749 and $33,119,375 of associated reverse repurchase agreements as of
December 31, 1996 and 1995.
On January 23, 1997, the Company sold its ownership of the CMBS
consisting of the Nomura Series 1994-MD1 B3A (the "MD1 Certificate") and repaid
the associated Loan Payable. At the time of the sale of the MD1 Certificate, the
Company had outstanding U.S. Treasury Note short positions totaling $10,000,000
associated with the MD1 Certificate. In connection with the sale of the MD1
Certificate, the Company closed $9,500,000 of U.S. Treasury Note short
positions. As a result of the sale, the Company realized a book loss of
approximately $1,100,000. See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources.
On November 10, 1997, the Company sold its remaining ownership of
the CMBSs consisting of a Nomura Series 1996-MDV B2 certificate (the "MDV
Certificate"), a DLJ 1994-MF11 B2 certificate (the "B2 Certificate"), and a DLJ
1994-MF11 B3 certificate (the "B3 Certificate") ( the MDV Certificate, the B2
Certificate and the B3 Certificate may be referred to collectively herein as the
"Certificates") and repaid the associated Loans Payable. At the time of the sale
of the Certificates, the Company had outstanding U.S. Treasury Note short
positions totaling $25,500,000 associated with the Certificates. In connection
with the sale of the Certificates, the Company closed all such remaining U.S.
Treasury Note short positions. As a result of the sale, the Company realized a
book gain of approximately $3,500,000. See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations Liquidity and Capital
Resources.
From time to time the Company sells, or may take actions to sell,
certain real estate assets which it does not believe to be material to the
overall business or financial position of the Company.
Investment Policy
There are no limitations on the percentage of assets which may be
invested in any one investment or on the type of investments the Company may
make. The Company has no present intention of investing in or acquiring the
securities of other companies for the purpose of exercising control over other
companies. The Company does not currently intend to expand its operations to
include non-real estate related activities, but may do so if the Company's Board
of Directors determines it to be in the best interest of the Company. The
Company's policies towards its investments are not subject to the vote of the
Company's stockholders.
Currently, the Company is not required to register as an
investment company under the Investment Company Act of 1940 (the "Investment
Company Act"). The Company intends to operate its businesses so that it will not
be deemed to be an investment company under Section 3(a)(3) of the Investment
Company Act or would qualify for an exemption from registration under the
Investment Company Act (e.g. Rule 3a-1 or the real estate interest exemption
under Section 3(c)(5)(C)).
Real Estate Revenues
For the years ended December 31, 1997, 1996 and 1995, no tenant accounted
for more than 10% of the Company's total revenues. However, K-Mart Corporation
accounted for approximately 32%, 30% and 40 %, respectively, of rent revenue.
7
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Potential Environmental Risks
Under various federal, state and local environmental laws,
ordinances and regulations, a current or previous owner or operator of real
property may be held liable for the costs of removal or remediation of certain
hazardous or toxic substances, including, without limitations,
asbestos-containing materials, that could be located on, in or under such
property. Such laws and regulations often impose liability whether or not the
owner or operator know of, or was responsible for, the presence of the hazardous
or toxic substances. The costs of any required remediation or removal of these
substances could be substantial and the liability of an owner or operator as to
any property is generally not limited under such laws and regulations, and could
exceed the property's value and the aggregate assets of the owner or operator.
The presence of these substances or failure to remediate such substances
properly may also adversely affect the owner's ability to sell or rent the
property, or to borrow using the property as collateral. Under these laws and
regulations, an owner, operator or any entity who arranges for the disposal of
hazardous or toxic substances, such as asbestos-containing materials, at a
disposal site may also be liable for these costs, as well as certain other
costs, including governmental fines and injuries to persons or properties. To
date, the Company has not incurred any costs of removal or remediation of such
hazardous or toxic substances. However, the presence, with or without the
Company's knowledge, of hazardous or toxic substances at any property held or
operated by the Company could have an adverse effect on the Company's business,
operating results and financial condition. The Company is not aware of any
environmental conditions.
Competition
Any rental property owned or hereafter acquired by the Company
(whether retail, office, industrial or residential) will have substantial
competition from similar properties in the vicinity in which such property is
located. Such competition is generally for the retention of existing tenants and
for new tenants upon space becoming vacant. The Company believes that the
profitability of each of the Properties is based, in part, upon its geographic
location, the operations and identity of the property's tenants, the performance
of the property and leasing managers, the maintenance and appearance of the
property, the ease of access to the property and the adequacy of property
related facilities. The Company also believes that general economic
circumstances and trends as well as the character and quality of new and
existing properties which may be located in the vicinity of the Properties are
factors that may affect the operation and competitiveness of the property.
The Company competes with other investors, managers and
developers to acquire desirable properties and engages in a continuing effort to
identify desirable properties for acquisition. Management believes that the
Company can continue to compete effectively in the current real estate
environment because of its experience in real estate investments, tenant
selection and lease negotiation. However, many other investors in real property
who compete with the Company have far greater resources than the Company.
Employees
The Company employs 38 people, 5 of whom are officers. Pursuant
to a management and service agreement, the Company has made available to Concord
certain of its employees to perform a variety of management and administrative
services for Concord. Except for services provided by certain employees pursuant
to such agreements, all of the employees are employed full-time by the Company.
8
<PAGE>
Forward-Looking Statements
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 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.
9
<PAGE>
Item 2. Description of Property.
The Company's executive offices are located at 150 E. Palmetto
Park Road, 4th Floor, Boca Raton, Florida, 33432 where it leases approximately
8,000 square feet of office space.
The company is engaged in the ownership and operation of 32
commercial real estate properties consisting of shopping centers, strip malls
and free standing department stores. The following tables describe and summarize
certain data for each of the properties. See also Item 1. Business, for a
description of additional terms relating to the Properties and the Company's
investment policies.
Table 1. Summary of Properties and Underlying Debt.
Table 2. Summary of Wraparound Notes.
10
<PAGE>
Table 1. Summary of Properties and Underlying Debt
<TABLE>
<CAPTION>
Amortization
Provisions - Balance at
Underlying Monthly Payments Maturity
GLA Occupancy Debt at Interest of Principal & Prepayment Maturity (Assuming no
Location Property (Sq.Ft) Rate(%) 12/31/97 Rate(%) Interest Provisions Date Prepayment)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1)Bend,OR Mountain View Mall 346,923 95 $17,179,016 9.00 148,925 - 67% of Yield maintenance 6/1/98 $17,077,113
cash flow as plus participation
defined in the per formula
note
(2)Deland, FL Deland Plaza 68,337 100 932,726 8.875 14,016 1% premium 4/1/03 343,437
(2)Rochester,NY Ridgemont Plaza 84,181 100 1,156,461 9.25 15,992 1% premium 1/1/02 747,266
Pascagoula,MS Gulf Coast Plaza 125,803 79 0 - - - - -
Janesville,WI Blackhawk Village 88,500 86 990,092 9.00 14,060 - 7/31/02 540,492
118,196 9.00 1,529 - 8/1/07 0
(2)Marietta,OH Kmart Corporation 87,543 100 2,040,000 5.75-6.70 Variable semi None until 2002; then 3/15/07 0
annual payments 3%declining 1%annually
to par
(2)Mt.Pleasant,PA Kmart Corporation 83,552 100 1,365,000 6.50-6.80 Variable semi None until 2001; then 5/1/07 76,197
annual payments 3%declining 1%annually
to par
(2)North Canton,OH Kmart Corporation 84,180 100 2,116,132 9.00 21,669 Prepayable at a discount 9/30/12 0
(2) Owensboro,KY Kmart Corporation 68,337 100 1,600,000 6.50-6.80 Variable semi None until 2001; then 12/1/07 0
annual payments 3%declining 1% annually
to par
Quincy, IL Harrison Street Plaza 149,954 99 3,042,405 7.75 27,912 Prepayable at par 7/1/98 2,992,016
Natchez, MS Morgantown Plaza 92,646 100 1,833,519 12.50 Available cash 6% declining 1% annually 4/1/07 1,076,197
flow to par
(2)Streetsboro,OH Kmart Corporation 84,800 100 1,385,000 6.35-6.70 Variable semi None until 2001; then 12/1/06 0
annual payments 3% declining 1% annually
to par
(2)Dubois, PA Sandy Plaza 34,019 100 1,490,000 7.00 Variable semi None until 2004; then 12/1/06 0
annual payments 3% declining 1% annually
(2)Franklin
Township,PA Franklin Plaza 31,170 100 1,465,000 6.00 Variable semi None until 2004; then 12/15/07 0
annaul payments 3%declining 1% annually
(2)Clarksville,TN Kmart Corporation 88,100 100 1,565,000 6.00-6.80 Variable semi None until 2002; then 10/1/06 0
annaul payments 3% declining 0.5% annually
to par
Montgomery,AL Chisolm Shopping 39,075 100 1,277,608 8.75 14,500 None until 1998; then 4/1/07 396,073
Center 5% declining 1% annually
to a 2% minimum
Paris, TN Paris Plaza 102,453 98 590,753 13.50 8,859 None until 1998; then 4% 4/1/08 0
declining 1% annually to par
355,949 9.25 8,467 7% declining 1% annually 7/1/03 0
until par
(3)Chili, NY Chili Plaza - - 1,477,009 9.63 21,688 1% premium 8/1/04 0
South
Williamson KY, Southside Mall 285,655 97 15,088,951 9.00 144,833 - 10/1/98 14,463,542
Savannah,TN Savannah Plaza 46,400 100 323,794 9.50 6,612 - 1/31/03 0
Danville,IL Holiday Square 50,978 100 475,636 9.625 9,663 1% premium 9/1/02 64,250
(2)Warsaw, VA Richmond Plaza 43,200 100 817,913 13.125 11,373 5% declining 1% annually 10/1/09 0
to a 2% minimum
(2)Southwick,MA Greenwood Plaza 45,000 100 793,343 11.50 9,857 in advance 1% premium 9/1/09 0
(2)Walpole, NH Kendiana Plaza 32,400 100 793,343 11.50 9,857 in advance 1% premium 9/1/09 0
Baton Rouge,LA Capitol Heights 52,700 100 2,066,293 12.00 33,583 5% declining 1% annua1ly 12/1/05 0
to a 2% minimum
(1)Sunrise, FL Pine Oak Plaza 16,994 94 0 - - - - 0
(2)Palatka, FL Walmart Corporation 91,840 100 1,196,901 12.00 17,247 5% declining 1% annua1y 11/1/07 0
to a 2% minimum
(2)Vestiva
Hills,AL Columbiana Crossing 35,946 100 745,292 13.00 13,759 5% declining 1% annually 11/1/04 0
to a 2% minimum
(2)Columbus, NE Cottonwood Plaza 64,890 100 1,360,287 12.00 17,201 - 9/1/10 9,274
63,918 9.50 697 - 7/1/11 0
(2)Hamilton, NY Alexander Plaza 43,200 100 822,687 13.125 11,373 5% declining 1% annually 12/1/09 0
to a 2% minimum
(1)Zanesville,OH
Sunrise Shopping Center 130,072 55 1,199,650 9.50 14,295 - 5/31/98 1,170,645
(1)Blackstone,VA Family Dollar 43,200 21 0 - - - - -
</TABLE>
(1) Fee Property
(2) Annual real estate taxes are the responsibility of the tenant.
(3) Property was under receivership at December 31, 1997. On February 9, 1998
the Wraparound Note was assigned resulting in the relief of the non-recourse
underlying mortgage.
11
<PAGE>
Table 2. Summary of Wraparound Notes at December 31, 1997
<TABLE>
<CAPTION>
Carrying Face Annual Balance at Annual
Amount of Amountof Payments Final Maturity Master Master
Interest Wraparound Wraparound of Principal Maturity (Assuming No lease lease
Location Rate(%) Notes Notes &Interest Date Prepayment) Payment Termination
==================== ========= ============ ============= ============= ========= ============= ============ ============
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Baton Rouge, LA 9.75 $ 4,006,610 $4,469,548 $ 630,350 12/31/99 $3,890,656 $630,350 12/31/99
Chili, NY 10.00 1,477,009 4,883,737 674,340 12/31/99 3,152,116 674,340 12/31/99
Clarksville, TN 9.75 1,754,804 3,759,873 554,822 12/31/99 2,969,232 554,822 12/31/99
Columbus, NE 9.75 2,172,024 2,436,955 309,207 12/31/99 2,235,677 309,207 12/31/99
Danville, IL 9.75 886,939 1,851,308 275,730 12/31/99 1,564,040 275,730 12/31/99
Deland, FL 9.70 1,411,835 1,929,531 207,550 12/31/99 1,890,294 207,550 12/31/99
Dubois, PA 10.00 1,484,336 3,057,647 475,498 12/31/99 1,995,528 475,498 12/31/99
Ellwood City (Franklin
Township), PA 10.00 1,484,336 3,057,647 475,498 12/31/99 1,995,528 475,498 12/31/99
Hamilton, NY 9.75 1,089,447 1,493,689 210,745 12/31/99 1,229,940 210,745 12/31/99
Janesville, WI 10.25 1,434,849 2,173,824 268,502 12/31/15 0 268,502 12/31/15
Marietta, OH 8.32 2,958,338 3,165,088 371,533 12/31/14 0 371,533 12/31/14
11.00 20,000 25,148 12/31/14 160,313 - -
Montgomery, AL 9.75 940,941 2,251,243 295,516 12/31/99 2,032,563 295,516 12/31/99
Mt. Pleasant, PA 9.18 2,334,042 2,545,423 290,345 12/31/15 0 290,345 12/31/15
11.00 12,626 12,976 12/31/14 83,481 - -
Natchez, MS 10.00 1,574,516 3,825,382 516,210 12/31/98 3,097,131 516,210 12/31/98
No. Canton, OH 9.11 2,207,236 2,873,770 333,272 12/31/14 0 333,272 12/31/14
11.00 26,575 33,958 0 12/31/14 216,478 - -
11.00 25,650 29,026 0 12/01/14 186,725 - -
Owensboro, KY 10.00 2,784,791 2,787,357 337,955 12/31/15 0 337,955 12/31/15
Palatka, FL 9.75 1,765,532 2,446,691 407,745 12/31/99 1,921,922 407,745 12/31/99
11.00 24,650 24,816 0 12/31/99 30,891 - -
Paris, TN 10.00 1,551,337 3,364,006 555,860 12/31/99 2,687,003 555,860 12/31/99
11.00 51,016 65,515 0 12/31/99 80,814 - -
Southwick, MA 9.75 868,168 1,420,480 196,750 12/31/99 1,248,385 196,750 12/31/99
So. Williamson, KY 9.88 13,674,922 24,521,288 4,181,000 12/31/99 19,052,522 4,181,000 12/31/99
Streetsboro, OH 9.68 1,793,315 2,298,679 276,986 12/31/14 0 276,986 12/31/14
11.00 21,447 27,640 0 12/31/14 176,200 - -
11.00 19,600 22,180 0 12/01/14 142,686 - -
11.00 10,000 10,169 0 12/31/14 65,418 - -
Vestivia Hills, AL 9.75 1,360,003 1,800,257 257,306 12/31/99 1,555,772 257,306 12/31/99
Walpole, NH 9.75 1,006,457 1,420,480 196,750 12/31/99 1,248,385 196,750 12/31/99
Pascagoula, MS 9.75 1,225,566 2,070,634 246,507 12/31/17 0 270,266 12/31/17
12.00 175,125 187,335 23,759 12/31/17 187,335 - -
11.00 34,658 35,620 0 12/31/16 285,255 - -
Quincy, IL 10.00 2,545,600 6,293,133 920,890 12/31/98 4,904,390 920,890 12/31/98
Rochester (Greece), NY 9.70 1,507,843 1,788,998 220,906 12/31/14 0 220,906 12/31/14
10.00 130,625 166,167 0 12/31/14 910,735 - -
Savannah, TN 9.88 500,590 1,228,035 197,500 12/31/99 993,633 197,500 12/31/99
Warsaw, VA 9.75 1,049,573 1,406,491 175,974 12/31/99 1,547,507 175,974 12/31/99
</TABLE>
12
<PAGE>
Item 3. Legal Proceedings.
A lawsuit (the "Rabin Litigation") purporting to be a class action against,
among others, Concord, Leonard S. Mandor, Robert A. Mandor and certain
partnerships (the "Concord Partnerships") and affiliates of Concord, was filed
in September 1989 in the United States District Court for the Southern District
of New York alleging various federal and common law claims relating to the sales
of interests in such Concord Partnerships. In November 1991, the Rabin
Litigation was settled pursuant to the terms of the court-approved settlement
agreement (the "Rabin Settlement Agreement"). A motion brought by the plaintiffs
in the Rabin Litigation seeking to enforce the Rabin Settlement Agreement and
for declaratory and other relief was settled by a Stipulation and Order (the
"Rabin Stipulation and Order") entered and approved by the United States
District Court on October 24, 1997. The plaintiffs asserted, inter alia, that
the defendants breached the Rabin Settlement Agreement by improperly allocating
transaction expenses against the payment to be made to the selling Concord
Partnerships in certain circumstances pursuant to the Rabin Settlement Agreement
and breached their fiduciary duties to the plaintiffs by prematurely selling
properties without valid business justification.
Under the Rabin Stipulation and Order, the plaintiffs withdrew their breach
of fiduciary duty claims and withdrew with prejudice their claim that defendants
breached the Rabin Settlement Agreement by their allocation of transaction
expenses from the sale of certain properties in exchange for a payment of
$600,000 from the defendants. The settlement payment has been made. In addition,
the Rabin Stipulation and Order provides for a formula relating to the
allocation of transaction expenses in connection with the future sale of certain
properties owned by the Concord Partnerships, including the Underlying
Properties subject to the Wrap Debt. Generally, under such formula, if a
Property (as defined in the Rabin Settlement Agreement) is sold for a price less
than the sum of (a) the outstanding Wrap Debt, (b) the Permitted Additional Wrap
Debt (as defined in the Rabin Settlement Agreement) and (c) the amount to be
paid to the holder of the Wrap Debt pursuant to the Rabin Settlement Agreement,
then 82.25% of the transaction expenses shall be the obligation of the selling
Concord Partnership, and shall be deducted from the 11% of net proceeds (as
defined in the Rabin Settlement Agreement) to be distributed to the selling
Concord Partnership, and the Company, as the holder of the Wrap Debt, will be
responsible for paying the remaining 17.75% of the transaction expenses incurred
in such sale. In the event a Property is sold for a price in excess of the sum
of (a) the outstanding Wrap Debt, (b) the Permitted Additional Wrap Debt and (c)
the amount to be paid to the holder of the Wrap Debt pursuant to the Rabin
Settlement Agreement, then the transaction expenses shall be deducted from the
proceeds in excess of such existing debt, and, if such excess proceeds are not
sufficient to pay all such transaction expenses, 82.25% of the balance of such
transaction expenses shall be paid out of the 11% of the net proceeds
distributed to the selling Concord Partnership, and the Company will be
responsible for paying the remaining 17.75% of the transaction expenses incurred
in such sale. Concord and one of its subsidiaries have agreed to indemnify the
Company for any losses, up to $200,000 in the aggregate, resulting from any such
additional transaction fees, costs or expenses incurred by the Company as a
result of such events. The Company does not believe that the Rabin Stipulation
and Order materially adversely affects the Company. There can be no assurance,
however, that the plaintiffs will not pursue the breach of fiduciary duty claims
against Concord and the General Partners of the Concord Partnerships which own
the Underlying Properties which were withdrawn under the terms of the Rabin
Stipulation and Order.
On January 30, 1996, Milestone, its Board of Directors and Concord were
named as defendants in an action (the "Winston Action") commenced in the Court
of Chancery of the State of Delaware (the "Delaware Court"). In the action, the
plaintiff, a Series A Preferred Stockholder purporting to bring the action on
behalf of himself and other Series A Preferred Stockholders, alleged that in
connection with the Acquisition, the Transfer and the Distribution (the
Acquisition, the Transfer and the Distribution are collectively referred to
herein as the "Transactions"), Milestone and its directors engaged in
self-dealing and breached their fiduciary duties and faith and fair dealing to
the Series A Preferred Stockholders. The plaintiff claimed, among other things,
that, as a result of the Transactions, Milestone would not have sufficient funds
to pay dividends on the Series A Preferred Stock and that the Properties were
grossly inferior to the UPI Properties. The defendants moved to dismiss the
plaintiff's
13
<PAGE>
original complaint, and thereafter, the plaintiff amended his complaint to
allege further causes of action, including a claim of rescission. The defendants
moved to dismiss the amended complaint and, after hearing arguments thereon, the
Delaware Court dismissed the plaintiff's claim for rescission of both the
Transfer and the Distribution and reserved decision on the defendants' motion to
dismiss the plaintiff's claim for damages and other relief. On December 9, 1996,
the plaintiff requested that the Delaware Court dismiss the amended complaint,
and filed a purported new class action. On January 14, 1997, the defendants
filed a motion to dismiss or stay the purported new class action. On May 12,
1997, the Delaware Court issued a decision on such motion and dismissed the
plaintiff's breach of fiduciary duty and statutory claims (although the Delaware
Court had allowed the plaintiff to replead the fiduciary duty claim as a
derivative claim brought on behalf of Milestone), but did not dismiss the
plaintiff's claim that the Transfer and the Distribution did not comply with the
Certificate of Designations for the Series A Preferred Stock. On June 4, 1997,
the plaintiff appealed the Delaware Court's dismissal of the fiduciary duty
claim and, on June 11, 1997, the defendants filed a cross-appeal. The plaintiff
thereafter filed an amended complaint.
On October 30, 1997, Milestone entered into a Stipulation of Settlement
(the "Winston Settlement Agreement") providing for the settlement (the "Winston
Settlement") of the purported class action lawsuit. The Winston Settlement is
subject to approval by the Delaware Court after a hearing, and is also subject
to a number of conditions which may be 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 do not opt out of the Winston Settlement.
If the Winston Settlement is approved and consummated, the Winston Action
will be dismissed, Milestone's stockholders will release 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 is consummated will release any claims they may have against
Milestone and the other named defendants arising out of the Transactions. Each
Series A Preferred Stockholder who does not opt out of the Winston Settlement
and who owns shares of the Series A Preferred Stock on the date the Winston
Settlement is consummated will 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 will have a liquidation preference of $2.25 per share, will
be required to be redeemed by CMP at $2.25 per share after five years, and will
have no voting or dividend rights; in addition, the CMP Preferred Stock will be
subject to optional redemption in accordance with a schedule during the five
year period prior to mandatory redemption. CMP's redemption obligations will be
secured by a letter of credit.
The ultimate consummation of the Winston Settlement as set forth in the
Winston Settlement Agreement is subject to numerous conditions, some of which
are not in the control of the Company, such as approval by the Delaware Court,
and therefore is inherently uncertain. Accordingly, no dollar amount has been
included in the Company's accompanying financial statements to reflect the
potential Winston Settlement. If the Winston Settlement is consummated, the
Company does not anticipate that the Company's portion of such settlement costs
will exceed $3,000,000. There can be no assurance, however, that any fees,
expenses or other costs associated with the ultimate resolution of the Winston
Action will not differ from such estimate.
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.
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
14
<PAGE>
$2,000,000. Pursuant to the Winston Settlement Agreement, if the Winston
Settlement is consummated, Milestone will be required to pay, in cash, $0.75 per
share for each of the outstanding 3,033,995 shares of Series A Preferred Stock,
to each Series A Preferred Stockholder who does not opt out of the Winston
Setllement, plus the plaintiff's legal fees in an amount not to exceed $650,000
and will incur other legal expenses. Milestone believes that the amount it and
certain of its directors will be required to pay, pursuant to the Winston
Settlement Agreement and as a result of the litigation, if the Winston
Settlement is consummated, are covered losses under both the National Union
Policy and the Stonewall Policy. In addition, the Company has incurred
approximately $250,000 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 has 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 has also refused to
contribute to the Winston Settlement. In the complaint, the plaintiffs allege
that National Union and Stonewall have 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 has answered the
complaint and has denied liability. Stonewall has until April 6, 1998 to answer
the complaint. At this time, the Company is not in a position to render an
opinion as to the outcome of this action.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended December 31, 1997.
15
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Common Stock and the Series A Preferred Stock have traded on the New
York Stock Exchange ("NYSE") under the symbols "MPI" and "MPI PRA",
respectively, since January 29, 1991.
The quarterly high and low sales prices in 1997 and 1996 for the Common
Stock and the Series A Preferred Stock, as reported by Bloomberg, were as
follows:
Common Stock High Low
1997
First Quarter $ 7/8 $ 9/16
Second Quarter 9/16 7/16
Third Quarter 9/16 7/16
Fourth Quarter 11/16 1/2
1996
First Quarter $ 2 1/8 $ 1 1/2
Second Quarter 1 7/8 1 1/8
Third Quarter 1 1/8 11/16
Fourth Quarter 1 1/8 5/8
Series A Preferred Stock High Low
1997
First Quarter $ 7/8 $ 5/8
Second Quarter 11/16 1/2
Third Quarter 1 5/16 7/16
Fourth Quarter 1 5/16 1 3/16
1996
First Quarter $ 3 1/4 $ 2
Second Quarter 2 5/8 1 1/8
Third Quarter 1 1/4 26/32
Fourth Quarter 1 1/8 5/8
On March 20, 1998, the last reported sale price of the Common Stock was $1 9/16
and the last reported sale price of the Series A Preferred Stock was $1 7/16. On
March 20, 1998, there were approximately 1,899 record holders of the Common
Stock and 1,651 record holders of the Series A Preferred Stock.
16
<PAGE>
Dividend Policy
Common Stock
Milestone has never paid any cash dividends on its Common Stock and has no
present intention to declare or pay cash dividends on the Common Stock in the
foreseeable future. While there are no restrictions on Milestone's ability to
pay dividends, except for the preference of the Series A Preferred Stock
(discussed below), the Company anticipates that in the future earnings will be
retained to finance the Company's operations. Any decision as to the future
payment of dividends on the Common 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 Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources.
Series A Preferred Stock
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 Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources.
17
<PAGE>
Item 6. Selected Financial Data
(Amounts in thousands, except per share information)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 30,092 $ 33,722 $ 25,768 $ 19,404 $ 14,494
Total expenses 34,244 35,843 26,261 16,951 14,278
(Loss)income before income taxes (4,152) (2,121) (493) 2,453 216
Benefit (provision) for income taxes 721 (366) (317) (1,161) ( 377)
Net (loss)income (3,431) (2,487) (810) 1,292 (161)
Distributions on preferred stock 0 0 (2,732) (2,772) (2,807)
-------------- --------------- ----------- ----------- -----------
Loss attributable to common stockholders ($3,431) ($2,487) ($3,542) ($1,480) ($2,968)
=============== =============== =========== ========== ===========
Loss per common share ($0.82) ($0.65) ($2.13) ($1.28) ($2.06)
================ =============== =========== =========== ===========
Weighted average common shares
outstanding 4,207 3,846 1,665 1,160 1,441
=============== =============== ============ ============ ===========
Total assets $112,223 $182,095 $198,413 $137,785 $87,390
Mortgages and notes payable 67,739 71,563 79,278 47,105 43,253
</TABLE>
Milestone has never paid any cash dividends on its Common Stock and has no
present intention to declare or pay cash dividends on the Common Stock or on the
Series A Preferred Stock in the foreseeable future. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Liquidity and Capital Resources.
For a discussion regarding new accounting standards, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations - New
Accounting Standards.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements of the Company and the notes thereto
appearing in Item 14 of this report.
General
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. See Item 1. Business - Forward Looking Statements.
The Company is engaged in the business of owning, acquiring, managing,
developing and investing in commercial real estate and real estate related
assets.
18
<PAGE>
Year 2000 Compliance
The Company has and will continue to make certain investments in its
software systems and applications to ensure that the Company is year 2000
compliant. It is anticipated that the project will be completed by internal
staff without significant contributions from outside contractors. Management
believes that the financial impact to the Company of ensuring its year 2000
compliance has not been and will not be material to the Company's financial
position or results of operations.
Recent Developments
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, which is in the
feasibility stage, the potential purchaser is not yet obligated to purchase the
Bend Property and the Company is not yet obligated to sell the Bend Property,
and any such obligation for the purchase or sale of such property is conditional
upon the occurrence or non-occurrence of certain events and/or determinations,
some or all of which may not be in the control of the Company. Accordingly,
there can be no assurance that the contemplated transaction will occur.
On February 9, 1998, the Company realized its position in its wraparound
note on the property located in Chili, New York, as a result of the assignment
of the wraparound note. Such assignment resulted in the relief of the
non-recourse underlying mortgage, which resulted in a net book gain of
approximately $75,000 to the Company.
The Company entered into an agreement with SGSC (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 of its Fee
Properties. The shopping center properties to be sold by the Affiliates are
subject to Wrap Debt held by the Company which 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 with respect to 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 November 21, 1997 and December 17, 1997, the Company entered into
contracts (the "Purchase Contracts") in connection with the contemplated
purchase of two strip mall shopping centers in the Jacksonville, Florida area.
Pursuant to the Purchase Contracts any obligations to purchase such properties
are subject to the occurrence or non-occurrence of certain events and/or
determinations, some or all of which may not be in the control of the Company.
Accordingly, there can be no assurance that the contemplated transactions will
occur.
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Results of Operations
Calendar Year 1997 Compared to Calendar Year 1996
The Company recognized a net loss of $3,430,731 for the year ended December
31, 1997 as compared to a net loss of $2,486,974 for the same period in 1996 due
to the following factors:
Revenues for 1997 were $30,091,911, a decrease of $3,630,531 or 11%, from
$33,722,442 for 1996. Such decrease was primarily due to the net of: (1) a
decrease in interest income of $4,299,059 resulting primarily from (a) a
decrease in interest income of approximately $994,000 due to a decrease in the
number of wraparound notes held by the Company to 28 for the year ended December
31, 1997 from 30 for the same period in 1996 and (b) a decrease in interest
income of approximately $3,196,900 due to the sale by the Company of all four of
its mortgage backed securities, (2) a decrease in rental income of $1,102,272
resulting from a decrease in the number of properties leased by the Company to
28 for the year ended December 31, 1997 from 30 for the same period in 1996, (3)
an unrealized holding loss on U.S. Treasury Notes sold short of $316,887 for
1997 compared to an unrealized holding gain of $1,217,186 for 1996 and (4) a
gain on the sale of available-for-sale securities of $3,511,560 for 1997
compared to a loss on the sale of available-for-sale securities of $350,699 for
1996.
Operating expenses for the year ended December 31, 1997 were $21,686,805, a
decrease of $1,221,139, or 5%, from $22,907,944 for the year ended December 31,
1996. Such decrease was primarily due to the net of: (1) a decrease in net lease
expenses of $1,221,258 due to a decrease in the number or properties leased by
the Company to 28 for the year ended December 31, 1997 from 30 for the same
period in 1996, (2) a decrease in property expenses of $299,903 due to the
decrease in the number of properties leased by the Company, (3) a decrease in
professional fees of $139,627 due to non-recurring transaction costs associated
with the disposition of real estate related assets in 1996 and (4) an increase
in salaries, general and administration expenses of $416,800 due to an increase
in bonuses for several executive officers of the Company.
Interest expense for the year ended December 31, 1997 was $9,119,554, a
decrease of $2,842,226, or 24%, from $11,961,780 for the year ended December 31,
1996. Such decrease was primarily due to a decrease in financing arrangements
related to the disposition during 1997 by the Company of all four of the
mortgage backed securities then held by the Company resulting in a decrease in
interest expense of approximately $2,560,800.
Valuation allowance, which is a reduction in the carrying value of the
Wraparound Notes, for the year ended December 31, 1997 was $2,590,132, an
increase of $2,400,279 from $189,853 for the year ended December 31, 1996. The
value of the underlying collateral was determined by internal analysis and
independent appraisals.
Depreciation and amortization for the year ended December 31, 1997 was
$847,385, an increase of $63,984, or 8%, from $783,401 for the year ended
December 31, 1996. Such increase was primarily due to approximately $1,253,000
of property improvements purchases made during 1997.
Calendar Year 1996 Compared to Calendar Year 1995
Revenues for 1996 were $33,722,442, an increase of $7,954,932, or 31%, from
$25,767,510 in 1995. Such increase was primarily due to the net of: (1) an
increase in rental income of $1,506,092 attributable to the Properties acquired
in the Acquisition, (2) an increase in interest income of $8,637,435 resulting
primarily from (a) Wraparound Note receivable interest of approximately
$7,875,000, and (b) interest income relating to the mortgage backed securities
purchased in March 1995 and March 1996 of approximately $398,000, (3) an
unrealized holding gain on U.S. Treasury Notes sold short of $1,217,186 in 1996
compared to an unrealized holding loss of
20
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$4,137,225 for such securities in 1995, (4) a gain on sale of real estate
related assets of $260,239 for 1996 as compared to a gain of $6,326,231 on sale
of property in 1995 and (5) a loss on the sale of available-for-sale securities
of $350,699 in 1996 compared to a gain of $1,561,721 for such securities in
1995.
Operating expenses for 1996 were $23,097,797, an increase of $9,140,312, or
65%, from $13,957,485 in 1995. Such increase was primarily due to the net of:
(1) an increase in lease expense of $11,953,480 attributable to the Master
Leases acquired in the Acquisition, (2) an increase in property expenses of
$782,070 due to the Underlying Properties relating to the Master Leases, (3) an
increase in expenses for management company operations of $653,300 due to
additional properties managed by the Company in 1996 and (5) a decrease in
professional fees of $3,979,434 for 1996 compared to 1995, when the Company
consumated the Acquisition, the Transfer and the Distribution.
Interest expense for 1996 was $11,961,780, an increase of $3,046,016, or
34%, from $8,915,764 in 1995. Such increase was primarily due to: (1) debt
service on the Underlying Properties and (2) additional interest charges
relating to the mortgage backed securities purchased in March 1995 and March
1996.
Depreciation and amortization expense for 1996 was $783,401, a decrease of
$2,604,001, or 77%, from $3,387,402 in 1995. Such decrease was primarily due to:
(1) a decrease in depreciable real estate assets to three properties in 1996
from 18 properties in 1995, amounting to a decrease in property depreciation of
approximately $583,270 in 1996 and (2) a net decrease in amortization of
management contract rights of approximately $191,798 in 1996.
Liquidity and Capital Resources
During 1997, the Company sold its $16,700,000 par MDV Certificate for
$14,680,344, using $10,251,093 to pay off the balance of the financing
associated with the MDV Certificate and keeping net proceeds of $4,429,251.
During 1997, the Company sold its $5,000,000 par B2 and its $8,560,000 par B3
Certificates for $12,556,138, using $9,373,175 to pay off the balance of the
financing associated with the B2 and B3 Certificates and keeping net proceeds of
$3,182,963. In connection with the sale of the Certificates and the close of the
U.S. Treasury Note short positions and the proceeds therefrom, the Company has
paid bonuses of approximately $669,460 to several executive officers of the
Company pursuant to a long term incentive plan for management. The Company does
not currently anticipate investing in additional certificates.
The Company, as the holder of 222,860 shares of Kranzco Series C Cumulative
Redeemable Preferred Shares is entitled to receive from the redemption of such
shares, in 5 equal installments over the next 13 months, an aggregate amount of
cash equal to approximately $2,228,600, plus interest at the rate of 8% per
annum on the applicable outstanding balance of such shares. Such funds will be
available to fund the Company's obligations and its real estate investment and
development activities.
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. The Company anticipates that approximately
$3,000,000 of cash will be required in connection with the implementation of the
Winston Settlement and that additional sums of cash will be required in
connection with potential purchases of community shopping centers and strip
malls that are currently being contemplated. 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 implement the Winston Settlement, effect the contemplated purchases 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
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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 Item 5.Market for Registrant's Common Equity and
Related Stockholder Matters
Cash generated by the sale of the Certificates, the redemption of the
Kranzco Series C Cumulative Redeemable Preferred Stock and the cash on hand at
December 31, 1997 may be used to fund (i) the cash payments to be made by the
Company pursuant to the Winston Settlement, (ii) expenses relating to the
Winston Settlement, (iii) bonus payments to be made to several executive
officers of the Company under a long term incentive plan, (iv) the Company's
real estate investment, acquisition and development activities and (v) other
general corporate purposes. See Item 3. Legal Proceeding for a description of
the terms of the Winston Settlement.
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 $6,073,949 for the year ended
December 31, 1997 included (1) a net loss of $3,430,731, (2) adjustments for
non-cash items of $1,172,247 and (3) a net change in operating assets and
liabilities of $1,470,971, compared to net cash used in operating activities of
$2,783,859 for the year ended December 31, 1996, which included (1) net loss of
$2,486,974, (2) adjustments of $728,499 for non-cash items and (3) a net change
in operating asset and liabilities of $431,614, compared to net cash provided by
operating activities of $637,203 for the year ended December 31, 1995, which
included (1) a net loss of $809,649, (2) adjustments for non-cash items of
$4,530,845 and (3) a net change in operating assets and liabilities of
$5,977,697.
Net cash provided by investing activities of $47,421,221 for the year
ending December 31, 1997 included (1) proceeds from principal repayments on
loans receivable and Wraparound Notes of $4,750,010, (2) the issuance of
Wraparound Notes of $81,934, (3) purchase of building, land and leasehold
improvements of $1,363,153; (4) proceeds from the sale of real estate related
assets of $5,258,708, (5) proceeds from the sale of available-for-sale
securities of $36,360,354, (6) proceeds from the redemption of investments in
preferred stock of $1,730,833, (7) proceeds from redemption of reverse
repurchase agreements of $35,035,636 and (8) purchase of U.S. Treasury Notes of
$34,269,233, compared to net cash provided by investing activities of
$14,021,098 for the year ended December 31, 1996, which included (1) proceeds
from principal repayments of $4,817,864 on loans receivable and Wraparound
Notes, (2) issuance of Wraparound Notes of $45,550, (3) purchase of leasehold
improvements of $213,186, (4) proceeds from the sale of real estate related
assets of $4,325,177, (5) proceeds from the sale of available-for-sale
securities of $23,201,402, (6) proceeds from the redemption of investments of
$2,541,667, (7) purchase of $20,142,060 of available-for-sale securities, (8)
proceeds from U.S. Treasury Notes sold short of $13,989,844, (9) proceeds from
the redemption of reverse repurchase agreements of $9,203,125, (10) purchase of
U.S. Treasury Notes of $9,143,750 and (11) purchase of reverse repurchase
agreements of $14,513,435. Net cash provided by investing activities of
$21,712,986 for the year ended December 31, 1995 included (1) purchase of
building, land and leasehold improvements of $796,561, (2) proceeds from the
principal repayments on loans receivable of $49,771, (3) proceeds from the sale
of real estate related assets of $25,079,214, (4) proceeds from the sale of
available-for-sale securities of $25,285,441, (5) proceeds from U.S. Treasury
Notes payable of $2,590,951, (6) purchase of reverse repurchase agreements of
$2,240,011 and (7) purchase of $28,255,819 of available-for-sale securities.
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Net cash used in financing activities of $31,053,874 for the year ended
December 31, 1997 included (1) principal payments on mortgages and notes payable
of $6,685,652, (2) principal payments on loans payable of $23,829,335, (3)
amounts paid on U.S. Treasury Notes payable of $316,887 and (4) amounts in
restricted cash of $222,000, compared to net cash used in financing activities
of $10,657,906 for the year ended December 31, 1996, which included (1)
distributions of $666,622 to Series A preferred stockholders, (2) principal
repayments of $7,586,850 on mortgages and notes payable, (3) proceeds of
$14,522,045 from loans payable, (4) principal payments of $18,143,665 on loans
payable and (5) proceeds of $1,217,186 received on U.S. Treasury Notes payable.
Net cash used in financing activities of $21,606,887 for the year ended December
31, 1995 included (1) distributions paid to Series A Preferred Stockholders of
$2,732,243, (2) principal payments on mortgages payable of $19,733,850, (3)
proceeds from loans payable of $22,630,146, (4) principal repayments on loans
payable of $17,344,127, (5) amounts paid on U.S. Treasury Notes payable of
$4,137,225 and (6) payments to common and preferred claimants of $289,588.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". 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 applicable to all entities that provide a full set of
financial statements. Enterprises that have no comprehensive income items in any
period presented are excluded from the scope of SFAS No. 130.
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. SFAS No. 130 will not have a material effect on current or prior period
financial statement displays presented by the Company.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for the way public business enterprises are to report
information about operating segments in annual financial statements and requires
those enterprises to report selected information about operation segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures concerning products and services, geographic areas and
major customers.
SFAS No. 131 is effective for both interim and annual periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated, unless it is impracticable to
do so. SFAS No. 131 need not be applied to interim financial statements in the
initial year of its application, but comparative information for interim periods
in the initial year of application shall be reported in financial statements for
interim periods in the second year of application. SFAS No. 131 will not have
any material effect on disclosures presented by the Company, as the Company
operates as a single segment.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits".
SFAS No. 132 revises employers' disclosure requirements concerning pension and
other postretirement benefit plans by standardizing such disclosure requirements
23
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to the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminate certain disclosures that are no longer as
useful as they were when FASB Statements No. 87, "Employers' Accounting for
Pensions", No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits", and No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions", were
issued. SFAS No. 132 suggests combined formats for presentation of pension and
other postretirement benefit disclosures and permits reduced disclosures for
nonpublic entities.
SFAS No. 132 is effective for fiscal years beginning after December 15,
1997. SFAS No. 132 will not have any material effect on disclosures presented by
the Company.
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements and the notes thereto
appear in Item 14 of this report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
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PART III
Certain information required by Part III is omitted from this report
since the Company plans to file with the Securities and Exchange Commission a
definitive proxy statement for its 1998 Annual Meeting of Stockholders (the
"Proxy Statement") no later than 120 days after the end of the fiscal year
covered by this report, and certain information included therein is incorporated
herein by reference.
Item 10. Directors and Executive Officers of the Registrant.
The information regarding the Company's directors required by this
Item is incorporated by reference to the section in the Proxy Statement entitled
"Election of Directors."
The information regarding the Company's executive officers required by
this Item is incorporated by reference to the section in the Proxy Statement
entitled "Executive Officers."
The information regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934 by the directors, executive officers and
beneficial owners of more than 10% of the Common Stock or the Series A Preferred
Stock required by this Item is incorporated by reference to the section in the
Proxy Statement entitled "Section 16(a) Beneficial Ownership Reporting
Compliance."
Item 11. Executive Compensation.
The information regarding compensation of directors and executive
officers of the Company required by this Item is incorporated by reference to
the sections in the Proxy Statement entitled "Executive Compensation" and
"Compensation of Directors."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information regarding security ownership of certain beneficial
owners and management required by this Item is incorporated herein by reference
to the section in the Proxy Statement entitled "Security Ownership of Certain
Beneficial Owners and Management."
Item 13. Certain Relationships and Related Transactions.
The information regarding certain relationships and related
transactions required by this Item is incorporated by reference to the section
in the Proxy Statement entitled "Certain Relationships and Related
Transactions."
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Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a)(1) Financial Statements and Financial Statement Schedule.
The following consolidated financial statements of the Company are filed as part
of this report:
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets - December 31, 1997 and 1996 F-2
Consolidated Statements of Revenues and Expenses -
Years Ended December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows -
Years Ended December 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
Consolidated Schedule.
III. Real Estate and Accumulated Depreciation at F-24
December 31, 1997
Note. All schedules, other than those indicated above, are
omitted because of the absence of the conditions under
which they are required or because the required information
is included in the consolidated financial statements or the
notes to the consolidated financial statements.
(a)(2) Exhibits.
The exhibits to this report are listed below.
Exhibit Description
2.1 Master Purchase and Sale Agreement dated as of February 17, 1995, as
amended, between the Company and Castle Plaza, Inc. (incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K filed with the
Securities and Exchange Commission (the "Commission") on November 7, 1995).
2.2 Short-Form Contracts, dated as of February 17, 1995, between the Company
and Castle Plaza, Inc. (incorporated by reference to Exhibit 2.2 to the
Company's Form 8-K filed with the Commission on November 7, 1995).
2.3 Purchase and Sale Agreement, dated as of February 17, 1995, as amended
between the Company and Mountain View Mall, Inc. (incorporated by reference
to Exhibit 2.3 to the Company's Form 8-K filed with the Commission on
November 7, 1995).
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<PAGE>
Exhibit Description
2.4 Purchase and Sale Agreement, dated as of February 17, 1995, as amended
between the Company and Concord Income Realty Partners VI, L.P.
(incorporated by reference to Exhibit 2.4 to the Company's Form 8-K filed
with the Commission on November 7, 1995).
2.5 Purchase and Sale Agreement, dated as of February 17, 1995, as amended
between the Company and Concord Income Realty Partners IX, L.P.
(incorporated by reference to Exhibit 2.5 to the Company's Form 8-K filed
with the Commission on November 7, 1995).
3.1 Certificate of Amendment to Certificate of Incorporation of the Company,
filed on December 18, 1990 (incorporated by reference to Exhibit 3.1 to the
Company's Form 10-K filed with the Commission on March 29, 1991).
4.1 Certificate of Designations of $.78 Convertible Series A Preferred Stock of
the Company, filed on December 18, 1990 (incorporated by reference to
Exhibit 4.1 to the Company's Form 10-K filed with the Commission on March
29, 1991).
4.1A Certificate of Amendment to Certificate of Designations of $.78 Convertible
Series A Preferred Stock of the Company filed on June 9, 1994 (incorporated
by reference to Exhibit 4.5 to the Company's Form 10-QSB filed with the
Commission on August 15, 1994).
4.2 Specimen form of Common Stock Certificate (incorporated by reference to
Exhibit 4.2 to the Company's Form 10-K filed with the Commission on March
29, 1991).
4.3 Specimen form of Series A Preferred Stock Certificate (incorporated by
reference to Exhibit 4.3 to the Company's Form 10-K filed with the
Commission on March 29, 1991).
4.4 Rights Agreement, dated as of March 31, 1993 between the Company and The
Bank of New York, as Rights Agent (incorporated by reference to Exhibit 1
to the Company's Form 8-A filed with the Commission on March 31, 1993).
10.1 Asset purchase agreement among the Company, Milestone Property Management,
Inc., Concord Assets Group, Inc. and Concord Assets Management, Inc.
(incorporated by reference to Item 7(c) to the Company's Form 8-K filed
with the Commission on January 3, 1993).
10.2 Settlement agreement dated as of January 31, 1993 relating to the
settlement of a class action litigation (incorporated by reference to
Exhibit 10.22 to the Company's Form 10-KSB filed with the Commission on
March 30, 1993).
10.3 Letter agreement related to employment dated March 31, 1993 between the
Company and Leonard S. Mandor (incorporated by reference to Exhibit 10.23
to the Company's Form 10-QSB filed with the Commission on May 14, 1993).
10.3AAmendment to letter agreement related to employment dated March 31, 1993
between the Company and Leonard S. Mandor, dated May 2, 1996 (incorporated
by reference to Exhibit 10.1 to the Company's Report on Form 10-QSB filed
with the Commission on May 16,1996).
10.4 Letter agreement related to employment dated March 31, 1993 between the
Company and Robert A. Mandor (incorporated by reference to Exhibit 10.24 to
the Company's Form 10-QSB filed with the Commission on May 14, 1993).
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<PAGE>
Exhibit Description
10.4AAmendment to letter agreement related to employment dated March 31, 1993
between the Company and Robert A. Mandor, dated May 2, 1996 (incorporated
by reference to Exhibit 10.2 to the Company's Report on Form 10-QSB filed
with the Commission on May 16, 1996).
10.5 Letter agreement related to employment dated March 31, 1993 between the
Company and Harvey Shore (incorporated by reference to Exhibit 10.25 to the
Company's Form 10-QSB filed with the Commission on May 14, 1993).
10.5AAmendment to letter agreement related to employment dated March 31, 1993
between the Company and Harvey Shore, dated May 2, 1996 (incorporated by
reference to Exhibit 10.4 to the Company's Report on Form 10-QSB filed with
the Commission on May 16, 1996).
10.6 Letter agreement related to employment dated March 31, 1993 between the
Company and Joan LeVine (incorporated by reference to Exhibit 10.26 to the
Company's Form 10-QSB filed with the Commission on May 14, 1993).
10.6AAmendment to letter agreement related to employment dated March 31, 1993
between the Company and Joan LeVine, dated May 2, 1996 (incorporated by
reference to Exhibit 10.3 to the Company's Report on Form 10-QSB filed with
the Commission on May 16, 1996).
10.7 Letter agreement related to employment dated March 31, 1993 between the
Company and Joseph P. Otto (incorporated by reference to Exhibit 10.27 to
the Company's Form 10-QSB filed with the Commission on May 14, 1993).
10.7AAmendment to letter agreement related to employment dated March 31, 1993
between the Company and Joseph P. Otto, dated May 2, 1996 (incorporated by
reference to Exhibit 10.5 to the Company's Report on Form 10-QSB filed with
the Commission on May 16, 1996).
10.8 Key Executive Employment and Severance Agreements entered into between the
Company and:
a. Leonard S. Mandor
b. Robert A. Mandor
c. Harvey Shore
d. Joan LeVine
e. Joe Otto
(incorporated by reference to Exhibit 10.29 to the Company's Form 10-QSB filed
with the Commission on May 14, 1993).
10.9 Purchase money promissory note purchase money mortgage and security
agreement with The Benderson 85-1 Trust for the Tonawanda, New York,
property (incorporated by reference to Exhibit 10.33 to the Company's Form
10-QSB filed with the Commission on August 14, 1993).
10.10Amended indemnification agreement between the Company and related parties
(incorporated by reference to Exhibit 19.2 to the Company's Form 10-Q filed
with the Commission on May 14, 1992).
10.11Second amended and restated management and reimbursement agreement between
the Company and Concord (incorporated by reference to Exhibit 19.3 to the
Company's Form 10-Q filed with the Commission on March 30, 1993).
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Exhibit Description
10.121993 Employee Stock Option Plan (incorporated by reference to Exhibit
10.20 to the Company's Form 10-KSB filed with the Commission on March 31,
1994).
10.131993 Non-Employee Director Stock Option Plan (incorporated by reference to
Exhibit 10.21 to the Company's Form 10-KSB filed with the Commission on
March 31, 1994).
10.14Pre-sale Wet Ink Funding Facility between ("MMC") and Nomura Asset Capital
Corporation (incorporated by reference to Exhibit 10.32 to the Company's
Form 10-QSB filed with the Commission on August 15, 1994).
10.15Guaranty between the Company and Nomura Asset Capital Corporation
(incorporated by reference to Exhibit 10.33 to the Company's Form 10-QSB
filed with the Commission on August 15, 1994).
10.16Global master Repurchase Agreement between Nomura Grand Cayman, Ltd. and
MMC (incorporated by reference to Exhibit 10.34 to the Company's Form
10-QSB filed with the Commission on August 15, 1994).
10.17Master Repurchase Agreement between DLJ Mortgage Acceptance Corporation
and MMC (incorporated by reference to Exhibit 10.35 to the Company's Form
10-QSB filed with the Commission on August 15, 1996).
10.18Management Services Agreement dated November 20, 1995, between the Company
and Union Property Investors, Inc. (incorporated by reference to Exhibit
10.30 to the Company's Form 10- KSB filed with the Commission on March 30,
1996).
10.19Property Management Agreement, dated November 20, 1995, between the
Company and Milestone Property Management, Inc. (incorporated by reference
to Exhibit 10.31 to the Company's Form 10- KSB filed with the Commission on
April 1, 1996).
10.20Stipulation and Agreement of Settlement dated October 30, 1997 by and
among John Winston, the plaintiff, and Leonard S. Mandor, Robert M. Mandor,
Joan LeVine, Harvey Jacobson, Gregory McMahon, Geoffrey S. Aaronson,
Milestone and Concord (incorporated by reference to Exhibit 2 to the
Company's 8-K filed with the Commission on November 12, 1997.
21 Subsidiaries of the Company.
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 and is
qualified in its entirety by reference to such financial statements.
29
<PAGE>
(b) Reports on Form 8-K.
On November 12, 1997, a Form 8-K was filed with
the Commission reporting the Winston Settlement and Winston
Settlement Agreement entered into on October 30, 1997.
On November 21, 1997, a Form 8-K was filed with the
Commission reporting the sale of the remaining holdings of
available-for-sale securities and containing (i) a pro
forma balance sheet as of September 31, 1997 and (ii) a pro
forma consolidated statements of revenue and expenses for
the nine months ended September 30, 1997 and the year ended
December 31, 1996.
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.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Leonard S. Mandor
Leonard S. Mandor
Chairman of the Board and
Chief Executive Officer
DATE: March 20, 1998
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.
Signature and Title Date
/s/ Leonard S. Mandor March 20, 1998
- ------------------------------------
Leonard S. Mandor
Chairman of the Board and
Chief Executive Officer
/s/ Robert A. Mandor March 20, 1998
- ------------------------------------
Robert A. Mandor
President, Chief Financial
Officer and Director
/s/ Joseph P. Otto March 20, 1998
- ------------------------------------
Joseph P. Otto
Vice President and Director
/s/ Patrick S. Kirse March 20, 1998
- -----------------------------------
Patrick S. Kirse
Vice President of Accounting
(Principal Accounting Officer)
/s/ Geoffrey S. Aaronson March 20, 1998
- ------------------------------------
Geoffrey S. Aaronson
Director
/s/ Harvey Jacobson March 20, 1998
- ----------------------------------
Harvey Jacobson
Director
/s/ Gregory McMahon March 20, 1998
- ---------------------------------
Gregory McMahon
Director
31
<PAGE>
INDEPENDENT AUDITORS' REPORT
Milestone Properties, Inc.:
We have audited the accompanying consolidated balance sheets of Milestone
Properties, Inc. and subsidiaries (the "Company") as of December 31, 1997 and
1996 and the related consolidated statements of revenues and expenses,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. Our audits also included the financial statement
schedule of real estate and accumulated depreciation. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Milestone Properties,
Inc. and subsidiaries at December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ Deloitte & Touche, LLP
New York, New York
March 20, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS December 31, 1997 December 31, 1996
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents .................................................$ 13,435,237 $ 3,141,839
Restricted cash ........................................................... 222,000 0
Loans receivable .......................................................... 1,512,744 1,684,585
Accounts receivable ....................................................... 1,265,625 1,360,621
Accrued interest receivable ............................................... 8,465,528 9,646,886
Due from related party .................................................... 391,851 599,093
Prepaid expenses and other ................................................ 1,034,613 430,603
Reverse repurchase agreements ............................................. 0 34,718,749
Available-for-sale securities ............................................ 0 32,314,853
------------- -----------
Total current assets .................................................. 26,327,598 83,897,229
Property, improvements and equipment, net ................................. 19,610,060 18,884,467
Wraparound notes, net ..................................................... 59,402,931 71,431,945
Deferred income tax asset, net ............................................ 4,058,358 3,272,873
Investments in preferred stock ............................................ 2,228,600 3,959,433
Management contract rights, net ........................................... 290,926 426,467
Goodwill and other, net ................................................... 304,639 222,863
------------- -------------
Total assets .......................................................... $ 112,223,112 $ 182,095,277
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ..................................... $ 2,015,942 $ 2,031,513
Accrued interest payable .................................................. 259,116 1,139,941
Master lease payable ...................................................... 13,637,564 14,445,351
Due to related party ...................................................... 0 61,688
Current portion of mortgages and notes payable ............................ 5,997,687 2,862,274
Income taxes payable ...................................................... 2,822,119 3,250,744
Loans payable ............................................................. 0 23,829,335
Treasury notes sold short ................................................. 0 33,952,346
------------- -------------
Total current liabilit .................................................... 24,732,428 81,573,192
Mortgages and notes payable ............................................... 61,741,877 71,562,942
------------- -------------
Total liabilities ..................................................... 86,474,305 153,136,134
------------- -------------
Commitments and Contingencies
Stockholders' equity:
Common stock ($.01 par value, 10,000,000 shares authorized, 4,905,959 and
4,743,155 issued and outstanding in 1997 and 1996,
respectively: 692,591 shares in treasury) ............................... 49,060 47,433
Preferred stock (Series A $0.01 par value,
$10 liquidation preference, 10,000,000 shares
authorized, 3,033,995 and 3,182,184 shares issued
and outstanding in 1997 and 1996, respectively) ........................ 30,341 31,822
Additional paid-in surplus ................................................ 48,105,428 48,105,575
Unrealized holding loss - available-for-sale securities
(Net of tax benefit of $151,552 in 1996) ............................... 0 (220,396)
Accumulated deficit ....................................................... (18,995,604) (15,564,873)
Shares held in treasury - at cost ......................................... (3,440,418) (3,440,418)
------------- -------------
Total stockholders' equity ............................................ 25,748,807 28,959,143
------------- -------------
Total liabilities and stockholders' equity ..................................... $ 112,223,112 $ 182,095,277
============= ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-2
<PAGE>
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES
For the Years Ended December 31, 1997,1996 and 1995
<TABLE>
<CAPTION>
December 31,1997 December 31, 1996 December 31, 1995
---------------- ----------------- -----------------
<S> <C> <C> <C>
REVENUES:
Rent .............................................. $ 10,280,548 $11,382,820 $ 9,876,728
Interest income ................................... 13,355,849 17,654,908 9,017,473
Revenue from management company operations ........ 512,303 976,983 1,034,321
Tenant reimbursements ............................. 1,261,217 1,184,462 926,791
Management and reimbursement income ............... 407,286 835,811 499,806
Percentage rent ................................... 450,423 266,653 428,739
Amortization of discount - available-for-sale
securities ........................................ 313,551 294,079 232,925
Unrealized (loss)gain on treasury notes
sold short ........................................ (316,887) 1,217,186 (4,137,225)
Gain on sale of real estate related assets ........ 316,061 260,239 6,326,231
Gain (loss)on sale of available-for-sale securities 3,511,560 (350,699) 1,561,721
------------ ------------ ------------
Total revenues .................................... 30,091,911 33,722,442 25,767,510
------------ ------------ ------------
EXPENSES:
Master lease expense .............................. 13,787,465 15,008,723 3,055,243
Interest expense .................................. 9,119,554 11,961,780 8,915,764
Depreciation and amortization ..................... 847,385 783,401 3,387,402
Valuation allowance on wraparound notes ........... 2,590,132 189,853 0
Salaries, general and administration .............. 3,955,434 3,538,634 3,997,591
Property expenses ................................. 1,718,346 2,018,249 1,236,179
Expenses for management company operations ........ 1,304,166 1,281,317 628,017
Professional fees ................................. 921,394 1,061,021 5,040,455
------------ ------------ ------------
Total expenses ................................ 34,243,876 35,842,978 26,260,651
------------ ------------ ------------
Loss before income taxes ............................... (4,151,965) (2,120,536) (493,141)
(Benefit) Provision for income taxes ................... (721,234) 366,438 316,508
------------ ------------ ------------
Net loss ............................................... (3,430,731) (2,486,974) (809,649)
Distributions on preferred stock ....................... 0 0 (2,732,242)
------------ ------------ ------------
Loss attributable to common stockholders ............... $ (3,430,731) $ (2,486,974) $ (3,541,891)
============ ============ ============
Loss per common share .................................. $ (0.82) $ (0.65) $ (2.13)
============ ============ ============
Weighted average common shares outstanding ............. 4,206,550 3,845,546 1,664,956
============ ============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-3
<PAGE>
MILESTONE PROPERTIES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock Preferred Stock Treasury Stock
------------------ ------------------- ----------------------
Shares Amount Shares Amount Shares Cost
------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 1,852,921 $ 18,529 3,549,578 $ 35,496 (692,591) $ (3,440,418)
Conversion of preferred stock into common stock 85,852 859 (131,023) (1,310)
Cash distributions declared -
$0.78 per preferred claimant share
Cash distributions declared -
$0.78 per preferred share
Purchase of Acquisition Assets 2,544,654 25,447
Spin-off of UPI
Net loss for the year ended December 31, 1995
Unrealized holding gain - available-for-sale securities
----------------------------------------------------------------------
Balance December 31, 1995 4,483,427 44,835 3,418,555 34,186 (692,591) (3,440,418)
-----------------------------------------------------------------------
Conversion of preferred stock into common stock 259,728 2,598 (236,371) (2,364)
Net loss for the year ended December 31, 1996
Unrealized holding loss - available-for-sale securities
--------------------------------------------------------------------------
Balance December 31, 1996 4,743,155 47,433 3,182,184 31,822 (692,591) (3,440,418)
--------------------------------------------------------------------------
Conversion of preferred stock into common stock 162,804 1,627 (148,189) (1,481)
Net loss for the year ended December 31, 1997
Realization of unrealized holding loss -
available-for-sale securities
-------------------------------------------------------------------------
Balance December 31, 1997 4,905,959 $49,060 3,033,995 $ 30,341 (692,591) $(3,440,418)
=========================================================================
Unrealized
Holding (Loss)/
Additional Gain on
Paid-in Available-for- Accumulated Stockholders'
Surplus Sale Securities Deficit Equity
---------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Balance December 31, 1994 $51,326,392 $ (900,111) $(9,536,007) $37,503,881
Conversion of preferred stock into common stock 451 0
Cash distributions declared -
$0.78 per preferred claimant share (289,588) (289,588)
Cash distributions declared -
$0.78 per preferred share (2,732,243) (2,732,243)
Purchase of Acquisition Assets 12,285,779 12,311,226
Spin-off of UPI (15,217,225) (15,217,225)
Net loss for the year ended December 31, 1995 (809,649) (809,649)
Unrealized holding gain - available-for-sale securities 1,749,093 1,749,093
-------------------------------------------------------
Balance December 31, 1995 48,105,809 848,982 (13,077,899) 32,515,495
-------------------------------------------------------
Conversion of preferred stock into common stock (234) 0
Net loss for the year ended December 31, 1996 (2,486,974) (2,486,974)
Unrealized holding loss - available-for-sale securities (1,069,378) (1,069,378)
-------------------------------------------------------
Balance December 31, 1996 48,105,575 (220,396) (15,564,873) 28,959,143
-------------------------------------------------------
Conversion of preferred stock into common stock (146) 0
Net loss for the year ended December 31, 1997 (3,430,731) (3,430,731)
Realization of unrealized holding loss -
available-for-sale securities 220,396 220,396
------------------------------------------------------
Balance December 31, 1997 $48,105,428 $ 0 $(18,995,604) $25,748,807
======================================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-4
<PAGE>
MILESTONE PROPERTIES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1995
---------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Loss .................................................... $ (3,430,731) $ (2,486,974) $ (809,649)
Adjustments to reconcile net loss to
net cash (used in )provided by operating activities:
Depreciation and amortization ............................... 847,385 783,401 3,387,402
Deferred benefit taxes ...................................... (785,479) (280,948) (3,934,595)
Valuation allowance on wraparound notes ..................... 2,590,132 189,853 0
Unrealized loss (gain) on treasury notes sold short ......... 316,887 (1,217,186) 4,137,225
Amortization of discount - available-for-sale securities .... (313,551) (294,079) (232,925)
Realized loss (gain) on sale of available-for-sale securities (3,511,560) 350,699 (1,561,721)
Gain on sale of real estate related assets .................. (316,061) (260,239) (6,326,231)
Change in operating assets and liabilities net:
Decrease (increase) in accounts receivable ............. 94,996 26,743 (528,548)
Decrease(increase) in due from related party ........... 207,242 (442,959) 795,267
Decrease (increase) in accrued interest receivable ..... 1,181,358 1,751,144 (2,201,377)
(Increase) decrease in prepaid expenses and other ...... (760,071) 59,044 561,559
(Decrease) increase in accrued expenses ................ (15,571) 196,295 657,952
(Decrease) increase in accrued interest payable ........ (880,825) 194,390 514,656
(Decrease) increase in master lease payable ........... (807,787) (1,347,380) 3,042,770
(Decrease) increase in income taxes payable ............ (428,625) 75,913 2,992,154
(Decrease) increase in due to related party ............ (61,688) (81,576) 143,264
------------ ------------ ------------
Net cash (used in) provided by operating activities .... (6,073,949) (2,783,859) 637,203
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayments on loans receivable .................... 171,841 53,460 49,771
Principal repayments on wraparound notes .................... 4,578,169 4,764,404 0
Issuance of wraparound notes ................................ (81,934) (45,550) 0
Purchase of building and land ............................... (1,100,000) 0 (745,092)
Purchase of leasehold improvements .......................... (263,153) (213,186) (51,469)
Proceeds from realization of real estate related assets ..... 5,258,708 4,325,177 25,079,214
Proceeds from the sale of available-for-sale securities ..... 36,360,354 23,201,402 25,285,441
Proceeds from redemption of investments in preferred stock .. 1,730,833 2,541,667 0
Purchase of available-for-sale securities ................... 0 (20,142,060) (28,255,819)
Proceeds from treasury notes sold short ..................... 0 13,989,844 2,590,951
Proceeds from redemption of reverse repurchase
agreements ............................................. 35,035,636 9,203,125 0
Purchase of treasury notes .................................. (34,269,233) (9,143,750) 0
Purchase of reverse repurchase agreements ................... 0 (14,513,435) (2,240,011)
------------ ------------ ------------
Net cash provided by investing activities .............. 47,421,221 14,021,098 21,712,986
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to preferred stockholders ................ 0 (666,622) (2,732,243)
Principal payments on mortgages and notes payable ........... (6,685,652) (7,586,850) (19,733,850)
Proceeds from loans payable ................................. 0 14,522,045 22,630,146
Principal payments on loans payable ......................... (23,829,335) (18,143,665) (17,344,127)
Amounts (paid) received on treasury notes payable ........... (316,887) 1,217,186 (4,137,225)
Payments to common and preferred stock claimants ............ 0 0 (289,588)
Amounts in restricted cash .................................. (222,000) 0 0
------------ ------------ ------------
Net cash used in financing activities .................. (31,053,874) (10,657,906) (21,606,887)
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ....................... 10,293,398 579,333 743,302
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................. 3,141,839 2,562,506 1,819,204
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................ $ 13,435,237 $ 3,141,839 $ 2,562,506
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for interest .................... $ 10,000,379 $ 11,767,390 $ 8,518,507
============ ============ ============
Cash paid during the period for income taxes ................ $ 854,429 $ 451,986 $ 754,501
============ ============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-5
<PAGE>
MILESTONE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Milestone Properties, Inc. ("Milestone"), directly and through its wholly owned
subsidiaries, is engaged in the business of owning, acquiring, managing,
developing and investing in commercial real estate and real estate related
assets. Milestone, together with its subsidiaries, is herein referred to as the
"Company". Milestone was incorporated on November 30, 1989 under the laws of the
State of Delaware. On December 18, 1990, the Concord Milestone Income Fund, L.P.
("CMIF") and Concord Milestone Income Fund II, L.P. ("CMIF II") (collectively,
the "Predecessor Partnerships") were merged with and into the Company (the
"Merger"). In the Merger, the Company succeeded to the business and operations
of the Predecessor Partnerships and the partnership interests in the Predecessor
Partnerships were converted into shares of Milestone's common stock, par value
$.01 per share (the "Common Stock"), and Milestone's $.78 Convertible Series A
preferred stock, par value $.01 per share, $10 liquidation preference (the
"Series A Preferred Stock").
In October 1995, the Company entered into various agreements with affiliates of
Concord Assets Group, Inc. ("Concord") pursuant to which the company acquired
certain real estate related assets for approximately $700,000 in cash and
approximately 2,545,000 shares of Common Stock (the "Acquisition"). The
Acquisition was treated in a manner similar to a pooling of interests, and
therefore the assets and liabilities have been transferred at the historical
cost basis of Concord.
In October 1995, the Company also completed the transfer (the "Transfer") of 16
of its retail properties (the "UPI Properties") to its then wholly-owned
subsidiary Union Property Investors, Inc. ("UPI"). UPI was then recapitalized
and spun-off in November 1995, when the Company distributed all of the
outstanding shares of common stock of UPI to the Company's Common Stockholders
(the "Distribution"). On February 27, 1997, UPI was merged (the "UPI Merger")
into a wholly-owned subsidiary of Kranzco Realty Trust, a Maryland real estate
investment trust ("Kranzco"). In connection with the UPI Merger, UPI terminated
its property management and management services agreements with the Company.
2. Summary of Significant Accounting Policies
Business
The Company primarily is the owner of Wraparound Notes, secured by mortgages on
commercial retail properties, as well as the master lessee of such properties
which are located in 16 states throughout the United States. The Company also
invests directly in real estate and real estate related assets.
Principles of Consolidation
The consolidated financial statements include the accounts of Milestone
Properties, Inc. and its subsidiaries. Intercompany accounts and transactions
have been eliminated in the consolidated financial statements.
Basis of Accounting, Fiscal Year
The Company records are maintained on the accrual basis of accounting for both
financial and tax reporting purposes. Its fiscal year is the calendar year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-6
<PAGE>
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. The carrying value of these
investments approximates fair market value. The Company has restricted cash of
$222,000 at December 31, 1997, as a compensating balance for a Letter of Credit
related to a guarantee of performance associated with the lease of office space
for the Company's corporate offices. Restricted cash is held in an interest
bearing account and becomes available for general operating purposes of the
Company on December 31, 2000. Currently, no amounts are outstanding on the
Letter of Credit.
Available-for-Sale Securities
Gains and losses relating to available-for-sale securities are excluded from
earnings and reported as a separate component of stockholders' equity, net of
tax effect, until such amounts are generally realized through the sale or
redemption of the securities. Realized gains and losses are determined based on
the specific identification method.
Property, Improvements and Equipment and Related Depreciation and Amortization
Properties are stated at cost, less depreciation computed on a straight-line
basis over their estimated useful lives of 26.5- 50 years. Building improvements
and equipment are stated at cost, and depreciated on a straight-line basis using
an estimated useful life of five years. Leasehold improvements and leasing
commissions are amortized on a straight-line basis over the lesser of the
estimated useful life or the remaining term of the applicable lease.
Investment in Wraparound Notes
Investment in Wraparound Notes is stated at the lower of the unamortized note
balance or the estimated value of the underlying collateral. The Company does
not recognize income from the discount portion of certain original issue
discount notes due to the uncertainty regarding realization of such amounts.
Impairment
The Company assesses at least annually the probability that the amounts
collectible under the contractual terms of each Wraparound Note will equal or
exceed the carrying amount of such Wraparound Note. When management believes
that a Wraparound Note has been impaired, the Company measures impairment based
on the estimated value of the underlying collateral, using internal analysis and
independent appraisals when necessary. For the years ended December 31, 1997 and
1996, the Company provided valuation allowances of $2,590,132 and $189,853,
respectively; no allowance was required in 1995.
The Company reviews each of its property investments for possible impairment at
least annually, and more frequently if circumstances warrant. Impairment is
determined to exist when estimated amounts recoverable through future cash flows
from operations on an undiscounted basis is less than the property's carrying
value. If a property is determined to be impaired, it is written down to its
estimated fair value to the extent that the carrying amount exceeds the fair
value of the property. No write downs for impairment of property investments
were recorded in 1997, 1996 or 1995.
The determination of impairment is based, not only upon future cash flows, which
rely upon estimates and assumptions including expense growth, occupancy and
rental rates, but also upon market capitalization and discount rates as well as
other market indicators. The Company believes that the estimates and assumptions
used are appropriate in evaluating the carrying amount of the Company's
Wraparound Notes and properties. However, changes in market conditions and
circumstances may occur in the near term which would cause these estimates and
assumptions to change, which, in turn, could cause the amounts ultimately
realized upon the sale or other disposition of the Wraparound Notes and
properties to differ materially from their carrying value. Such changes may also
require write-downs in future years.
F-7
<PAGE>
Management Contract Rights and Goodwill
Management contract rights and goodwill are being amortized over a period of
approximately seven years. The amortization for the management contract rights
has been accelerated for those agreements that are terminated prior to the
expiration of the initial lease term.
Income Taxes
Deferred taxes are provided for the temporary differences between the tax bases
of the assets and liabilities and the amounts reported in the financial
statements.
Loss Per Common Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
per Share" which establishes standards for computing and presenting earnings per
share. The new standard replaces the presentation of primary earnings per share
prescribed by Accounting Principles Board Opinion No. 15 ("APB 15"), "Earnings
per Share" with a presentation of basic earnings per share and also requires
dual presentation of basic and diluted earnings per share on the face of the
statement of operations for all entities with complex capital structures. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share is computed similarly to
fully-diluted earnings per share pursuant to APB 15. The Company adopted SFAS
No. 128 in the fourth quarter of fiscal 1997 and has restated all prior periods
in its financial statements.
Basis and diluted earnings per share are based on the same weighted-average
number of shares of common stock and common stock equivalents outstanding of
4,206,550, 3,845,546 and 1,664,956 for the years ending December 31, 1997, 1996
and 1995, respectively. Convertible Series A Preferred Stock amounts have been
excluded from weighted-average shares for 1997, 1996 and 1995 as inclusion would
be anti-dilutive. Options to purchase 313,700, 176,000, and 168,500 shares of
common stock in 1997, 1996 and 1995, respectively, were outstanding at each year
end but were not included in the computation of diluted earnings per share
because the weighted-average exercise prices of the options were greater than
the average market price of the common stock for the respective period and
inclusion would therefore be anti-dilutive.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1997
financial presentation.
3. Acquisition and Dispositions of Real Estate and Real Estate Related Assets
On October 30, 1997, the Company realized its position in its wraparound note on
a property located in Marion, Ohio as a result of the sale of such property by
the owners. The sale price of the property was approximately $2,750,000, which
resulted in a book gain of approximately $200,000 to the Company. In conjunction
with the sale of such property, the Company, as the lessor on the Master Lease
on such property, canceled such Master Lease.
On September 24, 1997, the Company completed the purchase of Pine Oak Plaza, a
16,944 square foot shopping center located in Sunrise (Broward County), Florida,
from REC I Corporation for approximately $1,100,000 in cash. The shopping center
is occupied by local tenants subject to operating leases ranging from four to
thirteen years with various renewal options and is currently 93.5% occupied.
This property can be classified as a neighborhood or community unanchored strip
center and is located in a secondary type market.
F-8
<PAGE>
Also, during 1997, the Company realized its position in its wraparound note on
the property located in Prattville, Alabama as a result of the foreclosure sale
of the associated property by the bank. Such sale resulted in the relief of the
non-recourse underlying mortgage, which also resulted in a book gain of
approximately $120,000 to the Company. In conjunction with the foreclosure sale
of such property, the Company, as the lessor on the Master Lease on such
property, canceled such Master Lease.
On November 1, 1996, the Company realized its position in the wraparound notes
on the property located in Southington, Connecticut as a result of the sale of
such property by its owners. The sale price was approximately $2,745,000,
resulting in a book loss of $127,020 to the Company. In conjunction with the
sale of such property, the Company, as the lessor on the Master Lease on such
property, canceled such Master Lease.
On May 24, 1996, the Company realized its position in the wraparound note on the
property located in Roanoke, Virginia as a result of the sale of such property
by its owners. The sale price was approximately $2,150,000, resulting in a book
gain of $393,768 to the Company. In conjunction with the sale of such property,
the Company, as the lessor on the Master Lease on such property, canceled such
Master Lease.
From August 1994 to November 1997 one of the focuses of the Company was on
investment opportunities and purchasing issues of mortgage loan securitizations
which were backed by mortgage loans on commercial and multi-family dwellings
("CMBSs"). To facilitate the purchase of CMBSs, short term borrowing
arrangements ("Loans Payable") were entered into with the brokers from which
such securitizations were purchased. The Company engaged in a variety of
interest rate management techniques in order to attempt to manage the effective
maturity and/or interest rate risks associated with the CMBSs. Such techniques
included selling short U.S. Treasury Notes which were collateralized by reverse
repurchase agreements.
The Company had $32,314,853 and $37,594,939 of CMBS as of December 31, 1996 and
1995, respectively; and $23,829,335 and $27,450,954 of associated Loans Payable
as of December 31, 1996 and 1995, respectively. Additionally, the Company had
$33,952,346 and $32,823,439 of U.S. Treasury Notes sold short as of December 31,
1996 and 1995, respectively; and $34,718,749 and $33,119,375 of associated
reverse repurchase agreements as of December 31, 1996 and 1995. On November 10,
1997, the Company sold its remaining ownership of the CMBS and repaid the
associated Loans Payable (the "Sale"). At the time of the Sale, the Company also
closed its remaining U.S. Treasury Note short positions.
The $12,089,000 MD1 Certificate was sold for $9,520,088. The Company received
net proceeds of $2,852,060, and used the remaining $6,668,028 to pay off the
balance of the financing associated with the MD1 Certificate. As a result of
such sale, the Company realized a book loss of approximately $1,100,000.
The $16,700,000 par MDV Certificate was sold for $14,680,344. The Company
received net proceeds of $4,429,251, and used the remaining $10,251,093 to pay
off the balance of the associated financing. The $5,000,000 par B2 and the
$8,560,000 par B3 Certificates were sold for $12,556,138. The Company received
net proceeds of $3,182,963 and used the remaining $9,373,175 to pay off the
balance of the associated financing. As a result of such sale, the Company
realized a book gain of $3,511,560. The Company has paid bonuses of
approximately $669,000 to several executive officers of the Company pursuant to
a long term incentive plan for management.
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, which is in the
feasibility stage, the potential purchaser is not yet obligated to purchase the
Bend Property and the Company is not yet obligated to sell the Bend Property,
and any such obligation for the purchase or sale of such property is conditional
upon the occurrence or non-occurrence of certain events and/or determinations,
some or all of which may not be in the control of the Company. Accordingly,
there can be no assurance that the contemplated transaction will occur.
On November 21, 1997 and December 17, 1997, the Company entered into contracts
(the "Purchase Contracts") in connection with the contemplated purchase of two
strip mall shopping centers in the Jacksonville, Florida area. Pursuant to the
Purchase Contracts any obligations to purchase such properties are subject to
the occurrence or non-occurrence of certain events and/or determinations, some
or all of which may not be in the control of the Company. Accordingly, there can
be no assurance that the contemplated transactions will occur.
F-9
<PAGE>
4. Property and Improvements
Property and improvements at December 31, 1997 and 1996 consisted of the
following:
December 31, 1997 December 31, 1996
----------------- -----------------
Land $ 1,140,000 $ 1,030,000
Building 24,181,311 23,191,311
Leasehold Improvements
and Equipment 692,609 429,458
------------- -------------
26,013,920 24,650,769
Less: Accumulated Depreciation
and Amortization (6,403,860) (5,766,302)
------------- -------------
Total $ 19,610,060 $ 18,884,467
============= =============
5. Investment in Wraparound Notes
Investment in Wraparound Notes represents notes due from limited partnerships
(the "Partnerships") which had previously been syndicated by Concord and certain
of its affiliates. Certain directors and officers of the Company are also
directors, officers and controlling stockholders of the general partner of each
of the Partnerships. The syndication of a Partnership by Concord typically
involved the sale of a property (the "Concord Property") owned by Concord to the
Partnership for cash and certain non-recourse promissory notes (the "Wraparound
Notes"), payment of which was secured by the Underlying Property. The related
Wraparound Notes were subordinate to the Underlying Property Mortgage Debt ("the
Underlying Debt") of the Concord Property. Concord then master leased (the
"Master Lease") the Concord Property back from the Partnership for a fixed
annual rental fee which entitled Concord to all rents under the tenant operating
leases. Concord was required to satisfy all other landlord obligations. Pursuant
to the Acquisition, the Company acquired 35 Wraparound Notes, assumed the
Underlying Debt and was assigned the interest in the Master Leases. The
Partnerships are obligated to make fixed payments of principal and interest on
certain Wraparound Notes. Such payments approximate the Master Lease
obligations. The payments received by the Company are used to make the Master
Lease payments to the Partnerships.
Upon sale of the Underlying Property, proceeds are initially applied to satisfy
the Underlying Debt, and the balance, to the extent proceeds are available, is
divided between a preferred return to the Partnership's limited partners and
then repayment of the Wraparound Note.
The Wraparound Notes have maturities ranging from 1998 to 2017. The scheduled
principal receipts of the Wraparound Notes are as follows (dollar amounts in
thousands):
Year Ending
December 31
1998 $ 3,717
1999 5,562
2000 36,452
2001 360
2002 395
Thereafter (excluding
$11,202 of the
original issue discount) 12,917
------
Total $ 59,403
======
F-10
<PAGE>
The following schedule depicts Wraparound Notes which are subordinate to the
underlying mortgages on such properties.
<TABLE>
<CAPTION>
Final Face Amount Carrying Amount
Closing Interest Maturity of Mortgage of Mortgage Interest Due
Location Date Rate (%) Date Loans Loans and Accrued
-------- ----- -------- ---- ----- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Baton Rouge, LA 10/23/95 9.75 12/31/99 $ 4,469,548 $ 4,006,610 $ 455,792
Clarksville, TN 10/23/95 9.75 12/31/99 3,759,873 a 1,754,804 226,186
Columbus, NE 10/23/95 9.75 12/31/99 2,436,955 2,172,024 248,514
Danville, IL 10/23/95 9.75 12/31/99 1,851,308 886,939 188,792
Deland, FL 10/23/95 9.70 12/31/99 1,929,531 1,411,835 195,715
Dubois, PA 10/23/95 10.00 12/31/99 3,057,647 a 1,484,336 155,782
Ellwood City, PA 10/23/95 10.00 12/31/99 3,057,647 a 1,484,336 155,782
Hamilton, NY 10/23/95 9.75 12/31/99 1,493,689 1,089,447 152,322
Janesville, WI 10/23/95 10.25 12/31/15 2,173,824 1,434849 233,654
Marietta, OH 10/23/95 8.32 12/31/14 3,165,088 2,958,338 307,837
Marietta, OH 10/23/95 11.00 12/31/14 25,148 20,000 -
Montgomery, AL 10/23/95 9.75 12/31/99 2,251,243 940,941 229,575
Mt. Pleasant, PA 10/23/95 9.18 12/31/15 2,545,423 2,334,042 243,708
Mt. Pleasant, PA 10/01/97 11.00 12/31/14 12,976 12,626 -
Natchez, MS 10/23/95 10.00 12/31/98 3,825,382 a 1,574,516 170,199
No. Canton, OH 10/23/95 9.11 12/31/14 2,873,770 2,207,236 272,969
No. Canton, OH 10/23/95 11.00 12/31/14 33,958 26,575 -
No. Canton, OH 10/15/96 11.00 12/01/14 29,026 25,650 -
Owensboro, KY 10/23/95 10.00 12/31/15 2,787,357 2,784,791 291,915
Palatka, FL 10/23/95 9.75 12/31/99 2,446,691 1,765,532 249,503
Palatka, FL 12/09/97 11.00 12/31/99 24,816 24,650 -
Paris, TN 10/23/95 10.00 12/31/99 3,364,006 1,551,337 352,256
Paris, TN 10/23/95 11.00 12/31/99 65,515 51,016 -
Southwick, MA 10/23/95 9.75 12/31/99 1,420,480 868,168 144,857
So. Williamson, KY 10/23/95 9.88 12/31/99 24,521,288 13,674,922 2,534,138
Streetsboro, OH 10/23/95 9.68 12/31/14 2,298,679 1,793,315 232,625
Streetsboro, OH 10/23/95 11.00 12/31/14 27,640 21,447 -
Streetsboro, OH 10/15/96 11.00 12/01/14 22,180 19,600 -
Streetsboro, OH 11/07/97 11.00 12/31/14 10,169 10,000 -
Vestivia Hills, AL 10/23/95 9.75 12/31/99 1,800,257 1,360,003 183,586
Walpole, NH 10/23/95 9.75 12/31/99 1,420,480 1,006,457 144,857
Pascagoula, MS 10/23/95 9.75 12/31/17 2,070,634 1,225,566 211,158
Pascagoula, MS 10/23/95 12.00 12/31/17 187,335 175,125 -
Pascagoula, MS 10/01/97 11.00 12/31/16 35,620 34,658 -
Quincy, IL 10/23/95 10.00 12/31/98 6,293,133 a 2,545,600 261,064
Rochester, NY 10/23/95 9.70 12/31/14 1,788,998 1,507,843 182,438
Rochester, NY 10/23/95 10.00 12/31/14 166,167 130,625 -
Savannah, TN 10/23/95 9.88 12/31/99 1,228,035 500,590 126,911
Warsaw, VA 10/23/95 9.75 12/31/99 1,406,491 1,049,573 143,431
----------- ----------- ----------
Totals 92,378,007 57,925,922 8,295,566
Temporary receiver - Chili Plaza, New York 4,883,737 1,477,009 169,962
----------- ----------- -----------
Total $ 97,261,744 $ 59,402,931 $ 8,465,528
========== ============ =========
</TABLE>
a - Includes discount elements totaling in aggregate $11,202,305.
F-11
<PAGE>
The following schedule represents the roll forward of Wraparound Notes for the
years ended December 31, 1997 and 1996:
Balance at January 1, 1996 $80,941,328
Add:
Issuance of wraparound notes 45,250
Less:
Principal repayments (4,506,963)
Notes satisfied - property sales (4,857,817)
Valuation allowance (189,853) (9,554,633)
------------- -----------
Balance at December 31, 1996 71,431,945
----------
Add:
Issuance of wraparound notes 81,934
Less:
Principal repayments (4,578,169)
Notes satisfied - property sales (4,942,647)
Valuation allowance (2,590,132) (12,110,948)
---------- -------------
Balance at December 31, 1997 $59,402,931
==========
At December 31, 1997 and 1996 the Wraparound Notes had a valuation allowance of
$2,590,132 and $189,853, respectively. The aggregate carrying value of the
Wraparound Notes adjusted by the valuation allowance is $12,160,890 and
$26,042,452, respectively.
Included in the Wraparound Notes carrying amount is $8,795,921, which represents
the non-discount portion, and $11,202,305, which represents the discount
portion, of certain original issue discount mortgage notes (the "Discount
Notes"). The carrying value of the Wraparound Notes exclude such discount
portion of the Discount Notes. The Partnerships are obligated to make fixed
payments on the non-discount portion of the Discount Notes and are not obligated
to make any principal payments on the discount portion of the Discount Notes.
The Company does not recognize income from the discount portion of the Discount
Notes due to uncertainty regarding the realization of such amounts.
Each of the Wraparound Notes gives the Company a lien on the Underlying Property
as well as the Partnership's interest in the Master Lease. The Wraparound Notes
are subordinate to the Underlying Debt.
6. Investments
On February 27, 1997, UPI was merged (the "UPI Merger") into a wholly-owned
subsidiary of Kranzco Realty Trust, a Maryland real estate investment trust
("Kranzco"). In connection with the UPI Merger, the 356,400 shares of UPI
Preferred Stock which the Company owned as of the date of the UPI Merger were
converted into 356,400 shares of Kranzco's Series C Cumulative Redeemable
Preferred Shares (the "Kranzco Series C Shares"). The Company believes that the
terms of the Kranzco Series C Shares are similar to the terms of the UPI
Preferred Stock, because the Kranzco Series C Shares (i) have the same
redemption price and liquidation preference and price ($10 per share) as the UPI
Preferred Stock, (ii) pay cumulative dividends at the rate paid on the UPI
Preferred Stock as of the date of the UPI Merger (8%), and (iii) are required to
be redeemed ratably on a quarterly basis over a two-year period from the date of
the UPI Merger, as compared to the UPI Preferred Stock, which was not required
to be redeemed until the year 2002 (although UPI could, at its option, redeem
shares of UPI Preferred Stock at any time).
F-12
<PAGE>
The Company, as the holder of 222,860 shares of Kranzco Series C Cumulative
Redeemable Preferred Shares is entitled to receive from the redemption of such
shares, in 5 equal installments over the next 13 months, an aggregate amount of
cash equal to approximately $2,228,600, plus interest at the rate of 8% per
annum on the applicable outstanding balance of such shares.
7. Leases
As Lessor
The Properties have gross leasable area of approximately 2,642,048 and 2,935,493
square feet of which approximately 94% and 95% was leased as of December 31,
1997 and 1996, respectively.
Minimum base rental income under tenant lease agreements relating to the
Properties having remaining lease terms ranging from one to twenty years at
December 31, 1997 is as follows (dollar amounts in thousands):
Year Ending
December 31
1998 $ 10,614
1999 9,738
2000 8,727
2001 7,899
2002 6,427
Thereafter 26,945
For the years ended December 31, 1997, 1996 and 1995, no tenant accounted for
more than 10% of the Company's total revenue. However, Kmart Corporation
accounted for approximately 32%, 30% and 40%, respectively, of rent revenue.
As Lessee
Minimum rental expense under the Master Leases, having original lease terms
ranging from 1998 to 2017 years, at December 31, 1997 is as follows (dollar
amounts in thousands):
Year Ending
December 31
1998 $13,411
1999 11,974
2000 2,370
2001 2,370
2002 2,370
Thereafter 30,646
Although the Company's lease payments are not contingent upon receiving rent
from the Properties, such payments are expected to be made from such receipts
and the receipt of interest and principal payments from the Wraparound Notes.
F-13
<PAGE>
8. Mortgages and Notes Payable
The mortgages and notes payable are non-recourse to the Company and are
collateralized by the Properties. The scheduled principal payments of the
mortgages and notes payable at December 31, 1997 are as follows (dollar amounts
in thousands):
Year Ending
December 31
1998 $5,998
1999 2,924
2000 3,235
2001 3,465
2002 881
Thereafter 51,236
------
Total $ 67,739
=======
The interest rates on the mortgages and notes payable range from 5.75% to 13.5%.
The mortgages and notes payable and related terms at December 31, 1997 for the
Properties are summarized as follows (amounts in thousands, except as noted):
<TABLE>
<CAPTION>
Monthly
Payment
Principal Provisions
Balance Stated
December 31 Interest in Actual
Property/Location 1997 Rate (%) Dollars Maturity Date (4)
----------------------- ------------------ -------- ------------ -------------------
<S> <C> <C> <C> <C>
Dubois, PA $1,490 7.00 $ (1) 12/01/2006
Franklin Township, PA 1,465 6.00 (1) 12/15/2007
Clarksville, TN 1,565 6.00-6.80 (1) 10/01/2006
Montgomery, AL 1,278 8.75 14,500 04/01/2007
Paris, TN 591 13.50 8,859 04/01/2008
Paris, TN 356 9.25 8,467 07/01/2003
Chili, NY 1,477 9.63 21,687 08/01/2004
South Williamson, KY 15,089 9.00 144,833 10/01/1998
Savannah, TN 324 9.50 6,612 01/31/2003
Danville, IL 476 9.625 9,663 09/01/2002
Warsaw, VA 818 13.125 11,373 10/01/2009
Southwick, MA 793 11.50 9,857 09/01/2009
Walpole, NH 793 11.50 9,857 09/01/2009
Baton Rouge, LA 2,066 12.00 33,583 12/01/2005
Palatka, FL 1,197 12.00 17,247 11/01/2007
Vestivia Hills, AL 745 13.00 13,759 11/01/2004
Columbus, NE 1,360 12.00 17,201 09/01/2010
Columbus, NE 64 9.50 697 07/01/2011
Hamilton, NY 823 13.125 11,373 12/01/2009
Bend, OR (3) 17,179 9.00 148,925(5) 06/01/1998
Bend, OR 11 10.75 242 11/17/2002
Zanesville, OH 1,200 9.50 14,295 05/31/1998
Deland, FL 933 8.875 14,016 04/01/2003
Rochester, NY 1,156 9.25 15,992 01/01/2002
Janesville, WI 990 9.00 14,060 07/31/2002
Janesville, WI 118 9.00 1,529(6) 08/01/2007
Marietta, OH 2,040 5.75-6.70 (1) 03/15/2007
Mt. Pleasant, PA 1,365 6.50 (1) 05/01/2007
North Canton, OH 2,116 9.00 21,669 09/30/2012
Owensboro, KY 1,600 6.50 - 6.80 (1) 12/01/2007
Quincy, IL 3,042 7.75 27,912 07/01/1998
Natchez, MS 1,834 12.50 (2) 04/01/2007
Streetsboro, OH 1,385 6.35-6.70 (1) 12/01/2006
-----
Total Balance $67,739
=======
</TABLE>
(1)Principal and interest serviced through a bond fund with variable semi-annual
payments.
(2) Monthly payments of principal and interest equal to available cash flow.
(3) At maturity, the mortgagee is entitled to 50% of (i) the property's value
(as determined by sale or appraisal) less (ii) the outstanding balance, plus
$1,500,000.
(4) Certain mortgages and notes contain various terms regarding prepayment
penalties.
(5) Plus 67% of annual cash flow.
(6) Monthly payments subject to available cash flow.
F-14
<PAGE>
The following schedule represents the roll forward of the mortgages and notes
payable activity:
Balance at January 1, 1996 $82,012,066
Principal payments (7,586,850)
Balance at December 31, 1996 74,425,216
Principal payments (6,685,652)
--------------
Balance at December 31, 1997 $ 67,739,564
===============
9. Capital Stock
The authorized capital stock of the Company consists of 10,000,000 shares of
Common Stock and 10,000,000 shares of Series A Preferred Stock.
The shares of Common Stock are entitled to one vote per share. The Series A
Preferred Stock has limited voting rights. The Series A Preferred Stock has a
$10.00 liquidation preference and has a preferential right to receive a
quarterly dividend of $0.195 per share before dividends can be paid on the
Common Stock.
On December 21, 1995 the conversion ratio for the Series A Preferred Stock was
adjusted to provide for the receipt of one share of Common Stock upon the
conversion of .91 shares of Series A Preferred Stock. Previously, the conversion
ratio was 1.6 shares of Series A Preferred Stock for one share of Common Stock.
The new conversion ratio, which was effective as of November 1, 1995, was
determined pursuant to the Certificate of Designations for the Series A
Preferred Stock, which required the adjustment to be made in connection with the
Distribution.
After September 30, 1995, holders of the MPI Preferred Stock were no longer
entitled to receive dividends on a cumulative basis. As a result of the
Company's Board of Director's 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
the Company'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.
Milestone's Board of Directors determined not to pay any dividends on the MPI
Preferred Stock for the years ended December 31, 1997 and 1996. The last
dividend declared by the Company 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.
In May 1994, the Common Stockholders approved the adoption of the 1993 Employee
Stock Option Plan (the "Employee Stock Option Plan"). The total number of shares
of Common Stock of the Company which may be issued pursuant to the exercise of
options granted under the Employee Stock Option Plan is 300,000. The
Compensation Committee of the Board of Directors (the "Compensation Committee")
made initial grants in December 1993 under such plan totaling 153,000 options
(the "Initial Grant") which are exercisable for 153,000 shares of Common Stock
at a per option exercise price of $4.75. In June 1997, the Compensation
Committee canceled the Original Issue and reissued 153,000 options which are
exercisable for 153,000 shares of Common Stock at a per option exercise price of
$0.50. At the same time, the Compensation Committee granted 154,000 options
which are exercisable for 154,000 shares of Common Stock at a per option
exercise price of $0.50. Options granted under the Employee Stock Option Plan
expire on the tenth anniversary of the date of their grant, or upon termination
of the grantee's employment with the Company. During the year ended December 31,
1997, 1996 and 1995, 23,800, 0 and 7,000 such options were canceled upon
resignation of an employee, respectively.
F-15
<PAGE>
In May 1994, the Common Stockholders also approved the adoption of the 1993
Non-Employee Director Stock Option Plan ("the "Non-Employee Director Stock
Option Plan"). Options granted under such plan expire on the tenth anniversary
of the date of their grant, or upon the grantee's removal or resignation from
the Board of Directors. The exercise price for each option granted under the
Non-employee Director Stock Option Plan is determined by averaging the high and
low trading prices of the Common Stock as reported on the New York Stock
Exchange on the date of such options. Under the Non-Employee Director Stock
Option Plan, the Company granted 2,500 options to each non-employee director in
each of 1993 (upon the adoption of the plan), 1994,1995,1996 and 1997, at a per
option exercise price of $4.75, $4.375, $1.375, $1.6875 and $0.50, respectively.
As of December 31, 1997, all of the non-employee director options granted in
1993 thru 1995 are exercisable, one half of the options granted in 1996 are
exercisable, and none of the non-employee director options granted in 1997 are
exercisable. Pursuant to such plan, each non-employee director was granted 2,500
options upon adoption of such plan in 1994 and is granted 2,500 options at each
annual meeting of the stockholders of the Company.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 requires expanded disclosure of
stock-based compensation arrangements with employees, and encourages, but does
not require compensation cost be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply
Accounting Principles Board Opinion No. 25 ("APB 25"), which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company will continue to apply APB 25 to its stock-based compensation
awards. Accordingly, no compensation cost has been recognized in the
consolidated financial statements of the Company.
No options were exercised and, other than the options granted under the
Non-Employee Director Stock Option Plan, no employee options were granted during
the years ended December 31, 1996 and 1995. The Company has evaluated the pro
forma effects of the options granted under the Employee Stock Option Plan during
the year ended December 31, 1997 and determined such effects not to be material
to the Company's consolidated financial position or results of operations. The
pro forma disclosure provisions of SFAS No. 123 for the years ended December 31,
1997, 1996 and 1995 are as follows:
1997 1996 1995
---- ---- ----
Net loss As reported $(3,430,731) $(2,486,974) $(809,649)
Pro-forma (3,443,748) (2,486,974) (809,649)
Loss per common share As reported $(0.82) $(0.65) $(2.13)
Pro-forma (0.79) (0.65) (2.13)
For the purposes of providing the pro forma disclosures, the fair value of
options granted were estimated using the Black Scholes options pricing model
with the following weighted average assumptions; a risk free interest rate of
5.06%, an expected life of one year, volatility of 42.20% and no dividends. The
estimated fair value compensation cost of the related options was amortized to
expense over the options' vesting period.
F-16
<PAGE>
Certain information relating to the options granted and outstanding under the
Employee Stock Option Plan and the Non- Employee Director Stock Option Plan
during the years ended December 31, 1997, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1996 December 31, 1997
--------------------------------- --------------------------- -------------------------------------
Number Weighted Number Weighted Number Weighted
of Average of Average of Average
Options Exercise Price Options Exercise Price Options Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at 168,000 $ 4.73 168,500 $ 4.58 176,000 $ 4.46
January 1
Granted 7,500 1.375 7,500 1.6875 307,500 0.50
Exercised 0 0 0
Forfeited (7,000) 4.75 0 (169,800) 4.15
-------- --------- ------------
Outstanding at 168,500 $ 4.58 176,000 $4.46 313,700 $ 0 .74
December 31
======== ========= ============
Options exercised
at December 31 0 0 0
======== ========= ============
</TABLE>
10. Income Taxes
The Company recognizes deferred taxes for the temporary differences between the
tax bases of its assets and liabilities and the amounts reported in the
financial statements at enacted statutory rates.
The provision for income taxes for the years ended December 31, 1997, 1996 and
1995 consists of the following:
Current Tax: 1997 1996 1995
---- ---- ----
Federal $ 0 $ 524,317 $3,293,167
State and other 64,245 123,069 957,936
--------- ------------ -----------
Total current 64,245 647,386 4,251,103
-------- ------------ ----------
Deferred Tax:
Federal (667,657) (11,894) (3,049,311)
State and other (117,822) (269,054) (885,284)
----------- ------------- -----------
Total deferred (785,479) (280,948) (3,934,595)
---------- ------------ -----------
Total (benefit) provision
for income taxes $ (721,234) $ 366,438 $ 316,508
============ ============= ===========
Temporary differences between the amount reported in the consolidated financial
statements and the tax bases of assets and liabilities result in deferred taxes.
There was a (decrease) increase in the valuation allowance of ($340,576) and
$1,355,576 for the year ended December 31, 1997 and 1996, respectively.
Realization of remaining deferred tax assets is dependent, in part, on
generating sufficient taxable income in the future. Although realization is not
assured, the Company believes that it is more likely than not that such deferred
tax assets will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced. The Company has a net operating loss carryforward of
$1,520,664 at December 31, 1997. Deferred tax assets and liabilities at December
31, 1997, 1996 and 1995 were as follows:
F-17
<PAGE>
<TABLE>
<CAPTION>
Deferred Tax Assets: 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Acquisition costs ....................................... $ 1,025,222 $ 1,078,538 $ 1,128,897
Unrealized holding loss on U.S. Treasury Notes sold short 0 517,553 1,116,073
Principal amortization on Wraparound Notes............... 2,000,385 2,210,868 341,546
Unrealized holding loss on Available-for-Sale Securities 0 146,531 0
Valuation allowance on Wraparound Notes ................. 1,380,811 344,758 0
Other ................................................... 880,897 421,409 350,086
----------- ----------- -----------
Gross deferred tax assets ............................... 5,287,315 4,719,657 2,936,602
Less: Valuation allowance .............................. (1,015,000) (1,355,576) 0
----------- ----------- -----------
Deferred tax asset net of valuation allowance ........... 4,272,315 3,364,081 2,936,602
----------- ----------- -----------
Deferred Tax Liabilities:
Accelerated depreciation ................................ 213,957 91,208 91,208
Unrealized holding gain on Available-for-Sale Securities 0 0 565,988
----------- ----------- -----------
Gross deferred tax liabilities .......................... 213,957 91,208 657,196
----------- ----------- -----------
Net deferred tax asset .................................. $ 4,058,358 $ 3,272,873 $ 2,279,406
=========== =========== ===========
</TABLE>
The provision for total income tax differs from the amount obtained by applying
the statutory federal income tax rate to pre-tax income for the following
reasons:
1997 1996 1995
---- ---- ----
Amount computed on pre-tax income (35.0)% (35.0)% (35.0)%
Increase (Decrease) in taxes:
Increase in taxes from State and other
taxes net of Federal tax benefit 2.1 (5.2) 9.7
Valuation Allowance 15.5 55.9 0
Non-deductible Acquisition Costs 0 0 90.2
Other 0 1.6 (0.6)
-------- ---------- --------
(17.4)% 17.3% 64.3%
======== ======= ========
11. Fair Values of Financial Instruments
The following estimated fair values were determined by the Company using
available market information and valuation methodologies considered appropriate
by management. However, considerable judgement is necessary to interpret and
apply market data to develop specific fair value estimates for given financial
instruments, and the use of different market assumptions and/or estimation
methodologies could have a material effect on reported fair value amounts.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that could be realized upon disposition of the Company's financial
instruments.
Cash and cash equivalents, account and loan receivables and accounts payable and
accrued expenses are reflected in the consolidated balance sheets at amounts
considered by management to reasonably approximate fair value due to their
short-term nature. The Company estimates the fair value of its long-term fixed
rate mortgage loans generally using discounted cash flow analysis based on the
Company's current borrowing rates for similar types of debt. At December 31,
1997 and 1996, the carrying value of the notes and mortgages payable and the
fair value of such instruments was not considered to be significantly different.
F-18
<PAGE>
The fair value of the Wraparound Notes has been estimated by management based on
the estimated fair value of the Underlying Properties. At December 31, 1997 and
1996, the fair value of the Wraparound Notes was estimated to be $65,997,009 and
$80,643,928 compared to a carrying amount of $59,402,931 and $71,431,945,
respectively.
For the investment in Kranzco Series C Cumulative Redeemable Preferred Shares
the estimated fair value, which approximates the carrying amount, is based on
the applicable mandatory redemption price and the dividend interest rates and is
evaluated using interest rates currently offered on like securities with similar
remaining maturities.
The fair value estimates presented herein are based on information available as
of December 31, 1997 and 1996. Although management is not aware of any factors
that would significantly affect the estimated fair value amounts, a
comprehensive reevaluation has not been performed for purposes of these
financial statement disclosures and current estimates of fair value may differ
significantly from the amounts presented herein.
12. Related Party Transactions
The Company is a party to a management agreement (the "Management Agreement")
with Concord pursuant to which the Company provides management services, assists
in the management of Concord Properties, provides certain personnel and office
space and general office service to Concord which the Company receives
reimbursements from Concord. The Management Agreement is renewable annually. For
the years ended December 31, 1997, 1996 and 1995 reimbursed expenses to the
Company were $338,394, $420,743 and $981,302, respectively.
As of December 31, 1997 and 1996, the Company has recorded receivables from
Concord of $391,851 and $599,093, respectively. Such receivable consist of
management fees due to the Company and expenses for general office services as
well as salary reimbursements.
Concord is wholly owned by Leonard S. Mandor and Robert A. Mandor, both of whom
are executive officers and directors of Concord and the Company, and both of
whom may be deemed to beneficially own more than a majority of the voting stock
of the Company.
Concord beneficially owns 2,901,098 shares of Common Stock at December 31, 1997
and 1996. The wholly-owned subsidiaries of Concord own 2,698,765 shares and the
two limited partnerships, which are the sole general partners of the wholly
owned subsidiaries of Concord, own 202,333 shares at December 31, 1997 and 1996.
In addition, the Company received property management fees of $107,725, $107,007
and $116,359 during 1997, 1996 and 1995, respectively, from a partnership whose
general partner is an affiliate of the Company.
In connection with the UPI Merger, UPI terminated its property management and
management services agreements with the Company. The Company does not expect the
termination of these agreements to have a materially adverse effect on the
operations or financial condition of the Company. The aggregate annual fee by
UPI to the Company under these agreements for the years ended December 31, 1997,
1996 and 1995 was $108,588, $1,235,831 and $155,018, respectively.
F-19
<PAGE>
13. Commitments and Contingent Liabilities
The Company's office facility in Boca Raton is subject to a noncancellable five
year operating lease agreement commencing January 1, 1998 and expiring December
31, 2002. Aggregate annual rental payments for the years ended December 31,
1997, 1996 and 1995 for the Company were $758,193, $752,344 and $720,751,
respectively. Future minimum annual payments under the noncancellable operating
lease agreement, as of December 31, 1997, are as follows:
1998 $176,374
1999 183,479
2000 190,805
2001 198,421
2002 206,358
-------
Total $955,437
Under a long term incentive bonus plan, the Company has accrued $669,460 and
$818,964 for bonuses to be paid to certain officers relating to the years ended
December 31, 1997 and 1996, respectively.
The Company has accrued performance related bonuses to certain executive
officers in the amount of $426,870 and $55,566 for the years ended December 31,
1997 and 1996, respectively.
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
held liable for the costs of removal or remediation of certain hazardous or
toxic substances, including, without limitations, asbestos-containing materials,
that could be located on, in or under such property. Such laws and regulations
often impose liability whether or not the owner or operator know of, or was
responsible for, the presence of the hazardous or toxic substances. The costs of
any required remediation or removal of these substances could be substantial and
the liability of an owner or operator as to any property is generally not
limited under such laws and regulations, and could exceed the property's value
and the aggregate assets of the owner or operator. The presence of these
substances or failure to remediate such substances properly may also adversely
affect the owner's ability to sell or rent the property, or to borrow using the
property as collateral. Under these laws and regulations, an owner, operator or
any entity who arranges for the disposal of hazardous or toxic substances, such
as asbestos-containing materials, at a disposal site may also be liable for
these costs, as well as certain other costs, including governmental fines and
injuries to persons or properties. To date, the Company has not incurred any
costs of removal or remediation of such hazardous or toxic substances. However,
the presence, with or without the Company's knowledge, of hazardous or toxic
substances at any property held or operated by the Company could have an adverse
effect on the Company's business, operating results and financial condition.
14. Legal Proceedings.
A lawsuit (the "Rabin Litigation") purporting to be a class action against,
among others, Concord, Leonard S. Mandor, Robert A. Mandor and certain
partnerships (the "Concord Partnerships") and affiliates of Concord, was filed
in September 1989 in the United States District Court for the Southern District
of New York alleging various federal and common law claims relating to the sales
of interests in such Concord Partnerships. In November 1991, the Rabin
Litigation was settled pursuant to the terms of the court-approved settlement
agreement (the "Rabin Settlement Agreement"). A motion brought by the plaintiffs
in the Rabin Litigation seeking to enforce the Rabin Settlement Agreement and
for declaratory and other relief was settled by a Stipulation and Order (the
"Rabin Stipulation and Order") entered and approved by the United States
District Court on October 24, 1997. The plaintiffs asserted, inter alia, that
the defendants breached the Rabin Settlement Agreement by improperly allocating
transaction expenses against the payment to be made to the selling Concord
Partnerships in certain circumstances pursuant to the Rabin Settlement Agreement
and breached their fiduciary duties to the plaintiffs by prematurely selling
properties without valid business justification.
Under the Rabin Stipulation and Order, the plaintiffs withdrew their breach of
fiduciary duty claims and withdrew with prejudice their claim that defendants
breached the Rabin Settlement Agreement by their allocation of transaction
expenses
F-20
<PAGE>
from the sale of certain properties in exchange for a payment of $600,000 from
the defendants. The settlement payment has been made. In addition, the Rabin
Stipulation and Order provides for a formula relating to the allocation of
transaction expenses in connection with the future sale of certain properties
owned by the Concord Partnerships, including the Underlying Properties subject
to the Wrap Debt. Generally, under such formula, if a Property (as defined in
the Rabin Settlement Agreement) is sold for a price less than the sum of (a) the
outstanding Wrap Debt, (b) the Permitted Additional Wrap Debt (as defined in the
Rabin Settlement Agreement) and (c) the amount to be paid to the holder of the
Wrap Debt pursuant to the Rabin Settlement Agreement, then 82.25% of the
transaction expenses shall be the obligation of the selling Concord Partnership,
and shall be deducted from the 11% of net proceeds (as defined in the Rabin
Settlement Agreement) to be distributed to the selling Concord Partnership, and
the Company, as the holder of the Wrap Debt, will be responsible for paying the
remaining 17.75% of the transaction expenses incurred in such sale. In the event
a Property is sold for a price in excess of the sum of (a) the outstanding Wrap
Debt, (b) the Permitted Additional Wrap Debt and (c) the amount to be paid to
the holder of the Wrap Debt pursuant to the Rabin Settlement Agreement, then the
transaction expenses shall be deducted from the proceeds in excess of such
existing debt, and, if such excess proceeds are not sufficient to pay all such
transaction expenses, 82.25% of the balance of such transaction expenses shall
be paid out of the 11% of the net proceeds distributed to the selling Concord
Partnership, and the Company will be responsible for paying the remaining 17.75%
of the transaction expenses incurred in such sale. Concord and one of its
subsidiaries have agreed to indemnify the Company for any losses, up to $200,000
in the aggregate, resulting from any such additional transaction fees, costs or
expenses incurred by the Company as a result of such events. The Company does
not believe that the Rabin Stipulation and Order materially adversely affects
the Company. There can be no assurance, however, that the plaintiffs will not
pursue the breach of fiduciary duty claims against Concord and the General
Partners of the Concord Partnerships which own the Underlying Properties which
were withdrawn under the terms of the Rabin Stipulation and Order.
On January 30, 1996, Milestone, its Board of Directors and Concord were named as
defendants in an action (the "Winston Action") commenced in the Court of
Chancery of the State of Delaware (the "Delaware Court"). In the action, the
plaintiff, a Series A Preferred Stockholder purporting to bring the action on
behalf of himself and other Series A Preferred Stockholders, alleged that in
connection with the Acquisition, the Transfer and the Distribution (the
Acquisition, the Transfer and the Distribution are collectively referred to
herein as the "Transactions"), Milestone and its directors engaged in
self-dealing and breached their fiduciary duties and faith and fair dealing to
the Series A Preferred Stockholders. The plaintiff claimed, among other things,
that, as a result of the Transactions, Milestone would not have sufficient funds
to pay dividends on the Series A Preferred Stock and that the Properties were
grossly inferior to the UPI Properties. The defendants moved to dismiss the
plaintiff's original complaint, and thereafter, the plaintiff amended his
complaint to allege further causes of action, including a claim of rescission.
The defendants moved to dismiss the amended complaint and, after hearing
arguments thereon, the Delaware Court dismissed the plaintiff's claim for
rescission of both the Transfer and the Distribution and reserved decision on
the defendants' motion to dismiss the plaintiff's claim for damages and other
relief. On December 9, 1996, the plaintiff requested that the Delaware Court
dismiss the amended complaint, and filed a purported new class action. On
January 14, 1997, the defendants filed a motion to dismiss or stay the purported
new class action. On May 12, 1997, the Delaware Court issued a decision on such
motion and dismissed the plaintiff's breach of fiduciary duty and statutory
claims (although the Delaware Court had allowed the plaintiff to replead the
fiduciary duty claim as a derivative claim brought on behalf of Milestone), but
did not dismiss the plaintiff's claim that the Transfer and the Distribution did
not comply with the Certificate of Designations for the Series A Preferred
Stock. On June 4, 1997, the plaintiff appealed the Delaware Court's dismissal of
the fiduciary duty claim and, on June 11, 1997, the defendants filed a
cross-appeal. The plaintiff thereafter, filed an amended complaint.
On October 30, 1997, Milestone entered into a Stipulation of Settlement (the
"Winston Settlement Agreement") providing for the settlement (the "Winston
Settlement") of the purported class action lawsuit. The Winston Settlement is
subject to approval by the Delaware Court after a hearing, and is also subject
to a number of conditions which may be 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 do not opt out of the Winston Settlement.
If the Winston Settlement is approved and consummated, the Winston Action will
be dismissed, Milestone's stockholders will release all derivative claims
arising in connection with the Transactions and the holders of the Series A
Preferred Stock
F-21
<PAGE>
between October 23, 1995 and the date on which the Winston Settlement is
consummated will release any claims they may have against Milestone and the
other named defendants arising out of the Transactions. Each Series A Preferred
Stockholder who does not opt out of the Winston Settlement and who owns shares
of the Series A Preferred Stock on the date the Winston Settlement is
consummated will 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 will
have a liquidation preference of $2.25 per share, will be required to be
redeemed by CMP at $2.25 per share after five years, and will have no voting or
dividend rights; in addition, the CMP Preferred Stock will be subject to
optional redemption in accordance with a schedule during the five year period
prior to mandatory redemption. CMP's redemption obligations will be secured by a
letter of credit.
The ultimate consummation of the Winston Settlement as set forth in the Winston
Settlement Agreement is subject to numerous conditions, some of which are not in
the control of the Company, such as approval by the Delaware Court, and
therefore is inherently uncertain. Accordingly, no dollar amount has been
included in the Company's accompanying financial statements to reflect the
potential Winston Settlement. If the Winston Settlement is consummated, the
Company does not anticipate that the Company's portion of such settlement costs
will exceed $3,000,000. There can be no assurance, however, that any fees,
expenses or other costs associated with the ultimate resolution of the Winston
Action will not differ from such estimate.
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.
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. Pursuant to the Winston Settlement
Agreement, if the Winston Settlement is consummated, Milestone will be required
to pay, in cash,$0.75 per share for each of the ouustanding 3,033,995 shares of
Series A Preferred Stock, to each Series A Preferred Stockholder who does not
opt out of the Winston Settlment , plus the plaintiff's legal fees in an amount
not to exceed $650,000 and will incur other legal expenses. Milestone believes
that the amount it and certain of its directors will be required to pay,
pursuant to the Winston Settlement Agreement and as a result of the litigation,
if the Winston Settlement is consummated, are covered losses under both the
National Union Policy and the Stonewall Policy. In addition, the Company has
incurred approximately $250,000 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 has 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 has also refused to
contribute to the Winston Settlement. In the complaint, the plaintiffs allege
that National Union and Stonewall have 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 has answered the
complaint and has denied liability. Stonewall has until April 6, 1998 to answer
the complaint. At this time, the Company is not in a position to render an
opinion as to the outcome of this action.
F-22
<PAGE>
15. Subsequent Events
The Company entered into an agreement (the "SGSC Agreement") on January 9, 1998,
effective as of December 24, 1997, with Societe Generale Securities Corporation
("SGSC") 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 (a "Transaction") involving a proposed sale by
the Affiliates of certain shopping center properties and a proposed sale by the
Company of certain of its Fee Properties. The shopping center properties to be
sold by the Affiliates are subject to Wrap Debt held by the Company which would
need to be released prior to the consummation of a Transaction. The Properties
to be sold and the Wrap Debt to be repaid in connection with any Transaction
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 with respect to any
Transaction, and there can be no assurance that SGSC will be able to identify
suitable candidates to undertake any Transaction, or that if identified, the
Company and the Affiliates will be able to consummate any Transaction on terms
acceptable to them.
On February 9, 1998, the Company realized its position in its Wraparound Note on
the property located in Chili, New York as a result of the assignment of the
Wraparound Note. Such assignment resulted in the relief of the non-recourse
underlying mortgage, which resulted in a net book gain of approximately $75,000
to the Company.
16. Consolidated Quarterly Summary of Operations
The following is summary financial information with respect to the Company's
operations for the four fiscal quarters during fiscal year 1997.
<TABLE>
<CAPTION>
Fourth Third Second First
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
Total revenues $10,968,487 (1) $6,308,950 $5,966,201 $6,848,273
Total expenses 11,738,497 7,328,116 7,657,032 7,520,231
------------ ------------ ---------- ----------
Loss before income taxes (770,010) (1,019,166) (1,690,831) (671,958)
(Benefit) provision for income taxes (980,919) 166,297 416,309 (322,921)
------------ ------------- ----------- -----------
Net income (loss) 210,909 (1,185,463) (2,107,140) (349,037)
=========== ============= ============ ===========
Net income(loss) per common share $0.05 ($0.28) ($0.50) ($0.08)
============ =============== ============== ============
Weighted average common shares outstanding 4,213,368 4,211,275 4,192,211 4,188,451
============ ============= ============ =========
</TABLE>
Note:
(1) Includes approximately $3,511,560 of gain on sale of available-for-sale
securities (see Note 2. "Summary of Significant Accounting Policies").
F-23
<PAGE>
MILESTONE PROPERTIES, INC.
Schedule III
Real Estate and Accumulated Depreciation
December 31, 1997
<TABLE>
<CAPTION>
Initial Cost Cost of Accumulated Date Depreciation
Location Encumbrances Land Building Improvements Total Depreciation Acquired Life
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mountain View Mall $17,179,016 $1,030,000 $19,866,183 $79,338 $20,975,521 ($4,472,989) 10/23/95 50
Bend, Oregon
Pine Oak Plaza - 110,000 990,000 45,145 1,145,145 (7,207) 09/24/97 50
Sunrise, Florida
Sunrise Shopping Center1,199,650 - 2,530,219 91,904 2,622,123 (1,022,012) 10/23/95 50
Zanesville, Ohio
Family Dollar Stores - - 794,909 8,607 803,516 (563,743) 10/23/95 26.65
Blackstone, Virginia
----------- ---------- ----------- -------- ----------- -----------
Totals $18,378,666 $1,140,000 $24,181,311 $224,994 $25,546,305 ($6,065,951)
=========== ========== =========== ======== =========== ===========
</TABLE>
Reconciliation of Property and Improvements
Balance at January 1, 1995 $84,160,584
Pooling-
Acquisitions $24,221,311
Dispositions (84,160,584)
Balance at December 31, 1995 24,221,311
Improvements 46,999
Balance at December 31, 1996 24,268,310
Acquisitions 1,100,000
Improvements 177,995
Balance at December 31, 1997 $25,546,305
Reconciliation of Accumulated Depreciation
Balance at January 1, 1995 ($13,848,604)
Dispositions $13,848,604
Pooling-Accumulated
Depreciation (4,965,798)
Depreciation Expense (97,380)
Balance at December 31, 1995 (5,063,178)
Depreciation expense (481,840)
Balance at December 31, 1996 (5,545,018)
Depreciation expense (520,933)
Balance at December 31, 1997 ($6,065,951)
At December 31, 1997 the tax basis of the Company's owned real estate was
approximately $25,406,248.
F-24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,435,237
<SECURITIES> 0
<RECEIVABLES> 11,635,748
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,327,598
<PP&E> 26,013,919
<DEPRECIATION> 6,403,859
<TOTAL-ASSETS> 112,223,112
<CURRENT-LIABILITIES> 24,732,428
<BONDS> 0
0
30,341
<COMMON> 49,060
<OTHER-SE> 25,669,406
<TOTAL-LIABILITY-AND-EQUITY> 112,223,112
<SALES> 0
<TOTAL-REVENUES> 30,091,911
<CGS> 0
<TOTAL-COSTS> 34,243,876
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,119,554
<INCOME-PRETAX> (4,151,965)
<INCOME-TAX> (721,234)
<INCOME-CONTINUING> (3,430,731)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,430,731)
<EPS-PRIMARY> (0.82)
<EPS-DILUTED> 0.00
</TABLE>
