UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 1-10641
MILESTONE PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0158204
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
150 E. Palmetto Park Rd. 4th Floor, Boca Raton, FL 33432
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (561) 394 - 9533
------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of November 12, 1999, 4,943,633 shares of the Registrant's Common
Stock, par value $.01 per share, were outstanding and 16,423 shares of the
Registrant's $.78 Convertible Series A Preferred Stock were outstanding.
<PAGE>
Part I: Financial Information
Item 1. Financial Statements
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1999 (Unaudited) and December 31, 1998
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 6,169,638 $ 11,826,301
Restricted cash 222,000 222,000
Reserved cash for settlement 1,650,393 0
Loans receivable 1,389,521 1,444,442
Accounts receivable 641,543 812,555
Accrued interest receivable 2,993,377 5,185,432
Due from related party 972,760 837,400
Prepaid expenses and other 1,231,787 1,231,663
-------------- ----------
Total current assets 15,271,019 21,559,793
Property, improvements and equipment, net 21,302,107 21,517,884
Wraparound notes, net 29,866,432 39,529,787
Deferred income tax asset, net 1,843,545 2,994,070
Investment in joint ventures 708,093 0
Investments in preferred stock 0 445,500
Management contract rights, net 136,798 193,600
Goodwill and other, net 638,046 681,562
-------------- -------
Total assets $ 69,766,040 $ 86,922,196
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,317,985 $ 2,436,964
Accrued litigation payable 2,393,811 9,692,454
Accrued interest payable 392,757 306,846
Master lease payable 4,666,721 8,962,828
Current portion of mortgages and notes payable 4,807,798 5,782,950
Income taxes payable 2,777,427 2,836,496
-------------- ---------
Total current liabilities 16,356,499 30,018,538
Mortgages and notes payable 39,643,945 42,194,179
--------------- ----------
Total liabilities 56,000,444 72,212,717
---------- ----------
Commitments and Contingencies
Stockholders' equity:
Common stock ($.01 par value, 10,000,000 shares authorized,
4,943,633 issued and outstanding at September 30, 1999 and
December 31, 1998; 692,591 shares in treasury) 49,436 49,436
Preferred stock (Series A $.01 par value, $10 liquidation
preference, 10,000,000 and 1,000,000 shares authorized,
16,423 and 2,999,707 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively) 164 29,997
Additional paid in surplus 45,527,013 45,497,180
Accumulated deficit (28,370,599) (27,426,716)
Shares held in treasury - at cost ( 3,440,418) (3,440,418)
------------ ---------------
Total stockholders' equity 13,765,596 14,709,479
---------- --------------
Total liabilities and stockholders' equity $ 69,766,040 $ 86,922,196
=============== ===============
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
2
<PAGE>
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES
(Unaudited)
For the Three Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
REVENUES
<S> <C> <C>
Rent $ 1,815,324 $ 2,414,928
Interest income 1,172,416 2,216,211
Revenue from management company operations 148,336 143,012
Tenant reimbursements 214,761 200,322
Management and reimbursement income 20,129 26,480
Percentage rent 84,041 46,050
Gain on sale of real estate and real estate related assets 1,488,523 1,284,617
----------- ----------
Total revenues 4,943,530 6,331,620
----------- ---------
EXPENSES
Master lease expense 1,549,217 3,421,815
Interest expense 914,896 1,345,002
Depreciation and amortization 193,793 87,881
Salaries, general and administrative 1,219,811 583,014
Property expenses 474,799 348,797
Expenses for management company operations 171,242 242,988
Professional fees 127,127 298,491
----------- ----------
Total expenses 4,650,885 6,327,988
---------- ----------
Income before income taxes 292,645 3,632
Provision (benefit) for income taxes 964,986 (367,821)
--------- ---------
Net (loss) income attributable to common stockholders $ (672,341) $ 371,453
============ =============
(Loss) income per common share, basic and diluted $ ( 0.16) $ 0.09
============== ===============
Weighted average common shares outstanding 4,250,992 4,230,245
=========== ===========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
3
<PAGE>
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES
(Unaudited)
For the Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
REVENUES
<S> <C> <C>
Rent $ 5,804,790 $ 7,759,148
Interest income 3,913,787 6,684,142
Revenue from management company operations 477,234 358,016
Tenant reimbursements 750,211 733,924
Management and reimbursement income 60,952 82,466
Percentage rent 262,487 357,057
Gain on sale of real estate and real estate related assets 2,762,316 1,366,507
------------- ------------
Total revenues 14,031,777 17,341,260
------------ ----------
EXPENSES
Master lease expense 5,172,613 10,313,481
Interest expense 2,904,141 4,445,607
Depreciation and amortization 576,714 493,902
Salaries, general and administrative 2,654,853 1,787,370
Property expenses 1,417,163 1,261,268
Expenses for management company operations 615,641 766,288
Professional fees 469,299 826,130
-------------- -----------
Total expenses 13,810,424 19,894,046
------------ -----------
Income (loss) before income taxes 221,353 (2,552,786)
Provision (benefit) for income taxes 1,165,236 (1,353,443)
------------- -----------
Net loss attributable to common stockholders $ (943,883) $(1,199,343)
============ ===========
Loss per common share, basic and diluted $ (0.22) $ (0.28)
================= ===============
Weighted average common shares outstanding 4,250,992 4,229,979
============= ===========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
4
<PAGE>
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Common Stock Preferred Stock Treasury Stock
Shares Cost Shares Cost Shares Cost
=============================================== =========== =========== ============== =========== =========== ==============
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 4,943,633 $ 49,436 2,999,707 $ 29,997 (692,591) $ (3,440,418)
Cancellation of Series A Preferred Stock (2,983,284) (29,833)
Net loss for the nine months
ended September 30, 1999
---------- ----------- --------------- ----------- ---------- --------------
Balance, September 30, 1999 4,943,633 $ 49,436 16,423 $ 164 (692,591) $ (3,440,418)
=========== =========== ============== =========== =========== ==============
Additional
paid in Accumulated Stockholders'
surplus deficit equity
=============================================== =============== =============== ===============
<S> <C> <C> <C>
Balance, January 1, 1999 $ 45,497,180 $ (27,426,716) $ 14,709,479
Cancellation of Series A Preferred Stock 29,833 0
Net loss for the nine months
ended September 30, 1999 (943,883) (943,883)
--------------- -------------- --------------
Balance, September 30, 1999 $ 45,527,013 $ (28,370,599) $ 13,765,596
=============== =============== ===============
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
5
<PAGE>
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
CASH FLOW FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (943,883) $ (1,199,343)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 576,714 493,902
Deferred taxes 1,150,525 (1,514,641)
Gain on sale of real estate and real estate related assets (2,721,750) (1,366,507)
Changes in operating assets and liabilities
Decrease in accounts receivable 137,579 437,420
Increase in due from related party (135,360) (260,125)
Decrease in accrued interest receivable 2,225,488 2,908,176
Increase in prepaid expenses and other (57,886) (1,536,320)
Decrease in accounts payable and accrued expenses (1,118,979) (542,624)
Decrease in accrued litigation payable (7,298,643) 0
Increase in accrued interest payable 85,911 40,066
Decrease in master lease payable (4,296,107) (3,489,028)
Decrease in income taxes payable (59,069) 0
------------------ ----------------
Net cash used in operating activities (12,455,460) (6,029,024)
--------------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Principal repayments on loans receivable 54,921 50,713
Principal repayments on wraparound notes 3,782,763 5,017,620
Investment in wraparound notes 0 (108,838)
Investment in affiliate (708,093) 0
Purchase of building and land 0 (6,825,000)
Purchase of leasehold improvements (342,532) (302,465)
Proceeds from realization of real estate related assets, net 8,742,017 950,334
Proceeds from the sale of property 0 319,230
Proceeds from redemption of investments in preferred stock 445,500 1,336,500
---------------- ----------
Net cash provided by investing activities 11,974,576 438,094
-------------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from mortgages and notes payable 1,750,000 9,180,000
Principal payments on mortgages and notes payable (5,275,386) (3,824,663)
Reserved cash for settlement (1,650,393) 0
--------------- --------------
Net cash (used in) provided by financing activities (5,175,779) 5,355,337
--------------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,656,663) (235,593)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,826,301 13,435,237
------------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,169,638 $ 13,199,644
============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 4,314,309 $ 4,405,541
============= ==============
Cash paid during the period for income taxes $ 59,069 $ 185,472
=============== ===============
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
6
<PAGE>
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying consolidated financial statements of Milestone Properties, Inc.
("Milestone") and its wholly owned subsidiaries (collectively, Milestone with
its subsidiaries is the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
financial statements as of and for the periods ended September 30, 1999 and 1998
are unaudited. The results of operations for the interim periods shown in this
report are not necessarily indicative of the results of operations to be
expected for the fiscal year. Certain information for 1998 has been reclassified
to conform to the 1999 presentation. These consolidated interim financial
statements should be read in conjunction with the annual financial statements
and footnotes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
The Company is engaged in the business of owning, acquiring, managing,
developing and investing in commercial real estate and real estate related
assets. The Company is primarily engaged in the ownership, operation and
management of interests in commercial real estate properties, currently (as of
the date of this filing) consisting of (i) 10 properties owned in fee (the "Fee
Properties"), (ii) the ownership of wraparound notes (the "Wraparound Notes")
and wraparound mortgages (the "Wraparound Mortgages" and, together with the
Wraparound Notes, the "Wrap Debt") which are secured by 17 commercial real
properties (the "Underlying Properties" and, together with the Fee Properties,
the "Properties") and (iii) the operation and management of the Properties. At
September 30, 1999, the Company possessed interests in 32 commercial real estate
properties consisting of (i) 10 properties owned in fee and (ii) the ownership
of wraparound notes and wraparound mortgages secured by 22 commercial real
properties. At September 30, 1998, the Company possessed interests in 33
commercial real properties consisting of (i) 6 properties owned in fee and (ii)
the ownership of wraparound notes and wraparound mortgages secured by 27
commercial real properties.
1. Acquisition and Disposition of Real Estate Related Assets
On April 6, 1999, a wraparound note held by the Company on a 125,803 square foot
shopping center property located in Pascagoula, Mississippi (the "Pascagoula
Property"), was paid as a result of the sale of the Pascagoula Property by its
owner, an affiliate of the Company (the partnership that owned the Pascagoula
Property), to an unrelated third party. In connection with the sale of the
Pascagoula Property, the Company, as the master lessee on a master lease on the
Pascagoula Property, canceled the subject master lease. As a result of the
payment of the wraparound note, the Company realized net cash proceeds of
approximately $2,178,000 and a book gain of approximately $845,000 in the second
quarter of 1999.
7
<PAGE>
On April 27, 1999, a wraparound note held by the Company on a 52,700 square foot
shopping center property located in Baton Rouge, Louisiana (the "Baton Rouge
Property"), was paid as a result of the sale of the Baton Rouge Property by its
owner, an affiliate of the Company (the partnership that owned the Baton Rouge
Property), to an unrelated third party. In connection with the sale of the Baton
Rouge Property, the Company, as the master lessee on a master lease on the Baton
Rouge Property, canceled the subject master lease. Of the gross proceeds,
$1,896,208 was used to satisfy the underlying mortgage debt on the Baton Rouge
Property. As a result of the payment of the wraparound note and the satisfaction
of the underlying mortgage debt, the Company realized net cash proceeds of
approximately $2,045,000 and a book gain of approximately $389,000 in the second
quarter of 1999.
On July 30, 1999, a wraparound note held by the Company on a 31,170 square foot
single tenant commercial building located in Franklin, Pennsylvania (the
"Franklin Property"), was paid as a result of the sale of the Franklin Property
by its owner, an affiliate of the Company (the partnership that owned the
Franklin Property), to an unrelated third party. In connection with the sale of
the Franklin Property, the Company, as the master lessee on a master lease on
the Franklin Property, canceled the subject master lease. Of the gross proceeds,
$1,348,000 was used to defease the underlying bond debt. As a result of the
payment of the wraparound note, the Company realized net cash proceeds of
approximately $896,000 and a book gain of approximately $1,544,000 in the third
quarter of 1999.
On October 21, 1999, five wraparound notes held by the Company on five separate
single-tenant commercial buildings (collectively the "Five Properties"), were
paid as a result of the sale of the Five Properties by their owners, affiliates
of the Company (the partnerships that owned the Five Properties) to unrelated
parties. In conjunction with the sale of the Five Properties, the Company, as
the master lessee on a master lease on the Five Properties, canceled the subject
master lease. The negotiated sales prices of the Five Properties aggregated
$12,500,000. As a result of the sale of the Five Properties, the payment of the
wraparound notes and the assumption of the underlying mortgage debt by the
buyers, the Company received approximately $5,400,000 in cash and will realize a
pre-tax book gain of approximately $2,200,000 in the fourth quarter of 1999.
2. Income Taxes
The Company is required by Statement of Financial Accounting Standards (SFAS)
No. 109 to record a deferred tax asset or liability for the basis of an asset or
liability that is temporarily different for financial reporting purposes and tax
reporting purposes. Income taxes for interim periods are generally computed
using the effective tax rate estimated to be applicable for the full fiscal
year. The interim tax provision is adjusted for specific significant
transactions which affect deferred tax assets or liabilities as recorded under
SFAS 109.
During 1999, the wraparound notes held by the Company on the eight properties
described in note 1. above were satisfied. Relating to such wraparound notes,
the Company had previously recorded deferred tax assets which were (or will be)
realized through the provision for income taxes. As a consequence of realizing
the deferred tax assets specifically recorded for these wraparound notes, which
is a non-cash tax adjustment, the Company's effective tax rate for the period
ended September 30, 1999 is significantly different from the expected federal
tax rate of 35%, and the expected rate for the entire year 1999 will also be
significantly different. The Company did not realize any deferred tax assets
from property sales in the corresponding third quarter of 1998.
8
<PAGE>
In prior years, the Company recorded income tax provisions related to certain
investment transactions. The Company no longer believes that the income taxes
payable resulting from these provisions is a necessary liability, and it will
reverse these accruals, amounting to approximately $2,700,000 in the fourth
quarter of 1999. The reversal of these accruals will reduce the 1999 income tax
provision, but will not affect cash or liquidity.
3. Legal Proceedings
As previously reported, the Company is the plaintiff in a Florida state court
action against certain insurance companies (the "National Union Action") for
their refusal to contribute to the settlement of certain previously-reported
actions (known as the "Winston Actions") which involved the Company and certain
of its present and former officers and directors. The National Union Action is
currently in discovery, and the Company is not in a position to render an
opinion as to its outcome.
For a detailed description of the Winston Actions, the settlement thereof, and
the commencement of the National Union Action, please see the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (and the
cross-references therein).
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
This Quarterly Report on Form 10-Q for the interim period ended September 30,
1999 filed by Milestone contains or incorporates by reference certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and Milestone
intends that such forward-looking statements be subject to the safe harbors
created thereby. Such forward-looking statements involve risks and uncertainties
and include, but are not limited to, statements regarding future events and
Milestone's plans, goals and objectives. Such statements are generally
accompanied by words such as "intend," "anticipate," "believe," "estimate,"
"expect" or similar terms. Milestone's actual results may differ materially from
such statements. Factors that could cause or contribute to such differences
include, without limitation, the following: (i) its plans, strategies,
objectives, expectations and intentions are subject to change at any time at its
discretion; (ii) general economic and business conditions, which may, among
other things, affect the demand for retail space or retails goods, the
availability and creditworthiness of prospective tenants, rental terms and the
terms and availability of financing, are subject to change at any time; (iii)
adverse changes in real estate markets including, among other things,
competition with other companies; (iv) adverse changes in the properties
Milestone owns which could require the expenditure of funds to fix or maintain
such properties; (v) the general risks of real estate development and
acquisitions, such as changes in demographics, construction delays, cost
overruns, work stoppages and slowdowns, the cost and availability of skilled
labor and weather conditions; (vi) governmental actions and initiatives, such as
seizures of property, condemnation and construction of alternative roadways;
(vii) environmental and safety conditions and hazards; (viii) the adequacy of
Year 2000 compliance measures; and (ix) other risks and uncertainties indicated
from time to time in Milestone's filings with the Securities and Exchange
Commission and
9
<PAGE>
in the documents incorporated herein by reference. Although Milestone believes
that the assumptions underlying its forward-looking statements are reasonable,
any of the assumptions could prove inaccurate and, therefore, Milestone cannot
make any assurances that the results contemplated in such forward-looking
statements will be realized. The inclusion of such forward- looking information
should not be regarded as a representation by Milestone or any other person that
the future events, plans or expectations contemplated by Milestone will be
achieved. Furthermore, past performance is not necessarily an indicator of
future performance.
The Company is engaged in the business of owning, acquiring, managing,
developing and investing in commercial real estate and real estate related
assets. The Company is primarily engaged in the ownership, operation and
management of interests in commercial real estate properties, currently (as of
the date of this filing) consisting of (i) 10 properties owned in fee (the "Fee
Properties"), (ii) the ownership of wraparound notes (the "Wraparound Notes")
and wraparound mortgages (the "Wraparound Mortgages" and, together with the
Wraparound Notes, the "Wrap Debt") which are secured by 17 commercial real
properties (the "Underlying Properties" and, together with the Fee Properties,
the "Properties") and (iii) the operation and management of the Properties. At
September 30, 1999, the Company possessed interests in 32 commercial real estate
properties consisting of (i) 10 Fee Properties and (ii) Wrap Debt interests in
22 Underlying Properties. At September 30, 1998, the Company possessed interests
in 33 commercial real properties consisting of (i) 6 Fee Properties and (ii)
Wrap Debt interests in 27 Underlying Properties.
Impact of Year 2000
The Year 2000 problem arises from the historic use of only two digits (rather
than four) for the designation of a year in date information within computer
programs. If not corrected, any of the Company's equipment or software programs
that perform time sensitive calculations may incorrectly identify the year 2000
and beyond or not function after December 31, 1999. This could result in
miscalculations or a major failure of certain systems. The Company may also be
vulnerable to the Year 2000 problems of its tenants, financial institutions or
other service vendors and/or other companies with which it conducts business
(e.g., utility companies, etc).
Early in calendar year 1998, the Company developed and initiated a Year 2000
compliance program, including information systems modifications, in an effort to
ensure that its business is not interrupted by the Year 2000 problem. The
Company's Year 2000 compliance program is broken into the following components:
Renovating internal systems and applications and ensuring compliance of
peripheral third party systems. The Company's internal systems and applications
include the accounting system, the lease asset management system and the
operating system (AS 400). As a result of the Company's commitment to ensure
that its systems are year 2000 compliant, management decided to replace the old
AS400 with a new AS400. The new AS400 was installed during September 1999. The
Company uses a number of third party package systems to supplement its
internally developed programs. From time to time, the Company updates the
accounting system and the operating system with upgrades it receives from the
software manufacturers. The software manufacturers have informed the Company
that they will continue to provide all updates necessary for such systems to be
Year 2000
10
<PAGE>
compliant. These software manufacturers have provided all such upgrades to the
Company which has installed all updates received to date. The lease asset
management system is in the final stages of testing.
Ensuring Year 2000 compliance by external companies that conduct business with
the Company. The Company has contacted all of its major tenants which remit rent
and other payments to the Company and financial institutions which process the
rental and other payments from major tenants on behalf of the Company, to
inquire about their Year 2000 compliance. The Company has not received responses
from all those contacted, but those who have responded have not indicated any
problems at this time.
Implementing standards and conducting testing in an effort to ensure that the
Company's existing and future systems are Year 2000 compliant. All new systems,
whether hardware or software, are tested before implementation in an effort to
ensure Year 2000 compliance.
The Company believes that the total cost of its Year 2000 compliance program
will not exceed $50,000. The new AS400 will be leased over the next 5 years at
an annual lease rate of $7,500. To date, the Company has incurred approximately
$15,000 of such expenses which includes hardware and software purchases and
upgrades. The Company does not anticipate that the costs of any required
modifications to its information technology or embedded technology systems will
have a material adverse effect on its financial position, results of operations
or liquidity, although there can be no assurances that this will be the case.
Although the Company systems upgrading was finalized during September 1999,
there can be no assurances that the system will work properly independently or
in conjunction with the systems of any third parties. In addition, the Company
would continue to bear the risk of a material adverse affect, if any, if its
third party systems do not appropriately address their own Year 2000 compliance
issues. The Company's current estimates of the impact of the Year 2000 problem
on its operations and financial results do not include costs and time that may
be incurred as a result of other companies' failure to become Year 2000
compliant on a timely basis, which costs could be material. There can be no
assurance that such other companies will achieve Year 2000 compliance or that
any conversions by such companies to become Year 2000 compliant will be
compatible with the Company's computer and operating systems. The inability of
the Company or any of its material third parties to become Year 2000 compliant
in a timely manner could have a material adverse effect on the Company's
financial condition or results of operations.
In the event that the Company or material third parties fail to complete their
Year 2000 compliance programs successfully and on time, the Company's ability to
operate its business, service tenants, bill, collect its revenue in a timely
manner, pay debts and communicate generally could be adversely affected.
Although there can be no assurance that the conversion of the Company's systems
will be successful or that the Company's key third-party relationships will have
successful conversion programs, management does not expect that any such failure
would have a material adverse effect on the financial position, results of
operations or liquidity of the Company, although there can be no assurances that
this will be the case.
The Company has day-to-day operational contingency plans, and management is in
the process of updating these plans for possible Year 2000 specific operational
requirements. If the Company's
11
<PAGE>
major tenants, financial institutions or third party systems are not Year 2000
compliant, it may have to arrange for alternative sources of services in the
fall of 1999 in preparation for the Year 2000. The Company does not have any
other contingency plans with respect to other problems that could arise in its
business as a result of the Year 2000 problem. Any of these could have a
material adverse effect on the Company's financial condition or results of
operations.
Results of Operations
Three Months Ended September 30, 1999 compared to Three Months Ended September
30, 1998
For the three months ended September 30, 1999, the Company recognized a net loss
of $672,341, or $0.16 per share of common stock, on total revenues of
$4,943,530. For the three months ended September 30, 1998, the Company
recognized a net gain of $371,453, or $0.09 per share of common stock, on total
revenues of $6,331,620.
Total revenues for the three months ended September 30, 1999 were $4,943,530, as
compared to $6,331,620 for the three months ended September 30, 1998, a decrease
of $1,388,090, or 22%.
Rent decreased by $599,604, or 25%, to $1,815,324 for the three months ended
September 30, 1999 as compared to $2,414,928 for the three months ended
September 30, 1998. This decrease is primarily due to property sales in 1998 and
1999.
Interest income decreased by $1,043,795, or 47% to $1,172,416 for the three
months ended September 30, 1999 compared to $2,216,211 the three months ended
September 30, 1998. This decrease is primarily due to property sales in 1998 and
1999 by the owners of the underlying properties which caused the Company to
receive final payment in the respective year of sale on wraparound notes held by
the Company.
Gain on sale of real estate and real estate related assets was $1,488,523 for
the three months ended September 30, 1999 as compared to $1,284,617 for the
three months ended September 30, 1998. The increase is due to the sale of the
Franklin property during the third quarter of 1999.
Total expenses for the three months ended September 30, 1999 were $4,650,885, as
compared to $6,327,988 for the three months ended September 30, 1998, a decrease
of $1,677,103, or 27%, due primarily to a decrease in master lease expense of
$1,872,598 resulting from a decrease in the number of properties leased by the
Company as a result of the sale of some of the underlying properties by their
owners during 1998 and 1999.
Interest expense for the three months ended September 30, 1999 was $914,896, a
decrease of $430,106, or 32%, from $1,345,002 for the three months ended
September 30, 1998. Such decrease is due to a reduction in the underlying debt
of the Company resulting from property sales in 1998 and 1999.
Salaries, general and administrative expense for the three months ended
September 30, 1999 was $1,219,811, an increase of $636,797, or 109% from
$583,014 for the three months ended September 30, 1998. The increase is due to
the Company's repurchase of 222,200 options to purchase shares of the Company's
common stock from certain executives of the Company for approximately $650,000,
12
<PAGE>
which amount represents the excess of the current market price of the common
stock over the exercise price of the options.
Nine Months Ended September 30, 1999 compared to Nine Months Ended September 30,
1998
For the nine months ended September 30, 1999, the Company recognized a net loss
of $943,883, or $0.22 per share of common stock, on total revenues of
$14,031,777. For the nine months ended September 30, 1998, the Company
recognized a net loss of $1,199,343, or $0.28 per share of common stock, on
total revenues of $17,341,260.
Total revenues for the nine months ended September 30, 1999 were $14,031,777, as
compared to $17,341,260 for the nine months ended September 30, 1998, a decrease
of $3,309,483, or 19%.
Rent decreased by $1,954,358, or 25% to $5,804,790 for the nine months ended
September 30, 1999 as compared to $7,759,148 for the nine months ended September
30, 1998. This decrease is primarily due to property sales in 1998 and 1999.
Interest income decreased by $2,770,355, or 41% to $3,913,787 for the nine
months ended September 30, 1999 compared to $6,684,142 for the nine months ended
September 30, 1998. This decrease is primarily due to property sales in 1998 and
1999 by the owners of the underlying properties which caused the Company to
receive final payment in the respective year of sale on wraparound notes held by
the Company.
Gain on sale of real estate and real estate related assets was $2,762,316 for
the nine months ended September 30, 1999 compared to $1,366,507 for the nine
months ended September 30, 1998. The increase is due to the property sales of
Pascagoula, Baton Rouge and Franklin.
Total expenses for the nine months ended September 30, 1999 were $13,810,424, as
compared to $19,894,046 for the nine months ended September 30, 1998, a decrease
of $6,083,622, or 31%, due primarily to a decrease in master lease expense of
approximately $5,140,868 resulting from a decrease in the number of properties
leased by the Company as a result of the sale of some of the underlying
properties by their owners during 1998 and 1999.
Interest expense for the nine months ended September 30, 1999 was $2,904,141, a
decrease of $1,541,466, or 35%, from $4,445,607 for the nine months ended
September 30, 1998. Such decrease is due to a reduction in the underlying debt
of the Company resulting from property sales in 1998 and 1999.
Salaries, general and administrative expense for the nine months ended September
30, 1999 was $2,654,853 an increase of $867,483, or 49% from $1,787,370 for the
nine months ended September 30, 1998. The increase is primarily due to the
repurchase of 222,200 options to purchase shares of the Company's common stock,
from certain executives of the Company for approximately $650,000, which amount
represents the excess of the current market price of the common stock over the
exercise price of the options.
13
<PAGE>
Cash Flows
For the nine months ended September 30, 1999, the Company had a decrease in cash
and cash equivalents of $5,656,663, as compared to a decrease in cash and cash
equivalents of $235,593 for the nine months ended September 30, 1998. For the
nine months ended September 30, 1999, cash used in operating activities was
$12,455,460, cash provided by investing activities was $11,974,576 and cash used
in financing activities was $5,175,779. The decrease in cash and cash
equivalents is primarily due to the payment of approximately $8,949,000 of cash
to the exchange agent in connection with the cancellation of Series A Preferred
Stock in accordance with the settlement of the Winston Actions (the "Winston
Settlement Agreement"). For a detailed description of the other Winston Actions,
the settlement thereof, please see the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999 (and the cross-references therein).
Liquidity and Capital Resources
Approximately $2,883,000 of underlying debt on the property located in Quincy,
Illinois, (the "Quincy Property") came due in July 1998. The mortgagee holding
the underlying debt did not demand payment while the partnership that owns the
Quincy Property attempted to sell the Quincy Property. Although the underlying
debt on the Quincy Property has not been satisfied, regular monthly debt
payments have been made by the Company through March 1999. On March 1, 1999, the
mortgagee holding the underlying debt sent a demand letter seeking to collect
the outstanding balance. At this time, the partnership that owns the Quincy
Property expects to convey ownership and title of the property to the mortgagee.
If conveyance occurs, the Company expects to record a book gain of approximately
$1,660,000 but no cash proceeds.
During 1999, the Company has invested approximately $1,035,000 in joint venture
partnerships with unrelated third parties, which has contracted for the
acquisition of four land parcels in the South Florida area. Currently, all such
investment is at risk.
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.
As a result of, and in connection with, the settlement of the Winston Actions,
the Company has disbursed approximately $10.3 million, which amount includes
$1.7 million which is held in trust by the exchange agent as settlement
consideration to be paid to Series A Preferred Stockholders, defendants's and
plaintiff's attorneys fees, court and Commission filing fees, printing costs and
other expenses. The Company, however, is considering whether to, and ways it
could, raise cash to make additional investments in suitable real estate
properties. If the Company determines to raise additional funds, it may decide
to do so through a public or private sale of debt or equity securities, by
selling or realizing on assets (including, but not limited to, sales of its
properties and interest in the Wrap Debt), through corporate borrowings, or by
other means.
14
<PAGE>
Other than 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.
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
At September 30, 1999, the Company was not invested in any market risk sensitive
instruments held for either trading purposes or for purposes other than trading.
Also, the Company does not have any variable or adjustable rate mortgages on any
of its properties. As a result, the Company is not subject to interest rate
risk, foreign currency exchange rate risk, commodity price risk, or other
relevant market risks, such as equity price risk.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, the Company is the plaintiff in a Florida state court
action against certain insurance companies (the "National Union Action") for
their refusal to contribute to the settlement of certain previously-reported
actions (known as the "Winston Actions") which involved the Company and certain
of its present and former officers and directors. The National Union Action is
currently in discovery, and the Company is not in a position to render an
opinion as to its outcome.
For a detailed description of the other Winston Actions, the settlement thereof,
and the commencement of the National Union Action, please see the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (and the
cross-references therein).
Item 2. Other Information
Milestone's Board of Directors determined not to declare any dividends on the
Series A Preferred Stock during the years ended December 31, 1996, 1997 and 1998
and during the nine months ended September 30, 1999. 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 have not been
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 declare a dividend for the quarter ended June 30, 1997,
which was the sixth consecutive quarter for which no dividend was declared, the
number of persons entitled to serve as directors on Milestone's Board of
Directors has been increased by one, and the holders of the Series A Preferred
Stock, who are otherwise entitled to elect one member of the Board of Directors,
became entitled to elect a second member of the Board of Directors to fill such
newly created directorship. At the annual meeting of stockholders on May 28,
1999, the Series A Preferred Stockholders elected Harvey Shore to the Board of
Directors to fill such newly created directorship. Any decision as to the future
payment of dividends on the Series A Preferred Stock will depend on the results
of operations and the financial condition of the Company and such other factors
as Milestone's Board of Directors, in its discretion, deems relevant. See Part
I-Financial Information, Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation, Liquidity and Capital Resources.
16
<PAGE>
Item 3. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
27 Financial Data Schedule Article 5 included for
Electronic Data Gathering, Analysis and Retrieval
(EDGAR) purposes only. This Schedule contains
summary financial information extracted from the
consolidated balance sheets and consolidated
statements of revenues and expenses of the Company
as of and for the nine month period ended September
30, 1999, and is qualified in its entirety by
reference to such financial statements.
(b) Reports on Form 8-K: There were no reports filed on Form 8-K
during the third quarter of 1999.
17
<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.
(Registrant)
Date: November 12, 1999 By /s/ Robert A. Mandor
---------------------------------------
Robert A. Mandor
President and Chief Financial Officer
Date: November 12, 1999 By /s/ Patrick S. Kirse
---------------------------------------
Patrick S. Kirse
Vice President of Accounting
(Principal Accounting Officer)
18
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,169,638
<SECURITIES> 0
<RECEIVABLES> 5,997,201
<ALLOWANCES> 0
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<CURRENT-ASSETS> 15,271,019
<PP&E> 23,969,415
<DEPRECIATION> 2,667,308
<TOTAL-ASSETS> 69,766,040
<CURRENT-LIABILITIES> 16,356,499
<BONDS> 0
0
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<COMMON> 49,436
<OTHER-SE> 13,715,996
<TOTAL-LIABILITY-AND-EQUITY> 69,766,040
<SALES> 0
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<CGS> 0
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<INCOME-PRETAX> 221,353
<INCOME-TAX> 1,165,236
<INCOME-CONTINUING> (943,883)
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