Item 1. Business.
Introduction
Milestone Properties, Inc., 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 the ownership, operation and management of interests in commercial real estate properties, currently 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 25 commercial real properties (the "Underlying Properties" and, together with the Fee Properties, the "Properties") and (iii) the operation and management of the Properties. The Properties include shopping centers, strip malls and single tenant properties and
have an aggregate gross leasable area ("GLA") of 2,218,645 square feet, of which 435,386 square feet are in the Fee Properties and 1,783,259 square feet are in the Underlying Properties. Additional information regarding the Properties is set forth in Table 1. Summary of Properties and Underlying Debt located in Item 2.
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 35 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 such property. 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.
Table 1. Summary of Properties and Underlying Debt
Table continues and footnotes appear on the following page.
Table continues and footnotes appear on the following page.
Table 1. Summary of Properties and Underlying Debt - continued
Table continues and footnotes appear on the following page.
(1) Annual real estate taxes are the responsibility of the tenant. (2) Represents a Fee Property. (3) Principal and interest are paid semi annually in accordance with the respective bond documents. (4) Represents a shopping center. (5) Represents a strip mall. (6) Represents a free standing department store.
Table 2. Summary of Wraparound Notes at December 31, 1998
Table continues the following page.
Item 3.
Item 3. Legal Proceedings.
During 1996 Milestone, certain past and present members of its Board of Directors, executive officers, and Concord were named as defendants in a purported class action and derivative lawsuit (the "Winston Actions") commenced in the Court of Chancery of the State of Delaware (the "Delaware Court"). In the actions, the plaintiff, a Series A Preferred Stockholder purporting to bring the action on behalf of himself, all other Series A Preferred Stockholders and derivatively on behalf of Milestone, alleged that in connection with the Acquisition and certain related transactions (collectively, the "Transactions"), Milestone and its directors engaged in self-dealing, violated federal securities laws and an injunction against such violations and breached their fiduciary duties 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 which were not transferred to UPI in the Transfer were grossly inferior to the properties that were transferred to UPI.
On August 5, 1998, the counsel for the named plaintiff in the Winston Actions and the counsel for the defendants entered into a Stipulation and Agreement of Settlement (the "Winston Settlement Agreement") which memorialized the terms of a settlement (the "Winston Settlement") of the Winston Actions. On January 28, 1999, the Delaware Court approved the Winston Settlement Agreement, which approval became final effective as of the close of business on March 5, 1999. At such time, (i) the shares of Series A Preferred Stock owned by each Series A Preferred Stockholder who was eligible to participate in the Winston Settlement and who did not properly opt out of the Winston Settlement and who owned shares of Series A Preferred Stock as of the close of business on March 5, 1999 were canceled and represented only the right of such Series A Preferred Stockholder to receive $3.00 in cash from the Company in exchange for each such share; (ii) the holders of shares of the Series A Preferred Stock between October 23, 1995 and the close of business on March 5, 1999, other than Series A Preferred Stockholders who properly opted out of the Winston Settlement Agreement or who were precluded from participating in the Winston Settlement, released any and all claims they may have had against the Company and the other named defendants in connection with the Transactions; (iii) Milestone's stockholders other than Series A Preferred Stockholders who were eligible to participate in the Winston Settlement and who properly opted out of the Winston Settlement released all derivative claims in connection with the Transactions; and (iv) the Winston Actions were dismissed. In connection with the Winston Actions, the Company retained counsel for all of the defendants (including, without limitation, Leonard S. Mandor, Robert A. Mandor, Harvey Jacobson, Gregory McMahon and Geoffrey Aaronson (each of whom is a director and/or officer of the Company)) and assumed responsibility for the payment of all legal fees incurred by such persons in connection with the Winston Actions and the Winston Settlement (subject to the insurance coverage litigation described below).
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 by the Company with the Commission on August 14, 1998 as Exhibit 10.01 to Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998.
The Company maintains a directors and officers insurance and company reimbursement policy (the "National Policy") issued by National Union Fire Insurance Company of Pittsburgh, PA ("National Union") with a $2,000,000 limit and an excess directors and officers liability and company reimbursement policy (the "Stonewall Policy") issued by Stonewall Surplus Lines Insurance Company, now known as American Dynasty Surplus Lines Insurance Company ("Stonewall"), with a $2,000,000 limit. The Company believes that the amounts that it has to pay pursuant to the Winston Settlement and in connection with the Winston Actions are covered losses under both the National Union Policy and the Stonewall Policy. In addition, the Company believes that the legal fees and other expenses incurred by the Company and the other defendants in connection with the Winston Actions are also covered losses under the National Union Policy and the Stonewall Policy. In connection with a previous proposed settlement of the Winston Actions which was never consummated, National Union and Stonewall both refused to contribute to such proposed settlement, asserting that such proposed settlement did not encompass any covered loss (as defined in the National Policy and the Stonewall Policy, respectively). On January 29, 1998, the Company commenced a lawsuit in the United States District Court for the Southern District of New York against National Union and Stonewall in connection with such refusal to contribute to such proposed settlement. In the complaint, the plaintiffs alleged that National Union and Stonewall wrongfully failed to contribute to the proposed settlement and sought reimbursement from National Union and Stonewall up to the limits of their respective policies. National Union and Stonewall both answered the complaint and denied liability. As a result of the termination of the previously proposed settlement, the Company on one hand, and Stonewall and National Union, on the other hand, agreed to dismiss such action without prejudice and such action was dismissed on May 29, 1998 by the United States District Court for the Southern District of New York. The Company gave both National Union and Stonewall notice of the Winston Settlement and provided each of them with a copy of the Winston Settlement Agreement on August 12, 1998. National Union and Stonewall reviewed the Winston Settlement Agreement and separately informed the Company that their basic position, denying coverage, had not changed. On February 12, 1999, the Company commenced a lawsuit in the Circuit Court for the Fifteenth Judicial Circuit in and for Palm Beach County, Florida against both National Union and Stonewall alleging, among other things, that National Union and Stonewall have wrongfully refused to contribute to the Winston Settlement and seeking reimbursement from National Union and Stonewall up to the limits of their respective policies. The initial complaint in the new lawsuit was served on each of National Union and Stonewall on February 12, 1999 and on March 17, 1999 the Company filed an amended complaint, which, among other things, added the other defendants to the Winston Actions as plaintiffs. National Union and Stonewall have until March 29, 1999 to answer the amended complaint. In connection with this action, the Company has retained counsel for all of the plaintiffs and is assuming responsibility for the payment of all legal fees incurred by such persons in connection with this action. At this time, the Company is not in a position to render an opinion as to the outcome of this action.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the security holders, through the solicitation of
proxies or otherwise, during the fourth quarter of the fiscal year ended December 31, 1998.
PART II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
The Common Stock and the Series A Preferred Stock traded on the New York Stock Exchange (the "NYSE") under symbols "MPI" and "MPI PRA", respectively, from January 29, 1991 through July 3, 1998. The NYSE suspended trading in shares of the Common Stock and Series A Preferred Stock prior to the market opening on July 6, 1998 because it had determined that Milestone had fallen below certain of the NYSE's continued listing criteria relating to net income and market value of publicly held shares of the Common Stock and Series A Preferred Stock. The Company has learned that on or about July 6, 1998, a market began to be made for shares of the Common Stock and Series A Preferred Stock on the Over-The-Counter (the "OTC") Bulletin Board with the ticker symbols"MPRP"and "MPRPP", respectively. The NYSE subsequently applied to the Securities and Exchange Commission (the "Commission") to delist the Common Stock and Series A Preferred Stock and, on September 10, 1998, the Commission issued an order granting the NYSE's application to delist the Common Stock and Series A Preferred Stock. Effective as of the opening of the trading session on September 11, 1998, the Common Stock and Series A Preferred Stock were de-listed from the NYSE.
The following tables set forth the high and low sales prices for the Common Stock and the Series A Preferred Stock, as reported on the NYSE, for each quarterly period for the 1997 fiscal year and the 1998 fiscal year (January 1, 1998 through July 3, 1998). In addition, the table also sets forth the high and low bid quotations for the Common Stock and the Series A Preferred Stock, as reported on the OTC Bulletin Board, for the period from July 6, 1998 through December 31, 1998. The high and low bid quotations for the Common Stock and Series A Preferred Stock represent prices between broker-dealers, and do not include retail mark-ups or mark-downs or any commission to the broker-dealer and may not represent actual transactions.
On March 12, 1999, the average bid and asked price of the Common Stock was $1.25 and the average bid and asked price of the Series A Preferred Stock was $2.82. On March 12, 1999, there were approximately 1,853 record holders of the Common Stock and six record holders of the Series A Preferred Stock.
At the close of business on March 5, 1999, Milestone canceled and retired 2,983,284 shares of Series A Preferred Stock, representing more than 99% of the then outstanding shares of Series A Preferred Stock, pursuant to the terms of the Winston Settlement. See Item 3. Legal Proceedings for a description of the Winston Settlement.
Dividend Policy
Common Stock
Milestone has never declared 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 declare 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 declaration 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 declare any dividends on the Series A Preferred Stock during the years ended December 31, 1998, 1997 and 1996. 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.
Since 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 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. 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.
Item 6.
Item 6. Selected Financial Data.
(Amounts in thousands, except per share information)
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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.
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.
The Company is engaged in the business of owning, acquiring, managing, developing and investing in commercial real estate and real estate related assets.
Recent Developments
The settlement of the Winston Actions became effective at the close of business on March 5, 1999. At such time, pursuant to the terms of the Winston Settlement, Milestone canceled and retired 2,983,284 shares of Series A Preferred Stock, representing more than 99% of the then outstanding shares of Series A Preferred Stock. See Item 3. Legal Proceedings for a description of the Winston Settlement and Liquidity and Capital Resources within this section for a discussion of the costs associated with the Winston Settlement.
Effective as of the opening of the trading session on September 10, 1998, the Common Stock and Series A Preferred Stock were delisted from the NYSE. See Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
Acquisition and Disposition of Real Estate and Real Estate Related Assets
During 1998, the Company purchased, as fee owner, seven commercial real estate properties located in the state of Florida for approximately $18,500,000 (the "Purchases"). In connection with the Purchases, the Company obtained approximately $15,400,000 of first mortgage loans which bear interest at rates ranging from 7.0% to 8.0%. The properties acquired in the Purchases represent approximately 56% of the GLA of the Fee Properties.
During 1998, approximately $14,800,000 of wraparound notes held by the Company were satisfied as a result of the sales(the "Sales") of the underlying properties by their owners which are affiliates of the Company (i.e. the Partnerships which owned the underlying properties). As a result of the Sales, the Company was no longer obligated to make payment on approxiamately $17,000,000 of underlying debt.
On July 7, 1998, the Company sold approximately $16,500,000 of commercial real estate, net of accumulated depreciation, located in the state of Oregon (the "Sale"). In connection with the Sale, the Company satisfied the balance of the first mortgage loan of approximately $17,065,000 (which represented approximately 23% of the Company's total liabilities at the time of sale).
Results of Operations
Calendar Year 1998 Compared to Calendar Year 1997
For the year ended December 31, 1998, the Company reported a net loss of $8,431,112, or $1.99 per common share, on total revenues of $25,515,391. These results include a nonrecurring charge of approximately $7,084,000 related to the settlement of the Winston Actions. See Part I-Item 3. Legal Proceedings for a description of the settlement. For the year ended December 31, 1997, the Company reported a net loss of $3,430,731 on total revenues of $30,091,911, or $0.82 per common share. The 1997 results included a charge of approximately $2,590,000 related to the fair value adjustment of the wraparound notes.
Total revenues for the year ended December 31, 1998 were $25,515,391, as compared to $30,091,911, for the year ended December 31, 1997, a decrease of $4,576,520, or 15%, due to the following:
Rent decreased $532,575, or 5%, in 1998 compared to 1997. This decrease is primarily due to the net of: (1) property sales, as previously described, which caused a decrease in rent revenue of approximately $1,539,000 which is offset by (2) the property purchases, as previously described, which caused an increase in rent revenue of approximately $1,006,000.
Interest income decreased $5,164,478, or 39%, for the year ended December 31, 1998 compared to the year ended December 31, 1997. This decrease is primarily due to: (1) the sale, by the Company, of all four of its remaining mortgage backed securities during 1997 which caused a decrease in interest income of approximately $3,655,000 and (2) a decrease of approximately $1,436,000 in interest income as a result of the Company receiving payment on wraparound notes, as previously described, held by the Company as a result of the sales of the underlying properties by its owners.
For the year ended December 31, 1998 the Company had gains on the sale of real estate and real estate related assets of $5,617,844 as compared to gains on the sale of real estate and real estate related assets of $316,061 for the year ended December 31, 1997.
During the year ended December 31, 1998, the Company did not have any available-for-sale securities or U.S. Treasury Notes. All of the available-for-sale securities and U.S. Treasury Notes were sold during 1997 as a result of the Company selling all four of its remaining mortgage backed securities during 1997 which resulted in a net gain of approximately $3,195,000 for the year ended December 31, 1997 and no such gain for the year ended December 31, 1998.
Total operating expenses for the year ended December 31, 1998 were $19,221,231, as compared to $21,686,805, for the year ended December 31, 1997, a decrease of $2,465,574, or 11%, due to the following:
Master lease expense decreased $1,427,752, or 10%, due to 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.
Salaries, general and administrative expenses decreased $1,080,948, or 27% primarily due to (1) a decrease in salary expense of approximately $999,000 as the result of a decrease in bonuses for several executive officers of the Company for the year ended December 31, 1998 and (2) a decrease in rental expense of approximately $563,000 for the corporate offices for the year ended December 31, 1998 compared to the same period in 1997.
Professional fees increased $352,161, or 38% due primarily to fees associated with the Winston Actions and the Winston Settlement. See Part I-Item 3. Legal Proceedings for a description of the Winston Actions and the Winston Settlement.
Interest expense for the year ended December 31, 1998 was $5,474,451, a decrease of $3,645,103 or 40%, from $9,119,554 for the year ended December 31, 1997. Such decrease was primarily due to: (1) a decrease in interest expense of approximately $2,365,000 due to U.S. Treasury Note(s) short positions which were closed simultaneously with the disposition during 1997, by the Company, of all four of the remaining mortgage backed securities then held by the Company and (2) a net decrease in interest expense of approximately $1,063,000 on the underlying debt as a result of the property sales, as previously described, which were offset by the property purchases, as previously described, during 1998.
Depreciation and amortization for the year ended December 31, 1998 was $913,527, an increase of $66,142 or 8%, from $847,385 for the year ended December 31, 1997. Such increase was primarily due to property purchases, as previously described, and property improvements during 1998 which is offset by property dispositions, as previously described.
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 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-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 $1,221,207 or 5%, from $22,908,012 for the year ended December 31, 1996. Such decrease was primarily due to the net of: (1) a decrease in master lease expense of $1,221,258 due to 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; (2) a decrease in property expenses of $299,971 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 administrative 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.
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 improvement purchases made during 1996.
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.
Cash Flows
For the year ended December 31, 1998, cash used in operating activities was $6,567,933, cash provided by investing activities was $24,721,432 and cash used in financing activities was $19,762,435. The primary uses and provision of these funds was a direct result of the property purchases and sales, as previously described, by the Company during 1998, as well as the payments received by the Company on its wraparound notes, as previously described, as a result of the sale of the related underlying property, by its owner, an affiliate of the Company (i.e., the Partnership that owned the underlying property).
For the year ended December 31, 1997 net cash used in operating activities of $6,073,949 included (1) a net loss of $3,430,731, (2) adjustments of $1,172,247 for non-cash items 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) a net loss of $2,486,974, (2) adjustments of $728,499 for non-cash items and (3) a net change in operating assets and liabilities of $431,614.
For the year ended December 31, 1997 net cash provided by investing activities of $47,421,221 included (1) proceeds from principal payments on loans receivable and wraparound notes of $4,750,010, (2) the investment in 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 the 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) the investment in 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.
For the year ended December 31, 1997 net cash used in financing activities of $31,053,874 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 Stock holders, (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.
Liquidity and Capital Resources
The Company, as the holder of 44,550 shares of Series C Redeemable Preferred Shares of Kranzco Realty Trust, a Maryland real estate investment trust ("Kranzco") as of December 31, 1998, received from the redemption of such shares, in one installment on January 29, 1999, an aggregate amount of cash equal to approximately $445,500, plus interest at the rate of 8% per annum on the applicable outstanding balance of such shares. Such redemption payment liquidated the Company's holdings of the Kranzco Series C Redeemable Preferred Shares, and accordingly, the Company is not entitled to future redemption payments on such shares.
The Underlying Debt on the Quincy Property came due in July 1998. Beginning July 1998, the mortgagor on the Underlying Debt did not demand payment while the Partnership, which 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 mortgagor of the Underlying Debt sent a demand letter seeking to collect the outstanding balance of the Underlying Debt of approximately $2,910,000.
The Underlying Debt of approximately $850,000 on the Fee Property located in Zanesville, Ohio (the "Zanesville Property") came due in October 1998 and the mortgagor on the Underlying Debt extended the balance due to May 1999. The Company is currently seeking to refinance the Zanesville Property.
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 make any payments required by the Winston Settlement.
As a result of, and in connection with, the settlement of the Winston Actions, the Company expects to disburse cash of approximately $10.5 million, including payments of the settlement consideration to Series A Preferred Stockholders, fees of the plaintiff's and defendant's lawyers, court and Securities and Exchange Commission filing fees, printing costs and other expenses. Although the expected expenditures of such funds represents a substantial amount of the Company's cash reserves, the Company believes that it would have sufficient cash to continue operating in the ordinary course of business. 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 conducting rights offerings, 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. The Company does not currently have any plans with respect to, and may never decide to do, any of the foregoing. In addition, the Company has no current understandings or arrangements with respect to purchasing additional properties.
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.
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). 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 compliant. These software manufacturers have informed the Company that they anticipate all such upgrades will be provided to the Company by June 1999. The Company anticipates that it will then be able to implement by June 1999 such upgrades assuming such upgrades are received by June 1999. The lease asset management system is currently being updated to be Year 2000 compliant by the Company using in-house technology. The Company anticipates that this upgrade to the lease asset management system to be completed by September 1999.
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 the 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. For those financial institutions which process payroll electronically, which debits the Company's bank account and credits the employees' bank accounts, the Company will be conducting tests to determine Year 2000 compliance. These tests are expected to be completed by September 1999. If such financial institutions are not Year 2000 compliant by December 31, 1999, it is possible that employees will not receive direct deposit pay, or the correct amount of such pay, or that the Company's bank accounts will be debited incorrect amounts of money.
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. To date, the Company has incurred approximately $10,000 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 believes it will have its own systems compliant prior to September 1999, there can be no assurances that it will be able to do so nor can there be any assurances that, even if the Company completes timely its Year 2000 compliance program, the systems, when actually implemented in full, will work properly independently or in conjunction with the systems of any third party systems. 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 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.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
At December 31, 1998, the Company was not invested in any market risk sensitive instruments held for either trading purposes or for purposes other than trading. 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.
Item 8.
Item 8. Financial Statements and Supplementary Disclosure.
The Company's Consolidated Financial Statements and the notes thereto appear in Item 14 of this report.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
On October 28, 1998, the Company terminated its relationship with the accounting firm of Deloitte & Touche LLP as independent auditor of the Company's financial statements. The termination of the relationship with Deloitte & Touche LLP was not the result of any disagreements between the Company and Deloitte & Touche LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. On November 2, 1998, the Company retained the accounting firm of Ahearn, Jasco + Company, P.A. as its new independent auditor to audit the Company's financial statements for the fiscal year ending December 31, 1998. The decision to change accounting firms as the Company's independent auditor to audit the Company's financial statements was approved by the Audit Committee of the Company's Board of Directors on October 27, 1998.
For further information regarding the termination of the relationship with of Deloitte & Touche LLP and the retention of Ahearn, Jasco + Company, P.A. as the Company's independent auditor, see the Current Report on Form 8-K filed by the Company with the Commission on November 4, 1998.
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 1999 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.
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 sections in the Proxy Statement entitled "Election of Directors" and "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.
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 section in the Proxy Statement entitled "Executive Compensation" and "Compensation of Directors."
Item 12.
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 by reference to the section in the Proxy Statement entitled "Security Ownership of Certain Beneficial Owners and Management."
Item 13.
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 sections in the Proxy Statement entitled "Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions."
PART IV
Item 14.
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 Auditor's Report of Ahearn, Jasco + Company, P.A.
Independent Auditor's Report of Deloitte & Touche, LLP
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Revenues and Expenses - Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Comprehensive Loss - Years Ended December 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule. Schedule III Real Estate and Accumulated Depreciation S-1
This financial statement schedule of the Company for each of the years ended December 31, 1998, 1997 and 1996 is filed as part of this Form 10-K and should be read in conjunction with the Consolidated Financial Statements, and related notes thereto, of the Company. All other financial statement schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or notes thereto.
(a)(3) Exhibits.
The exhibits to this report are listed below:
Exhibit Description
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).
4.2 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).
4.3 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).
4.4 Specimen form of $.78 Convertible 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).
4.5 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 Amended 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).
10.2 Second 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-KSB filed with the Commission on March 30, 1993).
10.3 Purchase money promissory note purchase money mortgage and security agreement with The Benderson 85-1 Trust for the Tonawanda, New York, property (incorporated by referenced to Exhibit 10.33 to the Company's Form 10-QSB filed with the Commission on August 14, 1993).
10.4 1993 Employee Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Company's Form 10-KSB filed with the Commission on March 31, 1994).
10.5 1993 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).
Exhibit Description
10.6 Property 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 March 30, 1996).
10.7 Stipulation and Agreement of Settlement dated August 5, 1998, by and among John Winston and Leonard S. Mandor, Robert A. Mandor, Joan LeVine, Harvey Jacobson, Gregory McMahon, Geoffrey S. Aaronson, Milestone Properties, Inc. and Concord Assets Group, Inc. (incorporated by reference to Exhibit 10.01 to the Company's Form 8-K filed with the Commission on August 14, 1998).
10.8 Third Amendedment of Management Agreement dated January 1, 1998 between the Company and Concord (filed herewith).
10.9 Employment Agreement dated January 1, 1999, entered into between the Company and Leonard S. Mandor (filed herewith).
10.10 Employment Agreement dated January 1, 1999, entered into between the Company and Robert A. Mandor (filed herewith).
10.11 Employment Agreement dated January 1, 1999, entered into between the Company and Harvey Shore (filed herewith).
10.12 Employment Agreement dated January 1, 1999, entered into between the Company and Joseph P. Otto (filed herewith).
10.13 Employment Agreement dated January 1, 1999, entered into between the Company and Patrick S. Kirse (filed herewith).
10.14 Description of Management Incentive Plan (filed herewith)
10.15 Description of Long Term Incentive Plan (filed herewith)
21 Subsidiaries of the Company.
27 Financial Data Schedule Article 5 included for Electronic Data Gathering, Analysis and Retrieval (EDGAR) purposed only. This Schedule contains financial information extracted from the consolidated balance sheet and consolidated statements of revenues and expenses and is qualified in its entirety by reference to such financial statements.
(b) Reports on Form 8-K.
On October 16, 1998, a Current Report on Form 8-K was filed with the Commission reporting the sale of the South Williamson property located in South Williamson, Kentucky.
On November 4, 1998, a Current Report on Form 8-K was filed with the Commission reporting changes in the Company's certifying accountant.
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 25, 1999
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 25, 1999 - --------------------- Leonard S. Mandor Chairman of the Board and Chief Executive Officer
/s/ Robert A. Mandor March 25, 1999 - -------------------- Robert A. Mandor President, Chief Financial Officer and Director
/s/ Joseph P. Otto March 25, 1999 - ------------------ Joseph P. Otto Vice President and Director
/s/ Patrick S. Kirse March 25, 1999 - -------------------- Patrick S. Kirse Vice President of Accounting (Principal Accounting Officer)
/s/ Geoffrey Aaronson March 25, 1999 - ----------------------- Geoffrey Aaronson Director
/s/ Harvey Jacobson March 25, 1999 - ---------------------- Harvey Jacobson Director
/s/ Gregory McMahon March 25, 1999 - --------------------- Gregory McMahon Director
INDEPENDENT AUDITORS' REPORT
Milestone Properties, Inc.:
We have audited the accompanying consolidated balance sheet of Milestone Properties, Inc. and subsidiaries (the "Company") as of December 31, 1998, and the related consolidated statements of revenues and expenses, stockholders' equity and cash flows for the year then ended. Our audit also included the financial statement schedule of real estate and accumulated depreciation. These consolidated financial statements and the financial statement schedule of real estate and accumulated depreciation are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and the financial statement schedule of real estate and accumulated depreciation based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Milestone Properties, Inc. and subsidiaries at December 31, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule of real estate and accumulated depreciation, when considered in relation to the basic financial statements, presents fairly, in all material respects, the information set forth herein.
/s/ Ahearn, Jasco + Company, P.A. Pompano Beach, Florida
March 12, 1999
INDEPENDENT AUDITORS' REPORT
Milestone Properties, Inc.:
We have audited the accompanying consolidated balance sheet of Milestone Properties, Inc. and subsidiaries (the "Company") as of December 31, 1997 and the related consolidated statements of revenues and expenses, comprehensive loss, stockholders' equity and cash flows for the years ended December 31, 1997 and 1996. Our audits also included the information pertaining to 1997 and 1996 contained in 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 the results of their operations and their cash flows for the years ended December 31, 1997 and 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the information pertaining to 1997 and 1996 contained in 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
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
See Accompanying Notes to Consolidated Financial Statements
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES For the Years Ended December 31, 1998, 1997 and 1996
See Accompanying Notes to Consolidated Financial Statements
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS For the Years Ended December 31, 1997 and 1996
See Accompanying Notes to Consolidated Financial Statements
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1998, 1997 and 1996
See Accompanying Notes to Consolidated Financial Statements
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1998, 1997 and 1996
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) For the Years Ended December 31, 1998, 1997 and 1996
See Accompanying Notes to Consolidated Financial Statements
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES 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 hereinafter 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 interest 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 (the "Series A Preferred Stock"), having a $10 liquidation preference.
In October 1995, the Company entered into various agreements with affiliates of Concord Assets Group, Inc., a New York Corporation ("Concord"), pursuant to which the Company acquired (the "Acquisition") certain real estate related assets for approximately $700,000 in cash and approximately 2,545,000 share of Common Stock. 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 Properties Investors, Inc. ("UPI"). UPI was then re-capitalized 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 is primarily engaged in a single business industry, commercial real estate, which involves the ownership, operation and management of 35 interests in commercial real estate properties consisting of (i)10 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 25 commercial real properties (the "Underlying Properties" and, together with the Fee Properties, the "Properties"). The Company is also the master lessee (the "Master Lessee") under individual leases (the "Master Leases") on each of the Underlying Properties. The Properties are located in 15 states through 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. Inter-company accounts and transactions have been eliminated in the consolidated financial statements.
Basis of Accounting, Fiscal Year
The Company's records are maintained on an accrual basis of accounting for both financial and tax reporting purposes. The Company's 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 the 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.
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, 1998, 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 earning 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. At December 31, 1998 and 1997 there were no gains or losses associated with the available-for-sale securities that were excluded from earnings and reported as a separate component of stockholders' equity.
For the year ended December 31, 1998 there were no components of Comprehensive Income as defined by Financial Accounting Standards Board Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS No. 130"). As a result, no comprehensive income statement has been presented.
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. The allocation of costs between land and depreciable assets are based upon estimates made by management. 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 Master Lease.
Investment in Wraparound Notes
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 fair value of the underlying collateral, using internal analysis and independent appraisals when necessary. For the years ended December 31, 1998, 1997 and 1996, the Company provided a valuation allowance of $0, $2,590,132 and $189,853, respectively.
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 un-discounted 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 1998, 1997 and 1996.
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 future write-downs.
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.
Capital Structure
In February 1997, the Financial Accounting Standards Board issued SFAS No. 129, "Disclosure of Information about Capital Structure" which establishes standards for disclosing information about an entity's capital structure. SFAS No. 129 was effective for financial statement periods ending after December 15, 1997. SFAS No. 129 will not have any material effect on current or prior period financial statement display presented by the Company. The new standard continues the previous requirements to disclose certain information about an entity's capital structure as prescribed by Accounting Principles Board Opinion No. 15 ("APB 15"), "Earnings per Share".
Income Taxes
The Company accounts for income taxes in accordance with the SFAS No. 109, "Accounting for Income Taxes" which requires the recognition of deferred tax assets and liabilities at currently enacted tax rates for the expected future tax benefits or consequences of events that have been included in the financial statements and tax returns. Deferred taxes are provided for the temporary differences between the tax basis of the assets and liabilities and the amounts reported in the financial statements. A valuation allowance is recognized, if necessary, to reduce the net deferred tax asset to an amount that is more likely than not to be realized.
Loss per Common Share
The Company has adopted SFAS No. 128, "Earnings per Share" which requires companies with complex capital structures or common stock equivalents to present both basic and diluted earnings per share ("EPS") on the face of the income statement. Basic EPS is calculated as income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated using the "if converted" method for convertible securities and the treasury stock method for options and warrants as previously prescribed by APB No. 15, "Earnings per Share." The adoption of SFAS No. 128 did not have an impact on the Company's reported results.
Basic and diluted earnings per share are based on the same weighted average number of shares of common stock and common stock equivalents outstanding, which were 4,235,245, 4,206,550 and 3,845,546 for the years ended December 31, 1998, 1997 and 1996, respectively. Convertible Series A Preferred Stock amounts have been excluded from the weighted average shares for 1998, 1997 and 1996 as inclusion would be anti-dilutive. Options to purchase 313,700 shares of common stock in 1998 and 1997 and 176,000 in 1996, were outstanding at each year end but were not included in the computation of diluted earnings per share as inclusion would be anti-dilutive.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1998 financial presentation.
3. Acquisition and Disposition of Real Estate and Real Estate Related Assets
On November 10, 1998, the Company completed the purchase of Lincoln Park, a 46,190 square foot strip mall located in Davie, Florida (Broward County), from an unrelated third party for $3,840,000. In connection with the purchase, the Company obtained a $3,219,000 first mortgage loan which bears interest at a rate of 7.58% per annum. Such first mortgage requires monthly principal and interest payments of $22,684 based upon a 30 year self liquidating amortization schedule, with a balloon payment of approximately $2,854,000 due November 1, 2008. The strip mall is currently 97% occupied by local tenants who are subject to operating leases ranging from one to five years with various renewal options.
On October 27, 1998, the Company completed the purchase of Pine Crest Square, a 40,408 square foot strip mall located in Fort Lauderdale, Florida (Broward County), from an unrelated third party for $3,200,000. In connection with the purchase, the Company obtained a $2,400,000 first mortgage loan which bears interest at a rate of 7.0% per annum. Such first mortgage requires monthly principal and interest payments of $15,967 based upon a 30 year self liquidating amortization schedule, with a balloon payment of approximately $2,063,000 due November 11, 2008. The strip mall is currently 97% occupied by local tenants subject to operating leases ranging from one to 19 years with various renewal options.
On October 13, 1998, the Company completed the purchase of Mandarin Central, a 63,346 square foot strip mall located in Jacksonville, Florida (Duval County), from an unrelated third party for $4,650,000. In connection with the purchase, the Company obtained a $3,950,000 first mortgage loan which bears interest at a rate of 8.0% per annum. Such first mortgage requires monthly principal and interest payments of $28,984 based upon a 30 year self liquidating amortization schedule, with a balloon payment of approximately $3,542,000 due October 1, 2008. The strip mall is currently 93% occupied by local tenants subject to operating leases ranging from one to 16 years with various renewal options.
On October 1, 1998, a wraparound note held by the Company on a 285,655 square foot shopping center property located in South Williamson, Kentucky (the "South Williamson Property"), was paid as a result of the sale of the South Williamson Property by its owner, an affiliate of the Company (i.e., the Partnership that owned the South Williamson Property), to an unrelated third party. In connection with the sale of the South Williamson Property, the Company, as the Master Lessee on a Master Lease on the South Williamson Property, canceled such Master Lease. The negotiated sales price of the South Williamson Property was approximately $14,874,000 which included acquiring the property subject to the $14,773,655 remaining balance of the underlying mortgage debt on the South Williamson Property (which represented approximately 21% of Company's total liabilities at such time). The wraparound note on the South Williamson Property represented approximately 13% of the Company's total assets at such time. As a result of the sale of the South Williamson Property, the payment of the wraparound note and the satisfaction of the underlying mortgage debt, the Company realized approximately $100,000 in cash and a book gain of approximately $4,197,000.
On September 21, 1998, a wraparound note held by the Company on a 35,496 square foot shopping center property located in Vestivia Hills, Alabama (the "Vestivia Hills Property"), was paid as a result of the sale of the Vestivia Hills Property by its owner, an affiliate of the Company (i.e., the Partnership that owned the Vestivia Hills Property), to an unrelated third party. In connection with the sale of the Vestivia Hills Property, the Company, as the Master Lessee on a Master Lease on the Vestivia Hills Property, canceled such Master Lease. The negotiated sale price of the Vestivia Hills Property was approximately $1,640,000. Of the gross proceeds, $722,638 was used to satisfy the underlying mortgage debt on the Vestivia Hills Property (which represented approximately 1% of the Company's total liabilities at such time). The wraparound note on the Vestivia Hills Property represented approximately 3% of the Company's total assets at such time. As a result of the sale of the Vestivia Hills Property, the payment of the wraparound note and the satisfaction of the underlying mortgage debt, the Company realized net cash proceeds of approximately $875,000 and a book gain of approximately $338,000.
On September 11, 1998, the Company completed the purchase of Country Grove Plaza, a 16,642 square foot strip mall located in West Palm Beach, Florida (Palm Beach County), from an unrelated third party for $1,100,000. In connection with the purchase, the Company obtained a $880,000 first mortgage loan which bears interest at a rate of 7.51% per annum. Such first mortgage requires monthly principal and interest payments of $6,159 based upon a 30 year self liquidating amortization schedule, with a balloon payment of approximately $780,150 due September 1, 2008. The strip mall is currently 93% occupied by local tenants subject to operating leases ranging from one to 13 years with various renewal options.
On July 15, 1998, the Company completed the purchase of Teeca Plaza, a 22,589 square foot strip mall located in Boca Raton, Florida (Palm Beach County), from an unrelated third party for $2,075,000. In connection with the purchase, the Company obtained a $1,800,000 first mortgage loan which bears interest at a rate of 7.39% per annum. Such first mortgage requires monthly principal and interest payments of $12,450 based upon a 30 year self liquidating amortization schedule, with a balloon payment of approximately $1,591,000 due July 1, 2008. The strip mall is currently 100% occupied by local tenants subject to operating leases ranging from three to 26 years with various renewal options.
On July 7, 1998, the Company completed the sale of its Mountain View Mall property located in Bend, Oregon (the "Bend Property") to an unrelated third party for approximately $17,750,000. The Company realized cash net proceeds from the sale of approximately $319,200, after paying off the balance of the underlying first mortgage of $17,065,000 (which represented approximately 23% of the Company's total liabilities at such time) and used a portion of the funds for closing costs and net credits to the buyer. At the time of the sale, the Bend Property represented approximately 17% of the Company's total assets with a carrying value, net of accumulated depreciation, of approximately $16,482,000. As a result of the sale, the Company realized a book gain of approximately $947,000.
On April 17, 1998, the Company completed the purchase of Orange Park Shopping Center, a 21,509 square foot strip mall located in Orange Park, Florida (Clay County), from an unrelated third party for $1,500,000. In connection with the purchase, the Company obtained a $1,300,000 first mortgage loan which bears interest at a rate of 7.39% per annum. Such first mortgage requires monthly principal and interest payments of $8,992 based upon a 30 year self liquidating amortization schedule, with a balloon payment of approximately $1,147,600 due April 1, 2008. The strip mall is currently 90% occupied by local tenants subject to operating leases ranging from two to six years with various renewal options.
On April 1, 1998, the Company completed the purchase of Regency Walk Shopping Center, a 34,436 square foot strip mall located in Jacksonville, Florida (Duval County), from an unrelated third party for $2,150,000. In connection with the purchase, the Company obtained a $1,840,000 first mortgage loan which bears interest at a rate of 7.87% per annum. Such first mortgage requires monthly principal and interest payments of $13,335 based upon a 30 year self liquidating amortization schedule, with a balloon payment of approximately $1,643,700 due May 1, 2008. The strip mall is currently 72% occupied by local tenants subject to operating leases ranging from two to nine years with various renewal options.
On February 9, 1998, a wraparound note held by the Company on a 128,864 square foot shopping center property located in Chili, New York (the "Chili Property"), was assigned to an unrelated third party for $75,000. The Company, as the master lessee on a Master Lease on the Chili Property, terminated such Master Lease on April 30, 1996. The assignment of the wraparound note relieved the Company of its responsibility to make any payments on the underlying mortgage debt on the Chili Property. As a result of the assignment of the wraparound note on the Chili Property and the relief of the Company's obligation to the underlying mortgage debt, the Company realized net cash proceeds of approximately $75,000 and a book gain of approximately $82,000.
On October 30, 1997, a wraparound note held by the Company on a 87,436 square foot shopping center property located in Marion, Ohio (the "Marion Property"), was paid as a result of the sale of the Marion Property by its owner, an affiliate of the Company (i.e., the partnership that owned the Marion Property), to an unrelated third party. In connection with the sale of the Marion Property, the Company, as the Master Lessee on a Master Lease on the Marion Property, canceled such Master Lease. The negotiated sales price of the Marion Property was approximately $2,750,000. Of the gross proceeds, $1,770,298 was used to satisfy the underlying mortgage debt on the Marion Property (which represented approximately 3% of the Company's total liabilities at such time). The wraparound note on the Marion Property represented approximately 4% of the Company's total assets at such time. As a result of the sale of the Marion Property, the payment of the wraparound note and the satisfaction of the underlying mortgage debt, the Company realized net cash proceeds of approximately $986,000 and a book gain of approximately $200,000.
On September 24, 1997, the Company completed the purchase of Pine Oak Plaza, a 16,994 square foot strip mall located in Sunrise, Florida (Broward County), from an unrelated third party for $1,100,000 in cash. On May 1, 1998, the Company secured a $1,160,000 first mortgage loan which bears interest at a rate of 7.48% per annum. Such first mortgage loan requires monthly principal and interest payments of $8,095 based upon a 30 year self liquidating amortization schedule, with a balloon payment of approximately $1,027,700 due May 1, 2008. The strip mall is currently 100% occupied by local tenants who are subject to operating leases ranging from three to 13 years with various renewal options.
As of April, 1996, the Company terminated, by written notice, the Master Lease associated with the 56,908 square foot shopping center located in Prattville, Alabama (the "Prattville Property"). In July 1996, the Underlying Debt of $2,325,000 associated with 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. June 12, 1997, a wraparound note held by the Company on the Prattville Property was paid as a result of the foreclosure sale, of the Prattville Property, by the bank (the holder of the underlying mortgage debt) to an unrelated third party. As a result of the foreclosure sale by the bank of the Prattville Property, the payment of the wraparound note and the satisfaction of the underlying mortgage debt, the Company realized a book gain of approximately $120,000.
As of December 31, 1998 and 1997, the Company did not have any related CMBSs ("CMBSs"), Loans Payable, U.S. Treasury Notes sold short or reverse repurchase agreements.
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. 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.
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 Certificates"), 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.
On January 23, 1997, the Company sold its ownership of the CMBSs 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.
The Company had $32,314,853 of CMBSs and $23,829,335 of associated Loans Payable as of December 31, 1996. Additionally, the Company has $33,952,346 of U.S. Treasury Notes sold short and $34,718,749 of associated reverse repurchase agreements as of December 31, 1996.
From time to time the Company sells, or may take action to sell, certain real estate assets which it does not believe to be material to the overall business or financial condition of the Company.
4. Property, Improvements and Equipment
Property, improvements and equipment at December 31, 1998 and 1997 consisted of the following:
5. Investment in Wraparound Notes
Investment in Wraparound Notes represents notes due from limited partnerships (the "Partnerships") which has 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 Leases 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 Lease. 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 the sale of an 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.
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. The Wraparound Notes have maturities ranging from 1998 to 2016. The scheduled principal receipts of the Wraparound Notes are as follows (dollar amounts in thousands):
Year Ending December 31st: ===================================== 1999 $ 3,766 2000 20,535 2001 380 2002 418 2003 460 Thereafter (a) 13,971 ------ Total $ 39,530 ========== - ------------------ -----------------
a - Excludes $11,202 of the original issue discount.
The following schedule depicts Wraparound Notes which are subordinate to the Underlying Debt on such properties:
a - Includes discount elements totaling in aggregate $11,202,305.
The following schedule represents a roll forward of Wraparound Notes for the years ended December 31, 1998 and 1997:
At December 31, 1998 and 1997 the Wraparound Notes had a valuation allowance of $0 and $2,590,132, respectively. The aggregate carrying value of the Wraparound Notes adjusted by the valuation allowance is $0 and $12,160,890, respectively.
Included in the Wraparound Notes carrying amount is $6,769,960, which represent 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.
On December 31, 1998 the Wraparound Note on the Underlying Property located in Quincy, Illinois, (the "Quincy Property") matured. The face amount of the Wraparound Note on the Quincy Property is approximately $4,904,000, such figure accounts for the 1998 principal payment of $728,919 which was made in January 1999. The Company, as the holder of the Wraparound Note on the Quincy Property is currently seeking payment from the Partnership that issued such Wraparound Note. On March 1, 1999, the mortgagor of the Underlying Debt sent a demand letter to collect the outstanding balance of approximately $2,910,000 of the Underlying Debt which had matured in July 1998. In accordance with the terms of the wraparound mortgages, the Underlying Debt must be satisfied prior to the Company receiving payment from the Partnership on the Wraparound Note on the Quincy Property. See the discussion regarding the Quincy Property in the footnote entitled Leases herein.
The maturity dates of the remaining 39 Wraparound Notes and Wraparound Mortgages range from December 1999 to December 2016, of which 17 Wraparound Notes and Wraparound Mortgages are due to mature on December 31, 1999, (the "Maturing Wrap Debt"). The Company, as the holder of the Maturing Wrap Debt will seek payment from each Partnership that issued the respective Maturing Wrap Debt. In order for each such Partnership to make payment, one of the following events may occur; (i) the Partnership may sell the Underlying Property securing the respective Maturing Wrap Debt, (ii) the Company, as the holder of a Maturing Wrap Debt, may obtain ownership of the Underlying Property securing the Maturing Wrap Debt in lieu of payment on the Maturing Wrap Debt via foreclosure or (iii) the Company may extend the Maturing Wrap Debt to a future maturity date upon terms to be determined at that time. See the discussion regarding the Maturing Wrap Debt in the footnote entitled Leases herein.
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 ratable 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).
The Company, as the holder of 44,550 shares of Kranzco Series C Redeemable Preferred Shares as of December 31, 1998, is entitled to receive from the redemption of such shares, in one installment, an aggregate amount of cash equal to approximately $445,500, plus interest at the rate of 8% per annum on the applicable outstanding balance of such shares. Such final redemption payment liquidated the Company's holdings of Kranzco Series C Redeemable Preferred Shares, and accordingly, the Company is not entitled to future redemption payments on such shares.
7. Leases
As Lessor
The Properties have a gross leaseable area of approximately 2,218,645 and 2,642,048 square feet of which approximately 96% and 94% was leased as of December 31, 1998 and 1997, respectively.
Minimum base rental income under tenant lease agreements relating to the Properties having remaining lease terms ranging from one to 33 years at December 31, 1998 is as follows (dollars amounts in thousands):
Year Ending December 31st: ==================================== 1999 $ 8,258 2000 6,597 2001 5,307 2002 4,276 2003 3,495 Thereafter 8,658 ----- Total $ 36,591 ======== - ----------------- ------------------
For the years ended December 31, 1998, 1997 and 1996, no tenant at any individual property accounted for more than 10% of the Company's total revenue. However, the total revenue from K- mart Corporation's nine leases with the Company accounted for approximately 29%, 32% and 30%, respectively, of the Company's aggregate rent revenue.
As Lessee
Minimum rental expense under the Master Leases, having original lease terms ranging from 1998 to 2016, at December 31, 1998 is as follows (dollar amounts in thousands):
Year Ending December 31st: ==================================== 1999 $ 7,535 2000 2,370 2001 2,370 2002 2,370 2003 2,370 Thereafter 28,546 ------ Total $ 45,561 ======== - ----------------- ------------------ 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.
On December 31, 1998, the Master Lease on the property located in Quincy, Illinois (the "Quincy Property") expired. As a result of such Master Lease expiration, the Company, as the tenant under such Master Lease, assigned all of its rights, title and interests in the Quincy Property to Quincy Plaza Associates, the landlord under such Master Lease and Quincy Plaza Associates assumed all of the Company's related obligations under such Master Lease.
On December 31, 1998, the Master Lease on the property located in Natchez, Mississippi (the "Natchez Property") expired. As a result of such Master Lease expiration, the Company, as the tenant under such Master Lease, assigned all of its rights, title and interests in the Natchez Property to Quincy II Plaza Associates, the landlord under such Master Lease and Quincy II Plaza Associates, assumed all of the Company's related obligations under such Master Lease.
The expiration dates of the remaining 23 Master Leases range from December 1999 to December 2016, of which 15 Master Leases are due to expire on December 31, 1999, (the "Expiring Master Leases"). As a result of the Expiring Master Leases, the Company, as the tenant under such Expiring Master Leases, may (i) assign all of its rights, title and interests in the Underlying Properties subject to the respective Expiring Master Leases to the Partnership, that is the landlord under the Expiring Master Leases and such Partnership may assume all of the Company's related obligations under the respective Expiring Master Leases or (ii) may extend such Expiring Master Leases.
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, 1998 are as follows (dollar amounts in thousands):
Year Ending December 31st: ==================================== 1999 $ 5,783 2000 2,268 2001 2,493 2002 3,872 2003 2,773 Thereafter 30,788 ------ Total $ 47,977 ======== - ----------------- ------------------
The interest rates on the mortgages and notes payable range from 5.75% to 13.5%. The mortgage and notes payable and related terms at December 31, 1998 for the Properties are summarized as follows (dollar amounts in thousands, except as noted):
(1) Principal and interest are paid semi annually in accordance with the bond documents.
(2) Certain mortgages and notes contain various terms regarding prepayment penalties.
The following schedule represents a reconciliation of the mortgages and notes payable for the years ended December 31, 1998 and 1997:
1998 1997 ==================================== ================== ================== Balance at January 1st $ 67,739,564 $ 74,425,216 Principal repayments (38,511,435) (6,685,652) Proceeds from loans 18,749,000 0 ---------- ------------------- Balance at December 31st $ 47,977,129 $ 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 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 per share 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 was increased by one, and the holders of the Series A Preferred Stock, who, at that date, only elected one member of the Board of Directors, were 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.
Milestone's Board of Directors determined not declare any dividends on the Series A Preferred Stock for the years ended December 31, 1998 and 1997. 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 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 146,000 options (the "Initial Grant") which are exercisable for 146,000 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 146,000 options which are exercisable for 146,000 share of Common Stock at a per option exercise price of $0.50. At the same time, the Compensation Committee granted 154,000 option 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 years ended December 31, 1998, 1997 and 1996, zero, 23,800 and zero such options were canceled upon resignation of an employee, respectively.
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 be averaging the high and low trading prices of the Common Stock as reported on either the New York Stock Exchange (through September 10, 1998) or the Over-The-Counter Bulletin Board (effective September 11, 1998) 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 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, 1998, all of the non-employee director options granted in 1993 though 1996 are exercisable and one half of the 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. No options were granted to the non-employee directors in 1998 due to the fact that an annual meeting of the stockholders of the Company was not held in 1998. The impact on earnings of the fair value of the options granted to has been deemed insignificant.
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 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 costs related to employee options have been recognized in the consolidated financial statements of the Company.
No options were exercised and no options were granted during the years ended December 31, 1998. The pro form disclosure provisions of SFAS No. 123 for the year ended December 31, 1998, 1997 and 1996 are as follows:
For the purposes of providing pro forma disclosures, the fair value of options granted in 1997 were estimated using the Black Scholes options pricing model with the following weighted average assumption; (i) a risk free interest rate of 5.06%, (ii) an expected life of one year, (iii) volatility of 52.20% and (iv) no dividends. The estimated fair value compensation cost of the related options was amortized to expense over the options' vesting period.
Certain information relating to the options under the Employee Stock Option Plan and the Non- Employee Director Stock Option Plan during the years ended December 31, 1998, 1997 and 1996 are as follows:
10. Income Taxes
The provision for income taxes for the years ended December 31, 1998, 1997 and 1996 are as follows:
Temporary differences between the amount reported in the consolidated financial statements and the tax basis of assets and liabilities results in deferred taxes. There was a change in the valuation allowance for deferred tax assets of $4,953,862 and $(340,576) for the years ended December 31, 1998 and 1997, respectively. Realization of the deferred tax asset is dependent, in part, on generating sufficient taxable income in the future. Although such realization is not assured, the Company believes that it is more likely than not that the deferred tax asset not allowanced will be recognized. Should estimates of future taxable income be reduced the deferred tax asset valuation allowance would be adjusted accordingly. The Company has a tax net operating loss carry forward of approximately $13,905,000 at December 31, 1998. Deferred tax assets and liabilities at December 31, 1998, 1997 and 1996 are as follows:
The provision (benefit) for income tax differs from the amount obtained by applying the statutory federal income tax rate to pre-tax losses for the following reasons:
11. Fair Value 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, accounts 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, 1998 and 1997, the carrying value of the notes and mortgages payable and the fair value of such instruments was not considered to be significantly different.
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, 1998 and 1997, the fair value of the Wraparound Notes was estimated to be $62,802,981 and $65,997,009, compared to a carrying value amount of $39,529,787 and $59,402,931, respectively.
For the investment in Kranzco Series C Cumulative Redeemable Preferred Shares the estimate fair value, which approximates 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, 1998 and 1997. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, a comprehensive re-evaluation has not been performed for purposes of these financial statement disclosures and current estimates of fair value may differ significantly from the amount presented herein.
12. Related Party Transactions
The Company is 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 services to Concord which the Company receives reimbursements from Concord. The Management Agreement is renewable annually. For the years ended December 31, 1998, 1997 and 1996 reimbursed expenses to the Company were $215,684, $338,394 and $420,743, respectively.
As of December 31, 1998 and 1997, the Company had recorded receivables from Concord of $598,765 and $391,851, respectively. Such receivables 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, 1998 and 1997. 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, 1998 and 1997.
In addition, the Company received property management fees of $132,388, $107,725 and $107,007 during 1998, 1997 and 1996, 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 paid by UPI to the Company under these agreements for the years ended December 31, 1998, 1997 and 1996 were $0, $108,588 and $1,235,831, respectively.
13. Commitments and Contingent Liabilities
The Company's office facility in Boca Raton, Florida 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 year ended December 31, 1998, 1997 and 1996 for the Company were $176,374, $758,193 and $752,344, respectively. Future minimum annual payments under the noncancellable operating lease agreement, as of December 31, 1998, are as follows:
Year Ending December 31st: ===================================== 1999 183,479 2000 190,805 2001 198,421 2002 206,358 ------- Total $ 779,063 ========= - ------------------ -----------------
Under a long term incentive bonus plan, the Company has accrued zero and $669,460 for bonuses to be paid to certain officers relating to the years ended December 31, 1998 and 1997, respectively. The Company has accrued performance related bonuses to certain executive officers in the amount of $486,041 and $426,870 for the years ended December 31, 1998 and 1997, respectively.
The Company has accrued for litigation expenses and settlement fees relating to a class action and derivative lawsuit brought against the Company. Such settlement requires, among other things, (i) the payment of $3.00 in cash in exchange for each eligible share of Series A Preferred Stock required to be surrendered as of the close of business on March 5, 1999 and (ii) the plaintiffs attorney fees not to exceed $750,000. See note 14. Legal Proceedings for additional information regarding the class action and derivative lawsuit.
Under various federal, state and local environmental laws, ordinances and regulations, the Company, as 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 knew 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 Company's liability as 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 Company's aggregate assets. The Company's ability to sell or rent a property, or to borrow using a property as collateral may be adversely affected by the presence of these substances or failure to remediate such substances properly. Under these laws and regulations, the Company, as 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 adversely affect the Company's business, operating results and financial condition. The Company is not aware
of any environmental conditions at any of the properties that it owns or in which it has an investment.
14. Legal Proceedings
During 1996 Milestone, certain past and present members of its Board of Directors, executive officers, and Concord were named as defendants in a purported class action and derivative lawsuit (the "Winston Actions") commenced in the Court of Chancery of the State of Delaware (the "Delaware Court"). In the actions, the plaintiff, a Series A Preferred Stockholder purporting to bring the action on behalf of himself, all other Series A Preferred Stockholders and derivatively on behalf of Milestone, alleged that in connection with the Acquisition and certain related transactions (collectively, the "Transactions"), Milestone and its directors engaged in self-dealing, violated federal securities laws and an injunction against such violations and breached their fiduciary duties 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 which were not transferred to UPI in the Transfer were grossly inferior to the properties that were transferred to UPI.
On August 5, 1998, the counsel for the named plaintiff in the Winston Actions and the counsel for the defendants entered into a Stipulation and Agreement of Settlement (the "Winston Settlement Agreement") which memorialized the terms of a settlement (the "Winston Settlement") of the Winston Actions. On January 28, 1999, the Delaware Court approved the Winston Settlement Agreement, which approval became final effective as of the close of business on March 5, 1999. At such time, (i) the shares of Series A Preferred Stock owned by each Series A Preferred Stockholder who was eligible to participate in the Winston Settlement and who did not properly opt out of the Winston Settlement and who owned shares of Series A Preferred Stock as of the close of business on March 5, 1999 were canceled and represented only the right of such Series A Preferred Stockholder to receive $3.00 in cash from the Company in exchange for each such share; (ii) the holders of shares of the Series A Preferred Stock between October 23, 1995 and the close of business on March 5, 1999, other than Series A Preferred Stockholders who properly opted out of the Winston Settlement Agreement or who were precluded from participating in the Winston Settlement, released any and all claims they may have had against the Company and the other named defendants in connection with the Transactions; (iii) Milestone's stockholders other than Series A Preferred Stockholders who were eligible to participate in the Winston Settlement and who properly opted out of the Winston Settlement released all derivative claims in connection with the Transactions; and (iv) the Winston Actions were dismissed. In connection with the Winston Actions, the Company retained counsel for all of the defendants (including, without limitation, Leonard S. Mandor, Robert A. Mandor, Harvey Jacobson, Gregory McMahon and Geoffrey Aaronson (each of whom is a director and/or officer of the Company)) and assumed responsibility for the payment of all legal fees incurred by such persons in connection with the Winston Actions and the Winston Settlement (subject to the insurance coverage litigation described below).
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 by the Company with the Commission on August 14, 1998 as Exhibit 10.01 to Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998.
The Company maintains a directors and officers insurance and company reimbursement policy (the "National Policy") issued by National Union Fire Insurance Company of Pittsburgh, PA ("National Union") with a $2,000,000 limit and an excess directors and officers liability and company reimbursement policy (the "Stonewall Policy") issued by Stonewall Surplus Lines Insurance Company, now known as American Dynasty Surplus Lines Insurance Company ("Stonewall"), with a $2,000,000 limit. The Company believes that the amounts that it has to pay pursuant to the Winston Settlement and in connection with the Winston Actions are covered losses under both the National Union Policy and the Stonewall Policy. In addition, the Company believes that the legal fees and other expenses incurred by the Company and the other defendants in connection with the Winston Actions are also covered losses under the National Union Policy and the Stonewall Policy. In connection with a previous proposed settlement of the Winston Actions which was never consummated, National Union and Stonewall both refused to contribute to such proposed settlement, asserting that such proposed settlement did not encompass any covered loss (as defined in the National Policy and the Stonewall Policy, respectively). On January 29, 1998, the Company commenced a lawsuit in the United States District Court for the Southern District of New York against National Union and Stonewall in connection with such refusal to contribute to such proposed settlement. In the complaint, the plaintiffs alleged that National Union and Stonewall wrongfully failed to contribute to the proposed settlement and sought reimbursement from National Union and Stonewall up to the limits of their respective policies. National Union and Stonewall both answered the complaint and denied liability. As a result of the termination of the previously proposed settlement, the Company on one hand, and Stonewall and National Union, on the other hand, agreed to dismiss such action without prejudice and such action was dismissed on May 29, 1998 by the United States District Court for the Southern District of New York. The Company gave both National Union and Stonewall notice of the Winston Settlement and provided each of them with a copy of the Winston Settlement Agreement on August 12, 1998. National Union and Stonewall reviewed the Winston Settlement Agreement and separately informed the Company that their basic position, denying coverage, had not changed. On February 12, 1999, the Company commenced a lawsuit in the Circuit Court for the Fifteenth Judicial Circuit in and for Palm Beach County, Florida against both National Union and Stonewall alleging, among other things, that National Union and Stonewall have wrongfully refused to contribute to the Winston Settlement and seeking reimbursement from National Union and Stonewall up to the limits of their respective policies. The initial complaint in the new lawsuit was served on each of National Union and Stonewall on February 12, 1999 and on March 17, 1999 the Company filed an amended complaint, which, among other things, added the other defendants to the Winston Actions as plaintiffs. National Union and Stonewall have until March 29, 1999 to answer the amended complaint. In connection with this action, the Company has retained counsel for all of the plaintiffs and is assuming responsibility for the payment of all legal fees incurred by such persons in connection with this action. At this time, the Company is not in a position to render an opinion as to the outcome of this action.
15. Subsequent Events
On January 28, 1999 the Delaware Court approved the Winston Settlement at a hearing held for such purpose. The order of the Delaware Court became final upon expiration of a 30 day appeal period which began on February 3, 1999, the day the Court's order was entered upon the Court's docket, and expired at the close of business on March 5, 1999.
At the close of business on March 5, 1999, Milestone canceled and retired 2,983,284 shares of its Series A Preferred Stock, representing approximately 99% of the then outstanding shares of Series A Preferred Stock, pursuant to the terms of the Winston Settlement.
As a result of the Winston Settlement, the Company is required to reserve approximately $9,000,000 with a court appointed trustee for twelve months. On March 18, 1999 the Company wired approximately $9,000,000 to such court appointed trustee to be held for the benefit of the plaintiffs.
See note 14. Legal Proceedings, for a description of the court Winston Actions and the Winston Settlement.
16. Consolidated Quarterly Summary of Operations
The following is a summary of financial information with respect to the Company's operations for the four fiscal quarters during fiscal year 1998:
Note: (a) Includes approximately $4,251,000 of gain on sale of real estate and real estate related assets.
(b) Includes approximately $7,084,000 of accrued litigation expense directly related to the Winston Settlement See Item 14. Legal Proceedings for a description of the Winston Action and the Winston Settlement.
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE III Real Estate and Accumulated Depreciation December 31, 1998
S-1
MILESTONE PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE III Real Estate and Accumulated Depreciation December 31, 1998
Reconciliation of Property and Improvements:
1998 1997 1996 ==================== ================= ================= ================= Beginning Balance $25,546,306 $24,268,310 $24,221,311 Acquisitions 18,515,000 1,100,000 0 Improvements 351,585 177,996 46,999 Dispositions (21,121,178) 0 0 ------------ ----------------------------------- Ending Balance $23,291,713 $25,546,306 $24,268,310 ============= =========== =========== - -------------------- ----------------- ----------------- -----------------
Reconciliation of Accumulated Depreciation:
1998 1997 1996 ====================== ================= ================= ================= Beginning Balance $6,065,951 $5,545,018 $5,063,178 Depreciation expense 492,686 520,933 481,840 Dispositions (4,679,587) 0 0 ----------- ----------------------------------- Ending Balance $1,879,050 $6,065,951 $5,545,018 =========== ========== ========== - ---------------------- ----------------- ----------------- -----------------
At December 31, 1998, the tax basis of the Company's owned real estate was approximately $22,616,000.
S-2