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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-23463
.................
PHILIPS INTERNATIONAL REALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-3963667
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
417 FIFTH AVENUE,
NEW YORK, NEW YORK 10016
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(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 545-1100
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
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(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
As of March 15, 2000, the aggregate market value of voting stock held by
non-affiliates of the registrant was approximately $111.5 million. The aggregate
market value was computed with reference to the closing price on the New York
Stock Exchange on such date. The calculation does not reflect a determination
that persons are non-affiliates for any other purpose.
As of March 15, 2000, 7,340,474 shares of common stock, $.01 par value, of
the Company (the "Common Stock") were outstanding.
LOCATION OF EXHIBIT INDEX: The index of exhibits is contained in Part IV
herein on page number 27.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's
definitive proxy statement to be issued in conjunction with registrant's annual
meeting of shareholders to be held on May 30, 2000 are incorporated by reference
in Part III of this Form 10-K.
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TABLE OF CONTENTS
FORM 10-K
PAGE
----
PART I
Item 1. Business................................................................................... 1
Item 2. Properties................................................................................. 12
Item 3. Legal Proceedings.......................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders........................................ 17
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters....................... 17
Item 6. Selected Financial Data.................................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 20
Quantitative and Qualitative Disclosures About Market Risk................................. 25
Item 7A.
Item 8. Financial Statements and Supplementary Data................................................ 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 25
PART III
Item 10. Directors and Executive Officers of the Registrant......................................... 25
Item 11. Executive Compensation..................................................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 25
Item 13. Certain Relationships and Related Transactions............................................. 25
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.......................... 26
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PART I
ITEM 1. BUSINESS
GENERAL
Philips International Realty Corp. (the "Company") is a self-advised real
estate investment trust ("REIT") formed to continue and expand the shopping
center business of certain affiliated companies owned or controlled by Philip
Pilevsky (the "Philips Group"). For more than 16 years, the Philips Group has
been engaged in the ownership, development and acquisition for redevelopment of
neighborhood and community shopping centers predominantly concentrated in two
major, densely populated, East Coast metropolitan regions: (i) the New York,
Northern New Jersey, Long Island and Connecticut consolidated metropolitan
statistical area (the "New York CMSA") and (ii) the Miami-Fort Lauderdale
consolidated metropolitan statistical area (the "Miami CMSA"). As of December
31, 1999, the Company's portfolio consisted of interests in 26 retail properties
plus 2 development sites (each a "Property," and collectively, the
"Properties"), encompassing 3.9 million square feet of gross leasable area
("GLA"). Twenty-one (21) of the Properties are anchored by national or regional
supermarkets or discount department stores such as Publix Supermarkets, Inc.,
Winn-Dixie Stores, Inc., Waldbaums/APW Supermarkets, Inc. and Kmart. The Company
believes the strength of these discount department stores and grocery retailers,
as well as other key anchor tenants, provide the Properties with consistent
consumer traffic and enables the Company to attract additional quality anchor
retailers, as well as quality national, regional and local non-anchor retailers.
As of December 31, 1999, the Properties were 90% leased to 393 tenants.
STRATEGIC ALTERNATIVES
On October 13, 1999, the Board of Directors of the Company announced that
it had retained a financial advisor to assist the Company in examining strategic
alternatives to maximize shareholder value. The Board believes that the
Company's current stock price does not reflect the underlying value of its
assets. Given the changing dynamics of the REIT market place and consistent with
its commitment to realize shareholder value for all investors, the Board
believes that it is prudent to explore the strategic alternatives for the
Company. Discussion regarding the Company's investment and operating strategy,
liquidity and capital resources and dividends and other future plans throughout
this Annual Report should be read giving appropriate consideration to this
pending evaluation.
INVESTING AND OPERATING STRATEGY
The Company's strategy is to develop and acquire for redevelopment quality
neighborhood and community shopping centers, located in demographically strong,
under-stored markets which serve the daily needs of the surrounding community.
The Company will continue this strategy by focusing its activities primarily in
the New York CMSA, and secondarily in the Miami CMSA. Management believes its
extensive experience, market knowledge and network of industry contacts within
these regions gives the Company a competitive advantage and enhances its ability
to identify and capitalize on development and acquisition for redevelopment
opportunities. The Company believes that the New York CMSA and Miami CMSA are
both attractive regions in which to own and develop retail properties for
long-term investment.
The Company's objective is to maximize shareholder value through aggressive
growth of its cash flow per share and through the appreciation of the value of
its portfolio. The Company will seek to accomplish this objective by continuing
its multi-faceted strategy of: (i) acquisition for redevelopment of retail
properties in demographically strong, under-stored markets and where supply is
constrained; (ii) development of retail properties in similar markets;
(iii) expansion of properties within its portfolio; and (iv) aggressive asset
management of its portfolio.
Management expects that a significant part of the Company's growth will be
achieved through continuing its program of acquiring an optimal, risk-adjusted
mix of additional shopping centers for redevelopment at attractive initial
returns, including: (i) well established, stable properties which the Company
believes are currently leased at below market rents; (ii) underperforming,
poorly managed properties; and (iii) properties with additional land
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for new development or expansion. The Company seeks to acquire shopping centers
in markets with strong demographics, emphasizing locations where retail demand
exceeds supply and the creation of new supply is constrained. The Company
believes there are significant opportunities within the markets in which it
currently operates to acquire such properties, including opportunities to
acquire property portfolios. The Company further believes that the markets in
which it operates are mature, established markets in which property owners may
have low tax bases, and therefore exposure to significant taxable gains upon
sale. Management believes that, over time, the Company's ability to acquire
properties for Units enabling such sellers to defer taxable gain, coupled with
its extensive market expertise and contacts, as well as its access to capital as
a public company, will enable the Company to successfully execute its business
plan.
The Company balances its acquisition activities through its selective
development of additional quality neighborhood and community shopping centers,
primarily in the New York CMSA markets. The Company capitalizes on management's
extensive development experience, market knowledge, network of industry contacts
and relationships and its proven track record. In order to minimize the risk and
the commitment of capital for prolonged periods usually associated with
development, the Company will continue to focus on two strategies to secure its
development projects: (i) pursuing requests for proposal ("RFPs") or similar
municipally sponsored development opportunities; and (ii) entering into land
purchase contracts which are subject to the satisfactory resolution of key
development contingencies, such as obtaining approvals and permits.
The Company also will continue to utilize its long-standing asset and
property management practices to maximize cash flow from its existing Properties
and enhance their long-term value through its extensive knowledge of the retail
industry and shopping center operations.
MANAGEMENT AND CAPITAL STRUCTURE
Philip Pilevsky, Chairman of the Board of Directors and Chief Executive
Officer, leads a management team whose executive officers have an average of
approximately 18 years experience in acquiring, redeveloping and developing
retail properties. Philips International Realty Corp. and the Philips Group have
acquired, redeveloped and/or developed more than 70 retail properties
encompassing over 5.4 million square feet within the New York CMSA and Miami
CMSA markets. Mr. Pilevsky and the other executive officers and directors
beneficially owned in the aggregate approximately 27.0% of the outstanding
Common Stock (or units redeemable therefor).
The Company's day-to-day operations are strategically directed by its
executive officers and implemented through a management agreement (the
"Management Agreement") with a property management company affiliated with the
Philips Group (the "Management Company"). The Management Agreement provides for
the payment of fees, not to exceed prevailing market rates, and can be canceled,
in whole or in part, at any time by the Company as it internalizes property
management services. This agreement enables the Company to utilize the Philips
Group's infrastructure on a cost-effective basis. The Company will internalize
property management functions as its portfolio grows.
The Company was incorporated in Maryland on July 16, 1997. Its executive
offices are located at 417 Fifth Avenue, New York, New York 10016, and its
telephone number is (212) 545-1100.
As of December 31, 1999, the Company's debt to total capitalization ratio
was approximately 53%, based on the closing stock price in trading on the New
York Stock Exchange ("NYSE") on such day of $16.438 per share. The Company's
organizational documents do not limit the amount of indebtedness that the
Company may incur.
EMPLOYEES
As of December 31, 1999, the Company had 30 employees, 24 of whom are
maintenance, security and clerical personnel at the Properties located in
Hialeah, Florida. The Company believes that relations with its employees are
good. None of the employees are unionized.
COMPETITION
Numerous shopping center properties compete with the Properties in
attracting tenants to lease space. Tenants may consider certain of these
competing properties to be newer in appearance, better located or better
maintained than the Properties. The number of competitive commercial properties
in a particular area could have
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a material effect on the Company's ability to lease space in the Properties or
at newly developed or acquired properties and on the rents charged. In addition,
retailers at the Properties face increasing competition from other forms of
retailing, such as catalogues, discount shopping clubs, telemarketing, and
electronic commerce.
REGULATIONS
A number of federal, state and local laws exist, such as the Americans with
Disabilities Act, which may require modifications to existing buildings to
improve, or restrict certain renovations by requiring, access to such buildings
by disabled persons. While the Company believes that all of the Properties are
in substantial compliance with laws currently in effect, and will review
periodically the Properties to determine continuing compliance with existing
laws and any additional laws that are hereafter promulgated, additional
legislation may impose further requirements on owners with respect to access by
disabled persons.
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in such property.
Such laws often impose such liability without regard to whether the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The presence of such substances, or the failure to properly
remediate such substances, may adversely affect the owner's or operator's
ability to sell or rent such property or to borrow using such property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances may also be liable for the costs of removal or remediation of
such substances at a disposal or treatment facility, whether or not such
facility is owned or operated by such person. Certain environmental laws impose
liability for release of asbestos-containing materials into the air, and third
parties may seek recovery from owners or operators of real properties for
personal injuries associated with asbestos-containing materials. In connection
with the ownership (direct or indirect), operation, management and development
of real properties, the Company may be considered an owner or operator of such
properties or as having arranged for the disposal or treatment of hazardous or
toxic substances and, therefore, may be potentially liable for removal or
remediation costs, as well as certain other costs, including governmental fines
and injuries to persons and property.
All of the Properties have been subject to a Phase I environmental
assessment (which involves general inspections without soil sampling or ground
water analysis) by independent environmental consultants. None of these
environmental assessments has revealed any environmental liability that the
Company believes would have a material adverse effect on the Company's financial
condition or results of operations taken as a whole, nor is the Company aware of
any material environmental liability.
There are no other laws or regulations which have a material effect on the
Company's operations, other than typical state and local laws affecting the
development and operation of real property, such as zoning laws.
INDUSTRY SEGMENTS
The Company operates in a single industry segment. The Company does not
have any foreign operations and its business is not seasonal. All of the
Company's Properties are retail shopping center properties. As of December 31,
1999, the total annualized contractual base rents due under leases with tenants
at the Company's 14 Properties located in the New York CMSA or Miami CMSA
markets represented 77% of the total annualized contractual base rents due under
all of the Company's leases.
RECENT DEVELOPMENTS
FORMATION TRANSACTIONS. On December 31, 1997, the Company and certain
members of the Philips Group completed the formation transactions (the
"Formation Transactions"), pursuant to which the Properties, or partnership or
membership interests in the Properties, were contributed to Philips
International Realty, L.P., a Delaware limited partnership (the "Operating
Partnership") of which the Company is the general partner, in exchange for
limited partnership interests in the Operating Partnership (the "Units"). The
Units are redeemable at the Unitholder's request; such Units will be redeemed,
at the Company's option and in its sole discretion, either for shares of Common
Stock on a one-for-one basis (subject to certain anti-dilution adjustments and
exceptions) and/or cash (based upon the fair market value of an equivalent
number of shares of Common Stock at the time of redemption). In connection with
the Formation Transactions, the Company entered into:
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(i) employment agreements with each of Messrs. Petra and Gallagher and
Ms. Levine; (ii) the Management Agreement with the Management Company; and
(iii) a non-competition agreement (the "Non-Competition Agreement") with
Mr. Pilevsky, Ms. Levine and the Management Company.
PUBLIC STOCK OFFERING. On May 13, 1998, the Company completed an initial
primary public stock offering of 7,200,000 shares of Common Stock at $17.50 per
share (the "Offering"). The net proceeds totaling approximately $113,000,000
have been used primarily to (i) repay certain mortgage loans and other
indebtedness (including accrued expenses incurred in connection with the
Formation Transactions and the Offering) of the Operating Partnership and the
partnerships or limited liability companies holding fee title to the Properties
(collectively the "Property Partnerships"), and (ii) to redeem the Series A
Convertible Redeemed Preferred Stock outstanding at December 31, 1997. The
ownership of the Operating Partnership is now comprised of a 74.8% general
partner interest held by the Company and 25.2% limited partner interest held by
the Unit holders. A total 9,812,869 shares of Common Stock (7,340,474) and Units
(2,472,395) were outstanding effective as of the completion of the stock
offering.
REAL ESTATE INVESTMENT. Beginning in July 1998, the Company purchased,
through a series of unrelated transactions, limited partnership interests in
nine shopping center properties (the Kmart Properties) anchored by Kmart and
comprising approximately 1.1 million square feet of leasable space. During the
year ended December 31, 1999, the Company acquired the remaining 57% interest in
the Kmart Properties for $30.4 million. The Kmart Properties are located in
Florida, California, Washington, Minnesota, Illinois and Kentucky. The reporting
of financial position and results of operations of the Kmart Properties by the
Company reflects a change from the equity to consolidation method of accounting
effective in the third quarter of 1999.
During 1999, the Company substantially completed the development of the
50,000 square foot shopping center in Glen Cove, Long Island. Staples, the
anchor tenant, opened its office supply superstore in November 1999.
Approximately $4.8 million was expended in 1999 toward completion of the
shopping center which is expected to have total development cost of
approximately $8.1 million. The Company also completed a 14,000 square foot
Walgreen's store in Freeport, Long Island in April 1999 with the expenditure of
$1.8 million in 1999 bringing total development cost to $3.5 million.
In March 1999, the Company acquired the remaining 50% interest in a 196,000
square foot shopping center development project in Palm Beach County, Florida
for approximately $3.5 million. The reporting of financial position and results
of operations of this property by the Company reflects a change from the equity
to consolidation method of accounting effective in the first quarter of 1999.
At December 31, 1999, the Company had a $7.1 million joint-venture
investment in a proposed retail-residential redevelopment project. Subsequent to
year-end, the joint venture sold this project and the Company's investment was
returned in full. A shareholder and Unit holder of the Company was also an
investor in this joint venture.
The above-referenced investments were funded with borrowings under the
Company's revolving line of credit.
LEASING ACTIVITIES
The Company has completed various transactions involving the leasing of
available space in the portfolio and the recapture of below market leases with
re-tenanting at higher rental levels, which activities are expected to
contribute to internal FFO growth. Specifically, during 1999 the Company
accomplished the following:
o Recaptured the Caldor's below market space at Elm Plaza in Enfield,
Connecticut and leased 88,000 square feet to Kohl's Department
Stores effective February 2000.
o Leased 35,000 square feet to Staples at the Central Park Avenue
center in Yonkers, New York. The prior tenant's below market space
was recaptured simultaneously with the acquisition of the property
in 1998.
o Commenced rent collection on 35,000 square feet leased to TJ Maxx in
Hialeah, Florida and 34,000 square feet leased to National Wholesale
at Forest Avenue Shoppers Town in Staten Island, New York.
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o Leased 8,000 square feet of recaptured space to Odd Jobs at
Meadowbrook Commons in Freeport, New York, at higher rental level.
As previously mentioned, Walgreens, the prior tenant, was relocated
to a newly developed 14,000 square foot store in Freeport.
o Leased in excess of 50,000 square feet of space at Palm Springs Mile
in Hialeah, Florida to various tenants including David's Bridal
(12,000s.f.), Rainbow Crafts (10,000s.f.), Fashion Bug (7,000s.f.),
Tops and Bottoms (6,000s.f.), Washington Mutual (6,000s.f.) and
Colonial Bank (4,000s.f.).
FINANCING ACTIVITIES. As of December 31, 1999, there was a total of
approximately $182.0 million in notes and mortgage debt outstanding which was
secured by substantially all of the Company's properties. This total includes
approximately $94.2 million in borrowings under the revolving credit facility
described below, and approximately $87.8 million of secured fixed rate debt with
a weighted average interest rate of 7.6% and a weighted average maturity of
4.8 years. See Note 7 to the Notes to Consolidated Financial Statements for a
discussion of the debt encumbering the Company's Properties at December 31,
1999.
CREDIT FACILITY. The Company maintains a $100 million senior revolving
credit facility (the "Credit Facility") with a financial services institution.
The availability of funds under the Credit Facility is subject to the Company's
compliance with a number of customary financial and other covenants. The Credit
Facility may be used to finance the Company's acquisition and redevelopment
activities and, within limitations, for working capital and general corporate
purposes. Borrowings under the Credit Facility are secured by certain Properties
with recourse to the Company and the Operating Partnership.
RISK FACTORS
Our results of operations and ability to pay dividends may be affected by
the risk factors set forth below. All investors should consider the following
risk factors before deciding to purchase securities of the Company. The Company
refers to itself as "we" or "our" in the following risk factors.
WE ARE DEPENDENT UPON THE ECONOMICS IN OUR MARKETS AND OF SHOPPING CENTERS
GENERALLY.
DEPENDENCE ON CERTAIN MARKET REGIONS. Fourteen of our property interests
are located in either of the following major east coast metropolitan regions:
(1) the New York, northern New Jersey, Long Island and Connecticut metropolitan
market area or (2) the Miami-Fort Lauderdale metropolitan market area. As of
December 31, 1999, the total weighted average annualized base rent due under
leases with tenants at properties located in such areas represented 77% of our
total annualized base rents due under all of our leases. Adverse economic
developments in these states could adversely impact the operations of our
properties and, therefore, our profitability. Since our portfolio consists
primarily of retail properties (as compared to a more diversified portfolio), a
decline in the economy or a decline in the demand for retail space may adversely
affect our ability to make distributions.
DEPENDENCE ON CERTAIN PROPERTIES. As of December 31, 1999, the total
annualized base rent due under leases with tenants at four of our properties
located in Hialeah, Florida represented 32% of our total annualized base rents
due under all of our leases. Adverse economic developments or a decline in
consumer demand for shopping centers in this area or at these four properties
could disproportionately and adversely affect our ability to make distributions.
CONFLICTS OF INTEREST COULD ADVERSELY AFFECT OUR OPERATIONS.
POTENTIAL CONFLICTS WITH MANAGEMENT. Our executive officers, including
Mr. Philip Pilevsky and Ms. Sheila Levine, direct our day-to-day operations.
Philips International Holding Corp., a corporation that Mr. Pilevsky and
Ms. Levine own, manages such day-to-day operations pursuant to a management
agreement dated December 31, 1997 among us, Philips International Realty, L.P.
and Philips International Holding Corp. Mr. Pilevsky also has several other real
estate holdings and activities that are not part of our company. A limited
number of such holdings are retail properties that may compete with our
properties. Personnel of Philips International Holding Corp. will spend some of
their time managing the holdings of Mr. Pilevsky. This will prevent such
personnel from devoting their efforts full-time to managing our properties. The
failure of the such personnel to adequately serve us could adversely affect our
business.
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POTENTIAL CONFLICTS WITH OTHER REAL ESTATE ACTIVITIES. In connection with
our and Philip International Realty, L.P.'s formation in December 1997, we
acquired twelve of the thirteen properties we then owned from holders of units
of the Philips International Realty, L.P. Certain of these holders, including
Mr. Pilevsky and Ms. Levine, continue to hold significant interests in real
properties (including retail properties that may compete with our properties)
that they owned but did not transfer to us at such time. While an Amended and
Restated Non-Competition Agreement dated as of December 31, 1997 among us,
Philips International Realty, L.P., Philips International Holding Co.,
Mr. Pilevsky and Ms. Levine prevents Mr. Pilevsky, Ms. Levine and Philips
International Holding Corp. from acquiring, operating and managing or developing
certain retail shopping center properties other than through us, it does not
restrict their activities with respect to retail properties they owned but did
not transfer to us at the time of our formation. As a result, Mr. Pilevsky will
devote his professional time to overseeing the management of our properties as
well as overseeing the management of other properties. The failure of
Mr. Pilevsky to adequately serve us could adversely affect our business.
POTENTIAL CONFLICTS WITH HOLDERS OF UNITS OF PHILIPS INTERNATIONAL REALTY,
L.P. Holders of units of Philips International Realty, L.P., including
Mr. Pilevsky and Ms. Levine, may have interests that conflict with our and our
shareholders' interests. If we (1) sell or refinance certain properties or (2)
reduce indebtedness encumbering such properties, holders of units (particularly
Mr. Pilevsky and Ms. Levine who previously held interests in our properties) may
suffer worse tax consequences than we or our shareholders may suffer. To avoid
such consequences, Mr. Pilevsky and Ms. Levine, as executive officers and
directors of our company, could (1) influence our board of directors not to sell
or refinance a property even though such sale or refinancing might otherwise
benefit us or (2) cause us to refinance a property at a higher level of debt
than would be in our best interest.
OUR PERFORMANCE IS SUBJECT TO RISKS ASSOCIATED WITH THE REAL ESTATE INDUSTRY.
GENERAL. Our ability to make distributions to our shareholders depends on
the ability of our properties to generate funds (including earned income and
capital appreciation) in excess of operating expenses (including scheduled
principal payments on debt and capital expenditure requirements). Events or
conditions that are beyond our control may adversely affect funds from
operations and the value of our properties. Such events or conditions could
include:
o changes in the general economic climate;
o material and adverse changes in capital market availability of debt
and/or equity;
o changes in local conditions such as oversupply of space or a reduction in
demand for rental space;
o decreased attractiveness of our properties to potential tenants;
o competition from other available space;
o our inability to provide adequate maintenance;
o increased operating costs, including insurance premiums and real estate
taxes, due to inflation and other factors which may not necessarily be
offset by increased rents;
o changes in laws and regulations (including tax, environmental and housing
laws and regulations) and agency or court interpretations of such laws
and regulations and the related costs of compliance;
o changes in interest rate levels and the availability of financing;
o the inability of a significant number of tenants to pay rent;
o our inability to rent space on favorable terms; and
o civil unrest, earthquakes and other natural disasters that may result in
uninsured losses.
FINANCIALLY DISTRESSED TENANTS MAY BE UNABLE TO PAY RENT. A tenant may
default or file for bankruptcy at any time. If a tenant defaults, we may
experience delays and incur substantial costs in enforcing our rights as
landlord and protecting our investments. If a tenant files for bankruptcy, a
potential court judgment rejecting and terminating such tenant's lease could
reduce our cash flow available for distribution. One of our anchor tenants,
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Bradlees Stores Inc., currently operates under the protection of the bankruptcy
laws. Bradlees Stores Inc. leases 60,000 square feet at Foxboro Plaza.
Termination of the lease could temporarily interrupt our rental income from
(1) the tenant of the affected space and (2) other tenants at the property whose
income depends upon the tenant's presence as an anchor store at such property.
ILLIQUIDITY OF REAL ESTATE LIMITS OUR ABILITY TO ACT QUICKLY. Real estate
investments are relatively illiquid. Such illiquidity may limit our ability to
vary our portfolio quickly in response to changes in economic and other
conditions. If we want to sell a property, we might not be able to dispose of
such property in the time period we desire, and the sales price of such property
might not recoup or exceed the amount of our investment. The prohibition in the
Internal Revenue Code of 1986, as amended, and related regulations on a real
estate investment trust holding property for sale also may restrict our ability
to sell property. Such limitations on our ability to sell our investments could
adversely affect our ability to make distributions.
AMERICANS WITH DISABILITIES ACT COMPLIANCE COULD BE COSTLY. Under the
Americans with Disabilities Act of 1990, all public accommodations and
commercial facilities must meet certain federal requirements related to access
and use by disabled persons. Compliance with the ADA requirements could involve
removal of structural barriers to certain disabled persons' accesses. Other
federal, state and local laws may require modifications to or restrict further
renovations of our properties with respect to such accesses. Although we believe
that our properties are substantially in compliance with present requirements,
noncompliance with the ADA or related laws or regulations could result in the
United States government imposing fines or private litigants being awarded
damages against us. Such costs may adversely affect our ability to make
distributions.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND MAY BE COSTLY. Various federal,
state and local laws and regulations subject property owners or operators to
liability for the costs of removal or remediation of certain hazardous or toxic
substances located on or in the property. These laws often impose liability
without regard to whether the owner or operator was responsible for or even knew
of the presence of such substances. The presence of or failure to properly
remediate hazardous or toxic substances may adversely affect our ability to
rent, sell or borrow against contaminated property. Various laws and regulations
also impose on persons who arrange for the disposal or treatment of hazardous or
toxic substances at another location liability for the costs of removal or
remediation of such substances at the disposal or treatment facility. These laws
often impose liability whether or not the person arranging for such disposal
ever owned or operated the disposal facility. Certain other environmental laws
and regulations impose liability on owners or operators of property for injuries
relating to the release of asbestos-containing materials into the air. As owners
and operators of property and as potential arrangers for hazardous substance
disposal, we may be liable under such laws and regulations for removal or
remediation costs, governmental penalties, property damage, personal injuries
and related expenses. Payment of such costs and expenses could adversely affect
our ability to make distributions.
"Phase I" environmental assessments of our properties were completed by
independent environmental consultants. Although this environmental assessment
did not reveal any environmental liability that could materially affect our
financial condition or results of operations, you should consider that (1) such
assessment involved general inspections without soil sampling or ground water
analysis and may not have revealed all environmental liabilities, (2) future
laws, ordinances or regulations could impose material environmental liability on
us and (3) acts by tenants or other third parties and the condition of land near
our properties (such as the presence of underground storage tanks) could
adversely affect the condition of our properties and subject us to environmental
liability.
COMPETITION FOR ACQUISITIONS MAY RESULT IN INCREASED PRICES FOR
PROPERTIES. Retailers at our properties face increasing competition from other
forms of retailing such as catalogues, discount shopping clubs, telemarketing
and electronic commerce. We face increasing competition for prospective tenants
with landlords of shopping center properties that may be newer in appearance,
better located or better maintained than our properties. Such competition may
reduce our cash flow and adversely affect our ability to make distributions by:
o interfering with our ability to attract and retain tenants in our
properties or in properties we develop or acquire;
o increasing vacancies which lowers market rental rates and limits our
ability to negotiate rental rates;
o and adversely affecting our ability to minimize expenses of operation.
7
REDEVELOPMENT AND DEVELOPMENT OF REAL ESTATE COULD BE COSTLY. As part of
our strategy, we actively pursue (1) redevelopment projects and (2) development
projects. In addition to the risks involved in the ownership and operation of
established retail properties, included among the risks of redevelopment or
development projects that may adversely affect our cash available for
distribution are the following:
o failure to complete construction on schedule or within budget may
increase debt service expense and construction costs;
o we may incur predevelopment costs for projects we do not complete;
o inadequate occupancy or rental rates of a completed project may affect
our ability to pay operating expenses or earn our targeted rate of return
on our investment;
o an unsuccessful project could cause our losses to exceed our investment
in such project;
o financing for redevelopment and newly developed projects may not be
available to us on favorable terms;
o long-term financing may not be available upon completion of construction;
and
o our distribution of 95% of our real estate investment trust taxable
income (to maintain our qualification as a real estate investment trust)
will limit our ability to rely upon income or cash flow from operations
to finance acquisitions or new developments.
UNINSURED LOSSES MAY ADVERSELY AFFECT OUR CASH FLOW. We carry
comprehensive liability, fire, flood, extended coverage and rental loss
insurance. Our insurance policies contain specifications, limits and deductibles
comparable to those typically contained in policies covering similar properties.
We also carry owner's title insurance policies on all of our properties for
amounts that may be less than the full value of our properties. If an uninsured
loss or a loss from a title defect to a property in excess of insured limits
occurs, we could lose all or part of our investment in and anticipated profits
and cash flows from such property. In the case of a title defect, we could
remain obligated for any recourse mortgage indebtedness or other financial
obligations related to such property. Any of such losses could adversely affect
our ability to make distributions.
DEBT FINANCING COULD ADVERSELY AFFECT OUR ECONOMIC PERFORMANCE.
SCHEDULED DEBT PAYMENTS AND REFINANCING COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION. We are subject to the risks normally associated with debt
financing, including the following:
o our cash flow may be insufficient to meet required payments of principal
and interest;
o payments of principal and interest on borrowings may leave us with
insufficient cash resources to pay operating expenses;
o we may not be able to refinance indebtedness on our properties at
maturity;
o the terms of refinancing may not be as favorable as the terms of the
related indebtedness; and
o we could become more highly leveraged (because our policies and
organizational documents do not limit the amount of debt, ratio of debt
to total market capitalization or percentage of indebtedness we may
incur) and, therefore, default on our obligations and debt service
requirements.
As of December 31, 1999, we had outstanding an aggregate of approximately
$182 million of mortgage indebtedness (including approximately $94.2 million in
borrowings under our revolving credit facility).
Because we may not be able to pay all of our mortgage indebtedness prior to
maturity with our internally generated cash, we may need to repay such debt
through refinancings and/or equity offerings. If we are unable to refinance our
indebtedness on acceptable terms, or at all, events or conditions that may
adversely affect our cash flow and ability to make distributions include the
following:
o we may need to dispose of one or more of our properties upon
disadvantageous terms;
o prevailing interest rates or other factors at the time of refinancing
could increase interest rates and, therefore, our interest expense;
o if we mortgage a property to secure payment of indebtedness and are
unable to meet mortgage payments, the mortgagee could foreclose upon such
property or appoint a receiver to receive an assignment of our rents and
leases;
8
o certain of our mortgages encumbering properties have "cross default" or
"cross collateralization" provisions that entitle the secured lender to
certain remedies (including foreclosure) against more than one property;
and
o foreclosures upon mortgaged property could create taxable income without
accompanying cash proceeds and, therefore, hinder our ability to meet the
real estate investment trust distribution requirements of the Internal
Revenue Code.
RISING INTEREST RATES MAY ADVERSELY AFFECT OUR CASH FLOW. Advances under
our $100 million senior revolving credit facility bear interest at rates ranging
from 1.25% to 1.75% over the 30-day London Interbank Offered Rate, based on the
level of borrowings outstanding relative to collateral value. We may incur
additional debt in the future that also bears interest at variable rates.
Variable rate debt creates higher debt service requirements if market interest
rates increase. Higher debt service requirements could adversely affect our cash
flow and ability to make distributions or cause us to default under certain debt
covenants.
WE ARE DEPENDENT UPON OUR KEY PERSONNEL WHOSE CONTINUED SERVICE IS NOT
GUARANTEED.
We are dependent upon our executive officers for strategic business
direction and real estate experience. While we believe that we could find
replacements for these key personnel, loss of their services could adversely
affect our operations. We cannot assure you that any of our executive officers
will remain with us. We have entered into employment agreements with Louis J.
Petra, Sheila Levine, Brian J. Gallagher and Carl Kraus. Although we do not
expect to enter into an employment agreement with Philip Pilevsky, Mr. Pilevsky
has a significant ownership interest in our company. We also have entered into a
non-competition agreement with each of Mr. Pilevsky and Ms. Levine that prevents
them from engaging in certain retail real estate activities.
INABILITY TO MAKE REQUIRED DISTRIBUTIONS TO SHAREHOLDERS COULD AFFECT OUR REAL
ESTATE INVESTMENT TRUST STATUS.
For the Internal Revenue Service to treat us as a real estate investment
trust under the Internal Revenue Code, we must distribute to our shareholders at
least 95% of our real estate investment trust taxable income each year. We
cannot assure you that we will satisfy the annual distribution requirement to
qualify as a real estate investment trust.
RELIANCE ON BOARD OF DIRECTORS TO DETERMINE DISTRIBUTIONS. Much of our
income will consist of our allocable share of the income of Philips
International Realty, L.P. and much of our cash flow will consist of
distributions from Philips International Realty, L.P. Our board of directors
will determine distributions by Philips International Realty, L.P. In making
such determination, the board of directors may consider many factors, including
the following:
o the amount of cash available for distribution;
o Philips International Realty, L.P.'s financial condition;
o Philips International Realty, L.P.'s capital expenditure requirements;
o the annual distribution requirement under the real estate investment
trust provisions of the Internal Revenue Code; and
o such other factors as our board of directors deems relevant.
RISK OF BORROWING FUNDS TO MEET DISTRIBUTION REQUIREMENTS. We may need to
borrow funds on a short-term or long-term basis to meet the distribution
requirements for real estate investment trust qualification even if the then
prevailing market conditions are not favorable for borrowings. Our need to
borrow such funds depends on (1) differences in timing between the receipt of
income and the payment of expenses in arriving at taxable income (of us or
Philips International Realty, L.P.) and (2) the effect of nondeductible capital
expenditures, the creation of reserves or required debt amortization payments.
CONSEQUENCES OF FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST COULD
ADVERSELY AFFECT OUR FINANCIAL CONDITION.
Our failure to qualify as a real estate investment trust for federal income
tax purposes could adversely affect our financial and other conditions.
9
TAX LIABILITIES AS A CONSEQUENCE OF FAILURE TO QUALIFY AS A REAL ESTATE
INVESTMENT TRUST. We believe we have operated so as to qualify as a real estate
investment trust for federal income tax purposes since our taxable year ended
December 31, 1997. Although we believe we will continue to operate in such
manner, we cannot guarantee you that we will. Qualification as a real estate
investment trust depends on our meeting various requirements (some on an annual
and quarterly basis) established under highly technical and complex tax
provisions of the Internal Revenue Code. Because few judicial or administrative
interpretations of such provisions exist and qualification determinations are
fact sensitive, we cannot assure you that we will qualify as a real estate
investment trust for any taxable year.
If we fail to qualify as a real estate investment trust in any taxable
year, we will be subject to the following:
o we will not be allowed a deduction for distributions to shareholders;
o we will be subject to federal income tax at regular corporate rates,
including any alternative minimum tax, if applicable; and
o unless we are entitled to relief under certain statutory provisions, we
will not be permitted to qualify as a real estate investment trust for
the four taxable years following the year during which we were
disqualified.
A loss of real estate investment trust status would reduce our net earnings
available for investment or distribution to our shareholders. Failure to qualify
as a real estate investment trust also would eliminate the requirement that
distributions to our shareholders be made.
OTHER TAX LIABILITIES. Even if we qualify as a real estate investment
trust, we are subject to certain federal, state and local taxes on our income
and property and, in some circumstances, certain other state taxes.
RISK OF CHANGES IN THE TAX LAW APPLICABLE TO REAL ESTATE INVESTMENT
TRUSTS. Since the Internal Revenue Service, the United States Treasury
Department and Congress frequently review federal income tax legislation, we
cannot predict whether, when or to what extent new federal tax laws,
regulations, interpretations or rulings will be adopted. Any of such legislative
action may prospectively or retroactively modify our tax treatment and,
therefore, may adversely affect taxation of us or our shareholders.
CERTAIN PROVISIONS OF LAW MAY INHIBIT CHANGES IN CONTROL.
Certain provisions of the Maryland General Corporation Law, our articles of
incorporation, our by-laws, our shareholder rights plan and Philips
International Realty, L.P.'s partnership agreement may (1) inhibit a change in
control of our company, (2) inhibit the removal of existing management or
(3) prevent us from paying you a premium for your shares of our common stock
over the then-prevailing market prices.
STAGGERED BOARD OF DIRECTORS. We divide our board of directors into three
classes serving staggered three-year terms. This may inhibit a change in control
of our company.
NEW CLASSES AND SERIES. Under our articles of incorporation, our board of
directors may create new classes and series of securities and establish
preferences and rights of such classes and series. Our issuance of additional
classes or series of our capital stock may inhibit a change of control of our
company.
OWNERSHIP LIMIT. Under our articles of incorporation and certain
resolutions of our board of directors, no one may acquire or own more than 8% of
the outstanding shares of our capital stock (except for Mr. Pilevsky who may own
up to 17.5% of such shares) and no one may own or acquire shares of any class of
our capital stock that would (1) cause five or fewer persons to own more than
50% in value of our shares of capital stock or (2) otherwise cause us to fail to
qualify as a real estate investment trust. Such ownership limit may:
o discourage a change of control of our company;
o deter tender offers for our capital stock that you may find attractive;
or
o limit your opportunity to receive a premium for your capital stock that
might otherwise exist if an investor attempted to assemble a block of
capital stock in excess of the ownership limit or to effect a change in
control of our company.
10
RIGHTS OF LIMITED PARTNERS. Under Philips International Realty, L.P.'s
partnership agreement, we may not engage in any of the following transactions
unless all limited partners of Philips International Realty, L.P. will receive
(or have the right to receive) for each unit an amount of cash, securities or
other property equal to the product of (1) the number of shares of our common
stock for which each unit is redeemable and (2) the greatest amount of cash,
securities or other property paid to the holder of shares of common stock
pursuant to the terms of such transaction:
o a merger, consolidation or other combination with or into another person;
o a sale of all or substantially all of our assets; or
o any reclassification, recapitalization or change of our outstanding
equity interests.
If, in connection with any of the above transactions, the holders of outstanding
shares of our common stock accepts a purchase, tender or exchange offer, each
holder of units of Philips International Realty L.P. will receive (or have the
right to receive) the greatest amount of cash, securities or other property
which such holder would have received had it (1) exercised its right to
redemption and (2) received shares of common stock in exchange for its units
immediately prior to the expiration of such purchase, tender or exchange offer
and then accepted such purchase, tender or exchange offer.
SHAREHOLDER RIGHTS PLAN. Our Board of Directors adopted a Shareholder
Rights Plan effective as of March 31, 1999. The Rights Plan provides for a
non-cash distribution of rights to purchase, for $55.00 each, a fraction of a
share of a new series of preferred stock, exercisable upon the occurrence of
certain events. Generally, upon the earlier to occur of (i) ten calendar days
following the date of public announcement that a person or group of affiliated
or associated persons has acquired, or obtained the right to acquire, beneficial
ownership of fifteen percent (15%) or more of our outstanding common stock or
(ii) ten calendar days following the commencement of, or public announcement of
an intent to commence, a tender offer or exchange offer the consummation of
which would result in the beneficial ownership by a person or group of fifteen
percent (15%) or more of our outstanding common stock, you, as a holder of a
right, will have the right to receive, upon exercise, common stock having a
market value equal to $110. Once any person or group becomes an acquiring
person, all rights that are or were beneficially owned by any such acquiring
person will be null and void.
The Rights Plan contains provisions to safeguard your interests in the
event of an unsolicited offer to acquire us. However, because our Board of
Directors can redeem the rights in certain circumstances, the Rights Plan will
not prevent our acquisition on terms that our Board of Directors considers
favorable and fair to you.
OUR BOARD OF DIRECTORS MAY CHANGE INVESTMENT AND FINANCING POLICIES WITHOUT YOUR
VOTE.
GENERAL. Our board of directors determines (1) our investment and
financing policies, (2) our growth strategy, and (3) our debt, capitalization,
distribution and operating policies. At any time and without your approval, the
board of directors may revise or amend these policies and strategies. Such
changes could adversely affect our financial condition or results of operations,
and, therefore, our ability to make distributions.
ISSUANCE OF ADDITIONAL SECURITIES. You do not have any preemptive right to
acquire any common stock or other equity or debt securities we may offer. Any
such issuance of securities could dilute your investment.
RISKS INVOLVED IN ACQUISITIONS THROUGH PARTNERSHIPS OR JOINT VENTURES. We
may invest in properties through partnerships or joint ventures. Partnership or
joint venture investments may involve risks not involved with direct
acquisitions that include the following:
o a co-venturer or partner in an investment may become bankrupt;
o a co-venturer's or partner's economic or business interests or goals may
conflict with our interests or goals;
o a co-venturer or partner may act contrarily to our instructions,
requests, policies or objectives; and
o our articles of incorporation do not limit the amount we may invest in
such joint ventures or partnerships.
RISKS OF INVESTING IN SECURITIES OF ENTITIES OWNING REAL ESTATE. We may
acquire securities of entities that own real estate. Because of ownership limits
and gross income requirements we must meet to maintain our real
11
estate investment trust qualification, we may not be able to control (1) the
ownership, operation and management of the underlying real estate or (2) the
distributions with respect to such securities. Our lack of control could
adversely affect our ability to make required distributions.
RISKS OF INVESTING IN MORTGAGES. We may invest in mortgages. Investments
in mortgages may include the following risks that may adversely affect our
ability to make distributions:
o borrowers may be unable to make debt service payments or pay principal
when due;
o the principal of the mortgage note securing a property may exceed the
value of the mortgaged property; and
o interest rates payable on the mortgages may be lower than our cost of
funds to acquire such mortgages.
ADVERSE EFFECT OF INCREASING MARKET INTEREST RATE LEVELS ON PRICE OF COMMON
STOCK.
The annual distribution rate on the price paid for shares of our common
stock (compared to rates on alternative investments) may influence the public
market price of our common stock. An increase in general interest rate levels
may lead purchasers of our common stock to demand a higher annual distribution
rate. Such demands could adversely affect the market price of our common stock.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS.
The Company considers portions of this information to be forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Although the Company
believes that the expectations reflected in such forward-looking statements are
based upon reasonable assumptions, it can give no assurance that expectations
will be achieved.
ITEM 2. PROPERTIES
GENERAL
As of December 31, 1999, the Company held interests in 26 retail
properties, plus 2 development sites, (the Properties) encompassing 3.9 million
square feet of GLA. Information concerning the Properties is set forth in the
following Property Summary Data chart.
The Company's neighborhood and community shopping centers usually are
anchored by national or regional retailers. As long-time participants in the
shopping center industry, management has established close relationships with a
large number of major national and regional retailers. As of December 31, 1999,
the Properties were 90% leased to 393 tenants with 82% of the total GLA leased
to national and regional retailers. Twenty-one (21) of the Properties are
anchored by national or regional supermarkets or discount department stores such
as Publix Supermarkets, Inc., Winn-Dixie Stores Inc., Waldbaums/APW
Supermarkets, Inc. and Kmart. The Company believes the strength of these
discount department stores and grocery retailers, as well as other key anchor
tenants, provide the Properties with consistent consumer traffic and enable the
Company to attract additional quality anchor retailers, as well as quality
national, regional and local non-anchor retailers.
12
PROPERTY SUMMARY DATA
The following table sets forth certain information relating to each of the
Properties at December 31, 1999.
ANNUALIZED CONTRACTUAL
BASE RENT AT 12/31/99(1)
YEAR BUILT/ --------------------------------------
RENOVATED % LEASED % OF BASE
% -------------- TOTAL GLA AT BASE PORTFOLIO RENT/SQ. FT.
PROPERTY AND LOCATION OWNED YR. ACQUIRED (SQ. FT.) 12/31/99 RENT ($000) BASE RENT (2) ($)
- --------------------------------- ------ -------------- --------- -------- ----------- --------- ------------
NEW YORK CMSA
Forest Avenue Shoppers Town 100.0 1957/1996 177,118 100.0 3,672 9.9 20.73
Forest Avenue ---------
Staten Island, New York 1984
Meadowbrook Commons 100.0 1990(3) 173,027 100.0 3,083 8.3 17.82
Sunrise Highway
Freeport, New York
Walgreens at Freeport 100.0 1999(3) 13,905 100.0 383 1.0 27.54
45 Henry St.
Freeport, New York
Merrick Commons 100.0 1960/1994 107,871 100.0 1,769 4.8 16.40
Merrick Road ---------
Merrick, New York 1985
Mill Basin Plaza 100.0 1991(3) 80,708 100.0 2,115 5.7 26.21
Avenue U
Brooklyn, New York
Branhaven Plaza 100.0 1971/1996 191,496 98.0 1,335 3.6 7.11
U.S. 1 ---------
Branford, Connecticut 1985
Munsey Park S.C. 100.0 1979/1995 73,294 100.0 2,326 6.3 31.73
Northern Blvd. ---------
Munsey Park, New York 1998
--------- ------ ------- ----- ------
TOTAL/WEIGHTED AVERAGE 817,419 99.7 14,683 39.5 18.05
NEW YORK CMSA-JOINT VENTURES
1517-25 Third Ave. 50.0 1962 10,552* 100.0 586** 1.6 111.09
New York, NY ----
1998
1703 Central Park Ave. 75.0 1972 56,304 100.0 985** 2.7 23.35
Yonkers, NY ----
1998
Northshore Triangle 75.0 1999(3) 49,597 50.2 392** 1.1 21.00
Glen Cove, NY
--------- ------ ------- ----- ------
TOTAL/WEIGHTED AVERAGE 116,453 78.8 1,963 5.3 32.80
MIAMI CMSA
Mall on the Mile 100.0 1985(4) 592,809 97.9 4,564 12.3 7.86
Palm Springs Mile
Hialeah, Florida
Palm Springs Village 100.0 1985(4) 315,799 94.5 3,454 9.3 11.57
Palm Springs Mile
Hialeah, Florida
The Shops on 49th Street 100.0 1985(4) 172,727 96.2 3,011 8.1 18.11
Palm Springs Mile
Hialeah, Florida
Philips Plaza 100.0 1985(4) 109,273 82.7 1,019 2.7 11.28
Palm Springs Mile
Hialeah, Florida
--------- ------ ------- ----- ------
TOTAL/WEIGHTED AVERAGE 1,190,608 95.4 12,048 32.4 10.61
PROPERTY AND LOCATION KEY TENANTS
- --------------------------------- -------------------------------------
NEW YORK CMSA
Forest Avenue Shoppers Town TJ Maxx (The TJX Companies, Inc.);
Forest Avenue National Wholesale Liquidators
Staten Island, New York
Meadowbrook Commons Giant Food Stores, Inc.; Toys 'R' Us,
Sunrise Highway Inc.; Marshall's, Inc.
Freeport, New York
Walgreens at Freeport Walgreens Co.
45 Henry St.
Freeport, New York
Merrick Commons APW Supermarkets, Inc. (Waldbaum,
Merrick Road Inc.)
Merrick, New York
Mill Basin Plaza Pergament Home Centers, Inc.;
Avenue U Walgreens Co.
Brooklyn, New York
Branhaven Plaza Kohl's Dept. Stores; APW
U.S. 1 Supermarkets, Inc. (Waldbaum, Inc.);
Branford, Connecticut CVS
Munsey Park S.C. Bed, Bath & Beyond; Fresh Fields
Northern Blvd. Markets
Munsey Park, New York
TOTAL/WEIGHTED AVERAGE
NEW YORK CMSA-JOINT VENTURES
1517-25 Third Ave. Development Project
New York, NY
1703 Central Park Ave. Staples, Inc.
Yonkers, NY
Northshore Triangle Staples, Inc.
Glen Cove, NY
TOTAL/WEIGHTED AVERAGE
MIAMI CMSA
Mall on the Mile Burlington Coat (Kmart); RTG
Palm Springs Mile Furniture; U/A Theaters; Mervyn's;
Hialeah, Florida Toys 'R' Us, Inc.; Publix
Supermarkets, Inc.; Circuit City
Palm Springs Village Winn-Dixie Stores, Inc.
Palm Springs Mile TJ Maxx
Hialeah, Florida
The Shops on 49th Street Smart & Final Stores Corporation;
Palm Springs Mile Pier One Imports (U.S.) Inc.; Trans
Hialeah, Florida World/ Spec's Music
Philips Plaza David's Bridal: Coral Springs School
Palm Springs Mile
Hialeah, Florida
TOTAL/WEIGHTED AVERAGE
13
ANNUALIZED CONTRACTUAL
BASE RENT AT 12/31/99(1)
YEAR BUILT/ --------------------------------------
RENOVATED % LEASED % OF BASE
% -------------- TOTAL GLA AT BASE PORTFOLIO RENT/SQ. FT.
PROPERTY AND LOCATION OWNED YR. ACQUIRED (SQ. FT.) 12/31/99 RENT ($000) BASE RENT (2) ($)
- --------------------------------- ------ -------------- --------- -------- ----------- --------- ------------
FLORIDA MARKET
Palm Springs Plaza 100.0 1962 195,661 22.2 225 0.6 5.18
Palm Beach County, FL 1998
Tradewinds Shopping 100.0 1987 209,404 97.1 1,152 3.1 5.67
Overseas Highway 1998
Key Largo, FL
Bayhill Plaza 100.0 1987 179,065 100.0 1,269 3.4 7.09
7705 Turkey Lake Road 1998
Orlando, FL
The Shoppes at Lake Mary 100.0 1985 38,125 86.1 296 0.8 9.01
Country Club Road 1997
Lake Mary, FL
--------- ------ ------- ----- ------
TOTAL/WEIGHTED AVERAGE 622,255 73.7 2,942 7.9 6.42
NEIGHBORING MARKETS
Elm Plaza 100.0 1973/1995 168,852 37.4 275 0.7 4.36
Rte. 220/I-91 ---------
Enfield, Connecticut 1986
Millside Plaza 100.0 1977 161,128 97.5 722 1.9 4.59
U.S. 130 1986
Delran, New Jersey
Foxboro Plaza 100.0 1982 117,784 100.0 617 1.7 5.24
Rte. 140/I-95 1986
Foxborough, Massachusetts
North Star Shopping Center 100.0 1987 127,986 100.0 487 1.3 3.80
Alexandria, MN 1998
1105 Bellvue Road 100.0 1987 109,698 98.6 702 1.9 6.49
Atwater, CA 1998
Northgate Shopping Center 100.0 1987 105,063 100.0 693 1.9 6.60
Northgate Blvd. Sacramento, 1998
CA
McHenry Commons, S.C. 100.0 1987 100,408 98.7 564 1.5 5.69
North Richmond Road McHenry, 1998
IL
Pennyrile Marketplace, S.C. 100.0 1987 90,077 97.8 460 1.2 5.23
3010 Fort Campbell Road 1998
Hopkinsville, KY
Highway 101 100.0 1987 89,128 89.2 516 1.4 6.49
Port Angeles, WA 1998
Manning Avenue 100.0 1987 72,655 100.0 473 1.3 6.51
Reedley, CA 1998
--------- ------ ------- ----- ------
TOTAL/WEIGHTED AVERAGE 1,142,779 89.1 5,509 14.8 5.41
--------- ------ ------- ----- ------
PORTFOLIO TOTAL/WEIGHTED AVERAGE 3,889,514 90.5 37,145 100.0 10.86
--------- ------ ------- ----- ------
--------- ------ ------- ----- ------
PROPERTY AND LOCATION KEY TENANTS
- --------------------------------- -------------------------------------
FLORIDA MARKET
Palm Springs Plaza Acquired for Redevelopment.
Palm Beach County, FL
Tradewinds Shopping Kmart; Publix
Overseas Highway
Key Largo, FL
Bayhill Plaza Kmart; Publix
7705 Turkey Lake Road
Orlando, FL
The Shoppes at Lake Mary
Country Club Road
Lake Mary, FL
TOTAL/WEIGHTED AVERAGE
NEIGHBORING MARKETS
Elm Plaza APW Supermarkets Inc. (Waldbaum,
Rte. 220/I-91 Inc.)
Enfield, Connecticut
Millside Plaza Kmart Corporation; Eickhoff
U.S. 130 Supermarket (Shop- Rite)
Delran, New Jersey
Foxboro Plaza Bradlees Stores, Inc.
Rte. 140/I-95
Foxborough, Massachusetts
North Star Shopping Center Kmart
Alexandria, MN
1105 Bellvue Road Kmart
Atwater, CA
Northgate Shopping Center Kmart
Northgate Blvd. Sacramento,
CA
McHenry Commons, S.C. Kmart
North Richmond Road McHenry,
IL
Pennyrile Marketplace, S.C. Kmart
3010 Fort Campbell Road
Hopkinsville, KY
Highway 101 Kmart
Port Angeles, WA
Manning Avenue Kmart
Reedley, CA
TOTAL/WEIGHTED AVERAGE
PORTFOLIO TOTAL/WEIGHTED AVERAGE
- ------------------
(1) Total annualized contractual base rent for all leases in place at
December 31, 1999. Amount excludes (i) future contractual rent escalations
and cost of living increases; (ii) percentage rent and (iii) additional rent
payable by tenants such as common area maintenance, real estate taxes and
other expense reimbursements.
(2) Total annualized contractual base rent divided by total GLA leased at
December 31, 1999.
(3) Property was developed by the Company.
(4) Development of the Properties commenced in 1958. Substantial redevelopment
and expansion has been ongoing since 1985, when the Properties were acquired
by the Philips Group.
* Retail GLA only (excludes residential premises under redevelopment).
** Weighted by the Company's share of ownership.
14
OCCUPANCY
During the past five years the portfolio occupancy and total annualized
contractual base rent per square foot for its wholly-owned shopping center
properties were as follows:
TOTAL ANNUALIZED
NUMBER OF CONTRACTUAL BASE RENT PER
YEAR ENDED DECEMBER 31 PROPERTIES % LEASED LEASED SQUARE FOOT ($)(1)
- ------------------------------------------------- --------- -------- -------------------------
1999............................................. 25 90.8 10.27
1998............................................. 14 96.8 11.38
1997............................................. 13 96.3 10.44
1996............................................. 13 95.4 10.26
1995............................................. 13 90.7 9.94
- ------------------
(1) Total annualized contractual base rent for all leases in place at
December 31 for the respective years indicated, divided by total GLA leased
at such dates. Amount excludes (i) future contractual rent escalations and
cost of living increases, (ii) percentage rent and (iii) additional rent
payable by tenants such as common area maintenance, real estate taxes and
other expense reimbursements.
At December 31, 1999, Kmart Corporation was the largest tenant representing
approximately 11.1% of the Company's annualized base rental revenues. No other
tenant accounted for more than 4.0% of revenues.
LEASE EXPIRATIONS
The following table sets forth all scheduled lease expirations for the
Properties beginning January 1, 2000, assuming that none of the tenants
exercises renewal options or termination rights:
ANNUALIZED CONTRACTUAL
TOTAL BASE RENT AT 12/31/99(1)
GLA UNDER --------------------------------------------------
NUMBER EXPIRING % OF
LEASE EXPIRATION OF LEASES LEASES % OF TOTAL BASE RENT PORTFOLIO BASE RENT/
YEAR EXPIRING (SQ. FT.) EXPIRING GLA ($000) BASE RENT SQ. FT.(2)($)
- ---------------------- ------------- ----------- --------------- ---------- ------------ ----------------
2000................. 67 234,000 6.7 3,372 8.8 14.41
2001................. 55 278,582 7.9 4,141 10.8 14.86
2002................. 71 594,778 16.9 3,544 9.3 5.96
2003................. 48 138,362 3.9 1,897 5.0 13.71
2004................. 42 171,593 4.9 2,706 7.1 15.77
2005................. 15 136,628 3.9 1,596 4.2 11.68
2006................. 17 74,833 2.1 1,419 3.7 18.96
2007................. 10 100,464 2.9 2,036 5.3 20.27
2008................. 13 91,524 2.6 1,329 3.5 14.52
2009................. 10 159,343 4.5 1,876 4.9 11.77
2010 and thereafter.. 45 1,537,873 43.7 14,276 37.4 9.28
--- ---------- ----- -------- ------ ------
TOTAL/ WEIGHTED
AVERAGE......... 393 3,517,980 100.0 38,192 100.0 10.86
--- ---------- ----- -------- ------ ------
--- ---------- ----- -------- ------ ------
- ------------------------
(1) Total annualized contractual base rent for all leases in place at
December 31, 1999. Amount excludes (i) future contractual rent escalation
and cost of living increases, (ii) percentage rent and (iii) additional rent
payable by tenants such as common area maintenance, real estate taxes and
other expense reimbursement.
(2) Total annualized contractual base rent divided by total GLA leased at
December 31, 1999.
TAX BASIS AND REAL ESTATE TAXES
The aggregate cost basis of depreciable real property for federal income
tax purposes in the Properties as of December 31, 1999 was approximately
$158.8 million. Depreciation and amortization are provided on the straight line
and double declining balance methods over the estimated useful lives of the
assets, which range from 15 to 39 years. The aggregate real estate tax
obligations on the Properties during the fiscal year ended December 31, 1999 was
approximately $6.8 million, or approximately $1.74 per square foot of GLA.
Virtually all of the Company's leases contain provisions requiring tenants to
pay as additional rent a proportionate share of real estate tax increases,
including real estate tax increases resulting from improvements.
15
SIGNIFICANT PROPERTIES
Since the 1999 aggregate gross revenues for the Company's four Properties
located in Hialeah, Florida amounted to more than 10% of the total gross
revenues for the Properties during such year, additional information regarding
these Properties is provided below.
HIALEAH, FLORIDA PROPERTIES. The Hialeah, Florida Properties consist of
four adjacent Properties, which include Mall on the Mile, Palm Springs Village,
The Shops on 49th Street, and Philips Plaza, with an aggregate of 1.2 million
square feet of GLA. Hialeah is situated in the greater Miami metropolitan area,
north of the Miami International Airport, west of the municipalities of Miami,
Miami Beach and Aventura, and south of Broward County and Fort Lauderdale. The
four Properties form a unique, one-mile retail shopping corridor that fronts
both sides of West 49th Street, locally known as "Palm Springs Mile." The
collective 90 acres of the four Properties facilitate the expansion or
reconfiguration of existing space, which has been regularly expanded by the
Company since 1985.
The following table sets forth the percent leased and total annualized
contractual base rent per leased square foot for Palm Springs Mile as of the
dates indicated:
TOTAL ANNUALIZED CONTRACTUAL BASE
YEAR ENDED DECEMBER 31, % LEASED RENT PER LEASED SQUARE FOOT($)(1)
- ------------------------------------------ -------- -----------------------------------
1999...................................... 95.4 10.61
1998...................................... 94.3 9.95
1997...................................... 94.1 9.53
1996...................................... 93.8 9.57
1995...................................... 85.5 8.94
- ------------------
(1) Total annualized contractual base rent for all leases in place at December
31 for the respective years indicated, divided by total GLA leased at such
dates. Amount excludes (i) future contractual rent escalations and cost of
living increases, (ii) percentage rent and (iii) additional rent payable by
tenants such as common area maintenance, real estate taxes and other expense
reimbursements.
The following table sets forth all scheduled lease expirations for Palm
Springs Mile beginning January 1, 2000, assuming that none of the tenants
exercises renewal options or termination rights:
ANNUALIZED CONTRACTUAL
BASE RENT AT 12/31/99(1)
----------------------------------------
% OF
LEASE NUMBER OF SQUARE FOOTAGE % OF TOTAL PROPERTY
EXPIRATION LEASES UNDER EXPIRING BASE RENT BASE BASE RENT/
YEAR EXPIRING EXPIRING LEASES GLA ($000) RENT SQ. FT.(2)($)
-------------------- --------- ------------------ ----------- --------- -------- -------------
2000 25 114,082 10.0 1,207 10.0 10.58
2001 23 108,899 9.6 1,444 12.0 13.26
2002 22 236,706 20.8 1,211 10.1 5.12
2003 20 61,277 5.4 822 6.8 13.41
2004 23 123,446 10.9 1,826 15.2 14.79
2005 8 82,077 7.2 682 5.7 8.31
2006 3 23,808 2.1 417 3.5 17.52
2007 2 6,700 .6 110 .9 16.42
2008 6 13,787 1.2 369 3.1 26.76
2009 5 91,223 8.0 1,074 8.8 11.77
2010 and thereafter 14 273,554 24.2 2,886 23.9 10.55
--- ---------- ----- ------- ------ -----
TOTAL/WEIGHTED AVERAGE............ 151 1,135,559 100.0 12,048 100.0 10.61
--- ---------- ----- ------- ------ -----
--- ---------- ----- ------- ------ -----
- ------------------
(1) Total annualized contractual base rent for all leases in place at
December 31, 1999. Amount excludes (i) future contractual rent
escalations and cost of living increases, (ii) percentage rent and
(iii) additional rent payable by tenants such as common area
maintenance, real estate taxes and other expense reimbursements.
(2) Total annualized contractual base rent divided by total GLA leased at
December 31, 1999.
The aggregate cost basis of depreciable real property for federal income
tax purposes for Palm Springs Mile at December 31, 1999 was approximately
$32.8 million. Depreciation and amortization are provided on the straight line
and double declining balance methods over the estimated useful lives of the
assets, which range from 15 to 39 years. The aggregate real estate tax
obligations for Palm Springs Mile during the fiscal year ended December 31, 1999
was approximately $1.6 million, or approximately $1.35 per square foot of GLA.
16
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved in any litigation nor to its
knowledge is any litigation threatened against the Company or its subsidiaries
that, in management's opinion, would result in any material adverse effect on
the Company's ownership, management or operation of its properties, or which is
not covered by the Company's liability insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in the
fourth quarter of the year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the NYSE under the ticker symbol
"PHR" and began trading on May 8, 1998.
Market Information
The following table sets forth the quarterly high, low and closing price
per share of Common Stock reported on the NYSE for the years ended December 31,
1999 and 1998:
HIGH LOW CLOSE
------- ------- -------
1999:
First Quarter.......................................... $15.875 $13.062 $14.188
Second Quarter......................................... $16.938 $13.688 $16.875
Third Quarter.......................................... $17.125 $15.000 $15.750
Fourth Quarter......................................... $16.625 $15.500 $16.438
1998:
First Quarter.......................................... N/A N/A N/A
Second Quarter......................................... $17.75 $16.50 $16.50
Third Quarter.......................................... $17.50 $13.875 $15.312
Fourth Quarter......................................... $15.812 $14.188 $15.375
On March 15, 2000, the closing Common Stock sales price on the NYSE was
$16.31 per share.
Holders
On March 15, 2000, the Company had 1,212 common shareholders of record.
Recent Sales of Unregistered Securities
In connection with the Formation Transactions, the Properties or
partnership or membership interests in the Properties were contributed to the
Operating Partnership in exchange for 2,472,395 Units. All of such equity
issuances were issued to the holders directly by the Company without use of an
underwriter or placement agent and without registration under the Securities Act
of 1933, as amended, pursuant to the private placement exemption contained in
Section 4(2) of such Act. The Units are redeemable, at the Unitholder's request;
such Units will be redeemed, at the Company's option and in its sole discretion,
either for shares of Common Stock on a one-for-one basis (subject to certain
anti-dilution adjustments and exceptions) and/or cash (based upon the fair
market value of an equivalent number of shares of Common Stock at the time of
redemption).
17
Dividends and Distributions
The Company intends to make regular quarterly distributions to holders of
the Common Stock. Since completion of the Offering on May 13, 1998, the Company
has paid distributions on its Common Stock as follows:
RECORD DATE OF AMOUNT
DATE OF DECLARATION DATE PAYMENT PER SHARE
- ------------------------ -------- -------- ---------
1999 YEAR
3/15/99................. 3/31/99 4/15/99 $ .3775
6/15/99................. 6/30/99 7/15/99 $ .3775
9/15/99................. 9/30/99 10/15/99 $ .3775
12/15/99................ 12/31/99 1/18/00 $ .3775
1998 YEAR
6/15/98................. 6/30/98 7/15/98 $ .1812
9/15/98................. 9/30/98 10/15/98 $ .3375
12/15/98................ 12/31/98 1/15/99 $ .3375
For income tax purposes, 100% of the dividends for 1999 and 1998 totalling
$1.3628 and $.6667, per share respectively, represented ordinary dividend income
to stockholders.
Future distributions by the Company will be determined by the Board of
Directors and will be dependent upon a number of factors. In addition, in order
to maintain its qualification as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"), the Company is, in general, required to distribute
currently 95% of its taxable income.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating information
for: (i) Philips International Realty Corp. as of and for the years ended
December 31, 1999 and 1998 (see Footnote 1 to the following table); and
(ii) for The Philips Company (consisting of ten Properties accounted for on a
combined basis and two Properties accounted for on an equity basis) on a
combined basis as of December 31, 1996 and 1995 and for each of the three years
in the period ended December 31, 1997. This information should be read in
conjunction with all of the financial statements and the notes thereto appearing
elsewhere in this Form 10-K. The audited financial information for The Philips
Company as of and for the years ended December 31, 1996 and 1995 presented
herein is derived from the audited combined financial statements of The Philips
Company and the notes thereto which do not appear in this Form 10-K.
18
THE COMPANY AND THE PHILIPS COMPANY (COMBINED)
(Dollars in thousands, except per share data)
THE PHILIPS COMPANY
-----------------------------------
PHILIPS
INTERNATIONAL REALTY CORP(1) YEAR ENDED DECEMBER 31,
----------------------------------------- -----------------------------------
1999 1998 1997 1996 1995
---------------------------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND PROPERTY DATA)
OPERATING DATA:
Revenues from rental property..... $ 42,457 $ 22,625 $ 26,968 $ 25,947 $ 23,187
Income before extraordinary
items........................... 8,336 4,521 1,336 1,888 307
Income before extraordinary items,
per common share:
Basic........................... 1.14 .94 -- -- --
Diluted......................... 1.14 .94 -- -- --
BALANCE SHEET DATA:
Rental properties, net, at cost... 261,631 208,914 --(2) 137,399 124,892
Investments in real estate joint
ventures........................ 25,134 34,664 --(2) -- --
Total assets...................... 306,550 264,347 --(2) 129,841 116,856
Mortgages and notes payable....... 181,955 137,487 --(2) 133,609 131,740
Shareholders' equity (deficit).... 86,854 89,398 --(2) (11,166) (22,091)
OTHER DATA:
Funds from operations(3).......... 19,113 15,533(4) -- 5,574 3,590
Net cash provided by operating
activities...................... 15,784 6,494 -- 3,567 3,535
Net cash used in investing
activities...................... (51,760) (47,300) -- (9,359) (6,604)
Net cash provided by financing
activities...................... 30,044 49,922 -- 6,086 2,160
Cash dividends declared per
share........................... 1.51 .86 -- -- --
GLA (sq. ft.) (at end of period).. 3,889,514 3,814,889 2,391,856 2,348,117 2,348,117
Occupancy of Properties owned
(%) (at end of period).......... 90.5 94.4 96.3 95.4 90.7
- ------------------
(1) The Company was formed in July 1997 and incurred general and administrative
expenses of $543 for the period ended December 31, 1997. However, it did not
commence operations until the consummation of the Formation Transactions as
of the close of business on December 31, 1997. Therefore, separate summary
data for the Company is not presented above for this period. As of
December 31, 1997, the Company had total assets of $2.3 million and
shareholders' equity of $2.2 million.
(2) No 1997 balance sheet or other data is presented for The Philips Company as
of December 31, 1997 because the Formation Transactions were consummated as
of the close of business on such date and the Properties were transferred to
the Property Partnerships.
(3) The White Paper on Funds from Operations approved by the Board of Governors
of NAREIT in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures. The Company believes that Funds from Operations is helpful
to investors as a measure of the performance of an equity REIT because,
along with cash flow from operating activities, financing activities and
investing activities, it
(Footnotes continued on next page)
19
(Footnotes continued from previous page)
provides investors with an indication of the ability of the Company to incur
and service debt, to make capital expenditures and to fund other cash needs.
The Company computes Funds from Operations in accordance with standards
established by NAREIT which may not be comparable to Funds from Operations
reported by other REITs that do not define the term in accordance with the
current NAREIT definition or that interpret the current NAREIT definition
differently than the Company. Funds from Operations does not represent cash
generated from operating activities in accordance with GAAP and should not
be considered as an alternative to net income (determined in accordance with
GAAP) as an indication of the Company's financial performance or to cash
flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available
to fund the Company's cash needs, including its ability to make cash
distributions.
(4) Pro forma giving retroactive effect to the Offering as if it had occurred
January 1, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
accompanying Philips International Realty Corp. Consolidated Financial
Statements and Notes thereto, and the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998.
When used in this Annual Report on Form 10-K, the words "may", "will",
"expect", "anticipate", "continue", "estimate", "project", "intend" and similar
expressions are intended to identify forward-looking statements regarding
events, conditions and financial trends that may affect the Company's future
plans of operations, business strategy, results of operations and financial
position. Such forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties. Actual results may
differ materially from those included within the forward-looking statements as a
result of various factors.
Prior to completion of the public stock offering referred to in Note 2 to
the accompanying Consolidated Financial Statements, the Company and its
subsidiaries held a 6.1% non-managing general partnership interest in the
Operating Partnership (which held a 99.989% limited partner or member interest
in each of the Property Partnerships) and .01% non-managing general
partner/member interests in the Property Partnerships, respectively.
Accordingly, the Company accounted for its investments in the Operating
Partnership and the Property Partnerships on the equity method from January 1
through May 12, 1998.
The following discussion compares (i) the results of operations for the
year ended December 31, 1999 with the results of property operations of the
Company as if the Property Partnerships had been consolidated for the full year
ended December 31, 1998, and (ii) the results of property operations of the the
Company as if the Property Partnerships had been consolidated for the full year
ended December 31, 1998, with the results of property operations of The Philips
Company and the Merrick Commons and Mill Basin Plaza properties for the year
ended December, 1997. A comparison of the Company's reported results of
operations for calendar year 1998 and 1997 would not be meaningful since
operations did not commence until consummation of the Formation Transactions on
December 31, 1997.
20
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998
Revenues from rental property increased $7,608,000 or 21.8% to $42,457,000
for the year ended December 31, 1999, as compared with $34,849,000 for the year
ended December 31, 1998. This net increase is largely due to growth in base
rental revenues associated with the acquisition of shopping center properties,
the leasing of available premises in the portfolio and higher rent levels
achieved on new and renewal leases.
Property operating expenses increased $185,000 from $4,718,000 for the year
ended December 31, 1998, to $4,903,000 for the year ended December 31, 1999.
This net increase reflects increased expenses associated with the acquisition of
shopping center properties partially offset by management's efforts to reduce
operating expenses at existing properties. Property real estate taxes increased
by approximately $1,312,000 between the corresponding periods, reflecting the
acquisition of shopping center properties and the effect of increased
assessments associated with property expansions and renovations.
Management fees remained constant at approximately 3% of gross revenues for
the years ended December 31, 1999, and 1998, as provided for in the Management
Agreement.
Interest charges decreased $30,000 to $9,552,000 for the year ended
December 31, 1999, as compared with $9,582,000 for the year ended December 31,
1998, reflecting the repayment of indebtedness with proceeds of the Company's
initial public offering as discussed in Note 3, partially offset by interest
costs on borrowings to fund the acquisition of shopping center properties.
Depreciation and amortization expenses increased $1,414,000 to $7,243,000
for the year ended December 31, 1999, as compared with $5,829,000 for the year
ended December 31, 1998. This increase reflects the depreciation and
amortization of capital expenditures associated with the acquisition of shopping
center properties and renovation and retenanting of properties in the portfolio.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31,
1997. Revenues from rental property increased $2,912,000 or 9.1% to $34,849,000
for the year ended December 31, 1998, as compared with $31,937,000 for the year
ended December 31, 1997. This net increase is largely due to growth in base
rental revenues associated with the leasing of available premises in the
portfolio, higher rent levels achieved on new and renewal leases and the
acquisition of the Lake Mary, Florida, and Munsey Park, New York, properties.
Property operating expenses and management fees increased $212,000 from
$5,557,000 for the year ended December 31, 1997, to $5,769,000 for the year
ended December 31, 1998. This net increase reflects moderate increases in
certain seasonal operating expenses and increased expenses associated with the
acquisition of the Lake Mary, Florida, and Munsey Park, New York properties,
offset by a reduction in property management expenses reflecting the economies
of scale achieved in conjunction with the Offering. Property real estate taxes
increased by approximately $368,000 or 7.9% between the corresponding periods,
reflecting the acquisition of the Lake Mary, Florida, and Munsey Park, New York
properties and the effect of increased assessments associated with property
expansions and renovations, offset by management's continuing efforts to secure
property tax reductions.
Interest charges decreased $5,429,000 or 36.2% to $9,582,000 for the year
ended December 31, 1998, as compared with $15,011,000 for the year ended
December 31, 1997, primarily due to the repayment of indebtedness with proceeds
of the Offering as discussed in Note 2 to the accompanying financial statements.
Depreciation and amortization expenses increased $883,000 or 17.9% to
$5,829,000 for the year ended December 31, 1998, as compared with $4,946,000 for
the year ended December 31, 1997. This increase reflects the depreciation and
amortization of (i) capital expenditures associated with the renovation and
retenanting of properties in the portfolio, (ii) increased carrying values
related to the acquisition of non-sponsor interests in the Company's properties,
and (iii) the acquisition of the Lake Mary, Florida, and Munsey Park, New York
properties.
21
LIQUIDITY AND CAPITAL RESOURCES
The Philips Company historically relied on fixed and floating rate mortgage
financing to fund acquisitions and refinance maturing debt. Working capital and
funds required for distributions, debt service and capital expenditures were
generally provided through net cash flows from operations and, in certain
instances, capital contributions of partners and/or additional borrowing. The
ability to refinance debt prior to maturity and to fund acquisitions was
generally dependent upon interest rates, the general availability of both
mortgage debt and private equity in the marketplace and the cash flow and value
of the asset to be financed or refinanced. Distributions were generally made
based upon 100% of excess cash over identified, near-term requirements.
The Company believes that the Offering improved its financial position,
principally through enabling the Company to substantially delever its shopping
center portfolio. In connection with the Offering, the Company utilized the
approximately $109 million net proceeds to repay all of its then outstanding
floating-rate debt and certain secured, fixed-rate obligations. The secured,
fixed-rate debt then remaining, totaling approximately $71.5 million, had a
weighted average interest rate and term to maturity of 7.6% and 5.2 years,
respectively. The significant reduction in the Company's overall debt served to
reduce annual mortgage interest expense as a percentage of total revenue and the
cash from operations required to fund debt service requirements.
As described in Note 15 to the accompanying Consolidated Financial
Statements, the Company has financed the acquisition of real estate interests
during the year ended December 31, 1999 primarily with borrowings under the
Company's line of credit.
As of December 31, 1999, based upon the closing price for the Company's
Common Stock in trading on the NYSE of $16.4375 per share, the Company's ratio
of total debt to total debt and equity market capitalization was 53%. The
Company considers the availability of funds under its revolving credit facility
described below and its access to other sources of debt and equity capital
sufficient to pursue its identified growth strategies.
The Company intends to make regular quarterly distributions to the holders
of its Common Stock. See "Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters."
The Company expects to invest temporarily available cash in short-term,
investment-grade interest bearing securities, such as securities of the United
States government or its agencies, high-grade commercial paper and bank
deposits.
The Company expects to meet its short-term liquidity requirements generally
through net cash provided by operations. The Company believes that its net cash
provided by operations will be sufficient to allow the Company to make
distributions necessary to enable the Company to continue to qualify as a REIT.
The Company also believes that the foregoing sources of liquidity will be
sufficient to fund its short-term liquidity needs for the foreseeable future.
The Company expects to meet its long-term liquidity requirements, such as
property acquisition and development, scheduled debt maturities, renovations,
expansions and other non-recurring capital improvements through long-term
secured and unsecured indebtedness and the issuance of additional equity or debt
securities. The Company also expects to use funds available under its credit
facility to finance acquisition and development activities and capital
improvements on an interim basis.
Upon consummation of the Offering, the Company entered into a $100 million
senior revolving credit facility with a financial services institution to
finance acquisition, redevelopment and development activities and for general
corporate purposes. Borrowings under the credit facility bear interest at rates
ranging from 1.25% to 1.75% over the 30-day London Interbank Offered Rate
("LIBOR") based on the Company's total indebtedness outstanding relative to
total assets, as defined. The availability of funds under the credit facility
will be subject to the Company's compliance with a number of customary financial
and other covenants. Borrowings under the credit facility, totaling
approximately $94.2 million at December 31, 1999, are secured by certain
shopping center properties with recourse to the Company. The credit facility
matures in May 2000, subject to extension upon mutual agreement of the parties.
22
FUNDS FROM OPERATIONS
The White Paper on Funds from Operations approved by the Board of Governors
of NAREIT in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. The Company believes that Funds from Operations is helpful to
investors as a measure of the performance of an equity REIT because, along with
cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures and to fund
other cash requirements. The Company computes Funds from Operations in
accordance with standards established by NAREIT which may not be comparable to
Funds from Operations reported by other REITs that do not define the term in
accordance with the current NAREIT definition or that interpret the current
NAREIT definition differently than the Company. Funds from Operations does not
represent cash generated from operating activities in accordance with GAAP and
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash requirements, including its ability to make cash
distributions.
Funds from Operations for the years ended December 31, 1999 and 1998,
totaled approximately $19,113,000 and $15,533,000, respectively. The 1998
calendar year pro forma figure gives retroactive effect as of January 1, 1998,
to the Offering completed May 13, 1998, and reflects adjustments consistent with
those noted in the Company's Registration Statement on Form S-11. Funds from
Operations have been determined as follows:
CALCULATION OF FUNDS FROM OPERATIONS
(In thousands)
YEAR ENDED YEAR ENDED
12/31/99 12/31/98
---------- ----------
Net income applicable to common shares.................... $ 8,336 $ 4,392
Extraordinary items....................................... -- 65(1)
Minority interests in Operating Partnerships.............. 2,807 1,506
Depreciation and amortization............................. 7,243 3,809
Adjustment for unconsolidated joint ventures.............. 727(2) 289(2)
Pro forma adjustments..................................... -- 5,472(3)
-------- --------
Funds from Operations..................................... $ 19,113 $ 15,533
-------- --------
-------- --------
- ------------------
(1) Company share of write off of deferred financing costs and prepayment
penalties incurred in connection with the satisfaction of mortgages and
other loans with proceeds of the Offering.
(2) Company share of depreciation and amortization charges in unconsolidated
real estate joint ventures.
(3) Non-recurring adjustments consistent with those noted in Form S-11
Registration Statement necessary to give effect to completion of the May
1998 Offering as of January 1, 1998.
CASH FLOWS
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO DECEMBER 31, 1998. Net cash
provided by operating activities increased from $6,494,000 in 1998 to
$15,784,000 in 1999 primarily due to acquisitions of new properties and
reporting a full year of operations in 1999 compared to 1998. Prior to
completion of the public stock offering, the Company accounted for its
investments in the Operating Partnership and the Property Partnerships on the
equity method from January 1, 1998 to May 12, 1998. Thereafter, the Company
accounted for its interest in the properties on a consolidated basis effective
as of the completion of the IPO on May 13, 1998. Net cash used in investing
activities increased from $47,300,000 in 1998 to $51,760,000 in 1999 reflecting
increased acquisition activity. Net cash provided by financing activities
decreased from $49,922,000 in 1998 to $30,044,000 in 1999. The May 1998 IPO
generated proceeds of $113,027,000 of which $109,304,000 was used
23
to repay mortgage debt. In 1999, the dividends paid on common stock of
$10,791,000 and distributions to minority interest of $3,634,000 reflect a full
calendar year and an increase in the quarterly distribution to $.3775 per share
from $.3375 in 1998. Cash and cash equivalents decreased by $5,933,000 in 1999
compared to an increase of $9,116,000 in 1998 resulting primarily from the
aforementioned IPO proceeds in 1998.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31,
1997. As discussed in Notes 1 and 2 to the accompanying Consolidated Financial
Statements, the Company was required to account for its interests in the
Operating Partnership and the Property Partnerships on the equity method prior
to the completion of the Offering. The Operating Partnership and the Property
Partnerships had no business operations during 1997. Consequently, a comparison
of cash flows for the years ended December 31, 1998 and 1997 would not be
meaningful. Net cash flows provided by operating and financing activities
totaled $6,494,000 and $49,922,000, respectively, during the calendar year 1998.
Such cash flows were used to fund $47,300,000 in real estate investments and to
increase cash reserves to $9,100,000.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in information and
operating systems and believes those systems successfully responded to the Year
2000 date change. The cost directly associated with Year 2000 compliance was not
material to the Company's financial condition or results of operations. The
Company is not aware of any material problems resulting from Year 2000 issues,
and will continue to monitor its systems and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
INFLATION
Substantially all of the Company's leases contain provisions designed to
mitigate the adverse impact of inflation. Such provisions include clauses
enabling the Company to receive percentage rentals based on tenants' gross
sales, which generally increase as prices rise, and/or escalation clauses, which
generally increase rental rates during the terms of the leases. Such escalation
clauses are often related to increases in the consumer price index or similar
inflation indices. In addition, many of the Company's leases are for terms of
less than 10 years, which permits the Company to seek to increase rents upon
re-rental at market rates. Most of the Company's leases require the tenant to
pay their share of operating expenses, including common area maintenance, real
estate taxes and insurance, thereby reducing the Company's exposure to increase
in costs and operating expenses resulting from inflation.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Note 7 to Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Regulation S-X
are included in this Annual Report on Form 10-K commencing on page 29.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference from the
Company's definitive proxy statement relating to its Annual Meeting of
Shareholders to be held on May 30, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
Company's definitive proxy statement relating to its Annual Meeting of
Shareholders to be held on May 30, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
Company's definitive proxy statement relating to its Annual Meeting of
Shareholders to be held on May 30, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
Company's definitive proxy statement relating to its Annual Meeting of
Shareholders to be held on May 30, 2000.
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS AND REPORTS OF INDEPENDENT AUDITORS
PAGE(S)
IN
FORM 10-K
---------
PHILIPS INTERNATIONAL REALTY CORP.
Report of Independent Auditors................................................................. 29
Consolidated Balance Sheets as of December 31, 1999 and 1998................................... 30
Consolidated Statements of Income for the Years Ended December 31, 1999 and 1998............... 31
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1999 and
1998.......................................................................................... 32
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999 and 1998........... 33
Statement of Operations for the Period July 16, 1997 (Incorporation) to December 31, 1997...... 34
Statement of Shareholders' Equity for the Period July 16, 1997 (Incorporation) to December 31,
1997.......................................................................................... 35
Statement of Cash Flows for the Period July 16, 1997 (Incorporation) to December 31, 1997...... 36
Notes to Consolidated Financial Statements..................................................... 37
THE PHILIPS COMPANY
Report of Independent Auditors................................................................. 51
Combined Statement of Income for the Year Ended December 31, 1997.............................. 52
Combined Statement of Owners' Deficit for the Year Ended December 31, 1997..................... 53
Combined Statement of Cash Flows for the Year Ended December 31, 1997.......................... 54
Notes to Combined Financial Statements......................................................... 55
(a) 2. FINANCIAL STATEMENT SCHEDULES
Schedule III--Real Estate and Accumulated Depreciation as of
December 31, 1999...........................................49
All other schedules are omitted because they are not required or
the required information is shown in the financial statements or
notes thereto.
26
(a) 3. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company's
Current Report on Form 8-K dated December 31, 1997 and incorporated herein by reference)
3.2 Second Amended and Restated By-Laws of the Company (filed as Exhibit 3.3 to the Company's Registration
Statement on Form S-11, Registration No. 333-47975, and incorporated herein by reference)
3.3 Articles Supplementary of Series A Preferred Stock (filed as Exhibit 3.2 to the Company's Form 8-K dated
December 31, 1997 and incorporated herein by reference)
3.4 Form of Certificate of Common Stock (filed as Exhibit 3.4 to the Company's Registration Statement on Form
S-11, Registration No. 333-47975, and incorporated herein by reference)
4.1 Shareholder Rights Agreement, dated as of March 31, 1999 between the Company and BankBoston, N.A.
4.2 Articles Supplementary for Series A Junior Participating Preferred Stock
10.1 Amended and Restated Agreement of Limited Partnership of the Operating Partnership (filed as
Exhibit 10.1 to the Company's Registration Statement on Form S-11, Registration No. 333-47975, and
incorporated herein by reference)
10.2 First Amendment to the Amended and Restated Agreement of Limited Partnership of the Operating Partnership
10.3 Form of 1997 Stock Option and Long-Term Incentive Plan of the Company (filed as Exhibit 10.2 to the
Company's Registration Statement on Form S-4, Registration No. 333-41431, and incorporated herein by
reference)
10.4 Form of Agreement of Limited Partnership for Property Partnerships (filed as Exhibit 10.3 to the
Company's Registration Statement on Form S-4, Registration No. 333-41431, and incorporated herein by
reference)
10.5 Form of Articles of Incorporation of Philips Subs (filed as Exhibit 10.4 to the Company's Registration
Statement on Form S-4, Registration No. 333-41431, and incorporation herein by reference)
10.6 Form of Bylaws of Phillips Subs (filed as Exhibit 10.5 to the Company's Registration Statement on Form
S-4, Registration No. 333-41431, and incorporated herein by reference)
10.7 Contribution and Exchange Agreement, dated August 11, 1997, among National Properties Investment Trust,
the Board of Trustees, the Company, the Operating Partnership and certain contributing partnerships or
limited liability companies associated with a private real estate firm controlled by Philip Pilevsky and
certain partners and members thereof (filed as Exhibit 10.6 to the Company's Registration Statement on
Form S-4, Registration No. 333-41431, and incorporated herein by reference)
10.8 Form of Registration Rights Agreement among the Company and certain holders of limited partnership
interests in the Operating Partnership ) filed as Exhibit 10.7 to the Company's Registration Statement on
Form S-4, Registration No. 333-41431, and incorporated herein by reference)
10.9 Amended and Restated Management Agreement, dated as of March 30, 1998, among the Company, the Operating
Partnership and Philips International Management Corp. (filed as Exhibit 10-8 to the Company's Form 10-K
for the year ended December 31, 1997 and incorporated herein by reference)
10.10 Amended and Restated Non-Competition Agreement, dated as of March 30, 1998, among the Company, the
Operating Partnership, Philip Pilevsky and Sheila Levine. (filed as Exhibit 10.9 to the Company's
Form 10-K for the year ended December 31, 1997 and incorporated herein by reference)
10.11 Employment Agreement between the Company and Louis J. Petra (filed as Exhibit 10.1 to the Company's
Form 8-K dated December 31, 1997 and incorporated herein by reference)
10.12 Employment Agreement between the Company and Sheila Levine (filed as Exhibit 10.2 to the Company's
Form 8-K dated December 31, 1997 and incorporated herein by reference)
27
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------------------------------
10.13 Form of Warrant (filed as Exhibit 10.12 to the Company' Registration Statement on Form S-4, Registration
No. 333-41431, and incorporated herein by reference)
10.14 Amendment No. 1 to Contribution and Exchange Agreement, dated as of December 29, 1997 (filed as
Exhibit 10.13 to the Company's Form 8-K dated December 31, 1997 and incorporated herein by reference)
10.15 Non-Recourse Secured Promissory Note of National Properties Trust (filed as Exhibit 10.14 to Company's
Form 8-K dated December 31, 1997 and incorporated herein by reference)
10.16 Form of Amended and Restated Mortgage, Assignment of Leases, Security Agreement and Spreader Agreement
and Renewal Promissory Note for Mall on the Mile and Palm Springs Village (filed as Exhibit 10.15 to the
Company's Form 10-K for the year ended December 31, 1999 and incorporated herein by reference)
10.17 Employment Agreement between the Company and Brian J. Gallagher (filed as Exhibit 10.12 to the Company's
Registration Statement on Form S-11, Registration No. 333-47975, and incorporated herein by reference)
10.18 Credit Agreement among the Operating Partnership and Prudential Securities Credit Corporation (filed as
Exhibit 10.18 to the Company's Report on Form 10-Q for the period ended March 31, 1998 and incorporated
herein by reference.)
21.1 List of Subsidiaries of the Company (filed as Exhibit 21.1 to the Company's Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference)
23.1* Consent of Ernst & Young LLP
27.1* Financial Data Schedule
- ------------------
* filed herewith
(B) REPORTS ON FORM 8-K
The Company did not file a Current Report on Form 8-K in the fourth quarter
of 1999.
28
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Philips International Realty Corp.
We have audited the accompanying balance sheets of Philips International Realty
Corp. as of December 31, 1999, and 1998 and the related statements of
income/operations, shareholders' equity and cash flows for each of the two years
in the period ended December 31, 1999, and the period July 16, 1997,
(Incorporation) to December 31, 1997. We have also audited the financial
statement schedule listed on the Index at Item 14(a). These financial statements
are the responsibility of the management of Philips International Realty Corp.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Philips
International Realty Corp. as of December 31, 1999, and 1998 and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended December 31, 1999, and the period July 16, 1997, to
December 31, 1997, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.
ERNST & YOUNG LLP
New York, New York
March 1, 2000
29
PHILIPS INTERNATIONAL REALTY CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
ASSETS
Rental properties, at cost
Land and improvements.......................................................... $ 66,403,111 $ 55,500,352
Building and improvements...................................................... 222,047,039 173,395,836
------------ ------------
288,450,150 228,896,188
Less: Accumulated depreciation................................................. 26,819,530 19,981,802
------------ ------------
Rental properties, net...................................................... 261,630,620 208,914,386
Investments in real estate joint ventures........................................ 25,134,060 34,663,524
Cash and cash equivalents........................................................ 3,183,142 9,116,070
Accounts receivable.............................................................. 7,445,972 5,986,763
Deferred charges and prepaid expenses............................................ 4,934,190 3,879,574
Other assets..................................................................... 4,222,373 1,786,903
------------ ------------
Total Assets..................................................................... $306,550,357 $264,347,220
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages and notes payable.................................................... $181,955,221 $137,486,668
Accounts payable and accrued expenses.......................................... 2,980,303 2,350,799
Dividends payable.............................................................. 2,771,031 2,477,412
Other liabilities.............................................................. 1,897,998 1,715,335
------------ ------------
Total Liabilities................................................................ 189,604,553 144,030,214
------------ ------------
Minority interests in Operating Partnership...................................... 30,091,696 30,919,150
------------ ------------
Commitments and contingencies
Shareholders' Equity:
Preferred Stock, $.01 par value; 30,000,000 shares authorized; no shares issued
and outstanding............................................................. -- --
Common Stock, $.01 par value; 150,000,000 shares authorized; 7,340,474 shares
issued and outstanding...................................................... 73,405 73,405
Additional paid in capital....................................................... 92,668,007 92,668,007
Cumulative distributions in excess of net income................................. (5,183,136) (2,435,222)
------------ ------------
87,558,276 90,306,190
Stock purchase loans receivable.................................................. (704,168) (908,334)
------------ ------------
Total Shareholders' Equity....................................................... 86,854,108 89,397,856
------------ ------------
Total Liabilities and Shareholders' Equity....................................... $306,550,357 $264,347,220
------------ ------------
------------ ------------
See accompanying notes.
30
PHILIPS INTERNATIONAL REALTY CORP.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
Revenues from rental property...................................................... $42,457,222 $22,625,029
----------- -----------
Expenses:
Operating expenses............................................................... 4,902,945 3,213,285
Real estate taxes................................................................ 6,319,382 3,258,543
Management fees to affiliates.................................................... 1,228,451 687,779
Interest expense................................................................. 9,552,032 4,243,152
Depreciation and amortization.................................................... 7,242,960 3,809,142
General and administrative expenses.............................................. 2,775,488 1,607,924
----------- -----------
32,021,258 16,819,825
----------- -----------
Operating income................................................................... 10,435,964 5,805,204
Equity in net income of real estate joint ventures................................. 2,432,494 683,222
Minority interests in income of Operating Partnership.............................. (2,806,967) (1,505,678)
Preferred units income allocation from Operating Partnership....................... -- 63,143
Equity in net income of Operating Partnership, as adjusted for the allocation of
income to preferred units........................................................ -- 6,823
Other income (expense), net........................................................ (1,725,281) (531,792)
----------- -----------
Income before extraordinary items.................................................. 8,336,210 4,520,922
Extraordinary items................................................................ -- (65,361)
----------- -----------
Net income....................................................................... $ 8,336,210 $ 4,455,561
----------- -----------
----------- -----------
Net income applicable to common shares........................................... $ 8,336,210 $ 4,392,418
----------- -----------
----------- -----------
Basic and diluted net income per common share:
Income before extraordinary items................................................ $ 1.14 $ 0.94
Extraordinary items.............................................................. -- (0.01)
----------- -----------
Net income....................................................................... $ 1.14 $ 0.93
----------- -----------
----------- -----------
See accompanying notes.
31
PHILIPS INTERNATIONAL REALTY CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------- ------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ---------- --------- ------------ ------------
Balance, December 31, 1997............... 1,940 $1,940,000 47,660 $ 477 $ 805,523
Net income...............................
Issuance of common stock................. 7,292,814 72,928 114,004,100
Redemption of preferred stock............ (1,940) (1,940,000)
Dividends on preferred stock.............
Dividends on common stock................
Amortization of stock purchase loans.....
Reallocation of equity to minority
partners in Operating Partnership...... (22,141,616)
--------- ---------- --------- ------------ ------------
Balance, December 31, 1998............... -- -- 7,340,474 73,405 92,668,007
Net income...............................
Dividends on common stock................
Amortization of stock purchase loans.....
--------- ---------- --------- ------------ ------------
Balance, December 31, 1999............... -- $ -- 7,340,474 $ 73,405 $ 92,668,007
--------- ---------- --------- ------------ ------------
--------- ---------- --------- ------------ ------------
CUMULATIVE
DISTRIBUTIONS
IN EXCESS STOCK TOTAL
OF NET PURCHASE SHAREHOLDERS'
INCOME LOANS EQUITY
------------- ----------- -------------
Balance, December 31, 1997.......................................... $ (542,723) $ 2,203,277
Net income.......................................................... 4,455,561 4,455,561
Issuance of common stock............................................ $(1,050,000) 113,027,028
Redemption of preferred stock....................................... (1,940,000)
Dividends on preferred stock........................................ (63,143) (63,143)
Dividends on common stock........................................... (6,284,917) (6,284,917)
Amortization of stock purchase loans................................ 141,666 141,666
Reallocation of equity to minority partners in
Operating Partnership............................................. (22,141,616)
----------- ----------- -------------
Balance, December 31, 1998.......................................... (2,435,222) (908,334) 89,397,856
Net income.......................................................... 8,336,210 8,336,210
Dividends on common stock........................................... (11,084,124) (11,084,124)
Amortization of stock purchase loans................................ 204,166 204,166
----------- ----------- -------------
Balance, December 31, 1999.......................................... $(5,183,136) $ (704,168) $ 86,854,108
----------- ----------- -------------
----------- ----------- -------------
See accompanying notes.
32
PHILIPS INTERNATIONAL REALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1999 1998
----------- -------------
Operating activities:
Net income..................................................................... $ 8,336,210 $ 4,455,561
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 7,242,960 3,809,142
Amortization--other......................................................... 928,845 141,666
Extraordinary items......................................................... -- 65,361
Equity in net income of real estate joint ventures.......................... (2,432,494) (683,222)
Distributions from real estate joint ventures............................... 2,406,781 --
Minority interests in income of Operating Partnership....................... 2,806,967 1,505,678
Preferred units income allocation from Operating Partnership................ -- (63,143)
Equity in net income of Operating Partnership............................... -- (6,823)
Changes in operating assets and liabilities:
Accounts receivable......................................................... (1,459,209) (566,067)
Deferred charges............................................................ (2,163,035) (1,045,036)
Other assets................................................................ (695,523) 8,289
Accounts payable and accrued expenses....................................... 629,504 (711,323)
Other payables.............................................................. 182,663 (416,083)
----------- -------------
Net cash provided by operating activities........................................ 15,783,669 6,494,000
----------- -------------
Investing activities:
Additions to land, buildings and improvements.................................. (40,088,553) (14,325,307)
Investments in real estate joint ventures...................................... (9,906,724) (32,974,286)
Investment in mortgage note, secured by real estate............................ (1,764,947) --
----------- -------------
Net cash used in investing activities............................................ (51,760,224) (47,299,593)
----------- -------------
Financing activities:
Repayment of mortgage notes payable, exclusive of scheduled principal
amortization................................................................ (6,300,000) (109,303,875)
Principal amortization of mortgage notes payable............................... (1,056,165) (483,411)
Proceeds from debt financing................................................... 51,824,718 53,775,000
Distributions to minority interests............................................ (3,634,421) (1,282,431)
Redemption of preferred stock.................................................. -- (1,940,000)
Proceeds from sale of common stock............................................. -- 113,027,028
Dividends paid on common stock................................................. (10,790,505) (3,807,505)
Dividends paid on preferred stock.............................................. -- (63,143)
----------- -------------
Net cash provided by financing activities........................................ 30,043,627 49,921,663
----------- -------------
Net increase (decrease) in cash and cash equivalents............................. (5,932,928) 9,116,070
Cash and cash equivalents, beginning of year..................................... 9,116,070 --
----------- -------------
Cash and cash equivalents, end of the year....................................... $ 3,183,142 $ 9,116,070
----------- -------------
----------- -------------
Acquisition of land, building and improvements with assumed indebtedness......... $ -- $ 196,863,763
----------- -------------
----------- -------------
Acquisition of real estate assets accounted for at the time of purchase on the
equity method.................................................................. $19,461,901 $ --
----------- -------------
----------- -------------
Dividends declared and paid in succeeding period................................. $ 2,771,031 $ 2,477,412
----------- -------------
----------- -------------
See accompanying notes.
33
PHILIPS INTERNATIONAL REALTY CORP.
STATEMENT OF OPERATIONS
FOR THE PERIOD JULY 16, 1997 (INCORPORATION) TO DECEMBER 31, 1997
(IN THOUSANDS)
Revenue.................................................................................................. $ --
General and administrative expenses...................................................................... 543
------
Net loss................................................................................................. $ (543)
------
------
See accompanying notes.
34
PHILIPS INTERNATIONAL REALTY CORP.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD JULY 16, 1997 (INCORPORATION) TO DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
COMMON STOCK CUMULATIVE
PREFERRED STOCK AND WARRANTS ADDITIONAL DISTRIBUTIONS TOTAL
--------------- --------------- PAID-IN IN EXCESS OF SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL NET INCOME EQUITY
------ ------ ------ ------ ---------- ------------- -------------
Net loss.................................. $(543) $ (543)
Issuance of preferred stock............... 1,940 $1,940 1,940
Issuance of common stock and warrants..... 47,660 $0 $ 2,594 2,594
Reallocation of equity to
minority partners in the
Operating Partnership................... (1,788) (1,788)
------ ------ ------ -- -------- ----- -------
Balance, December 31, 1997................ 1,940 $1,940 47,660 $0 $ 806 $(543) $ 2,203
------ ------ ------ -- -------- ----- -------
------ ------ ------ -- -------- ----- -------
See accompanying notes.
35
PHILIPS INTERNATIONAL REALTY CORP.
STATEMENT OF CASH FLOWS
FOR THE PERIOD JULY 16, 1997 (INCORPORATION) TO DECEMBER 31, 1997
(IN THOUSANDS)
Operating activities:
Net loss................................................................................................. $ (543)
Adjustments to reconcile net loss to net cash provided by operating activities:
Non-cash compensation.................................................................................. 461
Changes in operating assets and liabilities:
Due to related parties................................................................................. 82
------
Net cash provided by operating activities................................................................ --
Investing activities:
Investment in Philips International Realty, L.P., representing net cash used in
investing activities................................................................................ (533)
------
Financing activities:
Proceeds from issuance of common stock, representing net cash provided by
financing activities................................................................................ 533
------
Net increase in cash and cash equivalents................................................................ --
Cash and cash equivalents, beginning of period........................................................... --
------
Cash and cash equivalents, end of period................................................................. $ --
------
------
Non-cash investing and financing activities:
Issuance of Preferred Stock in payment of advisory fee................................................. $1,940
------
------
Acquisition of real estate in exchange for issuance of Common Stock and assumption of debt............. $2,142
------
------
Reallocation of equity in Operating Partnership........................................................ $1,788
------
------
See accompanying notes.
36
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. FORMATION TRANSACTIONS
Philips International Realty Corp. (the "Company"), a Maryland corporation,
and Philips International Realty, L.P. (the "Operating Partnership"), a Delaware
limited partnership, were formed in July 1997 for the purpose of combining
certain real estate properties (the "Properties") which were owned by
partnerships and limited liability companies (the "Contributing Companies") in
which Philip Pilevsky ("Mr. Pilevsky"), a substantial shareholder of the
Company, owned an interest.
On December 31, 1997, the partners and members of the Contributing
Companies transferred their shopping center assets or, in certain instances,
their partnership or membership interests in the entities which hold title to
such shopping center assets, to certain newly-formed entities (the "Property
Partnerships") as designated by the Operating Partnership in exchange for
limited partnership interests ("Units") therein. Simultaneously, the Company
contributed its fee title interest in another shopping center property plus $533
in cash to the Operating Partnership in exchange for a non-managing general
partnership interest therein. Philips International Realty, LLC (the "Interim
Managing General Partner"), a Delaware limited liability company whose sole
member was Mr. Pilevsky, made pro rata contributions to the Operating
Partnership and to each of the Property Partnerships in exchange for managing
general partner/member interests therein. Additionally, the Company capitalized
various wholly-owned subsidiaries so as to enable such entities to similarly
obtain general partner or managing member interests in each of the Property
Partnerships. The resultant effect of the foregoing, together with certain other
events constituting the Formation Transactions, was that the ownership of (A)
the Operating Partnership was comprised (i) .001% by a managing general partner
interest held by the Interim Managing General Partner (ii) 6.1% by a
non-managing general partner interest held by the Company, and (iii) 93.899% by
limited partner interests held by the Unit holders and (B) the Property
Partnerships were each comprised (i) .001% by a managing general partner/member
interest held by the Interim Managing General Partner (ii) .01% by a non-
managing general partner/member interest held by subsidiaries of the Company,
and (iii) 99.989% by a limited partner or member interest held by the Operating
Partnership.
Upon completion of the public stock offering discussed in Note 2, the
Interim Managing General Partner withdrew from the Operating Partnership and
each of the Property Partnerships and the Company (directly or through its
subsidiaries) assumed in full the rights and responsibilities associated with
the management of the business and affairs of the Operating Partnership and each
of the Property Partnerships as sole general partner/managing member. Prior to
this time, the Company was required to account for its interests in the
Operating Partnership and the Property Partnerships on the equity method. The
Operating Partnership and the Property Partnerships had no business operations
during 1997.
Reference should be made to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, for further information with regard to the
Formation Transactions.
2. STOCK SPLIT AND PUBLIC STOCK OFFERING
On April 14, 1998 the Company authorized a 1.7051 for 1 split of its Common
Stock which was effected immediately prior to the consummation of the stock
offering referred to below. As a result, the number of outstanding shares of
Common Stock prior to the stock offering increased to 81,265 shares from 47,660
shares.
On May 13, 1998, the Company completed a primary public stock offering (the
"IPO") of 7,200,000 shares of Common Stock at $17.50 per share. The proceeds
from this sale of Common Stock, net of related transaction costs of
approximately $13,000, totaling approximately $113,000, were used primarily to
(i) repay certain mortgage loans and other indebtedness (including accrued
expenses incurred in connection with the Formation Transactions) of the
Operating Partnership and the Property Partnerships, and (ii) to redeem the
Series A Convertible Redeemed Preferred Stock. As a consequence of this use of
proceeds, the ownership of the Operating Partnership is now comprised of a 74.8%
general partner interest held by the Company and a 25.2% limited partner
interest held by the Unit holders. Accordingly, the Company has accounted for
its interests in the
37
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. STOCK SPLIT AND PUBLIC STOCK OFFERING--(CONTINUED)
Operating Partnership and the Property Partnerships on a consolidated basis
effective as of the completion of the IPO. A total 9,812,869 shares of Common
Stock (7,340,474) and Units (2,472,395) were outstanding effective as of the
completion of the IPO.
3. SIGNIFICANT ACCOUNTING POLICIES
Business Information and Segments
The Company, its subsidiaries, affiliates and related real estate joint
ventures are engaged principally in the ownership, development and acquisition
for redevelopment of neighborhood and community shopping centers predominantly
located in the greater New York, N.Y. and Miami, Fl. metropolitan areas. These
shopping centers are anchored generally by discount stores, supermarkets,
drugstores and other retailers offering day to day shopping necessities.
Management considers the Company's various operating, investing, and financing
activities to comprise a single business segment and evaluates real estate
performance and allocates resources based upon net income.
The Company's results of operations are significantly dependent on the
overall health of the retail industry. The Company's tenant base is comprised
almost exclusively of merchants in the retail industry. The retail industry is
subject to external factors such as inflation, consumer confidence, unemployment
rates and consumer tastes and preferences. A decline in the retail industry
could reduce merchant sales, which could adversely affect the operating results
of the Company. At December 31, 1999, Kmart Corporation was the largest tenant
representing approximately 11.1% of Company's annualized base rental revenues.
No other tenant accounted for more than 4.0% of revenues. Approximately 32.4% of
total revenue for the year ended December 31, 1999 was derived from the
Company's four shopping center properties in Hialeah, Florida. Any adverse
change in the operating profitability of these properties may have a material
adverse effect on the Company.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly-owned, and the
Operating Partnership and the Property Partnerships effective as of May 13,
1998. See Notes 1 and 2. All significant intercompany accounts and balances have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
Real Estate Properties
Building and improvements are depreciated on the straight-line method over
the estimated useful lives of the assets which range from fifteen to thirty-nine
years, and tenant improvements (included in buildings and improvements in the
accompanying balance sheet) are amortized over the lives of the respective
leases using the straight-line method.
In accordance with Statement of Financial Accounting Standards No. 121
("SFAS No. 121"), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, the Company reviews real estate assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of assets to be held and used may not be recoverable. Impaired
assets are required to be reported at the lower of cost or fair value. Assets to
be disposed of are required to be reported at the lower of cost or fair value
less cost to sell.
38
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Assets are classified to be disposed when management has committed to a plan to
dispose of the assets. No impairment losses have been recorded.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with an
original maturity of three months or less from date of purchase.
Banking relationships are maintained with major financial institutions.
The properties are operated through multiple bank accounts to mitigate
exposure to loss of cash balances which may from time to time exceed federally
insured limits.
Revenue Recognition
Minimum revenues from rental property are recognized on a straight-line
basis over the terms of the respective tenant leases. Percentage rents,
representing the Company's participation in tenants' gross sales in excess of
predetermined thresholds, are recognized upon verification that such rents are
due for any given lease year.
Deferred Charges
Costs incurred to obtain tenant leases and long term financing, included in
deferred charges and prepaid expenses in the accompanying Consolidated Balance
Sheet, are amortized over the terms of the related leases or debt agreements, as
applicable.
Income Taxes
The Company operates so as to qualify as a REIT under section 856(C) of the
Internal Revenue Code of 1986, as amended. As a REIT, the Company generally will
not be subject to federal income tax to the extent it distributes its REIT
taxable income to its shareholders and meets certain other requirements. If the
Company fails to qualify as a REIT in any taxable year, the Company will be
subject to federal income tax on its taxable income at regular corporate rates.
As a REIT, the Company may be subject to certain state and local taxes on its
income and property and federal income and excise taxes on any undistributed
taxable income.
Income (loss) per share
Basic net income (loss) per share excludes the dilutive effects of any
outstanding options and warrants. Diluted net income (loss) per share includes
the dilutive (but not any anti-diliutive) effect of outstanding options and
warrants calculated under the treasury stock method.
Basic and diluted net income per common share in the accompanying
Consolidated Statement of Income is based upon a weighted average number
7,340,474 and 4,715,226 shares of Common Stock outstanding for the years ended
December 31, 1999 and December 31, 1998 respectively.
The Company and the Operating Partnership received their interest in the
Properties at the close of business on December 31, 1997 and had no operations
as a public entity; therefore, the Company has not presented income (loss) per
share for this period. If the 47,660 shares had been outstanding from the
Company's incorporation, through December 31, 1997, (see Note 2) the Company's
basic and diluted loss per share (as calculated pursuant to FASB No. 128) would
have been $11.39. The Company authorized a Common Stock split of 1.7051 to 1
effective immediately prior to the completion of the IPO. Had this stock split
occurred as of December 31, 1997, basic and diluted loss per share would have
been $6.68.
39
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities (as
amended by FASB Statement No. 137), which is required to be adopted in years
beginning after June 15, 2000. Statement 133 permits early adoption as of the
beginning of any fiscal quarter after its issuance. The Company expects to adopt
the new Statement effective January 1, 2001. The Statement will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company does not anticipate that the
adoption of the Statement will have a significant effect on its results of
operations or financial position.
Interest Capitalization
Interest costs incurred during the development and major redevelopment of
shopping center properties are capitalized and amortized on the same basis as
related depreciation. Total interest costs incurred, paid and capitalized during
the years ended December 31, 1999 and 1998 totaled $12,500, $12,143 and $407,
and $5,360, $4,572 and $50 respectively. A portion of interest cost is included
in other income (expense), net.
4. INVESTMENTS IN REAL ESTATE JOINT VENTURES
The Company and its subsidiaries have investments in various real estate
joint ventures which are accounted for on the equity method. These joint
ventures are engaged in the operation of shopping centers which are either owned
or held under a long-term ground lease. Summarized financial information
regarding the financial position and operations of these real estate joint
ventures is as follows: [see Note 15.]
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
ASSETS
Real estate, net....................................... $28,804 $87,223
Other assets........................................... 10,317 4,459
------- -------
$39,121 $91,682
------- -------
------- -------
LIABILITIES AND PARTNERS' CAPITAL
Mortgages payable...................................... $10,000 $10,000
Other liabilities...................................... 804 1,211
Partners' Capital...................................... 28,317 80,471
------- -------
$39,121 $91,682
------- -------
------- -------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
------- -------
Revenues from rental property.......................... $ 6,569 $ 9,417
Operating expenses..................................... (1,869) (2,456)
Mortgage interest...................................... (783) (394)
Depreciation and amortization.......................... (1,124) (1,505)
Other, net............................................. 369 (665)
------- -------
$ 3,162 $ 4,397
------- -------
------- -------
40
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. INVESTMENT IN OPERATING PARTNERSHIP AND PROPERTY PARTNERSHIPS
Prior to completion of the IPO, the Company and its subsidiaries held a
6.1% non-managing general partnership interest in the Operating Partnership
(which held a 99.989% limited partner or member interest in each of the Property
Partnerships) and .01% non-managing general partner/member interests in the
Property Partnerships, respectively. Accordingly, the Company accounted for its
investments in the Operating Partnership and the Property Partnerships on the
equity method.
Condensed financial information for (i) the Company as if its property
operations had been consolidated as of January 1, 1998 for (a) the period
January 1, 1998 to May 12, 1998 and, (b) for the year ended December 31, 1998,
follows:
PERIOD
JANUARY 1, 1998
TO YEAR ENDED
MAY 12, 1998 DECEMBER 31, 1998
--------------- -----------------
OPERATING DATA:
Revenues from rental property................................................. $12,224 $34,849
------- -------
Expenses:
Operating expenses.......................................................... 1,505 4,718
Real estate taxes........................................................... 1,749 5,007
Management fees to affiliates............................................... 363 1,051
Interest expense............................................................ 5,337 9,582
Depreciation and amortization............................................... 2,021 5,829
General and administrative expenses......................................... 52 62
------- -------
11,027 26,249
------- -------
Operating income.............................................................. $ 1,197 $ 8,600
------- -------
------- -------
6. DEFERRED CHARGES, PREPAID EXPENSES AND OTHER ASSETS
Deferred Charges and Prepaid Expenses:
Deferred charges and prepaid expenses included in the accompanying
Consolidated Balance Sheet as of December 31, 1999 and 1998 are comprised as
follows:
1999 1998
------ ------
Deferred financing......................................................... $1,953 $1,315
Deferred leasing........................................................... 3,716 2,802
Other deferred charges..................................................... 748 438
Prepaid expenses........................................................... 433 333
------ ------
6,850 4,888
Less, accumulated amortization............................................. 1,916 1,008
------ ------
$4,934 $3,880
------ ------
------ ------
41
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. DEFERRED CHARGES, PREPAID EXPENSES AND OTHER ASSETS--(CONTINUED)
Other Assets:
Other assets in the accompanying Consolidated Balance Sheets as of
December 31, 1999 and 1998 are comprised as follows:
1999 1998
------ ------
Mortgage note secured by real estate....................................... $1,765 $ --
Real estate tax, capital improvements and other escrows.................... 1,367 1,134
Other...................................................................... 1,090 653
------ ------
$4,222 $1,787
------ ------
------ ------
At December 31, 1999, Other Assets included loan to officer of $175, net of
amortization.
7. MORTGAGES AND NOTES PAYABLE
As of December 31, 1999 and 1998, mortgages and notes payable aggregated
$181,955 and $137,487 and were substantially collateralized by the shopping
center properties. Mortgage payments are due in monthly installments of
principal and/or interest and mature on various dates through 2019. The loan
agreements contain customary representations, covenants and events of default.
The following table summarizes the mortgages and notes payable outstanding
as of December 31, 1999 and 1998:
PROPERTY 1999 1998
- -------------------- -------- --------
Millside Plaza First mortgage notes payable to a bank with fixed interest rate $ 11,941 $ 12,061
Elm Plaza of 7.48% due December 2002. The notes are cross- defaulted and
Foxboro Plaza cross-collateralized. Monthly payments of principle and
interest total $85.
Mall on the Mile First mortgage notes with a life insurance company with a fixed 32,860 33,384
Palm Springs Village interest rate of 7.83% due February 2004. The notes are
cross-defaulted and cross-collateralized. Monthly payments of
principal and interest total $260.
Merrick Commons First mortgage note payable to a bank with a fixed interest 25,280 25,540
and Mill Basin Plaza rate of 7.38% due January 2003. The note is collateralized by
mortgages on both properties. Monthly payments of principal and
interest total $178.
Munsey Park S. C. First mortgage note payable to a bank with a fixed interest 12,612 12,727
rate of 8.125% due October 2007. Monthly payments of principal
and interest total $95.
1,250 1,250
Unsecured promissory note with a fixed interest rate of 5.00%
due July 2001.
Walgreens at First mortgage note with a life-insurance company with a fixed 3,812 --
Freeport interest rate of 7.01% due June 2019. Monthly payments of
principal and interest total $30.
-------- --------
TOTAL FIXED RATE OBLIGATIONS 87,755 84,962
-------- --------
(Table continued on following page)
42
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. MORTGAGES AND NOTES PAYABLE--(CONTINUED)
PROPERTY 1999 1998
- -------------------- -------- --------
Forest Ave. Revolving credit facility bearing interest at rates ranging 94,200 52,525
Branhaven Plaza from LIBOR plus 1.25% to 1.75% (8.23% at December 31, 1999),
Meadowbrook Commons maturing in May 2000, subject to extension upon mutual
Shops on 49th Street agreement of the parties.
Philips Plaza
Tradewinds
Bayhill Plaza
Central Park Ave
-------- --------
TOTAL VARIABLE RATE OBLIGATIONS 94,200 52,525
-------- --------
TOTAL MORTGAGES AND NOTES PAYABLE $181,955 $137,4878
-------- --------
-------- --------
Credit Facility
The Company established a revolving credit facility of $100,000 upon the
consummation of the IPO. The availability of funds under the credit facility is
subject to the Company's compliance with a number of customary financial and
other covenants on an on-going basis. The credit facility has been used
primarily to finance its acquisition and redevelopment activities. Borrowings
under the credit facility are collateralized by certain shopping center
properties with recourse to the Company and the Operating Partnership.
The combined aggregate principal maturities of mortgages and notes payable
outstanding as of December 31, 1999 are as follows:
FIXED RATE OBLIGATIONS VARIABLE RATE OBLIGATIONS
------------------------------------------------ -------------------------
RATE AMOUNT RATE
---------------------- ---------------------- -------------------------
2000.................................... 7.65% $ 1,195 8.23%
2001.................................... 6.35% 2,540 --
2002.................................... 7.50% 12,912 --
2003.................................... 7.40% 25,366 --
2004.................................... 7.83% 30,590 --
Thereafter.............................. 7.88% 15,152 --
AMOUNT
-------------------------
2000.................................... $94,200
2001.................................... --
2002.................................... --
2003.................................... --
2004.................................... --
Thereafter.............................. --
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values for the financial instruments were determined by
management using market information available as of December 31, 1999 and 1998
and appropriate valuation methodologies which included, in the case of debt
instruments, consideration of interest rates available for the issuance of debt
with terms and maturities similar to its currently outstanding indebtedness.
Considerable judgment is necessary to interpret market data and develop
estimated fair values. Accordingly, the estimates are not necessarily indicative
of the amounts that could be realized on disposition of the financial
instruments. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Although management is not aware of any factors that would significantly affect
its estimates of the fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since
December 31, 1999.
43
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
Cash equivalents, accounts receivable and mortgages and notes payable are
reflected in the accompanying Consolidated Balance Sheet as of December 31, 1999
and 1998 at amounts which reasonably approximate their fair values.
9. RELATED PARTY TRANSACTIONS
The Company has entered into a management agreement with Philips
International Holding Corp. ("PIHC"), a related party, which provides for
day-to-day management, leasing and construction supervisory services. Fees
payable for such services are (i) a management fee equal to 3% of gross rental
collections, (ii) leasing commissions in amounts not to exceed local current
market rates, and (iii) construction supervisory fees up to 10% of the costs of
a project. In addition, PIHC is reimbursed for certain direct out-of-pocket
expenses. Fees paid for such services totaled $1,900 and $1,441 for the years
ended December 31, 1999 and 1998, respectively. See also Note 15.
10. COMMITMENTS AND CONTINGENCIES
Rental Income
The Company's shopping center properties are leased to tenants under
operating leases. The minimum rental amounts due under the leases are generally
either subject to scheduled fixed increases or upward adjustments based on
certain inflation indices. The leases generally also require that the tenants
reimburse the Company for increases in certain operating costs and real estate
taxes.
The approximate future minimum rents to be received over the next five
years and thereafter, assuming neither renewals nor extensions of leases which
may expire during the period, for leases in effect at December 31, 1999 are as
follows:
2000........................................................................................ $ 33,714
2001........................................................................................ 31,476
2002........................................................................................ 28,330
2003........................................................................................ 26,141
2004........................................................................................ 24,380
Thereafter.................................................................................. 177,595
--------
$321,636
--------
--------
Percentage rent included in revenues from rental property was $1,152 and
$537 for the years ended December 31, 1999 and 1998, respectively.
Legal Proceedings
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. These matters are generally covered by
insurance. Management believes that the final outcome of such matters will not
have a material adverse effect on the financial position, results of operations
or liquidity of the Company.
11. STOCK OPTION PLAN
The Company maintains a stock option plan (the "Plan") pursuant to which a
maximum 852,550 shares of the Company's Common Stock may be issued for qualified
and non-qualified options. Options granted under the Plan generally vest ratably
over a three-year term, expire ten years from the date of grant and are
exercisable at
44
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. STOCK OPTION PLAN--(CONTINUED)
the market price on the date of grant, unless otherwise determined by the Board
in its sole discretion. The following is a summary of option activity for 1999
and 1998:
WEIGHTED
AVERAGE
EXERCISE
PRICE
SHARES PER
(000) SHARE
------ --------
Options outstanding, December 31, 1997............................................... -- --
Granted............................................................................ 659 $17.48
---- ------
Options outstanding, December 31, 1998............................................... 659 $17.48
Granted............................................................................ 50 $16.75
Forfeited.......................................................................... (1) $17.50
---- ------
Options outstanding, December 31, 1999............................................... 708 $17.43
---- ------
---- ------
Options exercisable:
December 31, 1998.................................................................. 185 $17.50
December 31, 1999.................................................................. 395 $17.49
The exercise prices for options outstanding as of December 31, 1999 range
from $14.50 to $17.50 per share. The weighted average remaining contractual life
for options outstanding as of December 31, 1999 was approximately 8.1 years.
Options to purchase 145,050 and 193,550 shares of the Company's common stock
were available for issuance under the Plan at December 31, 1999 and 1998
respectively.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" in accounting for stock-based employee
compensation arrangements whereby no compensation cost related to stock options
is deducted in determining net income. Had compensation cost for the Company's
stock option plans been determined pursuant to Financial Accounting Standards
Board Statement No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation" the Company's pro forma net income and net income per share for
calendar years 1999 and 1998 would have been $7,970, or $1.09 per basic and
diluted share and $4,072, or $.86 per basic and diluted share, respectively.
These calculations were made using a binomial option-pricing model to estimate
fair value of options using subjective assumptions, which can materially affect
fair value estimates and, therefore, do not necessarily provide a single measure
of fair value of options. The following are the primary assumptions used in the
above calculations during 1999 and 1998: (i) risk-free interest rates of 6.62%
and 5.11%, (ii) dividend yields on the Company's common stock of 9.01% and
7.71%, (iii) volatility factors for the market price of the Company's common
stock of 24.80% and 21.62% and weighted average expected lives of options of
10 years. The weighted average fair value at the dates of grant for options
awarded during 1999 and 1998 was $2.27 and $2.32, respectively. For purposes of
these pro forma disclosures, the estimated fair value of options is amortized
over the options' vesting period. Since the number of options granted and the
fair value thereof may vary significantly from year to year, the pro forma
compensation expense in future years may be materially different.
12. SUPPLEMENTAL FINANCIAL INFORMATION
The following summary represents the results of operations for each quarter
during the years ended December 31, 1999 and 1998. For 1998, the income before
extraordinary items per share on a basic and diluted
45
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. SUPPLEMENTAL FINANCIAL INFORMATION--(CONTINUED)
basis for the respective quarters does not total the amount reflected in the
accompanying Consolidated Statements of Income due to the significant number of
common shares issued in conjunction with the May 1998 Offering.
1999 (UNAUDITED)
-----------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- -------
Revenues from rental property........................................... $ 9,212 $ 9,347 $ 11,922 $11,976
Income before extraordinary items....................................... 1,821 1,919 2,247 2,349
Income before extraordinary items per common share
Basic................................................................. $ .25 $ .26 $ .31 $ .32
Diluted............................................................... $ .25 $ .26 $ .31 $ .32
1998 (UNAUDITED)
-----------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- -------
Revenues from rental property.............................................. $ -- $ 4,528 $8,769 $ 9,328
Income before extraordinary items.......................................... 28 1,015 1,748 1,730
Income before extraordinary items per common share
Basic.................................................................... $(0.20) $ 0.25 $ 0.24 $ 0.24
Diluted.................................................................. $(0.20) $ 0.25 $ 0.24 $ 0.24
13. EXTRAORDINARY ITEMS
The accompanying Consolidated Statement of Income for the year ended
December 31, 1998, includes $65 in extraordinary losses representing the
Company's share of prepayment penalties incurred and deferred financing costs
written-off in connection with the repayment of certain mortgage loans with
proceeds of the IPO.
14. DIVIDENDS ON COMMON AND PREFERRED STOCK
Stock Dividends
The Company declared dividends on its Common Stock for 1999 and 1998 as
follows:
RECORD DATE OF AMOUNT
DATE OF DECLARATION DATE PAYMENT PER SHARE
- ------------------------------------------------------------ -------- -------- ---------
1999 YEAR
3/15/99..................................................... 3/31/99 4/15/99 $ .3775
6/15/99..................................................... 6/30/99 7/15/99 $ .3775
9/15/99..................................................... 9/30/99 10/15/99 $ .3775
12/15/99.................................................... 12/31/99 1/18/00 $ .3775
1998 YEAR
6/15/98..................................................... 6/30/98 7/15/98 $ .1812
9/15/98..................................................... 9/30/98 10/15/98 $ .3375
12/15/98.................................................... 12/31/98 1/15/99 $ .3375
During March and May 1998 the Board of Directors of the Company declared
dividends on the Series A Convertible Redeemable Preferred Stock at the rates of
$22.50 and $10.04 per share, respectively. These dividends were paid on March 31
and May 13, 1998, respectively.
46
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
15. ACQUISITION OF REAL ESTATE INTERESTS
Beginning in July 1998, the Company purchased, through a series of
unrelated transactions, limited partnership interests in the nine shopping
center properties (the Kmart Properties) anchored by Kmart and comprising
approximately 1.1 million square feet of leasable space. During the year ended
December 31, 1999, the Company acquired the remaining 57% interest in the Kmart
Properties for $30.4 million. The Kmart Properties are located in Florida,
California, Washington, Minnesota, Illinois and Kentucky. The reporting of
financial position and results of operations of the Kmart Properties by the
Company reflects a change from the equity to consolidation method of accounting
effective in the third quarter of 1999.
During 1999, the Company substantially completed the development of the
50,000 square foot shopping center in Glen Cove, Long Island. Staples, the
anchor tenant, opened its office supply superstore in November 1999.
Approximately $4.8 million was expended in 1999 toward completion of the
shopping center which is expected to have total development cost of
approximately $8.1 million. The Company also completed a 14,000 square foot
Walgreen's store in Freeport, Long Island in April 1999 with the expenditure of
$1.8 million in 1999 bringing total development cost to $3.5 million.
In March 1999, the Company acquired the remaining 50% interest in a 196,000
square foot shopping center development project in Palm Beach County, Florida
for approximately $3.5 million. The reporting of financial position and results
of operations of this property by the Company reflects a change from the equity
to consolidation method of accounting effective in the first quarter of 1999.
At December 31, 1999, the Company had a $7.1 million joint-venture
investment in a proposed retail-residential redevelopment project. Subsequent to
year-end, the joint venture sold this project and the Company's investment was
returned in full. A shareholder and Unit holder of the Company was also an
investor in this joint venture.
The above referenced investments were funded with borrowings under the
Company's revolving line of credit.
During the year ended December 31, 1998 the Company acquired (i) a 77,000
square foot shopping center property located in Munsey Park, NY for
approximately $21,500 in cash, (ii) a 50% joint venture interest in a
retail/residential site located in New York City, N.Y. for approximately $3,400
in cash, (iii) a 43% interest in a limited partnership affiliated with the
Company which owns nine Kmart anchored shopping centers for approximately
$19,100 in cash, (iv) a 50% joint venture interest in a retail, redevelopment
site in Palm Beach County, Florida, for approximately $3,100 in cash, (v) a 75%
joint venture interest in a 54,000 square foot shopping center in Yonkers, N.Y.
which the Company intends to redevelop, for approximately $6,300 in cash,
(vi) a 75% interest in a retail development site in Glen Cove, N.Y., for
approximately $2,700 in cash, and (vii) interests in two additional retail
development sites for approximately $3,000 in cash. Purchase of the interests in
the portfolio of Kmart anchored shopping centers was unanimously approved by the
independent members of the Company's Board of Directors. Mr. Pilevsky was a 1%
general partner in the limited partnership which holds title to the Kmart
portfolio. These various transactions were financed with approximately $45,000
drawn under the Company's line of credit, and property indebtedness of
approximately $14,100.
16. PRO FORMA FINANCIAL INFORMATION
As discussed in Note 15, the Company acquired the nine shopping center
properties anchored by Kmart during the year ended December 31, 1999 and
acquired a shopping center located in Munsey Park, New York during the year
ended December 31, 1998. The pro forma information set forth below is based upon
the Company's Consolidated Statement of Income for the year ended December 31,
1999 and the historical operating results for 1998 after giving effect to the
Offering, adjusted to give effect to the property acquisitions as of January 1,
1998.
47
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
16. PRO FORMA FINANCIAL INFORMATION--(CONTINUED)
This pro forma financial information is presented for informational
purposes only and may not be indicative of what actual results of operations
would have been, had the property acquisition occurred as of January 1, 1998,
nor does it purport to represent the results of future operations.
YEAR ENDED YEAR ENDED
12/31/99 12/31/98
---------- ----------
Revenues from rental property....................................... $ 46,458 $ 45,321
Income before extraordinary items................................... $ 8,702 $ 8,311
Income before extraordinary items, basic and diluted per
common share...................................................... $ 1.19 $ 1.13
17. STRATEGIC ALTERNATIVES
On October 13, 1999, the Board of Directors of the Company announced that
it had retained a financial advisor to assist the Company in examining strategic
alternatives to maximize shareholder value. The Board believes that the
Company's current stock price does not reflect the underlying value of its
assets. Given the changing dynamics of the REIT market place and consistent with
its commitment to realize shareholder value for all investors, the Board
believes that it is prudent to explore the strategic alternatives for the
Company.
48
PHILIPS INTERNATIONAL REALTY CORP.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
COST CAPITALIZED
INITIAL COST SUBSEQUENT TO ACQUISITION
--------------------------- ---------------------------
BUILDINGS BUILDINGS
LAND AND AND LAND AND AND
DESCRIPTION ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS IMPROVEMENTS IMPROVEMENTS
- ------------------------------ ------------ ------------ ------------ ------------ ------------
Millside Plaza $ 4,395 $ 960 $ 5,443 $ 297 $ 741
Delran, NJ
Elm Plaza 3,338 709 4,968 17 (38)
Enfield, CT
Branhaven Plaza 9,500(1) 1,883 7,646 594 1,065
Branford, CT
Forest Avenue 24,000(1) 1,984 8,428 1,904 9,617
Shoppers Town
Staten Island, NY
Meadowbrook Commons 19,100(1) 6,284 -- 830 21,414
Freeport, NY
Foxboro Plaza 4,208 655 6,055 194 (333)
Foxborough, MA
Palm Springs Mile 53,460(1) 13,137 26,861 8,787 40,769
Hialeah, FL
(4 properties)
Mill Basin Plaza 13,001 5,107 8,696 1,795 2,782
Brooklyn, NY
The Shoppes -- 362 2,052 3 17
at Lake Mary
Lake Mary, FL
Merrick Commons 12,279 2,257 4,191 2,024 8,481
Merrick, NY
Munsey Park 13,862 4,382 17,543 -- 23
Munsey Park, NY
Philips Fund Assocs. 14,800(1) 9,667 38,667 -- 25
Various
(9 properties)
Palm Springs Plaza -- 1,287 5,160 -- --
Lake Worth, FL
Walgreens at Freeport 3,812 1,284 1,742 -- 32
Freeport, NY
-------- -------- -------- -------- --------
$175,755 $ 49,958 $137,452 $ 16,445 $ 84,595
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
GROSS AMOUNTS AT WHICH
CARRIED AT CLOSE OF PERIOD
---------------------------------------------------
BUILDINGS LIFE ON WHICH
LAND AND AND ACCUMULATED DATE DEPRECIATION
DESCRIPTION IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED IS COMPUTED
- ------------------------------ ------------ ------------ -------- ----------- -------- ------------------
Millside Plaza $ 1,257 $ 6,184 $ 7,441 $ 1,191 12/26/86 31.5-39 years
Delran, NJ
Elm Plaza 726 4,930 5,656 1,105 12/24/86 15-39 years
Enfield, CT
Branhaven Plaza 2,477 8,711 11,188 1,909 12/31/85 15-39 years
Branford, CT
Forest Avenue 3,888 18,045 21,933 2,918 11/16/84 15-39 years
Shoppers Town
Staten Island, NY
Meadowbrook Commons 7,114 21,414 28,528 2,386 11/9/89 15-39 years
Freeport, NY
Foxboro Plaza 849 5,722 6,571 1,227 11/24/86 15-39 years
Foxborough, MA
Palm Springs Mile 21,924 67,630 89,554 12,010 4/1/85 15-39 years
Hialeah, FL
(4 properties)
Mill Basin Plaza 6,902 11,478 18,380 976 9/1/94 39 years
Brooklyn, NY
The Shoppes 365 2,069 2,434 106 12/30/97 39 years
at Lake Mary
Lake Mary, FL
Merrick Commons 4,281 12,672 16,953 1,673 1/1/86 15-39 years
Merrick, NY
Munsey Park 4,382 17,566 21,948 657 7/31/98 39 years
Munsey Park, NY
Philips Fund Assocs. 9,667 38,692 48,359 483 7/1/99 39 years
Various
(9 properties)
Palm Springs Plaza 1,287 5,160 6,447 147 3/10/99 39 years
Lake Worth, FL
Walgreens at Freeport 1,284 1,774 3,058 32 4/12/99 39 years
Freeport, NY
-------- -------- -------- -------
$ 66,403 $222,047 $288,450 $26,820
-------- -------- -------- -------
-------- -------- -------- -------
- ------------------
(1) Includes allocable portion of borrowing under the Company's revolving line
of credit.
49
PHILIPS INTERNATIONAL REALTY CORP.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
(DOLLARS IN THOUSANDS)
The changes in real estate for the three years ended December 31, 1999 are
as follows:
1999 1998 1997
-------- -------- --------
Balance, beginning of year...................................... $228,896 $199,428 $137,399
Property acquisitions and purchase accounting adjustment........ 54,781 24,576 20,789
Improvements.................................................... 4,773 4,892 41,240
-------- -------- --------
Balance, end of year............................................ $288,450 $228,896 $199,428
-------- -------- --------
-------- -------- --------
The aggregate cost of land, buildings and improvements for federal income
tax purposes at December 31, 1999 was $219,607.
The changes in accumulated depreciation for the three years ended
December 31, 1999 are as follows:
1999 1998 1997
-------- -------- --------
Balance, beginning of year...................................... $ 19,982 $ 14,556 $ 24,277
Purchase accounting adjustments................................. -- -- (15,318)
Depreciation for period......................................... 6,838 5,426 5,597
-------- -------- --------
Balance, end of year............................................ $ 26,820 $ 19,982 $ 14,556
-------- -------- --------
-------- -------- --------
50
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Philips International Realty Corp.
We have audited the combined statements of income, owners' deficit and cash
flows of The Philips Company for the year ended December 31, 1997. These
financial statements are the responsibility of The Philips Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the combined financial statements of The Philips Company
referred to above present fairly, in all material respects, the combined results
of its operations and its cash flows for year ended December 31, 1997 in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
New York, New York
March 6, 1998
51
THE PHILIPS COMPANY
(PREDECESSOR)
COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
Revenues from rental properties........................................................................ $26,968
-------
Expenses:
Operating expenses................................................................................... 3,936
Real estate taxes.................................................................................... 3,819
Management fees to affiliates........................................................................ 1,001
Interest expense..................................................................................... 12,966
Depreciation and amortization........................................................................ 4,122
General and administrative expenses.................................................................. 165
-------
26,009
-------
959
Equity in income of investees.......................................................................... 339
Other income, net.................................................................................... 38
-------
Income before extraordinary items.................................................................... 1,336
Extraordinary items.................................................................................... 671
-------
Net income........................................................................................... $ 2,007
-------
-------
See accompanying notes.
52
THE PHILIPS COMPANY
(PREDECESSOR)
COMBINED STATEMENT OF OWNERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
Balance, December 31, 1996................................................................... (11,166)
Distributions.............................................................................. (21,489)
Contributions.............................................................................. 24,202
Net income................................................................................. 2,007
--------
Balance, December 31, 1997................................................................... $ (6,446)
--------
--------
See accompanying notes.
53
THE PHILIPS COMPANY
(PREDECESSOR)
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income........................................................................................... $ 2,007
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................................... 4,122
Amortization of mortgage discount................................................................. 32
Extraordinary items............................................................................... (671)
Equity in income of investees..................................................................... (339)
Changes in operating assets and liabilities:
Accounts receivable............................................................................... (665)
Related party receivables......................................................................... 3
Deferred charges.................................................................................. (1,055)
Other assets...................................................................................... 1,041
Accounts payable and accrued expenses............................................................. (161)
Related party payables............................................................................ (1,179)
Other liabilities................................................................................. (297)
--------
Net cash provided by operating activities.............................................................. 2,838
--------
INVESTING ACTIVITIES:
Additions to land, buildings and improvements.......................................................... (19,186)
--------
Net cash used in investing activities.................................................................. (19,186)
--------
FINANCING ACTIVITIES:
Proceeds from debt financing......................................................................... 79,400
Establish minority interest.......................................................................... (61,792)
Contributions from owners............................................................................ 18,421
Distributions to owners.............................................................................. (20,177)
--------
Net cash provided by financing activities.............................................................. 15,852
--------
Net increase (decrease) in cash and cash equivalents................................................... (496)
Cash and cash equivalents at beginning of period....................................................... 785
--------
Cash and cash equivalents at the end of the period..................................................... $ 289
--------
--------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Loans to and from affiliates reclassified as capital contributions and/or distributions:
Contributions........................................................................................ $ 1,009
Distributions........................................................................................ 1,312
Non-cash adjustments relating to purchase of partnership interests
Increase in rental properties........................................................................ $ 8,298
Decrease in accounts receivable...................................................................... (2,771)
Decrease in deferred charges (net)................................................................... (755)
--------
Increase in owners' equity........................................................................... $ 4,772
--------
--------
SUPPLEMENTARY INFORMATION:
Interest paid........................................................................................ $ 11,357
--------
--------
Interest capitalized................................................................................. $ --
--------
--------
See accompanying notes.
54
THE PHILIPS COMPANY
(PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Philips Company (the "Company") was engaged in the ownership,
operation, leasing and development of seven neighborhood and community shopping
center properties (collectively, the "Properties") located in New York,
Connecticut, New Jersey, Massachusetts and Florida.
Principles of Combination
The Company was not a legal entity, but rather a combination of real estate
properties that were organized as general and limited partnerships and limited
liability companies and which were under the common management and control of
Philip Pilevsky, his family or entities controlled by such parties (the
'Sponsors'). In addition, investments in certain non-controlled limited
partnerships were accounted for under the equity method (see Note 2). All
significant intercompany transactions and balances were eliminated in
combination.
The specific partnerships and limited liability companies included in the
accompanying combined financial statements are as follows:
ENTITY PROPERTY
- ------------------------------------- -----------------------------------------
Branhaven Plaza L.L.C. Branhaven Plaza
Palm Springs Mile Associates, Ltd. Mall on the Mile, Palm Springs Village,
The Shops on 49th Street and Philips
Plaza
Forest Avenue Shopping Associates Forest Avenue Shoppers Town
Philips Freeport Associates, L.P. Meadowbrook Commons
Foxborough Shopping L.L.C. Foxboro Plaza
Enfield Shopping L.L.C. Elm Plaza
Delran Shopping L.L.C. Millside Plaza
Formation Transactions
The partners and members of The Philips Company and the Merrick/Mill Basin
Properties (see note 2) transferred their shopping center assets or, in certain
instances, their partnership or membership interests in the entities which held
title to such shopping center assets, to certain newly-formed entities effective
December 31, 1997.
Reference should be made to Note 1 of the accompanying Notes to
Consolidated Financial Statements of Philips International Realty Corp. for
further information concerning the Formation Transactions.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Real Estate Properties
Buildings and improvements were depreciated on the straight-line method
over the estimated useful lives of the assets which range from fifteen to
thirty-nine years, while tenant improvements were amortized over the lives of
the respective leases, using the straight-line method.
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of.
55
THE PHILIPS COMPANY
(PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
SFAS No. 121 requires that the Company review real estate assets for impairment
whenever events or changes in circumstances indicate that the carrying value of
assets to be held and used may not be recoverable. Impaired assets are required
to be reported at the lower of cost or fair value. Assets to be disposed of are
required to be reported at the lower of cost or fair value less cost to sell.
Assets are classified to be disposed when management has committed to a plan to
dispose of the assets. Prior to the adoption of SFAS No. 121, real estate assets
were required to be stated at the lower of cost or net realizable value. No
impairment losses have been recorded in any of the periods presented.
Deferred Charges
Deferred charges are amortized over the terms of the related leases or debt
agreements, as applicable.
Revenue Recognition
Minimum revenues from rental property were recognized on a straight-line
basis over the terms of the respective tenant leases.
Income Taxes
The entities comprising the Company were not taxpaying entities for income
tax purposes and, accordingly, no provision or credit has been made in the
accompanying financial statements for income taxes. Owners'/members' allocable
shares of taxable income or loss are reportable on their respective income tax
returns.
Concentration of Revenue and Credit Risk
Approximately 54% of the Company's total revenue for the year ended
December 31, 1997 was derived from Palm Springs Mile Associates Ltd. Any adverse
change in the operating profitability of this property may have a material
adverse effect on the Company.
2. INVESTMENT IN PARTNERSHIPS
The Philips Company had a limited partnership interest and a minority
general partnership interest in the following two partnerships (the
"Merrick/Mill Basin Properties") which also owned and operated neighborhood and
community shopping centers.
THE PHILIPS COMPANY'S
PARTNERSHIP PROPERTY PERCENTAGE OWNERSHIP
- ----------------------------- ---------------- ----------------------
Merrick Shopping Associates Merrick Commons 30%
SP Avenue U Associates, L.P. Mill Basin Plaza 49%
As a limited partner and minority general partner, the Company did not
control the activities of the partnerships. These investments, accounted for
under the equity method, were recorded initially at cost and subsequently
adjusted for equity in the net income or loss of investees and cash
contributions and distributions.
56
THE PHILIPS COMPANY
(PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
2. INVESTMENT IN PARTNERSHIPS--(CONTINUED)
Condensed operating information for these entities for the year ended
December 31, 1997 was as follows:
1997
------
Revenues from rental property and other income................................................. $4,972
Interest income from affiliates................................................................ --
------
Total revenue................................................................................ 4,972
Operating and other expenses................................................................... 1,463
Interest....................................................................................... 2,045
Depreciation and amortization.................................................................. 824
------
Total expenses............................................................................... 4,332
------
Income before extraordinary item............................................................. 640
Extraordinary item............................................................................. --
------
Net income................................................................................... $ 640
------
------
3. RENTAL INCOME
The Company's shopping center properties are leased to tenants under
operating leases. The minimum rental amounts due under the leases are generally
either subject to scheduled fixed increases or upward adjustments based on
certain inflation indices. The leases generally also require that the tenants
reimburse the Company for increases in certain operating costs and real estate
taxes. Minimum rentals and expense reimbursements represented 96% and 95% of
revenues from rental properties for the year ended December 1997.
The approximate future minimum rents to be received over the next five
years and thereafter, assuming neither renewals nor extensions of leases which
may expire during the period, for leases in effect at December 31, 1997, are as
follows:
1998.............................................................................. $ 19,132
1999.............................................................................. 18,016
2000.............................................................................. 16,958
2001.............................................................................. 14,594
2002.............................................................................. 11,785
Thereafter........................................................................ 89,698
--------
$170,183
--------
--------
4. RELATED PARTY TRANSACTIONS
Management Agreement
Management services for the Company's properties are provided by a related
party, Philips International Holding Corp. Fees paid by the Company for such
services are generally based on 3% to 5% of total revenue.
Leasing Commissions
Philips International Holding Corp., a related party, provides leasing
services to the Company for fees ranging generally from 2% to 5% of total
contractual rent due pursuant to the tenant leases. Leasing commissions paid to
Philips International Holding Corp. for the year ended December 31, 1997 was
$95.
57
THE PHILIPS COMPANY
(PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
5. CONTINGENCIES
The Company was subject to various legal proceedings and claims that arise
in the ordinary course of business. These matters are generally covered by
insurance. Management believes that the final outcome of such matters will not
have a material adverse effect on the financial position, results of operations
or liquidity of the Company.
6. EXTRAORDINARY ITEMS
The Combined Statement of Income for the year ended December 31, 1997
includes an extraordinary gain of approximately $671, in connection with the
settlement of debt obligations on the Company's shopping center properties. This
amount is net of an extraordinary loss of approximately $265 representing the
write-off of deferred financing costs related to the refinancing of debt on
certain shopping center properties.
58
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- ------------------
/s/ PHILIP PILEVSKY Chairman of the Board and Chief Executive
- ------------------------------------------ Officer
Philip Pilevsky
/s/ LOUIS J. PETRA Director and President March 30, 2000
- ------------------------------------------
Louis J. Petra
/s/ SHEILA LEVINE Director, Chief Operating Officer, March 30, 2000
- ------------------------------------------ Executive Vice President and Secretary
Sheila Levine
/s/ CARL KRAUS Chief Financial Officer March 30, 2000
- ------------------------------------------
Carl Kraus
/s/ ARNOLD S. PENNER Director March 30, 2000
- ------------------------------------------
Arnold S. Penner
/s/ A. F. PETROCELLI Director March 30, 2000
- ------------------------------------------
A. F. Petrocelli
/s/ ELISE JAFFE Director March 30, 2000
- ------------------------------------------
Elise Jaffe
/s/ ROBERT GRIMES Director March 30, 2000
- ------------------------------------------
Robert Grimes
59