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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, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-23463
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PHILIPS INTERNATIONAL REALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Maryland 13-3963667
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(State or other jurisdication of (IRS Employer
Incorporation or Organization) Identification No.)
417 Fifth Avenue
New York, New York 10016
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(Address of principal executive office) (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.
As of March 15, 2001, the aggregate market value of voting stock held by
non-affiliates of the registrant was approximately $30.4 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, 2001, 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 20.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's definitive
proxy statement to be issued in conjunction with registrant's annual meeting of
shareholders are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
FORM 10-K
PAGE
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PART I
Item 1. Business.......................................................................................... 1
Item 2. Properties........................................................................................ 8
Item 3. Legal Proceedings................................................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............................................... 11
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.............................. 11
Item 6. Selected Financial Data........................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................ 18
Item 8. Financial Statements and Supplementary Data....................................................... 18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 18
PART III
Item 10. Directors and Executive Officers of the Registrant................................................ 18
Item 11. Executive Compensation............................................................................ 18
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 18
Item 13. Certain Relationships and Related Transactions.................................................... 18
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K................................. 19
i
PART I
ITEM 1. BUSINESS
GENERAL
Philips International Realty Corp. (the "Company") is a self-advised real estate
investment trust ("REIT") formed in 1997 to continue and expand the shopping
center business of certain affiliated companies owned or controlled by Philip
Pilevsky (the "Philips Group"). For more than 17 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").
PLAN OF LIQUIDATION
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 believed that the
Company's then current stock price did 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
believed that it was prudent to explore the strategic alternatives for the
Company.
At a Special Meeting of Stockholders held on October 10, 2000, approximately 80%
of the Company's 7,340,474 common shares then outstanding were voted, with 99.7%
of these votes cast in favor of the plan of liquidation.
On October 11, 2000, the Company announced that its stockholders had approved a
plan of liquidation for the Company, pursuant to which the Company planned to
(a) transfer its interests in affiliated entities that owned eight shopping
centers to Kimco Income Operating Partnership, L.P. for cash and the assumption
of indebtedness, (b) transfer its interests in entities that owned four shopping
centers and two redevelopment properties, subject to certain indebtedness, to
Philip Pilevsky, the chief executive officer, and certain of his affiliates and
family members in exchange for cash and the redemption of units in Philips
International Realty, L.P. (the "Operating Partnership"), (c) sell its remaining
assets for cash, (d) pay or provide for its liabilities and expenses, (e)
distribute the net cash proceeds of the liquidation, then estimated at $18.25
per share of common stock, to the stockholders in two or more liquidating
distributions, and (f) wind up operations and dissolve. On December 22, 2000,
the Company paid the initial liquidating distribution of $13 per share of common
stock.
SHOPPING CENTER PORTFOLIO
On July 14, 2000, certain subsidiaries of the Company sold seven properties
aggregating approximately 620,000 square feet to Kimco Income Operating
Partnership, L.P., a Delaware limited partnership ("Kimco"), for a total
consideration of $67.3 million pursuant to a Purchase and Sale Agreement dated
as of April 28, 2000. The purchase price was comprised of approximately $51.0
million in cash and mortgage debt assumption of $16.3 million. The properties
included four New York shopping centers (Walgreens at Freeport, Munsey Park,
Yonkers and Glen Cove) and three in Florida (Key Largo, Orlando and Lake Mary).
The sale of these seven properties resulted in a gain of $1.2 million, net of
$.4 million of minority interest.
On December 4, 2000, in conjunction with the plan of liquidation approved by
stockholders on October 10, 2000, certain affiliates of the Company disposed of
interests in another eight properties aggregating approximately 1,178,000 square
feet to Kimco for a total consideration of $137 million pursuant to an Asset
Contribution, Purchase and Sale Agreement dated as of April 28, 2000. The
purchase price was comprised of approximately $71.1 million in cash, $55.4
million in mortgage debt assumption and $10.5 million of equity redemption
(576,326 Operating Partnership Units valued at $18.25 per Unit). The properties
included four New York shopping centers (Forest Avenue Shoppers Town,
Meadowbrook Commons, Merrick Commons and Mill Basin Plaza), two Connecticut
shopping centers (Branhaven Plaza and Elm Plaza), one shopping center property
in New Jersey (Millside Plaza) and one shopping center property in Massachusetts
(Foxboro Plaza). The disposition of these properties resulted in a gain of
approximately $17.4 million, net of $6.6 million of minority interest.
Also in conjunction with its plan of liquidation, the Company has completed the
distribution of its interest in four shopping center properties in Hialeah,
Florida and the sale of its interest in one redevelopment site (1517-25 Third
Avenue, New York City) for total consideration of approximately $123 million to
certain limited partners in the Operating Partnership, including Philip
Pilevsky, the Company's Chairman and Chief Executive Officer. The total
consideration was comprised of $3.3 million in cash, $85.3 million in mortgage
debt assumption and $34.1 million in redemption of their entire equity interest
in the Operating Partnership (1,870,873 Units valued at $18.25 per Unit). These
transactions resulted in a book gain of $24.4 million, net of $9.3 million of
minority interest.
The sale of an additional redevelopment site (Palm Springs Plaza in Lake Worth,
Florida) to these limited partners for approximately $7.7 million in cash is
under contract and scheduled to close on or before June 1, 2001. The purchase
price to be paid by the limited partners under the Palm Springs Plaza agreement
will be adjusted so that the value per Unit received by them pursuant to the
above-referenced Hialeah agreements ($18.25 per Unit) and the estimated per
share value to be received by our stockholders in the liquidation will be the
same.
As a consequence of the above-referenced transactions, the Company's remaining
shopping center portfolio at December 31, 2000 not under contract for sale
comprises seven properties located in California (3), Washington (1), Illinois
(1), Kentucky (1) and Minnesota (1). These shopping centers, each with the
anchor store premises under lease to Kmart, represent an aggregate 695,000
square feet of gross leasable area. As of December 31, 2000, these properties
were 97.5% leased to 47 tenants. The Company is actively marketing these
properties for sale. Although management expects that it will be able to
consummate a sales transaction(s), there can be no assurance that a sale(s) will
be completed on satisfactory terms, if at all.
1
OPERATING STRATEGY
Pending the sale of its remaining seven shopping center properties, the Company
will continue to utilize its long-standing asset and property management
practices to maximize cash flow from these existing properties and endeavor to
enhance their 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 extensive experience in
managing and redeveloping retail properties.
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. This agreement enables the Company to utilize
the Philips Group's infrastructure on a cost-effective basis.
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, 2000, the Company had utilized proceeds from property
dispositions in part to satisfy all outstanding mortgage indebtedness. The
Company's organizational documents do not limit the amount of indebtedness that
the Company may incur.
EMPLOYEES
As of December 31, 2000, the Company had 5 employees, none of whom are
unionized.
COMPETITION
Numerous shopping center properties compete with the Company's 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 Company's properties. The number of competitive commercial
properties in a particular area could have a material effect on the Company's
ability to lease space in its properties. In addition, retailers at the
Company's 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 its 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.
The Company is not aware of any environmental condition or liability at its
properties that the Company believes would have a material adverse effect on the
Company's financial condition or results of operations taken as a whole.
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--real estate. 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.
2
RISK FACTORS
The Company's results of operations and ability to sell its remaining properties
and complete its planned liquidation 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 market regions and tenants. Adverse economic developments in the
states where the Company's remaining properties are located could adversely
impact the operations of our properties and, therefore, our profitability and
ability to sell. 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 cash flow and the value
of our remaining properties. As of December 31, 2000, approximately 60% of the
Company's GLA was leased to Kmart. Any adverse change in Kmart's operations
and/or profitability could have a material adverse impact on the Company's cash
flow and the value of its properties.
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. 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. It should also be noted
that Mr. Pilevrsky and Ms. Levine no longer have an economic interest in the
Operating Partnership as a result of the transactions that closed on December 4,
2000 in connection with the Company's plan of liquidation.
Potential conflicts with other real estate activities. In connection with the
Company'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 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 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.
OUR PERFORMANCE IS SUBJECT TO RISKS ASSOCIATED WITH THE REAL ESTATE INDUSTRY.
General. The Company's cash flow and ability to sell its remaining properties
and complete its plan of liquidation depends on the ability of our properties to
generate funds (including earned income and capital appreciation) in excess of
operating expenses (including 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.
3
Kmart currently leases approximately 60% of the Company's GLA and represents
approximately 64% of the Companys annualized base rental revenues. Any material
adverse change in Kmart's operations and/or profitability could interrupt our
rental income from Kmart and other tenants at the property whose income depends
upon Kmart's presence as an anchor store at such property. Kmart has ceased to
operate but continues to pay rent pursuant to its long-term lease agreement at
the Company's shopping centers in Port Angeles, WA and Reedley, CA.
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 cash flow and/or the
value of our properties.
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
cash flow and/or the value or our properties.
Although the Company is not aware of any environmental liability that could
materially affect our financial condition, results of operations or the value of
our properties, you should consider that (1) general property inspections
without soil sampling or ground water analysis may not reveal 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 may affect cash flow and the value of our 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 the value of our properties by:
o interfering with our ability to attract and retain tenants in our
properties;
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.
4
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 the value of our properties.
Debt financing could adversely affect our economic performance.
Scheduled debt payments and refinancing could adversely affect our financial
condition. Should the Company incur any mortgage indebtedness, we would be
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, 2000, we had no outstanding mortgage debt.
Because we may not be able to pay any future mortgage indebtedness incurred
prior to maturity with our internally generated cash, we may need to repay any
such debt through refinancings and/or equity offerings. If we are unable to
refinance any future indebtedness on acceptable terms, or at all, events or
conditions that may adversely affect our cash flow and the value of our 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;
5
o mortgages encumbering properties generally 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. Should the
Company incur debt in the future that bears interest at variable rates,
higher debt service requirements may arise if market interest rates
increase. Higher debt service requirements could adversely affect our
cash flow and the value of our properties 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 us. We cannot
assure you that any of our executive officers will remain with us. We 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% (90% effective in 2001) 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.
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 and (2) the effect of
nondeductible capital expenditures, the creation of reserves or required debt
amortization payments on future mortgage indebtedness.
Consequences of any 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.
6
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 cash flow.
Failure to qualify as a real estate investment trust also would eliminate any
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 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.
7
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 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 operating 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, the value of our properties.
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. Although
the Company presently intends to pursue its plan of liquidation, 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 achieve to
maintain our real 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 us.
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.
Any 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, 2000, the Company held interests in 7 retail properties not
under contract for sale encompassing approximately 695,000 square feet of GLA.
Information concerning the 7 properties, as well as Palm Springs Plaza which is
under contract for sale, 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 of December 31, 2000, the Company's
properties not under contract for sale were 97.5% leased to 47 tenants.
8
PROPERTY SUMMARY DATA
The following table sets forth certain information relating to each of the
Properties at December 31, 2000.
%
Year Built/ Total Leased
% Renovated GLA At
Property and Location Owned Yr. Acquired (Sq.Ft.) 12/31/00
- --------------------- ----- ------------ -------- --------
FLORIDA MARKET
Palm Springs Plaza 100.0% 1962 195,648 31.6%
Palm Beach County, FL 1999
------- ------
Total/weighted Average 195,648 31.6%
NEIGHBORING MARKETS
North Star Shopping Center 100.0% 1987 127,986 100.0%
Alexandria, MN 1999
1105 Bellvue Road 100.0% 1987 109,698 100.0%
Atwater, CA 1999
Northgate Shopping Center 100.0% 1987 105,063 100.0%
Northgate Blvd. 1999
Sacramento, CA
McHenry Commons, S.C. 100.0% 1987 100,408 98.7%
North Richmond Road 1999
McHenry, IL
Pennyrile Marketplace, S.C. 100.0% 1987 90,077 93.2%
3010 Fort Campbell Rd. 1999
Hopkinsville, KY
Highway 101 100.0% 1987 89,128 89.2%
Pt. Angeles, WA 1999
Manning Avenue 100.0% 1987 72,655 100.0%
Reedley, CA 1999
------- ------
Total/weighted Average 695,015 97.5%
------- ------
Portfolio Total/weighted Average 890,663 83.1%
======= ======
Annualized Contractual
Base Rent at 12/31/00 (1)
% of Base
Base Portfolio Rent/Sq.Ft.
Property and Location Rent ($000) Base Rent (2) $ Key Tenants
- --------------------- ----------- --------- ------------ -----------
FLORIDA MARKET
Palm Springs Plaza 315 7.6% 5.09 Under contract for sale
Palm Beach County, FL
----- ------ ----
Total/weighted Average 315 7.6% 5.09
OTHER MARKETS
North Star Shopping Center 487 11.7% 3.80 Kmart
Alexandria, MN
1105 Bellvue Road 730 17.6% 6.65 Kmart
Atwater, CA
Northgate Shopping Center 695 16.7% 6.62 Kmart
Northgate Blvd.
Sacramento, CA
McHenry Commons, S.C. 566 13.6% 5.71 Kmart
North Richmond Road
McHenry, IL
Pennyrile Marketplace, S.C. 430 10.3% 5.13 Kmart
3010 Fort Campbell Rd.
Hopkinsville, KY
Highway 101 457 11.0% 5.76 Kmart (dark)
Pt. Angeles, WA
Manning Avenue 477 11.5% 6.57 Kmart (dark)
Reedley, CA
----- ------ ----
Total/weighted Average 3,842 92.4% 5.67
----- ------ ----
Portfolio Total/weighted Average 4,157 100.0% 5.62
===== ====== ====
(1) Total annualized contractual base rent for all leases in place at December
31, 2000. 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, 2000.
9
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 not under contract for sale were as follows:
TOTAL ANNUALIZED
NUMBER OF % CONTRACTUAL BASE RENT PER
YEAR ENDED DECEMBER 31 PROPERTIES LEASED LEASED SQUARE FOOT ($)(1)
---------- ------ -------------------------
2000................................................... 7 97.5% 5.67
1999................................................... 7 97.9% 5.60
1998................................................... 7 99.4% 5.70
1997................................................... 7 98.0% 5.65
1996................................................... 7 97.8% 5.59
(1) Total annualized contractual base rent for all leases in place at December
31 for the respective years indicated, divided by total GLA leased at such
dates. Amount excludes (i) future contractual rent escalations and cost of
living increases, (ii) percentage rent and (iii) additional rent payable by
tenants such as common area maintenance, real estate taxes and other
expense reimbursements.
At December 31, 2000, Kmart Corporation was the Company's largest tenant
representing approximately 69% of the Company's annualized base rental
revenues. No other tenant accounted for more than 4% of revenues.
LEASE EXPIRATIONS
The following table sets forth all scheduled lease expirations for the Company's
remaining properties not under contract for sale beginning January 1, 2001,
assuming that none of the tenants exercises renewal options or termination
rights:
ANNUALIZED CONTRACTUAL
TOTAL BASE RENT AT 12/31/00(1)
GLA UNDER ------------------------
NUMBER EXPIRING % % OF
LEASE EXPIRATION OF LEASES LEASES OF TOTAL BASE RENT PORTFOLIO BASE RENT/
YEAR EXPIRING (SQ. FT.) EXPIRING GLA ($) BASE RENT SQ. FT.(2)($)
---------------- --------- --------- ------------ --------- --------- -------------
2001................. 11 26,237 3.9% 207,747 5.4% 7.92
2002................. 9 27,687 4.1% 270,784 7.0% 9.78
2003................. 7 23,089 3.4% 230,320 6.0% 9.98
2004................. 2 3,910 0.6% 39,648 1.0% 10.14
2005................. 5 7,940 1.2% 94,272 2.5% 11.87
2006................. 2 8,648 1.3% 76,896 2.0% 8.89
2007................. 1 2,800 0.4% 29,400 0.8% 10.50
2008................. 3 38,673 5.7% 245,760 6.4% 6.35
2009................. 0 0 0.0% 0 0.0% 0.00
2010................. 0 0 0.0% 0 0.0% 0.00
2011 and thereafter.. 7 538,950 79.5% 2,647,562 68.9% 4.91
-- ------- ------ --------- ------ -----
TOTAL/ WEIGHTED
AVERAGE.............. 47 677,934 100.0% 3,842,389 100.0% $5.67
== ======= ====== ========= ====== =====
(1) Total annualized contractual base rent for all leases in place at December
31, 2000. 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, 2000.
TAX BASIS AND REAL ESTATE TAXES
The aggregate cost basis of depreciable real property for federal income tax
purposes in the Company's remaining properties not under contract for sale as of
December 31, 2000 was approximately $27 million. Depreciation and amortization
are provided on the straight line and double declining balance methods over the
estimated useful lives of the assets of 39 years. The aggregate real estate tax
obligations on these properties during the fiscal year ended December 31, 2000
was approximately $.5 million, or approximately $.80 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.
10
ITEM 3. LEGAL PROCEEDINGS
On October 2, 2000, a class action complaint was filed in the United States
District Court for the Southern District of New York against the Company and its
directors. The complaint alleged a number of improprieties concerning the
pending plan of liquidation of the Company. The Company believes that the
asserted claims are without merit, and will defend such action vigorously. On
November 9, 2000, the Court, ruling from the bench, denied the plaintiff's
motion for a preliminary injunction seeking to prevent the liquidation based
essentially on the same allegations as in the complaint. This bench ruling was
followed by a written order dated November 30, 2000 wherein the Court concluded
that the plaintiff had failed to demonstrate either that it was likely to
succeed on the merits of its case or that there were sufficiently serious
questions going to the merits of its case to make it fair ground for litigation.
The plaintiffs in the action continue to prosecute the suit as a damage claim
against the Company and its directors. The Company continues to believe that the
action is without merit and will continue to defend it vigorously.
Except as noted above, 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
A Special Meeting of Stockholders was held on October 10, 2000, to consider and
vote upon a proposal to amend the Company's charter to reduce the affirmative
stockholder vote required to approve an extraordinary corporate action from
two-thirds to a majority of all votes entitled to be cast on the matter
(5,814,661 votes cast for; 32,403 votes cast against; 8,122 abstained; and 0
broker non-votes) and to consider and vote upon a proposal to approve a plan of
liquidation of the Company (5,835,051 votes cast for; 11,636 votes cast against;
8,499 abstained; 0 broker non-votes). Approximately 80% of the Company's
7,340,474 common shares outstanding were voted with 99.7% of these votes cast in
favor of the plan of liquidation.
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, 2000
and 1999:
HIGH LOW CLOSE
---- --- -----
2000:
First Quarter.............................. $16.812 $14.562 $16.625
Second Quarter............................. $17.50 $16.00 $17.375
Third Quarter.............................. $17.438 $16.938 $17.25
Fourth Quarter............................. $17.25 $ 4.000 $ 4.063
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
On March 15, 2001, the closing Common Stock sales price on the NYSE was $4.40
per share.
Holders
On March 15, 2001, the Company had 1,170 common shareholders of record.
11
Dividends and Distributions
The Company paid distributions on its Common Stock as follows during calendar
years 2000 and 1999:
Date of Declaration Record Date of Amount
2000 Year Date Payment Per Share
- --------- ------ ------- ---------
3/15/00 3/31/00 4/17/00 $.3775
6/15/00 6/30/00 7/17/00 $.3775
12/5/00 12/15/00 12/22/00 $13.00
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
For income tax purposes, dividends for 2000 totaling $.6653 per share
represented ordinary dividend income and $13.4264 was a return of capital to
shareholders. 100% of the dividends for 1999 totaling $1.3628 per share
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% (90% effective in 2001) 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, 2000, 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 for each of the two 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, 1997 and 1996 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.
12
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,
-------------------------------------------------- -----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands, except per share and property data)
OPERATING DATA:
Revenues from rental property....... $43,134 $42,457 $22,625 $26,968 $25,947
Income before extraordinary
items............................. 49,997 8,336 4,521 1,336 1,888
Income before extraordinary items,
per common share:
Basic............................... 6.81 1.14 .94 -- --
Diluted............................. 6.81 1.14 .94 -- --
BALANCE SHEET DATA:
Rental properties, net, at cost..... 33,579 261,631 208,914 --(2) 137,399
Investments in real estate joint
ventures.......................... -- 25,134 34,664 --(2) --
Total assets........................ 37,572 306,550 264,347 --(2) 129,841
Mortgages and notes payable......... -- 181,955 137,487 --(2) 133,609
Shareholders' equity (deficit)...... 34,944 86,854 89,398 --(2) (11,166)
OTHER DATA:
Net cash provided by operating
activities........................ 10,038 15,784 6,494 -- 3,567
Net cash provided by (used in)
investing activities.............. 120,268 (51,760) (47,300) -- (9,359)
Net cash provided by (used in)
financing activities.............. (131,785) 30,044 49,922 -- 6,086
Cash dividends declared per
share............................. 13.76 1.51 .86 -- --
GLA (sq. ft.) (at end of period).... 890,663 3,889,514 3,814,889 2,391,856 2,348,117
Occupancy of Properties owned
(%) (at end of period)............ 83.1% 90.5 94.4 96.3 95.4
(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.
13
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, 2000.
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 3 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 the results of operations for the years ended
December 31, 2000 and 1999 and 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 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.
14
RESULTS OF OPERATIONS
The following discussion compares the results of property operations of the
Company for the years ended December 31, 2000, and December 31, 1999.
During July 1999, the Company acquired nine shopping center properties anchored
by Kmart and comprising approximately 1.1 million square feet of leasable space
located in six states. Prior to these acquisitions, the Company had purchased,
through a series of unrelated transactions since July 1998, limited partnership
interests in these properties and reported its investment on the equity method
of accounting. During the first quarter 2000, the Company acquired the minority
interests in two additional shopping center properties previously accounted for
under the equity method of accounting. The accompanying Condensed Consolidated
Statements of Income for year ended December 31, 2000 report the operations of
these eleven properties on a consolidated basis subsequent to the date of
acquiring a controlling interest. Consequently, the acquisition of these
properties gives rise to significant changes when comparing the Company's
results of operations for the year December 31, 2000 to the year ended December
31, 1999.
During the third and fourth quarters of 2000, the Company disposed of
substantially all of its assets. The sale of these properties gives rise to
significant changes when comparing the Company's results of operations for year
ended December 31, 2000 to the year ended December 31, 1999.
Revenues from rental property increased by $677,000 in 2000 to $ 43,134,000 from
$42,457,000 in 1999. The net increase is primarily due to the acquisitions noted
above partially offset by the above mentioned dispositions.
Property operating expenses increased by $670,000 to $5,573,000 in 2000 from
$4,903,000 in 1999. The net increase is due primarily to the acquisitions noted
above coupled with higher operating expenses at certain of the existing
properties and partially offset by the above mentioned dispositions.
Real estate taxes were $6,290,000 in 2000 compared to $6,319,000 in 1999.
Increased real estate taxes from acquired properties were more than offset by
reduced expenses resulting from property dispositions.
Management fees remained constant at approximately 3% of gross revenues per the
Management Agreement.
Interest expense increased by $2,615,000 in 2000 to $12,167,000 from $9,552,000
in 1999. The increase results primarily from increased borrowings to fund to
above mentioned acquisitions coupled with higher interest rates on the variable
rate debt during 2000. In 1999, interest expense related to investments in joint
ventures was included in other expenses.
Depreciation and amortization expense decreased by $1,645,000 in 2000 to
$5,598,000 from $7,243,000 in 1999. The decrease is due primarily to the
property dispositions mentioned above partially offset by the acquisitions.
General and administrative expenses increased by $1,952,000 in 2000 to
$4,727,000 from $2,775,000 in 1999. The increase results primarily from cost
related to the plan of liquidation.
Equity in net income (loss) of real estate joint ventures was $(31,000) in 2000
compared to $2,432,000 in 1999. This change results primarily from reporting the
above mentioned acquisitions on a consolidated basis during 2000.
Other income (expense) was $1,675,000 in 2000 compared to $(1,725,000) in 1999.
The other income in 2000 includes higher interest income from short-term
investments and an amount collected on a mortgage note receivable in excess of
its cost. Other expense in 1999 was primarily interest expense related to
borrowings to acquire certain joint venture investments which were consolidated
in 2000.
Extraordinary items of $1,644,000 in 2000 represent prepayment penalties
incurred and deferred financing costs written-off in connection with the
repayment of certain mortgage loans, partially offset by a gain related to the
repayment of a note payable at a discount.
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.
15
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.
LIQUIDITY AND CAPITAL RESOURCES
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 and long-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 net cash provided by operations from its eight (8) remaining properties are
anticipated to be sufficient to fund the operation of such properties and those
of the Company. The Company is actively seeking to dispose of all such
properties and to complete its liquidation as soon as practicable. There can be
no assurance, however, that this will occur in the near future or at prices
sufficient to aggregate the currently estimated $18.25 in total per share
liquidating distributions to the shareholders of the Company.
16
CASH FLOWS
Comparison of Year Ended December 31, 2000 to December 31, 1999. Net cash
provided by operating activities decreased from $15,784,000 in 1999 to
$10,038,000 in 2000 primarily due to the above mentioned disposition of
substantially all of the Company's assets during the third and fourth quarters
of 2000 coupled with higher general and administrative expenses in 2000 related
to the plan of liquidation. Net cash provided by (used in) investing activities
was $120,268,000 in 2000 compared to ($51,760,000) in 1999. This change results
primarily from the disposition of substantially all of the assets during 2000
compared to significant acquisitions of rental properties and joint venture
interests in 1999. Net cash provided by (used in) financing activities was
($131,785,000) in 2000 compared to $30,044,000 in 1999. This change results
principally from the repayment of all debt related to the above mentioned
disposition of assets and the payment of the initial liquidating distribution of
$13 per common share on December 22, 2000 compared to significant borrowing of
debt to finance acquisitions in 1999. The net decrease in cash and cash
equivalents was $1,479,000 in 2000 and $5,933,000 in 1999 which resulted from a
combination of the aforementioned activities.
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 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.
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.
17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
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 22.
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.
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.
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.
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.
18
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............................................................................. 22
Consolidated Balance Sheets as of December 31, 2000 and 1999............................................... 23
Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998..................... 24
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2000, 1999 and
1998............................................................................................... 25
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998................. 26
Notes to Consolidated Financial Statements.................................................................
(a) 2. Financial Statement Schedules
Schedule III--Real Estate and Accumulated Depreciation as of December 31, 2000..................... 39
All other schedules are omitted because they are not required or the required
information is shown in the financial statements or notes thereto.
19
(a) 3. EXHIBITS
Exhibit
Number Description
- ------ -----------
2.1 Plan of Liquidation and Dissolution of the Company (filed as exhibit 2.1 to the
Company's Current Report on Form 8-K dated April 28, 2000, and incorporated
herein by reference).
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 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)
3.3 Articles Supplementary dated July 27, 1999, (filed as Exhibit 3.1 to the
Company's Current Report on Form 8-K dated July 15, 1999, and incorporated herein
by reference)
3.4 Third Amended and Restated By-Laws of the Company dated July 27, 1999, (filed as
Exhibit 3.2 to the Company's Current Report on Form 8-K dated July 15, 1999, and
incorporated herein by reference)
3.5 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. (filed as Exhibit 4.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, and incorporated herein by reference)
4.2 Amendment No. 1, dated July 27, 1999, to Shareholder Rights Agreement dated as of
March 31, 1999, between the Company and Bank Boston N.A., as Rights Agent (filed
as Exhibit 4.1 to the Company's Current Report on Form 8-K dated July 15, 1999,
and incorporated herein by reference)
4.3 Articles Supplementary for Series A Junior Participating Preferred Stock (filed as
Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference)
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 (filed as Exhibit 10.2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, and incorporated herein by
reference)
10.3 Form of 1997 Stock Option and Long-Term Incentive Plan of the Company (filed as
Exhibit 10.2 to the Company's Registraton Statement on Form S-4, Registration No.
333-41431, and incorporated herein by reference).
10.4 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)
10.5 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)
10.6 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)
10.7 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)
10.8 Employment Agreement between the Company and Louis J. Petra (filed as exhibit 10.1 to
the Company's Current Report on Form 8-K dated December 31, 1997 and incorporated
herein by reference).
10.9 Employment Agreement between the Company and Sheila Levine (filed as Exhibit 10.2 to
the Company's Current Report on Form 8-K dated December 31, 1997 and incorporated
herein by reference).
10.10 Employment Agreement between the Company and Carl Kraus (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated July 15, 1999 and Incorporated herein by
reference).
10.11 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)
10.12 Purchase and Sale Agreement dated as of April 28, 2000, by and among Munsey Park
Associates, LLC, a New York limited liability company, North Shore Triangle, LLC,
a New York limited liability company, Philips Yonkers, LLC, a New York limited
liability company, Philips Henry, LLC, a New York limited liability company,
Philips Shopping Center Fund, L.P., a Delaware limited partnership, and Philips
Lake Mary Associates, L.P., a Delaware limited partnership, and Kimco Income
Operating Partnership, L.P., a Delaware limited partnership (filed as exhibit
10.1 to the Company's Current Report on Form 8-K dated April 28, 2000, and
incorporated herein by reference).
10.13 Redemption Agreement dated as of April 27, 2000, by and among the Operating
Partnership and Philip Pilevsky (filed as exhibit 10.2 to the Company's Current
Report on Form 8-K dated April 28, 2000, and incorporated herein by reference).
20
10.14 Asset Contribution, Purchase and Sale Agreement dated as of April 28, 2000, by
and among the Company, the Operating Partnership, Certain Affiliated Parties
signatory thereto, KIR Acquisition, LLC, a Delaware limited liability company and
Kimco Income Operating Partnership, L.P., a Delaware limited partnership (filed
as exhibit 10.3 to the Company's Current Report on Form 8-K dated April 28, 2000,
and incorporated herein by reference).
10.15 Amended and Restated Redemption Agreement dated as of April 27, 2000, by and
among Philips International Realty, L.P., a Delaware limited partnership, and
Philip Pilevsky (filed as exhibit 10.1 to the Company's Current Report on Form
8-K dated April 28, 2000, and incorporated herein by reference).
10.16 Redemption Agreement dated as of April 28, 2000, by and among Philips
International Realty, L.P., a Delaware limited partnership, and Allen Pilevsky
(filed as exhibit 10.2 to the Company's Current Report on Form 8-K dated April
28, 2000, and incorporated herein by reference).
10.17 Redemption Agreement dated as of April 28, 2000, by and among Philips
International Realty, L.P., a Delaware limited partnership, and Fred Pilevsky
(filed as exhibit 10.3 to the Company's Current Report on Form 8-K dated April
28, 2000, and incorporated herein by reference).
10.18 Redemption Agreement dated as of April 28, 2000, by and among Philips
International Realty, L.P., a Delaware limited partnership, and SL Florida LLC, a
Delaware limited liability company (filed as exhibit 10.4 to the Company's
Current Report on Form 8-K dated April 28, 2000, and incorporated herein by
reference).
10.19 First Amendment to Asset Contribution, Purchase and Sale Agreement dated as of
May 31, 2000, by and among Philips International Realty, L.P., a Delaware limited
partnership, the Company, certain Affiliated Parties signatory thereto, KIR
Acquisition, LLC, a Delaware limited liability company, and Kimco Income
Operating Partnership, L.P., a Delaware limited partnership (filed as exhibit
10.5 to the Company's Current Report on Form 8-K dated April 28, 2000, and
incorporated herein by reference).
10.20 Second Amendment to Asset Contribution, Purchase and Sale Agreement dated as of
June 15, 2000, by and among Philips International Realty, L.P., a Delaware
limited partnership, the Company, certain Affiliated Parties signatory thereto,
KIR Acquisition, LLC, a Delaware limited liability company, and Kimco Income
Operating Partnership, L.P., a Delaware limited partnership (filed as exhibit
10.6 to the Company's Current Report on Form 8-K dated April 28, 2000, and
incorporated herein by reference).
10.21 Third Amendment to Asset Contribution, Purchase and Sale Agreement dated as of
June 20, 2000, by and among Philips International Realty, L.P., a Delaware
limited partnership, the Company, certain Affiliated Parties signatory thereto,
KIR Acquisition, LLC, a Delaware limited liability company, and Kimco Income
Operating Partnership, L.P., a Delaware limited partnership (filed as exhibit
10.7 to the Company's Current Report on Form 8-K dated April 28, 2000, and
incorporated herein by reference).
10.22 Amended and Restated Purchase and Sale Agreement dated as of June 20, 2000, by
1517-25 Third, L.P., a New York limited partnership, Philip Pilevsky, SL Florida
LLC, a Delaware limited liability company, Allen Pilevsky and Fred Pilevsky
(filed as exhibit 10.8 to the Company's Current Report on Form 8-K dated April
28, 2000, and incorporated herein by reference).
10.23 Amended and Restated Purchase and Sale Agreement dated as of June 20, 2000, by
Philips International Realty, L.P., a Delaware limited partnership, Philips Lake
Worth Corp., a New York corporation, and Philip Pilevsky (filed as exhibit 10.9
to the Company's Current Report on Form 8-K dated April 28, 2000, and
incorporated herein by reference).
10.24* Amendment to Amended and Restated Purchase and Sale Agreement dated as of April 4,
2001, by and between the Company, Philips Lake Worth Corp., a New York corporation,
and Philip Pilevsky.
21.1 Subsidiaries of the Company (filed as exhibit 21.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 and incorporated herein by reference).
23.1* Consent of Ernst & Young LLP
- ------------
* filed herewith
(B) REPORTS ON FORM 8-K
On October 5, 2000, the Company filed with the SEC a Current Report on
Form 8-K dated October 2, 2000, reporting under Item 5 the filing of a
class action suit against the Company.
On December 15, 2000, the Company filed with the SEC a Current Report
on Form 8-K dated November 30, 2000, reporting under Item 2 that the
Company consummated the distribution of certain of its properties,
pursuant to its plan of liquidation, on November 30, 2000 and December
4, 2000, and declared an initial liquidating distribution of $13.00 per
share to shareholders of record on December 15, 2000.
21
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Philips International Realty Corp.
We have audited the accompanying consolidated balance sheets of Philips
International Realty Corp. as of December 31, 2000, and 1999 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 2000. We have also audited
the financial statement schedule listed on the Index at Item 14(a). These
financial statements and schedule are the responsibility of the management of
Philips International Realty Corp. Our responsibility is to express an opinion
on these financial statements and schedule 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Philips
International Realty Corp. at December 31, 2000, and 1999 and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2000, 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
April 5, 2001
22
PHILIPS INTERNATIONAL REALTY CORP.
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------
2000 1999
------------ ------------
Assets
Rental properties, at cost
Land and improvements $ 6,856,284 $ 66,403,111
Building and improvements 27,801,307 222,047,039
------------ -------------
34,657,591 288,450,150
Less: Accumulated depreciation 1,078,362 26,819,530
------------ -------------
Rental properties, net 33,579,229 261,630,620
Investments in real estate joint ventures - 25,134,060
Cash and cash equivalents 1,704,425 3,183,142
Accounts receivable 981,192 7,445,972
Deferred charges and prepaid expenses 124,441 4,934,190
Other assets 1,183,102 4,222,373
------------ -------------
Total Assets $ 37,572,389 $ 306,550,357
============ =============
Liabilities And Shareholders' Equity
Liabilities:
Mortgages and notes payable $ - $ 181,955,221
Accounts payable and accrued expenses 2,402,595 2,980,303
Dividends payable - 2,771,031
Other liabilities 106,893 1,897,998
------------ -------------
Total Liabilities 2,509,488 189,604,553
------------ -------------
Minority interests in Operating Partnership 119,213 30,091,696
------------ -------------
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 (57,797,724) (5,183,136)
------------ -------------
34,943,688 87,558,276
Stock purchase loans receivable - (704,168)
------------ -------------
Total Shareholders' Equity 34,943,688 86,854,108
------------ -------------
Total Liabilities and Shareholders' Equity $ 37,572,389 $ 306,550,357
============ =============
See accompanying notes.
23
PHILIPS INTERNATIONAL REALTY CORP.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues from rental property $ 43,133,885 $ 42,457,222 $ 22,625,029
------------ ------------ ------------
Expenses:
Operating expenses 5,573,314 4,902,945 3,213,285
Real estate taxes 6,289,543 6,319,382 3,258,543
Management fees to affiliates 1,255,919 1,228,451 687,779
Interest expense 12,166,549 9,552,032 4,243,152
Depreciation and amortization 5,598,337 7,242,960 3,809,142
General and administrative expenses 4,726,522 2,775,488 1,607,924
------------ ------------ ------------
35,610,184 32,021,258 16,819,825
------------ ------------ ------------
Operating income 7,523,701 10,435,964 5,805,204
Equity in net income (loss) of real estate joint ventures (30,529) 2,432,494 683,222
Minority interests in income before gain on sale of shopping
center properties and extraordinary items of Operating Partnership (2,119,641) (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 1,675,155 (1,725,281) (531,792)
------------ ------------ ------------
Income before gain on sale of shopping center properties and
extraordinary items 7,048,686 8,336,210 4,520,922
Gain on sale of shopping center properties (net of minority share
of $16,250,253) 42,948,640 - -
------------ ------------ ------------
Income before extraordinary items 49,997,326 8,336,210 4,520,922
Extraordinary items (net of minority share of $553,463 in 2000) (1,643,690) - (65,361)
------------ ------------ ------------
Net income $ 48,353,636 $ 8,336,210 $ 4,455,561
============ ============ ============
Net income applicable to common shares $ 48,353,636 $ 8,336,210 $ 4,392,418
============ ============ ============
Basic and diluted net income per common share:
Income before extraordinary items $ 6.81 $ 1.14 $ 0.94
Extraordinary items (0.22) - (0.01)
------------ ------------ ------------
Net income $ 6.59 $ 1.14 $ 0.93
============ ============ ============
See accompanying notes.
24
PHILIPS INTERNATIONAL REALTY CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the Years Ended December 31, 2000, 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
Net Income
Dividends on common stock
Amortization of stock purchase loans --------- ----------- --------- -------- ------------
Balance, December 31, 2000 - $ - 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
Net Income 48,353,636 48,353,636
Dividends on common stock (100,968,224) (100,968,224)
Amortization of stock purchase loans 704,168 704,168
------------- ----------- ------------
Balance, December 31, 2000 $ (57,797,724) $ - $ 34,943,688
============= =========== ============
See accompanying notes.
25
PHILIPS INTERNATIONAL REALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
-----------------------------------------------
12/31/00 12/31/99 12/31/98
------------- ------------- -------------
Operating activities:
Net income $ 48,353,636 $ 8,336,210 $ 4,455,561
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 5,598,337 7,242,959 3,809,142
Amortization - other 1,977,797 928,846 141,666
Extraordinary items -- -- 65,361
Equity in net income of real estate joint ventures 30,529 (2,432,494) (683,222)
Distributions from real estate joint ventures -- 2,406,781 --
Minority interests in income of Operating Partnership 17,816,431 2,806,967 1,505,678
Preferred units income allocation from Operating Partnership -- -- (63,143)
Equity in net income of Operating Partnership -- -- (6,823)
Gain on sale of real estate (59,198,893) -- --
Gain on sale of of secured mortgage note receivable (585,053)
Changes in operating assets and liabilities:
Accounts receivable (658,911) (1,459,209) (566,067)
Deferred charges (2,178,899) (2,163,035) (1,045,036)
Other assets 1,274,234 (695,523) 8,289
Accounts payable and accrued expenses (599,853) 629,504 (711,323)
Other payables (1,791,105) 182,663 (416,083)
------------- ------------- -------------
Net cash provided by operating activities 10,038,250 15,783,669 6,494,000
------------- ------------- -------------
Investing activities:
Proceeds from sale of shoping center properties 108,274,800 -- --
Additions to land, buildings and improvements (2,239,600) (40,088,553) (14,325,307)
Investments in real estate joint ventures (274,387) (9,906,724) (32,974,286)
Proceeds from sale of interests in real estate joint ventures 12,157,364
Collection (purchase) of secured mortgage note receivable 2,350,000 (1,764,947) --
------------- ------------- -------------
Net cash provided by ( used in) investing activities 120,268,177 (51,760,224) (47,299,593)
------------- ------------- -------------
Financing activities:
Repayment of mortgage notes payable, exclusive of
scheduled principal amortization (63,648,998) (6,300,000) (109,303,875)
Principal amortization of mortgage notes payable (606,349) (1,056,165) (483,411)
Proceeds from debt financing 39,336,993 51,824,718 53,775,000
Distributions to minority interests (3,127,535) (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 (103,739,255) (10,790,505) (3,807,505)
Dividends paid on preferred stock -- -- (63,143)
------------- ------------- -------------
Net cash provided by (used in) financing activities (131,785,144) 30,043,627 49,921,663
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (1,478,717) (5,932,928) 9,116,070
Cash and cash equivalents, beginning of year 3,183,142 9,116,070 --
------------- ------------- -------------
Cash and cash equivalents, end of the year $ 1,704,425 $ 3,183,142 $ 9,116,070
============= ============= =============
Non cash investing & financing activities
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 $ 13,754,786 $ 19,461,901 $ --
============= ============= =============
Dividends declared and pain in succeeding period $ -- $ 2,771,031 $ 2,477,412
============= ============= =============
Assumption of debt by purchaser of properties $ 157,036,867
============= ============= =============
OP Unit Redemption from sale of properties $ 44,661,377 $ -- $ --
============= ============= =============
See accompanying notes.
26
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 held 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 3, 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.
PLAN OF LIQUIDATION
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 believed that the
Company's then current stock price did 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
believed that is was prudent to explore the strategic alternatives for the
Company.
On October 11, 2000, the Company announced that its stockholders had approved a
plan of liquidation for the Company, pursuant to which the Company planned to
(a) transfer its interests in affiliated entities that owned eight shopping
centers to Kimco Income Operating Partnership, L.P. for cash and the assumption
of indebtedness, (b) transfer its interests in entities that owned four shopping
centers and two redevelopment properties, subject to certain indebtedness, to
Philip Pilevsky, the chief executive officer, and certain of his affiliates and
family members in exchange for cash and the redemption of units in the Company's
operating partnership, (c) sell its remaining assets for cash, (d) pay or
provide for its liabilities and expenses, (e) distribute the net cash proceeds
of the liquidation, then estimated at $18.25 per share of common stock, to the
stockholders in two or more liquidating distributions, and (f) wind up
operations and dissolve. On December 22, 2000, the Company paid the initial
liquidating dividend of $13 per share of common stock.
At a Special Meeting of Stockholders held on October 10, 2000, approximately 80%
of the Company's 7,340,474 common shares outstanding were voted with 99.7% of
these votes cast in favor of the plan of liquidation. See Note 16.
3. 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.
27
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. STOCK SPLIT AND PUBLIC STOCK OFFERING--(CONTINUED)
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 was 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 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.
4. SIGNIFICANT ACCOUNTING POLICIES
Business Information and Segments
The Company, its subsidiaries, affiliates and related real estate joint ventures
have been 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. Kmart Corporation is the largest tenant for 2001 representing
approximately 64% of the Company's minimum base rental revenues. No other tenant
accounts for more than 4% of revenues.
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, 2 and 3. 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 15 to 39 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.
28
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
4. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
All assets are held for sale. 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 has operated 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 per share excludes the dilutive effects of any outstanding
options and warrants. Diluted net income 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
Statements of Income is based upon a weighted average numbers of 7,340,474,
7,340,474 and 4,715,226 shares of Common Stock outstanding for the years ended
December 31, 2000, 1999 and 1998, respectively.
29
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
4. 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 adopted 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, 2000, 1999 and 1998 totaled $12,424, $13,082 and
$0; $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.
5. INVESTMENTS IN REAL ESTATE JOINT VENTURES
The Company and its subsidiaries held interests in various real estate joint
ventures during 2000, 1999 and 1998 which were accounted for on the equity
method. These joint ventures were engaged in the operation of shopping centers
which were 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 16)
DECEMBER 31, 2000 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 YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31,1998
----------------- ----------------- ----------------
Revenues from rental property.................................. $1,059 $6,569 $9,417
Operating expenses............................................. (352) (1,869) (2,456)
Mortgage interest.............................................. (741) (783) (394)
Depreciation and amortization.................................. (216) (1,124) (1,505)
Other, net..................................................... -- 369 (665)
------- ------ ------
$ (250) $3,162 $4,397
------- ------ ------
30
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. 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
------ ------
7. DEFERRED CHARGES, PREPAID EXPENSES AND OTHER ASSETS
Deferred Charges and Prepaid Expenses:
Deferred charges and prepaid expenses included in the accompanying Consolidated
Balance Sheets as of December 31, 2000 and 1999 are comprised as follows:
2000 1999
---- ----
Deferred financing.................................................................... $ -- $1,953
Deferred leasing...................................................................... -- 3,716
Other deferred charges................................................................ 2 748
Prepaid expenses...................................................................... 122 433
----- ------
124 6,850
Less, accumulated amortization........................................................ -- 1,916
----- ------
$ 124 $4,934
----- ------
31
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. DEFERRED CHARGES, PREPAID EXPENSES AND OTHER ASSETS--(CONTINUED)
Other Assets:
Other assets in the accompanying Consolidated Balance Sheets as of December 31,
2000 and 1999 are comprised as follows:
2000 1999
---- ----
Mortgage note secured by real estate.................................................. $ -- $1,765
Real estate tax, capital improvements and other escrows............................... 235 1,367
Other................................................................................. 948 1,090
------ ------
$1,183 $4,222
------ ------
At December 31, 1999, Other Assets included a loan to officer of $175, net of
amortization.
8. MORTGAGES AND NOTES PAYABLE
During 2000, all debt was repaid.
As of December 31, 1999, mortgages and notes payable totalled $181,955 which
were substantially collateralized by the shopping center properties. Mortgage
payments were due in monthly installments of principal and/or interest and
matured on various dates through 2019. The loan agreements contained customary
representations, covenants and events of default.
The following table summarizes the mortgages and notes payable outstanding as of
December 31, 1999:
PROPERTY 1999
----
Millside Plaza First mortgage notes payable to a bank with fixed interest rate $11,941
Elm Plaza of 7.48% due December 2002. The notes were 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
Palm Springs Village interest rate of 7.83% due February 2004. The notes were
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
and Mill Basin Plaza rate of 7.38% due January 2003. The note was 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
rate of 8.125% due October 2007. Monthly payments of principal
and interest total $95.
Unsecured promissory note with a fixed interest rate of 1,250
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
---------------------------- ------
(Table continued on following page)
32
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. MORTGAGES AND NOTES PAYABLE--(CONTINUED)
PROPERTY 1999
----
Forest Ave. Revolving credit facility bearing interest at rates ranging 94,200
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
------------------------------- --------
Total mortgages and notes payable $181,955
--------------------------------- --------
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 was
subject to the Company's compliance with a number of customary financial and
other covenants on an on-going basis. The credit facility had been used
primarily to finance its acquisition and redevelopment activities. Borrowings
under the credit facility were collateralized by certain shopping center
properties with recourse to the Company and the Operating Partnership. The
credit facility was cancelled during 2000.
33
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values for financial instruments were determined by management
using market information available as of December 31, 2000, and 1999 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 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, 2000.
Cash equivalents, accounts receivable and mortgages and notes payable are
reflected in the accompanying Consolidated Balance Sheets as of December 31,
2000 and 1999 at amounts which reasonably approximate their fair values.
10. 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 $1,300, $1,900 and $1,441 for the years ended
December 31, 2000, 1999 and 1998, respectively. See also Notes 2 and 16.
11. 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, 2000 are as follows:
2001.................................................................. $ 3,988
2002.................................................................. 3,674
2003.................................................................. 3,415
2004.................................................................. 3,280
2005......................................... ........................ 3,213
Thereafter............................................................ 24,308
---------
$ 41,878
=========
Percentage rent included in revenues from rental property was $1,231, $1,152 and
$537 for the years ended December 31, 2000, 1999 and 1998, respectively. Kmart
is the Company's largest tenant for 2001 representing approximately 64% of the
Company's minimum base rental revenues.
Legal Proceedings
On October 2, 2000, a class action complaint was filed in the United States
District Court for the Southern District of New York against the Company and its
directors. The complaint alleged a number of improprieties concerning the
pending plan of liquidation of the Company. The Company believes that the
asserted claims are without merit, and will defend such action vigorously. On
November 9, 2000, the Court, ruling from the bench, denied the plaintiff's
motion for a preliminary injunction seeking to prevent the liquidation based
essentially on the same allegations as in the complaint. This bench ruling was
followed by a written order dated November 30, 2000 wherein the Court concluded
that the plaintiff had failed to demonstrate either that it was likely to
succeed on the merits of its case or that there were sufficiently serious
questions going to the merits of its case to make it fair ground for litigation.
The plaintiffs in the action continue to prosecute the suit as a damage claim
against the Company and its directors. The Company continues to believe that the
action is without merit and will continue to defend it vigorously.
The Company is also 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.
34
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. STOCK OPTION PLAN
The Company has maintained a stock option 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 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 2000, 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
Granted.. 0 0
Forfeited (3) $17.50
--- ------
Options outstanding, December 31, 2000 705 $17.43
--- ------
Options exercisable:
December 31, 1998........................................... 185 $17.50
December 31, 1999........................................... 395 $17.49
December 31, 2000........................................... 705 $17.43
In conjunction with the Company's adoption of the Plan described in Note 2, and
the disposal of substantially all of the Company's shopping center properties,
all options outstanding at December 31, 2000 are fully vested and as of January
1, 2001, each option holder received a contractual right to a cash distribution
to be made on the same basis and at the same time as distributions are made to
shareholders, in cancellation of the option holder's right to exercise the
option. The amount of proceeds per share covered by an option paid to each
option holder will equal the per share proceeds distributed to shareholders less
the option holder's per share exercise price. This contractual right will be
retained after the option holder's termination of employment.
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 2000,
1999 and 1998 would have been $47,814, or $6.51; $7,970, or $1.09; 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
2000, 1999 and 1998: (i) risk-free interest rates of 5.87%, 6.62% and 5.11%,
(ii) dividend yields on the Company's common stock of 8.36%, 9.01% and 7.71%,
(iii) volatility factors for the market price of the Company's common stock of
23.21%, 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.
35
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. SUPPLEMENTAL FINANCIAL INFORMATION
The following summary represents the results of operations for each quarter
during the years ended December 31, 2000 and 1999.
2000 (UNAUDITED)
----------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- -------
Revenues from rental property............................................... $12,641 $12,762 $10,304 $ 7,427
Income before extraordinary items........................................... 2,392 2,380 2,743 42,482
Income before extraordinary items per common share
Basic.................................................................. $ .33 $ .32 $ .37 $ 5.79
Diluted................................................................ $ .33 $ .32 $ .37 $ 5.79
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
14. EXTRAORDINARY ITEMS
The accompanying Consolidated Statements of Income for the years ended December
31, 2000 and 1998, include 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, partially offset in
calendar year 2000 by an extraordinary gain related to the repayment of a note
payable at a discount.
15. DIVIDENDS ON COMMON AND PREFERRED STOCK
Stock Dividends
The Company declared dividends on its Common Stock for 2000, 1999 and 1998 as
follows:
RECORD DATE OF AMOUNT
DATE OF DECLARATION DATE PAYMENT PER SHARE
---- ------- ---------
2000 Year
3/15/00........................................................... 3/31/00 4/17/00 $.3775
6/15/00........................................................... 6/30/00 7/17/00 $.3775
12/5/00........................................................... 12/15/00 12/22/00 $13.00
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.
36
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
16. ACQUISITION AND DISPOSITION OF REAL ESTATE INTERESTS
Acquisitions
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 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 had
a 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.
During the first quarter 2000, the Company acquired for approximately $1 million
in cash the minority interests in, and began reporting on a consolidated basis
the results of operations for, two shopping center properties previously
accounted for under the equity method.
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.
Dispositions
At December 31, 1999 the Company had a $7.1 million joint-venture investment in
a proposed retail-residential redevelopment project. The joint venture sold this
project in March 2000 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.
37
On July 14, 2000, certain subsidiaries of the Company sold seven properties
aggregating approximately 620,000 square feet to Kimco Income Operating
Partnership, L.P., a Delaware limited partnership ("Kimco"), for a total
consideration of $67.3 million pursuant to a Purchase and Sale Agreement dated
as of April 28, 2000. The purchase price was comprised of approximately $51.0
million in cash and mortgage debt assumption of $16.3 million. The properties
included four New York shopping centers (Walgreens at Freeport, Munsey Park,
Yonkers and Glen Cove) and three in Florida (Key Largo, Orlando and Lake Mary).
The sale of these seven properties resulted in a gain of $1.2 million, net of
$.4 million of minority interest.
On December 4, 2000, in conjunction with the plan of liquidation approved by
stockholders on October 10, 2000, certain affiliates of the Company disposed of
interests in eight properties aggregating approximately 1,178,000 square feet to
Kimco for a total consideration of $137 million pursuant to an Asset
Contribution, Purchase and Sale Agreement dated as of April 28, 2000. The
purchase price was comprised of approximately $71.1 million in cash, $55.4
million in mortgage debt assumption and $10.5 million of equity redemption
(576,326 Operating Partnership Units valued at $18.25 per Unit). The properties
included four New York shopping centers (Forest Avenue Shoppers Town,
Meadowbrook Commons, Merrick Commons and Mill Basin Plaza), two Connecticut
shopping centers (Branhaven Plaza and Elm Plaza), one shopping center property
in New Jersey (Millside Plaza) and one shopping center property in Massachusetts
(Foxboro Plaza). The disposition of these properties resulted in a gain of
approximately $17.4 million, net of $6.6 million in minority interest.
Also in conjunction with its plan of liquidation, the Company has completed the
distribution of its interest in four shopping center properties in Hialeah,
Florida and the sale of its interest in one redevelopment site (1517-25 Third
Avenue, New York City) for total consideration of approximately $123 million to
certain limited partners in the Operating Partnership, including Philip
Pilevsky, the Company's Chairman and Chief Executive Officer ("The Hialeah
Agreements"). The total consideration was comprised of $3.3 million in cash,
$85.3 million in mortgage debt assumption and $34.1 million in redemption of
their entire equity interest in the Operating Partnership (1,870,873 Units
valued at $18.25 per Unit). These transactions resulted in a book gain of $24.4
million, net of $9.3 million of minority interest.
The sale of an additional redevelopment site (Palm Springs Plaza in Lake Worth,
Florida) to these limited partners for approximately $7.7 million in in cash is
under contract and scheduled to close on or before June 1, 2001. The purchase
price to be paid by limited partners under the Palm Springs Plaza agreement will
be adjusted so that the value per Unit received by them pursuant to the
above-referenced Hialeah agreements ($18.25 per Unit) and the estimated per
share value to be received by our stockholders in the liquidation will be the
same.
17. PRO FORMA FINANCIAL INFORMATION
As discussed in Note 16, 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.
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.
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
As discussed in Note 16, the Company disposed of substantially all of its
properties during the third and fourth quarters of 2000. The pro forma
information set forth below is based upon the Company's Consolidated Statements
of Income for the years ended December 31, 2000 and 1999 adjusted to give effect
to the property dispositions as of January 1, 1999.
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 dispositions occurred as of January 1, 1999.
YEAR ENDED YEAR ENDED
12/31/00 12/31/99
-------- --------
Revenues from rental properties......................... $4,057 $ 2,982
Income before extraordinary items....................... $1,447 $ 779
Income (loss) before extraordinary items, basic and
diluted per common share.............................. $ .20 $ .11
38
PHILIPS INTERNATIONAL REALTY CORP.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
Cost Capitalized
Initial Cost Subsequent to Acquisition
-------------------------------- ------------------------------
Land and Buildings and Land and Buildings and
Description Encumbrances Improvements Improvements Improvements Improvements
- ----------- ------------ ------------ ------------- ------------- ------------
Kmart Sacramento Center $0 $ 678 $ 2,711 $ 0 $ 0
Sacramento, CA
Kmart Atwater Shopping Center
Atwater, CA 0 571 2,285 0 0
Pennryile Marketplace
Hopkinsville, KY 0 882 3,527 0 0
North Star Shopping Center
Alexandria, MN 0 848 3,415 0 0
McHenry Commons
McHenry, IL 0 1,421 5,685 0 0
Reedley Shopping Center
Reedley, CA 0 700 2,799 0 0
Port Angeles Shopping Center
Port Angeles, WA 0 471 1,884 0 0
Palm Springs Plaza
Lake Worth, FL 0 1,287 5,160 0 334
-- ------ ------- -- ------
0 $6,858 $27,466 0 $ 334
-- ------ ------- -- ------
39
PHILIPS INTERNATIONAL REALTY CORP.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
Gross Amounts at Which
Carried at Close of Period
-------------------------------------------------------------- Life on Which
Land and Buildings and Accumulated Date Depreciation
Description Improvements Improvements Total Depreciation Acquired is Computed
- ----------- ------------ ------------ ----- ------------ -------- -----------
Kmart Sacramento Center $ 678 $ 2,711 $ 3,389 $ 102 7/01/99 39 Years
Sacramento, CA
Kmart Atwater Shopping Center
Atwater, CA 571 2,285 2,856 86 7/01/99 39 Years
Pennryile Marketplace
Hopkinsville, KY 882 3,527 4,409 132 7/01/99 39 Years
North Star Shopping Center
Alexandria, MN 848 3,415 4,263 127 7/01/99 39 Years
McHenry Commons
McHenry, IL 1,421 5,685 7,106 213 7/01/99 39 Years
Reedley Shopping Center
Reedley, CA 700 2,799 3,499 105 7/01/99 39 Years
Port Angeles Shopping Center
Port Angeles, WA 471 1,884 2,355 71 7/01/99 39 Years
Palm Springs Plaza
Lake Worth, FL 1,287 5,494 6,781 243 3/10/99 39 Years
------- ------- ------- ------
$ 6,858 $27,800 $34,658 $1,079
------- ------- ------- ------
40
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, 2000 are as
follows:
2000 1999 1998
---- ---- ----
Balance, beginning of year.............................................. $ 288,450 $228,896 $199,428
Property acquisitions .................................................. 15,239 54,781 24,576
Improvements............................................................ 756 4,773 4,892
Property dispositions (269,787) -- --
---------- -------- --------
Balance, end of year.................................................... $ 34,658 $288,450 $228,896
--------- -------- --------
The aggregate cost of land, buildings and improvements for federal income tax
purposes at December 31, 2000 was $34,700.
The changes in accumulated depreciation for the three years ended December 31,
2000 are as follows:
2000 1999 1998
---- ---- ----
Balance, beginning of year.............................................. $ 26,820 $19,982 $14,556
Depreciation for period................................................. 5,281 6,838 5,426
Property dispositions (31,023) -- --
--------- ------- -------
Balance, end of year.................................................... $ 1,078 $26,820 $19,982
--------- ------- -------
41
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 April 16, 2001
------------------- Officer
Philip Pilevsky
/s/ LOUIS J. PETRA Director and President April 16, 2001
------------------
Louis J. Petra
/s/ SHEILA LEVINE Director, Chief Operating Officer, April 16, 2001
----------------- Executive Vice President and Secretary
Sheila Levine
/s/ CARL KRAUS Chief Financial Officer April 16, 2001
-----------------
Carl Kraus
/s/ ARNOLD S. PENNER Director April 16, 2001
--------------------
Arnold S. Penner
/s/ A. F. PETROCELLI Director April 16, 2001
--------------------
A. F. Petrocelli
/s/ ELISE JAFFE Director April 16, 2001
--------------------
Elise Jaffe
/s/ ROBERT GRIMES Director April 16, 2001
--------------------
Robert Grimes