Back to GetFilings.com
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, 2001
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-23463
.................
PHILIPS INTERNATIONAL REALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Maryland 13-3963667
------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
417 Fifth Avenue
New York, New York 10016
------------------------------- -------------------------------
(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
------------------------------- -------------------------------
(Title of Each Class) (Name of Each Exchange on
Which Registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. /X/
As of March 22, 2002, the aggregate market value of voting stock held by
non-affiliates of the registrant was approximately $15.9 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 22, 2002, 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 17.
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.
PHILIPS INTERNATIONAL REALTY CORP.
TABLE OF CONTENTS
FORM 10-K
PAGE
----
PART I
Item 1. Business.......................................................................................... 1
Item 2. Properties........................................................................................ 8
Item 3. Legal Proceedings................................................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............................................... 10
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.............................. 10
Item 6. Selected Financial Data........................................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................ 15
Item 8. Financial Statements and Supplementary Data....................................................... 15
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 15
PART III
Item 10. Directors and Executive Officers of the Registrant................................................ 15
Item 11. Executive Compensation............................................................................ 15
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 15
Item 13. Certain Relationships and Related Transactions.................................................... 15
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K................................. 16
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"). The Philips Group has been engaged in the
ownership, development and acquisition for redevelopment of neighborhood and
community shopping centers predominantly concentrated in greater New York and
Miami metropolitan areas.
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 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
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. To date, a total of
$15.25 per share has been distributed. The Company's five remaining assets are
currently being offered for sale.
On January 29, 2002, the Company announced that Kmart Corporation's ("Kmart")
Chapter 11 bankruptcy filing is likely to delay the sales of the Company's five
remaining properties pursuant to the Company's plan of liquidation, and may
result in a reduction of the remaining projected liquidating distributions of
$3.00 per common share. Further, the Company reported that Kmart leases a
significant portion of the space in each of the Company's five remaining
shopping center properties, of which four stores are currently operating and one
Kmart store in Reedley, California is closed. While operating in bankruptcy,
Kmart has announced that it will seek immediate cancellation of leases at closed
locations. As a result of the uncertainty pertaining to the ultimate status of
the Kmart leases, the Company expects a delay in the completion of its plan of
liquidation. Also, the potential impact on the proceeds from sales of the
remaining five properties cannot currently be evaluated.
On February 19, 2002, the Company announced that the New York Stock Exchange
(NYSE) has advised the Company that it may be subject to NYSE trading suspension
and delisting if the Company's average market capitalization falls below $15
million ($2.05 per common share) over a 30-day trading period. The Company's
stock closed at $2.30 per share on the NYSE on March 22nd. If the Company's
shares cease to be traded on the NYSE, the Company believes that an alternative
trading venue may be available; however, there can be no assurances that such an
alternative market will develop. If the Company is delisted from the NYSE, the
Company has no current intention to seek listing of its common shares on any
other securities exchange or on NASDAQ.
On March 13, 2002, the Company announced that its four properties with operating
Kmart stores (Sacramento, CA, Atwater, CA, McHenry, IL and Hopkinsville, KY) are
not affected by Kmart's recent announcement of store closings. Kmart is
operating under the protection of Chapter 11 of the Bankruptcy Code, and the
Court approved the cancellation of the Kmart lease at the Company's remaining
property, located in Reedley, California, in January. Although none of the
Company's remaining Kmart stores were targeted for closure, there can be no
assurance that Kmart will not seek to cancel additional leases while it is in
bankruptcy. Recently the Company objected to Kmart's request for an extension of
the 60-day period in which the debtor must assume or reject the Company's leases
under the Bankruptcy Code. Kmart was seeking an extension on all remaining
leases through July 2003, and the Courts generally grant such significant
extensions. As to the Company's Kmart leases, the Court approved an agreement
with Kmart that all leases which have not been assumed or rejected on or before
September 30, 2002 will be subject to certain protections from October 1, 2002
through January 15, 2003 which, among other things, precludes store closings
during this period. In addition, the Court set March 31, 2003 as the deadline
for Kmart to assume or reject the Company's leases without prejudice to Kmart's
right to seek further extension. As a result of the uncertainty pertaining to
the ultimate status of the Kmart leases, the Company expects a continued delay
in the completion of its plan of liquidation. Also, the potential impact on the
proceeds from sales of the Company's remaining five properties and the Company's
target of approximately $18.25 of aggregate liquidating distributions to
shareholders cannot currently be evaluated. The uncertainty that continues to
surround Kmart could impede the Company's ability to achieve prompt sales of its
remaining assets at acceptable prices.
ACQUISITION AND DISPOSITION OF REAL ESTATE INTERESTS
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 former unit holders of the Operating Partnership, including Philip
Pilevsky, the Company's Chairman and Chief Executive Officer (collectively, the
"Related Limited Partners"). 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
gain of $24.4 million, net of $9.3 million of minority interest.
In connection with its plan of liquidation, on June 14, 2001, the Company
completed the sale of its redevelopment site located in Lake Worth, Florida (the
"Lake Worth Property") to the Related Limited Partners, for approximately $7.6
million in cash, pursuant to the Amended and Restated Purchase and Sale
Agreement dated as of June 20, 2000 (the "Lake Worth Agreement"). The sale of
this property resulted in a gain of approximately $.3 million.
The purchase price paid by the Related Limited Partners under the Lake Worth
Agreement will be adjusted, up or down, so that the aggregate value per Unit
received by them in connection with the November 2000 distribution to the
Related Limited Partners of the Company's four (4) shopping center properties
located in Hialeah, Florida and the sale to the Related Limited Partners in
December 2000 of the Company's redevelopment property located on Third Avenue in
New York, New York ($18.25 per Unit), and the estimated per share value to be
received by the Company's stockholders in the liquidation ($18.25 per share),
will be the same.
On August 31, 2001, the Company completed the sale of its North Star Shopping
Center in Alexandria, Minnesota for approximately $4.5 million in cash, pursuant
to the Sale and Purchase Agreement dated July 16, 2001 by Philips Shopping
Center Fund L.P., a Delaware limited partnership, and Repco LLP, as successor to
Kordel, Inc., a Minnesota corporation. The sale resulted in a gain of
approximately $4 thousand.
On October 31, 2001, the Company completed the sale of its Highway 101 Shopping
Center in Port Angeles, Washington for approximately $4.5 million in cash,
pursuant to the Sale and Purchase Agreement dated June 14, 2001 by Philips
Shopping Center Fund L.P, a Delaware limited partnership, and BDG LLC, as
successor to 3 Puyallup Associates, LLC., a Washington limited liability
company. This transaction resulted in a gain of $39 thousand.
As a consequence of the above-referenced transactions, the Company's remaining
shopping center portfolio at December 31, 2001 comprises five properties located
in California (3), Illinois (1) and Kentucky (1). These shopping centers
represent an aggregate 477,901 square feet of gross leasable area. As of
December 31, 2001, these properties were 90.7% leased to 41 tenants. The Company
is actively marketing these properties for sale. On February 28, 2002, the
Company entered into an agreement to sell its property located in McHenry,
Illinois for approximately $4 million. In March 2002, the parties to the
agreement agreed to consummate the sale on April 16, 2002. Although management
will endeavor to consummate a sales transaction(s), there can be no assurance
that a sale(s) will be completed on satisfactory terms, if at all.
OPERATING STRATEGY
Pending the sale of its remaining five 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,
and Sheila Levine, Chief Operating Officer, Executive Vice President and
Secretary have extensive experience in managing and redeveloping retail
properties.
Louis Petra, former President and Director of the Company, resigned such offices
and terminated his at-will agreement with the Company effective October 5, 2001.
Carl Kraus, the Company's Chief Financial Officer is resigning as of March 31,
2002. Mr. Petra has agreed to act as a consultant to the Company's Board of
Directors and executive officers with regard to the completion of the plan of
liquidation.
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. There was no mortgage debt outstanding at December 31,
2001.
EMPLOYEES
As of December 31, 2001, the Company had 3 employees, who were not 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. 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.
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, 2001, approximately 69% of the
Company's GLA was leased to Kmart. On January 22, 2002, Kmart filed for
protection under Chapter 11 of the Bankruptcy Code. In January, the Court
approved the cancellation of the Company's Kmart lease at the Reedley, CA
property, which is reflected herein as if the lease were terminated as of
December 31, 2001. Although none of the Company's remaining five Kmart stores
have yet been targeted for closure (except for the store already closed), there
can be no assurance that Kmart will not seek to cancel additional leases while
it is in bankruptcy.
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 such personnel to
adequately serve us could adversely affect our business.
Mr. Louis Petra resigned as President of our Company and as a Director in
October 2001. Mr. Carl Kraus is resigning as Chief Financial Officer of our
Company as of March 31, 2002. Mr. Petra remains a consultant to our Company on a
per diem basis. We will not have the services of Mr. Kraus and will only have
the services of Mr. Petra on a limited basis. This loss of personnel could
adversely affect our business.
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 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.
Kmart currently leases approximately 69% of the Company's GLA and represents
approximately 60% of the Company's annualized base rental revenues. On January
22, 2002, Kmart filed for protection under Chapter 11 of the Bankruptcy Code. In
January, the Court approved the cancellation of the Company's Kmart lease at the
Reedley, CA property. Although none of the Company's remaining four Kmart stores
have yet been targeted for closure, there can be no assurance that Kmart will
not seek to cancel additional leases while it is in bankruptcy.
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.
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, 2001, 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;
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 executive officers and professional consultants whose
continued service is not guaranteed.
We are dependent upon our executive officers and professinal consultants for
strategic business direction and real estate experience. Loss of their services
could adversely affect us. We cannot assure you that any of our executive
officers and professional consultants will continue to provide services to 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.
Mr. Louis Petra resigned as President of our Company and as a Director in
October 2001. Mr. Carl Kraus is resigning as Chief Financial Officer of our
Company as of March 31, 2002. Mr. Petra remains a consultant to our Company on a
per diem basis. We will not have the services of Mr. Kraus and will only have
the services of Mr. Petra on a limited basis. This loss of personnel could
adversely affect our business.
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
90% 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.
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, and 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.
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.
Upon the shareholders' approval of the plan of liquidation in October 2000, the
Company suspended the payment of regular quarterly dividends. Pursuant to the
plan of liquidation, a total of $15.25 has been distributed to date.
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, 2001, the Company held interests in 5 retail properties
encompassing approximately 478,000 square feet of gross leaseable area ("GLA").
Information concerning the 5 properties, is set forth in the following Property
Summary Data chart.
The Company's neighborhood and community shopping centers usually are anchored
by national or regional retailers. As of December 31, 2001, the Company's
properties were 90.7% leased to 41 tenants.
PROPERTY SUMMARY DATA
The following table sets forth certain information relating to each of the
Properties at December 31, 2001.
Annualized Contractual
% Base Rent at 12/31/2001 (1)
Year Built/ Total Leased % of Base
% Renovated GLA At Base Portfolio Rent/Sq.Ft Key
Property and Location Owned Yr. Acquired (Sq.Ft. 12/31/01 Rent ($000) Base Rent (2) $ Tenant
- -------------------------- ------- ------------ --------- ---------- ----------- --------- --------- ------------
1105 Bellvue Road ................. 100.0% 1987 109,698 100.0% 738 27.2 6.72 Kmart
Atwater, CA 1998
Northgate Shopping Center ......... 100.0% 1987 105,063 100.0% 695 25.7 6.61 Kmart
Northgate Blvd 1998
Sacramento, CA
McHenry Commons, S.C .............. 100.0% 1987 100,408 98.7% 565 20.9 5.71 Kmart
North Richmond Road 1998
McHenry, IL
Pennyrile Marketplace, S.C. ...... 100.0% 1987 90,077 93.2% 433 16.0 5.15 Kmart
3010 Fort Campbell Rd 1998
Hopkinsville, KY
Manning Avenue ...................... 100.0% 1987 72,655 49.3% 275 10.2 7.67 Factory 2-U
Reedley, CA (3) 1998
--------- ---------- ----------- --------- ---------
Portfolio Total/weighted Average .... 477,901 90.7% 2,706 100.0% 6.24
========= ========== =========== ========= =========
(1) Total annualized contractual base rent for all leases in place at
December 31, 2001. 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, 2001.
(3) Kmart's lease cancelled by bankruptcy court in January 2002. Amounts
reflect Kmart vacancy at December 31, 2001.
OCCUPANCY
During the past five years the portfolio occupancy and total annualized
contractual base rent per square foot for its remaining wholly-owned shopping
center properties were as follows:
TOTAL ANNUALIZED
NUMBER OF % CONTRACTUAL BASE RENT PER
YEAR ENDED DECEMBER 31, PROPERTIES LEASED LEASED SQUARE FOOT ($)(1)
---------- ------ -------------------------
2001................................................... 5 90.7% 6.24
2000................................................... 5 98.4% 6.14
1999................................................... 5 99.0% 6.10
1998................................................... 5 99.8% 6.01
1997................................................... 5 99.6% 5.99
(1) Total annualized contractual base rent for all leases in place at
December 31 for the respective years indicated, divided by total GLA leased
at such dates. Amount excludes (i) future contractual rent escalations and
cost of living increases, (ii) percentage rent and (iii) additional rent
payable by tenants such as common area maintenance, real estate taxes and
other expense reimbursements.
At December 31, 2001, Kmart Corporation was the Company's largest tenant
representing approximately 60% of the Company's annualized base rental revenues.
On January 22, 2002, Kmart filed for protection under Chapter 11 of the
Bankruptcy Code. In January, the Court approved the cancellation of the
Company's Kmart lease at the Reedley, CA property. Although none of the
Company's remaining four Kmart stores have yet been targeted for closure, there
can be no assurance that Kmart will not seek to cancel additional leases while
it is in bankruptcy. No other tenant accounted for more than of 4% revenues.
LEASE EXPIRATIONS
The following table sets forth all scheduled lease expirations for the Company's
remaining properties beginning January 1, 2002, assuming that none of the
tenants exercises renewal options or termination rights:
ANUALIZED CONTRACTUAL
BASE RENT AT 12/31/01 (1)
-------------------------
TOTAL GLA
UNDER
NUMBER OF EXPIRING % OF
LEASE EXPIRATION LEASES LEASES % OF TOTAL BASE RENT PORTFOLIO BASE RENT/
YEAR EXPIRING (SQ.FT.) EXPIRING GLA ($) BASE RENT SQ.FT.(2)($)
---- -------- -------- ------------ --- --------- ------------
2002 13 42,664 9.8 392,250 14.5 9.19
2003 9 29,489 6.8 316,468 11.7 10.73
2004 5 8,759 2.0 93,964 3.5 10.73
2005 5 7,940 1.8 95,844 3.5 12.07
2006 2 8,648 2.0 80,256 3.0 9.28
2007 1 2,800 0.7 29,400 1.1 10.5
2008 2 5,086 1.2 63,084 2.3 12.4
2009 0 0 0 0 0 0
2010 0 0 0 0 0 0
2011 0 0 0 0 0 0
2012 and thereafter 4 328,264 75.7 1,634,563 60.4 4.98
--- -------- ------ ---------- ------ -----
Total/Weighted
Average 41 433,650 100.0 2,705,829 100.0 6.24
=== ======== ====== ========== ====== =====
(1) Total annualized contractual base rent for all leases in place at
December 31, 2001. 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, 2001.
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 as of December 31, 2001 was
approximately $20 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, 2001 was
approximately $.6 million, or approximately $.81 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.
ITEM 3. LEGAL PROCEEDINGS
On October 2, 2000, a class action 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. 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.
On February 19, 2002, the Company announced that on February 5, 2002 the Court
denied the plaintiff's motion for class action certification. The plaintiff may
elect to proceed with its claims on its own now that class certification has
been denied. The plaintiff also has asserted derivative claims for alleged
breaches of fiduciary duty by the directors of the Company. The Company believes
that such derivative claims are deficient for, among other reasons, the grounds
upon which class certification was denied. The Company believes that all of the
asserted claims are without merit, and will defend such action vigorously.
On February 28, 2002, the Company announced that the plaintiff has sought
permission from the Court of Appeals for the Second Circuit to appeal the denial
of class certification discussed above. In order for plaintiff to obtain
permission to appeal, it must demonstrate that the denial of class certification
effectively terminates the litigation and that the District Court's decision was
an abuse of its discretion. The Company has opposed plaintiff's application. If
the Court of Appeals grants plaintiff's request, plaintiff will then be able to
appeal the District Court's denial of class certification. The Company has
incurred significant costs in connection with defense of this litigation, which
are covered under the Company's directors and officers insurance policy (see
Note 6 to the Consolidated Financial Statements).
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
None
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. On February 19, 2002, the Company announced
that the New York Stock Exchange (NYSE) has advised the Company that it may be
subject to NYSE trading suspension and delisting if the Company's average market
capitalization falls below $15 million ($2.05 per common share) over a 30-day
trading period. If the Company's shares cease to be traded on the NYSE, the
Company believes that an alternative trading venue may be available; however,
there can be no assurances that such an alternative market will develop. If the
Company is delisted from the NYSE, the Company has no current intention to seek
listing of its common shares on any other securities exchange or on NASDAQ.
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, 2001
and 2000:
HIGH LOW CLOSE
---- --- -----
2001:
First Quarter .................................................. $ 4.60 $ 3.75 $ 4.10
Second Quarter ................................................. $ 4.30 $ 4.05 $ 4.20
Third Quarter .................................................. $ 4.40 $ 2.80 $ 2.90
Fourth Quarter ................................................. $ 3.18 $ 2.35 $ 2.51
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 $ 4.00 $ 4.063
On March 22, 2002, the closing Common Stock sales price on the NYSE was $2.30
per share.
Holders
On March 22, 2002, the Company had 1,156 common shareholders of record.
Dividends and Distributions
The Company paid distributions on its Common Stock as follows during calendar
years 2001 and 2000:
Record Date of Amount
Date of Declaration Date Payment Per Share
------------------- ---- ------- ---------
2001 Year
---------
6/21/01 7/2/01 7/9/01 $ 1.00*
9/5/01 9/17/01 9/24/01 $ .75*
11/2/01 11/12/01 11/19/01 $ .50*
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*
* Constituted liquidating distributions under the Company's plan of liquidation.
For income tax purposes, 100% of the dividends for 2001, totaling $2.25 per
share, were a return of capital to shareholders. Dividends for 2000 totaling
$.6653 per share represented ordinary dividend income and $13.4264 was a return
of capital to shareholders.
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 90% of its taxable income. Upon the stockholders' approval of the plan
of liquidation in October 2000, the Company suspended the payment of regular
quarterly dividends. Pursuant to the plan of liquidation, a total of $15.25 has
been distributed to date.
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, 2001, 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 and for the year 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 COMPANY AND THE PHILIPS COMPANY (COMBINED)
(Dollars in thousands, except per share data)
Philips International Realty Corp. (1) The Philips
Year ended December 31, Company
--------------------------------------------------------- ------------
(In thousands, except per share and property data)
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
OPERATING DATA:
Revenues from rental property.......................... $ 5,023 $ 43,134 $ 42,457 $ 22,625 $ 26,698
Income before extraordinary items...................... 2,743 49,997 8,336 4,521 1,336
Income before extraordinary items, per common share:
Basic.................................................. .37 6.81 1.14 .94 --
Diluted................................................ .37 6.81 1.14 .94 --
BALANCE SHEET DATA:
Rental properties, net, at cost........................ 18,974 33,579 261,631 208,914 --(2)
Investments in real estate joint ventures.............. -- -- 25,134 34,664 --(2)
Total assets........................................... 22,385 37,572 306,550 264,347 --(2)
Mortgages and notes payable............................ -- -- 181,955 137,487 --(2)
Shareholders' equity................................... 21,170 34,944 86,854 89,398 --(2)
OTHER DATA:
Net cash provided by (used in) operating
activities............................................. (298) 10,038 15,784 6,494 --
Net cash provided by (used in) investing
activities............................................. 16,029 120,268 (51,760) (47,300) --
Net cash provided by (used in) financing............... (16,573) (131,785) 30,044 49,922 --
activities.............................................
Cash dividends declared per share...................... 2.25 13.76 1.51 .86 --
GLA (sq.ft.) (at end of period)........................ 477,901 890,663 3,889,514 3,814,889 2,391,856
Occupancy of Properties owned (%) (at end of Period)... 90.7 83.1 90.5 94.4 96.3
(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.
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, 2001.
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.
RESULTS OF OPERATIONS
During the third and fourth quarters of 2000 and the year ended December 31,
2001, the Company disposed of substantially all of its assets. See Notes 2 and
14 to Consolidated Financial Statements. The disposition of these properties
gives rise to significant changes when comparing the Company's results of
operations for the years ended December 31, 2001 and 2000.
Comparison of the Year ended December 31, 2001 to December 31,2000.
Revenues from rental property was $5,023,000 for the year ended December 31,
2001 compared to $43,134,000 for the comparable period in 2000. Expenses were
$2,675,000 in 2001and $35,610,000 in 2000. These changes resulted primarily from
the above mentioned disposition of substantially all of the Company's assets.
Interest expense has been eliminated since the proceeds of property dispositions
were utilized, in part, to repay all outstanding mortgage indebtedness, while
depreciation and amortization charges have been suspended on the Company's
remaining properties held for sale. Minority interests in the Operating
Partnership were substantially eliminated in conjunction with property
dispositions as discussed in Notes 2 and 14 to the accompanying Consolidated
Financial Statements.
Comparison of Year Ended December 31, 2000 to 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 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.
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 five (5) 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 estimated $18.25 total per share liquidating
distributions to the shareholders of the Company.
CASH FLOWS
Comparison of Year Ended December 31, 2001 to December 31, 2000. Net cash
provided by (used in) operating activities was ($298,000) for the year ended
December 31, 2001 compared to $10,038,000 for the comparable period in 2000. Net
cash provided by investing activities was $16,029,000 in 2001 compared to
$120,268,000 in 2000. Net cash used in financing activities was $16,573,000 in
2001 compared to $131,785,000 in 2000. These changes resulted primarily from the
above mentioned disposition of substantially all of the Company's assets and the
adoption of the plan of liquidation.
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) financial 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.
Recently Issued Accounting Pronouncements
In October 2001, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This standard harmonizes the accounting for
impaired assets and resolves some of the implementation issues as originally
described in SFAS No. 121. The new standard becomes effective for the Company on
January 1, 2002. The Company does not expect this pronouncement to have a
material impact on the Company's results of operations or financial position.
Critical Accounting Policies
The Company believes that the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of consolidated
financial statements.
On a periodic basis, management assesses whether there are any indicators that
the value of the real estate properties may be impaired. To the extent
impairment has occurred, the loss shall be measured as the excess of the
carrying amount of the property over the fair value of the asset. Management
does not believe that the value of any of its rental properties is impaired at
December 31, 2001.
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its tenants to make required rent payments. If
the financial condition of a specific tenant were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
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.
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 19.
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.
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.......................................... 19
Consolidated Balance Sheets as of December 31, 2001 and 2000............ 20
Consolidated Statements of Income for the Years Ended December 31,
2001, 2000 and 1999............................................. 21
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999................................ 22
Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999............................................. 23
Notes to Consolidated Financial Statements.............................. 24
(a) 2. Financial Statement Schedules
Schedule III--Real Estate and Accumulated Depreciation as of
December 31, 2001............................................. 33
All other schedules are omitted because they are not required or the required
information is shown in the financial statements or notes thereto.
(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 Registration
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).
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 (filed as exhibit
10.24 to the Company's Annual Report on Form 10-K dated April 17,
2001, and incorporated herein by reference).
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).
(B) REPORTS ON FORM 8-K
The Company filed the following Current Reports on Form 8-K in the
fourth quarter of 2001:
On October 25, the Company filed with the SEC a Form 8-K/A dated
August 31, 2001 amending its current report on Form 8-K dated August
31, 2001 to amend certain pro forma financial information.
On November 14, 2001, the Company filed with the SEC a Current
Report on Form 8-K dated October 31, 2001, reporting under Item 2
that the Company completed the sale of its Highway 101 Shopping
Center in Port Angeles, Washington. In addition, on December 21,
2001 the Company filed with the SEC a Form 8-K/A dated October 31,
2001 amending its current report on Form 8-K dated October 31, 2001
to provide certain pro forma financial information.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of
Philips International Realty Corp.
We have audited the accompanying consolidated balance sheets of Philips
International Realty Corp. as of December 31, 2001, and 2000 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedule listed in the Index as 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, 2001, and 2000 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
ERNST & YOUNG LLP
New York, New York
March 20, 2002
PHILIPS INTERNATIONAL REALTY CORP.
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------------
2001 2000
--------------- ---------------
Assets
Rental properties - held for sale - at cost
Land and improvements $ 3,917,356 $ 6,856,284
Building and improvements 15,672,196 27,801,307
--------------- ---------------
19,589,552 34,657,591
Less: Accumulated depreciation 615,892 1,078,362
--------------- ---------------
Rental properties, net 18,973,660 33,579,229
Cash and cash equivalents 863,005 1,704,425
Accounts receivable net of allowance of $224,000 in 2001 and $0 in 2000 303,543 981,192
Deferred charges and prepaid expenses 86,269 124,441
Other assets 2,158,089 1,183,102
--------------- ---------------
Total Assets $ 22,384,566 $ 37,572,389
=============== ===============
Liabilities And Shareholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 1,071,891 $ 2,402,595
Other liabilities 70,671 106,893
--------------- ---------------
Total Liabilities 1,142,562 2,509,488
--------------- ---------------
Minority interests in Operating Partnership 71,878 119,213
--------------- ---------------
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 (71,571,286) (57,797,724)
--------------- ---------------
Total Shareholders' Equity 21,170,126 34,943,688
--------------- ---------------
Total Liabilities and Shareholders' Equity $ 22,384,566 $ 37,572,389
=============== ===============
See accompanying notes.
PHILIPS INTERNATIONAL REALTY CORP.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended
December 31,
-------------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Revenues from rental property $ 5,022,511 $ 43,133,885 $ 42,457,222
--------------- --------------- ---------------
Expenses:
Operating expenses 888,856 5,573,314 4,902,945
Real estate taxes 560,996 6,289,543 6,319,382
Management fees to affiliates 154,207 1,255,919 1,228,451
Interest expense -- 12,166,549 9,552,032
Depreciation and amortization -- 5,598,337 7,242,960
General and administrative expenses 1,070,547 4,726,522 2,775,488
--------------- --------------- ---------------
2,674,606 35,610,184 32,021,258
--------------- --------------- ---------------
Operating income 2,347,905 7,523,701 10,435,964
Equity in net income (loss) of real estate joint ventures (30,529) 2,432,494
Minority interests in income before gain on sale
and extraordinary items (8,044) (2,119,641) (2,806,967)
Other income (expense), net 18,128 1,675,155 (1,725,281)
--------------- --------------- ---------------
Income before gain on sale and extraordinary items 2,357,989 7,048,686 8,336,210
Gain on sale (net of minority share
of $1,312 and $16,250,253) 384,516 42,948,640 --
--------------- --------------- ---------------
Income before extraordinary items 2,742,505 49,997,326 8,336,210
Extraordinary items (net of minority share of $553,463 in 2000) (1,643,690) --
--------------- --------------- ---------------
Net income $ 2,742,505 $ 48,353,636 $ 8,336,210
=============== =============== ===============
Basic and diluted net income per common share:
Income before extraordinary items $ 0.37 $ 6.81 $ 1.14
Extraordinary items -- (0.22) --
--------------- --------------- ---------------
Net income $ 0.37 $ 6.59 $ 1.14
=============== =============== ===============
See accompanying notes.
PHILIPS INTERNATIONAL REALTY CORP.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
For the Years Ended December 31, 2001, 2000 and 1999
Common Stock Additional
----------------------------------- Paid-In
Shares Amount Capital
--------------- --------------- ---------------
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
Net Income
Dividends on common stock
--------------- --------------- ---------------
Balance, December 31, 2001 7,340,474 $ 73,405 $ 92,668,007
=============== =============== ===============
Cumulative
Distributions
in Excess Stock Total
of Net Purchase Shareholders'
Income Loans Equity
--------------- --------------- ---------------
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
Net Income 2,742,505 2,742,505
Dividends on common stock (16,516,067) (16,516,067)
--------------- --------------- ---------------
Balance, December 31, 2001 $ (71,571,286) -- $ 21,170,126
=============== =============== ===============
See accompanying notes.
PHILIPS INTERNATIONAL REALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
-------------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Operating activities:
Net income $ 2,742,505 $ 48,353,636 $ 8,336,210
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization -- 5,598,337 7,242,959
Amortization - other -- 1,977,797 928,846
Equity in net income of real estate joint ventures -- 30,529 (2,432,494)
Distributions from real estate joint ventures -- -- 2,406,781
Minority interests in income of Operating Partnership 9,356 17,816,431 2,806,967
Gain on sale of real estate (385,828) (59,198,893) --
Gain on sale of secured mortgage note receivable -- (585,053) --
Changes in operating assets and liabilities:
Accounts receivable 677,649 (658,911) (1,459,209)
Deferred charges (917,145) (2,178,899) (2,163,035)
Other assets (1,057,725) 1,274,234 (695,523)
Accounts payable and accrued expenses (1,330,704) (599,853) 629,504
Other payables (36,222) (1,791,105) 182,663
--------------- --------------- ---------------
Net cash provided by (used in) operating activities (298,114) 10,038,250 15,783,669
--------------- --------------- ---------------
Investing activities:
Net proceeds from sale of shopping center properties 16,029,452 108,274,800 --
Additions to land, buildings and improvements -- (2,239,600) (40,088,553)
Investments in real estate joint ventures -- (274,387) (9,906,724)
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 16,029,452 120,268,177 (51,760,224)
--------------- --------------- ---------------
Financing activities:
Repayment of mortgage notes payable, exclusive of
scheduled principal amortization -- (63,648,998) (6,300,000)
Principal amortization of mortgage notes payable -- (606,349) (1,056,165)
Proceeds from debt financing -- 39,336,993 51,824,718
Distributions to minority interests (56,691) (3,127,535) (3,634,421)
Dividends paid on common stock (16,516,067) (103,739,255) (10,790,505)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities (16,572,758) (131,785,144) 30,043,627
--------------- --------------- ---------------
Net decrease in cash and cash equivalents (841,420) (1,478,717) (5,932,928)
Cash and cash equivalents, beginning of year 1,704,425 3,183,142 9,116,070
--------------- --------------- ---------------
Cash and cash equivalents, end of the year $ 863,005 $ 1,704,425 $ 3,183,142
=============== =============== ===============
Non cash investing & financing activities
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 paid in succeeding period $ -- $ -- $ 2,771,031
=============== =============== ===============
Assumption of debt by purchaser of properties $ -- $ 157,036,867 $ --
=============== =============== ===============
OP Unit redemption from sale of property $ -- $ 44,661,377 $ --
=============== =============== ===============
See accompanying notes.
PHILIPS INTERNATIONAL REALTY CORP.
December 31, 2001
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.
2. PLAN OF LIQUIDATION
On October 13, 1999, the Board of Directors (the "Board") 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. To date, a total of $15.25 per share has been
distributed. The Company's five remaining assets are currently being offered for
sale.
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 14.
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.
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
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)
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, which is operating under Chapter 11 of the
Bankruptcy Code, is the largest tenant representing approximately 60% of
Company's annualized base rental revenues. No other tenant accounted 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. All significant inter-company 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 were 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 ("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.
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 and depreciation and amortization and straight line
rent charges have been suspended during 2001. 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, included in deferred charges and prepaid
expenses in the accompanying consolidated balance sheet, are amortized over the
terms of the related leases.
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.
Earnings Per Share
Basic earnings per share ("EPS") excludes the dilutive effects of any
outstanding options and warrants. Diluted earnings per share include the
dilutive (but not any anti-dilutive) effect of outstanding options and warrants
calculated under the treasury stock method.
Basic and diluted EPS in the accompanying consolidated statements of income is
based upon 7,340,474 weighted average shares of Common Stock outstanding for the
years ended December 31, 2001, 2000 and 1999, and is computed by dividing net
income by the weighted average number of shares outstanding for the period.
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 October 2001, the Financial Accounting Standards Board issued ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. This standard harmonizes the accounting for impaired assets
and resolves some of the implementation issues as originally described in SFAS
No. 121. The new standard becomes effective for the Company on January 1, 2002.
The Company does not expect this prouncement to have a material impact on the
Company's results of operations or financial position.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash investments and accounts receivable. The
Company places its cash investments with high quality financial institutions.
Management of the Company performs ongoing credit evaluations of its tenants and
requires certain tenants to provide security deposits. Though these security
deposits are insufficient to meet the terminal value of a tenant's lease
obligation, they are a measure of good faith and a source of funds to offset the
economic costs associated with lost rent and the costs associated with
retenanting the space. The properties are shopping centers located throughout
the United States. Kmart Corporation, which is operating under Chapter 11 of the
Bankruptcy Code, is the largest tenant representing approximately 60% of the
Company's annualized base rental revenues. No other tenant accounted for more
than 4% of the Company's revenues.
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 and 1999 totaled $12,424 and $13,082; $12,500
and $12,143 and $5,360 and $4,572 respectively. A portion of interest cost is
included in other income (expense), net. During 2001, no interest expense was
incurred.
5. INVESTMENTS IN REAL ESTATE JOINT VENTURES
The Company and its subsidiaries held interests in various real estate joint
ventures during 2000 and 1999 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 14).
DECEMBER 31, DECEMBER 31,
2000 1999
--------------- ---------------
ASSETS
Real estate, net ............................................................... $ -- $ 28,804
Other assets ................................................................... -- 10,317
--------------- ---------------
-- 39,121
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL
Mortgages payable .............................................................. -- 10,000
Liabilities .................................................................... -- 804
Partners' Capital .............................................................. -- 28,317
--------------- ---------------
$ -- $ 39,121
=============== ===============
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
--------------- ---------------
Revenues from rental property .................................................. $ 1,059 $ 6,569
Operating expenses ............................................................. (352) (1,869)
Mortgage interest .............................................................. (741) (783)
Depreciation and amortization .................................................. (216) (1,124)
Other, net ..................................................................... -- 369
--------------- ---------------
$ (250) $ 3,162
=============== ===============
6. DEFERRED CHARGES, PREPAID EXPENSES AND OTHER ASSETS
Deferred charges and prepaid expenses included in the accompanying consolidated
balance sheets as of December 31, 2001 and 2000 were comprised primarily of
prepaid expenses.
Other assets in the accompanying consolidated balance sheets as of December 31,
2001 and 2000 were comprised primarily of legal costs incurred in connection
with the defense of the class action litigation (see Note 9), which are covered
under the Company's directors and officers insurance policy.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values for financial instruments were determined by management
using market information available as of December 31, 2001, and 2000 and
appropriate valuation methodologies. 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, 2001.
Cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses are reflected in the accompanying consolidated balance sheets as of
December 31, 2001 and 2000 at amounts which reasonably approximate their fair
values.
8. 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 $247, $1,300 and $1,900 for the years ended
December 31, 2001, 2000 and 1999, respectively.
9. 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, 2001 are as follows:
2002.............................................................. $ 2,510
2003.............................................................. 2,155
2004.............................................................. 1,950
2005.............................................................. 1,855
2006.............................................................. 1,767
Thereafter........................................................ 13,232
---------
$ 23,469
=========
Percentage rent included in revenues from rental property was $204, $1,231 and
$1,152 for the years ended December 31, 2001, 2000 and 1999, respectively.
Kmart, which is operating under Chapter 11 of the Bankruptcy Code, is the
Company's largest tenant for 2002, 2001 and 2000 representing approximately 60%,
64% and 11%, respectively of the Company's minimum base rental revenues. The
bankruptcy Court approved the cancellation of the Company's Kmart lease at the
Reedley, CA property, in January 2002, which is reflected herein as if the lease
were terminated as of December 31, 2001.
Legal Proceedings
On October 2, 2000, a class action 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. 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.
On February 19, 2002, the Company announced that on February 5, 2002, the Court
denied the plaintiff's motion for class action certification. The plaintiff may
elect to proceed with its claims on its own now that class certification has
been denied. The plaintiff also has asserted derivative claims for alleged
breaches of fiduciary duty by the directors of the Company. The Company believes
that such derivative claims are deficient for, among other reasons, the grounds
upon which class certification was denied. The Company believes that all of the
asserted claims are without merit, and will defend such action vigorously.
On February 28, 2002, the Company announced that the plaintiff has sought
permission from the Court of Appeals for the Second Circuit to appeal the denial
of class certification discussed above. In order for plaintiff to obtain
permission to appeal, it must demonstrate that the denial of class certification
effectively terminates the litigation and that the District Court's decision was
an abuse of its discretion. The Company has opposed plaintiff's application. If
the Court of Appeals grants plaintiff's request, plaintiff will then be able to
appeal the District Court's denial of class certification.
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.
10. STOCK OPTION PLAN
The Company had maintained a stock option plan pursuant to which a maximum
852,550 shares of the Company's Common Stock could be issued for qualified and
non-qualified options. Options granted under the Plan generally vested ratably
over a three-year term, expired ten years from the date of grant and were
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 and 1999:
WEIGHTED
SHARES AVERAGE
(in EXERCISE PRICE
thousands) PER SHARE
--------------- ---------------
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, 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 were 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 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 applied 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 was 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 and 1999 would have been $47,814,
or $6.51 and $7,970, or $1.09; 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 and 1999 : (i) risk-free interest rates of 5.87%,
6.62% , (ii) dividend yields on the Company's common stock of 8.36% and 9.01%
(iii) volatility factors for the market price of the Company's common stock of
23.21% and 24.80% 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 was $2.27. For purposes of these pro forma disclosures, the estimated fair
value of options is amortized over the options' vesting period.
11. QUARTERLY FINANCIAL INFORMATION
The following summary represents the results of operations for each quarter
during the years ended December 31, 2001 and 2000.
2001 (UNAUDITED)
------------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
--------------- --------------- --------------- ---------------
Revenues from rental property ......................... $ 1,416 $ 1,233 $ 1,372 $ 1,002
Income before extraordinary items ..................... 793 826 899 225
Income before extraordinary items per common share
Basic ............................................ $ .11 $ .11 $ .12 .03
Diluted .......................................... $ .11 $ .11 $ .12 .03
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
12. EXTRAORDINARY ITEMS
The accompanying consolidated statement of income for the year ended December
31, 2000, includes 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 by an
extraordinary gain related to the repayment of a note payable at a discount.
13. DIVIDENDS ON COMMON STOCK
Stock Dividends
The Company declared dividends on its Common Stock for 2001, 2000 and 1999 as
follows:
RECORD DATE OF AMOUNT
DATE OF DECLARATION DATE PAYMENT PER SHARE
- ------------------- --------------- --------------- ---------------
2001 Year
6/21/01 ...................................................... 7/2/01 7/9/01 $ 1.00
9/5/01 ....................................................... 9/17/01 9/24/01 $ .75
11/2/01 ...................................................... 11/12/01 11/19/01 $ .50
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
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
14. 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.
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.
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
former unit holders in the Operating Partnership, including Philip Pilevsky, the
Company's Chairman and Chief Executive Officer, (collectively, the "Related
Limited Partners") ("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 gain of $24.4 million, net of $9.3 million of minority interest.
In connection with its plan of liquidation, on June 14, 2001, the Company
completed the sale of its redevelopment site located in Lake Worth, Florida (the
"Lake Worth Property") to the Related Limited Partners, for approximately $7.6
million in cash, pursuant to the Amended and Restated Purchase and Sale
Agreement dated as of June 20, 2000 (the "Lake Worth Agreement"). The sale of
this property resulted in a gain of approximately $.3 million.
The purchase price paid by the Related Limited Partners under the Lake Worth
Agreement will be adjusted, up or down, to that the aggregate value per Unit
received by them in connection with the November 2000 distribution to the
Related Limited Partners of the Company's four (4) shopping center
properties located in Hialeah, Florida and the sale to the Related Limited
Partners in December 2000 of the Company's redevelopment property located on
Third Avenue in New York, New York ($18.25 per share), and the estimated per
share value to be received by the Company's stockholders in the liquidation
($18.25 per share), will be the same.
On August 31, 2001, the Company completed the sale of its North Star Shopping
Center in Alexandria, Minnesota for approximately $4.5 million pursuant to the
Sale and Purchase Agreement dated July 16, 2001 by Philips Shopping Center Fund
L.P., a Delaware limited partnership, and Repco LLP, as successor to Kordel,
Inc., a Minnesota corporation. The sale resulted in a gain of approximately $4
thousand.
On October 31, 2001, the Company completed the sale of its Highway 101 Shopping
Center in Port Angeles, Washington for approximately $4.5 million in cash,
pursuant to the Sale and Purchase Agreement dated June 14, 2001 by Philips
Shopping Center Fund L.P., a Delaware limited partnership, and BDG LLC, as
successor to 3 Puyallup Associates, LLC, a Washington limited liability company.
This sale resulted in a gain of $39 thousand.
On February 28, 2002, the Company entered into an agreement to sell its property
located in McHenry, Illinois for approximately $4 million. In March 2002, the
parties to the agreement agreed to consummate the sale on April 16, 2002.
15. ENVIRONMENTAL MATTERS
Management of the Company believes that the properties are in compliance in all
material respects with applicable Federal, state and local ordinances and
regulations regarding environmental issues. Management is not aware of any
environmental liability that it believes would have a material adverse impact on
the Company's financial position, results of operations or cash flows.
Management is unaware of any instances in which it would incur significant
environmental cost if any of the properties were sold.
PHILIPS INTERNATIONAL REALTY CORP.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
Initial Cost Cost Capitalized Gross Amounts at Which
------------ Subsequent to Acquisition Carried at Close of Period
------------------------- --------------------------
Land and Buildings and Land and Buildings and Land and Buildings and
Encumbrances Improvements Improvements Improvements Improvements Improvements Improvements
------------ ------------ ------------ ------------ ------------ ------------ ------------
Kmart $ 0 $ 1,106 $ 4,426 $ 0 $ 0 $ 1,106 $ 4,426
Sacramento
Center
Sacramento, CA
Kmart Atwater 0 1,016 4,063 0 0 1,016 4,063
Shopping
Center
Atwater, CA
Pennyrile 0 580 2,322 0 0 580 2,322
Marketplace
Hopkinsville,
KY
McHenry 0 725 2,902 0 0 725 2,902
Commons
McHenry, IL
Reedley 0 490 1,959 0 0 490 1,959
Shopping ------------ ------------ ------------ ------------ ------------ ------------ ------------
Center
Reedley, CA
$ 0 $ 3,917 $ 15,672 $ 0 $ 0 $ 3,917 $ 15,672
------------ ------------ ------------ ------------ ------------ ------------ ------------
Life on
which
Accumulated Date Depreciation
Total Depreciation Acquired is computed
------------ ------------ ------------ ------------
Kmart $ 5,532 $ 174 7/01/99 39 Years
Sacramento
Center
Sacramento, CA
Kmart Atwater 5,079 160 7/01/99 39 Years
Shopping
Center
Atwater, CA
Pennyrile 2,902 91 7/01/99 39 Years
Marketplace
Hopkinsville,
KY
McHenry 3,627 114 7/01/99 39 Years
Commons
McHenry, IL
Reedley 2,449 77
Shopping ------------ ------------
Center
Reedley, CA
$ 19,589 $ 616
------------ ------------
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, 2001 are as
follows:
2001 2000 1999
--------------- --------------- ---------------
Balance, beginning of year ................................... $ 34,658 $ 288,450 $ 228,896
Property acquisitions ........................................ -- 15,239 54,781
Improvements ................................................. -- 756 4,773
Property Dispositions ........................................ (15,069) (269,787) --
--------------- --------------- ---------------
Balance, end of year ......................................... $ 19,589 $ 34,658 $ 288,450
=============== =============== ===============
The aggregate cost of land, buildings and improvements for federal income tax
purposes at December 31, 2001 was approximately $20 million.
The changes in accumulated depreciation for the three years ended December 31,
2001 are as follows:
2001 2000 1999
--------------- --------------- ---------------
Balance, beginning of year ................................... $ 1,078 $ 26,820 $ 19,982
Depreciation ................................................. -- 5,281 6,838
Property dispositions ........................................ (462) (31,023) --
--------------- --------------- ---------------
Balance, end of year ......................................... $ 616 $ 1,078 $ 26,820
=============== =============== ===============
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PHILIP PILEVSKY Chairman of the Board and Chief Executive
------------------------------------- Officer March 29, 2002
Philip Pilevsky
/s/ SHEILA LEVINE Director, Chief Operating Officer, March 29, 2002
------------------------------------- Executive Vice President and Secretary
Sheila Levine
/s/ CARL KRAUS Chief Financial Officer March 29, 2002
-------------------------------------
Carl Kraus
/s/ ARNOLD S. PENNER Director March 29, 2002
-------------------------------------
Arnold S. Penner
/s/ A. F. PETROCELLI Director March 29, 2002
-------------------------------------
A. F. Petrocelli
/s/ ELISE JAFFE Director March 29, 2002
-------------------------------------
Elise Jaffe
/s/ ROBERT GRIMES Director March 29, 2002
-------------------------------------
Robert Grimes