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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-23463
PHILIPS INTERNATIONAL REALTY CORP.
(Exact name of registrant as specified in its charter)
Maryland 13-3963667
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(State or other jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
417 Fifth Avenue 10016
New York, New York
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (212) 545-1100
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value None
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(Title of Each Class) (Name of Each Exchange on Which
Registered)
Securities registered pursuant to Section 12(b) 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|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2) Yes |_| No |X|
As of March 21, 2003, the aggregate market value of voting stock held
by non-affiliates of the registrant was approximately $10.2 million. The
aggregate market value was computed with reference to the average bid and asked
prices of the stock as quoted on the OTC Bulletin Board on such date. The
calculation does not reflect a determination that persons are non-affiliates for
any other purpose.
As of March 21, 2003, 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 26.
DOCUMENTS INCORPORATED BY REFERENCE: None
PHILIPS INTERNATIONAL REALTY CORP.
TABLE OF CONTENTS
FORM 10-K
Page
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PART I
Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 12
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 16
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 17
PART III
Item 10. Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder 22
Matters
Item 13. Certain Relationships and Related Transactions 23
Item 14. Controls and Procedures 24
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 26
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 had been engaged for
more than 15 years in the ownership, development and acquisition for
redevelopment of neighborhood and community shopping centers predominantly
concentrated in the 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 a plan of liquidation.
On October 11, 2000, the Company announced that its stockholders had
approved a plan of liquidation for the Company, pursuant to which the Company
planned to (a) transfer its interests in affiliated entities that owned eight
shopping centers to Kimco Income Operating Partnership, L.P. for cash and the
assumption of indebtedness, (b) transfer its interests in entities that owned
four shopping centers and two redevelopment properties, subject to certain
indebtedness, to Philip Pilevsky, the Chief Executive Officer, and certain of
his affiliates and family members, in exchange for cash and the redemption of
Units in Philips International Realty, L.P. (the "Operating Partnership"), (c)
sell its remaining assets for cash, (d) pay or provide for its liabilities and
expenses, (e) distribute the net cash proceeds of the liquidation, then
estimated at $18.25 per share of common stock, to the stockholders in two or
more liquidating distributions, and (f) wind up operations and dissolve. On
December 22, 2000, the Company paid the initial liquidating distribution of $13
per share of common stock upon substantial completion of the transactions
referenced in (a) and (b) above. Subsequent liquidating distributions of $1.00,
$.75, $.50, $.50 and $.50 per share (bringing the total paid to date to $16.25
per share) were paid on July 9, 2001, September 24, 2001, November 19, 2001,
October 22, 2002 and March 18, 2003, respectively, following sales of the
Company's shopping center properties located in Lake Worth, Florida, Alexandria,
Minnesota, Port Angeles, Washington, McHenry, Illinois, Sacramento, California
and Reedley, California. The Company's two remaining shopping centers are
currently being offered for sale.
On January 29, 2002, the Company announced that Kmart Corporation's
("Kmart") Chapter 11 bankruptcy filing was likely to delay the sales of the
Company's then 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 leased a significant portion of the space in each of the
Company's then five remaining shopping center properties, of which four stores
were currently operating and one Kmart store in Reedley, California was closed.
While operating in bankruptcy, Kmart announced that it would 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 expected a
delay in the completion of its plan of liquidation. Also, the potential impact
on the proceeds from sales of the then remaining five properties could not then
be evaluated.
On February 19, 2002, the Company announced that the New York Stock
Exchange (the "NYSE") had advised the Company that it may be subject to NYSE
trading suspension and delisting if the Company's average market capitalization
fell below $15 million ($2.05 per common share) over a 30-day trading period.
On March 13, 2002, the Company announced that its four properties with
operating Kmart stores (Sacramento, CA, Atwater, CA, McHenry, IL and
Hopkinsville, KY) were not affected by Kmart's recent announcement of store
closings. Kmart has been 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 then fifth remaining property, located in Reedley, California, in
January. Although none of the Company's remaining Kmart stores were targeted for
closure at such time, there can be no assurance that Kmart will not seek to
cancel additional leases while it is in bankruptcy. Further, 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 whereby all leases
which had not been assumed or rejected on or before September 30, 2002 would be
subject to certain protections from October 1, 2002 through January 15, 2003
which, among other things, precluded 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.
On April 30, 2002, the Company reported completion of the sale of its
McHenry Commons shopping center property in McHenry, Illinois pursuant to a Sale
and Purchase Agreement dated November 29, 2001 by and between Philips Shopping
Center
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Fund, L.P., a Delaware limited partnership, as Seller, and GK Development, Inc.,
an Illinois corporation, and Star Realty Investors, LLC, an Illinois limited
liability company, jointly and severally as Purchaser.
On October 8, 2002, the Company announced completion of the sale of its
Kmart Shopping Center in Sacramento, California pursuant to a Purchase and Sale
Agreement dated September 24, 2002 by and between Philips Shopping Center Fund
L.P., a Delaware limited partnership, as Seller, and M&A Gabaee L.P., a
California limited partnership, Mirasa L.L.C., a Califonia limited liability
company, and Corsair, L.L.C., a Nevada limited liability company, jointly and
severally as Buyer. The announcement further disclosed management's expectation
that the New York Stock Exchange would commence action to suspend trading and
apply to delist the Company's shares of common stock on the NYSE concurrent with
payment of the fifth liquidating distribution scheduled to be paid on October
22, 2002. If the Company's shares ceased to be traded on the NYSE, the Company
indicated it believed that an alternative trading venue may be available;
however, there could be no assurance that such an alternative market would
develop. If the Company was delisted from the NYSE, the Company further noted
that it had no current intention to seek listing of its common shares on any
other securities exchange or on NASDAQ.
On October 28, 2002, the Company reported that the NYSE had delivered
notice to the Company and issued a press release to advise that it had
determined the common stock of the Company, trading symbol PHR, should be
removed from the list of companies traded on the NYSE. This decision was reached
in view of the fact that the Company had fallen below the NYSE's continued
listing standards as its average global market capitalization over a consecutive
30 day period was less than $15,000,000. Furthermore, the NYSE noted that the
Company has been operating pursuant to a plan of liquidation approved by its
shareholders on October 10, 2000 and has made four liquidating distributions
totaling $15.25 as of such date, with a fifth liquidating distribution of $0.50
to be paid on October 22, 2002. The NYSE indicated it intended to (and did, in
fact) suspend trading in the Company's common stock prior to the opening on
October 23, 2002 in connection with this distribution. Action by the NYSE with
the Securities and Exchange Commission delisting the Company's shares followed
the completion of applicable procedures. The Company did not request a review of
this NYSE determination. The Company has no current intention to seek listing of
its common shares on any other securities exchange or on NASDAQ. However the
Company believes that alternative trading venues, such as the "Pink Sheets" and
the "OTC Bulletin Board," will continue to be available to its shareholders.
While the Company may seek sponsorship by market makers with such quotation
services in the future, there can be no assurance that any such alternative
markets will remain active . Upon the completion of all prescribed delisting
procedures, the Company automatically became a Section 12(g) reporting company,
pursuant to the Securities and Exchange Act, and was no longer a Section 12(b)
reporting company.
On January 24, 2003, Kmart filed a plan of reorganization and related
disclosure statement with the bankruptcy court. Confirmation hearings are
currently scheduled for April 14 and 15, 2003. Assuming the court approves the
disclosure statement and the plan is confirmed, Kmart's filings indicate it
would emerge from Chapter 11 on or about April 30, 2003. In connection
therewith, Kmart filed a motion dated February 5, 2003 with the court seeking to
extend the deadline by which it must assume or reject certain "go-forward"
leases of real property from March 31, 2003 to the effective date of a plan
reorganization, but no later than May 31, 2003. The Company did not object to
this motion as it pertains to its leases with Kmart at its Atwater, California
and Hopkinsville, Kentucky shopping centers.
On March 3, 2003, the Company reported completion of the sale, in an
amount in excess of its carrying value, of its shopping center property in
Reedley, California, on February 28, 2003 pursuant to a Purchase and Sale
Agreement dated January 29, 2003 by and between Philips Shopping Center Fund,
L.P., a Delaware limited partnership, as Seller, and D&L Lowe L.P., a California
limited partnership, as Buyer.
As a result of the uncertainty pertaining to the ultimate status of its
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 two remaining properties, and the Company's target of
approximately $18.25 per share of aggregate liquidating distributions to
shareholders, cannot be currently 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.
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
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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 approximately $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 total per share value received by
the Company's stockholders in the liquidation, 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 $4,000.
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 approximately $39,000.
On April 16, 2002, the Company completed the sale of its McHenry
Commons shopping center property in McHenry, Illinois for approximately $3.9
million in cash, pursuant to a Sale and Purchase Agreement dated November 29,
2001 by and between Philips Shopping Center Fund, L.P., a Delaware limited
partnership, as Seller, and GK Development, Inc., an Illinois corporation, and
Star Realty Investors, LLC, an Illinois limited liability company, jointly and
severally as Purchaser. This sale resulted in a gain of approximately $102,000.
On October 3, 2002, the Company completed the sale of its Kmart
Shopping Center in Sacramento, California for approximately $5.9 million in
cash, pursuant to a Purchase and Sale Agreement dated September 24, 2002 by and
between Philips Shopping Center Fund, L.P., a Delaware limited partnership, as
Seller, and M&A Gabaee L.P., a California limited partnership, Mirasa L.L.C., a
California limited liability company, and Corsair L.L.C., a Nevada limited
liability company, jointly and severally as Buyer. This transaction resulted in
a gain of approximately $118,000.
On February 28, 2003, the Company completed the sale, in an amount in
excess of its carrying value, of its shopping center property in Reedley,
California for approximately $2.6 million in cash, pursuant to a Purchase and
Sale Agreement dated January 29, 2003 by and between Philips Shopping Center
Fund L.P., a Delaware limited partnership, as Seller, and D&L Lowe, L.P., a
California limited partnership, as Buyer.
As a consequence of the above-referenced transactions, the Company's
remaining shopping center portfolio comprises two properties, located in
California (1) and Kentucky (1). These shopping centers represent an aggregate
200,000 square feet of gross leasable area. As of December 31, 2002, these
properties were 96.9% leased to 21 tenants. The Company is actively marketing
these properties for sale. 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 two remaining 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 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, President, principal financial officer and Secretary of the Company,
has extensive experience in managing and redeveloping retail properties.
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Louis Petra, former President and Director of the Company, resigned
such offices and terminated his at-will employment agreement with the Company
effective October 5, 2001. Mr. Petra currently acts as a consultant to the
Company's Board of Directors with regard to the completion of the plan of
liquidation. Sheila Levine, former Chief Operating Officer, Executive Vice
President and Secretary, resigned such offices and terminated her at-will
agreement with the Company effective November 12, 2002. Ms. Levine remains a
member of the Board of Directors of the Company. Carl Kraus, the Company's Chief
Financial Officer, resigned such office effective March 31, 2002.
The Company's day-to-day operations are strategically directed by its
Chief Executive Officer 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, 2002.
Employees
Philip Pilevsky was the sole employee of the Company as of December 31,
2002. Mr. Pilevsky does not currently receive any remuneration for services
rendered in such capacities. Mr. Pilevsky is, however, a shareholder of the
Company and receives liquidating distributions in respect of this equity
interest as may be declared from time to time by the Board generally with regard
to all shares of common stock then outstanding.
Competition
The leasing of real estate is highly competitive. 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
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The Company operates in a single industry segment -- real estate. The
Company does not have any foreign operations and its business is not seasonal.
The Company's two remaining real estate assets are retail shopping center
properties. Please see our financial statements attached hereto and incorporated
by reference herein for financial information relating to our industry segment.
Risk Factors
The Company's results of operations and ability to sell its two
remaining properties and complete its plan of 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.
Declines in economic activities in our markets and of shopping centers generally
could adversely affect our operating results.
Dependence on market regions and tenants. Adverse economic developments
in the states where our remaining properties are located could adversely impact
the operations of our properties and, therefore, our profitability and ability
to sell. Since our portfolio consists solely 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. Approximately 78% of our gross leasable area is currently
leased to Kmart. On January 22, 2002, Kmart filed for protection under Chapter
11 of the Bankruptcy Code. In January, 2002, the Court approved the cancellation
of our Kmart lease at the Reedley, CA property. Although neither of our two
remaining 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.
Conflicts of interest could adversely affect our operations.
Potential conflicts with management. Our Chief Executive Officer,
President, principal financial officer and Secretary, Mr. Philip Pilevsky,
directs our day-to-day operations. Philips International Holding Corp., a
corporation owned by Mr. Pilevsky and Ms. Levine (Mr. Pilevsky's sister and a
member of our Board of Directors) 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.
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.
Potential conflicts with other real estate activities. Mr. Pilevsky and
Ms. Levine continue to hold interests in real estate properties (including
retail properties) that they owned but did not transfer to the Company at the
time of its formation. 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. Our cash flow and ability to sell our remaining properties and
complete our 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;
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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 78% of our gross leasable area and
represents approximately 66% of our 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 our Kmart lease at the Reedley,
CA property. Although neither of our two remaining 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.
Our insurance coverage on our properties may be inadequate. We
currently carry comprehensive insurance on all of our properties, including
insurance for liability, fire, flood, extended coverage and rental loss. 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. We cannot guarantee that the
limits of our current policies will be sufficient in the event of a catastrophe
to our properties. Our primary property and liability insurance policies expire
annually. We cannot guarantee that we will be able to renew or duplicate our
current insurance coverage in adequate amounts or at reasonable prices. In
addition, while our current insurance policies insure us against loss from
terrorist acts, in the future insurance companies may no longer offer coverage
against this type of loss, or, if offered, these types of insurance may be
prohibitively expensive. If any or all of the foregoing should occur, we may not
have insurance coverage against certain types of losses and/or there may be
decreases in the limits of insurance available. Should an uninsured loss or a
loss in excess of our insured limits occur, we could lose all or a portion of
the capital we have invested in a property or properties, as well as the
anticipated future revenue from the property or properties. Nevertheless, we
might remain obligated for any mortgage debt or other financial obligations
related to the property or properties. We cannot guarantee that material losses
in excess of insurance proceeds will not occur in the future. If any of our
properties were to experience a catastrophic loss, it could seriously disrupt
our operations, delay revenue and result in large expenses to repair or rebuild
the property. Such events could adversely affect our ability to make
distributions or payments to our investors.
Illiquidity of real estate limits our ability to act quickly. Real
estate investments are relatively illiquid. Such illiquidity may limit our
ability to react quickly in response to changes in economic and other
conditions. If we want to sell an investment, we might not be able to dispose of
that investment in the time period we desire, and the sales price of that
investment might not recoup or exceed the amount of our investment.
Americans with Disabilities Act Compliance could be costly. Under the
Americans with Disabilities Act of 1990 (the "ADA"), 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 we are 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.
6
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; and
o adversely affecting our ability to minimize expenses of
operation.
Debt financing could adversely affect our economic performance.
Scheduled debt payments and refinancing could adversely affect our
financial condition. Should we 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, 2002, 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 properties 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. If we 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 Chief Executive Officer and professional consultants
whose continued service is not guaranteed.
We are dependent upon our Chief Executive Officer and professional
consultants for strategic business direction and real estate experience. Loss of
their services could adversely affect us. We cannot assure you that our Chief
Executive Officer 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 our President and as a Director in October
2001. Mr. Petra remains a consultant to us on a per diem basis. Sheila Levine,
former Chief Operating Officer, Executive Vice President and Secretary, resigned
such offices and terminated her at-will employment agreement with the Company
effective November 12, 2002. Ms Levine remains a member of our Board of
Directors. Mr. Carl Kraus resigned as our Chief Financial Officer effective
March 31, 2002.. We no longer have the services of Mr. Kraus, and will only have
the services of Mr. Petra, as consultant, and Ms. Levine, as a Board member, on
a limited basis. This loss of personnel could adversely affect our business.
7
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 we make distributions to our shareholders.
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.
Recently, President Bush proposed legislation that would exempt from
income taxation those dividends that shareholders receive that are out of
earnings that have been subject to corporate-level taxation. Since the earnings
of real estate investment trusts generally are not subject to corporate-level
taxation (by reason of the dividends-paid deduction to which real estate
investment trusts are entitled), the President's proposed dividend exemption
would generally not apply to real estate investment trust dividends. Enactment
of the President's proposed legislation may cause the Board of Directors to
determine to revoke the election for us to qualify as a real estate investment
trust.
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
8
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 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
two times the cost of such shares. 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 we presently intend to pursue our 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
9
of our common stock. Upon the shareholders' approval of the plan of liquidation
in October 2000, we suspended the payment of regular quarterly dividends.
Pursuant to the plan of liquidation, a total of $16.25 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 21E of the Securities
Exchange Act of 1934. The Company intends such forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements contained
in Section 21E of the Exchange Act. Such forward-looking statements relate to,
without limitation, the Company's future economic performance, plans and
objectives for future operations and projections of revenue and other financial
items. Forward-looking statements can be identified by the use of words such as
"may," "will," "should," "expect," "anticipate," "estimate," "continue" or
comparable terminology. Forward-looking statements are inherently subject to
risks and uncertainties, many of which the Company cannot predict with accuracy
and some of which the Company might not even anticipate. Although the Company
believes that the expectations reflected in such forward-looking statements are
based upon reasonable assumptions at the time made, it can give no assurance
that its expectations will be achieved. Future events and actual results,
financial and otherwise, may differ materially from the results discussed in the
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements. Among the factors about which the Company has
made assumptions are changes in the general economic climate; conditions,
including those affecting industries in which the Company's principal tenants
compete; any failure of the general economy to recover from the current economic
downturn; the extent of any tenant bankruptcies; the Company's ability to lease
or re-lease space at current or anticipated rents; changes in the supply of and
demand for shopping center properties; changes in interest rate levels; changes
in operating costs; the Company's ability to obtain adequate insurance,
including coverage for terrorist acts; the availability of financing; and other
risks associated with the development and acquisition of properties, including
risks that the development may not be completed on schedule, that the tenants
will not take occupancy or pay rent, or that development or operating costs may
be greater than anticipated. For further information on factors which could
impact the Company and the statements contained herein, see the "Risk Factors"
section. The Company assumes no obligation to update and supplement
forward-looking statements that become untrue because of subsequent events.
ITEM 2. PROPERTIES
General
As of December 31, 2002, the Company held interests in three retail
properties encompassing approximately 272,000 square feet of gross leaseable
area ("GLA"). Information concerning these three properties,which were 84.2%
leased to 28 tenants as of such date, is set forth in the following Property
Summary Data chart.
Property Summary Data
The following table sets forth certain information relating to each of the
Properties at December 31, 2002.
Annualized Contractual Base Rent at 12/31/2002 (1)
---------------------------------------------------
Year Built/ Total % % of
Property and % Renovated GLA Leased At Base Portfolio Base Rent/
Location Owned Yr. Acquired (Sq.Ft.) 12/31/02 Rent ($000) Base Rent Sq.Ft (2)$ Key Tenant
- -------- ----- ------------ -------- --------- --------- --------- ---------- ----------
Kmart Shopping Center
1105 Bellvue Road 100.0% 1987 109,698 100.0% $ 743 50.2% $6.78 Kmart
Atwater, CA 1998
Pennyrile Marketplace, S.C. 100.0% 1987 90,077 93.2% 451 30.5% $5.37 Kmart
3010 Fort Campbell RD 1998
Hopkinsville, KY
Reedley Shopping Center
Manning Avenue 100.0% 1987 72,655 49.3% 286 19.3% $7.97 Factory 2-U
Reedley, CA (3) 1998
------- ----- ------ ----- -----
Portfolio Total/Weighted 272,430 84.2% $1,480 100.0% $6.45
Average ======= ===== ====== ===== =====
- ---------------
(1) Total annualized contractual base rent for all leases in place at December
31, 2002. Amount excludes (i) future contractual rent escalations and cost
of living increases; (ii) percentage rent and (iii) additional rent payable
by tenants such as common area maintenance, real estate taxes and other
expense reimbursements.
(2) Total annualized contractual base rent divided by total GLA leased at
December 31, 2002.
(3) The Company completed the sale of its Reedley Shopping Center on February
28, 2003
10
Occupancy
The portfolio occupancy and total annualized contractual base rent per
square foot for the Company's three remaining shopping center properties were as
follows:
Total
Annualized
Contractual
Base Rent
Per
Leased
Number of Square
Year Ended December 31, Properties % Leased Foot ($)(1)
- ------------------------ ---------- -------- -----------
2002 3 84.2% $6.45
2001 3 84.2% $6.29
2000 3 97.8% $6.15
1999 3 98.7% $6.08
1998 3 99.8% $6.00
- ------------
(1) Total annualized contractual base rent for all leases in place at December
31 for the respective years indicated, divided by total GLA leased at such
dates. Amount excludes (i) future contractual rent escalations and cost of
living increases, (ii) percentage rent and (iii) additional rent payable by
tenants such as common area maintenance, real estate taxes and other
expense reimbursements.
At December 31, 2002, Kmart Corporation was the Company's largest
tenant representing approximately 53% (66% as after the sale of Reedley, CA in
February 2003) of the Company's annualized base rental revenues. On January 22,
2002, Kmart filed for protection under Chapter 11 of the Bankruptcy Code. In
January 2002, the Court approved the cancellation of the Company's Kmart lease
at the Reedley, CA property. Although neither of the Company's two remaining
Kmart stores have yet been targeted for closure, there can be no assurance that
Kmart will not seek to cancel additional leases while it is in bankruptcy. No
other tenant accounted for more than of 7.5%(4.4% as after the sale of Reedley,
CA in February, 2003) of annualized base rents at December 31, 2002.
Lease Expirations
The following table sets forth all scheduled lease expirations for the
Company's three remaining properties as of December 31, 2002, assuming that none
of the tenants exercises renewal options or termination rights:
Anualized Contractual
Base Rent At 12/31/02 (1)
Total Gla
Under
Number of Expiring % of Total % of Base Rent/
Leases Leases Expiring Base Rent Portfolio Sq.
Lease Expiration Year Expiring (Sq. Ft.) GLA ($) Base Rent Ft.(2)($)
- --------------------- -------- --------- ---------- --------- --------- -----------
2003 7 11,910 5.2 148,128 10.0 12.44
2004 7 12,579 5.5 136,456 9.2 10.85
2005 7 14,099 6.1 149,920 10.1 10.63
2006 1 5,600 2.4 47,040 3.2 8.40
2007 3 22,514 9.8 161,370 10.9 7.17
2008 1 7,500 3.3 52,500 3.6 7.00
2009 - - - - - -
2010 - - - - - -
2011 - - - - -
2012 - - - - - -
2013 and thereafter 2 155,306 67.7 784,308 53.0 5.05
------------------------------------------------------------------------
Total/Weighted Average 28 229,508 100.0 1,479,722 100.0 6.45
======= ========= ========= ========= ========= =========
- --------------
11
(1) Total annualized contractual base rent for all leases in place at December
31, 2002. 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, 2002.
Tax Basis And Real Estate Taxes
The aggregate cost basis of depreciable real property for federal
income tax purposes in the Company's three remaining properties as of December
31, 2002 was approximately $12 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, 2002
was approximately $145,000, or approximately $.53 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 had
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 have
obtained permission to appeal, it had to demonstrate that the denial of class
certification effectively terminated the litigation and that the District
Court's decision was an abuse of its discretion. The Company opposed plaintiff's
application. If the Court of Appeals granted plaintiff's request, plaintiff
would then have been able to appeal the District Court's denial of class
certification.
On May 28, 2002, the United States Court of Appeals for the Second
Circuit ordered that the plaintiff's petition to appeal the District Court's
denial of class certification also be denied.
The Company has incurred significant costs in connection with the
defense of this litigation, which it believes are covered under the Company's
directors and officer's insurance policy and included in Other assets in the
accompanying Consolidated Balance Sheets. However, there can be no assurance
that the carrier will not seek to disqualify certain of such costs.
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 was listed on the NYSE under the ticker
symbol "PHR" and began trading May 8, 1998.
On October 18, 2002, the NYSE delivered notice to the Company and
issued a press release to advise that it had determined the common stock of the
Company should be removed from the list of companies traded on the NYSE. This
decision was reached in view of the fact that the Company had fallen below the
NYSE's continued listing standards as its average global market capitalization
over a consecutive thirty day period was less than $15,000,000. Furthermore, the
NYSE noted that the Company has been operating pursuant to a plan of liquidation
approved by its shareholders on October 10, 2000 and has made four liquidating
distributions totaling $15.25 as of such date, with a fifth liquidating of $0.50
to be paid on October 22, 2002. The NYSE indicated it intended to (and did, in
fact) suspend trading in the Company's common stock prior to the opening on
October 23, 2002 in connection with this distribution. Action by the NYSE with
the Securities and Exchange Commission delisting the Company followed the
completion of applicable procedures. The Company did not request a review of
this NYSE determination.
12
The Company has no current intention to seek listing of its common
shares on any other securities exchange or on NASDAQ. However the Company
believes that alternative trading venues, such as the "Pink Sheets" and the "OTC
Bulletin Board," will continue to be available to its shareholders. While the
Company may seek sponsorship by market makers with such quotation services in
the future, there can be no assurance that any such alternative markets will
remain active.
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 year ended December
31, 2001 and for the period January 1, 2002 through October 22, 2002:
High Low Close
---- --- -----
2002:
First Quarter $2.50 $1.77 $2.45
Second Quarter $2.50 $2.00 $2.07
Third Quarter $2.15 $1.77 $1.88
Fourth Quarter (to October 22) $2.00 $1.71 $1.95
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
The high and low bid prices for the Company's common stock, as quoted
on the OTC Bulletin Board, for the period October 23, 2002 through December 31,
2002 were $1.65 and $1.25 respectively. These high and low bid quotations were
furnished by a representative of the OTC Bulletin Board, represent prices
between broker-dealers (without regard to retail mark-ups and mark-downs or any
commissions to the broker-dealer), and may not reflect prices for the Company's
common stock in actual transactions.
On March 21, 2003, the average bid and asked prices of the Company's
common stock as quoted on the OTC Bulletin Board was $1.48 per share.
Holders
On March 21, 2003, the Company had 1,146 common shareholders of record.
Recent Sales of Unregistered Securities
The Company did not issue any unregistered securities in the years
ended December 31, 2002, 2001 or 2000.
Dividends and Distributions
The Company paid distributions on its common stock during calendar
years 2002 and 2001 as follows:
Record Date of Amount
Date of Declaration Date Payment Per Share
- ------------------- ---- ------- ---------
2002 Year
10/8/02............................... 10/15/02 10/22/02 $0.50*
2001 Year
6/21/01............................... 7/2/01 7/9/01 $1.00*
9/5/01................................. 9/17/01 9/24/01 $0.75*
11/2/01............................... 11/12/01 11/19/01 $0.50*
- --------------
* Constituted liquidating distributions under the Company's plan of liquidation.
For income tax purposes, 100% of the dividends paid during 2002,
totaling $0.50 per share, and 100% of the dividends paid during 2001, totaling
$2.25 per share, were 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 $16.25 has
been distributed to date.
13
Common Stock Buy-Back Program
In March 1999, the Board of Directors authorized a discretionary common
stock buy-back program pursuant to which the Company may repurchase up to $5
million in value of its outstanding shares of common stock. Purchases may be
made from time to time in open market transactions at prevailing prices or
through privately negotiated transactions and are subject to compliance with
applicable securities and tax regulations. No shares have been repurchased to
date under this program; however, the Board may elect in its discretion to
repurchase shares in the future.
Securities Authorized for Issuance Under Equity Compensation Plans
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 Company's Board of Directors in its sole discretion.
In conjunction with the Company's adoption of the plan of liquidation
and the disposal of substantially all of its shopping center properties, all
options outstanding at December 31, 2000 (approximately 705,000 shares at a
weighted average exercise price of $17.43) became fully vested and were replaced
one-for-one by a contractual right (a "Contract Right") to receive a cash
distribution on the same basis and at the same time as liquidating distributions
are made to shareholders. The total amount to be paid on each Contract Right
will equal the total per share proceeds distributed to shareholders less the
original stock option exercise price. Contract Rights are retained after
termination of employment. No additional stock options or Contract Rights have
been issued since December 2000.
The Company made stock acquisition loans available to certain executive
officers upon their commencement of employment with the Company during years
1998 and 1999. The scheduled forgiveness of such stock acquisition loans
totaling $1,250,000, together with accrued interest thereon, was accelerated
upon the termination of each officer's employment agreement as a result of the
change in control arising out of the sale of substantially all of the assets of
the Company. No stock acquisition loans have been made by the Company since
1999.
See "Item 11 - Executive Compensation" and "Item 12 - Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters."
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating
information for the Company as of and for the years ended December 31, 2002,
2001, 2000, 1999 and 1998. This information should be read in conjunction with
all of the financial statements and the notes thereto appearing elsewhere in
this Form 10-K.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In thousands, except per share and property data)
Operating Data:
Revenues from rental property $2,791 $5,023 $43,134 $42,457 $22,625
Income from discontinued operations before 113 2,743 49,997 8,336 4,521
extraordinary items
Income from discontinued operations before
extraordinary items, per common share:
Basic .02 .37 6.81 1.14 .94
Diluted .02 .37 6.81 1.14 .94
Balance Sheet Data:
Rental properties, net, at cost 10,103 18,974 33,579 261,631 208,914
Investments in real estate joint ventures -- -- -- 25,134 34,664
Total assets 18,679 22,385 37,572 306,550 264,347
Mortgages and notes payable -- -- -- 181,955 137,487
Shareholders' equity 17,613 21,170 34,944 86,854 89,398
Other Data:
Net cash provided by (used in) operating 427 (298) 10,038 15,784 6,494
activities
Net cash provided by (used in) investing 8,334 16,029 120,268 (51,760) (47,300)
activities
Net cash provided by (used in) financing (3,683) (16,573) (131,785) 30,044 49,922
activities
Cash dividends declared per share .50 2.25 13.76 1.51 .86
GLA (sq.ft.) (at end of period) 272,430 477,901 890,663 3,889,514 3,814,889
Occupancy of Properties owned (%) (at end of 84.2 90.7 83.1 90.5 94.4
Period)
14
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.
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 from Operations
During each of the three years in the period ended December 31, 2002,
the Company divested portions of its shopping center portfolio pursuant to a
plan of liquidation approved by shareholders on October 10, 2000. See Notes 2
and 13 of the accompanying notes to Consolidated Financial Statements. The
disposition of these properties gives rise to significant changes when comparing
the Company's results of operations for the three years ended December 31, 2002,
2001 and 2000.
Comparison of Year Ended December 31, 2002 to December 31, 2001
Revenues from rental property was $2,791,000 for the year ended
December 31, 2002 compared to $5,023,000 for the year ended December 31, 2001.
Expenses were $1,729,000 during 2002 as compared to $2,675,000 in 2001. These
changes resulted primarily from the above-mentioned disposition of portions of
the Company's shopping center portfolio pursuant to the plan of liquidation
during these respective periods. See Notes 2 and 13 of the accompanying Notes to
Consolidated Financial Statements.
Other income (expense), net for year ended December 31, 2002,
includes $253,943 in interest charges relating to the settlement of real
property transfer tax obligations. See Note 13 of the accompanying Notes to
Consolidated Financial Statements.
Reference should be made to Note 13 of the accompanying Notes to
Consolidated Financial Statements for information relating to the gains (losses)
on sales of shopping center properties during these respective periods.
Comparison of 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 year 2000. Expenses were
$2,675,000 in 2001and $35,610,000 in 2000. These changes resulted primarily from
the above-mentioned disposition of a substantial portion of the Company's
shopping center portfolio pursuant to the plan of liquidation. Interest expense
was eliminated in 2001 since the proceeds of property dispositions during 2000
were utilized, in part, to repay all outstanding mortgage indebtedness, while
depreciation and amortization charges were 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 13 to the accompanying Notes to Consolidated Financial
Statements.
Reference should be made to Note 13 of the accompanying Notes to
Consolidated Financial Statements for information relating to the gains (losses)
on sales of shopping center properties during these respective periods.
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.
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 two remaining
properties is 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 (i) the net cash provided by the
operations of the Company's properties will be sufficient to fund all such cash
requirements, or (ii) the Company will be able to dispose of its properties 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, given
the uncertainties relating to the status of the Company's leases with Kmart.
15
Pending the sale of its remaining 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 knowledge of the shopping center industry.
Cash Flows
Comparison of the Year Ended December 31, 2002 to December 31, 2001
Net cash provided by (used in) operating activities was $427,000 for
the year ended December 31, 2002, as compared to $(298,000) for the year ended
December 31, 2001. This change reflects the combined effects of (i)a reduction
in liquidation and litigation related costs incurred during 2002 as compared to
2001, (ii)the settlement of real property transfer tax obligations relating to
the Company's 1997 Formation Transactions and 1998 initial public stock offering
during 2002, and (iii)the above-mentioned disposition of shopping center
properties pursuant to the plan of liquidation during the respective periods.
Net cash provided by investing activities was $8,334,000 during 2002,
as compared to $16,029,000 during 2001. See Note 13 of the accompanying Notes to
Consolidated Financial Statements for information pertaining to the sales of
shopping center properties paid during these respective periods.
Net cash used in financing activities was $3,683,000 during 2002 as
compared to $16,573,000 during 2001. See Note 12 of the accompanying Notes to
Consolidated Financial Statements for information relating to dividends paid
during these respective periods.
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 year 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 substantial portions of the Company's shopping
center portfolio and the adoption of the plan of liquidation.
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 the financial accounting and reporting for
the impairment or disposal of long-lived assets. This standard clarifies the
accounting for impaired assets and resolves some of the implementation issues as
originally described in SFAS No. 121. The new standard became effective for the
Company on January 1, 2002. This pronouncement did not 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, 2002.
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 may be 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.
16
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 30.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICER OF THE REGISTRANT
Set forth below is certain information as of March 21, 2003 for (i) the
members of the Board of Directors of the Company, (ii) the executive officer of
the Company and (iii) the directors and executive officer of the Company as a
group:
Percentage
of Shares
Percentage Outstanding
Of Shares (on a fully-
First Term Number of Outstanding diluted
Name and Position Age Elected Expires (1) Shares (2)(3) (%) basis) %
- ----------------- --- -------- ----------- ------------- ----------- -------------
Philip Pilevsky, Chairman of the Board of
Directors and Chief Executive Officer,
President and Secretary of the
Company ....................................... 56 1997 2001 344,695(6) 4.7 4.7
Sheila Levine, Director(4) .................... 45 1997 2000 2,800(7) * *
Elise Jaffe, Director(5) ...................... 47 1999 2002 1,000(8) * *
Robert S. Grimes, Director(4) ................. 58 1997 2001 12,800(9) * *
Arnold S. Penner, Director(4)(5) .............. 66 1997 2001 0(10) * *
A.F. Petrocelli, Director(5) .................. 59 1997 2000 57,100(11) * *
------- --- ---
All directors and executive officer as a
group (6 persons) ............................. 418,395(12) 5.7 5.7
======= --- ---
*Beneficial ownership of less than 1 percent is omitted.
(1) The Company's charter divides the Company's Board of Directors into
three classes, with the members of each such class serving staggered
three-year terms until their successors are duly elected and qualified.
The Board of Directors presently consists of six members as follows:
Class I director, Elise Jaffe, whose term expired in 2002; Class II
directors, Sheila Levine and A.F.Petrocelli, whose terms expired in
2000; and Class III directors, Philip Pilevsky, Robert Grimes and
Arnold S. Penner, whose terms expired in 2001. In light of the adoption
of the Company's plan of liquidation on October 10, 2000, the present
directors are expected to remain in office until the liquidation is
completed.
(2) Except as otherwise noted below, all shares of common stock are owned
beneficially by the individual listed with sole voting and/or
investment power.
(3) In conjunction with the Company's adoption of the plan of liquidation
and the disposal of substantially all of its shopping center
properties, all options then outstanding to acquire shares of the
Company's common stock became fully vested and replaced one-for-one by
a contractual right (a "Contract Right") to receive a cash distribution
on the same basis and at the same time as liquidating distributions are
made to shareholders. The total amount to be paid on each Contract
Right will equal the total per share proceeds distributed to
shareholders less the original stock option exercise price. Contract
Rights are retained after termination of employment.
(4) Member of the Compensation Committee of the Board of Directors.
(5) Member of the Audit Committee of the Board of Directors.
17
(6) Represents 344,695 shares of common stock. Does not include 240,000
Contract Rights.
(7) Represents 2,800 shares of common stock. Does not include 100,000
Contract Rights.
(8) Represents 1,000 shares of common stock. Does not include 10,000
Contract Rights.
(9) Represents 12,800 shares of common stock (11,400 shares of common
stock were purchased by SEJ Properties, L.P. of which Mr. Grimes is
the President/Treasurer and a shareholder of the General Partner, SEJ
Properties, Inc.; 1,400 shares of common stock were purchased by Mr.
Grimes' spouse, Ellen Grimes). Does not include 10,000 Contract
Rights.
(10) Does not include 10,000 Contract Rights.
(11) Represents 57,100 shares of common stock. Does not include 10,000
Contract Rights.
(12) Represents 418,395 shares of common stock. Does not include 380,000
Contract Rights.
Biographical information concerning the directors and executive officer
is set forth below.
Philip Pilevsky is Chairman of the Board of Directors and Chief
Executive Officer, President, principal financial officer and Secretary of the
Company, and has served as Chief Executive Officer and President of Philips
International Holding Corp. since its formation in 1982. Mr. Pilevsky has been
involved in the real estate business for nearly 30 years, including the
development, leasing, management, operation, acquisition and disposition of
commercial properties. Together with Ms. Levine, he founded the entities that
now comprise Philips International Holding Corp. and its affiliates. Mr.
Pilevsky is a nationally recognized member of the real estate community,
providing the Company with strategic leadership and a broadly based network of
relationships. Outside the real estate industry he is renowned as an educator,
author in the field of international relations and frequent commentator for Fox
5 and CNBC. Mr. Pilevsky received a Bachelor of Arts degree from C.W. Post
College and a Masters Degree of Arts and a Masters Degree of Education from
Columbia University. Mr. Pilevsky is the brother of Sheila Levine.
Sheila Levine is a Director of the Company. Ms. Levine resigned as
Chief Operating Officer, Executive Vice President and Secretary of the Company
effective November 12, 2002. She has served as Chief Operating Officer and
Executive Vice President of Philips International Holding Corp. and, together
with Mr.Pilevsky, founded the entities that now comprise Philips International
Holding Corp. and its affiliates. Ms. Levine, active in the real estate business
for more than 20 years, received a Bachelor of Science in Business
Administration from the Hofstra University School of Business. Ms. Levine is the
sister of Mr. Pilevsky.
Elise Jaffe is a Director of the Company. Ms. Jaffe has served since
1994 as Senior Vice President of Real Estate for Dress Barn, Inc., a major
women's apparel retailer owning approximately 725 stores within the United
States. She has been with Dress Barn, Inc. for nearly 20 years and serves on its
Executive Committee. Ms. Jaffe is on the Advisory Board of the International
Council of Shopping Centers/Value Retail News and is Vice President and the
Treasurer of the Paul Taylor Dance Foundation. Ms. Jaffe graduated from Tufts
University with a Bachelor of Arts in English and Psychology.
Arnold S. Penner is a Director of the Company. For over 30 years Mr.
Penner has been active in the real estate business as a real estate broker and
investor in a diverse portfolio of properties, including office buildings,
retail properties and parking facilities. Mr. Penner is a Director of United
Capital Corp. ("United Capital"), an American Stock Exchange-listed company
specializing in the investment and management of real estate assets and the
manufacturing and sale of antenna and transformer products to a global customer
base. Mr. Penner also is involved with several philanthropic organizations
devoted to children's education.
A.F. Petrocelli is a Director of the Company. He has served as Chairman
of the Board and Chief Executive Officer of United Capital since December 1987
and President since 1991. Mr. Petrocelli currently owns over 65% of United
Capital and has been a Director of United Capital since 1981. Mr. Petrocelli
also serves on the Board of Directors of Prime Hospitality Corp., a New York
Stock Exchange-listed company, Nathan's Famous, Inc., Metex Corporation and
Boyar Value Fund, Inc.
Robert S. Grimes is a Director of the Company. He has served as
President of RS Grimes Co., Inc., an investment company, since September 1987.
Mr. Grimes has also been a Director and Executive Vice President of
Autobytel.com Inc. since July 1996. From April 1981 to March 1987, Mr. Grimes
was a partner with the investment firm of Cowen & Company. Mr. Grimes holds a
Bachelor of Science from Wharton School of Commerce and Finance at the
University of Pennsylvania and an L.L.B. from the University of Pennsylvania Law
School.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Exchange Act requires the Company's officers,
directors and persons who beneficially own more than 10% of the Company's common
stock to file initial reports of ownership and reports of changes of ownership
(Forms 3, 4 and
18
5) of the common stock with the SEC. Officers, directors and greater than 10%
holders are required by SEC regulations to furnish the Company with copies of
such forms that they file.
To the Company's knowledge, based solely on the Company's review of
the copies of such reports received by the Company, the Company believes that
during fiscal year 2002, its officers, directors and greater than 10% beneficial
owners complied with all applicable Section 16(a) filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation of the Chief Executive Officer and the four other executive
officers of the Company (collectively, the "Named Executive Officers") for each
of the Company's last three fiscal years:
SUMMARY COMPENSATION TABLE
Long-Term Compensation
--------------------------------------------------
Awards Payouts
----------------------- ----------------------
Annual Compensation (1) Securities
-------------------------------------- Restricted Underlying LTIP
Name and Other Annual Stock Options/SARs Payouts All Other
Principal Position Year Salary($) Bonus($) Compensation($) Award(s)($) (#) ($) Compensation
- ------------------ ---- --------- -------- --------------- ----------- ------------ ------- ------------
Philip Pilevsky ............ 2002 0(2) 0 0 0 0 0 0
Chief Executive Officer 2001 0(2) 0 0 0 0 0 0
President, principal 2000 0(2) 0 0 0 0 0 0
financial officer
And Secretary
Louis J. Petra.(3) ......... 2002 0 0 0 0 0 0 0
2001 51,000 0 0 0 0 0 0
2000 165,625 250,000 0 0 0 0 1,057,933(7)
Sheila Levine(4) ........... 2002 0(4) 0 0 0 0 0 0
2001 0(4) 0 0 0 0 0 0
2000 150,369 0 0 0 0 0 0
Brian J. Gallagher(5) ...... 2002 0 0 0 0 0 0 0
2001 0 0 0 0 0 0 0
2000 150,349 0 0 0 0 0 464,538(7)
0
Carl E. Kraus(6) ........... 2002 74,400 0 0 0 0 0 0
2001 126,000 0 0 0 0 0 0
2000 143,238 0 0 0 50,000(7) 0 396,200(7)
(1) The annual compensation portion of this table includes the dollar value of
regular annual payments of base salary, bonus and any other annual
compensation earned by each named executive officer during the year
indicated.
(2) Philip Pilevsky, Chairman of the Board of Directors and Chief Executive
Officer, President and Secretary of the Company, did not receive
compensation from the Company in consideration for services rendered in
such capacities, as applicable, during calendar years 2002, 2001, and 2000.
(3) Louis J. Petra terminated the Petra At-Will Arrangement (as defined under
"-- Employment Contracts; Termination of Employment" below) and resigned
from his positions as President and Director of the Company effective
October 5, 2001. See Employment Contracts; Louis J. Petra Termination of
Employment Agreement. Mr. Petra currently provides consulting services to
the Company on a per diem basis.
(4) Sheila Levine terminated the Levine-At-Will Arrangement (as defined under
"-- Employment Contracts; Termination of Employment" below) and resigned
from her positions as Chief Operating Officer, Executive Vice President and
Secretary of the Company effective November 12, 2002. Ms. Levine did not
receive compensation for services rendered in such capacities during 2002
and 2001 pursuant to the Levine-At-Will Arrangement. See Employment
Contracts; Sheila Levine Termination of Employment Agreement. Ms. Levine
remains a member of the Board of Directors of the Company
(5) Brian J. Gallagher resigned from his position as Acquisitions Director of
the Company effective December 4, 2000. See Employment Contracts; Brian J.
Gallagher Termination of Employment Agreement.
(6) Carl E. Kraus terminated the Kraus At-Will Arrangement (as defined under
"-- Employment Contracts; Termination of Employment" below) and resigned
from his position as Chief Financial Officer of the Company effective March
31, 2002. See Employment Contracts; Carl E. Kraus Termination of Employment
Agreement.
(7) Includes payments made in connection with the termination of the executive
officer's employment agreement with the Company upon the sale of
substantially all of the assets of the Company on December 4, 2000. See
"Employment Contracts; Termination of Employment" below.
19
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities
Underlying Unexercised Value of Unexercised In-
Shares Options/SARs at Fiscal The-Money Options/SARs at
Acquired Value Year-End (#) Fiscal Year-End ($)
on Exercise Realized --------------------------------- -------------------------------
Name (#) ($) Exercisable(1) Unexercisable Exercisable Unexercisable
- ---- ----------- -------- -------------- ------------- ----------- -------------
Philip Pilevsky........... 0 0 (1) 0 0 0
Louis J. Petra............ 0 0 (1) 0 0 0
Sheila Levine............. 0 0 (1) 0 0 0
Brian J. Gallagher........ 0 0 (1) 0 0 0
Carl E. Kraus............. 0 0 (1) 0 0 0
(1) In conjunction with the Company's adoption of the plan of liquidation and
the disposal of substantially all of the Company's shopping center
properties, Philip Pilevsky received 240,000 Contract Rights, Louis J.
Petra received 100,000 Contract Rights, Sheila Levine received 100,000
Contract Rights, Brian J. Gallagher received 25,000 Contract Rights and
Carl E. Kraus received 50,000 Contract Rights, in replacement of previously
vested stock options granted in years prior to 2000. Such Contract Rights
represent the right to receive the excess of the total per share
liquidating distributions to stockholders over the original stock option
exercise price ($17.50 per share as to Messrs. Pilevsky, Petra, Gallagher
and Ms. Levine; $16.75 per share as to Mr. Kraus). The value of such
Contract Rights is at present not calculable. Contract Rights are retained
after termination of employment.
Compensation of Directors
Directors' Fees. In 2002, each non-employee director of the Company
was paid an annual fee of $10,000, plus (a) $750 for attendance in person at
each meeting of the full Board of Directors, (b) $500 for attendance in person
at each meeting of a committee thereof, if such meeting is held on a day other
than the day of a full Board meeting, and (c) $250 for each telephonic meeting
participation. The Company does not pay director fees to Sheila Levine, or to
employee directors, who in fiscal 2002 consisted of Philip Pilevsky. Each
director also was reimbursed for expenses relating to attendance at meetings of
the Board of Directors or any committee thereof. During 2002, Elise Jaffe,
Robert S. Grimes, Arnold S. Penner, and A.F. Petrocelli each received directors'
fees in the amount of $10,250.
Stock Option Plan. Pursuant to the Company's 1997 Stock Option and
Long-Term Incentive Plan (the "Stock Option Plan"), in 1998 each non-employee
director was granted a non-qualified option to purchase 10,000 shares of common
stock in connection with the director's initial appointment to the Board of
Directors, which have now been converted into Contract Rights. These grants
under the Stock Option Plan were made at an exercise price equal to the "fair
market value" (as defined under the Stock Option Plan) at the time of the grant
of the shares of common stock subject to such option. No options or additional
Contract Rights were granted to directors or executive officers in 2002.
Employment Contracts; Termination of Employment
Louis J. Petra Termination of Employment Agreement. In connection
with the Company's plan of liquidation, on December 4, 2000, Mr. Petra's
employment agreement with the Company (the "Petra Employment Agreement") was
terminated as a result of the change in control arising out of the sale of
substantially all of the assets of the Company. In connection with such
termination, pursuant to the terms of the Petra Employment Agreement, Mr. Petra
received the remainder of his salary through December 31, 2000, forgiveness of
the $1,000,000 non-recourse stock acquisition loan (plus interest) made by the
Company to Mr. Petra (the "Petra Loan"), and tax gross-up payments relating to
such forgiveness of the interest on such loan. In addition, all unvested options
granted to Mr. Petra immediately vested. The Company subsequently entered into
an at-will employment arrangement with Mr. Petra (the "Petra At-Will
Arrangement"), whereby Mr. Petra served as President of the Company and received
a salary of $1,200 for each day worked, customary employee benefits and
reimbursement for reasonable business expenses. The Petra At-Will Arrangement
was terminable by the Company or Mr. Petra at any time and for any or no reason.
Mr. Petra terminated the Petra At-Will Arrangement effective October 5, 2001.
Mr. Petra did not receive any severance payments in connection with the
termination of the Petra At-Will Arrangement, and no non-competition provisions
apply. Mr. Petra currently provides consulting services to the Company on a per
diem basis.
Sheila Levine Termination of Employment Agreement. In connection
with the Company's plan of liquidation, on December 4, 2000, Ms. Levine's
employment agreement with the Company (the "Levine Employment Agreement") was
terminated as a result of the change in control arising out of the sale of
substantially all of the assets of the Company. All unvested options granted to
Ms. Levine immediately vested (they would have vested on January 1, 2001). The
Company subsequently entered into an at-will employment arrangement with Ms.
Levine (the "Levine At-Will Arrangement"), whereby Ms. Levine served as Chief
Operating Officer, Executive Vice President and Secretary of the Company and
received no salary, but did receive reimbursement for reasonable business
expenses. The Levine At-Will Arrangement was terminable by the Company or
Ms.Levine at any time and for any or no reason. Ms. Levine terminated the Levine
At-Will Arrangement effective November 12, 2002. Ms.
20
Levine did not receive any severance payments in connection with the termination
of the Levine At-Will Arrangement, and non-competition provisions continue to
apply. Ms. Levine remains a member of the Board of Directors of the Company.
Brian J. Gallagher Termination of Employment Agreement. In
connection with the Company's plan of liquidation, on December 4, 2000, Mr.
Gallagher's employment agreement with the Company (the "Gallagher Employment
Agreement") was terminated as a result of the change in control arising out of
the sale of substantially all of the assets of the Company. In connection with
such termination, pursuant to the terms of the Gallagher Employment Agreement,
Mr. Gallagher received a severance payment of $414,538 and forgiveness of the
$50,000 non-recourse stock acquisition loan (plus interest) made by the Company
to Mr. Gallagher (the "Gallagher Loan"). In addition, all unvested options
granted to Mr. Gallagher immediately vested, although they would have vested on
January 1, 2001. Mr. Gallagher left the Company's employ on December 4, 2000.
Carl E. Kraus Termination of Employment Agreement. In connection
with the Company's plan of liquidation, on December 4, 2000, Mr. Kraus'
employment agreement with the Company (the "Kraus Employment Agreement") was
terminated as a result of the change in control arising out of the sale of
substantially all of the assets of the Company. In connection with such
termination, pursuant to the terms of the Kraus Employment Agreement, Mr. Kraus
received the remainder of his salary through December 31, 2001 and forgiveness
of the $200,000 non-recourse stock acquisition loan (plus interest) made by the
Company to Mr. Kraus (the "Kraus Loan"). In addition, all unvested options
granted to Mr. Kraus immediately vested. The Company subsequently entered into
an at-will employment arrangement with Mr. Kraus (the "Kraus At-Will
Arrangement"), whereby Mr. Kraus served as Chief Financial Officer of the
Company and received a salary of $1,200 for each day worked, customary employee
benefits and reimbursement for reasonable business expenses. The Kraus At-Will
Arrangement was terminable by the Company or Mr. Kraus at any time and for any
or no reason. Mr. Kraus terminated the Kraus At-Will Arrangement effective March
31, 2002. Mr. Kraus did not receive any severance payments in connection with
the termination of the Kraus At-Will Arrangement, and no non-competition
provisions apply.
Compensation Committee Interlocks and Insider Participation
Sheila Levine, a member of the Compensation Committee of the Board
of Directors during 2002, also served as the Chief Operating Officer, Executive
Vice President and Secretary of the Company through November 12, 2002. Ms.
Levine is also a party to certain related transactions with the Company. See
"Certain Relationships and Related Transactions". The other two members of the
Compensation Committee of the Board of Directors (comprising a majority thereof)
are Robert S. Grimes and Arnold S. Penner. Messrs Grimes and Penner are
independent outside directors of the Company who are neither employed by, nor
have any other affiliation with, the Company.
Board Compensation Committee Report on Executive Compensation
The Company is operating under a plan of liquidation. Philip
Pilevsky, the sole executive officer of the Company, serves as Chief Executive
Officer, President, principal financial officer and Secretary, and does not
receive compensation for services rendered in such capacities or as Chairman of
the Board of Directors of the Company.
Base Salaries. Carl E. Kraus, former Chief Financial Officer of the
Company, received base compensation during 2002 in accordance with his at-will
employment arrangement. Such compensation level was set to provide remuneration
for the services performed and was considered reasonable in light of the
circumstances.
Stock Option Plan. Awards granted under the Stock Option Plan were
historically based on a number of factors, including (i) the executive officer's
or key employee's position in the Company, (ii) his or her performance and
responsibilities, (iii) the extent to which he or she already held an equity
stake in the Company, (iv) equity participation levels of comparable executives
and key employees at other companies in the compensation peer group, and (v)
individual contribution to the success of the Company's financial performance.
However, the Stock Option Plan did not provide any formulated method for
weighing these factors, and a decision to grant an award was based primarily
upon the Compensation Committee's evaluation of the past as well as the future
anticipated performance and responsibilities of the individual in question. No
options or additional Contract Rights were granted in 2002. See "Item 12 -
Market for Registrant's Common Stock and Related Stockholder Matters -
Securities Authorized for Issuance Under Equity Compensation Plans" for a more
detailed description of such Contract Rights.
401(k) Savings Plan. The Company has maintained a 401(k) Savings and
Retirement Plan (the "401(k) Plan") to cover eligible employees of the Company
and any designated affiliates. The 401(k) Plan permits eligible employees of the
Company (and any designated affiliate) to defer up to 15% of their annual
compensation, subject to certain limitations imposed by the Code. The employees'
elective deferrals are immediately fully vested and non-forfeitable upon
contribution to the 401(k) Plan. The Company did not make matching contributions
or discretionary profit sharing contributions to the 401(k) Plan during 2002 and
does not currently intend to do so in the future. The 401(k) Plan is designed to
qualify under Section 401 of the Internal Revenue Code of 1986, as amended, so
that contributions by employees or by the Company to the 401(k) Plan, and income
earned thereon, will not be taxable to employees until withdrawn from the 401(k)
Plan, and so that contributions by the Company, if any, will be deductible by
the Company when made.
21
Chief Executive Officer Compensation. Philip Pilevsky, Chairman of
the Board of Directors and Chief Executive Officer, President, principal
financial officer and Secretary of the Company, does not currently receive any
remuneration for services performed in such capacities. Mr. Pilevsky is,
however, a shareholder of the Company and receives liquidating distributions in
respect of this equity interest as may be declared from time to time by the
Board generally with regard to all shares of Common Stock then outstanding.
COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
SHEILA LEVINE
ARNOLD S. PENNER
ROBERT S. GRIMES
Performance Graph
Stockholders of the Company approved the adoption of a plan of
liquidation on October 10, 2000. Pursuant to such plan, the Company has
proceeded to divest substantially all of its real estate assets and concurrently
authorize liquidating distributions to its stockholders. Such liquidating
distributions, totaling $16.25 in cash per share to date, have been paid as
follows:
December 2000 $13.00
June 2001 1.00
September 2001 .75
November 2001 .50
October 2002 .50
March 2003 .50
------
$16.25
======
The market price of the Company's shares of common stock in trading
on the New York Stock Exchange through October 22, 2002 (the date of trading
suspension) has fluctuated in correlation with payment of these liquidating
distributions, as well as with investors' perception as to the potential for
future distributions. Therefore, the Company does not believe presentation of a
performance graph comparing total stockholder returns to any broad market or
REIT industry index would be meaningful. See Item 5 - Market For Registrant's
Common Stock and Related Stockholder Matters.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information as of March 21, 2003 with
respect to each person who is known by the Company, in reliance on Schedules 13D
and 13G filed with the Securities and Exchange Commission (the "SEC"), to own
beneficially more than 5% of the Company's outstanding shares of common stock.
Except as otherwise noted below, all shares of common stock are owned
beneficially by the individual listed with sole voting and/or investment power.
Amount and Percentage of
Nature Shares
Name of Of Beneficial Outstanding
Beneficial Owner Ownership (%) (1)
- ---------------- -------------- --------------
Double Play Partners Limited Partnership (2)....................... 919,100 12.52%
Deutsche Bank AG (3)............................................... 799,850 10.90%
Hot Creek Investors, L.P. (4)...................................... 687,800 9.40%
Kensington Investment Group, Inc. (5).............................. 508,300 6.92%
Cohen & Steers Capital Management, Inc. (6)........................ 481,000 6.55%
Option Opportunities Co. (7)....................................... 434,300 5.92%
AEW Capital Management, L.P. (8)................................... 430,650 5.87%
- ----------------
(1) The total number of shares outstanding used in calculating this
percentage does not include shares which had been reserved for issuance
upon the exercise of stock options granted, or reserved for possible grant,
to certain employees and directors of the Company because all shares which
had been reserved for issuance upon the exercise of stock options, have
been converted into Contract Rights. Such Contract Rights carry no voting
or dispositive rights. This information is as of March 21, 2003.
(2) Address: 1391 Main Street, Springfield, MA 01103. Share information
furnished in reliance on the Schedule 13 G/A dated February 14, 2003 of
Double Play Partners Limited Partnership ("Double Play") filed with the
SEC, which represents holdings as of December 31, 2002. This number
represents shares for which Double Play has sole dispositive and voting
power.
(3) Address: Taunusanlage 12, D-60325, Frankfurt am Main, Federal Republic of
Germany. Share information is furnished in reliance on the Schedule 13G
dated February 10, 2003 of Deutsche Bank AG ("Deutsche") filed with the
SEC, which represents holdings as of December 31, 2002. This number
represents shares for which Deutsche has sole voting and shared dispositive
power by virtue of its position as the parent of RREEF America, L.L.C. This
number reflects the securities beneficially owned by the Private Clients
and Asset Management
22
business group of Deutsche and its subsidiaries and affiliates ("DBAG"),
but does not reflect securities, if any, beneficially owned by any other
business group of DBAG.
(4) Address: Post Office Box 3178, Gardnerville, Nevada 89410. Share
information furnished in reliance on the Schedule 13G dated March 7, 2003
of Hot Creek Investors, L.P. filed with SEC, which represents holdings as
of March 6, 2003. This number represents shares for which Hot Creek
Investors, L.P. has shared voting and dispositive power with Hot Creek
Capital , L.L.C. and David M. W. Harvey.
(5) Address: 4 Orinda Way, Suite 220D, Orinda, CA 94563. Share information is
furnished in reliance on the Schedule 13G dated January 31, 2003 of
Kensington Investment Group, Inc. filed with the SEC, which represents
holdings as of December 31, 2002. This number represents shares for which
Kensington has sole dispositive and voting power.
(6) Address: 757 Third Avenue, New York, NY 10017. Cohen & Steers Capital
Management, Inc. ("Cohen & Steers") takes the position that such shares are
held for investment advisory clients and that Cohen & Steers disclaims
beneficial ownership of these shares. Share information is furnished in
reliance on the Schedule 13G dated February 13, 2001 of Cohen & Steers
filed with the SEC, which represents holdings as of December 31, 2000. This
number includes 406,500 shares for which Cohen & Steers has sole voting
power and 481,000 shares for which they have sole dispositive power.
(7) Address: 225 W. Washington St., 3rd Floor, Chicago, IL 60606. Share
information is furnished in reliance on the Schedule 13G dated February 23,
2001 of Option Opportunities Co. filed with the SEC, which represents
holdings as of January 31, 2001. This number represents shares for which
Option Opportunities Co. has sole voting and dispositive power.
(8) Address: World Trade Center East, Two Seaport Lane, Boston, MA 02110-2021.
Share information is furnished in reliance on the Schedule 13G dated
November 13, 2000 of AEW Capital Management, L.P. filed with the SEC. This
number represents shares for which AEW Capital Management, L.P. has sole
voting and dispositive power.
Equity Compensation Plan Information
The following table summarizes information, as of December 31, 2002,
relating to equity compensation plans of the Company (including individual
compensation arrangements) pursuant to which equity securities of the Company
are authorized for issuance.
Number of Securities
Remaining Available for
Number of Securities to be Future Issuance Under Equity
Issued Upon Exercise of Weighted-Average Exercise Compensation Plans
Outstanding Options, Warrants Price of Outstanding Options, (excluding securities reflected
Plan Category and Rights Warrants and Rights in column (a))
----------------------------- ----------------------------- -------------------------------
(a) (b) (c)
Equity Compensation Plans
Approved by Stockholders........ 705,000(1) $17.43(1) N/A(1)
Equity Compensation Plans
Not Approved by
Stockholders.................... N/A N/A N/A
--- --- ---
Total 705,000 N/A N/A
======= === ===
- -----------
(1) 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 Company's Board of Directors in its sole
discretion.
In conjunction with the Company's adoption of the plan of liquidation and
the disposal of substantially all of its shopping center properties, all
options outstanding at December 31, 2000 (approximately 705,000 shares at a
weighted average exercise price of $17.43) became fully vested and were
replaced one-for-one by a Contract Right to receive a cash distribution on
the same basis and at the same time as liquidating distributions are made
to shareholders. The total amount to be paid on each Contract Right will
equal the total per share proceeds distributed to shareholders less the
original stock option exercise price. Contract Rights are retained after
termination of employment.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain directors and executive officers of the Company (or members of
their immediate families or related trusts) and persons who hold more than 5% of
the outstanding shares of common stock had direct or indirect interests in
certain transactions of the Company during 2002 as follows:
o Management Agreement. Pursuant to a Management Agreement, under the
direction of the executive officer of the Company, Philips
International Holding Corp. ("PIHC"), an entity affiliated with Mr.
Philip Pilevsky, the Company's Chief Executive Officer, President and
Secretary, provides property management and leasing services for the
Company's
23
retail properties including, among other things, (i) operating, leasing
and maintaining the properties; (ii) the collection of rents; and (iii)
overseeing the construction of improvements and additions to the
properties. PIHC receives a management fee from the Company equal to 3%
of gross rental collections received from the properties, leasing
commissions (not to exceed local current market rates) and a
construction supervisory fee (up to 10% of the cost of a project) with
regard to tenant improvements and construction matters relating to the
properties. In addition, PIHC is reimbursed for out-of-pocket expenses.
The Management Agreement expires on December 31, 2003, subject to
automatic one-year renewals. The Management Agreement may be terminated
by the Company, at any time, (i) in whole or in part, upon thirty days'
written notice, in the event that the Company elects to perform one or
more of such management functions on an 'in-house' basis (with a
commensurate reduction in fees), and (ii) in whole, immediately, upon
the occurrence of certain other events, including upon the gross
negligence or willful misconduct of PIHC, or if all or substantially
all of the properties are sold. The Company has continued the
Management Agreement, notwithstanding substantially all of its
properties have been sold, in order to have the benefit of the PIHC
organization managing its remaining properties.
PIHC is owned and controlled by Mr. Pilevsky and Ms. Levine. The
Company has granted options under the Stock Option Plan to certain
senior employees of PIHC who are actively involved in the management of
the properties. Such options have been converted into Contract Rights.
Fees paid by the Company to PIHC pursuant to the Management Agreement
totaled approximately $225,000 during 2002.
o Non-Competition Agreement. Mr. Pilevsky, Ms. Levine and PIHC have
agreed pursuant to the Non-Competition Agreement to conduct all their
retail shopping center activities through the Company, except for their
activities with respect to the Excluded Properties and retail
properties under 10,000 square feet. The Non-Competition Agreement is
in effect until such time as (i) neither Mr. Pilevsky nor Ms. Levine
owns beneficially more than 15% of the outstanding shares of common
stock (including interests redeemable therefore) and (ii) one year has
lapsed since the Management Agreement has been terminated and neither
Mr. Pilevsky nor Ms. Levine is a director or executive officer of the
Company. In addition, in the event that at any time after December 31,
2002, Ms. Levine is neither a director nor executive officer of the
Company for at least one year, nor owns beneficially more than five
percent of the outstanding shares of common stock (including interests
redeemable therefore), then the Non-Competition Agreement will
terminate as to Ms. Levine. The Non-Competition Agreement currently
remains in effect due to clause (ii) above.
o Excluded Properties. Mr. Pilevsky and Ms. Levine have economic
interests in certain retail properties which were not transferred to
the Company in the formation transactions (the "Excluded Properties").
The Excluded Properties were not included in the Company's portfolio
either because of the inability to obtain necessary partnership and
lender consents or because the asset profile was inconsistent with the
Company's criteria. Mr. Pilevsky has also granted the Company a right
of first refusal on the sale or transfer by Mr. Pilevsky of his
partnership interest in any of the Excluded Properties, except for a
transfer of Mr. Pilevsky's interest to an existing partner of such
property or a family member, or a sale of the entire property, in which
case Mr. Pilevsky will use reasonable efforts to cause such property to
be offered to the Company.
o Redemption Transaction. On June 14, 2001, in conjunction with its plan
of liquidation, the Company completed the sale of a redevelopment site
(Palm Springs Plaza in Lake Worth, Florida) to certain limited partners
in the Operating Partnership, including Mr. Pilevsky and Ms. Levine,
for approximately $7.6 million in cash. The purchase price paid by
these limited partners under the Palm Springs Plaza agreement will be
adjusted, if necessary, so that the value per Unit received by them
($18.25 per Unit) pursuant to the redemption transactions which
occurred in 2000 (i.e., the November 2000 distribution of the Company's
four shopping center properties located in Hialeah, FL, and the
December 2000 sale of the Company's redevelopment property located on
Third Avenue in New York, NY) and the total per share value received by
our stockholders in the liquidation, will be the same.
o Other Matters. Jeffrey Levine, the husband of Ms. Levine, is a partner
at the accounting firm of Margolin Winer & Evens, LLP (formerly Chassin
Levine Rosen & Company, LLP), which firm has provided tax, accounting
and consulting services to the Company. During the year ended December
31, 2002, the Company paid an aggregate of approximately $108,000 in
fees to Margolin Winer & Evens, LLP.
Elise Jaffe, a Director of the Company, is also the Senior Executive
Vice President of Real Estate for Dress Barn, Inc., a tenant at certain
of the Company's shopping center properties. During the year ended
December 31, 2002, Dress Barn, Inc. paid an aggregate of approximately
$41,000 in rent under leases for certain of the properties.
ITEM 14. CONTROLS AND PROCEDURES
(a) Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive
Officer/principal financial officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chief
Executive Officer/principal financial officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting him to
material information
24
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic filings with the Securities and Exchange
Commission.
(b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the Company's
internal controls subsequent to the date the Company carried out the evaluation
set forth above, including any corrective actions with regard to significant
deficiencies and material weaknesses.
25
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT 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 30
Consolidated Balance Sheets as of December 31, 2002 and 2001 31
Consolidated Statements of Income for the Years Ended December 31, 2002, 2001 and 2000 32
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2002, 2001 and 2000 33
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 34
Notes to Consolidated Financial Statements 35
(a) 2. Financial Statement Schedules
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2002 43
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).
26
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
27
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
28
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).
99.1* Certification of the Company's Chief Executive Officer and
principal financial officer, Philip Pilevsky, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, to be codified at
18 U.S.C. ss.1350.
- --------------
* filed herewith
(b) Reports On Form 8-K
The Company filed the following Current Reports on Form 8-K in the
fourth quarter of 2002:
On October 10, 2002, the Company filed with the SEC a Current Report on
Form 8-K dated October 3, 2002, reporting under Item 2 that the Company had
completed the sale of its Kmart Shopping Center in Sacramento, California. In
addition, on November 26, 2002, the Company filed with the SEC a Form 8-KA dated
October 3, 2002 amending its Current Report on Form 8-K dated October 3, 2002 to
provide certain pro forma financial information.
On October 28, 2002, the Company filed with the SEC a Current Report on
Form 8-K dated October 18, 2002, reporting under Item 5 that the NYSE had
delivered notice to the Company and issued a press release to advise that it had
determined the common stock of the Company should be removed from trading on the
NYSE.
On November 14, 2002, the Company filed with the SEC a Current Report
on Form 8-K dated November 14, 2002, furnishing under Items 7 and 9 the
transmittal letter and certification of the Company's Chief Executive Officer
and principal financial officer, Philip Pilevsky, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 that accompanies the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002.
29
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, 2002, and 2001 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 2002. Our audits also
included the financial statement schedule listed in the Index as Item 15(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, 2002, and 2001 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2002 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 11, 2003
30
PHILIPS INTERNATIONAL REALTY CORP.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2002 2001
------------ ------------
DISCONTINUED OPERATIONS
ASSETS
Rental properties - held for sale - at cost
Land and improvements $ 2,086,356 $ 3,917,356
Buildings and improvements 8,344,196 15,672,196
------------ ------------
10,430,552 19,589,552
Less: Accumulated depreciation 327,892 615,892
------------ ------------
Rental properties, net 10,102,660 18,973,660
Cash and cash equivalents 5,941,024 863,005
Accounts receivable, net of allowance of $140,000 in 2002 and $224,000 in 2001 107,484 303,543
Deferred charges and prepaid expenses 320,827 86,269
Other assets 2,206,614 2,158,089
------------ ------------
Total Assets $ 18,678,609 $ 22,384,566
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 961,505 $ 1,071,891
Other liabilities 44,899 70,671
------------ ------------
Total Liabilities 1,006,404 1,142,562
------------ ------------
Minority interests 59,664 71,878
------------ ------------
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 73,405 73,405
and outstanding
Additional paid in capital 92,668,007
92,668,007
Cumulative distributions in excess of net income (75,128,871) (71,571,286)
------------ ------------
Total Shareholders' Equity 17,612,541 21,170,126
------------ ------------
Total Liabilities and Shareholders' Equity $ 18,678,609 $ 22,384,566
============ ============
See accompanying notes.
31
PHILIPS INTERNATIONAL REALTY CORP.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended
December 31,
2002 2001 2000
---- ---- ----
Discontinued Operations:
Revenues from rental property $ 2,790,564 $ 5,022,511 $ 43,133,885
------------ ------------ ------------
Expenses:
Operating expenses 425,298 888,856 5,573,314
Real estate taxes 245,686 560,996 6,289,543
Management fees to affiliates 84,171 154,207 1,255,919
Interest expense -- -- 12,166,549
Depreciation and amortization -- -- 5,598,337
General and administrative expenses 974,053 1,070,547 4,726,522
------------ ------------ ------------
1,729,208 2,674,606 35,610,184
------------ ------------ ------------
Operating income from discontinued operations 1,061,356 2,347,905 7,523,701
Equity in net loss of real estate joint ventures -- -- (30,529)
Minority interests in income before gain (loss) on sale and
extraordinary items (2,863) (8,044) (2,119,641)
Other income (expense), net (219,029) 18,128 1,675,155
------------ ------------ ------------
Income from discontinued operations before gain (loss) on sale and 839,464 2,357,989 7,048,686
extraordinary items
Gain (loss) on sale (net of minority share of $(2,479), $1,312 and
$16,250,253) (726,812) 384,516 42,948,640
------------ ------------ ------------
Income from discontinued operations before extraordinary items 112,652 2,742,505 49,997,326
Extraordinary items (net of minority share of $553,463 in 2000) -- -- (1,643,690)
------------ ------------ ------------
Net income from discontinued operations $ 112,652 $ 2,742,505 $ 48,353,636
============ ============ ============
Basic and diluted net income per common share:
Income from discontinued operations before extraordinary items $ 0.02 $ 0.37 $ 6.81
Extraordinary items -- -- (0.22)
------------ ------------ ------------
Net income from discontinued operations $ 0.02 $ 0.37 $ 6.59
============ ============ ============
See accompanying notes.
32
PHILIPS INTERNATIONAL REALTY CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2002, 2001 and 2000
Cumulative
Distributions
Common Stock Additional in Excess Stock Total
------------------ Paid-In of Net Purchase Shareholders'
Shares Amount Capital Income Loans Equity
--------- ------- ----------- -------------- --------- -------------
Balance, December 31, 1999 7,340,474 $73,405 $92,668,007 $ (5,183,136) $(704,168) $ 86,854,108
Net income from discontinued operations 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 7,340,474 73,405 92,668,007 (57,797,724) -- 34,943,688
Net income from discontinued operations 2,742,505 2,742,505
Dividends on common stock (16,516,067) (16,516,067)
--------- ------- ----------- ------------- --------- -------------
Balance, December 31, 2001 7,340,474 73,405 92,668,007 (71,571,286) -- 21,170,126
Net income from discontinued operations 112,652 112,652
Dividends on common stock (3,670,237) (3,670,237)
--------- ------- ----------- ------------- --------- -------------
Balance, December 31, 2002 7,340,474 $73,405 $92,668,007 $ (75,128,871) $-- $ 17,612,541
--------- ------- ----------- ------------- --------- -------------
See accompanying notes.
33
PHILIPS INTERNATIONAL REALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
------------------------------------------------
2002 2001 2000
------------- --------------- ----------------
Operating activities:
Net income from discontinued operations $ 112,652 $ 2,742,505 $ 48,353,636
Adjustments to reconcile net income from discontinued operations to net
cash provided by (used in) operating activities:
Depreciation and amortization -- -- 5,598,337
Amortization - other -- -- 1,977,797
Equity in net income of real estate joint ventures -- -- 30,529
Minority interests in income 384 9,356 17,816,431
(Gain) loss on sale of real estate 729,291 (385,828) (59,198,893)
Gain on sale of secured mortgage note receivable -- -- (585,053)
Changes in operating assets and liabilities:
Accounts receivable 196,059 677,649 (658,911)
Deferred charges (426,691) (917,145) (2,178,899)
Other assets (48,525) (1,057,725) 1,274,234
Accounts payable and accrued expenses (110,386) (1,330,704) (599,853)
Other payables (25,772) (36,222) (1,791,105)
----------- ------------- -------------
Net cash provided by (used in) operating activities 427,012 (298,114) 10,038,250
----------- ------------- -------------
Investing activities:
Net proceeds from sale of shopping center properties 8,333,842 16,029,452 108,274,800
Additions to land, buildings and improvements -- -- (2,239,600)
Investments in real estate joint ventures -- -- (274,387)
Proceeds from sale of interests in real estate joint ventures -- -- 12,157,364
Collection of secured mortgage note receivable -- -- 2,350,000
----------- ------------- -------------
Net cash provided by investing activities 8,333,842 16,029,452 120,268,177
----------- ------------- -------------
Financing activities:
Repayment of mortgage notes payable, exclusive of scheduled -- -- (63,648,998)
principal amortization
Principal amortization of mortgage notes payable -- -- (606,349)
Proceeds from debt financing -- -- 39,336,993
Distributions to minority interests (12,598) (56,691) (3,127,535)
Dividends paid on common stock (3,670,237) (16,516,067) (103,739,255)
----------- ------------- -------------
Net cash used in financing activities (3,682,835) (16,572,758) (131,785,144)
----------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 5,078,019 (841,420) (1,478,717)
Cash and cash equivalents, beginning of year 863,005 1,704,425 3,183,142
----------- ------------- -------------
Cash and cash equivalents, end of the year $ 5,941,024 $ 863,005 $ 1,704,425
----------- ------------- -------------
Non cash investing & financing activities
Acquisition of real estate assets accounted for at the time of purchase $-- $-- $ 13,754,786
on the equity method
----------- ------------- -------------
Assumption of debt by purchaser of properties $-- $-- $ 157,036,867
----------- ------------- -------------
OP Unit redemption from sale of property $-- $-- $ 44,661,377
----------- ------------- -------------
See accompanying notes.
34
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. Business
Philips International Realty Corp. (the "Company"), a Maryland
corporation, 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 had been engaged for more than fifteen years in the ownership,
development and acquisition for redevelopment of neighborhood and community
shopping centers predominantly concentrated in the greater New York and Miami
metropolitan areas.
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.
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 a plan of liquidation.
On October 11, 2000, the Company announced that its stockholders had
approved a plan of liquidation for the Company, pursuant to which the Company
planned to (a) transfer its interests in affiliated entities that owned eight
shopping centers to Kimco Income Operating Partnership, L.P. for cash and the
assumption of indebtedness, (b) transfer its interests in entities that owned
four shopping centers and two redevelopment properties, subject to certain
indebtedness, to Philip Pilevsky, the chief executive officer, and certain of
his affiliates and family members, in exchange for cash and the redemption of
units in the Company's Operating Partnership, (c) sell its remaining assets for
cash, (d) pay or provide for its liabilities and expenses, (e) distribute the
net cash proceeds of the liquidation, then estimated at $18.25 per share of
common stock, to the stockholders in two or more liquidating distributions, and
(f) wind up operations and dissolve. On December 22, 2000, the Company paid the
initial liquidating distribution of $13 per share of common stock upon
substantial completion of the transactions referenced in (a) and (b) above.
Subsequent liquidating distributions of $1.00, $.75, $.50, $.50 and $.50 per
share (bringing the total paid to date to $16.25 per share) were paid on July 9,
2001, September 24, 2001, November 19, 2001, October 22, 2002, and March 18,
2003 (unaudited),respectively, following sales of the Company's shopping center
properties located in Lake Worth, Florida, Alexandria, Minnesota, Port Angeles,
Washington, McHenry, Illinois, Sacramento, California and Reedley, California.
The Company's two remaining assets are currently being offered for sale.
On October 23, 2003, the New York Stock Exchange (the "NYSE") suspended
trading in the Company's common stock. This action was taken in view of the fact
that the Company had fallen below the NYSE's continued listing standards as its
average global market capitalization over a consecutive 30 day period was less
than $15,000,000.
3. Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries, all of which are wholly-owned. All
significant inter-company accounts and balances have been eliminated in
consolidation.
Segment Information
The Company's shopping center properties have historically been
anchored by discount stores, supermarkets, drugstores and other retailers
offering day to day shopping necessities. Management considers the operating,
investing and financing activities of its properties 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 dependamt 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.
As the result of the plan of liquidation, the Company's shopping
center operations are presented as discontinued operations.
35
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
The Company's two (three at December 31, 2002 prior to the sale of
Reedley, CA) remaining shopping center properties are currently being held for
sale. Depreciation and amortization charges were suspended upon adoption of the
plan of liquidation. Buildings and improvements were depreciated on the
straight-line method over the estimated useful lives of the assets which range
from 15 to 39 years. Tenant improvements (included in Buildings and improvements
in the accompanying Consolidated Balance Sheets) were amortized over the lives
of the respective leases using the straight-line method.
On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards 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. 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.
The adoption did not have a material impact on the Company's results of
operations or financial position.
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 Sheets) are
amortized over the terms of the related leases.
Income Taxes
The Company believes it 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 is not 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 would 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, 2002, 2001 and 2000, and is
computed by dividing Net income from discontinued operations by the weighted
average number of shares outstanding for the period.
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. Kmart Corporation, which is operating
under Chapter 11 of the Bankruptcy Code, is the largest tenant
36
representing approximately 66% (53% at December 31, 2002 prior to the sale of
Reedley, CA) of the Company's annualized base rental revenues. No other tenant
accounts for more than 4.4% (7.5% at December 31, 2002 prior to the sale of
Reedley, CA) of the Company's annualized base rental revenues.
Interest Capitalization
Interest costs incurred during the development and major redevelopment
of shopping center properties were capitalized and amortized on the same basis
as related depreciation. Total interest costs incurred, paid and capitalized
during the year ended December 31, 2000 totaled $12,424,000, $12,500,000 and
$5,360,000 respectively.
Minority Interests
The Company historically conducted substantially all of its business
and held its real estate interests through Philips International Realty, L.P., a
Delaware limited partnership (the "Operating Partnership"). This Operating
Partnership was owned 74.8% by the Company, as General Partner, and 25.2% by
Unit holders, as limited partners. The minority interests of these limited
partners were substantially eliminated in conjunction with the disposition of
properties pursuant to the plan of liquidation. See Notes 2 and 13.
4. Investments in Real Estate Joint Ventures
The Company and its subsidiaries held interests in certain real estate
joint ventures during 2000 which were accounted for on the equity method. See
Note 13. 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 operations of these real estate joint
ventures is as follows:
Year Ended
December 31, 2000
(In Thousands)
-------------------
Revenues from rental property $1,059
Operating expenses (352)
Mortgage interest (741)
Depreciation and amortization (216)
Other, net --
------
$ (250)
======
5. Deferred Charges, Prepaid Expenses and Other Assets
Deferred charges and prepaid expenses included in the accompanying
Consolidated Balance Sheets as of December 31, 2002 and 2001 were comprised
primarily of certain deferred costs related to the plan of liquidation and
prepaid expenses.
Other assets in the accompanying Consolidated Balance Sheets as of
December 31, 2002 and 2001 were comprised primarily of legal costs
(approximately $2,025,000 and $1,787,000, respectively) incurred in connection
with the defense of the class action litigation (see Note 8), which the Company
believes are covered under its directors and officers insurance policy.
However, there can be no assurance that the carrier will not seek to disqualify
certain of such costs.
6. Fair Value of Financial Instruments
Estimated fair values for financial instruments were determined by
management using market information available as of December 31, 2002 and 2001
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, 2002.
Cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses are reflected in the accompanying Consolidated Balance Sheets
as of December 31, 2002 and 2001 at amounts which reasonably approximate their
fair values due to the short maturities of these accounts.
7. 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
37
direct out-of-pocket expenses. Fees paid for such services totaled $225,000,
$247,000 and $1,300,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
8. Commitments and Contingencies
Rental Income
The Company's shopping center properties are leased to tenants under
operating leases. The minimum rental amounts due under certain leases are
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 this period, for leases in effect at December 31, 2002 are as
follows (in thousands):
2003 $1,406
2004 1,287
2005 1,102
2006 1,025
2007 884
Thereafter 5,364
-------
$11,068
=======
Percentage rent included in revenues from rental property was $53,000,
$204,000 and $1,231,000 for the years ended December 31, 2002, 2001 and 2,000,
respectively. Kmart, which is operating under Chapter 11 of the Bankruptcy Code,
is the Company's largest tenant for 2003, 2002 and 2001 representing
approximately 66% (53% at December 31, 2002 prior to the sale of Reedley, CA),
60% and 64%, respectively of the Company's minimum base rental revenues.
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 had
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 have
obtained permission to appeal, it had to demonstrate that the denial of class
certification effectively terminated the litigation and that the District
Court's decision was an abuse of its discretion. The Company opposed plaintiff's
application. If the Court of Appeals granted plaintiff's request, plaintiff
would then have been able to appeal the District Court's denial of class
certification.
On May 28, 2002, the United States Court of Appeals for the Second
Circuit ordered that the plaintiff's petition to appeal the District Court's
denial of class certification also be denied.
The Company has incurred significant costs in connection with the
defense of this litigation, which it believes are covered under the Company's
directors and officer's insurance policy and included in Other assets in the
accompanying Consolidated Balance Sheets. However, there can be no assurance
that the carrier will not seek to disqualify certain of such costs. See Note 5.
38
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.
Other Matters
In March 2003, the New York City Department of Finance (the "DOF")
issued preliminary Notices of Tax Due with regard to the Company's December 2000
transfer of its New York City shopping center properties to Kimco. The DOF is
seeking to impose interest and penalty charges only relating to the late filing
of the subject transfer tax returns. The Company does not expect to incur any
material liability in connection with such notices.
In March 2003, the New York State Department of Taxation and Finance
made certain requests for information pertaining to real property transfer taxes
due in connection with the Company's 1998 initial public offering. The Company
believes it has adequately provided for any liabilities which may arise in
connection with this matter.
9. Contract Rights Agreements
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.
In conjunction with the Company's adoption of the plan of liquidation
and the disposal of substantially all of its shopping center properties, all
options outstanding at December 31, 2000 (approximately 705,000 shares at a
weighted average exercise price per share of $17.43) became fully vested and
replaced one-for-one by a contractual right (a "Contract Right") to receive a
cash distribution on the same basis and at the same time as liquidating
distributions are made to shareholders. The total amount to be paid on each
Contract Right will equal the total per share proceeds distributed to
shareholders less the original stock option exercise price. Contract Rights are
retained after 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 the
stock options originally issued was deducted in determining net income from
discontinued operations. 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 from discontinued operations and net income from
discontinued operations per share for calendar year 2000 would have been
$47,814,000 and $6.51, 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 primary
assumptions used in the above calculation include : (i) a risk-free interest
rate of 5.87%, , (ii) a dividend yield on the Company's common stock of 8.36%
(iii) a volatility factor for the market price of the Company's common stock of
23.21% and (iv) a weighted average expected life of options of 10 years. For
purposes of these pro forma disclosures, the estimated fair value of options is
amortized over the option vesting period.
10. Quarterly Financial Information
The following summary represents the results of operations for each
quarter during the years ended December 31, 2002 and 2001.
2002 (Unaudited)
---------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- -------
(in thousands, except per share data)
Revenues from rental property $ 888 $ 735 $ 674 $ 494
Income (loss) from discontinued operations before
extraordinary items $ 428 $ (551) $ 211 $ 25
Income (loss) from discontinued operations before
extraordinary items, per common share
Basic $ .06 $ (.08) $ .03 $ .01
Diluted $ .06 $ (.08) $ .03 $ .01
2001 (Unaudited)
---------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- -------
(in thousands, except per share data)
Revenues from rental property $1,416 $1,233 $1,372 $1,002
Income from discontinued operations before extraordinary items $793 $826 $899 $225
Income from discontinued operations before extraordinary
items, per common share
Basic $.11 $.11 $.12 $.03
Diluted $.11 $.11 $.12 $.03
39
11. 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.
40
12. Dividends On Common Stock
The Company declared and paid cash dividends on its common stock for 2002, 2001
and 2000 as follows:
Record Date of Amount
Date of Declaration Date Payment Per Share
------ ------- ---------
2002 Year
10/8/02 10/15/02 10/22/02 $.50
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
13. Acquisition and Disposition of Real Estate Interests
Acquisitions
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.
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 approximately $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.
41
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 share), and the total per share value received by
the Company's stockholders in the liquidation, 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 $4,000.
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 approximately $39,000.
On April 16, 2002, the Company completed the sale of its McHenry
Commons shopping center property in McHenry, Illinois for approximately $3.9
million in cash, pursuant to a Sale and Purchase Agreement dated November 29,
2001 by and between Philips Shopping Center Fund, L.P., a Delaware limited
partnership, as Seller, and GK Development, Inc., an Illinois corporation, and
Star Realty Investors, LLC, an Illinois limited liability company, jointly and
severally as Purchaser. This sale resulted in a gain of approximately $102,000.
On June 28, 2002, the Company entered into a settlement agreement with
the DOF pursuant to which the Company paid $903,943, including principal of
$650,000 and interest of $253,943, in full satisfaction of all real property
transfer taxes, interest and penalties assessed by the DOF in May 2002 in
connection with the Company's 1997 formation transactions and 1998 initial
public stock offering. The shopping center properties relating to the subject
tax assessments have been previously disposed in connection with the plan of
liquidation. Accordingly, the principal and interest components of the
settlement payment have been charged to Gain (loss) on sale of shopping center
properties and Other income (expense), respectively, in the accompanying
Consolidated Statement of Income for the year ended December 31, 2002.
On October 3, 2002, the Company completed the sale of its Kmart
Shopping Center in Sacramento, California for approximately $5.9 million in
cash, pursuant to a Purchase and Sale Agreement dated September 24, 2002 by and
between Philips Shopping Center Fund, L.P., a Delaware limited partnership, as
Seller, and M&A Gabaee L.P., a California limited partnership, Mirasa L.L.C., a
California limited liability company, and Corsair L.L.C., a Nevada limited
liability company, jointly and severally as Buyer. This transaction resulted in
a gain of approximately $118,000.
14. 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.
15. Subsequent Event
On February 28, 2003, the Company completed the sale, in an amount in
excess of its carrying value, of its shopping center property in Reedley,
California, pursuant to a Purchase and Sale Agreement dated January 29, 2003 by
and between Philips Shopping Center Fund, L.P., a Delaware limited partnership,
as Seller, and D&L Lowe, L.P., a California limited partnership, as Buyer.
On March 3, 2003, the Board of Directors of the Company declared a
sixth liquidating distribution in the amount of $.50 per share which was paid on
March 18, 2003 (unaudited).
42
PHILIPS INTERNATIONAL REALTY CORP.
Schedule III-Real Estate and Accumulated Depreciation
December 31, 2002
(Dollars in thousands)
Cost Capitalized Gross Amounts at Which
Initial Cost Subsequent to Acquisition Carried at the Close of Period
--------------------------- --------------------------- ------------------------------
Land and Buildings and Land and Buildings and Land and Buildings and
Encumbrances Improvements Improvements Improvements Improvements Improvements Improvements
------------ ------------ ------------- ------------ ------------- ------------ ---------------
Kmart $0 $1,016 $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
Reedley 0 490 1,959 0 0 490 1,959
Shopping Center
Reedley, CA
---- ------ ------ --- --- ------ ------
$0 $2,086 $8,344 $0 $0 $2,086 $8,344
---- ------ ------ --- --- ------ ------
Life on
which
Accumulated Date Depreciation
Total Depreciation Acquired is computed
------ ------------ -------- ------------
Kmart $5,079 $160 7/01/99 39 Years
Shopping Center
Atwater, CA
Pennyrile 2,902 91 7/01/99 39 Years
Marketplace
Hopkinsville,
KY
Reedley 2,449 77 7/01/99 39 Years
Shopping Center
Reedley, CA
------- ----
$10,430 $328
------- ----
43
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, 2002
are as follows:
2002 2001 2000
--------- ---------- ---------
Balance, beginning of year $ 19,589 $ 34,658 $ 288,450
Property acquisitions -- -- 15,239
Improvements -- -- 756
Property dispositions (9,159) (15,069) (269,787)
--------- --------- ---------
Balance, end of year $ 10,430 $ 19,589 $ 34,658
--------- --------- ---------
The aggregate cost of land, buildings and improvements for federal
income tax purposes at December 31, 2002 was approximately $12 million.
The changes in accumulated depreciation for the three years ended
December 31, 2002 are as follows:
2002 2001 2000
--------- ---------- ---------
Balance, beginning of year $ 616 $ 1,078 $ 26,820
Depreciation -- -- 5,281
Property dispositions (288) (462) (31,023)
-------- -------- --------
Balance, end of year $ 328 $ 616 $ 1,078
-------- -------- --------
44
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 28, 2003
------------------- President, principal financial officer and Secretary
Philip Pilevsky
/s/ SHEILA LEVINE Director March 28, 2003
-----------------
Sheila Levine
/s/ ARNOLD S. PENNER Director March 28, 2003
--------------------
Arnold S. Penner
/s/ A. F. PETROCELLI Director March 28, 2003
--------------------
A. F. Petrocelli
/s/ ELISE JAFFE Director March 28, 2003
---------------
Elise Jaffe
/s/ ROBERT S. GRIMES Director March 28, 2003
--------------------
Robert S.Grimes
45
CERTIFICATIONS
I, Philip Pilevsky, Chief Executive Officer and principal financial
officer of Philips International Realty Corp., certify that:
1. I have reviewed this Annual Report on Form 10-K of Philips
International Realty Corp.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to me by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. I have indicated in this annual report whether there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 31, 2003
By: /s/ Philip Pilevsky
---------------------------------
Philip Pilevsky
Chief Executive Officer and
principal financial officer
46
EXHIBIT INDEX
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.
47
(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).
48
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).
99.1* Certification of the Company's Chief Executive Officer and principal financial officer,
Philip Pilevsky, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to be
codified at 18 U.S.C. ss.1350.
- --------------
* filed herewith
49