ITEM 1. BUSINESS
GENERAL
Philips International Realty Corp. (the "Company") is a self-advised real estate investment trust ("REIT") formed to continue and expand the shopping center business of certain affiliated companies owned or controlled by Philip Pilevsky (the "Philips Group"). For more than 16 years, the Philips Group has been engaged in the ownership, development and acquisition for redevelopment of neighborhood and community shopping centers predominantly concentrated in two major, densely populated, East Coast metropolitan regions: (i) the New York, Northern New Jersey, Long Island and Connecticut consolidated metropolitan statistical area (the "New York CMSA") and (ii) the Miami-Fort Lauderdale consolidated metropolitan statistical area (the "Miami CMSA"). As of December 31, 1999, the Company's portfolio consisted of interests in 26 retail properties plus 2 development sites (each a "Property," and collectively, the "Properties"), encompassing 3.9 million square feet of gross leasable area ("GLA"). Twenty-one (21) of the Properties are anchored by national or regional supermarkets or discount department stores such as Publix Supermarkets, Inc., Winn-Dixie Stores, Inc., Waldbaums/APW Supermarkets, Inc. and Kmart. The Company believes the strength of these discount department stores and grocery retailers, as well as other key anchor tenants, provide the Properties with consistent consumer traffic and enables the Company to attract additional quality anchor retailers, as well as quality national, regional and local non-anchor retailers. As of December 31, 1999, the Properties were 90% leased to 393 tenants.
STRATEGIC ALTERNATIVES
On October 13, 1999, the Board of Directors of the Company announced that it had retained a financial advisor to assist the Company in examining strategic alternatives to maximize shareholder value. The Board believes that the Company's current stock price does not reflect the underlying value of its assets. Given the changing dynamics of the REIT market place and consistent with its commitment to realize shareholder value for all investors, the Board believes that it is prudent to explore the strategic alternatives for the Company. Discussion regarding the Company's investment and operating strategy, liquidity and capital resources and dividends and other future plans throughout this Annual Report should be read giving appropriate consideration to this pending evaluation.
INVESTING AND OPERATING STRATEGY
The Company's strategy is to develop and acquire for redevelopment quality neighborhood and community shopping centers, located in demographically strong, under-stored markets which serve the daily needs of the surrounding community. The Company will continue this strategy by focusing its activities primarily in the New York CMSA, and secondarily in the Miami CMSA. Management believes its extensive experience, market knowledge and network of industry contacts within these regions gives the Company a competitive advantage and enhances its ability to identify and capitalize on development and acquisition for redevelopment opportunities. The Company believes that the New York CMSA and Miami CMSA are both attractive regions in which to own and develop retail properties for long-term investment.
The Company's objective is to maximize shareholder value through aggressive growth of its cash flow per share and through the appreciation of the value of its portfolio. The Company will seek to accomplish this objective by continuing its multi-faceted strategy of: (i) acquisition for redevelopment of retail properties in demographically strong, under-stored markets and where supply is constrained; (ii) development of retail properties in similar markets; (iii) expansion of properties within its portfolio; and (iv) aggressive asset management of its portfolio.
Management expects that a significant part of the Company's growth will be achieved through continuing its program of acquiring an optimal, risk-adjusted mix of additional shopping centers for redevelopment at attractive initial returns, including: (i) well established, stable properties which the Company believes are currently leased at below market rents; (ii) underperforming, poorly managed properties; and (iii) properties with additional land
for new development or expansion. The Company seeks to acquire shopping centers in markets with strong demographics, emphasizing locations where retail demand exceeds supply and the creation of new supply is constrained. The Company believes there are significant opportunities within the markets in which it currently operates to acquire such properties, including opportunities to acquire property portfolios. The Company further believes that the markets in which it operates are mature, established markets in which property owners may have low tax bases, and therefore exposure to significant taxable gains upon sale. Management believes that, over time, the Company's ability to acquire properties for Units enabling such sellers to defer taxable gain, coupled with its extensive market expertise and contacts, as well as its access to capital as a public company, will enable the Company to successfully execute its business plan.
The Company balances its acquisition activities through its selective development of additional quality neighborhood and community shopping centers, primarily in the New York CMSA markets. The Company capitalizes on management's extensive development experience, market knowledge, network of industry contacts and relationships and its proven track record. In order to minimize the risk and the commitment of capital for prolonged periods usually associated with development, the Company will continue to focus on two strategies to secure its development projects: (i) pursuing requests for proposal ("RFPs") or similar municipally sponsored development opportunities; and (ii) entering into land purchase contracts which are subject to the satisfactory resolution of key development contingencies, such as obtaining approvals and permits.
The Company also will continue to utilize its long-standing asset and property management practices to maximize cash flow from its existing Properties and enhance their long-term value through its extensive knowledge of the retail industry and shopping center operations.
MANAGEMENT AND CAPITAL STRUCTURE
Philip Pilevsky, Chairman of the Board of Directors and Chief Executive Officer, leads a management team whose executive officers have an average of approximately 18 years experience in acquiring, redeveloping and developing retail properties. Philips International Realty Corp. and the Philips Group have acquired, redeveloped and/or developed more than 70 retail properties encompassing over 5.4 million square feet within the New York CMSA and Miami CMSA markets. Mr. Pilevsky and the other executive officers and directors beneficially owned in the aggregate approximately 27.0% of the outstanding Common Stock (or units redeemable therefor).
The Company's day-to-day operations are strategically directed by its executive officers and implemented through a management agreement (the "Management Agreement") with a property management company affiliated with the Philips Group (the "Management Company"). The Management Agreement provides for the payment of fees, not to exceed prevailing market rates, and can be canceled, in whole or in part, at any time by the Company as it internalizes property management services. This agreement enables the Company to utilize the Philips Group's infrastructure on a cost-effective basis. The Company will internalize property management functions as its portfolio grows.
The Company was incorporated in Maryland on July 16, 1997. Its executive offices are located at 417 Fifth Avenue, New York, New York 10016, and its telephone number is (212) 545-1100.
As of December 31, 1999, the Company's debt to total capitalization ratio was approximately 53%, based on the closing stock price in trading on the New York Stock Exchange ("NYSE") on such day of $16.438 per share. The Company's organizational documents do not limit the amount of indebtedness that the Company may incur.
EMPLOYEES
As of December 31, 1999, the Company had 30 employees, 24 of whom are maintenance, security and clerical personnel at the Properties located in Hialeah, Florida. The Company believes that relations with its employees are good. None of the employees are unionized.
COMPETITION
Numerous shopping center properties compete with the Properties in attracting tenants to lease space. Tenants may consider certain of these competing properties to be newer in appearance, better located or better maintained than the Properties. The number of competitive commercial properties in a particular area could have
a material effect on the Company's ability to lease space in the Properties or at newly developed or acquired properties and on the rents charged. In addition, retailers at the Properties face increasing competition from other forms of retailing, such as catalogues, discount shopping clubs, telemarketing, and electronic commerce.
REGULATIONS
A number of federal, state and local laws exist, such as the Americans with Disabilities Act, which may require modifications to existing buildings to improve, or restrict certain renovations by requiring, access to such buildings by disabled persons. While the Company believes that all of the Properties are in substantial compliance with laws currently in effect, and will review periodically the Properties to determine continuing compliance with existing laws and any additional laws that are hereafter promulgated, additional legislation may impose further requirements on owners with respect to access by disabled persons.
Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's or operator's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injuries associated with asbestos-containing materials. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may be potentially liable for removal or remediation costs, as well as certain other costs, including governmental fines and injuries to persons and property.
All of the Properties have been subject to a Phase I environmental assessment (which involves general inspections without soil sampling or ground water analysis) by independent environmental consultants. None of these environmental assessments has revealed any environmental liability that the Company believes would have a material adverse effect on the Company's financial condition or results of operations taken as a whole, nor is the Company aware of any material environmental liability.
There are no other laws or regulations which have a material effect on the Company's operations, other than typical state and local laws affecting the development and operation of real property, such as zoning laws.
INDUSTRY SEGMENTS
The Company operates in a single industry segment. The Company does not have any foreign operations and its business is not seasonal. All of the Company's Properties are retail shopping center properties. As of December 31, 1999, the total annualized contractual base rents due under leases with tenants at the Company's 14 Properties located in the New York CMSA or Miami CMSA markets represented 77% of the total annualized contractual base rents due under all of the Company's leases.
RECENT DEVELOPMENTS
FORMATION TRANSACTIONS. On December 31, 1997, the Company and certain members of the Philips Group completed the formation transactions (the "Formation Transactions"), pursuant to which the Properties, or partnership or membership interests in the Properties, were contributed to Philips International Realty, L.P., a Delaware limited partnership (the "Operating Partnership") of which the Company is the general partner, in exchange for limited partnership interests in the Operating Partnership (the "Units"). The Units are redeemable at the Unitholder's request; such Units will be redeemed, at the Company's option and in its sole discretion, either for shares of Common Stock on a one-for-one basis (subject to certain anti-dilution adjustments and exceptions) and/or cash (based upon the fair market value of an equivalent number of shares of Common Stock at the time of redemption). In connection with the Formation Transactions, the Company entered into:
(i) employment agreements with each of Messrs. Petra and Gallagher and Ms. Levine; (ii) the Management Agreement with the Management Company; and (iii) a non-competition agreement (the "Non-Competition Agreement") with Mr. Pilevsky, Ms. Levine and the Management Company.
PUBLIC STOCK OFFERING. On May 13, 1998, the Company completed an initial primary public stock offering of 7,200,000 shares of Common Stock at $17.50 per share (the "Offering"). The net proceeds totaling approximately $113,000,000 have been used primarily to (i) repay certain mortgage loans and other indebtedness (including accrued expenses incurred in connection with the Formation Transactions and the Offering) of the Operating Partnership and the partnerships or limited liability companies holding fee title to the Properties (collectively the "Property Partnerships"), and (ii) to redeem the Series A Convertible Redeemed Preferred Stock outstanding at December 31, 1997. The ownership of the Operating Partnership is now comprised of a 74.8% general partner interest held by the Company and 25.2% limited partner interest held by the Unit holders. A total 9,812,869 shares of Common Stock (7,340,474) and Units (2,472,395) were outstanding effective as of the completion of the stock offering.
REAL ESTATE INVESTMENT. Beginning in July 1998, the Company purchased, through a series of unrelated transactions, limited partnership interests in nine shopping center properties (the Kmart Properties) anchored by Kmart and comprising approximately 1.1 million square feet of leasable space. During the year ended December 31, 1999, the Company acquired the remaining 57% interest in the Kmart Properties for $30.4 million. The Kmart Properties are located in Florida, California, Washington, Minnesota, Illinois and Kentucky. The reporting of financial position and results of operations of the Kmart Properties by the Company reflects a change from the equity to consolidation method of accounting effective in the third quarter of 1999.
During 1999, the Company substantially completed the development of the 50,000 square foot shopping center in Glen Cove, Long Island. Staples, the anchor tenant, opened its office supply superstore in November 1999. Approximately $4.8 million was expended in 1999 toward completion of the shopping center which is expected to have total development cost of approximately $8.1 million. The Company also completed a 14,000 square foot Walgreen's store in Freeport, Long Island in April 1999 with the expenditure of $1.8 million in 1999 bringing total development cost to $3.5 million.
In March 1999, the Company acquired the remaining 50% interest in a 196,000 square foot shopping center development project in Palm Beach County, Florida for approximately $3.5 million. The reporting of financial position and results of operations of this property by the Company reflects a change from the equity to consolidation method of accounting effective in the first quarter of 1999.
At December 31, 1999, the Company had a $7.1 million joint-venture investment in a proposed retail-residential redevelopment project. Subsequent to year-end, the joint venture sold this project and the Company's investment was returned in full. A shareholder and Unit holder of the Company was also an investor in this joint venture.
The above-referenced investments were funded with borrowings under the Company's revolving line of credit.
LEASING ACTIVITIES
The Company has completed various transactions involving the leasing of available space in the portfolio and the recapture of below market leases with re-tenanting at higher rental levels, which activities are expected to contribute to internal FFO growth. Specifically, during 1999 the Company accomplished the following:
o Recaptured the Caldor's below market space at Elm Plaza in Enfield, Connecticut and leased 88,000 square feet to Kohl's Department Stores effective February 2000.
o Leased 35,000 square feet to Staples at the Central Park Avenue center in Yonkers, New York. The prior tenant's below market space was recaptured simultaneously with the acquisition of the property in 1998.
o Commenced rent collection on 35,000 square feet leased to TJ Maxx in Hialeah, Florida and 34,000 square feet leased to National Wholesale at Forest Avenue Shoppers Town in Staten Island, New York.
o Leased 8,000 square feet of recaptured space to Odd Jobs at Meadowbrook Commons in Freeport, New York, at higher rental level. As previously mentioned, Walgreens, the prior tenant, was relocated to a newly developed 14,000 square foot store in Freeport.
o Leased in excess of 50,000 square feet of space at Palm Springs Mile in Hialeah, Florida to various tenants including David's Bridal (12,000s.f.), Rainbow Crafts (10,000s.f.), Fashion Bug (7,000s.f.), Tops and Bottoms (6,000s.f.), Washington Mutual (6,000s.f.) and Colonial Bank (4,000s.f.).
FINANCING ACTIVITIES. As of December 31, 1999, there was a total of approximately $182.0 million in notes and mortgage debt outstanding which was secured by substantially all of the Company's properties. This total includes approximately $94.2 million in borrowings under the revolving credit facility described below, and approximately $87.8 million of secured fixed rate debt with a weighted average interest rate of 7.6% and a weighted average maturity of 4.8 years. See Note 7 to the Notes to Consolidated Financial Statements for a discussion of the debt encumbering the Company's Properties at December 31, 1999.
CREDIT FACILITY. The Company maintains a $100 million senior revolving credit facility (the "Credit Facility") with a financial services institution. The availability of funds under the Credit Facility is subject to the Company's compliance with a number of customary financial and other covenants. The Credit Facility may be used to finance the Company's acquisition and redevelopment activities and, within limitations, for working capital and general corporate purposes. Borrowings under the Credit Facility are secured by certain Properties with recourse to the Company and the Operating Partnership.
RISK FACTORS
Our results of operations and ability to pay dividends may be affected by the risk factors set forth below. All investors should consider the following risk factors before deciding to purchase securities of the Company. The Company refers to itself as "we" or "our" in the following risk factors.
WE ARE DEPENDENT UPON THE ECONOMICS IN OUR MARKETS AND OF SHOPPING CENTERS GENERALLY.
DEPENDENCE ON CERTAIN MARKET REGIONS. Fourteen of our property interests are located in either of the following major east coast metropolitan regions: (1) the New York, northern New Jersey, Long Island and Connecticut metropolitan market area or (2) the Miami-Fort Lauderdale metropolitan market area. As of December 31, 1999, the total weighted average annualized base rent due under leases with tenants at properties located in such areas represented 77% of our total annualized base rents due under all of our leases. Adverse economic developments in these states could adversely impact the operations of our properties and, therefore, our profitability. Since our portfolio consists primarily of retail properties (as compared to a more diversified portfolio), a decline in the economy or a decline in the demand for retail space may adversely affect our ability to make distributions.
DEPENDENCE ON CERTAIN PROPERTIES. As of December 31, 1999, the total annualized base rent due under leases with tenants at four of our properties located in Hialeah, Florida represented 32% of our total annualized base rents due under all of our leases. Adverse economic developments or a decline in consumer demand for shopping centers in this area or at these four properties could disproportionately and adversely affect our ability to make distributions.
CONFLICTS OF INTEREST COULD ADVERSELY AFFECT OUR OPERATIONS.
POTENTIAL CONFLICTS WITH MANAGEMENT. Our executive officers, including Mr. Philip Pilevsky and Ms. Sheila Levine, direct our day-to-day operations. Philips International Holding Corp., a corporation that Mr. Pilevsky and Ms. Levine own, manages such day-to-day operations pursuant to a management agreement dated December 31, 1997 among us, Philips International Realty, L.P. and Philips International Holding Corp. Mr. Pilevsky also has several other real estate holdings and activities that are not part of our company. A limited number of such holdings are retail properties that may compete with our properties. Personnel of Philips International Holding Corp. will spend some of their time managing the holdings of Mr. Pilevsky. This will prevent such personnel from devoting their efforts full-time to managing our properties. The failure of the such personnel to adequately serve us could adversely affect our business.
POTENTIAL CONFLICTS WITH OTHER REAL ESTATE ACTIVITIES. In connection with our and Philip International Realty, L.P.'s formation in December 1997, we acquired twelve of the thirteen properties we then owned from holders of units of the Philips International Realty, L.P. Certain of these holders, including Mr. Pilevsky and Ms. Levine, continue to hold significant interests in real properties (including retail properties that may compete with our properties) that they owned but did not transfer to us at such time. While an Amended and Restated Non-Competition Agreement dated as of December 31, 1997 among us, Philips International Realty, L.P., Philips International Holding Co., Mr. Pilevsky and Ms. Levine prevents Mr. Pilevsky, Ms. Levine and Philips International Holding Corp. from acquiring, operating and managing or developing certain retail shopping center properties other than through us, it does not restrict their activities with respect to retail properties they owned but did not transfer to us at the time of our formation. As a result, Mr. Pilevsky will devote his professional time to overseeing the management of our properties as well as overseeing the management of other properties. The failure of Mr. Pilevsky to adequately serve us could adversely affect our business.
POTENTIAL CONFLICTS WITH HOLDERS OF UNITS OF PHILIPS INTERNATIONAL REALTY, L.P. Holders of units of Philips International Realty, L.P., including Mr. Pilevsky and Ms. Levine, may have interests that conflict with our and our shareholders' interests. If we (1) sell or refinance certain properties or (2) reduce indebtedness encumbering such properties, holders of units (particularly Mr. Pilevsky and Ms. Levine who previously held interests in our properties) may suffer worse tax consequences than we or our shareholders may suffer. To avoid such consequences, Mr. Pilevsky and Ms. Levine, as executive officers and directors of our company, could (1) influence our board of directors not to sell or refinance a property even though such sale or refinancing might otherwise benefit us or (2) cause us to refinance a property at a higher level of debt than would be in our best interest.
OUR PERFORMANCE IS SUBJECT TO RISKS ASSOCIATED WITH THE REAL ESTATE INDUSTRY.
GENERAL. Our ability to make distributions to our shareholders depends on the ability of our properties to generate funds (including earned income and capital appreciation) in excess of operating expenses (including scheduled principal payments on debt and capital expenditure requirements). Events or conditions that are beyond our control may adversely affect funds from operations and the value of our properties. Such events or conditions could include:
o changes in the general economic climate;
o material and adverse changes in capital market availability of debt and/or equity;
o changes in local conditions such as oversupply of space or a reduction in demand for rental space;
o decreased attractiveness of our properties to potential tenants;
o competition from other available space;
o our inability to provide adequate maintenance;
o increased operating costs, including insurance premiums and real estate taxes, due to inflation and other factors which may not necessarily be offset by increased rents;
o changes in laws and regulations (including tax, environmental and housing laws and regulations) and agency or court interpretations of such laws and regulations and the related costs of compliance;
o changes in interest rate levels and the availability of financing;
o the inability of a significant number of tenants to pay rent;
o our inability to rent space on favorable terms; and
o civil unrest, earthquakes and other natural disasters that may result in uninsured losses.
FINANCIALLY DISTRESSED TENANTS MAY BE UNABLE TO PAY RENT. A tenant may default or file for bankruptcy at any time. If a tenant defaults, we may experience delays and incur substantial costs in enforcing our rights as landlord and protecting our investments. If a tenant files for bankruptcy, a potential court judgment rejecting and terminating such tenant's lease could reduce our cash flow available for distribution. One of our anchor tenants,
Bradlees Stores Inc., currently operates under the protection of the bankruptcy laws. Bradlees Stores Inc. leases 60,000 square feet at Foxboro Plaza. Termination of the lease could temporarily interrupt our rental income from (1) the tenant of the affected space and (2) other tenants at the property whose income depends upon the tenant's presence as an anchor store at such property.
ILLIQUIDITY OF REAL ESTATE LIMITS OUR ABILITY TO ACT QUICKLY. Real estate investments are relatively illiquid. Such illiquidity may limit our ability to vary our portfolio quickly in response to changes in economic and other conditions. If we want to sell a property, we might not be able to dispose of such property in the time period we desire, and the sales price of such property might not recoup or exceed the amount of our investment. The prohibition in the Internal Revenue Code of 1986, as amended, and related regulations on a real estate investment trust holding property for sale also may restrict our ability to sell property. Such limitations on our ability to sell our investments could adversely affect our ability to make distributions.
AMERICANS WITH DISABILITIES ACT COMPLIANCE COULD BE COSTLY. Under the Americans with Disabilities Act of 1990, all public accommodations and commercial facilities must meet certain federal requirements related to access and use by disabled persons. Compliance with the ADA requirements could involve removal of structural barriers to certain disabled persons' accesses. Other federal, state and local laws may require modifications to or restrict further renovations of our properties with respect to such accesses. Although we believe that our properties are substantially in compliance with present requirements, noncompliance with the ADA or related laws or regulations could result in the United States government imposing fines or private litigants being awarded damages against us. Such costs may adversely affect our ability to make distributions.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND MAY BE COSTLY. Various federal, state and local laws and regulations subject property owners or operators to liability for the costs of removal or remediation of certain hazardous or toxic substances located on or in the property. These laws often impose liability without regard to whether the owner or operator was responsible for or even knew of the presence of such substances. The presence of or failure to properly remediate hazardous or toxic substances may adversely affect our ability to rent, sell or borrow against contaminated property. Various laws and regulations also impose on persons who arrange for the disposal or treatment of hazardous or toxic substances at another location liability for the costs of removal or remediation of such substances at the disposal or treatment facility. These laws often impose liability whether or not the person arranging for such disposal ever owned or operated the disposal facility. Certain other environmental laws and regulations impose liability on owners or operators of property for injuries relating to the release of asbestos-containing materials into the air. As owners and operators of property and as potential arrangers for hazardous substance disposal, we may be liable under such laws and regulations for removal or remediation costs, governmental penalties, property damage, personal injuries and related expenses. Payment of such costs and expenses could adversely affect our ability to make distributions.
"Phase I" environmental assessments of our properties were completed by independent environmental consultants. Although this environmental assessment did not reveal any environmental liability that could materially affect our financial condition or results of operations, you should consider that (1) such assessment involved general inspections without soil sampling or ground water analysis and may not have revealed all environmental liabilities, (2) future laws, ordinances or regulations could impose material environmental liability on us and (3) acts by tenants or other third parties and the condition of land near our properties (such as the presence of underground storage tanks) could adversely affect the condition of our properties and subject us to environmental liability.
COMPETITION FOR ACQUISITIONS MAY RESULT IN INCREASED PRICES FOR PROPERTIES. Retailers at our properties face increasing competition from other forms of retailing such as catalogues, discount shopping clubs, telemarketing and electronic commerce. We face increasing competition for prospective tenants with landlords of shopping center properties that may be newer in appearance, better located or better maintained than our properties. Such competition may reduce our cash flow and adversely affect our ability to make distributions by:
o interfering with our ability to attract and retain tenants in our properties or in properties we develop or acquire;
o increasing vacancies which lowers market rental rates and limits our ability to negotiate rental rates;
o and adversely affecting our ability to minimize expenses of operation.
REDEVELOPMENT AND DEVELOPMENT OF REAL ESTATE COULD BE COSTLY. As part of our strategy, we actively pursue (1) redevelopment projects and (2) development projects. In addition to the risks involved in the ownership and operation of established retail properties, included among the risks of redevelopment or development projects that may adversely affect our cash available for distribution are the following:
o failure to complete construction on schedule or within budget may increase debt service expense and construction costs;
o we may incur predevelopment costs for projects we do not complete;
o inadequate occupancy or rental rates of a completed project may affect our ability to pay operating expenses or earn our targeted rate of return on our investment;
o an unsuccessful project could cause our losses to exceed our investment in such project;
o financing for redevelopment and newly developed projects may not be available to us on favorable terms;
o long-term financing may not be available upon completion of construction; and
o our distribution of 95% of our real estate investment trust taxable income (to maintain our qualification as a real estate investment trust) will limit our ability to rely upon income or cash flow from operations to finance acquisitions or new developments.
UNINSURED LOSSES MAY ADVERSELY AFFECT OUR CASH FLOW. We carry comprehensive liability, fire, flood, extended coverage and rental loss insurance. Our insurance policies contain specifications, limits and deductibles comparable to those typically contained in policies covering similar properties. We also carry owner's title insurance policies on all of our properties for amounts that may be less than the full value of our properties. If an uninsured loss or a loss from a title defect to a property in excess of insured limits occurs, we could lose all or part of our investment in and anticipated profits and cash flows from such property. In the case of a title defect, we could remain obligated for any recourse mortgage indebtedness or other financial obligations related to such property. Any of such losses could adversely affect our ability to make distributions.
DEBT FINANCING COULD ADVERSELY AFFECT OUR ECONOMIC PERFORMANCE.
SCHEDULED DEBT PAYMENTS AND REFINANCING COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION. We are subject to the risks normally associated with debt financing, including the following:
o our cash flow may be insufficient to meet required payments of principal and interest;
o payments of principal and interest on borrowings may leave us with insufficient cash resources to pay operating expenses;
o we may not be able to refinance indebtedness on our properties at maturity;
o the terms of refinancing may not be as favorable as the terms of the related indebtedness; and
o we could become more highly leveraged (because our policies and organizational documents do not limit the amount of debt, ratio of debt to total market capitalization or percentage of indebtedness we may incur) and, therefore, default on our obligations and debt service requirements.
As of December 31, 1999, we had outstanding an aggregate of approximately $182 million of mortgage indebtedness (including approximately $94.2 million in borrowings under our revolving credit facility).
Because we may not be able to pay all of our mortgage indebtedness prior to maturity with our internally generated cash, we may need to repay such debt through refinancings and/or equity offerings. If we are unable to refinance our indebtedness on acceptable terms, or at all, events or conditions that may adversely affect our cash flow and ability to make distributions include the following:
o we may need to dispose of one or more of our properties upon disadvantageous terms;
o prevailing interest rates or other factors at the time of refinancing could increase interest rates and, therefore, our interest expense;
o if we mortgage a property to secure payment of indebtedness and are unable to meet mortgage payments, the mortgagee could foreclose upon such property or appoint a receiver to receive an assignment of our rents and leases;
o certain of our mortgages encumbering properties have "cross default" or "cross collateralization" provisions that entitle the secured lender to certain remedies (including foreclosure) against more than one property; and
o foreclosures upon mortgaged property could create taxable income without accompanying cash proceeds and, therefore, hinder our ability to meet the real estate investment trust distribution requirements of the Internal Revenue Code.
RISING INTEREST RATES MAY ADVERSELY AFFECT OUR CASH FLOW. Advances under our $100 million senior revolving credit facility bear interest at rates ranging from 1.25% to 1.75% over the 30-day London Interbank Offered Rate, based on the level of borrowings outstanding relative to collateral value. We may incur additional debt in the future that also bears interest at variable rates. Variable rate debt creates higher debt service requirements if market interest rates increase. Higher debt service requirements could adversely affect our cash flow and ability to make distributions or cause us to default under certain debt covenants.
WE ARE DEPENDENT UPON OUR KEY PERSONNEL WHOSE CONTINUED SERVICE IS NOT GUARANTEED.
We are dependent upon our executive officers for strategic business direction and real estate experience. While we believe that we could find replacements for these key personnel, loss of their services could adversely affect our operations. We cannot assure you that any of our executive officers will remain with us. We have entered into employment agreements with Louis J. Petra, Sheila Levine, Brian J. Gallagher and Carl Kraus. Although we do not expect to enter into an employment agreement with Philip Pilevsky, Mr. Pilevsky has a significant ownership interest in our company. We also have entered into a non-competition agreement with each of Mr. Pilevsky and Ms. Levine that prevents them from engaging in certain retail real estate activities.
INABILITY TO MAKE REQUIRED DISTRIBUTIONS TO SHAREHOLDERS COULD AFFECT OUR REAL ESTATE INVESTMENT TRUST STATUS.
For the Internal Revenue Service to treat us as a real estate investment trust under the Internal Revenue Code, we must distribute to our shareholders at least 95% of our real estate investment trust taxable income each year. We cannot assure you that we will satisfy the annual distribution requirement to qualify as a real estate investment trust.
RELIANCE ON BOARD OF DIRECTORS TO DETERMINE DISTRIBUTIONS. Much of our income will consist of our allocable share of the income of Philips International Realty, L.P. and much of our cash flow will consist of distributions from Philips International Realty, L.P. Our board of directors will determine distributions by Philips International Realty, L.P. In making such determination, the board of directors may consider many factors, including the following:
o the amount of cash available for distribution;
o Philips International Realty, L.P.'s financial condition;
o Philips International Realty, L.P.'s capital expenditure requirements;
o the annual distribution requirement under the real estate investment trust provisions of the Internal Revenue Code; and
o such other factors as our board of directors deems relevant.
RISK OF BORROWING FUNDS TO MEET DISTRIBUTION REQUIREMENTS. We may need to borrow funds on a short-term or long-term basis to meet the distribution requirements for real estate investment trust qualification even if the then prevailing market conditions are not favorable for borrowings. Our need to borrow such funds depends on (1) differences in timing between the receipt of income and the payment of expenses in arriving at taxable income (of us or Philips International Realty, L.P.) and (2) the effect of nondeductible capital expenditures, the creation of reserves or required debt amortization payments.
CONSEQUENCES OF FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
Our failure to qualify as a real estate investment trust for federal income tax purposes could adversely affect our financial and other conditions.
TAX LIABILITIES AS A CONSEQUENCE OF FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST. We believe we have operated so as to qualify as a real estate investment trust for federal income tax purposes since our taxable year ended December 31, 1997. Although we believe we will continue to operate in such manner, we cannot guarantee you that we will. Qualification as a real estate investment trust depends on our meeting various requirements (some on an annual and quarterly basis) established under highly technical and complex tax provisions of the Internal Revenue Code. Because few judicial or administrative interpretations of such provisions exist and qualification determinations are fact sensitive, we cannot assure you that we will qualify as a real estate investment trust for any taxable year.
If we fail to qualify as a real estate investment trust in any taxable year, we will be subject to the following:
o we will not be allowed a deduction for distributions to shareholders;
o we will be subject to federal income tax at regular corporate rates, including any alternative minimum tax, if applicable; and
o unless we are entitled to relief under certain statutory provisions, we will not be permitted to qualify as a real estate investment trust for the four taxable years following the year during which we were disqualified.
A loss of real estate investment trust status would reduce our net earnings available for investment or distribution to our shareholders. Failure to qualify as a real estate investment trust also would eliminate the requirement that distributions to our shareholders be made.
OTHER TAX LIABILITIES. Even if we qualify as a real estate investment trust, we are subject to certain federal, state and local taxes on our income and property and, in some circumstances, certain other state taxes.
RISK OF CHANGES IN THE TAX LAW APPLICABLE TO REAL ESTATE INVESTMENT TRUSTS. Since the Internal Revenue Service, the United States Treasury Department and Congress frequently review federal income tax legislation, we cannot predict whether, when or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted. Any of such legislative action may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of us or our shareholders.
CERTAIN PROVISIONS OF LAW MAY INHIBIT CHANGES IN CONTROL.
Certain provisions of the Maryland General Corporation Law, our articles of incorporation, our by-laws, our shareholder rights plan and Philips International Realty, L.P.'s partnership agreement may (1) inhibit a change in control of our company, (2) inhibit the removal of existing management or (3) prevent us from paying you a premium for your shares of our common stock over the then-prevailing market prices.
STAGGERED BOARD OF DIRECTORS. We divide our board of directors into three classes serving staggered three-year terms. This may inhibit a change in control of our company.
NEW CLASSES AND SERIES. Under our articles of incorporation, our board of directors may create new classes and series of securities and establish preferences and rights of such classes and series. Our issuance of additional classes or series of our capital stock may inhibit a change of control of our company.
OWNERSHIP LIMIT. Under our articles of incorporation and certain resolutions of our board of directors, no one may acquire or own more than 8% of the outstanding shares of our capital stock (except for Mr. Pilevsky who may own up to 17.5% of such shares) and no one may own or acquire shares of any class of our capital stock that would (1) cause five or fewer persons to own more than 50% in value of our shares of capital stock or (2) otherwise cause us to fail to qualify as a real estate investment trust. Such ownership limit may:
o discourage a change of control of our company;
o deter tender offers for our capital stock that you may find attractive; or
o limit your opportunity to receive a premium for your capital stock that might otherwise exist if an investor attempted to assemble a block of capital stock in excess of the ownership limit or to effect a change in control of our company.
RIGHTS OF LIMITED PARTNERS. Under Philips International Realty, L.P.'s partnership agreement, we may not engage in any of the following transactions unless all limited partners of Philips International Realty, L.P. will receive (or have the right to receive) for each unit an amount of cash, securities or other property equal to the product of (1) the number of shares of our common stock for which each unit is redeemable and (2) the greatest amount of cash, securities or other property paid to the holder of shares of common stock pursuant to the terms of such transaction:
o a merger, consolidation or other combination with or into another person;
o a sale of all or substantially all of our assets; or
o any reclassification, recapitalization or change of our outstanding equity interests.
If, in connection with any of the above transactions, the holders of outstanding shares of our common stock accepts a purchase, tender or exchange offer, each holder of units of Philips International Realty L.P. will receive (or have the right to receive) the greatest amount of cash, securities or other property which such holder would have received had it (1) exercised its right to redemption and (2) received shares of common stock in exchange for its units immediately prior to the expiration of such purchase, tender or exchange offer and then accepted such purchase, tender or exchange offer.
SHAREHOLDER RIGHTS PLAN. Our Board of Directors adopted a Shareholder Rights Plan effective as of March 31, 1999. The Rights Plan provides for a non-cash distribution of rights to purchase, for $55.00 each, a fraction of a share of a new series of preferred stock, exercisable upon the occurrence of certain events. Generally, upon the earlier to occur of (i) ten calendar days following the date of public announcement that a person or group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of fifteen percent (15%) or more of our outstanding common stock or (ii) ten calendar days following the commencement of, or public announcement of an intent to commence, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of fifteen percent (15%) or more of our outstanding common stock, you, as a holder of a right, will have the right to receive, upon exercise, common stock having a market value equal to $110. Once any person or group becomes an acquiring person, all rights that are or were beneficially owned by any such acquiring person will be null and void.
The Rights Plan contains provisions to safeguard your interests in the event of an unsolicited offer to acquire us. However, because our Board of Directors can redeem the rights in certain circumstances, the Rights Plan will not prevent our acquisition on terms that our Board of Directors considers favorable and fair to you.
OUR BOARD OF DIRECTORS MAY CHANGE INVESTMENT AND FINANCING POLICIES WITHOUT YOUR VOTE.
GENERAL. Our board of directors determines (1) our investment and financing policies, (2) our growth strategy, and (3) our debt, capitalization, distribution and operating policies. At any time and without your approval, the board of directors may revise or amend these policies and strategies. Such changes could adversely affect our financial condition or results of operations, and, therefore, our ability to make distributions.
ISSUANCE OF ADDITIONAL SECURITIES. You do not have any preemptive right to acquire any common stock or other equity or debt securities we may offer. Any such issuance of securities could dilute your investment.
RISKS INVOLVED IN ACQUISITIONS THROUGH PARTNERSHIPS OR JOINT VENTURES. We may invest in properties through partnerships or joint ventures. Partnership or joint venture investments may involve risks not involved with direct acquisitions that include the following:
o a co-venturer or partner in an investment may become bankrupt;
o a co-venturer's or partner's economic or business interests or goals may conflict with our interests or goals;
o a co-venturer or partner may act contrarily to our instructions, requests, policies or objectives; and
o our articles of incorporation do not limit the amount we may invest in such joint ventures or partnerships.
RISKS OF INVESTING IN SECURITIES OF ENTITIES OWNING REAL ESTATE. We may acquire securities of entities that own real estate. Because of ownership limits and gross income requirements we must meet to maintain our real
estate investment trust qualification, we may not be able to control (1) the ownership, operation and management of the underlying real estate or (2) the distributions with respect to such securities. Our lack of control could adversely affect our ability to make required distributions.
RISKS OF INVESTING IN MORTGAGES. We may invest in mortgages. Investments in mortgages may include the following risks that may adversely affect our ability to make distributions:
o borrowers may be unable to make debt service payments or pay principal when due;
o the principal of the mortgage note securing a property may exceed the value of the mortgaged property; and
o interest rates payable on the mortgages may be lower than our cost of funds to acquire such mortgages.
ADVERSE EFFECT OF INCREASING MARKET INTEREST RATE LEVELS ON PRICE OF COMMON STOCK.
The annual distribution rate on the price paid for shares of our common stock (compared to rates on alternative investments) may influence the public market price of our common stock. An increase in general interest rate levels may lead purchasers of our common stock to demand a higher annual distribution rate. Such demands could adversely affect the market price of our common stock.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS.
The Company considers portions of this information to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that expectations will be achieved.
ITEM 2.
ITEM 2. PROPERTIES
GENERAL
As of December 31, 1999, the Company held interests in 26 retail properties, plus 2 development sites, (the Properties) encompassing 3.9 million square feet of GLA. Information concerning the Properties is set forth in the following Property Summary Data chart.
The Company's neighborhood and community shopping centers usually are anchored by national or regional retailers. As long-time participants in the shopping center industry, management has established close relationships with a large number of major national and regional retailers. As of December 31, 1999, the Properties were 90% leased to 393 tenants with 82% of the total GLA leased to national and regional retailers. Twenty-one (21) of the Properties are anchored by national or regional supermarkets or discount department stores such as Publix Supermarkets, Inc., Winn-Dixie Stores Inc., Waldbaums/APW Supermarkets, Inc. and Kmart. The Company believes the strength of these discount department stores and grocery retailers, as well as other key anchor tenants, provide the Properties with consistent consumer traffic and enable the Company to attract additional quality anchor retailers, as well as quality national, regional and local non-anchor retailers.
PROPERTY SUMMARY DATA
The following table sets forth certain information relating to each of the Properties at December 31, 1999.
- ------------------
(1) Total annualized contractual base rent for all leases in place at December 31, 1999. Amount excludes (i) future contractual rent escalations and cost of living increases; (ii) percentage rent and (iii) additional rent payable by tenants such as common area maintenance, real estate taxes and other expense reimbursements.
(2) Total annualized contractual base rent divided by total GLA leased at December 31, 1999.
(3) Property was developed by the Company.
(4) Development of the Properties commenced in 1958. Substantial redevelopment and expansion has been ongoing since 1985, when the Properties were acquired by the Philips Group.
* Retail GLA only (excludes residential premises under redevelopment).
** Weighted by the Company's share of ownership.
OCCUPANCY
During the past five years the portfolio occupancy and total annualized contractual base rent per square foot for its wholly-owned shopping center properties were as follows:
- ------------------ (1) Total annualized contractual base rent for all leases in place at December 31 for the respective years indicated, divided by total GLA leased at such dates. Amount excludes (i) future contractual rent escalations and cost of living increases, (ii) percentage rent and (iii) additional rent payable by tenants such as common area maintenance, real estate taxes and other expense reimbursements.
At December 31, 1999, Kmart Corporation was the largest tenant representing approximately 11.1% of the Company's annualized base rental revenues. No other tenant accounted for more than 4.0% of revenues.
LEASE EXPIRATIONS
The following table sets forth all scheduled lease expirations for the Properties beginning January 1, 2000, assuming that none of the tenants exercises renewal options or termination rights:
- ------------------------ (1) Total annualized contractual base rent for all leases in place at December 31, 1999. Amount excludes (i) future contractual rent escalation and cost of living increases, (ii) percentage rent and (iii) additional rent payable by tenants such as common area maintenance, real estate taxes and other expense reimbursement. (2) Total annualized contractual base rent divided by total GLA leased at December 31, 1999.
TAX BASIS AND REAL ESTATE TAXES
The aggregate cost basis of depreciable real property for federal income tax purposes in the Properties as of December 31, 1999 was approximately $158.8 million. Depreciation and amortization are provided on the straight line and double declining balance methods over the estimated useful lives of the assets, which range from 15 to 39 years. The aggregate real estate tax obligations on the Properties during the fiscal year ended December 31, 1999 was approximately $6.8 million, or approximately $1.74 per square foot of GLA. Virtually all of the Company's leases contain provisions requiring tenants to pay as additional rent a proportionate share of real estate tax increases, including real estate tax increases resulting from improvements.
SIGNIFICANT PROPERTIES
Since the 1999 aggregate gross revenues for the Company's four Properties located in Hialeah, Florida amounted to more than 10% of the total gross revenues for the Properties during such year, additional information regarding these Properties is provided below.
HIALEAH, FLORIDA PROPERTIES. The Hialeah, Florida Properties consist of four adjacent Properties, which include Mall on the Mile, Palm Springs Village, The Shops on 49th Street, and Philips Plaza, with an aggregate of 1.2 million square feet of GLA. Hialeah is situated in the greater Miami metropolitan area, north of the Miami International Airport, west of the municipalities of Miami, Miami Beach and Aventura, and south of Broward County and Fort Lauderdale. The four Properties form a unique, one-mile retail shopping corridor that fronts both sides of West 49th Street, locally known as "Palm Springs Mile." The collective 90 acres of the four Properties facilitate the expansion or reconfiguration of existing space, which has been regularly expanded by the Company since 1985.
The following table sets forth the percent leased and total annualized contractual base rent per leased square foot for Palm Springs Mile as of the dates indicated:
- ------------------
(1) Total annualized contractual base rent for all leases in place at December 31 for the respective years indicated, divided by total GLA leased at such dates. Amount excludes (i) future contractual rent escalations and cost of living increases, (ii) percentage rent and (iii) additional rent payable by tenants such as common area maintenance, real estate taxes and other expense reimbursements.
The following table sets forth all scheduled lease expirations for Palm Springs Mile beginning January 1, 2000, assuming that none of the tenants exercises renewal options or termination rights:
- ------------------
(1) Total annualized contractual base rent for all leases in place at December 31, 1999. Amount excludes (i) future contractual rent escalations and cost of living increases, (ii) percentage rent and (iii) additional rent payable by tenants such as common area maintenance, real estate taxes and other expense reimbursements.
(2) Total annualized contractual base rent divided by total GLA leased at December 31, 1999.
The aggregate cost basis of depreciable real property for federal income tax purposes for Palm Springs Mile at December 31, 1999 was approximately $32.8 million. Depreciation and amortization are provided on the straight line and double declining balance methods over the estimated useful lives of the assets, which range from 15 to 39 years. The aggregate real estate tax obligations for Palm Springs Mile during the fiscal year ended December 31, 1999 was approximately $1.6 million, or approximately $1.35 per square foot of GLA.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved in any litigation nor to its knowledge is any litigation threatened against the Company or its subsidiaries that, in management's opinion, would result in any material adverse effect on the Company's ownership, management or operation of its properties, or which is not covered by the Company's liability insurance.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in the fourth quarter of the year ended December 31, 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the NYSE under the ticker symbol "PHR" and began trading on May 8, 1998.
Market Information
The following table sets forth the quarterly high, low and closing price per share of Common Stock reported on the NYSE for the years ended December 31, 1999 and 1998:
On March 15, 2000, the closing Common Stock sales price on the NYSE was $16.31 per share.
Holders
On March 15, 2000, the Company had 1,212 common shareholders of record.
Recent Sales of Unregistered Securities
In connection with the Formation Transactions, the Properties or partnership or membership interests in the Properties were contributed to the Operating Partnership in exchange for 2,472,395 Units. All of such equity issuances were issued to the holders directly by the Company without use of an underwriter or placement agent and without registration under the Securities Act of 1933, as amended, pursuant to the private placement exemption contained in Section 4(2) of such Act. The Units are redeemable, at the Unitholder's request; such Units will be redeemed, at the Company's option and in its sole discretion, either for shares of Common Stock on a one-for-one basis (subject to certain anti-dilution adjustments and exceptions) and/or cash (based upon the fair market value of an equivalent number of shares of Common Stock at the time of redemption).
Dividends and Distributions
The Company intends to make regular quarterly distributions to holders of the Common Stock. Since completion of the Offering on May 13, 1998, the Company has paid distributions on its Common Stock as follows:
For income tax purposes, 100% of the dividends for 1999 and 1998 totalling $1.3628 and $.6667, per share respectively, represented ordinary dividend income to stockholders.
Future distributions by the Company will be determined by the Board of Directors and will be dependent upon a number of factors. In addition, in order to maintain its qualification as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), the Company is, in general, required to distribute currently 95% of its taxable income.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating information for: (i) Philips International Realty Corp. as of and for the years ended December 31, 1999 and 1998 (see Footnote 1 to the following table); and (ii) for The Philips Company (consisting of ten Properties accounted for on a combined basis and two Properties accounted for on an equity basis) on a combined basis as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1997. This information should be read in conjunction with all of the financial statements and the notes thereto appearing elsewhere in this Form 10-K. The audited financial information for The Philips Company as of and for the years ended December 31, 1996 and 1995 presented herein is derived from the audited combined financial statements of The Philips Company and the notes thereto which do not appear in this Form 10-K.
THE COMPANY AND THE PHILIPS COMPANY (COMBINED) (Dollars in thousands, except per share data)
- ------------------ (1) The Company was formed in July 1997 and incurred general and administrative expenses of $543 for the period ended December 31, 1997. However, it did not commence operations until the consummation of the Formation Transactions as of the close of business on December 31, 1997. Therefore, separate summary data for the Company is not presented above for this period. As of December 31, 1997, the Company had total assets of $2.3 million and shareholders' equity of $2.2 million.
(2) No 1997 balance sheet or other data is presented for The Philips Company as of December 31, 1997 because the Formation Transactions were consummated as of the close of business on such date and the Properties were transferred to the Property Partnerships.
(3) The White Paper on Funds from Operations approved by the Board of Governors of NAREIT in March 1995 defines Funds from Operations as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. The Company believes that Funds from Operations is helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, it
(Footnotes continued on next page)
(Footnotes continued from previous page)
provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. The Company computes Funds from Operations in accordance with standards established by NAREIT which may not be comparable to Funds from Operations reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than the Company. Funds from Operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make cash distributions.
(4) Pro forma giving retroactive effect to the Offering as if it had occurred January 1, 1998.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying Philips International Realty Corp. Consolidated Financial Statements and Notes thereto, and the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
When used in this Annual Report on Form 10-K, the words "may", "will", "expect", "anticipate", "continue", "estimate", "project", "intend" and similar expressions are intended to identify forward-looking statements regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, results of operations and financial position. Such forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Actual results may differ materially from those included within the forward-looking statements as a result of various factors.
Prior to completion of the public stock offering referred to in Note 2 to the accompanying Consolidated Financial Statements, the Company and its subsidiaries held a 6.1% non-managing general partnership interest in the Operating Partnership (which held a 99.989% limited partner or member interest in each of the Property Partnerships) and .01% non-managing general partner/member interests in the Property Partnerships, respectively. Accordingly, the Company accounted for its investments in the Operating Partnership and the Property Partnerships on the equity method from January 1 through May 12, 1998.
The following discussion compares (i) the results of operations for the year ended December 31, 1999 with the results of property operations of the Company as if the Property Partnerships had been consolidated for the full year ended December 31, 1998, and (ii) the results of property operations of the the Company as if the Property Partnerships had been consolidated for the full year ended December 31, 1998, with the results of property operations of The Philips Company and the Merrick Commons and Mill Basin Plaza properties for the year ended December, 1997. A comparison of the Company's reported results of operations for calendar year 1998 and 1997 would not be meaningful since operations did not commence until consummation of the Formation Transactions on December 31, 1997.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998
Revenues from rental property increased $7,608,000 or 21.8% to $42,457,000 for the year ended December 31, 1999, as compared with $34,849,000 for the year ended December 31, 1998. This net increase is largely due to growth in base rental revenues associated with the acquisition of shopping center properties, the leasing of available premises in the portfolio and higher rent levels achieved on new and renewal leases.
Property operating expenses increased $185,000 from $4,718,000 for the year ended December 31, 1998, to $4,903,000 for the year ended December 31, 1999. This net increase reflects increased expenses associated with the acquisition of shopping center properties partially offset by management's efforts to reduce operating expenses at existing properties. Property real estate taxes increased by approximately $1,312,000 between the corresponding periods, reflecting the acquisition of shopping center properties and the effect of increased assessments associated with property expansions and renovations.
Management fees remained constant at approximately 3% of gross revenues for the years ended December 31, 1999, and 1998, as provided for in the Management Agreement.
Interest charges decreased $30,000 to $9,552,000 for the year ended December 31, 1999, as compared with $9,582,000 for the year ended December 31, 1998, reflecting the repayment of indebtedness with proceeds of the Company's initial public offering as discussed in Note 3, partially offset by interest costs on borrowings to fund the acquisition of shopping center properties.
Depreciation and amortization expenses increased $1,414,000 to $7,243,000 for the year ended December 31, 1999, as compared with $5,829,000 for the year ended December 31, 1998. This increase reflects the depreciation and amortization of capital expenditures associated with the acquisition of shopping center properties and renovation and retenanting of properties in the portfolio.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997. Revenues from rental property increased $2,912,000 or 9.1% to $34,849,000 for the year ended December 31, 1998, as compared with $31,937,000 for the year ended December 31, 1997. This net increase is largely due to growth in base rental revenues associated with the leasing of available premises in the portfolio, higher rent levels achieved on new and renewal leases and the acquisition of the Lake Mary, Florida, and Munsey Park, New York, properties.
Property operating expenses and management fees increased $212,000 from $5,557,000 for the year ended December 31, 1997, to $5,769,000 for the year ended December 31, 1998. This net increase reflects moderate increases in certain seasonal operating expenses and increased expenses associated with the acquisition of the Lake Mary, Florida, and Munsey Park, New York properties, offset by a reduction in property management expenses reflecting the economies of scale achieved in conjunction with the Offering. Property real estate taxes increased by approximately $368,000 or 7.9% between the corresponding periods, reflecting the acquisition of the Lake Mary, Florida, and Munsey Park, New York properties and the effect of increased assessments associated with property expansions and renovations, offset by management's continuing efforts to secure property tax reductions.
Interest charges decreased $5,429,000 or 36.2% to $9,582,000 for the year ended December 31, 1998, as compared with $15,011,000 for the year ended December 31, 1997, primarily due to the repayment of indebtedness with proceeds of the Offering as discussed in Note 2 to the accompanying financial statements.
Depreciation and amortization expenses increased $883,000 or 17.9% to $5,829,000 for the year ended December 31, 1998, as compared with $4,946,000 for the year ended December 31, 1997. This increase reflects the depreciation and amortization of (i) capital expenditures associated with the renovation and retenanting of properties in the portfolio, (ii) increased carrying values related to the acquisition of non-sponsor interests in the Company's properties, and (iii) the acquisition of the Lake Mary, Florida, and Munsey Park, New York properties.
LIQUIDITY AND CAPITAL RESOURCES
The Philips Company historically relied on fixed and floating rate mortgage financing to fund acquisitions and refinance maturing debt. Working capital and funds required for distributions, debt service and capital expenditures were generally provided through net cash flows from operations and, in certain instances, capital contributions of partners and/or additional borrowing. The ability to refinance debt prior to maturity and to fund acquisitions was generally dependent upon interest rates, the general availability of both mortgage debt and private equity in the marketplace and the cash flow and value of the asset to be financed or refinanced. Distributions were generally made based upon 100% of excess cash over identified, near-term requirements.
The Company believes that the Offering improved its financial position, principally through enabling the Company to substantially delever its shopping center portfolio. In connection with the Offering, the Company utilized the approximately $109 million net proceeds to repay all of its then outstanding floating-rate debt and certain secured, fixed-rate obligations. The secured, fixed-rate debt then remaining, totaling approximately $71.5 million, had a weighted average interest rate and term to maturity of 7.6% and 5.2 years, respectively. The significant reduction in the Company's overall debt served to reduce annual mortgage interest expense as a percentage of total revenue and the cash from operations required to fund debt service requirements.
As described in Note 15 to the accompanying Consolidated Financial Statements, the Company has financed the acquisition of real estate interests during the year ended December 31, 1999 primarily with borrowings under the Company's line of credit.
As of December 31, 1999, based upon the closing price for the Company's Common Stock in trading on the NYSE of $16.4375 per share, the Company's ratio of total debt to total debt and equity market capitalization was 53%. The Company considers the availability of funds under its revolving credit facility described below and its access to other sources of debt and equity capital sufficient to pursue its identified growth strategies.
The Company intends to make regular quarterly distributions to the holders of its Common Stock. See "Item 5. Market for Registrant's Common Stock and Related Stockholder Matters."
The Company expects to invest temporarily available cash in short-term, investment-grade interest bearing securities, such as securities of the United States government or its agencies, high-grade commercial paper and bank deposits.
The Company expects to meet its short-term liquidity requirements generally through net cash provided by operations. The Company believes that its net cash provided by operations will be sufficient to allow the Company to make distributions necessary to enable the Company to continue to qualify as a REIT. The Company also believes that the foregoing sources of liquidity will be sufficient to fund its short-term liquidity needs for the foreseeable future.
The Company expects to meet its long-term liquidity requirements, such as property acquisition and development, scheduled debt maturities, renovations, expansions and other non-recurring capital improvements through long-term secured and unsecured indebtedness and the issuance of additional equity or debt securities. The Company also expects to use funds available under its credit facility to finance acquisition and development activities and capital improvements on an interim basis.
Upon consummation of the Offering, the Company entered into a $100 million senior revolving credit facility with a financial services institution to finance acquisition, redevelopment and development activities and for general corporate purposes. Borrowings under the credit facility bear interest at rates ranging from 1.25% to 1.75% over the 30-day London Interbank Offered Rate ("LIBOR") based on the Company's total indebtedness outstanding relative to total assets, as defined. The availability of funds under the credit facility will be subject to the Company's compliance with a number of customary financial and other covenants. Borrowings under the credit facility, totaling approximately $94.2 million at December 31, 1999, are secured by certain shopping center properties with recourse to the Company. The credit facility matures in May 2000, subject to extension upon mutual agreement of the parties.
FUNDS FROM OPERATIONS
The White Paper on Funds from Operations approved by the Board of Governors of NAREIT in March 1995 defines Funds from Operations as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. The Company believes that Funds from Operations is helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash requirements. The Company computes Funds from Operations in accordance with standards established by NAREIT which may not be comparable to Funds from Operations reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than the Company. Funds from Operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash requirements, including its ability to make cash distributions.
Funds from Operations for the years ended December 31, 1999 and 1998, totaled approximately $19,113,000 and $15,533,000, respectively. The 1998 calendar year pro forma figure gives retroactive effect as of January 1, 1998, to the Offering completed May 13, 1998, and reflects adjustments consistent with those noted in the Company's Registration Statement on Form S-11. Funds from Operations have been determined as follows:
CALCULATION OF FUNDS FROM OPERATIONS (In thousands)
- ------------------ (1) Company share of write off of deferred financing costs and prepayment penalties incurred in connection with the satisfaction of mortgages and other loans with proceeds of the Offering.
(2) Company share of depreciation and amortization charges in unconsolidated real estate joint ventures.
(3) Non-recurring adjustments consistent with those noted in Form S-11 Registration Statement necessary to give effect to completion of the May 1998 Offering as of January 1, 1998.
CASH FLOWS
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO DECEMBER 31, 1998. Net cash provided by operating activities increased from $6,494,000 in 1998 to $15,784,000 in 1999 primarily due to acquisitions of new properties and reporting a full year of operations in 1999 compared to 1998. Prior to completion of the public stock offering, the Company accounted for its investments in the Operating Partnership and the Property Partnerships on the equity method from January 1, 1998 to May 12, 1998. Thereafter, the Company accounted for its interest in the properties on a consolidated basis effective as of the completion of the IPO on May 13, 1998. Net cash used in investing activities increased from $47,300,000 in 1998 to $51,760,000 in 1999 reflecting increased acquisition activity. Net cash provided by financing activities decreased from $49,922,000 in 1998 to $30,044,000 in 1999. The May 1998 IPO generated proceeds of $113,027,000 of which $109,304,000 was used
to repay mortgage debt. In 1999, the dividends paid on common stock of $10,791,000 and distributions to minority interest of $3,634,000 reflect a full calendar year and an increase in the quarterly distribution to $.3775 per share from $.3375 in 1998. Cash and cash equivalents decreased by $5,933,000 in 1999 compared to an increase of $9,116,000 in 1998 resulting primarily from the aforementioned IPO proceeds in 1998.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997. As discussed in Notes 1 and 2 to the accompanying Consolidated Financial Statements, the Company was required to account for its interests in the Operating Partnership and the Property Partnerships on the equity method prior to the completion of the Offering. The Operating Partnership and the Property Partnerships had no business operations during 1997. Consequently, a comparison of cash flows for the years ended December 31, 1998 and 1997 would not be meaningful. Net cash flows provided by operating and financing activities totaled $6,494,000 and $49,922,000, respectively, during the calendar year 1998. Such cash flows were used to fund $47,300,000 in real estate investments and to increase cash reserves to $9,100,000.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in information and operating systems and believes those systems successfully responded to the Year 2000 date change. The cost directly associated with Year 2000 compliance was not material to the Company's financial condition or results of operations. The Company is not aware of any material problems resulting from Year 2000 issues, and will continue to monitor its systems and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.
INFLATION
Substantially all of the Company's leases contain provisions designed to mitigate the adverse impact of inflation. Such provisions include clauses enabling the Company to receive percentage rentals based on tenants' gross sales, which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of the leases. Such escalation clauses are often related to increases in the consumer price index or similar inflation indices. In addition, many of the Company's leases are for terms of less than 10 years, which permits the Company to seek to increase rents upon re-rental at market rates. Most of the Company's leases require the tenant to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increase in costs and operating expenses resulting from inflation.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Note 7 to Notes to Consolidated Financial Statements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Regulation S-X are included in this Annual Report on Form 10-K commencing on page 29.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference from the Company's definitive proxy statement relating to its Annual Meeting of Shareholders to be held on May 30, 2000.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the Company's definitive proxy statement relating to its Annual Meeting of Shareholders to be held on May 30, 2000.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the Company's definitive proxy statement relating to its Annual Meeting of Shareholders to be held on May 30, 2000.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the Company's definitive proxy statement relating to its Annual Meeting of Shareholders to be held on May 30, 2000.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS AND REPORTS OF INDEPENDENT AUDITORS
(a) 2. FINANCIAL STATEMENT SCHEDULES
Schedule III--Real Estate and Accumulated Depreciation as of December 31, 1999...........................................49
All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.
(a) 3. EXHIBITS
- ------------------
* filed herewith
(B) REPORTS ON FORM 8-K
The Company did not file a Current Report on Form 8-K in the fourth quarter of 1999.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors Philips International Realty Corp.
We have audited the accompanying balance sheets of Philips International Realty Corp. as of December 31, 1999, and 1998 and the related statements of income/operations, shareholders' equity and cash flows for each of the two years in the period ended December 31, 1999, and the period July 16, 1997, (Incorporation) to December 31, 1997. We have also audited the financial statement schedule listed on the Index at Item 14(a). These financial statements are the responsibility of the management of Philips International Realty Corp. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Philips International Realty Corp. as of December 31, 1999, and 1998 and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1999, and the period July 16, 1997, to December 31, 1997, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
ERNST & YOUNG LLP
New York, New York March 1, 2000
PHILIPS INTERNATIONAL REALTY CORP. CONSOLIDATED BALANCE SHEETS
See accompanying notes.
PHILIPS INTERNATIONAL REALTY CORP. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED
See accompanying notes.
PHILIPS INTERNATIONAL REALTY CORP. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
See accompanying notes.
PHILIPS INTERNATIONAL REALTY CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
See accompanying notes.
PHILIPS INTERNATIONAL REALTY CORP. STATEMENT OF OPERATIONS FOR THE PERIOD JULY 16, 1997 (INCORPORATION) TO DECEMBER 31, 1997 (IN THOUSANDS)
See accompanying notes.
PHILIPS INTERNATIONAL REALTY CORP. STATEMENT OF SHAREHOLDERS' EQUITY FOR THE PERIOD JULY 16, 1997 (INCORPORATION) TO DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying notes.
PHILIPS INTERNATIONAL REALTY CORP. STATEMENT OF CASH FLOWS FOR THE PERIOD JULY 16, 1997 (INCORPORATION) TO DECEMBER 31, 1997 (IN THOUSANDS)
See accompanying notes.
PHILIPS INTERNATIONAL REALTY CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. FORMATION TRANSACTIONS
Philips International Realty Corp. (the "Company"), a Maryland corporation, and Philips International Realty, L.P. (the "Operating Partnership"), a Delaware limited partnership, were formed in July 1997 for the purpose of combining certain real estate properties (the "Properties") which were owned by partnerships and limited liability companies (the "Contributing Companies") in which Philip Pilevsky ("Mr. Pilevsky"), a substantial shareholder of the Company, owned an interest.
On December 31, 1997, the partners and members of the Contributing Companies transferred their shopping center assets or, in certain instances, their partnership or membership interests in the entities which hold title to such shopping center assets, to certain newly-formed entities (the "Property Partnerships") as designated by the Operating Partnership in exchange for limited partnership interests ("Units") therein. Simultaneously, the Company contributed its fee title interest in another shopping center property plus $533 in cash to the Operating Partnership in exchange for a non-managing general partnership interest therein. Philips International Realty, LLC (the "Interim Managing General Partner"), a Delaware limited liability company whose sole member was Mr. Pilevsky, made pro rata contributions to the Operating Partnership and to each of the Property Partnerships in exchange for managing general partner/member interests therein. Additionally, the Company capitalized various wholly-owned subsidiaries so as to enable such entities to similarly obtain general partner or managing member interests in each of the Property Partnerships. The resultant effect of the foregoing, together with certain other events constituting the Formation Transactions, was that the ownership of (A) the Operating Partnership was comprised (i) .001% by a managing general partner interest held by the Interim Managing General Partner (ii) 6.1% by a non-managing general partner interest held by the Company, and (iii) 93.899% by limited partner interests held by the Unit holders and (B) the Property Partnerships were each comprised (i) .001% by a managing general partner/member interest held by the Interim Managing General Partner (ii) .01% by a non- managing general partner/member interest held by subsidiaries of the Company, and (iii) 99.989% by a limited partner or member interest held by the Operating Partnership.
Upon completion of the public stock offering discussed in Note 2, the Interim Managing General Partner withdrew from the Operating Partnership and each of the Property Partnerships and the Company (directly or through its subsidiaries) assumed in full the rights and responsibilities associated with the management of the business and affairs of the Operating Partnership and each of the Property Partnerships as sole general partner/managing member. Prior to this time, the Company was required to account for its interests in the Operating Partnership and the Property Partnerships on the equity method. The Operating Partnership and the Property Partnerships had no business operations during 1997.
Reference should be made to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, for further information with regard to the Formation Transactions.
2. STOCK SPLIT AND PUBLIC STOCK OFFERING
On April 14, 1998 the Company authorized a 1.7051 for 1 split of its Common Stock which was effected immediately prior to the consummation of the stock offering referred to below. As a result, the number of outstanding shares of Common Stock prior to the stock offering increased to 81,265 shares from 47,660 shares.
On May 13, 1998, the Company completed a primary public stock offering (the "IPO") of 7,200,000 shares of Common Stock at $17.50 per share. The proceeds from this sale of Common Stock, net of related transaction costs of approximately $13,000, totaling approximately $113,000, were used primarily to (i) repay certain mortgage loans and other indebtedness (including accrued expenses incurred in connection with the Formation Transactions) of the Operating Partnership and the Property Partnerships, and (ii) to redeem the Series A Convertible Redeemed Preferred Stock. As a consequence of this use of proceeds, the ownership of the Operating Partnership is now comprised of a 74.8% general partner interest held by the Company and a 25.2% limited partner interest held by the Unit holders. Accordingly, the Company has accounted for its interests in the
PHILIPS INTERNATIONAL REALTY CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. STOCK SPLIT AND PUBLIC STOCK OFFERING--(CONTINUED) Operating Partnership and the Property Partnerships on a consolidated basis effective as of the completion of the IPO. A total 9,812,869 shares of Common Stock (7,340,474) and Units (2,472,395) were outstanding effective as of the completion of the IPO.
3. SIGNIFICANT ACCOUNTING POLICIES
Business Information and Segments
The Company, its subsidiaries, affiliates and related real estate joint ventures are engaged principally in the ownership, development and acquisition for redevelopment of neighborhood and community shopping centers predominantly located in the greater New York, N.Y. and Miami, Fl. metropolitan areas. These shopping centers are anchored generally by discount stores, supermarkets, drugstores and other retailers offering day to day shopping necessities. Management considers the Company's various operating, investing, and financing activities to comprise a single business segment and evaluates real estate performance and allocates resources based upon net income.
The Company's results of operations are significantly dependent on the overall health of the retail industry. The Company's tenant base is comprised almost exclusively of merchants in the retail industry. The retail industry is subject to external factors such as inflation, consumer confidence, unemployment rates and consumer tastes and preferences. A decline in the retail industry could reduce merchant sales, which could adversely affect the operating results of the Company. At December 31, 1999, Kmart Corporation was the largest tenant representing approximately 11.1% of Company's annualized base rental revenues. No other tenant accounted for more than 4.0% of revenues. Approximately 32.4% of total revenue for the year ended December 31, 1999 was derived from the Company's four shopping center properties in Hialeah, Florida. Any adverse change in the operating profitability of these properties may have a material adverse effect on the Company.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned, and the Operating Partnership and the Property Partnerships effective as of May 13, 1998. See Notes 1 and 2. All significant intercompany accounts and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
Real Estate Properties
Building and improvements are depreciated on the straight-line method over the estimated useful lives of the assets which range from fifteen to thirty-nine years, and tenant improvements (included in buildings and improvements in the accompanying balance sheet) are amortized over the lives of the respective leases using the straight-line method.
In accordance with Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company reviews real estate assets for impairment whenever events or changes in circumstances indicate that the carrying value of assets to be held and used may not be recoverable. Impaired assets are required to be reported at the lower of cost or fair value. Assets to be disposed of are required to be reported at the lower of cost or fair value less cost to sell.
PHILIPS INTERNATIONAL REALTY CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Assets are classified to be disposed when management has committed to a plan to dispose of the assets. No impairment losses have been recorded.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less from date of purchase.
Banking relationships are maintained with major financial institutions.
The properties are operated through multiple bank accounts to mitigate exposure to loss of cash balances which may from time to time exceed federally insured limits.
Revenue Recognition
Minimum revenues from rental property are recognized on a straight-line basis over the terms of the respective tenant leases. Percentage rents, representing the Company's participation in tenants' gross sales in excess of predetermined thresholds, are recognized upon verification that such rents are due for any given lease year.
Deferred Charges
Costs incurred to obtain tenant leases and long term financing, included in deferred charges and prepaid expenses in the accompanying Consolidated Balance Sheet, are amortized over the terms of the related leases or debt agreements, as applicable.
Income Taxes
The Company operates so as to qualify as a REIT under section 856(C) of the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally will not be subject to federal income tax to the extent it distributes its REIT taxable income to its shareholders and meets certain other requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax on its taxable income at regular corporate rates. As a REIT, the Company may be subject to certain state and local taxes on its income and property and federal income and excise taxes on any undistributed taxable income.
Income (loss) per share
Basic net income (loss) per share excludes the dilutive effects of any outstanding options and warrants. Diluted net income (loss) per share includes the dilutive (but not any anti-diliutive) effect of outstanding options and warrants calculated under the treasury stock method.
Basic and diluted net income per common share in the accompanying Consolidated Statement of Income is based upon a weighted average number 7,340,474 and 4,715,226 shares of Common Stock outstanding for the years ended December 31, 1999 and December 31, 1998 respectively.
The Company and the Operating Partnership received their interest in the Properties at the close of business on December 31, 1997 and had no operations as a public entity; therefore, the Company has not presented income (loss) per share for this period. If the 47,660 shares had been outstanding from the Company's incorporation, through December 31, 1997, (see Note 2) the Company's basic and diluted loss per share (as calculated pursuant to FASB No. 128) would have been $11.39. The Company authorized a Common Stock split of 1.7051 to 1 effective immediately prior to the completion of the IPO. Had this stock split occurred as of December 31, 1997, basic and diluted loss per share would have been $6.68.
PHILIPS INTERNATIONAL REALTY CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (as amended by FASB Statement No. 137), which is required to be adopted in years beginning after June 15, 2000. Statement 133 permits early adoption as of the beginning of any fiscal quarter after its issuance. The Company expects to adopt the new Statement effective January 1, 2001. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company does not anticipate that the adoption of the Statement will have a significant effect on its results of operations or financial position.
Interest Capitalization
Interest costs incurred during the development and major redevelopment of shopping center properties are capitalized and amortized on the same basis as related depreciation. Total interest costs incurred, paid and capitalized during the years ended December 31, 1999 and 1998 totaled $12,500, $12,143 and $407, and $5,360, $4,572 and $50 respectively. A portion of interest cost is included in other income (expense), net.
4. INVESTMENTS IN REAL ESTATE JOINT VENTURES
The Company and its subsidiaries have investments in various real estate joint ventures which are accounted for on the equity method. These joint ventures are engaged in the operation of shopping centers which are either owned or held under a long-term ground lease. Summarized financial information regarding the financial position and operations of these real estate joint ventures is as follows: [see Note 15.]
PHILIPS INTERNATIONAL REALTY CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. INVESTMENT IN OPERATING PARTNERSHIP AND PROPERTY PARTNERSHIPS
Prior to completion of the IPO, the Company and its subsidiaries held a 6.1% non-managing general partnership interest in the Operating Partnership (which held a 99.989% limited partner or member interest in each of the Property Partnerships) and .01% non-managing general partner/member interests in the Property Partnerships, respectively. Accordingly, the Company accounted for its investments in the Operating Partnership and the Property Partnerships on the equity method.
Condensed financial information for (i) the Company as if its property operations had been consolidated as of January 1, 1998 for (a) the period January 1, 1998 to May 12, 1998 and, (b) for the year ended December 31, 1998, follows:
6. DEFERRED CHARGES, PREPAID EXPENSES AND OTHER ASSETS
Deferred Charges and Prepaid Expenses:
Deferred charges and prepaid expenses included in the accompanying Consolidated Balance Sheet as of December 31, 1999 and 1998 are comprised as follows:
PHILIPS INTERNATIONAL REALTY CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. DEFERRED CHARGES, PREPAID EXPENSES AND OTHER ASSETS--(CONTINUED) Other Assets:
Other assets in the accompanying Consolidated Balance Sheets as of December 31, 1999 and 1998 are comprised as follows:
At December 31, 1999, Other Assets included loan to officer of $175, net of amortization.
7. MORTGAGES AND NOTES PAYABLE
As of December 31, 1999 and 1998, mortgages and notes payable aggregated $181,955 and $137,487 and were substantially collateralized by the shopping center properties. Mortgage payments are due in monthly installments of principal and/or interest and mature on various dates through 2019. The loan agreements contain customary representations, covenants and events of default.
The following table summarizes the mortgages and notes payable outstanding as of December 31, 1999 and 1998:
(Table continued on following page)
PHILIPS INTERNATIONAL REALTY CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. MORTGAGES AND NOTES PAYABLE--(CONTINUED)
Credit Facility
The Company established a revolving credit facility of $100,000 upon the consummation of the IPO. The availability of funds under the credit facility is subject to the Company's compliance with a number of customary financial and other covenants on an on-going basis. The credit facility has been used primarily to finance its acquisition and redevelopment activities. Borrowings under the credit facility are collateralized by certain shopping center properties with recourse to the Company and the Operating Partnership.
The combined aggregate principal maturities of mortgages and notes payable outstanding as of December 31, 1999 are as follows:
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values for the financial instruments were determined by management using market information available as of December 31, 1999 and 1998 and appropriate valuation methodologies which included, in the case of debt instruments, consideration of interest rates available for the issuance of debt with terms and maturities similar to its currently outstanding indebtedness. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Although management is not aware of any factors that would significantly affect its estimates of the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 1999.
PHILIPS INTERNATIONAL REALTY CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED) Cash equivalents, accounts receivable and mortgages and notes payable are reflected in the accompanying Consolidated Balance Sheet as of December 31, 1999 and 1998 at amounts which reasonably approximate their fair values.
9. RELATED PARTY TRANSACTIONS
The Company has entered into a management agreement with Philips International Holding Corp. ("PIHC"), a related party, which provides for day-to-day management, leasing and construction supervisory services. Fees payable for such services are (i) a management fee equal to 3% of gross rental collections, (ii) leasing commissions in amounts not to exceed local current market rates, and (iii) construction supervisory fees up to 10% of the costs of a project. In addition, PIHC is reimbursed for certain direct out-of-pocket expenses. Fees paid for such services totaled $1,900 and $1,441 for the years ended December 31, 1999 and 1998, respectively. See also Note 15.
10. COMMITMENTS AND CONTINGENCIES
Rental Income
The Company's shopping center properties are leased to tenants under operating leases. The minimum rental amounts due under the leases are generally either subject to scheduled fixed increases or upward adjustments based on certain inflation indices. The leases generally also require that the tenants reimburse the Company for increases in certain operating costs and real estate taxes.
The approximate future minimum rents to be received over the next five years and thereafter, assuming neither renewals nor extensions of leases which may expire during the period, for leases in effect at December 31, 1999 are as follows:
Percentage rent included in revenues from rental property was $1,152 and $537 for the years ended December 31, 1999 and 1998, respectively.
Legal Proceedings
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. Management believes that the final outcome of such matters will not have a material adverse effect on the financial position, results of operations or liquidity of the Company.
11. STOCK OPTION PLAN
The Company maintains a stock option plan (the "Plan") pursuant to which a maximum 852,550 shares of the Company's Common Stock may be issued for qualified and non-qualified options. Options granted under the Plan generally vest ratably over a three-year term, expire ten years from the date of grant and are exercisable at
PHILIPS INTERNATIONAL REALTY CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. STOCK OPTION PLAN--(CONTINUED) the market price on the date of grant, unless otherwise determined by the Board in its sole discretion. The following is a summary of option activity for 1999 and 1998:
The exercise prices for options outstanding as of December 31, 1999 range from $14.50 to $17.50 per share. The weighted average remaining contractual life for options outstanding as of December 31, 1999 was approximately 8.1 years. Options to purchase 145,050 and 193,550 shares of the Company's common stock were available for issuance under the Plan at December 31, 1999 and 1998 respectively.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for stock-based employee compensation arrangements whereby no compensation cost related to stock options is deducted in determining net income. Had compensation cost for the Company's stock option plans been determined pursuant to Financial Accounting Standards Board Statement No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation" the Company's pro forma net income and net income per share for calendar years 1999 and 1998 would have been $7,970, or $1.09 per basic and diluted share and $4,072, or $.86 per basic and diluted share, respectively. These calculations were made using a binomial option-pricing model to estimate fair value of options using subjective assumptions, which can materially affect fair value estimates and, therefore, do not necessarily provide a single measure of fair value of options. The following are the primary assumptions used in the above calculations during 1999 and 1998: (i) risk-free interest rates of 6.62% and 5.11%, (ii) dividend yields on the Company's common stock of 9.01% and 7.71%, (iii) volatility factors for the market price of the Company's common stock of 24.80% and 21.62% and weighted average expected lives of options of 10 years. The weighted average fair value at the dates of grant for options awarded during 1999 and 1998 was $2.27 and $2.32, respectively. For purposes of these pro forma disclosures, the estimated fair value of options is amortized over the options' vesting period. Since the number of options granted and the fair value thereof may vary significantly from year to year, the pro forma compensation expense in future years may be materially different.
12. SUPPLEMENTAL FINANCIAL INFORMATION
The following summary represents the results of operations for each quarter during the years ended December 31, 1999 and 1998. For 1998, the income before extraordinary items per share on a basic and diluted
PHILIPS INTERNATIONAL REALTY CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. SUPPLEMENTAL FINANCIAL INFORMATION--(CONTINUED) basis for the respective quarters does not total the amount reflected in the accompanying Consolidated Statements of Income due to the significant number of common shares issued in conjunction with the May 1998 Offering.
13. EXTRAORDINARY ITEMS
The accompanying Consolidated Statement of Income for the year ended December 31, 1998, includes $65 in extraordinary losses representing the Company's share of prepayment penalties incurred and deferred financing costs written-off in connection with the repayment of certain mortgage loans with proceeds of the IPO.
14. DIVIDENDS ON COMMON AND PREFERRED STOCK
Stock Dividends
The Company declared dividends on its Common Stock for 1999 and 1998 as follows:
During March and May 1998 the Board of Directors of the Company declared dividends on the Series A Convertible Redeemable Preferred Stock at the rates of $22.50 and $10.04 per share, respectively. These dividends were paid on March 31 and May 13, 1998, respectively.
PHILIPS INTERNATIONAL REALTY CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
15. ACQUISITION OF REAL ESTATE INTERESTS
Beginning in July 1998, the Company purchased, through a series of unrelated transactions, limited partnership interests in the nine shopping center properties (the Kmart Properties) anchored by Kmart and comprising approximately 1.1 million square feet of leasable space. During the year ended December 31, 1999, the Company acquired the remaining 57% interest in the Kmart Properties for $30.4 million. The Kmart Properties are located in Florida, California, Washington, Minnesota, Illinois and Kentucky. The reporting of financial position and results of operations of the Kmart Properties by the Company reflects a change from the equity to consolidation method of accounting effective in the third quarter of 1999.
During 1999, the Company substantially completed the development of the 50,000 square foot shopping center in Glen Cove, Long Island. Staples, the anchor tenant, opened its office supply superstore in November 1999. Approximately $4.8 million was expended in 1999 toward completion of the shopping center which is expected to have total development cost of approximately $8.1 million. The Company also completed a 14,000 square foot Walgreen's store in Freeport, Long Island in April 1999 with the expenditure of $1.8 million in 1999 bringing total development cost to $3.5 million.
In March 1999, the Company acquired the remaining 50% interest in a 196,000 square foot shopping center development project in Palm Beach County, Florida for approximately $3.5 million. The reporting of financial position and results of operations of this property by the Company reflects a change from the equity to consolidation method of accounting effective in the first quarter of 1999.
At December 31, 1999, the Company had a $7.1 million joint-venture investment in a proposed retail-residential redevelopment project. Subsequent to year-end, the joint venture sold this project and the Company's investment was returned in full. A shareholder and Unit holder of the Company was also an investor in this joint venture.
The above referenced investments were funded with borrowings under the Company's revolving line of credit.
During the year ended December 31, 1998 the Company acquired (i) a 77,000 square foot shopping center property located in Munsey Park, NY for approximately $21,500 in cash, (ii) a 50% joint venture interest in a retail/residential site located in New York City, N.Y. for approximately $3,400 in cash, (iii) a 43% interest in a limited partnership affiliated with the Company which owns nine Kmart anchored shopping centers for approximately $19,100 in cash, (iv) a 50% joint venture interest in a retail, redevelopment site in Palm Beach County, Florida, for approximately $3,100 in cash, (v) a 75% joint venture interest in a 54,000 square foot shopping center in Yonkers, N.Y. which the Company intends to redevelop, for approximately $6,300 in cash, (vi) a 75% interest in a retail development site in Glen Cove, N.Y., for approximately $2,700 in cash, and (vii) interests in two additional retail development sites for approximately $3,000 in cash. Purchase of the interests in the portfolio of Kmart anchored shopping centers was unanimously approved by the independent members of the Company's Board of Directors. Mr. Pilevsky was a 1% general partner in the limited partnership which holds title to the Kmart portfolio. These various transactions were financed with approximately $45,000 drawn under the Company's line of credit, and property indebtedness of approximately $14,100.
16. PRO FORMA FINANCIAL INFORMATION
As discussed in Note 15, the Company acquired the nine shopping center properties anchored by Kmart during the year ended December 31, 1999 and acquired a shopping center located in Munsey Park, New York during the year ended December 31, 1998. The pro forma information set forth below is based upon the Company's Consolidated Statement of Income for the year ended December 31, 1999 and the historical operating results for 1998 after giving effect to the Offering, adjusted to give effect to the property acquisitions as of January 1, 1998.
PHILIPS INTERNATIONAL REALTY CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
16. PRO FORMA FINANCIAL INFORMATION--(CONTINUED) This pro forma financial information is presented for informational purposes only and may not be indicative of what actual results of operations would have been, had the property acquisition occurred as of January 1, 1998, nor does it purport to represent the results of future operations.
17. STRATEGIC ALTERNATIVES
On October 13, 1999, the Board of Directors of the Company announced that it had retained a financial advisor to assist the Company in examining strategic alternatives to maximize shareholder value. The Board believes that the Company's current stock price does not reflect the underlying value of its assets. Given the changing dynamics of the REIT market place and consistent with its commitment to realize shareholder value for all investors, the Board believes that it is prudent to explore the strategic alternatives for the Company.
PHILIPS INTERNATIONAL REALTY CORP. SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999 (DOLLARS IN THOUSANDS)
- ------------------ (1) Includes allocable portion of borrowing under the Company's revolving line of credit.
PHILIPS INTERNATIONAL REALTY CORP.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED) (DOLLARS IN THOUSANDS)
The changes in real estate for the three years ended December 31, 1999 are as follows:
The aggregate cost of land, buildings and improvements for federal income tax purposes at December 31, 1999 was $219,607.
The changes in accumulated depreciation for the three years ended December 31, 1999 are as follows:
REPORT OF INDEPENDENT AUDITORS
The Board of Directors Philips International Realty Corp.
We have audited the combined statements of income, owners' deficit and cash flows of The Philips Company for the year ended December 31, 1997. These financial statements are the responsibility of The Philips Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements of The Philips Company referred to above present fairly, in all material respects, the combined results of its operations and its cash flows for year ended December 31, 1997 in conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
New York, New York March 6, 1998
THE PHILIPS COMPANY (PREDECESSOR) COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
See accompanying notes.
THE PHILIPS COMPANY (PREDECESSOR) COMBINED STATEMENT OF OWNERS' DEFICIT FOR THE YEAR ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
See accompanying notes.
THE PHILIPS COMPANY (PREDECESSOR) COMBINED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
See accompanying notes.
THE PHILIPS COMPANY (PREDECESSOR) NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Philips Company (the "Company") was engaged in the ownership, operation, leasing and development of seven neighborhood and community shopping center properties (collectively, the "Properties") located in New York, Connecticut, New Jersey, Massachusetts and Florida.
Principles of Combination
The Company was not a legal entity, but rather a combination of real estate properties that were organized as general and limited partnerships and limited liability companies and which were under the common management and control of Philip Pilevsky, his family or entities controlled by such parties (the 'Sponsors'). In addition, investments in certain non-controlled limited partnerships were accounted for under the equity method (see Note 2). All significant intercompany transactions and balances were eliminated in combination.
The specific partnerships and limited liability companies included in the accompanying combined financial statements are as follows:
Formation Transactions
The partners and members of The Philips Company and the Merrick/Mill Basin Properties (see note 2) transferred their shopping center assets or, in certain instances, their partnership or membership interests in the entities which held title to such shopping center assets, to certain newly-formed entities effective December 31, 1997.
Reference should be made to Note 1 of the accompanying Notes to Consolidated Financial Statements of Philips International Realty Corp. for further information concerning the Formation Transactions.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Real Estate Properties
Buildings and improvements were depreciated on the straight-line method over the estimated useful lives of the assets which range from fifteen to thirty-nine years, while tenant improvements were amortized over the lives of the respective leases, using the straight-line method.
During 1996, the Company adopted Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
THE PHILIPS COMPANY (PREDECESSOR) NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) SFAS No. 121 requires that the Company review real estate assets for impairment whenever events or changes in circumstances indicate that the carrying value of assets to be held and used may not be recoverable. Impaired assets are required to be reported at the lower of cost or fair value. Assets to be disposed of are required to be reported at the lower of cost or fair value less cost to sell. Assets are classified to be disposed when management has committed to a plan to dispose of the assets. Prior to the adoption of SFAS No. 121, real estate assets were required to be stated at the lower of cost or net realizable value. No impairment losses have been recorded in any of the periods presented.
Deferred Charges
Deferred charges are amortized over the terms of the related leases or debt agreements, as applicable.
Revenue Recognition
Minimum revenues from rental property were recognized on a straight-line basis over the terms of the respective tenant leases.
Income Taxes
The entities comprising the Company were not taxpaying entities for income tax purposes and, accordingly, no provision or credit has been made in the accompanying financial statements for income taxes. Owners'/members' allocable shares of taxable income or loss are reportable on their respective income tax returns.
Concentration of Revenue and Credit Risk
Approximately 54% of the Company's total revenue for the year ended December 31, 1997 was derived from Palm Springs Mile Associates Ltd. Any adverse change in the operating profitability of this property may have a material adverse effect on the Company.
2. INVESTMENT IN PARTNERSHIPS
The Philips Company had a limited partnership interest and a minority general partnership interest in the following two partnerships (the "Merrick/Mill Basin Properties") which also owned and operated neighborhood and community shopping centers.
As a limited partner and minority general partner, the Company did not control the activities of the partnerships. These investments, accounted for under the equity method, were recorded initially at cost and subsequently adjusted for equity in the net income or loss of investees and cash contributions and distributions.
THE PHILIPS COMPANY (PREDECESSOR) NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS)
2. INVESTMENT IN PARTNERSHIPS--(CONTINUED) Condensed operating information for these entities for the year ended December 31, 1997 was as follows:
3. RENTAL INCOME
The Company's shopping center properties are leased to tenants under operating leases. The minimum rental amounts due under the leases are generally either subject to scheduled fixed increases or upward adjustments based on certain inflation indices. The leases generally also require that the tenants reimburse the Company for increases in certain operating costs and real estate taxes. Minimum rentals and expense reimbursements represented 96% and 95% of revenues from rental properties for the year ended December 1997.
The approximate future minimum rents to be received over the next five years and thereafter, assuming neither renewals nor extensions of leases which may expire during the period, for leases in effect at December 31, 1997, are as follows:
4. RELATED PARTY TRANSACTIONS
Management Agreement
Management services for the Company's properties are provided by a related party, Philips International Holding Corp. Fees paid by the Company for such services are generally based on 3% to 5% of total revenue.
Leasing Commissions
Philips International Holding Corp., a related party, provides leasing services to the Company for fees ranging generally from 2% to 5% of total contractual rent due pursuant to the tenant leases. Leasing commissions paid to Philips International Holding Corp. for the year ended December 31, 1997 was $95.
THE PHILIPS COMPANY (PREDECESSOR) NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS)
5. CONTINGENCIES
The Company was subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. Management believes that the final outcome of such matters will not have a material adverse effect on the financial position, results of operations or liquidity of the Company.
6. EXTRAORDINARY ITEMS
The Combined Statement of Income for the year ended December 31, 1997 includes an extraordinary gain of approximately $671, in connection with the settlement of debt obligations on the Company's shopping center properties. This amount is net of an extraordinary loss of approximately $265 representing the write-off of deferred financing costs related to the refinancing of debt on certain shopping center properties.
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.