<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1997.
REGISTRATION NO. 333-41431
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PHILIPS INTERNATIONAL REALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MARYLAND 13-3963667
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
------------------------
417 FIFTH AVENUE
NEW YORK, NEW YORK 10016
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(212) 545-1100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
MR. PHILIP PILEVSKY
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
PHILIPS INTERNATIONAL REALTY CORP.
417 FIFTH AVENUE
NEW YORK, NEW YORK 10016
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
with a copy to:
JONATHAN A. BERNSTEIN, ESQ.
BLAKE HORNICK, ESQ.
PRYOR, CASHMAN, SHERMAN & FLYNN
410 PARK AVENUE
NEW YORK, NEW YORK 10022
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: Upon consummation of the transactions described in the enclosed Proxy
Statement/Prospectus.
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM OFFERING PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE PRICE PER MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share................................ 32,000 $50.00 $1,600,000 $484.85
</TABLE>
(1) Based upon the maximum number of shares expected to be issued in connection
with the transaction described herein.
(2) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(f)(2). The registration fee has been calculated on
the basis of the pro forma net asset value as of August 8, 1997 of the
aggregate number of shares of common stock of Philips International Realty
Corp., $.01 par value per share, to be received by National Properties
Investment Trust and its shareholders upon consummation of the Formation
Transactions (as defined herein). The proposed maximum offering price per
share is based upon the proposed maximum aggregate offering price divided by
the amount to be registered.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
FORM S-4
REGISTRATION STATEMENT
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-4 PROXY STATEMENT/PROSPECTUS
ITEM NUMBER AND CAPTION CAPTION OR LOCATION
- ------------------------------------------------------------------ ------------------------------------------------
<S> <C>
A. INFORMATION ABOUT THE TRANSACTION
Item 1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................ Outside Front Cover Page
Item 2. Inside Front and Outside Back Cover Pages of
Prospectus.................................... Inside Front Cover; Available Information; Table
of Contents
Item 3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information......................... Summary; Risk Factors; Selected Financial Data
Item 4. Terms of the Transactions....................... Formation Transactions and Structure of the
Company; Description of Capital Stock of the
Company; Comparison of Shareholders' Rights;
Federal Income Tax Considerations
Item 5. Pro Forma Financial Information................. Historical and Pro Forma Unaudited
Capitalization; Pro Forma Unaudited Financial
Information
Item 6. Material Contracts with Company Being
Acquired...................................... Formation Transactions and Structure of the
Company--Formation Transactions; --Background
of the Formation Transactions; --Description
of the Contribution and Exchange Agreement
Item 7. Additional Information Required for Reoffering
by Persons and Parties Deemed to be
Underwriters.................................. *
Item 8. Interests of Named Experts and Counsel.......... *
Item 9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................... Certain Provisions of Maryland Law and of the
Company's Charter and By-Laws
B. INFORMATION ABOUT THE REGISTRANT
Item 10. Information with Respect to S-3 Registrants..... *
Item 11. Incorporation of Certain Information by
Reference..................................... *
Item 12. Information with respect to S-2 or S-3
Registrants................................... *
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Item 13. Incorporation of Certain Information by
Reference..................................... *
Item 14. Information with Respect to Registrants Other
Than S-2 or S-3 Registrants................... Summary; The Companies; The Company's Strategy
for Growth; Business and Properties; Policies
with Respect to Certain Activities;
Distribution Policy; Shares Available For
Future Sale; Financial Statement Schedules;
Selected Financial Data; Combined Financial
Statements and Other Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of Operations
C. INFORMATION ABOUT COMPANY BEING ACQUIRED
Item 15. Information with Respect to S-3 Companies....... *
Item 16. Information with Respect to S-2 or S-3
Companies..................................... *
Item 17. Information with Respect to Companies Other Than
S-2 or S-3 Companies.......................... Summary; The Companies--National, Business and
Properties; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Combined Financial Statements and Other
Financial Data; Financial Statement Schedules
D. VOTING AND MANAGEMENT INFORMATION
Item 18. Information if Proxies, Contents or
Authorizations are to be Solicited............ The Meeting; Formation Transactions and
Structure of the Company--Benefits of the
Formation Transactions to the Philips Group;
--Benefits of the Formation Transactions to
the Trustees; --Benefits of the Formation
Transactions to the National Shareholders;
--Interests of the Trustees in the Formation
Transactions; --Solicitation Agent; --Fees and
Expenses; Management; Principal Shareholders;
Certain Relationships and Related Transactions
Item 19. Information if Proxies, Consents or
Authorizations are not to be Solicited in an
Exchange Offer................................ *
</TABLE>
- ------------------
* Omitted since the answer is negative or the Item is not applicable.
ii
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
32 Hanson Road
Canton Center, CT 06020
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 30, 1997
------------------------
TO OUR SHAREHOLDERS:
A Meeting of Shareholders (the 'Meeting') of National Properties Investment
Trust ('National') will be held on December 30, 1997, at the offices of Pryor,
Cashman, Sherman & Flynn, 410 Park Avenue, New York, New York 10022, at 3:00
p.m. (local time), for the following purposes:
1. To consider and act upon a proposal to approve, pursuant to the
Contribution and Exchange Agreement hereinafter described, the sale of
National's sole real estate asset to a newly-formed real estate investment
trust company, which will indirectly own ten shopping center properties in
the New England, Mid-Atlantic and Southeast regions of the United States,
in exchange for shares of common stock of such company, a portion of which
shares will be distributed as a dividend to the National shareholders on a
pro-rata basis in calendar year 1997, and a further portion to be
distributed as a dividend in January 1998 (representing in the aggregate
not less than 75% of such shares received by National), and the related
formation transactions, including the consideration to be received by
certain members of the Board of Trustees of National.
2. To consider and act upon a proposal to approve the amendment of
certain provisions of the Restated Declaration of Trust of National to
permit the above transactions.
3. To transact such other business as may properly be brought before
the Meeting or any adjournment or postponement thereof.
Pursuant to action taken by the Board of Trustees of National, the close of
business on December 4, 1997 has been fixed as the record date for the
determination of the shareholders entitled to notice and to vote at the Meeting
and any adjournment thereof.
You are cordially invited to attend the Meeting. In any event, in order
that we may be assured of a quorum, we request that you complete, sign, date and
return the enclosed proxy as soon as possible. Proxies may be returned to The
Herman Group, Inc., the Solicitation Agent, by facsimile at (214) 999-9323 or in
the enclosed postage paid envelope. Proxies may be revoked at any time prior to
the Meeting by giving written notice of revocation to the Solicitation Agent, by
giving a later dated proxy, or by attending the Meeting and voting in person. If
you have any questions, please call The Herman Group, Inc. at (800) 582-1313.
Your vote is important regardless of the number of shares you own.
By order of the Board of Trustees,
/s/ PETER STEIN
PETER STEIN
Trustee
December , 1997
YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR PROXY
<PAGE>
PROXY STATEMENT
NATIONAL PROPERTIES INVESTMENT TRUST
MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 30, 1997
------------------------
PROSPECTUS
PHILIPS INTERNATIONAL REALTY CORP.
32,000 SHARES OF COMMON STOCK
------------------------
This Proxy Statement and Prospectus (the 'Proxy Statement/Prospectus') is
being furnished to holders (each a 'Holder') of shares of beneficial interest
('National Shares') of National Properties Investment Trust, a Massachusetts
business trust, f/k/a Richard Roberts Real Estate Growth Trust I ('National'),
in connection with the solicitation of proxies by the Board of Trustees of
National (the 'Board of Trustees' or 'Board') for use at the Meeting of
Shareholders (the 'Meeting') to be held on December 30, 1997, at the offices of
Pryor, Cashman, Sherman & Flynn, 410 Park Avenue, New York, New York 10022, at
3:00 p.m., local time, and at any adjournment thereof. This document also serves
as a prospectus of Philips International Realty Corp. (the 'Company'), a
Maryland corporation (which expects to qualify as a real estate investment trust
for federal income tax purposes), with respect to the common stock, $.01 par
value per share (the 'Common Stock'), of the Company to be issued in connection
with its purchase of a retail shopping center property from National. This Proxy
Statement/Prospectus and the enclosed form of proxy are first being mailed to
shareholders of National on or about December , 1997.
At the Meeting, the shareholders of National will be asked to consider and
act upon proposals to approve (i) pursuant to the Contribution and Exchange
Agreement, dated as of August 11, 1997 (the 'Contribution and Exchange
Agreement'), among National, the members of the Board of Trustees, the Company,
Philips International Realty, L.P., a Delaware limited partnership (the
'Operating Partnership'), and certain contributing partnerships or limited
liability companies (collectively, the 'Contributing Partnerships') associated
with a private real estate firm controlled by Philip Pilevsky ('Philips Private
Company') and certain partners and members thereof, the sale of National's sole
real estate asset to the Company in exchange for 32,000 shares of Common Stock
(and the assumption of approximately $550,000 of debt), of which approximately
3,744 shares will be distributed as a dividend in calendar 1997 and
approximately 20,256 shares will be distributed as a dividend in January 1998 to
the National shareholders on a pro-rata basis (representing in the aggregate not
less than 75% of such shares received by National, with the remaining shares of
Common Stock retained by National for working capital purposes), and the related
formation transactions (the 'Formation Transactions'), including the
consideration to be received by certain members of the Board of Trustees of
National ('Proposal 1'), and (ii) the amendment of certain provisions of the
Restated Declaration of Trust of National to permit such transactions ('Proposal
2') ((i) and (ii) collectively, the 'Transaction Agreements'). The adoption of
each proposal is conditioned upon the approval of the other proposal. As a
result of these Formation Transactions, National and its shareholders (excluding
certain additional securities described below to be received by certain members
of the Board of Trustees in connection with the Formation Transactions) will
collectively hold approximately 2.1% of the outstanding shares of Common Stock
of the Company (including in such outstanding shares, interests redeemable or
convertible therefor and shares of Common Stock issuable upon exercise of
outstanding warrants) and the Company will own ten shopping center properties in
the New England, Mid-Atlantic and Southeast regions of the United States,
thereby representing an investment for National shareholders in an enterprise
with a significantly larger and more diversified portfolio than National's.
SEE 'RISK FACTORS' COMMENCING AT PAGE 27 FOR A DISCUSSION OF CERTAIN FACTORS
RELEVANT TO AN INVESTMENT IN COMMON STOCK WHICH SHOULD BE CONSIDERED BY HOLDERS
OF NATIONAL SHARES, INCLUDING THE FOLLOWING:
o control of the business of the Company by Mr. Pilevsky, as Chairman of
the Board and Chief Executive Officer of the Company and as sole
member of the interim managing general partner of the Operating
Partnership, which will control the Operating Partnership until such
time as the Company completes public or private equity offerings of
its securities aggregating in excess of $25 million (subject to
certain limitations, including limitations with respect to
transactions between the Company and Mr. Pilevsky and his affiliates),
and whose interests may not be consistent with the interests of other
shareholders of the Company;
o control by Mr. Pilevsky, as sole member of the interim managing
general partner, as to whether shareholders will receive a
distribution, until such time as the Company completes public or
private equity offerings of its securities aggregating in excess of
$25 million (subject to certain federal tax requirements to maintain
REIT status);
o substantial influence over the affairs of the Company and the
Operating Partnership by Mr. Pilevsky and Sheila Levine, as directors
and executive officers of the Company and as holders of Common Stock
and units of limited partnership interest in the Operating Partnership
representing approximately 70.6% of the outstanding shares of Common
Stock of the Company (including interests redeemable or convertible
therefor and shares of Common Stock issuable upon exercise of
outstanding warrants);
o conflicts of interest associated with the engagement of, and
dependence of the Company on, third-party management affiliated with
Philips Private Company, including conflicts with certain executive
officers and personnel of the management company, who will continue to
spend a material amount of their time and effort managing the business
and properties of Philips Private Company;
o possible conflicts of interest with, and material benefits to, certain
members of the Board of Trustees, including receipt of certain
compensation upon completion of the Formation Transactions;
o conflicts of interests with Mr. Pilevsky who will continue to hold,
through Philips Private Company or otherwise, significant interests in
income producing real property not contributed to the Company and who
may continue to spend a material amount of his time and effort
managing these interests;
o possible adverse consequences of the Company's negative cash position
on a pro forma basis as of September 30, 1997, particularly in light
of the Company's significantly leveraged capital structure; and
o material differences between the rights of shareholders of National as
compared to the rights of shareholders of the Company, including the
absence from the Company's charter documents of certain provisions
protective of shareholders' rights currently applicable to National
shareholders, such as restrictions on corporate investment and
financing policies and limitations on certain corporate transactions.
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS PASSED UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION
OR UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(Cover continued on next page)
The date of this Proxy Statement/Prospectus is December , 1997.
<PAGE>
(Cover continued from previous page)
The Company will be the general partner of the Operating Partnership, which
will hold certain properties and assets contributed to it pursuant to the
Transaction Agreements. Pursuant to the Transaction Agreements, the Operating
Partnership will issue (i) units of general partnership interest to the Company,
as general partner, (ii) units of limited partnership interest ('Units') to the
Contributing Partnerships (or, in certain cases, the partners or members of the
Contributing Partnerships), as limited partners and (iii) units of general
partnership interest to Philips International Realty, LLC, a Delaware limited
liability company (the 'Interim Managing General Partner') which will control
the Operating Partnership until such time as the Company completes public or
private equity offerings of its securities aggregating in excess of $25 million
(collectively, an 'Offering'). The Units are redeemable on a one-for-one basis
for shares of Common Stock, upon the terms and conditions set forth in the
Agreement of Limited Partnership of the Operating Partnership (the 'Partnership
Agreement'). The sole member of the Interim Managing General Partner will be Mr.
Pilevsky, who, together with those persons (collectively, the 'Philips Group')
who receive Units in connection with the contribution of properties of, or
partnership or membership interests in, the Contributing Partnerships upon
consummation of the transactions contemplated by the Transaction Agreements,
will own Units and Common Stock representing approximately 94.6% of the
outstanding shares of Common Stock (including interests redeemable or
convertible therefor and shares of Common Stock issuable upon exercise of
outstanding warrants). The Interim Managing General Partner will have full and
exclusive power under the Partnership Agreement, subject to certain limitations
set forth therein, to manage the business and affairs of the Operating
Partnership until such time, among other things, as the Company completes an
Offering. Upon completion of an Offering, the Interim Managing General Partner
will be deemed to have withdrawn from the Operating Partnership and the Company
will be entitled to exercise in full the rights and responsibilities to manage
the business and affairs of the Operating Partnership as sole general partner
under the Partnership Agreement.
The Management Company will be engaged to provide certain property level
services and accounting services to the Company.
Upon consummation of the Formation Transactions described in this Proxy
Statement/Prospectus, including the amendment of the terms of the Restated
Declaration of Trust of National (the 'Declaration of Trust') to permit such
transactions, (i) National and its shareholders will receive an aggregate of
approximately 2.1% of the outstanding Common Stock of the Company (including
interests redeemable or convertible therefor and shares of Common Stock issuable
upon exercise of outstanding warrants); (ii) the Trustees will receive an
aggregate of approximately 0.3% of the outstanding shares of Common Stock and
warrants to purchase an additional 0.5% of the outstanding shares of Common
Stock (in each case, including interests redeemable or convertible therefor and
shares of Common Stock issuable upon exercise of outstanding warrants); (iii)
Mr. Pilevsky will beneficially own approximately 0.7% of the outstanding Common
Stock of the Company (including interests redeemable or convertible therefor and
shares of Common Stock issuable upon exercise of outstanding warrants); (iv) the
Philips Group (of which Mr. Pilevsky will hold a majority interest) will
beneficially own 1,450,000 Units redeemable for shares of Common Stock of the
Company, which Units represent approximately 93.9% of the outstanding shares of
Common Stock of the Company (including interests redeemable or convertible
therefor and shares of Common Stock issuable upon exercise of outstanding
warrants) and (v) Prudential Securities Incorporated ('Prudential Securities')
will receive, in lieu of the financial advisory fee payable by National upon
consummation of the Formation Transactions and assumed by the Company under the
Contribution and Exchange Agreement, 1,940 shares of Series A Preferred Stock,
liquidation preference $1,000 per share (the 'Series A Preferred Stock'),
convertible into 38,800 shares of Common Stock, which Series A Preferred Stock
represents approximately 2.5% of the outstanding shares of Common Stock of the
Company (including interests redeemable or convertible therefor and shares of
Common Stock issuable upon exercise of outstanding warrants). National's
shareholders will also continue to hold their National Shares.
The Formation Transactions are subject to the satisfaction or waiver of
certain conditions, including certain conditions set forth in the Transaction
Agreements and the receipt of the requisite National shareholder approval of the
Transaction Agreements, which includes the amendment of the terms of the
Declaration of Trust to permit the Formation Transactions. See 'The Formation
Transactions--Description of the Transaction Agreements--Conditions to the
Consummation of the Formation Transactions.'
ii
<PAGE>
This Proxy Statement/Prospectus serves as the Proxy Statement of National
for the Meeting and as the Prospectus of the Company with respect to the Common
Stock to be issued to National and its shareholders in the Formation
Transactions. The information contained in this Proxy Statement/Prospectus
relating to National was furnished by National. All other information was
furnished by the Company.
There is currently no public market for the Common Stock. The Company's
articles of incorporation contains limitations on the transfer or accumulation
of Common Stock in order to protect the status of the Company as a real estate
investment trust for federal income tax purposes. See 'Description of Capital
Stock of the Company--Restrictions on Transfer--Ownership Limits.'
On December 4, 1997, the issued and outstanding voting capital stock of
National consisted of 748,738 National Shares held by approximately 1,770
holders of record.
The accompanying proxy is solicited on behalf of the Board of Trustees of
National.
VOTING RIGHTS AND PROXY INFORMATION
The Board of Trustees has fixed the close of business on December 4, 1997,
as the record date (the 'Record Date') for the determination of shareholders
entitled to notice of and to vote at the Meeting. Each holder of National Shares
on the Record Date is entitled to cast one vote per National Share. Approval of
each proposal requires the affirmative vote of the holders of a majority of the
issued and outstanding National Shares entitled to vote at the Meeting. In
addition, the Contribution and Exchange Agreement requires the affirmative vote
of a plurality of votes cast by the shareholders of National who are not
Affiliates of National (as such term is defined below) (the 'Unaffiliated
Shareholders') for the approval of Proposal 1. The adoption of each proposal is
conditioned upon the approval of the other proposal.
'Affiliate' means (i) any person directly or indirectly controlling,
controlled by or under common control with another person, (ii) any person
owning or controlling 5% or more of the outstanding voting securities or
beneficial interests of such other person, (iii) any officer, retired officer,
director, trustee, employee or general partner of such person and (iv) if such
other person is an officer, director, trustee or partner of another entity, then
the entity for which that person acts in any such capacity.
All National Shares represented at the Meeting by properly executed proxies
received prior to or at the Meeting, and not revoked, will be voted at the
Meeting in accordance with the instructions thereon. If no instructions are
indicated, proxies will be voted in favor of the Transaction Agreements.
Abstentions and broker non-votes will have the effect of a vote against all
proposals. Proxies that are voted against either Proposal 1 or Proposal 2 will
not be voted in favor of an adjournment or postponement of the Meeting.
National does not know of any matters, other than as described in the
Notice of Meeting, which are to come before the Meeting. If any other matters
are properly presented at the Meeting for action, the persons named in the
enclosed form of proxy and acting thereunder will have the discretion to vote on
such matters in accordance with their best judgment.
Proxies may be returned to the Solicitation Agent by facsimile at (214)
999-9323 or in the enclosed postage paid envelope. If returning a proxy by
facsimile, both sides of the proxy card should be transmitted. A proxy given
pursuant to this solicitation may be revoked at any time before it is voted.
Proxies may be revoked (i) by filing with the Solicitation Agent at or before
the Meeting a written notice of revocation bearing a later date than the proxy,
(ii) by duly executing a subsequent proxy relating to the same National Shares
and delivering it to the Solicitation Agent at or before the Meeting or (iii) by
attending the Meeting and voting in person (although attendance at the Meeting
will not in and of itself constitute revocation of a proxy). Any written notice
revoking a proxy should be delivered to the Solicitation Agent, The Herman
Group, Inc., 2121 San Jacinto Street, 26th Floor, Dallas, Texas 75201-6705 or by
facsimile to (214) 999-9323. If you have any questions, please call The Herman
Group, Inc. at (800) 582-1313.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-4 (the
'Registration Statement') with the Securities and Exchange Commission (the
'Commission') under the Securities Act of 1933, as amended (the 'Securities
Act'), with respect to the securities offered hereby. As permitted by the rules
and regulations of the
iii
<PAGE>
Commission, this Proxy Statement/Prospectus omits certain information, exhibits
and undertakings contained (or to be contained) in the Registration Statement.
Such additional information, exhibits and undertakings can be inspected at and
obtained from the Commission in the manner set forth below. For further
information with respect to the securities offered hereby and the Company,
reference is made to the Registration Statement and the financial schedules and
exhibits filed as a part thereof. Statements contained in this Proxy
Statement/Prospectus as to the terms of any contract or other document are not
necessarily complete, and, in each case, reference is made to the copy of each
such contract or other document that has been filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
National is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act'), and, in accordance
therewith, files periodic reports and other information with the Commission.
Such reports and other information filed with the Commission, as well as the
Registration Statement, can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and should also be available at the Commission's regional offices
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511, and 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of such material can also be obtained by mail from the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.
Washington, D.C. 20549 at prescribed rates, or at the Commission's Web site at
http://www.sec.gov.
No person has been authorized to give any information or to make any
representations, other than those contained in this Proxy Statement/Prospectus.
If given or made, such information or representation may not be relied upon as
having been authorized by National. National is not aware of any jurisdiction in
which the making of the proxy solicitation is not in compliance with applicable
law. If National becomes aware of any jurisdiction in which the making of the
proxy solicitation would not be in compliance with applicable law, National will
make a good faith effort to comply with such law. If, after such good faith
effort, National cannot comply with any such law, the proxy solicitation will
not be solicited from shareholders residing in such jurisdictions. In any
jurisdiction where the securities, blue sky or other laws require the proxy
solicitation to be made by a licensed broker or dealer, the proxy solicitation
will be deemed to be made on behalf of National by the Solicitation Agent or one
or more registered brokers or dealers licensed under the laws of such
jurisdiction. Neither the delivery of this Proxy Statement/Prospectus nor any
distribution of securities hereunder shall under any circumstances create any
implication that the information contained herein is correct as of any time
subsequent to the date hereof or that there has been no change in the
information set forth herein or in the affairs of National, the Company or their
respective subsidiaries since the date hereof.
iv
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
SUMMARY................................................................................................. 1
The Company........................................................................................... 1
Risk Factors.......................................................................................... 3
Formation Transactions................................................................................ 5
Benefits of the Formation Transactions to the Philips Group........................................... 10
Benefits of the Formation Transactions to National Shareholders....................................... 10
Background of the Formation Transactions and Alternatives to the Formation Transactions............... 11
Conflicts of Interest................................................................................. 13
Management............................................................................................ 14
Growth Strategy....................................................................................... 14
Properties............................................................................................ 15
Financing Policy...................................................................................... 18
Distribution Policy................................................................................... 18
Comparison of Shareholders' Rights.................................................................... 18
Restrictions on Common Stock Ownership................................................................ 19
Tax Status of the Company............................................................................. 19
Certain Aspects of the Contribution and Exchange Agreement............................................ 19
The Meeting........................................................................................... 21
Market Information.................................................................................... 22
Summary Selected Financial Data....................................................................... 22
RISK FACTORS............................................................................................ 27
Control by the Interim Managing General Partner....................................................... 27
Control by the Philips Group.......................................................................... 27
Conflicts of Interest with and Dependence on the Management Company................................... 27
Conflicts of Interest................................................................................. 27
Board of Trustees.................................................................................. 27
The Philips Group.................................................................................. 27
The Interim Managing General Partner............................................................... 28
Philips Private Company/Excluded Properties........................................................ 28
Potential Conflict of Interests with Prudential Securities......................................... 28
Benefits to the Philips Group, the Founders and Philips Private Company from the Formation
Transactions...................................................................................... 29
Benefits to the Trustees from the Formation Transactions.............................................. 29
Certain Consequences of the Formation Transactions: Distributions of Common Stock: Federal Income Tax
Consequences: National's REIT Status............................................................... 29
Dependence on Key Management Personnel................................................................ 30
Changes in Shareholders' Rights; Elimination of Restrictions on Corporate Activities.................. 30
High Level of Debt; No Limitation on Debt; Uncertainty of Ability to Refinance Debt................... 30
High Level of Debt................................................................................. 30
No Limitation on Debt.............................................................................. 30
Inability to Pay Debt Service; Effect of Cross-Collateralization................................... 30
Variable Rate Debt................................................................................. 31
Refinancing Risks.................................................................................. 31
Lack of Acquisition Funding........................................................................... 31
Inability to Make Required Distributions to Shareholders Could Affect REIT Status; Potential
Requirement to Borrow.............................................................................. 31
Lack of Appraisals.................................................................................... 32
Validity of 1993 Amendment to Declaration of Trust.................................................... 32
Possible Adverse Effects on Common Stock Price Arising From Shares Available for Future Sale.......... 32
Changes in Investment and Financing Policies Without Shareholder Vote................................. 33
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Issuance of Additional Securities.................................................................. 33
Risks Involved in Acquisitions Through Partnerships or Joint Ventures.............................. 33
Risks Involved in Investments in Securities Related to Real Estate................................. 33
Certain Anti-Takeover Provisions May Inhibit a Change of Control...................................... 34
New Classes and Series of Stock.................................................................... 34
Staggered Board of Directors....................................................................... 34
Ownership Limit.................................................................................... 34
Consent of Limited Partners........................................................................ 34
Adverse Effect of Increasing Market Interest Rate Levels on Price of Common Stock..................... 35
Absence of Public Market for Common Stock; Market Price of Common Stock............................... 35
Odd-lot Shares........................................................................................ 35
Risks of Equity Real Estate Investment; Adverse Impact on Ability to Make Distributions; Effect on
Value of Properties................................................................................ 35
General............................................................................................ 35
Dependence on Certain Properties................................................................... 36
Competition........................................................................................ 36
Risks of Acquisition, Renovation and Development Activities........................................ 36
Possible Environmental Liabilities................................................................. 36
General Uninsured Losses........................................................................... 37
Bankruptcy of Tenants.............................................................................. 37
Regulation......................................................................................... 38
Degree of Leverage................................................................................. 38
Tax Risks............................................................................................. 38
Adverse Tax Consequences of Failure to Qualify as a REIT........................................... 38
Other Tax Liabilities.............................................................................. 38
Necessity to Maintain Ownership Limit Required to Maintain REIT Qualification; Anti-Takeover Effect... 38
Computer Systems and Year 2000 Issues................................................................. 39
Forward--Looking Statements........................................................................... 40
FORMATION TRANSACTIONS AND STRUCTURE OF THE COMPANY..................................................... 41
Formation Transactions................................................................................ 41
Calculation of Net Asset Value........................................................................ 43
Benefits of the Formation Transactions to the Philips Group........................................... 43
Benefits of the Formation Transactions to the Trustees................................................ 44
Benefits of the Formation Transactions to the National Shareholders................................... 44
Background of the Formation Transactions.............................................................. 45
Reasons for the Formation Transactions; Recommendations of the Board of Trustees...................... 47
Interests of the Trustees in the Formation Transactions............................................... 52
Opinion of Financial Advisor.......................................................................... 52
Description of the Contribution and Exchange Agreement................................................ 55
Representations and Warranties..................................................................... 55
Conduct of Business................................................................................ 55
No Solicitation of Competing Transactions.......................................................... 55
Conditions to the Formation Transactions........................................................... 55
Indemnification and Insurance...................................................................... 56
Agreement to Vote.................................................................................. 56
Fees and Expenses.................................................................................. 56
Termination........................................................................................ 56
Certain Federal Income Tax Consequences............................................................... 57
Solicitation Agent.................................................................................... 58
THE MEETING............................................................................................. 58
Purpose of the Meeting................................................................................ 58
General............................................................................................ 58
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Record Date; Shareholders Entitled to Vote and Required Vote....................................... 59
Solicitation, Revocation and Use of Proxies........................................................ 59
Appraisal Rights; Shareholders List................................................................ 59
Approval of the Transaction Agreements................................................................ 60
Other Business; Adjournment or Postponement of Meeting................................................ 60
Principal Holders of National Shares.................................................................. 60
THE COMPANIES........................................................................................... 62
Philips International Realty Corp. ................................................................... 62
Affiliates of the Company.......................................................................... 62
The Holding Partnerships, the Interim Managing General Partner and Philips Subs....................... 62
The Operating Partnership............................................................................. 63
National.............................................................................................. 63
MANAGEMENT AGREEMENT AND NON-COMPETITION AGREEMENT...................................................... 64
Management Agreement.................................................................................. 64
Non-Competition Agreement............................................................................. 64
PARTNERSHIP AGREEMENT OF OPERATING PARTNERSHIP.......................................................... 65
Management............................................................................................ 65
Control by Interim Managing General Partner........................................................... 65
Rights of the Limited Partners........................................................................ 66
Indemnification and Fiduciary Standards............................................................... 66
Transferability of Interests.......................................................................... 67
Capital Contributions................................................................................. 68
Additional Classes of Units........................................................................... 68
Awards Under Stock Option Plans....................................................................... 68
Redemption Rights..................................................................................... 68
Registration Rights................................................................................... 68
Tax Matters........................................................................................... 68
Operations............................................................................................ 69
Duties and Conflicts.................................................................................. 69
Term.................................................................................................. 69
COMPARISON OF SHAREHOLDERS' RIGHTS...................................................................... 69
Board of Trustees and Board of Directors.............................................................. 70
Issuance of Capital Stock............................................................................. 70
Distributions to Shareholders......................................................................... 71
Shareholder Meetings.................................................................................. 71
Shareholder Approval of Certain Actions............................................................... 71
Restrictions on Corporate Activities.................................................................. 71
Interested Party Transactions......................................................................... 72
Ownership Limit....................................................................................... 72
Anti-takeover Provisions.............................................................................. 73
Indemnification....................................................................................... 73
Nomination of Trustees/Directors by Shareholders...................................................... 73
CAPITALIZATION.......................................................................................... 74
THE COMPANY'S STRATEGY FOR GROWTH....................................................................... 74
Internal Growth....................................................................................... 74
Operations......................................................................................... 74
Balance Sheet Management and Cost Control.......................................................... 75
Self-Management.................................................................................... 75
External Growth....................................................................................... 75
Acquisitions....................................................................................... 75
Referrals of Potential Shopping Center Acquisitions................................................ 75
Development........................................................................................ 76
Geographic Expansion............................................................................... 76
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DISTRIBUTION POLICY..................................................................................... 76
SELECTED FINANCIAL DATA................................................................................. 77
Selected Combined Financial Data of The Philips Company and
Merrick/Mill Basin Properties...................................................................... 78
Selected Financial Data of National................................................................... 79
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE PHILIPS
COMPANY............................................................................................... 82
Overview.............................................................................................. 82
Results of Operations................................................................................. 82
Pro Forma Operating Results........................................................................... 84
Liquidity and Capital Resources....................................................................... 84
Funds from Operations................................................................................. 85
Inflation............................................................................................. 86
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF NATIONAL....... 87
Liquidity and Capital Resources....................................................................... 87
Inflation............................................................................................. 87
Competition........................................................................................... 87
Results of Operations................................................................................. 87
BUSINESS AND PROPERTIES................................................................................. 89
General............................................................................................... 89
Shopping Center Properties............................................................................ 89
Geographic Markets................................................................................. 89
Rentals and Major Tenants.......................................................................... 90
Property Data...................................................................................... 91
Occupancy and Average Rentals...................................................................... 92
Leasing Activity................................................................................... 92
Lease Expirations.................................................................................. 93
Tax Basis and Real Estate Taxes.................................................................... 93
Government Regulations................................................................................ 94
Employees............................................................................................. 95
Legal Proceedings..................................................................................... 95
SIGNIFICANT PROPERTIES.................................................................................. 95
Palm Springs Mile..................................................................................... 95
Forest Avenue Shoppers Town........................................................................... 97
Meadowbrook Commons................................................................................... 100
EXCLUDED PROPERTIES..................................................................................... 102
ASSUMED INDEBTEDNESS.................................................................................... 103
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES............................................................. 105
Investment Objectives and Policies.................................................................... 105
Real Estate Investment Policies and Criteria.......................................................... 105
Dispositions.......................................................................................... 105
Other Investments..................................................................................... 105
Financing............................................................................................. 106
Equity Capital........................................................................................ 107
Working Capital Reserves.............................................................................. 107
Annual Reports........................................................................................ 107
Other Policies........................................................................................ 107
MANAGEMENT.............................................................................................. 108
Board of Trustees of National......................................................................... 108
Directors and Executive Officers of the Company....................................................... 108
Compensation of Directors............................................................................. 110
Committees of the Board of Directors.................................................................. 110
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Audit Committee.................................................................................... 110
Compensation Committee............................................................................. 110
Executive Compensation................................................................................ 110
Employment Agreements................................................................................. 111
Stock Option Plan..................................................................................... 112
The 401(k) Plan....................................................................................... 113
Indemnification....................................................................................... 113
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................................... 114
Terms of Transfers.................................................................................... 114
Registration Rights................................................................................... 114
Non-Competition Agreement............................................................................. 114
Partnership Agreement................................................................................. 114
Management Agreement.................................................................................. 114
Miscellaneous......................................................................................... 114
Benefits of the Formation Transactions to Certain Executive Officers and the Philips Group............ 114
PRINCIPAL SHAREHOLDERS.................................................................................. 115
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY............................................................. 116
General............................................................................................... 116
Series A Preferred Stock.............................................................................. 116
Restrictions on Transfer.............................................................................. 117
Ownership Limits................................................................................... 117
Transfer Agent and Registrar.......................................................................... 119
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER
AND BY-LAWS........................................................................................... 119
Board of Directors.................................................................................... 119
Removal of Directors.................................................................................. 119
Business Combinations................................................................................. 119
Control Share Acquisitions............................................................................ 120
Amendment to the Articles of Incorporation............................................................ 121
Advance Notice of Director Nominations and New Business............................................... 121
Limitation of Directors' and Officers' Liability...................................................... 121
SHARES AVAILABLE FOR FUTURE SALE........................................................................ 122
General............................................................................................... 122
Registration Rights................................................................................... 123
FEDERAL INCOME TAX CONSIDERATIONS....................................................................... 123
Taxation of the Company............................................................................... 123
Taxation of Shareholders.............................................................................. 128
Other Tax Considerations.............................................................................. 131
ERISA CONSIDERATIONS.................................................................................... 132
Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs....................................... 133
Status of the Company, the Operating Partnership and the Holding Partnerships Under ERISA............. 133
OTHER BUSINESS.......................................................................................... 134
EXPERTS................................................................................................. 134
LEGAL MATTERS........................................................................................... 134
GLOSSARY OF CERTAIN DEFINED TERMS....................................................................... 135
INDEX TO FINANCIAL INFORMATION.......................................................................... F-1
APPENDIX A--Opinion of Prudential Securities Incorporated............................................... A-1
</TABLE>
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Proxy
Statement/Prospectus. Unless otherwise indicated, the information contained in
this Proxy Statement/Prospectus assumes the completion of the transactions
resulting in the formation of the Company and the Operating Partnership,
including the acquisition of the nine properties owned by the Philips Group and
the acquisition of the one property from National. Unless the context otherwise
requires, the 'Company' shall mean Philips International Realty Corp., its
subsidiaries, and those entities controlled by it, including the Operating
Partnership, on a combined basis after giving effect to the Formation
Transactions. All references to 'this Proxy Statement/Prospectus' shall mean the
Proxy Statement/Prospectus being furnished to the shareholders of National in
connection with the solicitation of proxies by the Board of Trustees of
National. Additional capitalized terms shall have the meanings set forth in the
Glossary.
THE COMPANY
Philips International Realty Corp. (the 'Company') has been formed to
continue and expand the Philips Group business of acquiring, developing and
redeveloping community and neighborhood shopping centers. As part of the
Formation Transactions, the Company will acquire the interests and/or assets of
certain partnerships, limited liability companies and affiliates of the Philips
Group in a portfolio of nine shopping center properties (collectively, the
'Partnership Properties') and, upon consummation of the Formation Transactions,
the Company will acquire a shopping center property located in Lake Mary,
Florida, owned by National (the 'National Property'). Upon consummation of the
Formation Transactions, the Company will be a self-advised real estate company
with expertise, through its directors and executive officers and the Management
Company, in all aspects of acquisition, development, construction, leasing,
management, operation and financing of shopping center properties in the New
England, Mid-Atlantic and Southeast regions of the United States. The Company
intends to qualify as a real estate investment trust (a 'REIT') for federal
income tax purposes commencing with the taxable year ending December 31, 1998,
but may elect to qualify as a REIT for federal income tax purposes as early as
the taxable year ending December 31, 1997.
Philips Private Company and the Management Company were founded in 1982 by
Philip Pilevsky, Chairman of the Board and Chief Executive Officer of the
Company, and Sheila Levine, Chief Operating Officer and Executive Vice President
of the Company (the 'Founders'). The Founders have been involved in the
development, leasing, financing, management, operation, acquisition and
disposition of commercial properties in a diversity of markets for over 20 years
and have been focusing primarily on retail shopping center properties in the New
England, Mid-Atlantic and Southeast regions of the United States. Mr. Pilevsky
and Ms. Levine, along with the Management Company, will conduct all of their
future retail shopping center activities, including acquisition, development,
leasing and management, exclusively through the Company, subject to certain
limited exceptions.
The Partnership Properties are located in suburban and metropolitan markets
in five states along the East Coast, including New York, Florida, Connecticut,
New Jersey and Massachusetts. The Partnership Properties are well established
community and neighborhood shopping centers strategically located in densely
populated middle and upper income markets and are easily accessible from major
transportation arteries. The Partnership Properties contain approximately 2.3
million square feet of GLA, representing approximately 98.4% of the Company's
total GLA, and were approximately 96.4% leased at September 30, 1997. The
National Property consists of a two-story shopping center and office facility
and is located in Lake Mary, Florida. The National Property contains
approximately 38,000 square feet of GLA, representing approximately 1.6% of the
Company's total GLA, and was 100% leased at September 30, 1997.
The Company's ten properties (collectively, the 'Properties') are leased to
more than 260 tenants representing a diverse group of local, regional, national
and international companies. Such leases, generally ranging from 5 to 10 years
for non-anchor tenants and 15 to 25 years for anchor tenants, provide for
minimum rentals that are generally either subject to scheduled fixed increases
or upward adjustments based upon certain inflation indices. The leases generally
also provide for the recovery of operating costs through either full pass-
through to tenants or the recovery of increases over a stated cost base. As of
September 30, 1997, no one tenant represented more than 6.1% of the Company's
total annualized contractual base rental revenues. All of the
<PAGE>
Partnership Properties are anchored by national or regional tenants such as
Pergament Home Centers, Inc., APW Supermarkets, Inc. (Waldbaum's), Toys 'R' Us
Inc., Giant Food Stores, Inc., Mervyn's, United Artists Communications, Inc.,
Walgreen Co., The TJX Companies Inc. (TJ Maxx), Winn Dixie Stores Inc. and
Michaels Stores Inc. See 'Business and Properties.'
The Company's senior management will include the Founders, Mr. Louis J.
Petra, President, and Mr. Brian J. Gallagher, Chief Financial Officer.
Collectively, the senior management has an average of 20 years of real estate
experience. The Company believes that its ability to grow will be driven by
senior management's market and industry knowledge and their significant
experience in the acquisition, development, management and leasing of shopping
centers. Management believes, based on the real estate investment experience of
senior management, coupled with an extensive network of relationships
established by Mr. Pilevsky and other members of senior management, that the
Company will have a competitive advantage in the operation of retail shopping
centers and in the identification of attractive retail property investments.
Under the direction of senior management of the Company, the leasing,
management, construction and day-to-day operations of the Properties will be
conducted primarily through the Management Company. The Company initially
intends to utilize the Management Company to provide certain services to the
Company, such as property management, leasing and construction management, that
are currently uneconomic for the Company to provide internally. Any such
services provided by the Management Company will be provided at market level
fees.
The Company's business strategy involves three fundamental practices: (i)
developing, acquiring, expanding and redeveloping shopping centers in select
markets with strong economic and demographic characteristics in order to
establish and maintain a portfolio of real estate assets with stable income and
the potential for long-term growth; (ii) continuing to develop its local and
regional market expertise through the involvement and direction of senior
management in the property operations and leasing of the properties in order to
capitalize on the prevailing market and retailing trends; and (iii) establishing
and maintaining a diversified and complementary tenant mix with an emphasis on
national and regional tenants that provide day-to-day consumer necessities in
order to produce consistent rental revenues. The Company has a proven track
record of enhancing the value of its properties through increases in occupancy
rates and rental revenues.
The Company's goal is to maximize the long-term value of the Company and
the total return to its shareholders through the acquisition, development,
expansion and redevelopment of additional community and neighborhood shopping
center properties and through intensive asset and portfolio management. The
Company intends to expand its presence in the targeted geographic regions to
realize economies of scale in the Company's operations. The Company also intends
to maximize the opportunities to expand, relocate and build-to-suit for its
numerous tenants.
The Company's executive offices are located at 417 Fifth Avenue, New York,
New York, 10016, and its telephone number is (212) 545-1100. National's
executive offices are located at the offices of its managing trustee at 32
Hanson Road, Canton Center, Connecticut 06020, and its telephone number is (888)
678-1109.
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RISK FACTORS
The holders of National Shares should carefully consider the matters
discussed under 'Risk Factors' prior to voting on the Transaction Agreements.
Such considerations include, among others:
o control of the business of the Company by Mr. Pilevsky as Chairman of the
Board and Chief Executive Officer of the Company and as sole member of
the Interim Managing General Partner (which will control the Operating
Partnership until completion of an Offering), subject to certain
limitations with respect to transactions between the Company and Mr.
Pilevsky and his affiliates; Mr. Pilevsky's interests may not be
consistent with the interests of the other shareholders of the Company;
o control by Mr. Pilevsky, as sole member of the Interim Managing General
Partner, as to whether shareholders will receive a distribution, until
such time as the Company completes an Offering (subject to certain
federal tax requirements to maintain REIT status);
o substantial influence over the affairs of the Company and the Operating
Partnership by the Founders as directors and executive officers of the
Company and as holders initially of Units and Common Stock representing
approximately 70.6% of the outstanding shares of Common Stock of the
Company (including interests redeemable or convertible therefor and
shares of Common Stock issuable upon exercise of outstanding warrants);
o conflicts of interest with the Founders and other members of the Philips
Group in connection with the operation of the Company's ongoing business,
including conflicts associated with the tax consequences of sales and
refinancings of certain of the Properties. In particular, the Founders
and other members of the Philips Group may suffer different and/or more
adverse tax consequences than the Company and its shareholders upon the
sale or refinancing of certain of the Properties, including a reduction
of indebtedness on such properties. Thus, the Founders, as directors and
executive officers, on the one hand, and the shareholders, on the other
hand, may have different objectives regarding the appropriate pricing and
timing of any sale or refinancing of certain Properties, and such
directors and executive officers will be in a position to influence the
Company not to sell or refinance a Property, even though such sale might
otherwise be financially advantageous to the Company, and will be in a
position to influence the Company to refinance a Property with a higher
level of debt (which could be more advantageous from a tax standpoint to
such directors and executive officers due to their existing holdings in
the Properties) than would be in the best interests of the Company;
o material benefits to the Philips Group in connection with the Formation
Transactions, including improved liquidity and diversification of their
investment in the Properties and the deferral of certain tax consequences
in connection with the contribution of the Properties to the Operating
Partnership in exchange for Units;
o material benefits to the Founders in connection with the Formation
Transactions, including the receipt by Mr. Pilevsky of stock options and
the receipt by Ms. Levine of salary and stock options, each as an
executive officer of the Company;
o conflicts of interest associated with the engagement of third-party
management affiliated with Philips Private Company, including conflicts
with certain personnel of the Management Company who will continue to
spend a material amount of their time and effort managing the business
and properties of Philips Private Company;
o dependence of the Company on such third-party management in the
management, acquisition, development, leasing and operations of the
Properties;
o possible conflicts of interest due to the fact that two members of the
Board of Trustees of National, Messrs. Stein and Goldman, have interests
in and will receive certain benefits from the Formation Transactions that
are in addition to the interests and benefits of shareholders of National
generally, including receipt by Messrs. Stein and Goldman of 5,000 shares
of Common Stock (the 'Trustees Stock') with an aggregate pro forma net
asset value of $250,000 and warrants (the 'Trustees Warrants' and,
together with the Trustees Stock, the 'Trustees Securities') to purchase
an aggregate of 8,000 shares of Common Stock at an exercise price of
$25.00 per share. See 'The Formation Transactions and
3
<PAGE>
Structure of the Company--Calculation of Net Asset Value' for a
description of the net asset value of the Company ('Net Asset Value').
o conflicts of interests with certain members of the Philips Group,
including the Founders, who will continue to hold through Philips Private
Company significant interests in income producing real property not
contributed to the Company, including conflicts with one of the Founders
who may continue to spend a material amount of his time and effort
managing these interests;
o lack of any limitation on the amount or percentage of debt the Company
may incur, which could lead to an increase in the Company's indebtedness
and adversely affect the ability of the Company to repay its indebtedness
or make distributions to shareholders;
o following completion of the Formation Transactions, the Company will have
a Debt-to-Total Capitalization Ratio (as defined below) of approximately
70% (assuming a Net Asset Value of $50.00 per share of Common Stock) and
will need to complete a public or private equity offering in order to
decrease its level of indebtedness and obtain funds for expansion.
'Debt-to-Total Capitalization Ratio' is defined as the ratio of total
debt of the Company to the sum of the aggregate Net Asset Value plus the
total debt of the Company;
o risks associated with debt financing, which could adversely affect the
Company's ability to make distributions to shareholders and its ability
to qualify as a REIT, including the possibility that (i) interest on the
Company's floating rate mortgage debt (initially approximately $96.8
million, with a weighted average interest rate of approximately 8.0% per
annum) may increase; and (ii) the Company will not have sufficient funds
from operating activities available to make balloon payments of principal
upon maturity (assuming exercise of extension options by the Company) of
its mortgage debt, including approximately $63.5 million of debt maturing
within one year, and therefore, the Company may have to refinance its
debt obligations on less favorable terms, raise equity or lose the
Company's interest in the applicable Properties if it cannot refinance
such obligations;
o possible adverse consequences of the Company's negative cash position of
approximately $1.1 million on a pro forma basis as of September 30, 1997,
which could adversely affect the Company's ability to repay its
obligations or make distributions to shareholders; although no assurances
can be given, the Company expects that its net cash flow from operations
during the period subsequent to September 30, 1997 and preceding
consummation of the Formation Transactions will be sufficient to
substantially, if not fully, fund the related transaction costs and
eliminate such pro forma cash deficiency. Alternatively, the Company may
arrange short-term debt financing to eliminate such cash deficiency; such
financing could be more difficult as a result of the Company's highly
leveraged capital structure;
o the valuation of the Properties, including the National Property, was not
based on third-party appraisals; the consideration to be paid by the
Company for the Properties and other assets to be acquired by it may
exceed their aggregate fair market value and the consideration to be paid
by the Company for any individual property, including the National
Property, may be less than its fair market value;
o material differences in the rights of shareholders of National as
compared to the rights of shareholders of the Company, including the
absence from the Company's charter documents of provisions protective of
shareholders' rights currently applicable to National shareholders, such
as restrictions on corporate investment and financing policies and
limitations on certain corporate transactions, as well as differences in
the ability to remove and replace directors and request meetings of
shareholders;
o real estate investment risks, including: a general lack of liquidity of
investments in real estate; the dependence of income and cash flow on
certain significant Properties and on the economic conditions and
continued demand for shopping centers and retail space in the New
England, Mid-Atlantic and Southeast regions of the United States; the
ability of the Company to attract and retain tenants; factors that may
adversely affect the value of the Properties, such as potential unknown
or future environmental liabilities and potential losses in the event of
an uninsurable casualty and uninsured losses from title defects;
4
<PAGE>
o taxation of the Company as a corporation if it fails to qualify as a
REIT, and the resulting decrease in funds available to make
distributions; failure of the Company to quality as a REIT could affect
National's REIT status if the principal assets held by National are
shares of Common Stock of the Company;
o potential anti-takeover effects of provisions generally limiting the
actual or constructive ownership of capital stock of the Company by any
one person or entity to 6.5% of the outstanding shares, a classified
board of directors and other charter and statutory provisions and
provisions in the Partnership Agreement that may have the effect of
inhibiting a change of control of the Company or making it more difficult
to effect a change in management or limiting the opportunity for
shareholders to receive a premium over the market price for the Common
Stock;
o no prior public market for the shares of Common Stock, including the risk
that an active trading market might not develop, or if developed might
not be maintained, which may negatively impact the price at which shares
of Common Stock may be resold; no assurances can be made that the shares
of Common Stock will trade at or above $50.00 per share, the Net Asset
Value per share of Common Stock; see 'Formation Transactions and
Structure of the Company--Calculation of Net Asset Value.'
o in connection with the dividend of shares of Common Stock by National,
certain shareholders may receive fractional shares or 'odd-lot' shares
(fewer than 100 shares), which in turn could affect the liquidity of such
shares and the transaction costs of a sale of such shares;
o potential adverse effects on the value of the shares of Common Stock of
fluctuations in interest rates or equity markets, which may negatively
impact the price at which shares of Common Stock may be resold and may
limit the Company's ability to raise additional equity to finance future
development; and
o the possible issuance of additional shares of Common Stock (or Common
Stock equivalents), including 1,450,000 shares of Common Stock issuable
upon redemption of the Units, 38,800 shares of Common Stock issuable upon
conversion of the Series A Preferred Stock and 269,600 shares of Common
Stock issuable pursuant to outstanding warrants and stock options, which
may adversely affect the market price of the shares of Common Stock or
result in dilution on a per share basis of cash available for
distribution.
FORMATION TRANSACTIONS
The Formation Transactions are as follows:
o Pursuant to the Contribution and Exchange Agreement, the partners of the
Contributing Partnerships will transfer their partnership or membership
interests, as the case may be, in the Partnership Properties, or, in
certain cases, the Contributing Partnerships will transfer their
properties directly, to the Operating Partnership and/or its wholly-owned
subsidiaries in exchange for an aggregate of 1,450,000 Units in the
Operating Partnership, which Units represent approximately 93.9% of the
outstanding Common Stock of the Company (including interests redeemable
or convertible therefor and shares of Common Stock issuable upon exercise
of outstanding warrants). In connection with such transfers, the
Operating Partnership will assume approximately $176.8 million of
indebtedness encumbering the contributed assets and partnership and
membership interests.
o The Company will purchase the National Property in exchange for 32,000
shares of Common Stock and the assumption of approximately $550,000 of
debt.
o National will distribute as a dividend approximately 3,744 of such shares
of Common Stock by the end of calendar year 1997 and approximately 20,256
of such shares of Common Stock by the end of January 1998 (representing
in the aggregate not less than 75% of the Common Stock received by
National) to its shareholders on a pro-rata basis and retain 8,000 shares
of Common Stock; distributions received, if any, on account of the
retained shares, or the net proceeds from the sale of any such shares,
will be available to National for working capital purposes.
o Messrs. Stein and Goldman, Trustees of National, will receive the
Trustees Securities in consideration of their efforts on behalf of
National to arrange and carry out the Formation Transactions and their
agreement to vote their National Shares in favor of the Transaction
Agreements.
5
<PAGE>
o Mr. Pilevsky will purchase 10,660 shares of Common Stock (approximately
22.4% of the outstanding shares of Common Stock of the Company, excluding
interests redeemable or convertible therefor and shares of Common Stock
issuable upon exercise of outstanding warrants) at $50.00 per share, for
a total purchase price of $533,000.
o Prudential Securities will receive, in lieu of the financial advisory fee
payable by National upon consummation of the Formation Transactions and
assumed by the Company under the Contribution and Exchange Agreement,
1,940 shares of Series A Preferred Stock, convertible into 38,800 shares
of Common Stock, which Series A Preferred Stock represents approximately
2.5% of the outstanding shares of Common Stock of the Company (including
interests redeemable or convertible therefor and shares of Common Stock
issuable upon exercise of outstanding warrants).
o The Company will enter into a three-year employment agreement with Ms.
Levine as Chief Operating Officer and Executive Vice President, which
will be effective as of the consummation of the Formation Transactions.
Mr. Pilevsky, who will serve as Chief Executive Officer of the Company,
Ms. Levine and the Management Company will enter into a non-competition
agreement with the Company.
o The Company will enter into employment agreements with Messrs. Louis J.
Petra as President and Brian J. Gallagher as Chief Financial Officer,
which will be effective upon consummation of the Formation Transactions.
o The Company will contribute its fee title interest in the National
Property (together with the cash received from Mr. Pilevsky in connection
with his purchase of Common Stock) to the Operating Partnership in
exchange for its initial approximately 3.2% general partnership interest
therein (increasing to approximately 6.1% upon exercise of the Trustee
Warrants and conversion of the Series A Preferred Stock). The Company
will also acquire 1,940 preferred units of the Operating Partnership,
which will have financial terms substantially identical to the financial
terms of the Series A Preferred Stock.
o Until the completion of an Offering, the Interim Managing General Partner
will have full and exclusive control over the business and affairs of the
Operating Partnership, subject to certain rights of the limited partners
and certain limitations with respect to transactions with Mr. Pilevsky or
his affiliates.
o The Management Company will be engaged to provide certain property level
services and accounting services to the Company.
6
<PAGE>
The following diagram illustrates certain aspects of the Formation
Transactions.
----------------------------------
----------------------- Palm Springs Mile Associates, Ltd.
National Properties Forest Avenue Shopping Associates
Investment Trust Philips Freeport Associates, L.P.
----------------------- Merrick Shopping Associates
| ^ SP Avenue U Associates, L.P.
| | Foxborough Shopping L.L.C.
| ---------- | Enfield Shopping L.L.C.
| National | 32,000 shares Delran Shopping L.L.C.
| Trustees | of Common Stock Branhaven Plaza L.L.C.
| ---------- | ----------------------------------
1 ^ | ^ |
Property | ----------- | |
| ------------- | | |
| Trustees Securities | | | |
| ---------------------- L.P. | |
| Philips International interest | |9 Properties
| Realty Corp. | |
| ---------------------- | |
| 1,940 shares | ^ | | |
| of Preferred Stock | | | | |
| -------------| $| |10,660 shares | |
| | | | |of Common Stock | |
| \/ | | | | |
| ----------- | | \/ | |
| Prudential | ----------------- | |
| Securities | Philip Pilevsky | |
| ----------- GP | ----------------- | |
| interest| | |
| \/ | |
| ----------------------- | |
| Philips International ------------- |
---------------\ Realty, L.P. /--------------
/-----------------------\
See 'Structure and Formation of the Company', 'Partnership Agreement of the
Operating Partnership', and 'Risk Factors' for additional information regarding
the Formation Transactions.
7
<PAGE>
As a result of the Formation Transactions, the structure and ownership of
the Company will be as shown in the following diagram:
---------------------------------------------------------
Philips International Realty Corp.
("Company")(l)
33.9% owned by National and its shareholders (Common Stock)
11.3% owned by Mr. Pilevsky (Common Stock)
---- 13.7% owned by the Trustees (Common Stock and Warrants)
| 41.1% owned by Prudential Securities(2) (Preferred Stock
| convertible into Common Stock, on an as-converted basis)
| ---------------------------------------------------------
| | -----------------
| \/ Philips
| ------------------------------------------------------- International
| Philips International Realty, L.P. Realty, LLC
| ("Operating Partnership") ("Interim
| 6.1% owned by the Company, as non-managing general / Managing General
| partner(3) \--- Partner")(4)
| 0.001% owned by the Interim Managing General Partner, 100% owned by
| as managing general partner Mr. Pilevsky
| 93.899% owned by the Philips Group, as limited partners -----------------
| ------------------------------------------------------- / |
| | | / |
- --------------- | | / |
Philips Subs | | / |
100% owned by ------+---------------------------- | / |
the Company | -----------+-----+----------- |
- --------------- | | | | |
| \/ \/ \/ \/ \/
| ------------------------------------ ---------------------------------
| 3 Contributing Partnerships(5) 7 Holding Partnerships (6)
| (Owner of fee title to 3 (Owner of fee title to 7
| of the 10 Properties) of the 10 Properties)
| 99.989% owned by the Operating 99.989% owned by the Operating
| Partnership, as limited partner Partnership, as limited
--\ or non-managing member partner
/ 0.01% owned by the Philips Subs, 0.01% owned by the Philips Subs,
as non-managing partner or as non-managing general
non-managing member partner
0.001% by the Interim Managing 0.001% by the Interim Managing
General Partner, as managing General Partner as managing
general partner or managing general partner
member
------------------------------------ ---------------------------------
(1) If all Units of the Operating Partnership were redeemed by the Company for
Common Stock, all of the Trustees Warrants were exercised for Common Stock
and all the Series A Preferred Stock was converted into Common Stock, the
Company would be owned approximately 2.1% by National and its shareholders,
approximately 0.7% by Mr. Pilevsky, approximately 0.8% by the Trustees,
approximately 2.5% by Prudential Securities and approximately 93.9% by
members of the Philips Group (of which Mr. Pilevsky will hold a majority
interest). Units are redeemable beginning on the first anniversary of the
consummation of the Formation Transactions, at the holder's request, for
shares of Common Stock on a one-for-one basis (subject to certain
anti-dilution adjustments and exceptions) and/or cash (based on the fair
market value of an
(Footnotes continued on next page)
8
<PAGE>
(Footnotes continued from previous page)
equivalent number of shares of Common Stock at the time of redemption) or, at
the Company's option, for shares of Common Stock and/or cash, in its sole
discretion. See 'Partnership Agreement of Operating Partnership--Redemption
Rights.' Officers, directors, employees and consultants of the Company will
be granted stock options to acquire an aggregate of 261,600 shares of Common
Stock, which could reduce the percentage owned by public stockholders to 1.8%
(on a fully-diluted basis).
(2) Prudential Securities will receive, in lieu of the financial advisory fee
payable by National upon consummation of the Formation Transactions and
assumed by the Company under the Contribution and Exchange Agreement, 1,940
shares of Series A Preferred Stock, which are convertible into 38,800 shares
of Common Stock. Upon consummation of an Offering, the Company will have the
right, subject to the holder's right to convert, to redeem all (but not less
than all) of the Series A Preferred Stock for $1,940,000 in cash, plus any
accrued and unpaid dividends.
(3) Assumes exercise of the Trustee Warrants and conversion of the Series A
Preferred Stock, but not redemption of outstanding Units since such Units
may not be redeemed until the first anniversary of the consummation of the
Formation Transactions.
(4) The Interim Managing General Partner will have full and exclusive power
under the Partnership Agreement to manage the business and affairs of the
Operating Partnership, the Contributing Partnerships and the Holding
Partnerships until such time as the Company completes an Offering, subject
to certain limitations set forth therein, including limitations on
transactions with Mr. Pilevsky or any other member of the Philips Group and
subject to certain federal tax requirements to maintain REIT status.
(5) The Contributing Partnerships for 3 of the 10 Properties initially will be
owned 0.01% by a Philips Sub, as non-managing general partner or
non-managing member, as the case may be, 0.001% by the Interim Managing
General Partner, as managing general partner or managing member, and 99.989%
by the Operating Partnership, as limited partner or non-managing member, as
the case may be. Upon completion of an Offering, the interests of the
Interim Managing General Partner will be redeemed and the Philips Subs will
become managing general partners or managing members, as the case may be.
The balance of the Contributing Partnerships will transfer their respective
properties to the Holding Partnerships.
(6) The Holding Partnerships for 7 of the 10 Properties initially will be owned
0.01% by a Philips Sub, as non-managing general partner, 0.001% by the
Interim Managing General Partner as managing general partner and 99.989% by
the Operating Partnership, as limited partner. Upon completion of an
Offering, the interests of the Interim Managing General Partner will be
redeemed and the Philips Subs will become managing general partners.
9
<PAGE>
BENEFITS OF THE FORMATION TRANSACTIONS TO THE PHILIPS GROUP
The Founders proposed the Formation Transactions to the Philips Group
because they believe that the benefits of the organization of the Company for
the Philips Group outweigh the detriments to them. Benefits to members of the
Philips Group, including the Founders, include:
o improved liquidity of their interests in the Properties, increased
diversification of investment and deferral of the tax consequences
of the contribution of their interests in the Partnership Properties
to the Operating Partnership;
o the Company will own and manage ten shopping center properties
throughout the New England, Mid-Atlantic and the Southeast regions
of the United States, thereby representing an investment in an
enterprise with a significantly larger and more diversified
portfolio, which, although no assurances can be given, should
provide the Company greater access to the capital markets and result
in economies of scale in its operations;
o the release and/or indemnification by the Company of various members
of the Philips Group, including Mr. Pilevsky, with respect to the
assumed indebtedness and certain guarantees and indemnities in
connection with such indebtedness;
o receipt by the Founders of options to purchase Common Stock, each as
an executive officer of the Company, and the employment agreement
entered into with Ms. Levine providing for an annual salary, bonus
and other benefits for her services; and
o the Management Agreement, which will provide a fee to the Management
Company, an affiliate of the Founders, in connection with management
of the Properties. In addition, the Management Company or its
designees will receive options to purchase Common Stock.
BENEFITS OF THE FORMATION TRANSACTIONS TO NATIONAL SHAREHOLDERS
The Board of Trustees has unanimously approved the Transaction Agreements
and recommends that National shareholders approve the Transaction Agreements. In
making its recommendation, the Board of Trustees considered a number of factors,
including the following benefits to National shareholders:
o the Formation Transactions will result in a diversified real estate
company with expertise, through the Company's executive officers and
directors and the Management Company, in acquisition, development,
financing, construction, leasing and other tenant-related services,
enabling the Company to benefit from an effective management team with
substantial real estate experience;
o the Company will own ten shopping center properties throughout the New
England, Mid-Atlantic and Southeast regions of the United States,
compared with National's ownership of one property in Lake Mary, Florida,
thereby representing an investment for National shareholders in an
enterprise with a significantly larger and more diversified portfolio,
which, although no assurances can be given, should provide the Company
greater access to the capital markets and result in economies of scale in
its operations; and
o National does not expect to make cash distributions to shareholders in
the near future except as required to maintain its REIT status, but the
Company intends to make periodic distributions at least annually to its
shareholders in order to maintain its REIT status.
In making its recommendation, the Board of Trustees also considered the
written opinion of Prudential Securities, dated August 7, 1997, that, as of the
date of such opinion and based upon and subject to certain matters stated
therein, the consideration to be received by National for the National Property
pursuant to the Contribution and Exchange Agreement is fair to National from a
financial point of view, and the requirement under the Contribution and Exchange
Agreement of the approval of the Transaction Agreements by a plurality of
Unaffiliated Shareholders. The Board of Trustees also considered the effect of
the controlling ownership of the Philips Group, the reliance upon the Management
Company for the day-to-day management of the Properties and other factors
referred to above under 'Risk Factors'.
10
<PAGE>
In the process of reviewing the proposed Formation Transactions, the Board
examined the benefits to be received by insiders and affiliates of National and
the Company from the Formation Transactions. With respect to the additional
consideration in the form of the Trustees Securities to be received from the
Company by the National Trustees, Messrs. Stein and Goldman, the Board
acknowledged the effort, mostly uncompensated, that had been made by the
Trustees over a three year period to enhance shareholder value in National by,
among other things, making improvements to National's real property and
exploring alternative investment opportunities for National. The Board also took
note of the substantial time and effort expended by each of the Trustees in
performing due diligence and negotiating the Formation Transactions opportunity
for National shareholders. Based on these efforts and the ongoing effort of
managing National, the Board determined that the additional consideration to be
received by Messrs. Stein and Goldman, when viewed as part of the Formation
Transactions, was fair to and in the best interest of the National shareholders.
The Board also considered the conflicts of interest and control issues
presented by the role of Mr. Pilevsky and the Philips Group and their insiders
and affiliates in the Formation Transactions. In particular, the Board noted
that Mr. Pilevsky and the other officers and directors of the Company and the
members of the Philips Group initially will control Units and Common Stock
representing approximately 94.6% of the outstanding shares of Common Stock of
the Company (including interests redeemable or convertible therefor and shares
of Common Stock issuable upon exercise of outstanding warrants) compared to the
2.1% that it is contemplated that the National shareholders will own and the
0.8% to be owned by the Trustees. Despite the foregoing negative factors, the
Board determined that the opportunities and value to the shareholders presented
by the Formation Transactions outweighed the risks posed by the control and
conflicts of interest issues raised by the role of insiders and affiliates of
the Philips Group in the Formation Transactions and concluded that the Formation
Transactions were both fair to, and in the best interests of, shareholders.
As of the Record Date, the Trustees of National had the right to vote
96,789 National Shares, or approximately 12.9% of the outstanding National
Shares.
BACKGROUND OF THE FORMATION TRANSACTIONS AND ALTERNATIVES TO THE FORMATION
TRANSACTIONS
National was organized on January 16, 1985, as a Massachusetts business
trust. On July 23, 1993, National changed its name from Richard Roberts Real
Estate Growth Trust I to its current name. Since electing its REIT status in
1985, National has filed as a REIT under the provisions of the Code and intends
to maintain this status as long as it will benefit National's shareholders.
From inception, National invested directly in equity interests in five
commercial properties in the United States which had income-producing
capabilities. Four of these properties were lost to foreclosure in 1990 and
1992. National has experienced a loss of $18,598, income of $33,452 and a loss
of $272,220 for fiscal years ended December 31, 1996, 1995 and 1994,
respectively. The Shoppes at Lake Mary, a shopping center located in Lake Mary,
Florida, is National's sole remaining property.
Over the past several years, the Board of Trustees of National,
specifically Messrs. Stein and Goldman, has spent a considerable amount of time
investigating various alternatives in order to enhance shareholder value and
return on equity. The Board of Trustees has received various proposals, and has
performed extensive due diligence in assessing all of these proposals.
In spring of 1994, National retained a securities firm to assist in
locating a merger or joint venture partner that would be interested in operating
within a public real estate investment trust structure. Different properties
were reviewed, and preliminary discussions were held with one party. In July
1994, discussions were held with an owner's representative of a portfolio
comprising 56 small retail shopping properties in the Chicago area, Northern
Indiana and Southern Wisconsin. Most of the sites were visited by the Trustees,
and they received and evaluated detailed financial data on each property.
Discussions and meetings were held with the attorneys for the seller, but no
definitive proposal was made by either party. In January 1995, the Trustees
entered into negotiations with the general partner for a portfolio of 4,700
multi-family units located primarily in Michigan and Ohio. All the sites were
visited by the Trustees, some financial data was exchanged and various meetings
between principals were held. The limited partners of such general partner
elected not to proceed with a transaction. In spring of 1995, the Trustees
entered into detailed discussions with the general partner of a portfolio of
more than 100,000 multi-family units, mostly government-subsidized properties.
The Trustees
11
<PAGE>
entered into contract negotiations to acquire numerous properties, the largest
being a 230 unit high-rise in Cincinnati, Ohio. The parties were unable to agree
on the terms of a definitive agreement. In January through March of 1996, the
Trustees held discussions with a group owning more than 1,000 manufactured
housing units in the Phoenix, Arizona area. Included in this portfolio was land
and plans to develop an additional 900 units. The parties were unable to agree
on the terms of a definitive agreement. In May 1996, the Trustees held
discussions with both principals and attorneys for a portfolio of multi-family
units, located in the upper Midwest. Preliminary meetings were held in New York
with potential securities firms to raise the necessary capital for a
transaction. However, the parties were unable to agree on the terms of a
definitive agreement.
Prudential Securities' initial meeting with National was on December 30,
1996. There was a general discussion concerning the Trustees' goals for National
and potential candidates for a consolidation with National. Included among the
attributes deemed by the Board of Trustees to be of critical importance were:
(i) the financial strength of the strategic partner; (ii) the compatibility of
investment objectives and policies; and (iii) the potential for expansion by the
combined entity. On January 12, 1997, National engaged Prudential Securities to
serve as National's financial advisor. Prudential Securities had preliminary
conversations with several private real estate owners to obtain indications of
interest concerning a possible consolidation transaction with National. On
February 12, 1997, Philips and another private real estate owner made
presentations to National to introduce themselves to National and to describe
their respective businesses and organizations. Following the meeting, National
advised Prudential Securities that it would prefer to pursue a possible
transaction with Philips because Philips' property type was a better fit with
National, Philips had a Florida presence like National and National favored
Philips' development-oriented growth plans. The other party did not make a
proposal for a consolidation transaction with National.
Representatives of National and representatives of the Philips Group, and
their respective advisors, held numerous meetings and telephone conference calls
to discuss in conceptual terms the parameters of a possible transaction, to
refine the structure of the transaction and to negotiate the terms of a proposed
acquisition agreement. See 'Formation Transactions and Structure of the
Company--Background of the Formation Transactions.'
During the course of negotiations, the structure of the transaction was
established as a taxable transfer of the National Property for Common Stock
rather than as a tax-free merger transaction to ensure that the Company is not
deemed to assume the liabilities of National, and the parties further discussed
the compensation that would be paid to the Trustees. The Company sought a
distribution by National of Common Stock to shareholders in 1997, (so that the
Company would achieve an immediate public distribution), which distribution was
expected to be taxable to the National shareholders. The Board agreed to this
distribution, since it concluded that it would minimize the adverse tax
consequences to National shareholders by limiting the 1997 distribution to
approximately 18% of the Common Stock to be received by National. National also
agreed to maintain its REIT status and corporate existence for at least one year
following the closing of the Formation Transactions. During this period the
Trustees intend to pursue new opportunities for investment by the REIT and to
continue National as a REIT thereafter so long as, in the Board's determination,
reasonable avenues for enhancing shareholder value remain available.
On August 7, 1997, a special meeting of the Board of Trustees of National
was held in the offices of Bingham Dana LLP in Boston, Massachusetts to consider
the proposed Formation Transactions. After consideration of the positive and
negative factors involved, based on the totality of the facts and circumstances,
the Board resolved to approve National's entering into the Contribution and
Exchange Agreement and the consummation of the Formation Transactions as being
fair and in the best interest of the shareholders, and recommended shareholder
approval of the Transaction Agreements following a proxy solicitation. See
'Formation Transactions and Structure of the Company--Reasons for the Formation
Transactions; Recommendation of the Board of Trustees.'
12
<PAGE>
CONFLICTS OF INTEREST
Board of Trustees. As a result of certain benefits to be received by two
of the members of the National Board of Trustees, Messrs. Stein and Goldman,
upon consummation of the Formation Transactions, such individuals may have
conflicts of interest with respect to their obligations to National in
determining whether it should consummate the Formation Transactions. These
benefits are described in 'Risk Factors--Benefits to Trustees from the Formation
Transactions' and in 'The Formation Transactions--Interests of Certain Persons
in the Formation Transactions.'
The Philips Group. The Philips Group, including the Founders, has
interests that conflict with the interests of others participating in the
Formation Transactions, including the shareholders of National. The Company and
the Philips Group have been represented by the same legal counsel and,
therefore, the Company has not been advised by separate legal counsel in
connection with the Formation Transactions. See 'Risk Factors--Benefits to the
Philips Group from the Formation Transactions' and 'The Formation
Transactions--Interests of Certain Persons in the Formation Transactions.'
Mr. Pilevsky and Ms. Levine, who will be directors and executive officers
of the Company, will own Units in the Operating Partnership. As a result of
their status as holders of Units, such persons may have interests that conflict
with shareholders with respect to business decisions affecting the Company and
the Operating Partnership. In particular, such principals of the Philips Group
may suffer different and/or more adverse tax consequences than the Company and
its shareholders upon the sale or refinancing of certain of the Properties,
including a reduction of indebtedness on such properties. Thus, these executive
officers, on the one hand, and the shareholders, on the other hand, may have
different objectives regarding the appropriate pricing and timing of any sale or
refinancing of certain Properties, and such executive officers will be in a
position to influence the Company not to sell or refinance a Property, even
though such sale might otherwise be financially advantageous to the Company, and
will be in a position to influence the Company to refinance a Property with a
higher level of debt (which could be more advantageous from a tax standpoint to
such persons due to their existing holdings in the Properties) than would be in
the best interests of the Company.
The Interim Managing General Partner. The Partnership Agreement provides
that the Interim Managing General Partner will have full, exclusive and complete
responsibility in the management and control of the business and affairs of the
Operating Partnership (subject to the rights accorded to the limited partners,
of which Mr. Pilevsky will hold a majority of the Units), the Contributing
Partnerships and the Holding Partnerships, and that the Company shall have no
such rights until the completion of an Offering. Thus, until completion of an
Offering, the business and affairs of the Company, conducted through the
Operating Partnership, will be exclusively controlled by Mr. Pilevsky, as sole
member of the Interim Managing General Partner, subject to certain limitations
with respect to transactions between the Company and Mr. Pilevsky or his
affiliates. Since distributions to shareholders require a distribution from the
Operating Partnership to the Company, Mr. Pilevsky will also control any
decision regarding distributions to shareholders (subject to certain federal tax
requirements to maintain REIT status). See 'Partnership Agreement of Operating
Partnership' and 'Risk Factors--Control by the Interim Managing General
Partner.'
Philips Private Company/Excluded Properties. The Philips Group has
directly or indirectly contributed all of the Partnership Properties to the
Operating Partnership. However, certain members of the Philips Group, including
the Founders, will continue to hold through Philips Private Company significant
interests in income producing real property, including certain retail
properties, which will not be contributed to the Company as part of the
Formation Transactions. Neither the Philips Group nor any of its affiliates will
be limited in any manner with respect to such income producing real property
other than pursuant to a non-competition agreement (which places certain
restrictions on the ability of Mr. Pilevsky, Ms. Levine, the Management Company
and their respective affiliates to acquire, operate, manage or develop retail
shopping center properties, other than through the Company, subject to certain
limited exceptions) and they may therefore engage in real estate activities
which could be directly competitive with the business of the Company. See
'Excluded Properties,' '--Conflicts of Interest with and Dependence on the
Management Company' and 'Management Agreement and Non-Competition Agreement.'
The Management Company. The day-to-day leasing, development, acquisition,
property and portfolio management and related administrative functions of the
Company will be performed jointly by the Company and
13
<PAGE>
the Management Company, including certain executive officers and employees of
the Management Company who currently manage the Partnership Properties, pursuant
to the terms of the Management Agreement. Management Company personnel will not
devote their efforts full-time to the management of the business and properties
of the Company, but will in fact devote a material amount of their time to the
management of the business and properties of Philips Private Company, which
could be directly competitive with the business of the Company. The failure of
the Management Company personnel to adequately perform services for the Company
could adversely effect the business of the Company. See 'Risk Factors--Conflicts
of Interests--Philips Private Company/Excluded Properties.'
MANAGEMENT
The Company's day-to-day leasing, development, acquisition, property and
portfolio management and related administrative functions will be performed
jointly by the Company and the Management Company. The Management Company
initially will be engaged to manage the Partnership Properties, pursuant to a
management agreement (the 'Management Agreement'), for a fee equal to 3% of
annual gross rental collections (which, based upon estimated gross rental
collections for 1996, would have been approximately $930,000), plus certain
leasing commissions (not to exceed local current market rates, determined based
upon an analysis derived from contacts with local brokers), construction
supervisory fees (ranging from 10-20% of the cost of a project, determined based
upon the level of difficulty of such project) and other fees not to exceed
current market rates. The Management Agreement may be terminated at any time, in
whole or in part, upon thirty days' written notice, by the Company in the event
it elects to perform one or more of such management functions on an 'in-house'
basis, and at the Company's option upon certain other conditions. See
'Management Agreement and Non-Competition Agreement--Management Agreement.'
The Company's executive officers will include Mr. Pilevsky, Chairman of the
Board and Chief Executive Officer of the Company, who will devote in excess of
50% of his professional time to overseeing the management of the Properties and
the growth of the Company as well as a significant amount of his time to the
management of the business and properties of Philips Private Company, including
non-retail real estate activities and certain properties not contributed to the
Company in the Formation Transactions. Ms. Levine, Chief Operating Officer and
Executive Vice President of the Company, will devote in excess of 90% of her
professional time to overseeing the management of the Properties and the growth
of the Company, and will have limited involvement with certain properties not
contributed to the Company in the Formation Transactions. See 'Risk
Factors--Conflicts of Interests--Philips Private Company/Excluded Properties.'
Pursuant to the terms of a non-competition agreement, Mr. Pilevsky, Ms. Levine
and the Management Company have agreed to conduct all of their future
management, operations, acquisitions or development of retail shopping center
properties, with certain exceptions, through the Company. See 'Management
Agreement and Non-Competition Agreement--Non-Competition Agreement.' In
addition, prior to the consummation of the Formation Transactions, the Company
will enter into employment agreements with Messrs. Petra and Gallagher, who will
devote all of their professional time overseeing the management of the
Properties and the growth of the Company. Ms. Levine and Messrs. Pilevsky, Petra
and Gallagher (the 'Executive Officers') have an average of 20 years' experience
in all aspects of the real estate industry, and have developed many long-term
relationships with tenants, brokers, property owners, lenders, contractors,
suppliers and others in the real estate industry throughout the New England,
Mid-Atlantic and Southeast regions of the United States. In addition, Mr. Petra
has 13 years of prior experience as a senior executive with a publicly-traded
real estate company that focused on the retail shopping center business.
GROWTH STRATEGY
The Company will seek to maximize shareholder value through aggressive
growth of its cash flow per share to be accomplished through an integrated,
multi-faceted strategy capitalizing on the Company's existing strengths and
substantial expertise in the real estate industry.
The Company will continue to utilize its aggressive asset and property
management style to maximize cash flow from its Properties. The Company, through
management's extensive knowledge of retail demand and shopping center operations
accumulated in over 20 years of shopping center ownership and development
14
<PAGE>
throughout the United States, and through its extensive, direct relationships
with the tenant community, will continue its program of (a) seeking optimal
tenant mix at the most favorable rental structure, (b) maximizing occupancy, (c)
minimizing property operating expenses, and (d) superior physical maintenance.
The Company also will continue to selectively engage in property expansion,
re-leasing and redevelopment where the economics of such are favorable to
shareholder value.
The Company intends to aggressively manage its capital and cost structures
so as to maximize total return to shareholders. The Company intends to
restructure its balance sheet to reduce leverage, appropriately match assets and
liabilities and to continuously seek more favorable forms of capital with which
to fulfill its business objectives and enhance its cash flow per share.
Consistent with this strategy, the Company intends, subject to market
conditions, to complete a public or private equity offering, at such time as it
deems it advantageous to do so, and, simultaneously therewith, to obtain a
revolving credit facility to fund acquisitions and for working capital purposes.
The Company, in order to more appropriately match its overhead to the size of
its portfolio, initially will utilize the services of the Management Company for
certain non-executive functions, but intends as the portfolio grows to hire
directly a significant number of those individuals providing such services.
The Company initially will focus its activities in the New England,
Mid-Atlantic and Southeast regions of the United States, utilizing the initial
Properies as a foundation for the Company's anticipated geographic expansion.
The Company, upon closing of the Formation Transactions, will have two offices,
one located at the midpoint of the New England and Mid-Atlantic regions, in New
York, New York, and one located in the Southeast region in Hialeah, Florida. The
Company intends to utilize its existing presence in these regions for expansion
throughout the major markets of the eastern United States.
The Company intends to acquire additional properties at initially
attractive returns which are capable of being further enhanced through the use
of management's proven, value-added expertise, including opportunities to expand
or redevelop properties to attract tenants at higher rent levels. The Company
will seek to acquire properties at below replacement cost in markets with strong
demographics, emphasizing locations where retail demand exceeds supply and the
creation of new supply is hindered. As a result, it is anticipated that most new
acquisitions will occur in major urban-suburban markets. The Company, through
its management team, will apply the same asset and property management
philosophy which it has successfully used for over 20 years, embodied in the
assets to be contributed by the Contributing Partnership upon the closing of the
Formation Transactions. The Company may acquire properties, in whole or in part,
through the issuance of Units, which will enable sellers to defer the payment of
taxes on properties contributed to the Operating Partnership until such time as
the Units are redeemed for Common Stock.
The Philips Group's long-standing relationships in the real estate
brokerage community should give the Company a competitive advantage in
identifying potential acquisition candidates which fit the Company's investment
objectives. Furthermore, the numerous individuals and institutions who have
invested with the members of the Philips Group in past and present real estate
projects should also provide a referral source of potential future retail
shopping center acquisition candidates. In addition, certain members of the
Philips Group, including Mr. Pilevsky, have significant equity interests in
retail shopping center properties which may over time become desirable
acquisition targets for the Company. Such properties were not included in the
Formation Transactions for various reasons, including (i) the asset size, type,
quality or geographic location was not consistent with the Company's acquisition
criteria, (ii) the required valuation of such property would be economically
undesirable from the Company's standpoint, and (iii) partnership and lender
consent issues precluded including certain property in the Company's property
portfolio. Any acquisition of properties owned in part or in whole by Mr.
Pilevsky or any other member of the Philips Group must be approved by the
Company's independent directors.The Company has no agreement with respect to the
acquisition of any of these excluded properties, and, therefore, no assurance
can be made that any such acquisitions will be consummated.
PROPERTIES
The Company initially will own and operate ten shopping center properties
located in metropolitan and suburban areas in the New England, Mid-Atlantic and
Southeast regions of the United States. The Partnerships Properties consist of
shopping centers located in Merrick, Brooklyn, Staten Island, and Freeport, New
York;
15
<PAGE>
Hialeah, Florida; Enfield and Branford, Connecticut; Delran, New Jersey; and
Foxborough, Massachusetts. The National Property consists of one shopping center
in Lake Mary, Florida.
The Properties are well established community and neighborhood shopping
centers strategically located in densely populated, generally middle and upper
income markets and are conveniently located and easily accessible from major
transportation arterials. The Properties contain a total of approximately 2.4
million square feet of GLA, with the individual properties ranging from
approximately 38,000 square feet to approximately 1.2 million square feet of
GLA. As of September 30, 1997, the Properties were approximately 96.4% leased to
over 260 tenants. The Company's principal tenants include major national and
regional retailers, such as Pergament Home Centers, Inc., APW Supermarkets, Inc.
(Waldbaum's), Toys 'R' Us Inc., Giant Food Stores, Inc., Walgreen Co., Mervyn's,
United Artists Communications, Inc., The TJX Companies (TJ Maxx), Winn-Dixie
Stores Inc. and Michaels Stores Inc. The Company believes, based in part on
recent engineering reports, that all of its Properties are well-maintained and
do not require significant capital improvements.
For the year ended December 31, 1996, the Partnership Properties and the
National Property accounted for 98.4% and 1.6%, respectively, of the Company's
approximately 2.4 million square feet of pro forma GLA and approximately 99.6%
and 0.4%, respectively of the Company's approximately $5.1 million of pro forma
Funds from Operations.
16
<PAGE>
Property Data. The following table sets forth certain information relating
to each of the Properties as of September 30, 1997. All of the Properties will
be 100% owned by the Company after completion of the Formation Transactions.
<TABLE>
<CAPTION>
TOTAL PERCENTAGE TOTAL
YEAR TOTAL ANNUALIZED OF TOTAL ANNUALIZED PERCENT
BUILT/ GLA PERCENT OF BASE RENT ANNUALIZED BASE RENT/ LEASED
PROPERTY LOCATION RENOVATED (SQ. FT.) TOTAL GLA(%) ($000)(1) BASE RENT(%) SQ. FT.($)(2) (3)(%)
- ---------------------------------------- --------- ------------ ---------- ------------ ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Forest Avenue 1957/1996 177,002 7.4 3,071 12.8 17.51 99.1
Shoppers Town,
Staten Island, NY
Meadowbrook Commons 1990 173,027 7.2 3,029 12.7 17.50 100.0
Sunrise Highway,
Freeport, NY
Merrick Commons 1960/1994 106,393 4.4 1,737 7.3 16.38 99.7
Merrick Road
Merrick, NY
Mill Basin Plaza 1991 80,708 3.4 2,104 8.8 26.07 100.0
5700-5716 Avenue U
Brooklyn, NY
Palm Springs Mile 1958/1985 - 1,175,346 49.3 10,491 43.9 9.47 94.3
419 West 49th St. 1997
Hialeah, FL
The Shoppes at Lake Mary 1985 38,125 1.6 309 1.3 8.10 100.0
101 N. Country Club Rd.
Lake Mary, FL 32746
Branhaven Plaza 1971/1996 187,829 7.9 1,319 5.5 7.04 99.8
1060 West Main St.
Branhaven, CT
Elm Plaza 1973/1995 168,852 7.1 582 2.4 3.53 97.6
95 Elm Street
Enfield, CT
Millside Plaza 1977 161,128 6.8 761 3.2 4.81 98.3
Route 130 & Haines Mill Rd.
Delran, NJ
Foxboro Plaza 1982 117,831 4.9 513 2.1 4.77 91.2
Route 140 &
Commercial St.
Foxborough, MA
--------- ----- ---------- ----- ----- -------
2,386,241 100.0 23,916 100.0 10.40 96.4
--------- ----- ---------- ----- ----- -------
--------- ----- ---------- ----- ----- -------
<CAPTION>
ANCHOR TENANTS (.25,000 SQ.
FT.) (YEAR OF LEASE
EXPIRATION; PRIMARY/OPTION
PROPERTY LOCATION TERM)
- ---------------------------- ----------------------------
<S> <C>
Forest Avenue The TJX Companies
Shoppers Town, (TJ Maxx) (2005, 2020)
Staten Island, NY APW Supermarkets, Inc.
(Waldbaum's) (2001, 2011)
Meadowbrook Commons Giant Food Stores, Inc.
Sunrise Highway, (2025)
Freeport, NY Toys 'R' Us, Inc. (2020,
2040)
Marshall's (2001, 2016)
Merrick Commons APW Supermarkets, Inc.
Merrick Road (Waldbaum's) (2013, 2041)
Merrick, NY
Mill Basin Plaza Pergament Home Centers, Inc.
5700-5716 Avenue U (2011, 2021)
Brooklyn, NY
Palm Springs Mile United Artists Theaters
419 West 49th St. (2010, 2030)
Hialeah, FL Mervyn's (2011, 2031)
Publix (2002)
Kids 'R' Us (2016, 2026)
Burlington Co. (2002, 2022)
Toys 'R' Us, Inc. (2002,
2033)
Circuit City Stores, Inc.
(2009, 2029)
RTG Furniture (2000, 2005)
The Shoppes at Lake Mary
101 N. Country Club Rd.
Lake Mary, FL 32746
Branhaven Plaza Caldor, Inc. (2002, 2022)
1060 West Main St. APW Supermarkets, Inc.
Branhaven, CT (Waldbaum's) (2016, 2038)
Elm Plaza Caldor Inc. (2001, 2021)
95 Elm Street APW Supermarkets, Inc.
Enfield, CT (Waldbaum's) (2014, 2034)
Millside Plaza Kmart Corp. (2002, 2017)
Route 130 & Haines Mill Rd. Shop Rite (2001, 2016)
Delran, NJ
Foxboro Plaza Bradlees (Stop N Shop)
Route 140 & (2002, 2022)
Commercial St.
Foxborough, MA
</TABLE>
- ------------------
(1) Total annualized contractual base rent as of September 30, 1997, excluding
(i) percentage rent, (ii) additional rent payable by tenants such as common
area maintenance, real estate taxes and other expense reimbursements, and
(iii) future contractual rent escalations and cost of living increases.
(2) Total annualized contractual base rent divided by total GLA leased as of
September 30, 1997.
(3) Percent of GLA leased as of September 30, 1997.
17
<PAGE>
FINANCING POLICY
The Company's Board of Directors has not set any limit on the amount or
percentage of debt the Company may incur. Subject to existing market conditions,
the Company intends to raise additional debt and/or equity capital consistent
with its objective to maximize shareholder value. See 'Management's Discussion
and Analysis of Financial Condition and Results of Operations--The Company (Pro
Forma)--Liquidity and Capital Resources.'
DISTRIBUTION POLICY
The Company currently intends to make periodic distributions to comply with
REIT distribution requirements. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations--The Company (Pro
Forma)--Liquidity and Capital Resources.' In order to maintain its qualification
as a REIT, the Company must make annual distributions to shareholders of at
least 95% of its REIT taxable income (excluding capital gains). Under certain
circumstances, the Company may be required to make distributions in excess of
cash available for distribution in order to meet such distribution requirements.
COMPARISON OF SHAREHOLDERS' RIGHTS
The following provisions are applicable to National shareholders through
the Declaration of Trust, the trustees regulations adopted by the Board of
Trustees (the 'Trustees Regulations') or the Massachusetts Business Corporation
Law (the 'MBCL'), but will not be applicable to shareholders of the Company
(which will be governed by the Company's Amended and Restated Articles of
Incorporation (the 'Charter'), its Amended and Restated By-Laws (the 'By-Laws')
and the Maryland General Corporation Law (the 'MGCL') following completion of
the Formation Transactions:
o National's Declaration of Trust restricts investment and financing
activities and certain extraordinary transactions, whereas the Company's
Charter and By-Laws do not contain similar restrictions;
o a trustee of National may be removed without cause by the
affirmative vote of the holders of a majority of the outstanding National
Shares entitled to vote or with cause by the remaining trustees, whereas a
director of the Company may be removed only for cause by the affirmative
vote of the holders of two-thirds of the total outstanding shares of Common
Stock;
o the holders of 10% of the outstanding National Shares or a majority
of the Board of Trustees may require that a special meeting of National
shareholders be called, whereas a majority of the Board of Directors, the
Chief Executive Officer, the President, or the holders of a majority of
outstanding shares of Common Stock may request a special meeting of the
Company's shareholders;
o there are no Massachusetts anti-takeover statutes currently
applicable to National and there will be no MGCL anti-takeover statutes
applicable to the Company upon consummation of the Formation Transactions
due to the election by the Company to opt out of such provisions; however,
certain provisions of the Company's Charter and By-Laws may have the effect
of discouraging a third party from making an acquisition proposal for the
Company and may thereby inhibit a change of control of the Company.
In addition, certain provisions of the Operating Partnership's partnership
agreement further provide that the Company may not engage in any merger,
consolidation or other combination with or into another person, the sale of all
or substantially all of its assets or any reclassification, recapitalization or
change of its outstanding equity interests (each a 'Termination Transaction')
unless all limited partners either will receive, or will have the right to elect
to receive, for each Unit an amount of cash, securities or other property equal
to the product of (i) the number of shares of Common Stock into which each Unit
is convertible and (ii) the greatest amount of cash, securities or other
property paid to the holder of one share of Common Stock in consideration of one
share of Common Stock pursuant to the terms of the Termination Transaction. If,
in connection with the Termination Transaction, a purchase, tender or exchange
offer shall have been made to and accepted by the holders of the outstanding
shares of Common Stock, each holder of Units will receive, or will have the
right to elect to receive, the greatest amount of cash, securities or other
property which such holder would have received had it exercised its right to
redemption and received shares of Common Stock in exchange for its Units
immediately prior to the
18
<PAGE>
expiration of such purchase, tender or exchange offer and had thereupon accepted
such purchase, tender or exchange offer. See 'Comparison of Shareholders'
Rights' and 'Partnership Agreement of Operating Partnership--Rights of Limited
Partners'.
RESTRICTIONS ON COMMON STOCK OWNERSHIP
Because of limitations imposed by the Internal Revenue Code of 1986, as
amended (the 'Code'), on the concentrations of ownership of stock of a REIT, the
Charter generally prohibits any stockholder, directly or through attribution,
from owning more than 6.5% (by number of shares or value, whichever is more
restrictive) of the outstanding capital stock of the Company, which percentage
may be increased up to 9.8% upon resolution of the Board of Directors of the
Company. The Board of Directors has waived the ownership limitation with respect
to Mr. Pilevsky and has permitted Mr. Pilevsky and his affiliates to actually or
constructively own up to 25% of the outstanding capital stock of the Company
(excluding interests redeemable or convertible therefor and shares issuable upon
exercise of outstanding warrants; the 'Philips Ownership Limit'). In addition,
no holder may own or acquire (either actually or constructively under the
applicable attribution rules of the Code) shares of any class of capital stock
if such ownership or acquisition (i) would cause more than 50% in value of the
outstanding capital stock to be owned by five or fewer individuals or (ii) would
otherwise result in the Company's failing to qualify as a REIT. See 'Description
of Capital Stock,' 'Certain Provisions of Maryland Law and of the Company's
Charter and By-laws' and 'Federal Income Tax Considerations'.
TAX STATUS OF THE COMPANY
The Company intends to make an election to be taxed as a REIT under
Sections 856 through 860 of the Code, commencing with taxable year ending
December 31, 1998, but may elect to qualify as a REIT as early as the taxable
year ending December 31, 1997. The Company will elect REIT status for the year
ending December 31, 1997, if the failure to so elect would adversely affect
National's REIT status. As a REIT, the Company generally will not be subject to
federal income tax on taxable income that it distributes to its shareholders,
and is subject to a number of organizational and operational requirements,
including a requirement that it currently distribute at least 95% of its REIT
taxable income (determined without regard to the dividends paid deduction and by
excluding net capital gains) to its shareholders. If the Company fails to
qualify as a REIT in any taxable year, the Company will be subject to federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. See 'Federal Income Tax Considerations--
Failure to Qualify as a REIT' for a more detailed discussion of the consequences
of a failure of the Company to qualify as a REIT. Even if the Company qualifies
for taxation as a REIT, the Company may be subject to certain state and local
taxes on it income and property and to federal income tax and excise taxes on
its undistributed income. See 'Federal Income Tax Considerations--Taxation of
the Company.'
In the opinion of Pryor, Cashman, Sherman & Flynn, tax counsel to the
Company, the discussion contained in the section entitled 'Federal Income Tax
Considerations' fairly summarizes the federal income tax considerations that are
likely to be material to a holder of Common Stock, and commencing with the
Company's taxable year in which it timely elects to be taxed as a REIT, the
Company will be organized in conformity with the requirements for qualification
as a REIT and its proposed method of operation will enable it to meet the
requirements for qualification and taxation as a REIT under the Code. The
opinion of Pryor, Cashman, Sherman & Flynn is based upon current law, the
Company's ability to satisfy certain Code requirements, and certain
representations made by the Company as to certain factual matters; such opinion
is not binding upon the IRS and no assurance can be given that the Internal
Revenue Service will not challenge the Company's eligibility for taxation as a
REIT.
CERTAIN ASPECTS OF THE CONTRIBUTION AND EXCHANGE AGREEMENT
Conduct of Business. Until the closing of the Formation Transactions
contemplated by the Contribution and Exchange Agreement (the 'Closing'), or
earlier termination of the Contribution and Exchange Agreement, National, the
Company, its subsidiaries and the Contributing Partnerships will each conduct
their operations in the ordinary course of business consistent with past
practice. In addition, unless agreed in writing or except as
19
<PAGE>
otherwise permitted by the Transaction Agreements, none of National, the
Company, any of its subsidiaries or any of the Contributing Partnerships is
permitted to engage in any of a number of actions specified in the Transaction
Agreements. Additionally, National has agreed to maintain its existence and not
adopt any plan of liquidation or dissolution for a period of at least one year
following the Closing. See 'The Formation Transactions--Description of the
Contribution and Exchange Agreement--Conduct of Business.'
No Solicitation. Prior to the Closing or earlier termination of the
Contribution and Exchange Agreement, neither National nor any of its trustees,
advisors, officers, employees, agents, affiliates, or any investment banker or
financial advisor acting on its behalf, will, directly or indirectly, solicit,
initiate or encourage any person to pursue a Competing Offer (as defined in
'Formation Transactions and Structure of the Company--Description of the
Contribution and Exchange Agreement'), except as may be required by the exercise
of their fiduciary duties under applicable law. See 'The Formation
Transactions--Description of the Contribution and Exchange Agreement--No
Solicitation of Competing Transactions.'
Additional Conditions of the Formation Transactions. The consummation of
the Formation Transactions is conditioned upon the satisfaction or waiver of
certain additional conditions set forth in the Contribution and Exchange
Agreement, including the condition that the requisite approval of the National
shareholders shall have been obtained. See 'The Formation
Transactions--Description of the Contribution and Exchange Agreement--
Conditions to the Consummation of the Formation Transactions.'
Certain Federal Income Tax Consequences. National and the Company consider
the Formation Transactions to be taxable transactions for federal income tax
purposes, in which National will recognize gain to the extent that the fair
market value of the Common Stock received by National pursuant to the
Contribution and Exchange Agreement exceeds National's adjusted tax basis in the
National Property. It is estimated that for federal tax purposes a gain of
approximately $1.1 million will be recognized by National as a result of the
Formation Transactions and all such gain and substantial portion of state tax
gain will be offset by carry-over net operating losses of National. National and
the Company intend to file federal, state and local income tax returns
consistent with such treatment.
Generally, as a result of the distribution in 1997 of 3,744 shares of
Common Stock to the National shareholders, gain for federal tax purposes will be
recognized by the shareholders of National of approximately $0.25 per Share, and
the distribution of 20,256 shares of Common Stock in 1998 will be considered a
reduction in basis of the National Shares held by each holder and will be
taxable as capital gain only to the extent it exceeds a shareholder's basis in
the National Shares held by such shareholder. Holders of National Shares are
urged to consult their own tax advisors as to the specific tax consequences to
them of the Formation Transactions. See 'The Formation Transactions--Certain
Federal Income Tax Consequences.'
Bingham Dana LLP, tax counsel to National, has rendered an opinion
regarding the federal income tax consequences that are likely to be material to
a holder of National Shares. See 'The Formation Transactions--Certain Federal
Income Tax Consequences'.
Termination. The Contribution and Exchange Agreement may be terminated (i)
by mutual consent of the parties, (ii) by either National or the Contributing
Partnerships if the Formation Transactions have not been consummated by December
31, 1997 and (iii) under certain other circumstances. In addition, National will
be obligated to pay to the Company certain termination fees under certain
circumstances. See 'The Formation Transactions--Description of the Contribution
and Exchange Agreement--Termination.'
Indemnification. The Company will indemnify, defend and hold harmless the
Board of Trustees for any damages suffered in the event any suits (other than
suits that relate to actions or inactions on the part of Messrs. Stein, Goldman
or Reibstein taken or not taken, as the case may be, which are unrelated to the
negotiation and execution of the Contribution and Exchange Agreement and
consummation of the Formation Transactions) are brought against them as a result
of the transactions contemplated by the Contribution and Exchange Agreement.
These indemnification obligations of the parties survive the consummation of the
Formation Transactions. See 'The Formation Transactions--Description of the
Contribution and Exchange Agreement--Indemnification and Insurance.'
20
<PAGE>
Agreement to Vote. Pursuant to the Contribution and Exchange Agreement,
Messrs. Stein, Goldman and Reibstein agreed to vote all National Shares held by
them, and to cause their respective affiliates to vote all National Shares held
by such affiliates, in favor of the Transaction Agreements.
Expenses. In general, the Company will bear its expenses and those of
National incurred in connection with the Formation Transactions. See 'The
Formation Transactions--Description of the Contribution and Exchange
Agreement--Expenses.'
THE MEETING
Date, Time and Place. The Meeting will be held at 3:00 p.m., local time,
on Tuesday, December 30, 1997, at the offices of Pryor, Cashman, Sherman &
Flynn, 410 Park Avenue, New York, New York 10022. See 'The Meeting--Purpose of
the Meeting.'
Record Date. Only holders of record of National Shares at the close of
business on December 4, 1997, the Record Date, are entitled to notice of, and to
vote at, the Meeting. See 'The Meeting--Purpose of the Meeting--Record Date;
Shareholders Entitled to Vote and Required Vote.'
Other Matters. In addition to considering and acting upon Proposal 1 and
Proposal 2, the shareholders of National will consider and act upon such other
business as may properly be brought before the Meeting.
Vote Required. The presence of a majority of the outstanding National
Shares, either in person or by proxy, is necessary to constitute a quorum at the
Meeting. Abstentions and broker non-votes are counted as shares present for
purposes of determining the presence of a quorum at the Meeting, but broker
non-votes are not counted as votes on any matter to which they relate. Approval
of each of the proposals requires the affirmative vote of the holders of a
majority of the outstanding National Shares entitled to vote at the Meeting.
Accordingly, abstentions and broker non-votes will have the effect of a vote
against the approval of a proposal. In addition, the Contribution and Exchange
Agreement requires the affirmative vote of a plurality of the votes cast by
Unaffiliated Shareholders for approval of Proposal 1. The adoption of each
proposal is conditioned upon the approval of the other proposal. As of the
Record Date, the Trustees of National (or their affiliates) had the right to
vote 96,789 National Shares, or approximately 12.9% of the outstanding National
Shares. Such persons have agreed to vote their National Shares in favor of the
Transaction Agreements. See 'Formation Transactions and Structure of the
Company--Reasons for the Formation Transactions; Recommendation of the Board of
Trustees' and '--Description of the Contribution and Exchange
Agreement--Agreement to Vote.'
Proxies. All holders of National Shares represented at the Meeting by
properly executed proxies received by National prior to or at the Meeting,
unless such proxies previously have been revoked, will be voted at the Meeting
in accordance with the instructions on the proxies. IF NO CONTRARY INSTRUCTIONS
ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR THE APPROVAL OF EACH OF PROPOSAL 1
AND PROPOSAL 2. PROXIES THAT ARE VOTED AGAINST EITHER PROPOSAL 1 OR PROPOSAL 2
WILL NOT BE VOTED IN FAVOR OF AN ADJOURNMENT OR POSTPONEMENT OF THE MEETING.
PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY PROMPTLY USING THE
ENCLOSED PRE-PAID ENVELOPE OR DELIVER TO: THE HERMAN GROUP, INC., 2121 SAN
JACINTO STREET, 26TH FLOOR, DALLAS, TEXAS 75201. FACSIMILE COPIES OF THE PROXY,
PROPERLY COMPLETED AND DULY EXECUTED, WILL BE ACCEPTED AT (214) 999-9323 OR
(214) 999-9348. IF YOU HAVE ANY QUESTIONS, PLEASE CALL THE HERMAN GROUP, INC. AT
(800) 582-1313.
Recommendation of the National Board of Trustees. The Board of Trustees of
National has unanimously approved the Transaction Agreements, and unanimously
recommends that the shareholders of National approve each of Proposal 1 and
Proposal 2. In making its recommendation, the Board of Trustees evaluated a
number of factors. See 'The Formation Transactions--Reasons for the Formation
Transactions; Recommendation of the Board of Trustees.'
Opinion of Financial Advisor. National engaged Prudential Securities as
its financial advisor in connection with the Board of Trustees' review of
strategic alternatives for National and its shareholders. On August 7, 1997,
Prudential Securities delivered its written opinion to the Board of Trustees
that, as of such date and subject to certain matters stated therein, the
consideration to be received by National for the National Property pursuant to
the Contribution and Exchange Agreement is fair to National from a financial
point of view. Prudential Securities confirmed its prior opinion as of the date
of this Proxy Statement/Prospectus. The opinion of Prudential Securities does
not constitute a recommendation as to how any shareholder should vote at the
Meeting. See 'The Formation Transactions--Opinion of Financial Advisor.'
21
<PAGE>
Appraisal Rights; Shareholders List. The shareholders of National have no
appraisal rights or dissenters' rights with respect to the Formation
Transactions under the Declaration of Trust or Massachusetts business trust law.
The Declaration of Trust provides that shareholders of National have the right,
for proper purposes, to inspect a list of the names and addresses of the
shareholders of National in the manner and to the extent provided under
Massachussetts business corporation law. Such request for inspection should be
delivered to the Board of Trustees of National at 32 Hanson Road, Canton Center,
Connecticut, 06020, or by facsimile to (888) 678-7642.
MARKET INFORMATION
The National Shares are not actively traded and, therefore, there is no
available information concerning historical stock prices for the National
Shares.
As of the Record Date, 1997, there were approximately 1,770 holders of
record of National Shares.
National declared and paid cash distributions on a monthly basis from
February 1987 through July 1988 and in September 1988 and February 1989. On
April 11, 1989, the Trustees voted to suspend the monthly shareholders' dividend
indefinitely, effective with the scheduled distribution for the third month of
1989. This decision was predicated upon the desire to direct all available funds
into property operations. A one-time dividend of $0.05 per share was declared in
January 1996 and paid in February 1996 to shareholders of record as of September
30, 1995. This dividend was a return of capital to the shareholders. The
dividend was declared by the sole vote of the managing trustee at such time.
SUMMARY SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating information
for (i) Philips International Realty Corp. (the 'Company'), on a pro forma
basis, (ii) for The Philips Company ('Philips') on a combined historical basis,
(iii) for the Merrick Commons and Mill Basin Plaza Properties ('Merrick/Mill
Basin') on a combined historical basis, (iv) for National on a historical basis,
(v) for Philips, Merrick/Mill Basin and National, all on a combined historical
basis and as modified for the pro forma adjustments (collectively, the 'Equity
Investees') and (vi) for Philips International Realty, L.P. (the 'Operating
Partnership') on a pro forma basis. This information should be read in
conjunction with all of the financial statements and the notes thereto included
elsewhere in this Proxy Statement/Prospectus. The unaudited historical financial
information presented herein is based upon the separate historical financial
statements of the respective entities and the notes thereto which appear
elsewhere in this Proxy Statement/Prospectus and should be read in conjunction
with such financial statements. The unaudited pro forma financial information
presented herein is based upon the pro forma financial statements of Philips
International Realty Corp., the Equity Investees, the Operating Partnership and
the notes thereto which appear elsewhere in this Proxy Statement/Prospectus and
should be read in conjunction with such financial statements. Reference should
also be made to 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' in conjunction with the review of all historical and pro
forma financial and operating information set forth herein.
Upon completion of the Formation Transactions, Philips International Realty
LLC will become the 'Interim Managing General Partner' of the Operating
Partnership and each of the property partnerships with a .001% interest in each
and the Company will have directly or indirectly a non-managing general
partnership interest and therefore will record its investment in the Operating
Partnership on the equity method. The Interim Managing General Partner's
interests will be redeemed by the respective partnerships upon consummation of a
future equity offering of at least $25 million. The Company's pro forma
adjustments are derived from the pro forma financial statements of the Equity
Investees' property partnerships as set forth in the notes to the pro forma
financial statements.
The unaudited pro forma operating information for the Company, the Equity
Investees and the Operating Partnership has been presented as if the Formation
Transactions had occurred as of January 1, 1996, and as if the Company had
qualified as a REIT, distributed all of its taxable income and, therefore,
incurred no federal income tax expense during the period. The unaudited pro
forma balance sheets for the Company, the Equity Investees and the Operating
Partnership as of September 30, 1997 are presented as if the Formation
Transactions had occurred on September 30, 1997. The unaudited pro forma balance
sheet of the Equity Investees combines the respective balance sheets of the
property partnerships as of September 30, 1997, subject to certain pro forma
adjustments. The pro forma balance sheet of the Operating Partnership reflects
its equity interest in the Equity Investees and the pro forma balance sheet of
the Company reflects its equity interest in the Operating Partnership.
The pro forma financial information is not necessarily indicative of what
the Company's, the Equity Investees' or the Operating Partnership's actual
financial position and results of operations would have been as of and for the
period indicated, nor does it purport to represent the future financial position
or results of operations of the Company, the Equity Investees or the Operating
Partnership.
22
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP., PHILIPS INTERNATIONAL REALTY L.P., EQUITY
INVESTEES,
THE PHILIPS COMPANY AND THE MERRICK COMMONS AND MILL BASIN PLAZA PROPERTIES
SUMMARY SELECTED COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
PRO FORMA HISTORICAL
------------------------------------- ----------------------------------------
1997 1997 1996
------------------------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
PHILIPS INT. EQUITY MERRICK/ MERRICK/
PHILIPS INT. L.P. INVESTEES PHILIPS MILL BASIN PHILIPS MILL BASIN
------------ ------------ --------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA: (1)
Revenues from rental
property................ $ -- $ -- $23,865 $19,508 $ 3,725 $19,338 $3,531
--- --- --------- ------- ----- ------- -----
Property operating
expenses................ -- -- 3,919 3,618 436 3,646 559
Real estate taxes........ -- -- 3,432 2,792 612 2,742 552
Interest................. -- -- 11,936 9,909 1,581 8,584 2,570
Depreciation and
amortization............ -- -- 3,946 2,867 422 2,480 470
General and
administrative.......... -- 14 1,364 206 47 230 38
--- --- --------- ------- ----- ------- -----
Total expenses........... -- 14 24,597 19,392 3,098 17,682 4,189
--- --- --------- ------- ----- ------- -----
(732) 116 627 1,656 (658)
Equity in income (loss)
of investees............ (27) (709) -- 285 -- 15 --
Allocation of income on
Preferred Units......... 131 -- -- -- -- -- --
Other income............. -- -- 23 22 1 17 949
--- --- --------- ------- ----- ------- -----
Income (loss) before
extraordinary items .... 104 (723) $ (709) $ 423 $ 628 $ 1,688 $ 291
--------- ------- ----- ------- -----
--------- ------- ----- ------- -----
Preferred Stock unit
distribution ........... (131) (131)
--- ---
Net loss attributable to
General and Limited
Partners................ $ (854)
---
---
Net loss attributable to
common shares .......... $ (27)
---
---
Net loss attributable to
General partners........ -- $ (27)
Net loss attributable to
Limited partners........ -- $ (827)
Loss per share before
extraordinary
items(2)................ $ (.57)
---
---
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
PRO FORMA
--------------------------------------
1996
--------------------------------------
(UNAUDITED)
PHILIPS PHILIPS INT. EQUITY
INT. L.P. INVESTEES
----------- ------------ -----------
<S> <C> <C> <C> <C>
OPERATING DATA: (1)
Revenues from rental
property................ $ -- $ -- $33,239
--- --- -----
Property operating
expenses................ -- -- 5,677
Real estate taxes........ -- -- 4,451
Interest................. -- -- 16,168
Depreciation and
amortization............ -- -- 5,134
General and
administrative.......... -- -- 1,847
--- --- -----
Total expenses........... -- -- 33,277
--- --- -----
(38)
Equity in income (loss)
of investees............ (6) (15) --
Allocation of income on
Preferred Units......... 175 -- --
Other income............. -- -- 23
--- --- -----
Income (loss) before
extraordinary items .... 169 (15) $ (15)
-----
-----
Preferred Stock unit
distribution ........... (175) (175)
--- ---
Net loss attributable to
General and Limited
Partners................ $ (190)
---
---
Net loss attributable to
common shares .......... $ (6)
---
---
Net loss attributable to
General partners........ -- $ (6)
Net loss attributable to
Limited partners........ -- $ (184)
Loss per share before
extraordinary
items(2)................ $(.13)
---
---
<CAPTION>
HISTORICAL
--------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------- ------------------- -------------------- --------------------
(UNAUDITED) (UNAUDITED)
MERRICK/ MERRICK/ MERRICK/ (*)MERRICK/ (*)MERRICK/
PHILIPS MILL BASIN PHILIPS MILL BASIN PHILIPS MILL BASIN PHILIPS MILL BASIN PHILIPS MILL BASIN
------- ---------- ------- ---------- ------- ---------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues from rental
property................ $25,947 $4,949 $23,187 $4,810 $22,192 $2,308 $22,337 $ 503 $22,622 $ 799
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Property operating
expenses................ 5,054 710 5,008 712 4,834 553 4,218 198 3,805 580
Real estate taxes........ 3,671 744 3,591 671 3,554 370 3,446 199 3,393 374
Interest................. 11,728 3,496 11,097 2,054 9,695 873 9,524 337 10,044 484
Depreciation and
amortization............ 3,417 576 3,072 540 2,896 322 2,738 44 2,724 117
General and
administrative.......... 306 38 201 53 222 20 270 23 192 8
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total expenses........... 24,176 5,564 22,969 4,030 21,201 2,138 20,196 801 20,158 1,563
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
1,771 (615) 218 780 991 170 2,141 (298) 2,464 (764)
Equity in income (loss)
of investees............ 95 -- 54 -- 6 -- (89) -- (225) --
Allocation of income on
Preferred Units......... -- -- -- -- -- -- -- -- -- --
Other income............. 22 1,307 35 3 48 2 46 1 23 14
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income (loss) before
extraordinary items .... $ 1,888 $ 692 $ 307 $ 783 $ 1,045 $ 172 $ 2,098 $ (297) $ 2,262 $ (750)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Preferred Stock unit
distribution ...........
Net loss attributable to
General and Limited
Partners................
Net loss attributable to
common shares ..........
Net loss attributable to
General partners........
Net loss attributable to
Limited partners........
Loss per share before
extraordinary
items(2)................
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-----------------------------------------------------------------------
PRO FORMA HISTORICAL
------------------------------------------- -----------------------
(UNAUDITED) (UNAUDITED)
PHILIPS INT. EQUITY MERRICK/
PHILIPS INT. L.P. INVESTEES PHILIPS MILL BASIN
------------ ------------ --------- -------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Rental properties,
at cost before
accumulated
depreciation...... $ -- $ -- $198,700 $165,066 $ 26,341
Investment in
Operating
Partnership/Equity
Investees......... 2,321 11,379
Total assets....... 2,323 13,852 197,375 154,036 27,661
Mortgage notes
payable........... -- -- 177,022 151,244 25,854
Stockholders/Owners'
equity (deficit)... 2,308 13,852 11,380 (5,218) 1,094
OTHER DATA:
Funds from
operations(4)..... 99 3,092 3,237 3,449 --
Net cash provided
by (used in)
operating
activities........ (27) (723) 3,237 21 --
Net cash provided
by (used in)
financing
activities........ 131 (131) (1,324 ) 18,687 --
Net cash (used in)
investing
activities........ -- -- (2,635 ) (19,369) --
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
---------------------- ----------------------- ----------------------- -----------------------
(UNAUDITED)
MERRICK/ MERRICK/ MERRICK/ MERRICK/
PHILIPS MILL BASIN PHILIPS MILL BASIN PHILIPS MILL BASIN PHILIPS MILL BASIN
-------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Rental properties,
at cost before
accumulated
depreciation...... $137,399 $ 26,161 $124,892 $ 25,783 $118,307 $ 25,509 $114,953 $ 11,468
Investment in
Operating
Partnership/Equity
Investees.........
Total assets....... 129,841 27,575 116,856 31,813 108,188 25,957 109,474 11,186
Mortgage notes
payable........... 133,609 26,049 131,740 24,075 131,187 19,606 132,125 5,967
Stockholders/Owners
equity (deficit).. (11,166) 586 (22,091) 6,011 (24,611) 5,056 (25,771) 3,555
OTHER DATA:
Funds from
operations(4)..... 5,574 -- 3,590 -- 4,050 -- -- --
Net cash provided
by (used in)
operating
activities........ 3,567 -- 3,535 -- 3,639 -- -- --
Net cash provided
by (used in)
financing
activities........ 6,086 -- 2,160 -- (876) -- -- --
Net cash (used in)
investing
activities........ (9,359) -- (6,604) -- (3,354) -- -- --
<CAPTION>
1992
-----------------------
(UNAUDITED)
MERRICK/
PHILIPS MILL BASIN
-------- ----------
<S> <C> <C>
BALANCE SHEET DATA:
Rental properties,
at cost before
accumulated
depreciation...... $113,748 $6,791
Investment in
Operating
Partnership/Equity
Investees.........
Total assets....... 108,770 6,833
Mortgage notes
payable........... 133,541 5,967
Stockholders/Owners
equity (deficit).. (26,071) 1,429
OTHER DATA:
Funds from
operations(4)..... -- --
Net cash provided
by (used in)
operating
activities........ -- --
Net cash provided
by (used in)
financing
activities........ -- --
Net cash (used in)
investing
activities........ -- --
</TABLE>
- ------------------
(*) In 1992 and 1993, Merrick/Mill Basin consisted of only the Merrick Commons
Property. During this period such Property was undergoing significant
renovations.
23
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
SUMMARY SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING DATA:
Revenues from rental property.............. $ 268 $ 260 $ 341 $ 311 $ 294 $ 307 $ 422
----------- ----------- ------ ------ ------ ------ ------
Property operating expenses................ 70 77 96 90 105 111 282
Real estate taxes.......................... 28 23 36 33 31 29 33
Interest................................... 43 47 60 46 32 47 61
Depreciation and amortization.............. 41 37 50 46 45 50 --
General and administrative................. 75 73 119 64 353 323 30
----------- ----------- ------ ------ ------ ------ ------
Total expenses............................. 257 257 361 279 566 560 406
----------- ----------- ------ ------ ------ ------ ------
Operating income........................... 11 3 (20) 32 (272) (253) 16
Other income expenses), net................ 1 1 1 1 -- 92 (24)
----------- ----------- ------ ------ ------ ------ ------
Net income (loss).......................... $ 12 $ 4 $ (19) $ 33 $ (272) $ (161) $ (8)
----------- ----------- ------ ------ ------ ------ ------
----------- ----------- ------ ------ ------ ------ ------
Net income (loss) per share(3)............. $0.02 $ 0.01 $(0.03) $ 0.05 $(0.39) $(0.24) $(0.01)
----------- ----------- ------ ------ ------ ------ ------
----------- ----------- ------ ------ ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, AS OF DECEMBER 31,
------------- ----------------------------------------------
1997 1996 1995 1994 1993 1992
------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Rental properties, at cost before accumulated
depreciation........................................ $ 1,700 $1,608 $1,548 $1,518 $1,510 $1,486
Total assets.......................................... 1,068 1,051 1,102 1,014 1,210 1,067
Mortgage notes payable................................ 550 571 598 399 400 --
Shareholders' equity.................................. 455 406 461 387 629 790
OTHER DATA:
Funds from operations(4).............................. 51 23 72 (230) (111) (8)
Net cash provided by (used in) operating activities... 47 60 (65) (54) (344) (11)
Net cash provided by (used in) financing activities... 15 (63) 200 19 360 --
Net cash (used in) investing activities............... (92) (60) (30) (7) (24) (15)
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, AS OF DECEMBER 31,
------------- ----------------------------------------------
1997 1996 1995 1994 1993 1992
------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
OTHER DATA (IN THOUSANDS):
Cash and cash equivalents............................. $ 14 $ 44 $ 108 $ 3 $ 45 $ 53
Total assets at book value............................ 1,068 1,051 1,102 1,014 1,210 1,067
Total assets at the value assigned for purposes of the
Formation Transactions.............................. 2,211 -- -- -- -- --
Total liabilities..................................... 613 645 642 628 581 277
Shareholders' equity.................................. 455 406 461 387 629 790
Net increase (decrease) in cash and cash
equivalents......................................... (30) (64) 105 (42) (344) (11)
Net cash provided by (used in) operating activities... 47 60 (65) (54) (8) (26)
Dividends............................................. 0 36 0 0 0 0
OTHER DATA:
Ratio of earnings to fixed charges.................... 1.24 0.73 1.99 (6.69) (2.40) 0.87
Earnings (loss) per Share............................. 0.02 (0.03) 0.05 (0.39) (0.24) (0.01)
Book value per Share.................................. 0.61 0.56 0.64 0.54 0.92 1.15
Value assigned for the purposes of the Formation
Transactions per Share.............................. 2.13 -- -- -- -- --
Dividends per Share - return of capital............... 0.00 0.05 0.00 0.00 0.00 0.00
</TABLE>
24
<PAGE>
(Footnotes from previous pages)
- ------------------
(1) The following is a reconciliation of historical operating results to pro
forma results for the Equity Investees:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Historical income (loss) before extraordinary item:
The Philips Company, less equity in income of
the Merrick/Mill Basin Properties................................ $ 138 $ 1,793
The Merrick/Mill Basin Properties.................................. 628 692
National Properties Investment Trust............................... 12 (19)
-------- --------
778 2,466
Adjustments relating to the purchase of the non-sponsor interests in
exchange for cash and Units:
Increase in depreciation related to purchase accounting............ (616) (1,090)
Increase in interest cost associated with financings of the
purchase of partners' interests and transaction fees............. (403) (884)
Increase in rental revenue related to partners' interests
purchased........................................................ 364 695
-------- --------
Combined historical, as adjusted..................................... 123 1,187
Pro forma changes in operating expenses due to organizational
changes:
Reduction in management fees....................................... 241 228
Increase in general and administrative expenses to support future
operations....................................................... (1,073) (1,430)
-------- --------
Pro forma loss before extraordinary items............................ $ (709) $ (15)
-------- --------
-------- --------
</TABLE>
(2) Pro forma net loss attributable to common shares items is calculated based
upon 47,660 shares of Common Stock assumed to be outstanding for the nine
months ended September 30, 1997 and the year ended December 31, 1996. The
anti-dilutive effect of the Warrants has not been considered in the
calculation for either period. In February 1997 the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128
('FAS 128') which is effective for periods ending after December 15, 1997.
Had FAS 128 been adopted there would be no effect on the pro forma net loss
attributable to common shares.
(3) Net income (loss) per share is based upon 742,000, 719,000, 718,000,
719,000, 693,000, 671,000 and 684,000 weighted average numbers of shares of
beneficial interest outstanding for the nine months ended September 30, 1997
and 1996 (unaudited) and the years ended December 31, 1996, 1995, 1994, 1993
and 1992, respectively.
(4) 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 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.
25
<PAGE>
Funds from Operations was calculated as follows:
<TABLE>
<CAPTION>
PHILIPS INTERNATIONAL PHILIPS INTERNATIONAL EQUITY
REALTY CORP. REALTY L.P. INVESTEES
PRO FORMA PRO FORMA PRO FORMA
---------------------------- ---------------------------- -------------
NINE MONTHS NINE MONTHS NINE MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1997 1996 1997
------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net loss attributable to common shares........ $ (27) $ (6)
Income (loss) before extraordinary items...... $ (723) $ (15) $ (709)
Depreciation and amortization................. -- -- 3,946
Allocation of income to preferred units....... -- -- (131) (175) --
Adjustment for unconsolidated joint
ventures.................................... 126 164 3,946 5,134 --
------------- ------------ ------------- ------------ -------------
Funds from Operations......................... $ 99 $ 158 $ 3,092 $4,944 $ 3,237
------------- ------------ ------------- ------------ -------------
------------- ------------ ------------- ------------ -------------
<CAPTION>
THE PHILIPS COMPANY HISTORICAL
----------------------------------------
NINE MONTHS
YEAR ENDED ENDED YEARS ENDED DECEMBER 31,
DECEMBER 31, SEPTEMBER 30, ------------------------
1996 1997 1996 1995 1994
------------ ------------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net loss attributable to common shares........
Income (loss) before extraordinary items...... $ (15) $ 423 $1,888 $ 307 $1,045
Depreciation and amortization................. 5,134 2,867 3,417 3,072 2,896
Allocation of income to preferred units....... -- -- -- -- --
Adjustment for unconsolidated joint
ventures.................................... -- 159 269 211 109
------------ ------------- ------ ------ ------
Funds from Operations......................... $5,119 $ 3,449 $5,574 $3,590 $4,050
------------ ------------- ------ ------ ------
------------ ------------- ------ ------ ------
</TABLE>
26
<PAGE>
RISK FACTORS
An investment in Common Stock involves various risks. In evaluating their
vote on the Transaction Agreements and the proposed Formation Transactions
resulting therefrom, holders of National Shares should carefully consider the
following information in conjunction with the other information contained in
this Proxy Statement/Prospectus.
CONTROL BY THE INTERIM MANAGING GENERAL PARTNER
Subject to certain limitations set forth in the Partnership Agreement,
including limitations with respect to transactions between the Company and Mr.
Pilevsky or his affiliates, until such time as an Offering is completed Mr.
Pilevsky, as sole member of the Interim Managing General Partner, will have full
and exclusive power under the Partnership Agreement to manage the business and
affairs of the Company through the Operating Partnership, including investment
and financing policies, and to make any decision with respect to distributions
to shareholders. These management decisions might not be consistent with the
interests of other shareholders of the Company. See 'Partnership Agreement of
Operating Partnership--Interim Managing General Partner,' and '--Conflicts of
Interest--Philips International' and '--The Philips Group.'
CONTROL BY THE PHILIPS GROUP
Upon completion of the Formation Transactions, the Philips Group will own
1,450,000 Units of the Operating Partnership, representing approximately 93.9%
of the outstanding shares of Common Stock of the Company (including interests
redeemable or convertible therefor and shares of Common Stock issuable upon
exercise of outstanding warrants). Mr. Pilevsky will own a majority of such
Units held by the Philip Group and approximately 22.4% of the outstanding shares
of Common Stock of the Company (excluding interests redeemable or convertible
therefor and shares of Common Stock issuable upon exercise of outstanding
warrants). Three designees of the Philips Group will be directors and executive
officers of the Company. Mr. Pilevsky and the Philips Group will be in a
position to exercise control over the affairs of the Operating Partnership and
the Company, and may take actions in their own interest which might not be
consistent with the interests of other shareholders of the Company. See
'--Conflicts of Interest--Philips Private Company', '--The Interim Managing
General Partner,' '--The Philips Group' and 'Partnership Agreement of Operating
Partnership.'
CONFLICTS OF INTEREST WITH AND DEPENDENCE ON THE MANAGEMENT COMPANY
The day-to-day leasing, development, acquisition, property and portfolio
management and related administrative functions of the Company will be performed
jointly by the Company and the Management Company, including certain executive
officers and employees of the Management Company who currently manage the
Partnership Properties, pursuant to the terms of the Management Agreement.
Management Company personnel will not devote their efforts full-time to the
management of the business and properties of the Company, but will in fact
devote a material amount of their time to the management of the business and
properties of Philips Private Company, which could be directly competitive with
the business of the Company. The failure of the Management Company personnel to
adequately perform services for the Company could adversely effect the business
of the Company. See '--Conflicts of Interests--Philips Private Company.'
CONFLICTS OF INTEREST
Board of Trustees. As a result of certain benefits to be received by two
of the members of the National Board of Trustees, Messrs. Stein and Goldman,
upon consummation of the Formation Transactions, such individuals may have
conflicts of interest with respect to their obligations to National in
determining whether it should consummate the Formation Transactions. These
benefits are described below in '--Benefits to Trustees from the Formation
Transactions' and in 'The Formation Transactions--Interests of Certain Persons
in the Formation Transactions.'
The Philips Group. The Philips Group, including the Founders, has
interests that conflict with the interests of others participating in the
Formation Transactions, including the shareholders of National. The Company and
the Philips Group have been represented by the same legal counsel and,
therefore, the Company has not been advised by separate legal counsel in
connection with the Formation Transactions. See '--Benefits to the Philips
27
<PAGE>
Group from the Formation Transactions' below and 'The Formation
Transactions--Interests of Certain Persons in the Formation Transactions.'
Mr. Pilevsky and Ms. Levine, who will be directors and executive officers
of the Company, will own Units in the Operating Partnership. As a result of
their status as holders of Units, such persons may have interests that conflict
with shareholders with respect to business decisions affecting the Company and
the Operating Partnership. In particular, such principals of the Philips Group
may suffer different and/or more adverse tax consequences than the Company and
its shareholders upon the sale or refinancing of certain of the Properties,
including a reduction of indebtedness on such properties. Thus, these executive
officers, on the one hand, and the shareholders, on the other hand, may have
different objectives regarding the appropriate pricing and timing of any sale or
refinancing of certain Properties, and such executive officers will be in a
position to influence the Company not to sell or refinance a Property, even
though such sale might otherwise be financially advantageous to the Company, and
will be in a position to influence the Company to refinance a Property with a
higher level of debt (which could be more advantageous from a tax standpoint to
such persons due to their existing holdings in the Properties) than would be in
the best interests of the Company. See '--Benefits to the Philips Group, the
Founders and Philips Private Company from the Formation Transactions' and
'Partnership of Operating Partnership.'
The Interim Managing General Partner. The Partnership Agreement provides
that the Interim Managing General Partner will have full, exclusive and complete
responsibility in the management and control of the business and affairs of the
Operating Partnership (subject to the rights accorded to the limited partners,
of which Mr. Pilevsky will hold a majority of the Units) and that the Company
shall have no such rights until the completion of an Offering. Thus, until
completion of an Offering, the business and affairs of the Company, which are
conducted through the Operating Partnership, will be exclusively controlled by
Mr. Pilevsky, as sole member of the Interim Managing General Partner, subject to
certain limitations with respect to transactions between the Company and Mr.
Pilevsky or his affiliates. Since distributions to shareholders will require a
distribution from the Operating Partnership to the Company, Mr. Pilevsky will
also control any decision whether to make distributions to shareholders (subject
to certain federal tax requirements to maintain REIT status). The Interim
Managing General Partner will also have complete responsibility in the
management and control of the Holding Partnerships and Contributing Partnerships
until the completion of an Offering. Mr. Pilevsky will continue to hold
significant interests in other income producing real property through Philips
Private Company which could be directly competitive with the business of the
Company, and it is anticipated that Mr. Pilevsky will spend a material amount of
his time managing these competing interests. See 'Partnership Agreement of
Operating Partnership' and '--Control by the Interim Managing General Partner.'
Philips Private Company/Excluded Properties. The Philips Group has
directly or indirectly contributed all of the Partnership Properties to the
Operating Partnership. However, certain members of the Philips Group, including
the Founders, will continue to hold through Philips Private Company significant
interests in income producing real property, including certain retail
properties, which will not be contributed to the Company as part of the
Formation Transactions. Neither the Philips Group nor any of its affiliates will
be limited in any manner with respect to such income producing real property
other than pursuant to a non-competition agreement (which places certain
restrictions on the ability of Mr. Pilevsky, Ms. Levine, the Management Company
and their respective affiliates to acquire, operate, manage or develop retail
shopping center properties, other than through the Company, subject to certain
exceptions) and they may therefore engage in real estate activities which could
be directly competitive with the business of the Company. See 'Excluded
Properties,' '--Conflicts of Interest with and Dependence on the Management
Company' and 'Management Agreement and Non-Competition Agreement.'
Potential Conflict of Interests with Prudential Securities. Prudential
Securities was retained by National to render financial advisory services.
Pursuant to the Contribution and Exchange Agreement, the Company will assume
National's payment and indemnification obligations under National's engagement
letter with Prudential Securities, and will issue to Prudential Securities the
Series A Preferred Stock, with an aggregate liquidation preference of
$1,940,000. The Series A Preferred Stock is convertible into Common Stock after
six months at a conversion price of $50.00 per share of Common Stock and is
redeemable by the Company (subject to the holder's right to convert) upon the
conclusion of an Offering for $1,940,000 in cash plus accrued and unpaid
dividends. Dividends accrue on the Series A Preferred Stock at an annual rate of
9%. The Company has also
28
<PAGE>
agreed that Prudential Securities shall have the right to act as lead manager of
the Company's first public offering or as the exclusive sales agent for its
first private offering, in either case with proceeds in excess of $25 million,
on terms to be agreed upon.
BENEFITS TO THE PHILIPS GROUP, THE FOUNDERS AND PHILIPS PRIVATE COMPANY FROM THE
FORMATION TRANSACTIONS
The Philips Group, including the Founders, will receive certain material
benefits from the Formation Transactions, including improved liquidity and
diversification of their investment in the Properties, the deferral of certain
tax consequences of taxable dispositions of assets through the creation of the
Operating Partnership and the direct contribution of their interests in the
Properties to the Operating Partnership in exchange for Units, and, with respect
to the Founders, the receipt of salaries and/or options as executive officers of
the Company, and the release and/or indemnification by the Company of various
members of the Philips Group, including Mr. Pilevsky, with respect to the
assumed indebtedness and certain guarantees and indemnities in connection with
such indebtedness. In addition, the Management Company, an affiliate of the
Founders, will receive a fee in connection with its management of the day-to-day
operations of the Properties and options to purchase shares of Common Stock of
the Company. See 'Management Agreement and Non-Competition Agreement.'
BENEFITS TO THE TRUSTEES FROM THE FORMATION TRANSACTIONS
In connection with the Formation Transactions, Messrs. Stein and Goldman
will receive the Trustees Stock, with an aggregate Net Asset Value of $250,000
(5,000 shares of Common Stock), and the Trustees Warrants to purchase an
aggregate of 8,000 shares of Common Stock at an exercise price equal to $25.00
per share (a value of $211,000, based on the Black Scholes valuation model). As
such, these persons may have interests in the Formation Transactions that
conflict with the interests of the National shareholders. In addition, Messrs.
Stein and Goldman (or their affiliates) own an aggregate of approximately 12.9%
of the outstanding National Shares and will receive a pro-rata portion of the
Common Stock when distributed to the National shareholders following
consummation of the Formation Transactions. Compensation paid to the Managing
Trustee as a result of the conversion of National to a self-managed REIT in 1995
was $46,000 and $36,000 for the year ended December 31, 1996, and the nine
months ended September 30, 1997, respectively.
CERTAIN CONSEQUENCES OF THE FORMATION TRANSACTIONS: DISTRIBUTIONS OF COMMON
STOCK; FEDERAL INCOME TAX CONSEQUENCES; NATIONAL'S REIT STATUS
Distributions of Common Stock. The Company will purchase the National
Property in exchange for, among other things, 32,000 shares of Common Stock.
National will dividend approximately 3,744 of such shares of Common Stock by the
end of calendar 1997 to its shareholders on a pro rata basis and will dividend
approximately 20,256 of such shares of Common Stock by the end of January 1998
to its shareholders on a pro rata basis. National will retain approximately
8,000 shares of Common Stock (approximately 25% of the Common Stock received by
National). Distributions received, if any, on account of such retained shares,
or the net proceeds from the sale of any such shares, will be available to
National for working capital purposes.
Federal Income Tax Consequences. As a result of the distribution in 1997
of 3,744 shares of Common Stock to the National shareholders, gain for federal
income tax purposes will be recognized by the shareholders of National of
approximately $0.25 per National Share, and the distribution of 20,256 shares of
Common Stock in 1998 will be considered a reduction in basis of the National
Shares held by each holder and will be taxable as capital gain to the extent it
exceeds a shareholder's basis in the National Shares held by such shareholder.
National's REIT Status. Pursuant to the Contribution and Exchange
Agreement, National has agreed to maintain its existence and not adopt any plan
of liquidation or dissolution for a period of at least one year following
consummation of the Formation Transactions, although there can be no assurances
that National will be able to maintain its REIT status for such period. If
National fails to qualify as a REIT in any taxable year, National will be
subject to federal income tax on its taxable income at regular corporate rates,
distributions to shareholders would not be deductible by National, nor would
they be required to be made, and National's earnings may be subject to an excise
tax. National's REIT status may be adversely affected if the Company fails to
qualify as a REIT in any taxable year, for so long as the principal assets held
by National are shares of Common Stock of the Company.
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DEPENDENCE ON KEY MANAGEMENT PERSONNEL
The executive officers of the Company have substantial experience in
owning, operating, managing, acquiring and developing retail shopping centers.
The Company believes that its success will depend in large part upon the efforts
of such persons. The Company has entered into an employment agreement with Ms.
Levine which provides for Ms. Levine's employment with the Company for three
years and will contain certain non-compete provisions. In addition, the Company
expects to enter into employment agreements with Messrs. Petra and Gallagher
effective upon consummation of the Formation Transactions. There can be no
assurance that any of the executive officers will remain in the employ of the
Company. See 'Management.'
CHANGES IN SHAREHOLDERS' RIGHTS; ELIMINATION OF RESTRICTIONS ON CORPORATE
ACTIVITIES
The following protective provisions are applicable to National shareholders
through the Declaration of Trust, the Trustees Regulations or the MBCL, but will
not be applicable to shareholders of the Company through its Charter or By-Laws
or the MGCL: a trustee of National may be removed without cause by the
affirmative vote of the holders of a majority of the outstanding National Shares
entitled to vote, whereas a director of the Company may be removed only for
cause by the affirmative vote of the holders of two-thirds of the total
outstanding shares of Common Stock; the holders of 10% of the outstanding
National Shares or a majority of the Board of Trustees of National may require
that a special meeting of National shareholders be called, whereas the Chief
Executive Officer, President, a majority of the Board of Directors or the
holders of a majority of the outstanding shares of Common Stock may request a
special meeting of the Company's shareholders; and National's Declaration of
Trust restricts its investment and financing activities and certain
extraordinary transactions, whereas the Company's Charter and By-Laws do not
contain similar restrictions. See 'Comparison of Shareholders' Rights' and
'Certain Provisions of Maryland Law and the Company's Charter and By-Laws.'
In addition, certain provisions of the Partnership Agreement provide that
the Company may not engage in any Termination Transaction unless all limited
partners either will receive, or will have the right to elect to receive, for
each Unit an amount of cash, securities or other property equal to the product
of (i) the number of shares of Common Stock into which each Unit is then
exchangeable and (ii) the greatest amount of cash, securities or other property
paid to the holder of one share of Common Stock in consideration of one share of
Common Stock pursuant to the terms of the Termination Transaction. If, in
connection with the Termination Transaction, a purchase, tender or exchange
offer shall have been made to and accepted by the holders of the outstanding
shares of Common Stock, each holder of Units will receive, or will have the
right to elect to receive, the greatest amount of cash, securities or other
property which such holder would have received had it exercised its right to
redemption and received shares of Common Stock in exchange for its Units
immediately prior to the expiration of such purchase, tender or exchange offer
and had thereupon accepted such purchase, tender or exchange offer See
'Comparison of Shareholders' Rights' and 'Partnership Agreement of Operating
Partnership--Rights of Limited Partners'.
HIGH LEVEL OF DEBT; NO LIMITATION ON DEBT; UNCERTAINTY OF ABILITY TO REFINANCE
DEBT
High Level of Debt. On a pro forma basis at September 30, 1997, after
giving effect to the Formation Transactions, the Company would have had a
Debt-to-Total Capitalization Ratio of approximately 70% (assuming a Net Asset
Value of $50.00 per share of Common Stock.) The Company's leverage may have the
effect generally of impairing the Company's ability to make distributions to
shareholders, to obtain additional financing in the future and may have the
effect of reducing the Company's flexibility in responding to changing business
and economic conditions.
No Limitation on Debt. The Company has no policy limiting the amount of
its debt or its Debt-to-Total Capitalization Ratio, and the organizational
documents of the Company do not limit the amount or percentage of indebtedness
it may incur. The Company could become more highly leveraged, resulting in an
increased risk of default on the obligations of the Company and an increase in
debt service requirements which could affect adversely the financial condition
and results of operations of the Company and, consequently, the Company's
ability to make distributions to shareholders. See 'Policies With Respect to
Certain Activities--Financing Policies.'
Inability to Pay Debt Service; Effect of Cross-Collateralization. The
Company will be subject to the risks normally associated with debt financing,
including the risk that the Company's cash flow will be insufficient to meet
required payments of principal and interest, the risk that existing indebtedness
on the Properties cannot be
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refinanced or that the terms of such refinancing will not be as favorable as the
terms of existing indebtedness. Upon consummation of the Formation Transactions,
the Company expects to have outstanding approximately $176.8 million of
indebtedness, substantially all of which will be secured directly or indirectly
by mortgages encumbering the Properties. Certain of these mortgages have
'cross-default' and 'cross-collateralization' provisions. Accordingly, a default
under certain individual mortgages may entitle the lender secured thereby or
certain other secured lenders to exercise their respective remedies (including
foreclosure) against a number of the Partnership Properties. Of the
approximately $176.8 million of such outstanding indebtedness, approximately
$63.5 million and $9 million matures in 1998 and 1999, respectively, after
giving effect to all extension options. See 'Assumed Indebtedness.'
Variable Rate Debt. Upon consummation of the Formation Transactions, the
Company will have debt totaling approximately $96.8 million with interest rates
that adjust based on prevailing market interest rates. Increases in the interest
rates on the variable rate debt would adversely affect the Company's cash flow
and could reduce the amount of funds available for distribution to shareholders.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
Refinancing Risks. Since the Company anticipates that its internally
generated cash will be adequate to repay only a small portion of the Company's
mortgage indebtedness prior to maturity, it is expected that the Company will be
required to repay debt through refinancings and/or equity offerings. If the
Company were unable to refinance its indebtedness on acceptable terms, or at
all, the Company might be forced to dispose of one of more of the Properties
upon disadvantageous terms, which might result in losses to the Company and
which might adversely affect the cash available for distribution. If prevailing
interest rates or other factors at the time of refinancing result in higher
interest rates on refinancing, the Company's interest expense would increase,
which would adversely affect the Company's cash available for distribution and
its ability to pay distributions to shareholders.
Negative Cash Position. On a pro forma basis as of September 30, 1997, the
Company had a negative cash position of approximately $1.1 million. Although no
assurances can be given, the Company expects that its net cash flow from
operations during the period subsequent to September 30, 1997 and preceding
consummation of the Formation Transactions will be sufficient to substantially,
if not fully, fund the related transaction costs and eliminate such pro forma
cash deficiency. Alternatively, the Company may arrange short-term debt
financing to eliminate any cash deficiency arising upon consummation of the
Formation Transactions. Such financing could be more difficult to obtain given
the Company's highly leveraged capital structure. Failure to finance such cash
deficiency, whether out of net cash flow from operations or from the proceeds of
a short-term debt financing, could adversely affect the Company's ability to
repay its obligations or make distributions to shareholders.
LACK OF ACQUISITION FUNDING
The Company generally will be unable to readily access the capital markets
for acquisition funding, whether through the issuance of debt or equity
securities, until such time as the Company completes an Offering. Such lack of
ready access to the capital markets may have an adverse affect on the Company's
ability to acquire new properties. The Company may alternatively be able to fund
acquisitions, in whole or in part, through the issuance of shares of Common
Stock and/or Units in exchange for new properties. Although the Common Stock is
not currently listed on a national securities exchange, upon such listing, if
any, the Company will be required to obtain the approval of the holders of the
Common Stock prior to the issuance of additional securities in excess of 20% of
the then outstanding shares of Common Stock, other than pursuant to a public
offering. Such requirement could restrict the Company's ability to fund
acquisitions through the issuance of its securities in exchange for new
properties.
INABILITY TO MAKE REQUIRED DISTRIBUTIONS TO SHAREHOLDERS COULD AFFECT REIT
STATUS; POTENTIAL REQUIREMENT TO BORROW
To obtain favorable tax treatment accorded to REITs under the Code, the
Company generally will be required each year to distribute to its shareholders
at least 95% of its REIT taxable income. The Company will be subject to income
tax on any undistributed REIT taxable income and net capital gain, and to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of 85% of its
ordinary income plus 95% of its capital gain net income for the calendar year,
plus 100% of its undistributed income from prior years.
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The Company intends to make distributions to its shareholders to comply
with the distribution provisions of the Code and to avoid federal income taxes
and the nondeductible 4% excise tax. Initially, a substantial portion of the
Company's income will consist of the income of the Operating Partnership and the
Company's cash flow will consist primarily of distributions from the Operating
Partnership. Distributions by the Operating Partnership will be determined,
until completion of an Offering, by the Interim Managing General Partner and,
following completion of an Offering, by the Company, through its Board of
Directors. The Interim Managing General Partner or the Board of Directors, as
the case may be, may consider a number of factors, including the amount of cash
available for distribution, the Operating Partnership's financial condition, the
Operating Partnership's capital expenditure requirements, the annual
distribution requirement under the REIT provisions of the Code and such other
factors as the Board of Directors deems relevant, in making such distribution
determinations.
Differences in timing between the receipt of income and the payment of
expenses in arriving at taxable income (of the Company or the Operating
Partnership), the effect of nondeductible capital expenditures, the creation of
reserves or required debt amortization payments could require the Company to
borrow funds on a short-term or long-term basis to meet the distribution
requirements that are necessary to continue to qualify as a REIT. In such
circumstances, the Company might need to borrow funds to avoid adverse tax
consequences even if management believes that the then prevailing market
conditions generally are not favorable for such borrowings or that such
borrowings are not advisable in the absence of such tax consideration. There is
no assurance that the Company will be able to continue to satisfy the annual
distribution requirement so as to qualify as a REIT. Failure of the Company to
qualify as a REIT could affect National's REIT status if the principal assets
held by National are the Common Stock of the Company. See 'Federal Income Tax
Considerations--Requirements for Qualification as a REIT--Annual Distribution
Requirements'.
LACK OF APPRAISALS
The relative valuations of the Partnership Properties, on the one hand, and
the National Property, on the other hand, were considered independently by the
Philips Group and National, and negotiated on an arm's-length basis. National
and the Philips Group are not related parties and retained separate legal
counsel and financial advisors. The terms of the Contribution and Exchange
Agreement were the result of lengthy negotiations. However, no third-party
appraisals of the Properties or any other assets were used to value such
property for purposes of the Formation Transactions. Accordingly, no assurance
can be given that the valuation of the Company implied by the market
capitalization of the Company does not exceed the aggregate value of the
Properties that might have been obtained from an independent appraisal, or that
the Common Stock received by National in the Formation Transactions reflects the
fair value of the National Property. See 'The Formation Transactions--Background
of the Formation Transactions', '--Opinion of Financial Advisor' and
'--Interests of the Trustees in the Formation Transactions.'
VALIDITY OF 1993 AMENDMENT TO DECLARATION OF TRUST
In July 1993, the then trustees of National amended the Declaration of
Trust, without seeking or obtaining shareholder approval, to, among other
things, create an open-end trust such that National would have an infinite life.
Since the date of such amendment, National and its trustees have been acting at
all times in a manner consistent with such infinite life status. Although the
current Trustees believe that such trustees acted within their discretionary
authority under the original Declaration of Trust in effecting such amendment
without seeking shareholder approval and that such amendment was properly
adopted, there can be no assurance that one or more shareholders of National
will not challenge the validity of such amendment premised upon the need for
such shareholder approval under the terms of the original Declaration of Trust
or seek damages for breach of the contractual provisions of the original
Declaration of Trust. If such a challenge was successfully brought, National may
be required to obtain shareholder approval of such amendment in order to
maintain its infinite life status (as opposed to liquidating one year after the
completion of the Formation Transactions), and there can be no assurances that
such shareholder approval, if required, would be obtained.
POSSIBLE ADVERSE EFFECTS ON COMMON STOCK PRICE ARISING FROM SHARES AVAILABLE FOR
FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
Common Stock or the availability of such shares for future sale will have on the
market price of the Common Stock. Sales of substantial amounts of Common Stock,
or the perception that such sales could occur, could affect adversely prevailing
market prices for the Common Stock. The Board of Directors has the authority,
without shareholder approval, to issue additional
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Common Stock or other capital stock in any manner it deems appropriate,
including in exchange for property. Shareholders will have no preemptive right
to purchase shares issued in any such offerings, and any such offerings might
cause a dilution of a shareholder's investment in the Company.
In connection with the Formation Transactions, an aggregate of 1,450,000
Units in the Operating Partnership, which are redeemable after one year for an
equal number of shares of Common Stock, have been issued to the Philips Group
and the Series A Preferred Stock, which is convertible after six months into an
aggregate of 38,800 shares of Common Stock, has been issued to Prudential
Securities. In addition, the Company has granted to certain Trustees the
Trustees Warrants, which are immediately exercisable for 8,000 shares of Common
Stock, and the Trustees Stock, and has granted, or will grant immediately after
consummation of the Formation Transactions, options to purchase an aggregate of
261,600 shares of Common Stock to certain directors and officers of the Company
and those employees of the Management Company who perform significant services
for the Company. When issued, upon redemption of Units, the conversion of Series
A Preferred Stock or the exercise of warrants or options, as the case may be,
the shares of Common Stock will be available for sale in the public markets from
time to time pursuant to exemptions from registration requirements or, in the
case of Common Stock issued upon redemption of Units, upon registration pursuant
to the registration rights under the Registration Rights Agreement (the
'Registration Rights Agreement') between the Company and the holders of the
Units (a copy of which has been filed with the Commission as an exhibit to the
Registration Statement and is incorporated herein by reference). Future sales of
such restricted Common Stock and shares issued upon exercise of the warrants or
options and upon redemption of the Units or conversion of the Series A Preferred
Stock could have an adverse effect on the market price of the Common Stock. See
'Shares Available for Future Sale,' 'Management--Executive Compensation' and
'--Stock Option Plan.'
CHANGES IN INVESTMENT AND FINANCING POLICIES WITHOUT SHAREHOLDER VOTE
Subject to the Company's fundamental investment policy to maintain its
qualification as a REIT, the Board of Directors will determine the Company's
investment and financing policies, its growth strategy, and its debt,
capitalization, distribution and operating policies. In addition, the Company's
Board of Directors may revise or amend its strategies and policies at any time
without a vote of the Company's shareholders. See 'Policies With Respect to
Certain Activities--Other Policies.' Accordingly, shareholders will have no
control over changes in strategies and policies of the Company, and such changes
may not serve the interest of all shareholders and could adversely affect the
Company's financial condition or results of operations. See 'Comparison of
Shareholders' Rights' and 'Policies with Respect to Certain
Activities--Financing.'
Issuance of Additional Securities. The Company has authority to offer its
Common Stock or other equity or debt securities in exchange for property or
otherwise. Existing shareholders will have no preemptive right to acquire any
such securities, and any such issuance of equity securities could result in
dilution of an existing shareholder's investment in the Company. To the extent
that the Company lists its securities, including the Common Stock, on a national
securities exchange, such exchange may have rules or policies which restrict the
issuance of equity securities above certain threshold levels without the Company
first obtaining shareholder approval for such issuances.
Risks Involved in Acquisitions Through Partnerships or Joint Ventures. The
Company may invest in properties through partnerships or joint ventures instead
of purchasing properties directly or through wholly-owned subsidiaries.
Partnership or joint venture investments may, under certain circumstances,
involve risks not otherwise present in a direct acquisition of properties. These
include the risk that the Company's co-venturer or partner in an investment
might become bankrupt; a co-venturer or partner might at any time have economic
or business interests or goals which are inconsistent with the business
interests or goals of the Company; and a co-venturer or partner might be in a
position to take action contrary to the instructions or the requests of the
Company or contrary to the Company's policies or objectives. There is no
limitation in the Charter as to the amount of investment the Company may make in
joint ventures or partnerships.
Risks Involved in Investments in Securities Related to Real Estate. The
Company may pursue its investment objectives through the ownership of securities
of entities engaged in the ownership of real estate. Ownership of such
securities may not entitle the Company to control the ownership, operation and
management of the underlying real estate. In addition, the Company may have no
ability to control the distributions with respect to such securities, which may
adversely affect the Company's ability to make required distributions to
shareholders. Furthermore, if the Company desires to control an issuer of
securities, it may be prevented from
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doing so by the limitations on percentage ownership and gross income tests which
must be satisfied by the Company in order for the Company to qualify as a REIT.
See 'Federal Income Tax Considerations--Requirements for Qualification as a
REIT.' The Company intends to operate its business in a manner that will not
require the Company to register under the Investment Company Act of 1940 and
shareholders will therefore not have the protection of that Act.
The Company may also invest in mortgages, and may do so as a strategy for
ultimately acquiring the underlying property. In general, investments in
mortgages include the risk that borrowers may not be able to make debt service
payments or pay principal when due, the risk that the value of the mortgaged
property may be less than the principal amount of the mortgage note securing
such property, and the risk that interest rates payable on the mortgages may be
lower than the Company's cost of funds to acquire these mortgages. In any of
these events, Funds from Operations and the Company's ability to make required
distributions to shareholders could be adversely affected.
CERTAIN ANTI-TAKEOVER PROVISIONS MAY INHIBIT A CHANGE OF CONTROL
Certain provisions of the Charter and the By-Laws of the Company and the
Partnership Agreement of the Operating Partnership may have the effect of
discouraging a third party from making an acquisition proposal for the Company
and may thereby inhibit a change of control of the Company under circumstances
that could give the holders of Common Stock the opportunity to realize a premium
over the then-prevailing market prices. Such provisions include staggered terms
for directors, advance notice requirements for certain shareholder proposals set
forth in the By-Laws, the absence of cumulative voting rights and certain
consent rights of the limited partners. See 'Certain Provisions of Maryland Law
and the Company's Charter and By-Laws' and 'Partnership Agreement of Operating
Partnership--Rights of Limited Partners.' In addition, the Ownership Limit may
have the effect of precluding an acquisition of control of the Company without
the approval of the Board of Directors. See '--Necessity to Maintain Ownership
Limit Required to Maintain REIT Qualification; Anti-Takeover Effect.'
New Classes and Series of Stock. The Charter authorizes the Board of
Directors to create new classes and series of securities and to establish the
preferences and rights of any such classes and series without further action of
the shareholders. The issuance of additional classes or series of capital stock
may have the effect of delaying, deferring or preventing a change of control of
the Company. See 'Description of Capital Stock of the Company--General.'
Staggered Board of Directors. Following consummation of the Formation
Transactions, the Board of Directors of the Company will be divided into three
classes serving staggered three-year terms, which may have the effect of
inhibiting a change of control of the Company. See 'Management--Directors and
Executive Officers of the Company.'
Ownership Limit. The Company has limited the ownership by any single
stockholder to 6.5% (by number of shares or value, whichever is more
restrictive) of the outstanding shares of capital stock of the Company (with
exemptions for Mr. Pilevsky and his affiliates, who are permitted to own up to
25% of the outstanding shares of capital stock (excluding interests redeemable
or convertible therefor and shares of Common Stock issuable upon exercise of
outstanding warrants) following consummation of the Formation Transactions).
Actual or constructive ownership of shares of capital stock in excess of the
applicable ownership limit will cause the violative transfer or ownership to be
void with respect to the transferee or owner as to that number of shares the
ownership of which by such owner or transferee results in such owner or
transferee or any other person violating any of the ownership limits, and such
shares will be automatically transferred to a trust for the benefit of a
qualified charitable organization. Such transferee or owner shall have no right
to vote such shares or be entitled to dividends or other distributions with
respect to such shares. See 'Description of Capital Stock of the Company--
Restrictions on Ownership and Transfer.'
Consent of Limited Partners. The Partnership Agreement provides that until
such time prior to the first anniversary of the consummation of the Formation
Transactions as the Company owns 67% of the partnership interests in the
Operating Partnership, and thereafter until such time as the Company owns 60% of
the partnership interests in the Operating Partnership, the consent of the
holders of at least 51% of the Units held by limited partners will be required
to: (i) engage in a Termination Transaction; (ii) dissolve, liquidate or wind-up
the Operating Partnership; (iii) change the nature of the business of the
Operating Partnership; or (iv) admit, remove or retain a general partner. In
addition, certain provisions of the Partnership Agreement provide that the
Company
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may not engage in any Termination Transaction unless all limited partners either
will receive, or will have the right to elect to receive, for each Unit an
amount of cash, securities or other property equal to the product of (i) the
number of shares of Common Stock into which each Unit is convertible and (ii)
the greatest amount of cash, securities or other property paid to the holder of
one share of Common Stock in consideration of one share of Common Stock pursuant
to the terms of the Termination Transaction. If, in connection with the
Termination Transaction, a purchase, tender or exchange offer shall have been
made to and accepted by the holders of the outstanding shares of Common Stock,
each holder of Units will receive, or will have the right to elect to receive,
the greatest amount of cash, securities or other property which such holder
would have received had it exercised its right to redemption and received shares
of Common Stock in exchange for its Units immediately prior to the expiration of
such purchase, tender or exchange offer and had thereupon accepted such
purchase, tender or exchange offer.
ADVERSE EFFECT OF INCREASING MARKET INTEREST RATE LEVELS ON PRICE OF COMMON
STOCK
One of the factors that may influence the public market price of the Common
Stock will be the annual distribution rate on the price paid for shares of
Common Stock as compared with the rates on alternative investments. Thus, an
increase in general interest rate levels may lead purchasers of Common Stock to
demand a higher annual distribution rate, which could adversely affect the
market price of the Common Stock. In addition, the Company currently has no
policy to maintain a specific distribution rate, and, therefore, the Common
Stock could trade differently as compared to the public securities of other
REITs.
ABSENCE OF PUBLIC MARKET FOR COMMON STOCK; MARKET PRICE OF COMMON STOCK
There has been no public market for the Common Stock and there can be no
assurance that an active trading market will develop or be sustained or that
market conditions will permit the completion of an Offering. Unless the Company
is able to complete a public offering of its Common Stock, it is not expected to
meet the eligibility requirements for listing on a national securities exchange.
Factors such as government regulatory action, tax laws, interest rates and
market conditions in general could have a significant impact on the future
market price of the Common Stock. In addition, the trading volume of the Common
Stock may be limited, which could also have a significant effect on the future
market price of the Common Stock. No assurances can be made that the shares of
Common Stock will trade at or above $50.00 per share, the Net Asset Value per
share of Common Stock. See 'The Formation Transactions and Structure of the
Company--Calculation of Net Asset Value' for a description of Net Asset Value.
ODD-LOT SHARES
In connection with the dividend of shares of Common Stock by National,
certain shareholders may receive fractional shares or 'odd-lot' shares (fewer
than 100 shares), which in turn could affect the liquidity of such shares and
the transaction costs of a sale of such shares.
RISKS OF EQUITY REAL ESTATE INVESTMENT; ADVERSE IMPACT ON ABILITY TO MAKE
DISTRIBUTIONS;
EFFECT ON VALUE OF PROPERTIES
General. Real property investments are subject to varying degrees of risk.
The yields available from equity investments in real estate depend on the amount
of income and capital appreciation generated by the related properties. If the
Properties do not generate sufficient income to meet operating expenses,
including debt service, tenant improvements, third-party leasing commissions and
other capital expenditures, the Company's income and ability to make
distributions to its shareholders will be adversely affected. Income from the
Properties may be adversely affected by the general economic climate, local
economic conditions in the markets in which the Properties are located, such as
oversupply of space or a reduction in demand for rental space, the
attractiveness of the Properties to tenants, competition from other available
space, the ability of the Company to provide for adequate maintenance and
insurance and increased operating expenses. There is also the risk the Company's
income would be adversely affected if a significant number of tenants were
unable to pay rent or that as leases on the Properties expire, tenants will
enter into new leases on terms that are less favorable to the Company. Income
and real estate values may also be adversely affected by factors beyond the
control of the Company, such as applicable laws (e.g., environmental and tax
laws), interest rate levels and the availability of financing. In addition, real
estate investments are relatively illiquid and, therefore, will tend to limit
the ability of the Company to vary its portfolio promptly in response to changes
in economic or other conditions.
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Dependence on Certain Properties. As of September 30, 1997, the total
annualized contractual base rents due under leases with tenants at the Company's
Palm Springs Mile Property represented 43.9% of the total annualized contractual
base rents due under all of the Company's leases. Furthermore, the Palm Springs
Mile Property represents 49.3% of the total leasable square footage of all of
the Properties. Although the Company believes that the current prospects for
this Property are good, the Company's revenues and cash available for
distributions to shareholders would be disproportionately and adversely affected
if this Property were to experience a materially adverse event. See 'Business
and Properties--Palm Springs Mile.'
As of September 30, 1997, the annualized contractual base rents due under
leases with tenants at the four Properties located within the New York City
metropolitan region represented 41.6% of the annualized contractual base rents
reserved under all of the Company's leases. The four Properties, Freeport
Meadowbrook Commons, Merrick Commons, Mill Basin Plaza and Forest Avenue
Shoppers Town, represent 22.5% of the total leasable square footage of all of
the Properties. Although the Company believes economic conditions within the New
York metropolitan area are favorable, such economic conditions can vary
significantly from time to time and the Company's revenues and cash available
for distribution could be disproportionately and adversely affected if general
economic or other relevant conditions were to decline and result in a decrease
in consumer demand in the New York metropolitan area.
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 and telemarketing.
Risks of Acquisition, Renovation and Development Activities. The Company
intends to continue to actively acquire shopping center properties. Acquisitions
entail risks that investments will fail to perform in accordance with
expectations and that judgments with respect to the costs of improvements to
bring an acquired property up to standards established for the market position
intended for that property will prove inaccurate, as well as general investment
risks associated with any new real estate investment. See 'The Company's
Strategy for Growth.' However, there can be no assurance that the Company will
be able to obtain the necessary financing to make any acquisitions. The Company
will also consider commercial property development projects and may acquire
properties which need substantial renovation or repositioning. In connection
with any renovation or development project, the Company will bear certain risks,
including the risks of construction delays or cost overruns that may increase
project costs and could make such project uneconomical, the risk that occupancy
or rental rates at a completed project will not be sufficient to enable the
Company to pay operating expenses or earn its targeted rate of return on its
investment, and the risk of incurrence of predevelopment costs in connection
with projects that are not pursued to completion. In case of an unsuccessful
renovation or development project, the Company's loss could exceed its
investment in such project. Renovation or development projects may be more
highly leveraged than the Company's portfolio as a whole, which may result in an
increased risk of default and loss of equity investment if the project does not
have sufficient cash flow to cover its relatively high debt service
requirements. In addition, the Company anticipates that new development will be
financed under lines of credit or other forms of secured or unsecured
construction financing that will result in a risk that permanent financing for
newly developed projects might not be available or would be available only on
disadvantageous terms. Furthermore, the fact that the Company must distribute
95% of its REIT taxable income in order to maintain its qualification as a REIT
will limit the ability of the Company to rely upon income from operations or
cash flow from operations to finance new development or acquisitions. As a
result, if permanent debt or equity financing were not available on acceptable
terms to refinance new development or acquisitions undertaken without permanent
financing, further development activities or acquisitions might be curtailed or
cash available for distribution might be adversely affected.
Possible Environmental Liabilities. 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.
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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 or update (which involves general inspections without soil sampling
or ground water analysis) completed within the last year 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 such material environmental
liability. Nonetheless, it is possible that the Company's assessments do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, there can be no assurance
that (i) future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks), or by third parties unrelated to the Company.
Compliance with the various laws and regulations, now existing or hereafter
adopted, may affect the Company's ability to make any distributions to
shareholders could be adversely affected.
General Uninsured Losses. The Company will carry comprehensive liability,
fire, flood, extended coverage and rental loss insurance with policy
specifications, limits and deductibles customarily carried for similar
properties. There are, however, certain types of extraordinary losses which may
be either uninsurable or not economically insurable. Should an uninsured loss
occur, the Company could lose its investment in, and anticipated profits and
cash flows from, a Property. Additionally, although the Company (through its
subsidiaries) has owner's title insurance policies on all of the Properties in
amounts such that policy claims should not be limited by co-insurance
provisions, the Company may carry title insurance for less than the full value
of the Properties. If a loss occurs resulting from a title defect with respect
to a Property in excess of insured limits, the Company could lose all or part of
its investment in, and anticipated profits and cash flows from, such Property,
while remaining obligated for any recourse mortgage indebtedness or other
financial obligations related to the Property. Any such loss would adversely
affect the Company.
Bankruptcy of Tenants. As substantially all of the Company's income is
derived from rental income from real property, the Company's Funds from
Operations and its ability to make distributions to shareholders could be
adversely affected if a significant number of the Company's tenants are unable
to meet their obligations to the Company or if the Company is unable to lease on
economically favorable terms a significant amount of space in, or collect rental
payments on, its properties. At such times as a recessionary environment exists,
there is an increased risk that tenants will be unable to meet their obligations
to the Company and/or seek protection of the bankruptcy laws (which could result
in the rejection and termination of the debtor's lease). No assurance can be
given that tenants will not experience a downturn in their businesses or file
for protection under the bankruptcy laws (and if any tenants file, that they
will affirm their leases and continue to make rental payments in a timely
manner). Bankruptcies of tenants have not had a material adverse effect on the
Company, although no assurance can be given that future bankruptcies of tenants
will not have such adverse effects. If tenant leases are not affirmed following
bankruptcy or if a tenant's financial condition weakens, the Company's income
and cash available for distribution to shareholders may be adversely affected.
The Company currently has three anchor stores under lease to tenants which
are operating under the protection of bankruptcy laws. Caldor Inc. leases 94,393
square feet at Elm Plaza Shopping Center and 86,830 square feet at Branhaven
Plaza. Bradlees leases 60,000 square feet at Foxboro Plaza. The total annualized
contractual base rent under each of the foregoing leases is $205,000, $209,200
and $240,000, or $2.17, $2.41 and $4.00 per square foot, respectively. The
Bradlees lease obligations are guaranteed by the Stop N Shop Companies. While
the Company believes that the rents under each of the foregoing leases are below
market rent levels and that re-leasing of space to other tenants could enhance
cash flow, the termination of any of the above
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mentioned leases could cause a short-term interruption in rental income from the
affected space and potentially affect the rental income from tenants at the
property whose ability to pay is dependent upon the presence at the property of
an operating anchor tenant.
Regulation. 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 its 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. Notwithstanding that in certain instances the Company's
compliance cost may be reimbursable by tenants under their leases or that
compliance may be the direct obligation of a tenant, the Company's share of the
costs of compliance with such laws may be substantial and may reduce overall
returns on the Company's investments.
Degree of Leverage. Prior to an equity offering, the Company will have a
Debt-to-Total Capitalization ratio of approximately 70%. Each of the Properties
will be encumbered with mortgage debt. Of the total $176.8 million of debt
expected to be outstanding upon completion of the Formation Transactions, $96.8
million represents floating rate debt. Increases in the interest rates on the
Company's variable rate debt would adversely affect cash flow and could reduce
the amount of funds available for distribution to shareholders. Additionally,
the degree of leverage presents risks relating to the ability of the Company to
refinance outstanding principal balances prior to maturity on terms at least as
favorable as the terms and conditions of the debt to be repaid. See '--High
Level of Debt; No Limitation on Debt; Uncertainty of Ability to Refinance Debt.'
TAX RISKS
Adverse Tax Consequences of Failure to Qualify as a REIT. The Company
intends to operate so as to qualify as a REIT under the Code commencing with its
taxable year ending December 31, 1998, but may elect to qualify as a REIT as
early as the taxable year ending December 31, 1997. The Company will elect REIT
status for the year ending December 31, 1997 if the failure to so elect would
adversely affect National's REIT status. A REIT generally is not taxed at the
corporate level on income it currently distributes to shareholders so long as it
distributes at least 95% of its REIT taxable income. Although the Company
believes that it will be organized and will operate in such a manner so as to
qualify and remain so qualified, qualification as a REIT involves the
satisfaction of numerous requirements applied under highly technical and complex
Code provisions for which there are only limited judicial or administrative
interpretations. The determination of various factual matters and circumstances
not entirely within the Company's control may affect its ability to qualify and
to continue to qualify as REIT. Moreover, no assurance can be given that
legislation, new regulations, administrative interpretations or court decisions
will not change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification. The Company is relying on
the opinion of Pryor, Cashman, Sherman & Flynn, counsel to the Company
('Counsel'), to the effect that, based on various assumptions relating to the
organization and operation of the Company and representations made by the
Company as to certain factual matters, the Company's proposed method of
operation will enable it to meet the requirements for qualification and taxation
as REIT. Such legal opinion is not binding on the IRS. See 'Federal Income Tax
Considerations.'
Other Tax Liabilities. Even if the Company qualifies as a REIT, it will be
subject to certain federal, state and local taxes on its income and property,
and certain states might contend that the Company is subject to certain
additional taxes. See 'Federal Income Tax Consideration--Other Tax
Considerations.'
NECESSITY TO MAINTAIN OWNERSHIP LIMIT REQUIRED TO MAINTAIN REIT QUALIFICATION;
ANTI-TAKEOVER EFFECT
For the Company to maintain its qualification as a REIT, not more than 50%
in value of the outstanding classes of capital stock of the Company ('Capital
Stock') may be owned, actually or constructively under the applicable
attribution rules of the Code, by five or fewer individuals (including certain
tax-exempt entities, other than, in general, qualified domestic pension funds)
at any time during the last half of any taxable year of the Company other than
the first taxable year for which the election to be taxed as a REIT has been
made (the 'five or fewer' requirement). The Charter contains certain
restrictions on the ownership and transfer of Capital Stock, described below,
which are intended to prevent concentration of stock ownership. These
restrictions, however,
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may not ensure that the Company will be able to satisfy the 'five or fewer'
requirement in all cases. If the Company fails to satisfy such requirement, the
Company's status as a REIT will terminate, and the Company will not be able to
prevent such termination.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates, and
would not be allowed a deduction in computing its taxable income for amounts
distributed to its shareholders. Moreover, unless entitled to relief under
certain statutory provisions, the Company also would be ineligible for
qualification as a REIT for the four taxable years following the year during
which qualification was lost. Such disqualification would reduce the net
earnings of the Company available for investment or distribution to its
shareholders due to the additional tax liability of the Company for the years
involved. See 'Federal Income Tax Consideration--Failure to Qualify as a REIT'.
Subject to certain exceptions, the Charter does not permit any person to
acquire or own (either actually or constructively under the applicable
attribution rules of the Code) more than 6.5% (by number of shares or value,
whichever is more restrictive) of the outstanding shares of Capital Stock (the
'Ownership Limit'). In addition, no holder may own or acquire (either actually
or constructively under the applicable attribution rules of the Code) shares of
any class of Capital Stock if such ownership or acquisition (i) would cause more
than 50% in value of the outstanding Capital Stock to be owned by five or fewer
individuals or (ii) would otherwise result in the Company's failing to qualify
as a REIT. As permitted by the Charter, the Board of Directors has adopted a
resolution providing that ownership by Mr. Pilevsky and his affiliates of up to
25% of the outstanding shares of Capital Stock (excluding interests redeemable
or convertible therefor and shares of Common Stock issuable upon exercise of
outstanding warrants) is not subject to the Ownership Limit. See 'Description of
Capital Stock of the Company--Restrictions on Ownership and Transfer.' The Board
of Directors may increase the Ownership Limit to up to 9.8% without a vote of
shareholders.
Any attempted acquisition (actual or constructive) of Capital Stock by a
person who, as a result of such acquisition, would violate one of the
limitations described above will cause the transfer resulting in such violation
to be deemed void ab initio. Violations of the Ownership Limit may result in a
repurchase by the Company of the shares the ownership of which violates such
limits. The Board of Directors may waive the Ownership Limit with respect to a
particular shareholder if it is satisfied, based upon the advice of tax counsel,
that such ownership in excess of the Ownership Limit will not jeopardize the
Company's status as a REIT. See 'Description of Capital Stock of the
Company--Restrictions on Ownership and Transfer' for additional information
regarding the aforementioned limits.
The Ownership Limit may (i) discourage a change of control of the Company,
(ii) deter tender offers for Common Stock, which offers may be attractive to the
Company's shareholders, or (iii) limit the opportunity for shareholders to
receive a premium for their Common Stock that might otherwise exist if an
investor attempted to assemble a block of Common Stock in excess of the
Ownership Limit or to effect a change of control of the Company.
COMPUTER SYSTEMS AND YEAR 2000 ISSUES
The 'Year 2000' issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from the
application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions. Given
that the Company's principal property management systems are licensed from and
maintained by a third party software development company, which company is
currently modifying its real estate products to address the Year 2000 issue,
management does not anticipate any significant costs, problems or uncertainties
associated with becoming Year 2000 compliant. The Company is currently
developing a plan to insure that its other internally generated operating
systems are similarly modified on a timely basis. Failure of the Company or its
software provider to adequately address the Year 2000 issue could result in
misstatement of reported financial information or otherwise adversely affect the
Company's business operations, although the Company does not anticipate any such
results.
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FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus contains forward-looking statements
generally identifiable by the words 'may,' 'will,' 'expect,' 'anticipate,'
'intend' and similar expressions. Discussions containing such forward-looking
statements may be found in material set forth under 'Summary,' 'The Company,'
'Capitalization,' 'Management's Discussion and Analysis of Financial Condition
and Results of Operations,' 'Business and Properties,' as well as within the
Proxy Statement/Prospectus generally. Such statements are subject to a number of
risks and uncertainties. Actual results in the future could differ materially
from those described in the forward-looking statements as a result of the risk
factors set forth above and the matters set forth in the Proxy
Statement/Prospectus generally. Prospective investors are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to such risks and uncertainties. The Company undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements that may be made to reflect any future events or circumstances.
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FORMATION TRANSACTIONS AND STRUCTURE OF THE COMPANY
The Company, the Operating Partnership and the Interim Managing General
Partner were each formed in July 1997. The other formation entities will each be
formed prior to the consummation of the Formation Transactions.
FORMATION TRANSACTIONS
National, the Company, the Operating Partnership, the other formation
entities and the Contributing Partnerships and their partners or members have or
will engage in the Formation Transactions designed to enable the Company to
continue and expand the real estate operations of the Philips Group and
National, to enable the Company to comply with certain requirements under the
federal income tax laws and regulations applicable to REITs, to facilitate
potential securitized financings, to gain certain tax advantages for the
existing owners of the Partnership Properties and to insulate each Property from
the liabilities of the other Properties. The Formation Transactions are as
follows:
(i) Pursuant to the Transaction Agreements,
(a) with respect to those Contributing Partnerships which own fee
title to Properties located in New York or Connecticut, the Contributing
Partnerships will contribute such fee title, together with any existing
indebtedness relating thereto, to the Operating Partnership or its
designee, which designee is likely to be a newly formed limited
partnership (in which the Company initially will own indirectly a 0.01%
non-managing general partnership interest through newly formed
wholly-owned subsidiaries of the Company ('Philips Subs'); each a
'Holding Partnership'), in exchange for Units;
(b) with respect to those Contributing Partnerships that are
partnerships or limited liability companies and which do not own fee
title to Properties located in New York or Connecticut, the partners or
members, as the case may be, of such Contributing Partnerships will
contribute all of their partnership interests or membership interests
therein, as the case may be, to the Operating Partnership, in exchange
for Units (which Units, together with those Units described in paragraph
(a) above, will represent approximately 93.9% of the outstanding Common
Stock of the Company, including interests redeemable or convertible
therefor and shares of Common Stock issuable upon exercise of
outstanding warrants); and
(c) any cash collateral posted by a Contributing Partnership as
security for indebtedness being assumed by the Operating Partnership in
connection with the Formation Transactions will be contributed to the
Operating Partnership or its designated affiliates upon the consummation
of the Formation Transactions and will remain as cash collateral for
such indebtedness and the relevant Contributing Partnerships will be
credited (in the form of additional Units) for such contribution.
(ii) The Company will purchase the National Property in exchange for
32,000 shares of Common Stock (which shares will represent approximately
2.1% of the outstanding Common Stock of the Company, including interests
redeemable or convertible therefor and shares of Common Stock issuable upon
exercise of outstanding warrants) and the assumption of approximately
$550,000 of debt.
(iii) National will dividend approximately 3,744 of such shares of
Common Stock by the end of calendar 1997 and approximately 20,256 of such
shares of Common Stock by the end of January 1998 (representing in the
aggregate not less than 75% of the Common Stock received by National) to
its shareholders on a pro-rata basis and retain approximately 8,000 shares
of Common Stock; distributions received, if any, on account of such
retained shares, or the net proceeds from the sale of any such shares, will
be available to National for working capital purposes;
(iv) Messrs. Stein and Goldman will receive the Trustees Securities in
consideration of their efforts on behalf of National to arrange and carry
out the Formation Transactions and their agreement to vote their National
Shares in favor of the Transaction Agreements;
(v) Mr. Pilevsky will purchase 10,660 shares of Common Stock
(approximately 22.4% of the outstanding Common Stock, excluding interests
redeemable or convertible therefor and shares of Common Stock issuable upon
exercise of outstanding warrants) at $50.00 per share, for a total purchase
price of $533,000;
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(vi) Prudential Securities will receive, in lieu of the financial
advisory fee payable by National upon consummation of the Formation
Transactions and assumed by the Company under the Contribution and Exchange
Agreement, 1,940 shares of Series A Preferred Stock, convertible into
38,800 shares of Common Stock, which Series A Preferred Stock represents
approximately 2.5% of the outstanding shares of Common Stock of the Company
(including interests redeemable or convertible therefor and shares of
Common Stock issuable upon exercise of outstanding warrants);
(vii) Ms. Levine, as Chief Operating Officer and Executive Vice
President, and Messrs. Petra and Gallagher, as President and Chief
Financial Officer, respectively, will each enter into an employment
agreement with the Company which will be effective as of the consummation
of the Formation Transactions;
(viii) The Company will contribute its fee title interest in the
National Property (together with the cash received from Mr. Pilevsky in
connection with his purchase of Common Stock) to the Operating Partnership
in exchange for its initial approximately 3.2% non-managing general
partnership interest therein (increasing to approximately 6.1% upon
exercise of the Trustee Warrant and conversion of the Series A Preferred
Stock). The Company will also acquire 1,940 preferred units of the
Operating Partnership, which will have financial terms substantially
identical to the financial terms of the Series A Preferred Stock;
(ix) The Interim Managing General Partner will make a pro rata
contribution to the Operating Partnership and to each of the Holding
Partnerships and Contributing Partnerships in exchange for its 0.001%
managing general partnership interest therein or managing member interest
therein, as the case may be;
(x) The Company will make capital contributions upon the consummation
of the Formation Transactions to the Philips Subs to enable them to be
0.01% owners of the Contributing Partnerships and the Holding Partnerships,
as non-managing general partner or non-managing member, as the case may be;
(xi) Each Unit holder may be required to recognize gain for federal
income tax purposes upon the contribution of the Property (or the
contribution of their partnership interests or membership interests, as the
case may be) to the Operating Partnership as a result of the Formation
Transactions, or in connection with the Operating Partnership's
satisfaction or assumption of the existing mortgages encumbering the
Property. Accordingly, in order to permit the Unit holders to defer the
recognition of gain for federal income tax purposes, Unit holders may
either (A) enter into an agreement with the Operating Partnership whereby
such Unit holder agrees to restore any deficit in such Unit holder's
capital account for federal income tax purposes upon a liquidation of the
Operating Partnership or the liquidation of such Unit holder's interest in
the Operating Partnership, or (B) execute a guarantee of the 'bottom
portion' (i.e., the last dollar portion) of secured or unsecured
indebtedness of the Operating Partnership within the meaning of the
Treasury Regulations promulgated under Section 752 of the Code;
(xii) The Company and the Operating Partnership will enter into the
Management Agreement with the Management Company; and
(xiii) Mr. Pilevsky, Ms. Levine and the Management Company will enter
into the Non-Competition Agreement with the Company.
As a result of the foregoing transactions, (i) National and its
shareholders (who will also continue to hold their National Shares) will own
32,000 shares of the Company's Common Stock, which will represent approximately
2.1% of the outstanding Common Stock of the Company (including interests
redeemable or convertible therefor and shares of Common Stock issuable upon
exercise of outstanding warrants); (ii) the Trustees will own the Trustees Stock
and the Trustees Warrants (which are immediately exercisable), which will
represent approximately 0.8% of the outstanding Common Stock of the Company
(including interests redeemable or convertible therefor and shares of Common
Stock issuable upon exercise of the Trustees Warrants); (iii) the Company will
own an approximately 6.1% non-managing general partnership interest in the
Operating Partnership; (iv) the Philips Group (of which Mr. Pilevsky will hold a
majority interest) will own 1,450,000 Units, which will represent an
approximately 93.9% limited partnership interest in the Operating Partnership;
(v) Mr. Pilevsky will own beneficially approximately 0.7% of the outstanding
Common Stock of the Company and 964,641 Units redeemable for shares of Common
Stock, which Units represent approximately 62.5% of the outstanding Common Stock
of the Company (in each case, including interests redeemable or convertible
therefor and shares of Common Stock issuable upon exercise of outstanding
warrants); (vi) Prudential Securities will
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own 1,940 shares of Series A Preferred Stock, convertible into 38,800 shares of
Common Stock, representing approximately 2.5% of the outstanding shares of
Common Stock of the Company (including interests redeemable or convertible
therefor and shares of Common Stock issuable upon exercise of outstanding
warrants); and (vii) the Interim Managing General Partner will own an
approximately 0.001% managing general partnership interest or managing member
interest, as the case may be, in each of the Operating Partnership, the Holding
Partnerships and the Contributing Partnerships. In addition, in connection with
the Formation Transactions, the Operating Partnership will assume approximately
$176.8 million of indebtedness encumbering the contributed assets and
partnership and membership interests.
In connection with the rendering of its opinion (described below) to the
Board of Trustees of National, Prudential Securities applied a range of
capitalization rates to the National Property's estimated net operating income
for 1997. Such application resulted in a range of estimated fair value of the
National Property of approximately $0.93 million to $1.07 million. Assuming a
value of $50.00 per share of Common Stock (see 'Calculation of Net Asset Value'
below), the value of the consideration to be received by National in exchange
for the National Property is approximately $1.6 million. Prudential Securities'
opinion is limited to the fairness of the consideration to be received by
National, and such opinion is subject to the assumptions and limitations
described below. See 'Formation Transactions and Structure of the
Company--Opinion of Financial Advisor.' Prudential Securities did not render an
opinion as to the fair value of the National Property.
CALCULATION OF NET ASSET VALUE
The Company's Net Asset Value was calculated based on the pro forma net
operating income for the nine properties contributed by the Contributing
Partnerships and the consideration to be paid for the National Property. The pro
forma annualized net operating income for the Partnership Properties was
calculated for the twelve-month period from March 1, 1997 to February 28, 1998,
based upon leases in place as of March 1, 1997. The calculation of net operating
income was not determined in accordance with GAAP. The total pro forma net
operating income for such period of approximately $22.7 million, valued by the
Company at a 9.0% capitalization rate, resulted in a gross asset value of
approximately $252.2 million. Such gross asset value, less the approximately
$178.5 million of indebtedness as of July 31, 1997 and less the approximately
$1.2 million of allocated transaction expenses, results in a net asset value of
approximately $72.5 million. Such net asset value, plus the $1.6 million in
consideration paid for the National Property, results in an aggregate Net Asset
Value of approximately $74.1 million for the portfolio as a whole.
The Company believes that its calculation of Net Asset Value (which value
has been denominated into 1,450,000 Units and 32,000 shares of Common Stock at
$50 per Unit and share of Common Stock) constitutes a reasonable basis for
determining the number of shares of Common Stock to be issued to National and
the Trustees in connection with the purchase of the National Property and is
made solely for such purpose. It is not intended that such calculation be a
projection or forecast of the net operating income of the Company or of the
trading price for the Common Stock if a market for the Common Stock is
established. No assurances can be made that the shares of Common Stock will
trade at or above $50.00 per share, the Net Asset Value per share of Common
Stock.
BENEFITS OF THE FORMATION TRANSACTIONS TO THE PHILIPS GROUP
The Founders proposed the Formation Transactions to the Philips Group
because they believe that the benefits of the organization of the Company for
the Philips Group outweigh the detriments to them. Benefits to members of the
Philips Group, including the Founders, include:
o improved liquidity of their interests in the Properties, increased
diversification of investment and deferral of the tax consequences
of the contribution of their interests in the Partnership Properties
to the Operating Partnership;
o the Company will own and manage ten shopping center properties
throughout the New England, Mid-Atlantic and the Southeast regions
of the United States, thereby representing an investment in an
enterprise with a significantly larger and more diversified
portfolio, which, although no assurances can be given, should
provide the Company greater access to the capital markets and result
in economies of scale in its operations;
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o the release and/or indemnification by the Company of various members
of the Philips Group, including Mr. Pilevsky, with respect to the
assumed indebtedness and certain guarantees and indemnities in
connection with such indebtedness;
o receipt by the Founders of options to purchase Common Stock, each as
an executive officer of the Company, and the employment agreement
entered into with Ms. Levine providing for an annual salary, bonus
and other benefits for her services; and
o the Management Agreement, which will provide a fee to the Management
Company, an affiliate of the Founders, in connection with management
of the Properties. In addition, the Management Company or its
designees will receive options to purchase Common Stock.
BENEFITS OF THE FORMATION TRANSACTIONS TO THE TRUSTEES
Messrs. Stein and Goldman will receive the following benefits in connection
with the Formation Transactions that are in addition to the benefits received by
the National shareholders generally. These benefits are in consideration of the
efforts made by Messrs. Stein and Goldman to investigate, negotiate and
otherwise undertake the preparations necessary for National to enter into the
Formation Transactions and to vote their National Shares in favor of the
Transaction Agreements.
o Trustees Stock equal to an aggregate of $250,000 of Common Stock
(5,000 shares of Common Stock, based on a Net Asset Value of $50.00
per share of Common Stock); and
o Trustees Warrants to purchase an aggregate of 8,000 shares of Common
Stock at an exercise price of $25.00 per share (a value of $211,000,
based on the Black Scholes valuation model), which are immediately
exercisable for Common Stock, which Common Stock may not be sold
until after the first anniversary of the date of issuance of the
Trustees Warrants, and expire in 2003.
See 'Formation Transactions--Interests of the Trustees in the Formation
Transactions.'
BENEFITS OF THE FORMATION TRANSACTIONS TO THE NATIONAL SHAREHOLDERS
The shareholders of National will receive certain benefits in connection
with the Formation Transactions, including the following:
o the Formation Transactions will result in a diversified real estate
company with expertise, through the Company's executive officers and
directors and the Management Company, in acquisition, development,
financing, construction, leasing and other tenant-related services,
enabling the Company to benefit from an effective management team
with substantial real estate experience;
o the Company will own ten shopping center properties throughout the
New England, Mid-Atlantic and Southeast regions of the United States
compared with National's ownership of one property in Lake Mary,
Florida, thereby representing an investment for National
shareholders in an enterprise with a significantly larger and more
diversified portfolio, which, although no assurances can be given,
should provide the Company greater access to the capital markets and
result in economies of scale in its operations; and
o National does not expect to make distributions to shareholders in
the near future except as required to maintain its REIT status, but
the Company intends to make periodic distributions at least annually
to its shareholders in order to maintain its REIT status.
Upon consummation of the Formation Transactions described in this Proxy
Statement/Prospectus, including the amendment of the terms of the Declaration of
Trust to permit such transactions, (i) National and its shareholders will
receive an aggregate of approximately 2.1% of the outstanding Common Stock of
the Company (including interests redeemable or convertible therefor and shares
of Common Stock issuable upon exercise of outstanding warrants); (ii) the
Trustees will beneficially own an aggregate of approximately 0.3% of the
outstanding shares of Common Stock and warrants to purchase an additional 0.5%
of the outstanding shares of Common Stock (in each case, including interests
redeemable or convertible therefor and shares of Common Stock issuable upon
exercise of outstanding warrants); (iii) Mr. Pilevsky will beneficially own
approximately 0.7% of the outstanding Common Stock of the Company (including
interests redeemable or convertible therefor and shares of Common Stock issuable
upon exercise of outstanding warrants); (iv) Prudential Securities will
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beneficially own 1,940 shares of Series A Preferred Stock, convertible into
38,800 shares of Common Stock, which Series A Preferred Stock represents
approximately 2.5% of the outstanding shares of Common Stock of the Company
(including interests redeemable or convertible therefor and shares of Common
Stock issuable upon exercise of outstanding warrants); and (v) the Philips Group
(of which Mr. Pilevsky will hold a majority interest) will beneficially own
1,450,000 Units redeemable for shares of Common Stock of the Company, which
Units represent approximately 93.9% of the outstanding shares of Common Stock of
the Company (including interests redeemable or convertible therefor and shares
of Common Stock issuable upon exercise of outstanding warrants). National's
shareholders will also continue to hold their National Shares.
As of the Record Date, the Trustees of National had the right to vote
96,789 National Shares, or approximately 12.9% of the outstanding National
Shares. Such persons and their affiliates have agreed to vote in favor of the
Transaction Agreements. See '--Background of the Formation Transactions' and
'--Interests of the Trustees in the Formation Transactions.'
Pursuant to the terms of the Contribution and Exchange Agreement, National
has agreed to maintain its existence and not adopt any plan of liquidation or
dissolution for a period of one year following the closing of the Formation
Transactions. After such time, the Trustees will consider the alternatives
available to National, including whether to purchase new properties or to pursue
other business combinations or similar transactions. If no such alternative
transactions are feasible at that time, then, more likely than not, the Trustees
will take action to liquidate the trust. The Trustees believe that before making
any such decision to liquidate the trust, National should maintain its existence
for such one year period and retain a limited portion of the shares of Common
Stock to be received by National in the Formation Transactions to provide for
the payment of unknown or contingent liabilities of National, if any, at the
time of liquidation of the trust and any ongoing administrative expenses.
BACKGROUND OF THE FORMATION TRANSACTIONS
National was organized on January 16, 1985, as a Massachusetts business
trust. On July 23, 1993, National changed its name from Richard Roberts Real
Estate Growth Trust I to its current name. Since electing its REIT status in
1985, National has filed as a REIT under the provisions of the Code and intends
to maintain this status as long as it will benefit National's shareholders.
In 1985 and 1986, National commenced a series of public offerings of its
Shares, resulting in aggregate net proceeds of approximately $8.0 million, all
of which was invested directly in equity interests in five commercial properties
in the United States which had income-producing capabilities. Four of these
properties were lost to foreclosure in 1990 and 1992. National has experienced a
loss of $18,598, income of $33,452 and a loss of $272,220 for fiscal years ended
December 31, 1996, 1995 and 1994, respectively. The Shoppes at Lake Mary, a
shopping center located in Lake Mary, Florida, is National's sole remaining
property.
Over the past several years, the Board of Trustees of National,
specifically Messrs. Stein and Goldman, has spent a considerable amount of time
investigating various alternatives in order to enhance shareholder value and
return on equity. Mr. Reibstein, having only joined the Board of Trustees in
June 1997, has not participated in the work that was preparatory to the
agreement by the parties to undertake the consummation of the Formation
Transactions. The Board of Trustees' primary goal has been and continues to be
to protect the shareholders' current investment and to enhance their return by
reduced general and administrative costs. The Trustees, specifically Messrs.
Stein and Goldman, have spoken to numerous individuals throughout the country
involved in all aspects and segments of the real estate industry.
The Board of Trustees has received various proposals, and has performed
extensive due diligence in assessing all of these proposals. In spring of 1994,
National retained a securities firm, Bentley Securities Corp., to assist in
locating a merger or joint venture partner that would be interested in operating
within a public real estate investment trust structure. Different properties
were reviewed, and preliminary discussions were held with one party. In July
1994, discussions were held with Vickman & Co., the owner's representative of a
portfolio comprising 56 properties in the Chicago area, Northern Indiana and
Southern Wisconsin. These properties were all small retail shopping plazas that
were owned by a single family. Most of the sites were visited by the Trustees,
and they received and evaluated detailed financial data on each property.
Discussions and meetings were held with the attorneys for the seller, but no
definitive proposal was made by either party.
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In January 1995, the Trustees entered into negotiations with David Clapper,
general partner for a portfolio of 4,700 multi-family units located primarily in
Michigan and Ohio. All the sites were visited by the Trustees, some financial
data was exchanged and various meetings between principals were held. The
limited partners of Mr. Clapper elected not to proceed with a transaction.
In spring of 1995, the Trustees entered into detailed discussions with
National Corporation for Housing Partnership, the general partner of a portfolio
of more than 100,000 multi-family units, mostly government-subsidized
properties. The Trustees entered into contract negotiations to acquire numerous
properties, the largest being a 230 unit high-rise in Cincinnati, Ohio. The
total purchase price would have been between $50 and $73 million depending on
the number of units in the final package. The parties were unable to agree on
the terms of a definitive agreement.
In January through March of 1996, the Trustees held discussions with a
group owning more than 1,000 manufactured housing units in the Phoenix, Arizona
area. Included in this portfolio was land and plans to develop an additional 900
units. The parties were unable to agree on the terms of a definitive agreement.
In May 1996, the Trustees held discussions with both principals and
attorneys for a portfolio of multi-family units, located in the upper Midwest,
with an agreed upon value of $95 million. In-depth work was developed for an
UPREIT structure. Preliminary meetings were held in New York with potential
securities firms to raise the necessary capital for a transaction. However, the
parties were unable to agree on the terms of a definitive agreement.
From January 1997 through August 1997, representatives of National and
representatives of the Philips Group, and their respective advisors, held
numerous meetings and telephone conference calls to discuss in conceptual terms
the parameters of a possible transaction, to refine the structure of the
transaction and to negotiate the terms of a proposed acquisition agreement, as
described below.
Prudential Securities' initial meeting with National was on December 30,
1996. The persons present were Messrs. Stein and Goldman and representatives of
Prudential Securities. There was a general discussion concerning the Trustees'
goals for National and potential candidates for a consolidation with National.
Included among the attributes deemed by the Board of Trustees to be of critical
importance were: (i) the financial strength of the strategic partner; (ii) the
compatibility of investment objectives and policies; and (iii) the potential for
expansion by the combined entity. On January 12, 1997, National engaged
Prudential Securities to serve as National's financial advisor.
Prudential Securities had preliminary conversations with several private
real estate owners to obtain indications of interest concerning a possible
consolidation transaction with National. On February 12, 1997, Philips and
another private real estate owner made presentations to National to introduce
themselves to National and to describe their respective businesses and
organizations. Persons present were Messrs. Stein and Goldman, representatives
of Prudential Securities and representatives of each of the presenting persons.
Following the meeting, National advised Prudential Securities that it would
prefer to pursue a possible transaction with Philips because Philips' property
type was a better fit with National, Philips had a Florida presence like
National and National favored Philips' development-oriented growth plans. The
other party did not make a proposal for a consolidation transaction with
National.
On March 11, 1997, a meeting was held to discuss the structure of a
possible consolidation transaction between National and Philips. Philips
suggested that it would be interested in considering a merger with a price to
National shareholders that would represent a premium over the net asset value of
the National Property and that Philips might consider some continuing role of
the Trustees. No prices for a transaction were discussed. Persons present at the
meeting included Messrs. Stein and Goldman, Mr. Gallagher and other
representatives of Philips, representatives of Prudential Securities and counsel
to National and to Philips.
The parties had various telephone discussions concerning the structure of a
possible transaction between National and Philips.
At a meeting on April 16, 1997, the parties continued to discuss structural
issues concerning a consolidation, as well as valuation of the respective
properties, provisions of an operating partnership agreement, expense
reimbursement for National and the parties' respective rights to terminate the
agreements and other matters. The parties continued these negotiations at a
meeting on April 28, 1997. Persons present at each meeting (or by
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telephone) were Mr. Stein, Mr. Gallagher, other representatives of Philips,
representatives of Prudential Securities, and counsel to Philips, to National
and to Prudential Securities.
The parties continued to work on drafts of the Contribution and Exchange
Agreement, the Operating Partnership Agreement and the proxy statement.
During the course of negotiations in June, the structure of the transaction
was established as a taxable transfer of the National Property for Common Stock
rather than as a tax-free merger transaction to ensure that the Company is not
deemed to assume the liabilities of National, and the parties further discussed
the compensation that would be paid to the Trustees. On June 12, 1997, the
parties met to negotiate the principal agreements. Persons present at the
meeting were Mr. Stein (via telephone), Mr. Gallagher, other representatives of
Philips, representatives of Prudential Securities, and counsel to Philips, to
National (via telephone) and to Prudential Securities. The Company sought a
distribution by National of Common Stock to shareholders in 1997, (so that the
Company would achieve an immediate public distribution), which distribution was
expected to be taxable to the National shareholders. The Board agreed to this
distribution, since it concluded that it would minimize the adverse tax
consequences to National shareholders by limiting the 1997 distribution to
approximately 18% of the Common Stock to be received by National. National also
agreed to maintain its REIT status and corporate existence for at least one year
following the closing of the Formation Transactions. During this period the
Trustees intend to pursue new opportunities for investment by the REIT and to
continue National as a REIT thereafter so long as, in the Board's determination,
reasonable avenues for enhancing shareholder value remain available.
On July 11, 1997, Messrs. Stein and Goldman met with counsel to National to
review a proposed draft of the Contribution and Exchange Agreement and the proxy
statement.
At meetings (including by telephone conference call) on July 16 and July
23, 1997, the parties met to continue work on a draft of the proxy statement and
the Contribution and Exchange Agreement. Peter Stein and National's counsel
participated by telephone. Present at the meeting were Mr. Gallagher, other
representatives of Philips, representatives of Prudential Securities and counsel
to Philips and to Prudential Securities. By the end of July 1997, compensation
for the Trustees was agreed upon.
On August 7, 1997, a special meeting of the Board of Trustees of National
was held in the offices of Bingham Dana LLP in Boston, Massachusetts to consider
the proposed Formation Transactions. Present at the meeting were each of the
Trustees, Messrs. Stein, Goldman and Reibstein, and National's counsel, Bingham
Dana LLP. Initially, the Board discussed with counsel the latest drafts of the
Contribution and Exchange Agreement and related documents and reviewed the
issues outstanding in the transaction with the Company. Following this review a
conference call was held with Prudential Securities. Prudential Securities
discussed with the Board the financial analyses performed by Prudential
Securities and responded to questions of the Trustees. Prudential Securities
then delivered its opinion to the Board of Trustees to the effect that, as of
the date thereof, based on Prudential Securities' review and subject to the
assumptions and limitations described below, the consideration to be received by
National for the National Property pursuant to the Contribution and Exchange
Agreement is fair to National from a financial point of view. Prudential
Securities was then excused from the meeting. The Board then continued to
deliberate, consulting as necessary with counsel, with respect to the
Transaction Agreements and the Formation Transactions. As described more fully
below under '--Reasons for the Formation Transactions; Recommendation of the
Board of Trustees,' after consideration of the positive and negative factors
involved, based on the totality of the facts and circumstances, the Board
resolved to approve National's entering into the Contribution and Exchange
Agreement and the consummation of the Formation Transactions as being fair and
in the best interest of the shareholders, and recommended shareholder approval
of the Transaction Agreements following a proxy solicitation.
REASONS FOR THE FORMATION TRANSACTIONS; RECOMMENDATIONS OF THE BOARD OF TRUSTEES
By unanimous vote, the Board of Trustees (i) determined that the
Transaction Agreements and the Formation Transactions are fair to, and in the
best interests of, National and its shareholders, (ii) approved and adopted the
Transaction Agreements, and (iii) resolved to recommend that the National
shareholders approve the Transaction Agreements.
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In evaluating the fairness of the Transaction Agreements and the Formation
Transactions and concluding to approve the Transaction Agreements and recommend
that shareholders of National approve the Transaction Agreements, the Trustees
reviewed the terms of the Transaction Agreements and the financial performance,
condition, business operations and prospects of National and the Company, and
considered a number of factors. The primary reasons that the Board of Trustees
is recommending approval of the Transaction Agreements are set forth below
(although there can be no assurances that a National shareholder will realize
all or any of the potential benefits described below):
o The total capitalization of the Company on a pro forma basis as of
June 30, 1997 (based on Net Asset Value of $50.00 per share of
Common Stock) would be approximately $252.9 million, which would be
considerably greater than National's market capitalization at June
30, 1997. The Board of Trustees viewed this favorably because of the
Board's belief that it would potentially provide National's
shareholders with greater liquidity in their investment;
o The opportunity to benefit from the depth of experience represented
on the Company's Board of Directors and in its Executive Officers in
a diversified real estate company with expertise, through the
Company's directors and executive officers and the Management
Company, in acquisition, development, financing, construction,
leasing and other tenant-related services. The Board of Trustees
viewed this as a factor favorable to its determination because of
its belief that such directors, officers and the Management Company
personnel, given their general knowledge of the real estate markets
in the New England, Mid-Atlantic and Southeast regions of the United
States and their property management and overall management
expertise, would be able to enhance the value of the Company's
assets;
o The opportunity to expand the number of properties owned and managed
to ten shopping center properties in the New England, Mid-Atlantic
and Southeast regions of the United States, thereby representing an
investment in an enterprise with a significantly larger and more
diversified portfolio, which, although no assurances can be given,
should provide greater access to the capital markets and result in
economies of scale in its operations;
o The location, distribution and mix of the combined portfolio of
Properties;
o National does not expect to make cash distributions to its
shareholders in the near term except as required to maintain its
REIT status, but the Company intends to make periodic cash
distributions at least annually to its shareholders in order to
maintain its REIT status. National has covenanted to continue its
existence for at least one year following consummation of the
Formation Transactions, although there can be no assurances that
National will be able to maintain its REIT status for such period.
National shareholders will continue to hold Shares representing
their beneficial interest in the assets of National;
o The structure of the Formation Transactions. In this regard, the
Board of Trustees placed special emphasis on, and viewed as
favorable to its determination, the fact that the Formation
Transactions will allow shareholders of National to receive shares
of Common Stock and will provide the opportunity, though not the
assurance, for National's shareholders to share in any future
appreciation in value realized by the Company;
o The provisions in the Contribution and Exchange Agreement that
permit National to terminate the Contribution and Exchange Agreement
under certain circumstances, if required by the fiduciary duty of
National's Board of Trustees. The Board of Trustees viewed such
factor as favorable to its determination because of its belief that
these provisions would provide a third party wishing to make a
financially superior acquisition proposal for National the
opportunity to do so;
o The opinion, analysis and presentation of Prudential Securities
described below under Opinion of Financial Advisor, including the
written opinion of Prudential Securities dated August 7, 1997 to the
effect that, as of the date of the opinion and based upon and
subject to certain matters stated therein, the consideration to be
received by National for the National Property pursuant to the
Contribution and Exchange Agreement was fair to National from a
financial point of view. The Board of Trustees viewed Prudential
Securities' opinion as favorable to its determination, in part,
because Prudential Securities is an internationally recognized
investment banking firm with experience and expertise in
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the evaluation of businesses and real estate portfolios and
expertise in connection with mergers and acquisitions and providing
advisory services and raising capital for companies in the real
estate industry;
o The increased cash flow potentially available for reinvestment in
the Company or distribution to shareholders of the combined entity;
o The agreement by the Company, pursuant to the Contribution and
Exchange Agreement, to pay the expenses of National in connection
with the Transaction Agreements and the Formation Transactions, the
preparation of this Proxy Statement/Prospectus and National's
actions in connection therewith; and
o The provision of the Contribution and Exchange Agreement requiring
the affirmative vote of a plurality of votes casts by Unaffiliated
Shareholders for approval of the Transaction Agreements.
The Trustees also considered the following potential disadvantages of the
Formation Transactions to National shareholders:
o Control of the business of the Company (subject to certain
limitations) by Mr. Pilevsky, as Chairman of the Board and Chief
Executive Officer of the Company, including investment, financing
and distribution policies, and as sole member of the Interim
Managing General Partner (which will control the Operating
Partnership until the completion of an Offering) and the fact that
Mr. Pilevsky may have interests that differ from those of other
shareholders of the Company;
o Substantial influence over the affairs of the Company and the
Operating Partnership by the Founders as directors and executive
officers of the Company and as holders initially of Units and Common
Stock representing approximately 70.6% of the outstanding shares of
Common Stock of the Company (including interests redeemable or
convertible therefor and shares of Common Stock issuable upon
exercise of outstanding warrants);
o Conflicts of interests with certain members of the Philips Group,
including the Founders, who will continue to hold through Philips
Private Company significant interests in income producing real
property not contributed to the Company, including conflicts with
one of the Founders who may continue to spend a material amount of
his time and effort managing these interests, and conflicts with
certain personnel of the Management Company who will continue to
spend a material amount of their time and efforts managing the
business and properties of Philips Private Company;
o Material differences in the rights of shareholders of National as
compared to the rights of shareholders of the Company, including the
absence from the Company's charter documents of provisions
protecting shareholders and their investment, restrictions on
corporate investment and financing policies and limitations on
corporate transactions;
o The dependence of the Company on one Property which at June 30, 1997
represents approximately 44.8% of the Company's annualized
contractual base rents and the risk that if this Property were to
experience a materially adverse event, the Company's revenues and
cash available for distributions to shareholders would be adversely
affected; and
o The possibility that National may be required, if the Contribution
and Exchange Agreement is terminated under certain circumstances, to
pay the Company a termination fee of $500,000 to $750,000 plus the
expenses of the Company (in addition to having to pay its own
expenses incurred in connection with the Formation Transactions,
which will be substantial).
In the process of reviewing the proposed Formation Transactions, the Board
examined the benefits to be received by insiders and affiliates of National and
the Company from the Formation Transactions. With respect to the additional
consideration in the form of the Trustees Securities to be received from the
Company by the National Trustees, Messrs. Stein and Goldman, the Board
acknowledged the effort, mostly uncompensated, that had been made by the
Trustees over a three-year period to enhance shareholder value in National by
making improvements to National's real property, and exploring alternative
investment opportunities for National. See '--Background of the Formation
Transactions' for a more detailed description of these efforts. The Board also
took note of the substantial time and effort expended by each of the Trustees in
performing due diligence and negotiating the Formation Transactions, opportunity
for National shareholders. Based on these efforts and the
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ongoing effort of managing National, the Board determined that the additional
consideration to be received by Messrs. Stein and Goldman, when viewed as part
of the Formation Transactions, was fair to, and in the best interest of, the
National shareholders.
The Board also considered the conflicts of interest and control issues
presented by the role of Mr. Pilevsky and the Philips Group and their insiders
and affiliates in the Formation Transactions. In particular, the Board noted
that Mr. Pilevsky and the other officers and directors of the Company and the
members of the Philips Group will initially control Units and Common Stock
representing approximately 94.6% of the outstanding shares of Common Stock of
the Company (including interests redeemable or convertible therefor and shares
of Common Stock issuable upon exercise of outstanding warrants) compared to the
2.1% that it is contemplated that the National shareholders will own and the
0.8% to be owned by the Trustees. While an Offering would reduce such control,
the Board acknowledged that there could be no assurance that such an Offering
would be made or, if made, would be successful. Even if an Offering is
consummated, the Board recognized that Mr. Pilevsky and other affiliates and
insiders of the Philips Group could be expected to continue to have a
controlling influence over the Company.
The Board considered the significant interest and the expected ongoing
substantial involvement in other businesses and real properties of Mr. Pilevsky,
the other officers and directors of the Company and the management personnel of
the Management Company. The Board also noted the benefits and conflicts of
interest created by the Formation Transactions for the Company, the Philips
Group and their affiliates, and the tax consequences of the sale and refinancing
of certain of the Properties.
Despite the foregoing negative factors, the Board determined that the
opportunities and value to the shareholders presented by the Formation
Transactions outweighed the risks posed by the control and conflicts of interest
issues raised by the role of insiders and affiliates of the Philips Group in the
Formation Transactions and concluded that the Formation Transactions were both
fair to, and in the best interests of, shareholders.
In making this determination the following factors were significant to the
Board's recommendation to National shareholders to approve the Formation
Transactions:
o The Company will own ten shopping center properties throughout the New
England, Mid-Atlantic and Southeast regions of the United States compared with
National's ownership of a single property in Lake Mary, Florida with less than
half the gross leasable area of the smallest of the nine other Properties. The
Company thus represents an investment for National shareholders in an
enterprise with a significantly larger and more diversified portfolio than
National's, which, although no assurance can be given, should result in
economies of scale in operations and provide the Company with greater access
to capital and debt markets and potential real estate investment opportunities
than are available to National. The Common Stock being distributed to the
National shareholders thus represents an opportunity for National holders to
invest in the greater capital appreciation potential of the Company.
o The Formation Transactions will result in a diversified real estate company
which, through the Company's executive officers and directors and the
Management Company personnel, will have expertise in real estate acquisition,
development, financing, construction, leasing and other tenant-related
services, and operating experience and familiarity with all of the Properties
(other than National's) and their geographic markets, enabling the Company to
benefit from an effective management team with substantial range and depth in
their real estate experience.
o The Company's Properties, including the National Property, as of June 30, 1997
were approximately 96% leased to over 260 tenants and, based on recent
engineering and environmental reports, are well-maintained, do not require
significant capital improvements or contain significant environmental
liabilities and are established in markets which the Company believes
represent good growth opportunities.
o Although there can be no assurance as to when, if ever, an Offering will be
completed, or if completed, whether an active trading market for the Common
Stock will develop, upon completion of an Offering, the shares of Common Stock
to be distributed to National shareholders would be a more readily liquid
investment in a significantly larger investment portfolio than currently is
represented by the National Shares, for which no trading market currently
exists and there are no reasonable prospects for one to develop.
o As a result of National's carry-over of net operating losses and a deferral of
80% of the distribution of Common Stock until 1998, National expects that it
will not need to pay federal taxes on the gain represented by the Common Stock
received in the Formation Transactions and that it can substantially offset
any state taxes
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that would otherwise become due. While the initial 18% distribution of Common
Stock should be taxable to National shareholders as ordinary income, the
overall net tax consequences to the shareholders were not viewed by the Board
as a significant negative factor given the resulting benefits to be received
by National and the National shareholders from consummation of the Formation
Transactions.
o National does not expect to make cash distributions to shareholders in the
near future except as may be required to maintain its REIT status, but the
Company believes it is likely to have net income sufficient to require limited
distributions to its shareholders in the near term in order to maintain its
REIT status.
In considering the Formation Transactions, the Board of Trustees of
National recognizes that the terms of the Contribution and Exchange Agreement
require National to agree that it will not initiate, solicit or encourage any
inquiry, offer or proposal for a merger, sale of assets or similar transaction.
The Board of Trustees of National concluded that this provision is necessary to
help ensure that the Formation Transactions could be consummated. Moreover, the
Board of Trustees viewed as favorable the fact that the Contribution and
Exchange Agreement does not prohibit National from responding to an unsolicited
proposal if the Board of Trustees concludes that it is required to do so by its
fiduciary duties to its shareholders.
The Board of Trustees of National further recognizes that the consummation
of the Formation Transactions requires the amendment of certain subsections of
Section 5.2 of the Declaration of Trust to eliminate provisions which might
otherwise prohibit National from engaging in the Formation Transactions and
certain of the investments resulting therefrom. The Board of Trustees concluded
that these amendments are a requirement for the consummation of the Formation
Transactions and a failure to amend these prohibitions would take away the
opportunity for shareholders to convert their National investment into an
investment in the larger, more diverse assets of the Company.
The Board of Trustees also notes that the provisions of the Contribution
and Exchange Agreement provide for indemnification equivalent to that available
to trustees, officers, employees or agents of National for actions and omissions
of such persons occurring prior to the Closing Date. Because the indemnification
provisions of the Contribution and Exchange Agreement are equivalent to the
rights currently available to such persons under National's Declaration of Trust
and National's Trustees' Regulations, the Board of Trustees did not view this
factor as affecting its evaluation or recommendation of the Formation
Transactions.
The Board of Trustees of National also notes that all of Prudential
Securities' compensation is contingent upon consummation of the Formation
Transactions and does not view such contingency as unfavorable to the Board of
Trustees' determination or the Board of Trustees' view of Prudential Securities'
analysis and opinion. The Board of Trustees did not view such potential
conflicts of Prudential Securities unfavorably because of the Board of Trustees'
belief that Prudential Securities would adhere to high standards of
professionalism in connection with its engagement and because contingencies for
financial advisors are common in transactions similar to the Formation
Transactions.
Finally, the Board of Trustees considered the risk that the anticipated
benefits of the Formation Transactions may not be fully realized. In the view of
the Board of Trustees, the negative factors are not sufficient, either
individually or collectively, to outweigh the advantages of the Formation
Transactions.
In view of the wide variety of factors considered in its evaluation, the
Trustees of National found it impracticable, and accordingly did not attempt, to
quantify or otherwise assign relative weights to specific factors. The Board of
Trustees of National believes that the positive and negative factors must be
considered as a whole and that isolating certain factors would create a
misleading view of the deliberative process and the reasons for the Board of
Trustees' recommendation.
THE BOARD OF TRUSTEES HAS UNANIMOUSLY APPROVED AND ADOPTED THE TRANSACTION
AGREEMENTS, AND HAVING DETERMINED THAT THE TRANSACTION AGREEMENTS AND THE
FORMATION TRANSACTIONS ARE FAIR TO AND IN THE BEST INTERESTS OF NATIONAL AND ITS
SHAREHOLDERS, UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR ADOPTION OF
EACH OF PROPOSAL 1 AND PROPOSAL 2.
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INTERESTS OF THE TRUSTEES IN THE FORMATION TRANSACTIONS
In considering the recommendation of the Board of Trustees to approve the
Transaction Agreements, shareholders of National should be aware that Messrs.
Stein and Goldman have interests in the Formation Transactions that are in
addition to the interests of shareholders of National generally, including the
receipt by Messrs. Stein and Goldman of the Trustees Stock, with an aggregate
Net Asset Value of $250,000 (5,000 shares of Common Stock), and the Trustees
Warrants, which are exercisable at $25.00 per share (a value of $211,000, based
on the Black Scholes valuation model).
Pursuant to the Contribution and Exchange Agreement, Messrs. Stein, Goldman
and Reibstein have agreed to vote all National Shares held by them, and to cause
their respective affiliates to vote all National Shares held by such affiliates,
in favor of the Transaction Agreements.
OPINION OF FINANCIAL ADVISOR
On August 7, 1997, Prudential Securities delivered its written opinion (the
'Opinion') to the Board of Trustees that, as of such date, the consideration to
be received by National for the National Property pursuant to the Contribution
and Exchange Agreement is fair to National from a financial point of view.
Prudential Securities made a presentation of the Opinion and the underlying
financial analysis to the Board of Trustees on August 7, 1997 and, in addition,
provided to each Trustee, prior to the meeting, a report setting forth the
analysis underlying the Opinion. This analysis, as presented to the Board of
Trustees, is summarized herein. All of the members of the Board of Trustees were
present at the meeting (either in person or via teleconference) and had an
opportunity to ask questions of Prudential Securities. Prudential Securities
discussed with the Board of Trustees the information in the report, and the
financial data and other factors considered by Prudential Securities, in
conducting its analysis, all of which are summarized herein.
In requesting the Opinion, the Board of Trustees did not give any special
instructions to Prudential Securities or impose any limitations upon the scope
of the investigation that Prudential Securities deemed necessary to enable it to
deliver the Opinion. A copy of the Opinion, which sets forth the assumptions
made, matters considered and limits on the review undertaken, is attached to
this Proxy Statement/Prospectus as Appendix A and is incorporated herein by
reference. The summary of the Opinion set forth below is qualified in its
entirety by reference to the full text of the Opinion. National shareholders are
urged to read the Opinion in its entirety. The Opinion is directed only to the
fairness of the consideration to be received by National from a financial point
of view and does not constitute a recommendation to any shareholder as to how
such shareholder should vote at the Meeting.
National selected Prudential Securities to provide financial advisory
services because it is an internationally recognized investment banking firm
engaged in rendering financial advisory services, with particular expertise in
REITs, and in the valuation of businesses and their securities in connection
with mergers and acquisitions and for other purposes, and has substantial
experience in transactions similar to the Formation Transactions. The engagement
letter with Prudential Securities provides that National will pay Prudential
Securities a fee equal to one percent of the total consideration paid in
connection with any transaction in which control of, or a material interest in,
National is acquired by a third party. Such fee is contingent upon consummation
of such a transaction. In addition, the engagement letter with Prudential
Securities provides that National will indemnify Prudential Securities and
certain related persons against certain liabilities, including liabilities under
securities laws, arising out of the agreement or Prudential Securities'
engagement.
In conducting its analysis and arriving at the Opinion, Prudential
Securities reviewed such information and considered such financial data and
other factors as Prudential Securities deemed relevant under the circumstances,
including:
(i) a draft dated July 31, 1997 of the Contribution and Exchange
Agreement;
(ii) a draft dated August 4, 1997 of the Proxy Statement/Prospectus on
Form S-4 (the 'Form S-4');
(iii) the Form 10-K and Form 10-K/A and related financial information
for the fiscal year ended December 31, 1996, the Form 10-Q and the related
unaudited financial information for the quarterly period ended March 31,
1997 for National and a draft of the Form 10-Q and the related unaudited
financial information for the quarterly period ended June 30, 1997 for
National;
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(iv) the draft financial statements of The Philips Company and the
Merrick/Mill Basin Properties, each for the fiscal year ended December 31,
1996 and the quarterly period ended March 31, 1997, included in the Form
S-4;
(v) the draft pro forma condensed combined financial statements of the
Company for the twelve months ended December 31, 1996 and the three months
ended March 31, 1997, included in the Form S-4;
(vi) certain information relating to the business, earnings, cash
flow, assets and prospects of National, furnished to Prudential Securities
by National;
(vii) certain information relating to the business, earnings, cash
flow, assets and prospects of the Company, furnished to Prudential
Securities by the management of Philips Private Company;
(viii) the financial terms of certain recent transactions Prudential
Securities deemed relevant to its inquiry; and
(ix) such other financial studies, analyses and investigations
Prudential Securities deemed appropriate.
Prudential Securities assumed that the draft Contribution and Exchange
Agreement, the draft Form S-4 and draft financial information reviewed by it
will conform in all material respects to those documents when in final form, and
that the Formation Transactions will be consummated substantially as
contemplated by the draft Contribution and Exchange Agreement.
Prudential Securities discussed with senior management of National and
Philips Private Company: (a) the prospects for the businesses of National and of
the Company; (b) their estimates of such business' future financial performance;
(c) the potential financial impact of the Formation Transactions on the
respective companies; and (d) such other matters as Prudential Securities deemed
relevant. Prudential Securities also visited selected properties owned by the
Contributing Partnerships.
In connection with its review and analysis and in arriving at the Opinion,
Prudential Securities assumed and relied upon the accuracy and completeness of
the financial and other information provided to Prudential Securities by
National and the Philips Private Company or which was publicly available, and
did not undertake to verify independently any such information. Prudential
Securities neither made nor obtained any independent valuations or appraisals of
any of National's assets or the assets of the Contributing Partnerships. With
respect to certain projected financial data provided to Prudential Securities
for National and for the Company, Prudential Securities assumed that the
information (and the assumptions and bases therefor) was reasonably prepared and
represented managements' best currently available estimate as to the future
financial performance of National and of the Company. Prudential Securities
reviewed unaudited pro forma financial information on a property-by-property
basis for the year ended February 28, 1998 for the Partnership Properties (see
'--Calculation of Net Asset Value', above), but did not use this information in
its financial analysis described below. The Opinion is necessarily based on
economic, financial and market conditions as they existed and could be evaluated
as of the date of the Opinion.
Prudential Securities expressed no opinion as to what the market value of
the Company's Common Stock will be when issued in the Formation Transactions or
the prices at which the Common Stock will trade after the Formation
Transactions. In addition, the Opinion does not evaluate the relative merits of
the Formation Transactions as compared to any other business plan or opportunity
which might be presented to National or the effect of any other arrangement
which National might pursue.
In arriving at the Opinion, Prudential Securities performed a variety of
financial analyses, which are summarized herein. The summary set forth herein of
the analyses presented to the Board of Trustees at the August 7, 1997 meeting
does not purport to be a complete description of the analyses performed. The
preparation of a fairness opinion is a complex process that involves various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of these methods to the particular circumstances
and, therefore, such an opinion is not necessarily susceptible to partial
analysis or summary description. Prudential Securities believes that its
analysis must be considered as a whole and that selecting portions thereof or
portions of the factors considered by it, without considering all the analyses
and factors, could create an incomplete view of the evaluation process
underlying the Opinion. Prudential Securities made numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
National or the Company. Any estimates contained in Prudential Securities'
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analyses are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than suggested by such
analyses. Additionally, estimates of the values of businesses and securities do
not purport to be appraisals or necessarily reflect the prices at which
securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty.
Subject to the foregoing, the following is a summary of the financial
analyses performed by Prudential Securities in arriving at the Opinion.
Pro Forma Value Analysis. A pro forma value analysis was used by
Prudential Securities to establish an implied range of pro forma values for the
National Property per National Share, before and after giving effect to the
Formation Transactions.
Applying low, median and high capitalization rates of 10.50%, 11.00% and
11.50% (based upon discussions with local appraisers) to the National Property's
estimated net operating income ('NOI') for 1997, the National Property was found
to have an estimated value of $1.24 to $1.43 per National Share (with a median
of $1.33 per National Share). Prudential Securities analyzed the consideration
paid in several recent acquisition transactions of portfolios deemed by
Prudential Securities to be comparable to the Company's portfolio, and
considered the multiple of the total purchase price to the acquired portfolio's
NOI for the last twelve months. The transactions considered were the portfolio
acquisitions of Mid-Atlantic Realty Trust/Pechtor Family Holdings, Excel Realty
Trust, Inc./Properties owned or controlled by Albert B. Glickman, Regency Realty
Corporation/Branch Properties, L.P. and Kranzco Realty Trust/Union Property
Investors, Inc. None of the portfolios listed is identical to the Philips'
portfolio but rather were used for comparative purposes. Accordingly, a complete
analysis of the results of the calculations cannot be limited to a quantitative
review of such results and involves complex considerations and judgments. Such
transactions were considered relevant because of the type of property (retail)
and the timing of the acquisition (1997). Such transactions were found to have
an implied purchase price for the acquired portfolio of 10.3x to 11.0x NOI for
the last twelve months, or a capitalization rate of 9.06% to 9.75% with a median
capitalization rate of 9.18%. Applying these capitalization rates to the
Company's estimated pro forma NOI for 1997 resulted in an implied pro forma
value per National Share in the range of $1.47 to $1.97 (with a median of $1.88
per National Share). The median implied pro forma value per National Share
exceeds the median estimated value per National Share. Thus, in Prudential
Securities' view, such analysis supports Prudential Securities' conclusion that
the consideration to be received by National for the National Property is fair
from a financial point of view.
Pro Forma Funds From Operations Per Share Analysis. Prudential Securities
also analyzed the pro forma effect of the Formation Transactions on the Funds
from Operations per National Share, assuming that National continued to hold all
the Common Stock to be received by it in the Formation Transactions. An analysis
of anticipated future results based on National's NOI for the six months ended
June 30, 1997 (annualized) and the Company's pro forma NOI for the quarter ended
March 31, 1997 (annualized), and certain estimated expenses provided by
management of National and of the Company, indicated that the Formation
Transactions result in an increase in Funds from Operations per National Share
from $0.052 for the twelve months ended June 30, 1997 to an estimated $0.188 on
a pro forma basis for the twelve months ended December 31, 1997.
Projected financial and other information concerning National and the
impact of the Formation Transactions upon holders of National Shares is not
necessarily indicative of future results. All projected financial information is
subject to numerous contingencies beyond the control of the management of
National and the Company.
Prudential Securities was retained by National to render financial advisory
services. Pursuant to the Contribution and Exchange Agreement, at the closing of
the Formation Transactions the Company will assume National's payment and
indemnification obligations under National's engagement letter with Prudential
Securities. The Company agreed to pay Prudential Securities a fee equal to
$1,940,000, payable (together with interest at 9% per annum) upon the earlier to
occur of (i) the first anniversary of the closing of the Formation Transactions
and (ii) the closing of the Company's first equity offering. The Company has
also agreed that Prudential Securities shall have the right to act as lead
manager of the Company's first public offering or as exclusive sales agent for
its first private offering, in either case with proceeds in excess of $25
million, on terms to be agreed upon.
In lieu of the financial advisory fee payable by National upon consummation
of the Formation Transactions and assumed by the Company under the Contribution
and Exchange Agreement, Prudential Securities will
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receive 1,940 shares of Series A Preferred Stock, convertible into 38,800 shares
of Common Stock, which Series A Preferred Stock represents approximately 2.5% of
the outstanding shares of Common Stock of the Company (including interests
redeemable or convertible therefor and shares of Common Stock issuable upon
exercise of outstanding warrants). Upon consummation of an Offering, the Company
will have the right (subject to the holder's right to convert) to redeem the
Series A Preferred Stock for $1,940,000 in cash, plus any accrued and unpaid
dividends.
Prudential Securities Credit Corporation, an affiliate of Prudential
Securities, is the lender to a Contributing Partnership in the aggregate
principal amount of $24 million and to the partners of a second Contributing
Partnership in the aggregate principal amount of $13 million, which loans will
become obligations of the Company in connection with the Formation Transactions.
The maturity date of the $13 million loan is June 1998. The Company may elect to
extend the June 1998 maturity date of the $24 million loan by converting this
obligation to either a seven or ten year term loan.
DESCRIPTION OF THE CONTRIBUTION AND EXCHANGE AGREEMENT
The following description of the Contribution and Exchange Agreement is a
summary of its material terms only, and is not a complete statement of the terms
and conditions of such agreement. This summary is qualified in its entirety by
reference to the Contribution and Exchange Agreement and the other Transaction
Agreements, copies of which have been filed with the Commission as exhibits to
the Registration Statement and are incorporated herein by reference. Copies of
the Transaction Agreements may be examined, and copies obtained, as set forth
under the caption 'Available Information.' References to terms of the
Transaction Agreements shall also be deemed to be references to the applicable
respective provisions of the Contribution and Exchange Agreement and the related
ancillary agreements to the extent such documents contain governing provisions
with respect thereto.
Representations and Warranties. In the Contribution and Exchange
Agreement, the Company, the Contributing Partnerships and National have each
made customary representations and warranties to the other parties.
Conduct of Business. Pursuant to the Contribution and Exchange Agreement,
the Company, the Contributing Partnerships and National have agreed that, except
as permitted by the Contribution and Exchange Agreement or as otherwise
consented to in writing by the other parties, during the period from the date of
the Contribution and Exchange Agreement to the Closing, the Company, the
Contributing Partnerships, National and their respective subsidiaries will each
carry on its business in the ordinary course consistent with past practice, and
will use its best efforts to preserve intact its present business organization.
In addition, National has agreed to maintain its existence and not adopt any
plan of liquidation or dissolution for a period of at least one year following
the Closing.
No Solicitation of Competing Transactions. National has agreed that it
will not and shall cause its trustees, advisors, officers, employees, agents,
affiliates, or any investment banker or financial advisor acting on its behalf,
not to, directly or indirectly, solicit or initiate the submission of proposals
or offers from, or solicit, encourage, entertain or enter into any agreement,
arrangement or understanding with, or solicit or initiate any discussions with,
or furnish any information to, any corporation, partnership, person or other
entity or group, other than the Contributing Partnerships, with respect to any
Competing Offer except as may be required by the exercise of its fiduciary
duties under applicable law. A Competing Offer is defined in the Contribution
and Exchange Agreement as any agreement, arrangement or understanding with, or
any discussions with, or the furnishing of any information to, any corporation,
partnership, person or other entity or group, other than the Property
Partnerships or a representative thereof, with respect to the transfer of all or
any part of the National Property, or with respect to a merger, acquisition,
tender offer, exchange offer, consolidation or similar transaction involving any
purchase of all or any significant portion of the assets or equity securities of
National.
Conditions to the Formation Transactions. The respective obligation of
each of the parties to effect the Formation Transactions are subject to the
satisfaction or waiver at or prior to the Effective Time of, among other things,
the following conditions: (i) the Transaction Agreements shall have been
approved and adopted by the affirmative vote of the holders of a majority of the
outstanding National Shares and the affirmative vote of a plurality of the votes
cast by Unaffiliated Shareholders; (ii) no governmental entity or federal or
state court shall have issued any injunction or other order which restrains or
prohibits the consummation of the Formation
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Transactions; (iii) all authorizations, waivers or consents required to be
obtained in order to consummate the Formation Transactions shall have been
obtained; (iv) the Registration Statement of which the Proxy
Statement/Prospectus is a part shall have been declared effective by the
Commission and no stop order suspending the effectiveness shall have been issued
under the Securities Act or proceedings therefor initiated or threatened by the
Commission; (v) the representations and warranties of each of the parties shall
be accurate in all material respects and each of the parties shall have
performed or complied in all material respects with each of its obligations to
be performed or complied with as if they had been made on and as of the Closing
Date; (vi) the receipt by the Board of Trustees of an opinion to the effect that
the consideration to be received by National for the National Property pursuant
to the Contribution and Exchange Agreement is fair to National from a financial
point of view; and (vii) the consummation of the other Formation Transactions
contemplated by the Contribution and Exchange Agreement.
Indemnification and Insurance. Except as described herein, no party will
have any liability to any other party under the Contribution and Exchange
Agreement if the agreement is terminated. See 'Termination' below. The Company
will indemnify, defend and hold harmless the Trustees for any damages suffered
in the event any suits (other than suits that relate to actions or inactions on
the part of Messrs. Stein, Goldman or Reibstein taken or not taken, as the case
may be, which are unrelated to the negotiation and execution of the Contribution
and Exchange Agreement and consummation of the Formation Transactions) are
brought against them as a result of the transactions contemplated by the
Contribution and Exchange Agreement. These indemnification obligations of the
parties survive the consummation of the Formation Transactions.
Agreement to Vote. Pursuant to the Contribution and Exchange Agreement,
Messrs. Stein, Goldman and Reibstein agreed to vote all National Shares held by
them, and to cause their respective affiliates to vote all National Shares held
by such affiliates, in favor of the Transaction Agreements.
Fees and Expenses. The Transaction Agreements provide that the Company
will pay all fees and expenses incurred by the Company, the Contributing
Partnerships and National (including attorneys' and accountants' fees and
expenses) in connection with the negotiation, documentation and consummation of
the Formation Transactions. In certain circumstances, upon termination of the
Contribution and Exchange Agreement, National is required to pay a break-up fee
and reimburse expenses to the Company. See 'Termination' below. If the Formation
Transactions are not consummated by reason of a willful misrepresentation or
breach by the Company, National shall be entitled to retain the amount
reimbursed by the Company.
The total cash expenditures to be incurred by the Company in connection
with the Formation Transactions, other than the financial advisory fee paid to
Prudential Securities, which shall be in the form of Series A Preferred Stock,
are estimated to be approximately $1.8 million, including filing fees, title
costs, transfer costs, solicitation fees, engineering costs and other
acquisition costs.
Termination. The Contribution and Exchange Agreement may be terminated and
the Formation Transactions may be abandoned at any time, notwithstanding
approval by the shareholders of National: (i) by mutual written consent of the
parties; (ii) by any party in the event that (a) National's proxy statement is
not filed with the Commission by August 12, 1997 (provided, however, that the
Company shall be entitled to extend said date to September 30, 1997, in its sole
discretion), (b) the closing has not occurred by December 31, 1997, or (c) the
closing has not occurred within fourteen (14) days of obtaining the requisite
National shareholder approval; provided, however, that the party terminating the
Contribution and Exchange Agreement pursuant to clause (ii) above (a) shall not
have been responsible for delaying the occurrence of the event resulting in such
termination, and (b) must exercise their right to terminate within ten (10) days
of the occurrence of the event resulting in such termination; (iii) by National
in the event that (a) its counsel advises its Board of Trustees that National's
failure to engage in or pursue a Competing Offer might subject National's
trustees to liability for breach of their fiduciary duties under applicable law,
in which case National is obligated to pay expenses and pay a break-up fee of
$750,000 to the Company, or (b) the Company or the Contributing Partnerships are
not ready, willing and able to perform their obligations under the Contribution
and Exchange Agreement on the closing date, or the Company or the Contributing
Partnerships willfully default thereunder or willfully breaches any material
representation, warranty, covenant or agreement set forth therein; (iv) by the
Company or the Contributing Partnerships in the event that National is not
ready, willing and able to perform its obligations under the Contribution and
Exchange Agreement on the closing date or National willfully defaults or
willfully breaches any material representation, warranty, covenant or agreement
set forth therein; provided, however, that if such termination did not result
solely from the action of a third party but resulted from the willful action or
inaction
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after the date of the Contribution and Exchange Agreement of National and/or the
Trustees, National is obligated to pay expenses and pay a break-up fee of
$500,000 to the Company.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
As a general rule, Section 351 of the Code provides that no gain or loss
shall be recognized if property is transferred to a corporation by one or more
persons solely in exchange for stock of such corporation and immediately after
the exchange such person or persons are in control of the corporation within the
meaning of Section 368(c) of the Code. For this purpose, control is defined as
the ownership of stock possessing at least 80% of the total combined voting
power of all classes of stock entitled to vote and at least 80% of the total
number of shares of all other classes of stock of the corporation. However,
Section 351 of the Code does not apply to any transfer of property to an
investment company. Pursuant to relevant Treasury Regulations, transfers of
property to a corporation will be considered transfers to an investment company
if (i) the transfer results in a diversification of the transferor's interests
and (ii) the transferee corporation is a REIT. A transfer ordinarily results in
diversification if two or more persons transfer non-identical assets to the
transferee corporation in exchange for its stock. The Treasury Regulations also
provide that transfers of non-identical assets which constitute an insignificant
portion of the total value of assets transferred to a transferee corporation
will be disregarded for purposes of determining whether diversification has
occurred. Pursuant to the Formation Transactions, in exchange for, among other
things in the case of National, Common Stock, Mr. Pilevsky will contribute cash
and National will contribute real estate to the Company, each representing a
significant portion of the assets contributed to the Company. In addition,
Prudential Securities will receive, in lieu of the financial advisory fee
payable by National upon consummation of the Formation Transactions and assumed
by the Company under the Contribution and Exchange Agreement, 1,940 shares of
the Company's Series A Preferred Stock (which are convertible into 38,800 shares
of Common Stock of the Company). Cash and real estate are non-identical assets
and, therefore, the transfer will not qualify as a Code Section 351 transaction
because of the resulting diversification of the transferor's interests and the
fact that the transferee corporation anticipates that it will elect to be taxed
as a REIT. Accordingly, National will not qualify under the non-recognition
provisions of Code Section 351 and will recognize gain or loss on the transfer
of its property to the corporation in exchange for its stock.
Similarly, the corporate reorganization provisions set forth in Code
Section 368(a) are not applicable to the Formation Transactions because the
requisite 'Control' will not be retained by National. 'Control' is defined as at
least 80% of the total combined voting power of all classes of stock entitled to
vote and at least 80% of the total number of shares of all other classes, in the
case of a type 'C' reorganization, and at least 50% of the voting stock and
number of shares of all other classes of stock in the case of a type 'D'
reorganization. Accordingly, National and the Company agreed to treat the
Formation Transactions as taxable for federal income tax purposes. Consequently,
the Formation Transactions should result in the following federal income tax
consequences:
(1) It is estimated that for federal tax purposes a gain of
approximately $1.1 million will be recognized by National as a result of
the Formation Transactions and all such gain and a substantial portion of
state tax gain will be offset by carry-over net operating losses of
National;
(2) As a result of the distribution in 1997 of 3,744 shares of Common
Stock to the National shareholders, gain for federal tax purposes will be
recognized by the shareholders of National of approximately $0.25 per
Share, and the distribution of 20,256 shares of Common Stock in 1998 will
be considered a reduction in basis of the National Shares held by each
holder and will be taxable as capital gain only to the extent it exceeds a
shareholder's basis in the National Shares held by such shareholder;
(3) The income tax basis of the Common Stock received by a National
shareholder in the Formation Transactions will be equal to the fair market
value of such Common Stock;
(4) The holding period of such Common Stock received by a National
shareholder will begin as of the date such Common Stock is received by the
shareholder; and
(5) Shareholders will continue to hold their National Shares on the
same tax basis as prior to the Formation Transactions, subject to any
reduction in basis as contemplated by (2) above.
See 'Risk Factors--Certain Consequences of the Formation Transactions:
Distributions of Common Stock; Federal Income Tax Consequences; National's Reit
Status.'
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Bingham Dana LLP, tax counsel to National, has rendered an opinion
regarding the federal income tax consequences that are likely to be material to
a holder of National Shares, the conclusions of which are substantially similar
to the discussion of certain federal income tax consequences set forth above. A
copy of the form of the opinion of Bingham Dana LLP has been filed as an exhibit
to the Registration Statement of which this Proxy Statement/Prospectus is a
part. A copy of such opinion may be obtained, without charge, upon receipt of a
written request delivered to the Managing Trustee of National, at 32 Hanson
Road, Canton Center, Connecticut, 06020, or by facsimile to (888) 678-7642.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS BASED UPON CURRENT LAW
AND IS INTENDED FOR GENERAL INFORMATION ONLY. SUCH DISCUSSION MAY NOT BE
APPLICABLE TO A NATIONAL SHAREHOLDER WHO ACQUIRES THE COMMON STOCK AS
COMPENSATION. EACH NATIONAL SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX
ADVISOR CONCERNING THE SPECIFIC TAX CONSEQUENCES OF THE FORMATION TRANSACTIONS
TO SUCH SHAREHOLDER, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND
OTHER TAX LAWS.
The Company's decision to be taxed as a REIT will not affect the federal
income tax consequences of the Formation Transactions to the National
shareholders.
Holders of National shares are urged to consult their own tax advisors as
to the specific tax consequences to them of the Formation Transactions.
SOLICITATION AGENT
National has retained The Herman Group, Inc. (the 'Solicitation Agent') to
assist in the solicitation of proxies. In addition to the delivery of this Proxy
Statement/Prospectus to shareholders, the Solicitation Agent will orally solicit
the votes of the holders of National Shares.
For its services as Solicitation Agent, National has agreed to pay a fee
equal to $10,000. In addition, National will reimburse the Solicitation Agent
for its expenses, including fees and expenses of its counsel. National has also
agreed to indemnify the Solicitation Agent against certain liabilities and
expenses, including liabilities under federal securities laws. The Solicitation
Agent will receive no additional compensation for its services as Solicitation
Agent.
The proxies are being solicited on behalf of the Board of Trustees. The
expenses of soliciting proxies will be borne by National and reimbursed by the
Company. The principal solicitation is being made by mail; however, additional
solicitation may be made by telephone or in person by the Trustees of National
and their affiliates, who will not receive additional compensation. Arrangements
may also be made with brokerage houses and other custodians, nominees and
fiduciaries to forward the proxy materials to the beneficial owners of National
Shares. National will reimburse such forwarding agents for reasonable
out-of-pocket expenses incurred by them, but no compensation will be paid for
their services. In addition, the Solicitation Agent will assist National with
the solicitation and deliveries of proxies.
THE MEETING
PURPOSE OF THE MEETING
General. This Proxy Statement/Prospectus is being furnished in connection
with the solicitation of proxies by the Board of Trustees of National from
holders of National Shares for use at the Meeting of Shareholders of National to
be held at the offices of Pryor, Cashman, Sherman & Flynn, 410 Park Avenue, New
York, New York 10022, at 3:00 p.m. (local time) on Tuesday, December 30, 1997,
and at any adjournment or postponement thereof. This Proxy Statement/Prospectus
and the form of proxy are first being mailed to the shareholders of National on
or about December , 1997.
At the Meeting, the shareholders of National will be asked to consider and
act upon proposals to approve (i) the sale of the National Property pursuant to
the Contribution and Exchange Agreement and the related Formation Transactions,
and (ii) the amendment of the terms of the Declaration of Trust to delete
Sections 5.2(e), (i), (o) and (q) of the Declaration of Trust which might
otherwise prohibit National from engaging in the Formation Transactions and
certain of the investments resulting therefrom and inserting the statement in
its place that each such section has been ['Intentionally omitted'].
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The Board of Trustees of National has determined that the Transaction
Agreements and the Formation Transactions are fair to, and in the best interests
of, National and its shareholders and has unanimously approved each of Proposal
1 and Proposal 2.
ACCORDINGLY, THE BOARD OF TRUSTEES OF NATIONAL UNANIMOUSLY RECOMMENDS THAT
THE SHAREHOLDERS OF NATIONAL APPROVE EACH OF PROPOSAL 1 AND PROPOSAL 2.
Record Date; Shareholders Entitled to Vote and Required Vote. Only holders
of record of National Shares at the close of business on the Record Date are
entitled to notice of and to vote at the Meeting. On the Record Date, there were
748,738 National Shares outstanding, which is the only class of capital stock
entitled to vote at the Meeting. These National Shares were held by
approximately 1,770 holders of record on the Record Date.
The presence of a majority of the outstanding National Shares, either in
person or by proxy, is necessary to constitute a quorum at the Meeting.
Abstentions and broker non-votes are counted as shares present for purposes of
determining the presence of a quorum at the Meeting. If there are insufficient
votes to constitute a quorum or for approval of the Transaction Agreements, the
Meeting may be adjourned from time to time in order to permit further
solicitation of proxies. At the Meeting, each holder of National Shares is
entitled to one vote for each National Share held. Approval of each of Proposal
1 and Proposal 2 requires the affirmative vote of a majority of the outstanding
National Shares entitled to vote at the Meeting. Accordingly, abstentions and
broker non-votes will have the effect of a vote against the approval of a
proposal. In addition, the Contribution and Exchange Agreement requires the
affirmative vote of a plurality of votes cast by Unaffiliated Shareholders for
approval of Proposal 1. The adoption of each proposal is conditioned upon the
approval of the other proposal.
Solicitation, Revocation and Use of Proxies. All holders of National
Shares represented at the Meeting by properly executed proxies received by
National prior to or at the Meeting, unless such proxies previously have been
revoked, will be voted at the Meeting in accordance with the instructions on the
proxies. IF NO CONTRARY INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL BE VOTED
FOR THE APPROVAL OF EACH OF PROPOSAL 1 AND PROPOSAL 2. PROXIES THAT ARE VOTED
AGAINST EITHER PROPOSAL 1 OR PROPOSAL 2 WILL NOT BE VOTED IN FAVOR OF AN
ADJOURNMENT OR POSTPONEMENT OF THE MEETING. National does not know of any
matters other than as described in the accompanying Notice of Special Meeting
that are to come before the Meeting. If any other matter or matters are properly
presented for action at the Meeting, the persons named in the enclosed form of
proxy and acting thereunder will have the discretion to vote on such matters in
accordance with their best judgment, unless such authorization is withheld.
Proxies may be returned to the Solicitation Agent by facsimile at (214)
999-9323 or in the enclosed postage paid envelope. If returning a proxy by
facsimile, both sides of the proxy card should be transmitted. Any proxy given
pursuant to this solicitation may be revoked by the person giving it at any time
before it is voted. Proxies may be revoked by filing with the Solicitation Agent
written notice of revocation bearing a later date than the proxy, by duly
executing a later-dated proxy relating to the National Shares or by attending
the Meeting and voting in person (although attendance at the Meeting will not in
and of itself constitute revocation of a proxy). If you have any questions,
please call the Herman Group, Inc. at (800) 582-1313.
National has retained The Herman Group, Inc. to solicit proxies. The
Solicitation Agent may contact holders of National Shares by mail, telephone,
telex, telegraph and personal interviews. The Solicitation Agent will receive a
fee of $10,000 for such services, plus reimbursement of out-of-pocket expenses,
and National has agreed to indemnify the Solicitation Agent against certain
liabilities and expenses in connection with such solicitation, including
liabilities under the federal securities laws. The Trustees of National and
their affiliates may also solicit proxies by telephone, telegram or personal
contact and such persons will receive no additional compensation for such
services. Copies of solicitation materials will be furnished to fiduciaries,
custodians and brokerage houses for forwarding to beneficial owners of National
Shares held in their names. The Company will bear the cost of preparing and
mailing proxy materials in connection with the Meeting and the solicitation of
proxies, and the cost of the Commission filing fees and the printing costs in
connection with this Proxy Statement/Prospectus.
Appraisal Rights; Shareholders List. The shareholders of National have no
appraisal rights or dissenters' rights with respect to the Formation
Transactions under the Declaration of Trust or Massachusetts business trust law.
The Declaration of Trust provides that shareholders of National have the right,
for proper purposes, to inspect the trust's records, including a list of the
names and addresses of the shareholders of National, in the
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manner and to the extent that comparable records of a Massachusetts business
corporation would be available for inspection by shareholders under the laws of
the Commonwealth of Massachusetts. Such request for inspection should be
delivered to the Board of Trustees of National at 32 Hanson Road, Canton Center,
Connecticut, 06020, or by facsimile to (888) 678-7642.
APPROVAL OF THE TRANSACTION AGREEMENTS
At the Meeting, the shareholders of National will be asked to consider and
act upon proposals to approve (i) the sale of the National Property pursuant to
the Contribution and Exchange Agreement, and the related Formation Transactions
and (ii) the amendment of the terms of the Declaration of Trust to delete
Sections 5.2(e), (i), (o) and (q) of the Declaration of Trust which might
otherwise prohibit National from engaging in the Formation Transactions and
certain of the investments resulting therefrom and inserting the statement in
its place that such section has been '[Intentionally omitted]'. Approval of each
proposal requires the affirmative vote of a majority of the outstanding National
Shares entitled to vote at the Meeting. In addition, the Contribution and
Exchange Agreement requires the affirmative vote of a plurality of votes cast by
Unaffiliated Shareholders for approval of Proposal 1. The adoption of each
proposal is conditioned upon the approval of the other proposal. For a
description of the Contribution and Exchange Agreement and the related
Transaction Agreements, see 'The Formation Transactions--Description of the
Contribution and Exchange Agreement.' For a description of the Declaration of
Trust, see 'Comparison of Shareholders' Rights.'
OTHER BUSINESS; ADJOURNMENT OR POSTPONEMENT OF MEETING
The management of National currently does not intend to present, and does
not have any reason to believe that others will present, at the Meeting any item
of business other than those set forth herein. However, if any other business is
properly presented at the Meeting and may properly be considered and acted upon,
proxies will be voted by those named on the proxy in their best judgment.
Proxies that are voted against either Proposal 1 or Proposal 2 will not be voted
in favor of an adjournment or postponement of the Meeting.
PRINCIPAL HOLDERS OF NATIONAL SHARES
The following table sets forth the beneficial ownership as of the Record
Date by (i) each trustee of National and all trustees of National as a group and
(ii) each person known to the Company to own beneficially more than 5% of the
outstanding National Shares. Under the rules of the Commission, and for the
purpose of the following table, a beneficial owner of a security includes any
person who, directly or indirectly, has or shares voting power and/or investment
power with respect to such security. Unless otherwise indicated in the
footnotes, all of such interests are owned directly and the indicated person has
sole voting and investment power with respect to such National Shares.
<TABLE>
<CAPTION>
NUMBER OF NATIONAL SHARES
NAME AND ADDRESS BENEFICIALLY OWNED PERCENT OF CLASS
- ------------------------------------------------------------------- ------------------------- ----------------
<S> <C> <C>
Peter M. Stein, Trustee ........................................... 0(1) 0%
32 Hanson Road
Canton Center, CT
Jay W. Goldman, Trustee ........................................... 50,679.59(2)(3) 6.8%
41 Vineyard Road
Newton, MA 02159
Robert R. Reibstein, Trustee ...................................... 0 0%
135 Dedham Street
Newton, MA 02161
Gretchen L. Stein ................................................. 46,109.45 6.2%
32 Hanson Road
Canton Center, CT 06020
All Trustees as a group ........................................... 96,789.04 12.9%
</TABLE>
- ------------------
(1) Excludes 46,109.45 shares beneficially owned by Gretchen L. Stein, wife of
Mr. Stein, as to which Mr. Stein disclaims beneficial ownership.
(Footnotes continued on next page)
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(Footnotes continued from previous page)
(2) Includes 50,679.59 shares held by In-Grates Restated Profit Sharing Plan, of
which Mr. Goldman is the sole beneficiary.
(3) On March 3, 1997, National issued 30,416 Shares (at an agreed upon value of
$1.2132 per Share) to Mr. Goldman to repay him for monies he advanced to
National in connection with certain municipal assessments payable by
National.
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THE COMPANIES
PHILIPS INTERNATIONAL REALTY CORP.
The Company will acquire the interests of the Philips Group and National in
a portfolio of ten shopping center properties upon consummation of the Formation
Transactions. The Company will be a self-advised real estate company with
expertise, through the Company's executive officers and directors and the
Management Company, in all aspects of acquisition, development, construction,
leasing, management, operation and financing of shopping center properties in
the New England, Mid-Atlantic and Southeast regions of the United States. The
Company expects to qualify as a real estate investment trust for federal income
tax purposes commencing with the taxable year ending December 31, 1998, but may
elect to qualify as a REIT as early as the taxable year commencing with the
taxable year ending December 31, 1997.
Upon consummation of the Formation Transactions, the Company will own,
directly or indirectly through the Holding Partnerships and the Philips Subs,
all of the partnership or membership interests in, or assets of, the
Contributing Partnerships, which own the nine Partnership Properties located in
the New England, Mid-Atlantic and Southeast regions of the United States, and
the National Property. See 'Business and Properties.'
Affiliates of the Company. The members of the Philips Group were the
limited or general partners or members of each of the Contributing Partnerships.
The members of the Philips Group have transferred their respective partnership
or membership interests in, or caused the transfer of assets of, the
Contributing Partnerships to the Company in exchange for an aggregate of
1,450,000 Units of the Operating Partnership. With the transfer of its interests
in the Contributing Partnerships, the Philips Group has transferred to the
Company the Partnership Properties located in the New England, Mid-Atlantic and
Southeast regions of the United States. See 'Risk Factors--Conflicts of
Interest.'
The Company's day-to-day leasing, development, acquisition, property and
portfolio management and related administrative functions will be performed
jointly by the Companyand the Management Company. The Management Company
initially will be engaged to manage the Partnership Properties, pursuant to the
terms of the Management Agreement. The Company's executive officers will include
Mr. Pilevsky, Chairman of the Board and Chief Executive Officer of the Company,
who will devote in excess of 50% of his professional time to overseeing the
management of the Properties and the growth of the Company, as well as a
significant amount of his time to the management of the business and properties
of Philips Private Company, including non-retail real estate activities and
certain retail properties not contributed to the Company in the Formation
Transactions. Ms. Levine, Chief Operating Officer and Executive Vice President
of the Company, will devote in excess of 90% of her professional time to
overseeing the management of the Properties and the growth of the Company, and
will have limited involvement with certain properties not contributed to the
Company in the Formation Transactions. Pursuant to the terms of a
non-competition agreement, Mr. Pilevsky, Ms. Levine and the Management Company
have agreed to conduct all of their future management, operations, acquisitions
and development of retail shopping center properties, with certain exceptions,
through the Company. See 'Management Agreement and Non-Competition
Agreement--Non-Competition Agreement.' In addition, prior to the consummation of
the Formation Transactions, the Company will enter into employment agreements
with Messrs. Petra and Gallagher, who will devote all of their professional time
to overseeing the management of the Properties and the growth of the Company.
The Executive Officers have an average of 20 years' experience in all aspects of
the real estate industry, and have developed many long-term relationships with
tenants, brokers, property owners, lenders, contractors, suppliers and others in
the real estate industry throughout the New England, Mid-Atlantic and Southeast
regions of the United States. In addition, Mr. Petra has 13 years of prior
experience as a senior executive with a publicly-traded real estate company that
focused on the retail shopping center business.
THE HOLDING PARTNERSHIPS, THE INTERIM MANAGING GENERAL PARTNER AND THE PHILIPS
SUBS
The Holding Partnerships are limited partnerships formed under the laws of
the State of Delaware for the sole purpose of owning certain of the Properties
and assuming the mortgage indebtedness encumbering such Properties. The
Operating Partnership is the sole limited partner of each of the Holding
Partnerships with a 99.989% interest in each Holding Partnership.
The Philips Subs are wholly-owned subsidiaries of the Company formed under
the laws of the State of Delaware. Each Holding Partnership and Contributing
Partnership is owned 0.01% by a Philips Sub as non-managing general partner or
non-managing member, as the case may be.
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In general, those Contributing Partnerships whose general partnership
interests were contributed to the Company transferred such general partnership
interests to the Holding Partnerships as the designee of the Operating
Partnership in exchange for Units in the Operating Partnership. Those
Contributing Partnerships whose assets were transferred to the Company
transferred such assets to the Holding Partnerships as the designee of the
Operating Partnership in exchange for Units in the Operating Partnership. Those
Contributing Partnerships whose limited partnership interests were contributed
to the Company transferred such limited partnership interests to the Operating
Partnership in exchange for Units in the Operating Partnership. Those
Contributing Partnerships whose limited liability company membership interests
were contributed to the Company transferred such membership interests to the
Operating Partnership in exchange for Units in the Operating Partnership.
The Interim Managing General Partner is a limited liability company formed
under the laws of the State of Delaware, whose sole member is Mr. Pilevsky. Each
Holding Partnership and Contributing Partnership is owned 0.001% by the Interim
Managing General Partner as managing general partner or managing member, as the
case may be. Generally, the Interim Managing General Partner will have the full,
exclusive and complete control in the management of each of the Holding
Partnerships and Contributing Partnerships until such time as an Offering is
completed.
THE OPERATING PARTNERSHIP
The Operating Partnership has been organized as a Delaware limited
partnership and holds the Properties either through the Holding Partnerships or
the Contributing Partnerships. Generally, pursuant to the Partnership Agreement,
the Interim Managing General Partner will have full, exclusive and complete
control in the management of the Operating Partnership until such time as an
Offering is completed, subject to certain rights accorded the limited partners
and certain other limitations. Thereafter, the Company, as sole general partner
of the Operating Partnership, will have full, exclusive and complete
responsibility and discretion in the management and control of the Operating
Partnership, and the limited partners of the Operating Partnership will have no
authority, subject to certain rights accorded the limited partners, to transact
business for, or participate in the management activities or decisions of, the
Operating Partnership. See 'Partnership Agreement of Operating Partnership',
'Risk Factors--Conflicts of Interests' and '--Control by Interim Managing
General Partner.'
NATIONAL
National was organized on January 16, 1985, as a Massachusetts business
trust, and on July 23, 1993, changed its name from Richard Roberts Real Estate
Growth Trust I to its current name. National has made for 1996 and prior years,
and intends to make for 1997, an election to file as a REIT under the provisions
of the Code and intends to maintain this status as long as it will benefit
National's shareholders. The shareholders of National, at their Annual Meeting
on October 19, 1995, voted to change the management structure of National to a
self-managed REIT, effective October 27, 1995 when the advisor agreement with
First Investment Properties, Inc. expired.
From inception, National invested directly in equity interests in five
commercial properties in the United States which had income-producing
capabilities. Four of these properties were lost to foreclosure in 1990 and
1992. National has experienced a loss of $18,598, income of $33,452 and a loss
of $272,220 for fiscal years ended December 31, 1996, 1995 and 1994,
respectively. National considers its business to be operating in one industry
segment, investment in real property.
On March 31, 1986, National purchased The Shoppes at Lake Mary, a 38,125
square foot neighborhood shopping center located on 4.7 acres of land in Lake
Mary, Florida, from an unaffiliated entity for $3,200,000 in cash. The Shoppes
at Lake Mary is a two-story shopping center and office facility consisting of
three buildings and a parking lot with 191 parking spaces. Lake Mary is located
in Seminole County, Florida, slightly north and to the east of Orlando. The
Trustees are not aware of any environmental problems at the property site.
Due to past adverse conditions in the real estate market, and the economy
in general, the Trustees have determined that it would be necessary to extend
the holding period for its property beyond the originally anticipated four- to
seven-year period. The results of National's operations depend upon its
property's competitive position in its leasing market. The Shoppes at Lake Mary
is National's sole remaining property.
The National Property is not significantly affected by seasonal factors but
is subject to competition from similar types of properties in the vicinity in
which it is located. While the market in which the property operates is
experiencing an economic recovery, the property values generally remain below
the relatively high values experienced in the mid-1980's.
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MANAGEMENT AGREEMENT
AND NON-COMPETITION AGREEMENT
MANAGEMENT AGREEMENT
The following summary of the Management Agreement is qualified in its
entirety by reference to the Management Agreement, a copy of the form of which
has been filed as an exhibit to the Registration Statement of which this Proxy
Statement/Prospectus is a part. A copy of the Management Agreement may be
examined, and copies obtained, as set forth under the caption 'Available
Information.'
Pursuant to the Management Agreement, the Management Company will provide
the day-to-day operations, management and leasing services for the Properties,
including, among other things, (i) operating, maintaining and managing the
Properties; (ii) after consultation with and approval by the Operating
Partnership and the Company (collectively, 'Owner'), establishing rental rates;
(iii) enforcing the collection of rents; (iv) constructing improvements and
additions to the Properties, after consultation with and approval by the Owner;
(v) after consultation with and approval by the Owner, making all decisions
regarding the leasing of space at the Properties, including the termination of
leases; (vi) hiring, training, discharging and supervising all employees
necessary to properly maintain and operate the Properties; (vii) repairing the
Properties; (viii) purchasing supplies, equipment and services necessary for the
operation, maintenance, and repair of the Properties; (ix) contracting for all
services and utilities necessary for the efficient operation and maintenance of
the Properties; (x) taking such action as may be necessary to comply promptly
with any orders or requirements affecting the Properties; (xi) placing and
keeping in force all forms of insurance needed to adequately protect the Owner
and as required by the underlying mortgages and at law; (xii) maintaining a bank
account for the deposit of monies collected from the Properties and drawing from
such account in order to discharge any liabilities, obligations or expenses
incurred pursuant to the Management Agreement; and (xiii) providing back office
and support functions, including bookkeeping and accounting services. The
Management Company will receive (i) a management fee from the Company equal to
3% of gross rental collections received from the Properties for the calendar
year, payable in monthly installments based upon the receipts of the prior
month, (ii) leasing commissions and renewal leasing commissions (not to exceed
local current market rates, determined based upon an analysis derived from
contacts with local brokers), and (iii) a construction supervisory fee (ranging
from 10-20% of the cost of a project, determined based upon the level of
difficulty of such project) with regard to any tenant improvements and
construction matters relating to the Properties, and will be reimbursed for all
reasonable out-of-pocket expenses.
The Management Agreement will have an initial term of three years,
commencing upon the consummation of the Formation Transactions, subject to
automatic one-year renewals. The Management Agreement may be terminated by Owner
at any time, (i) in whole or in part, upon thirty days' written notice, in the
event that Owner elects to perform one or more of such management functions on
an 'in-house' basis (with a commensurate reduction in fees), and (ii) in whole,
immediately, upon the occurrence of certain other events, including upon the
gross negligence or willful misconduct of the Management Company, or if all or
substantially all of the Properties are sold. In connection with the services to
be provided by the Management Company to the Operating Partnership, the Company
will grant options to purchase up to 54,400 shares of Common Stock to the
Management Company or its designees at an exercise price of $50.00 per share,
which options shall be exercisable for a period of ten years following the date
of grant and shall vest 33 1/3% per year over three years.
NON-COMPETITION AGREEMENT
The following summary of the Non-Competition Agreement is qualified in its
entirety by reference to the Non-Competition Agreement (as defined below), a
copy of the form of which has been filed as an exhibit to the Registration
Statement of which this Proxy Statement/Prospectus is a part. A copy of the
Non-Competition Agreement may be examined, and copies obtained, as set forth
under the caption 'Available Information.'
In connection with the Formation Transactions, the Management Company, Mr.
Pilevsky and Ms. Levine (collectively, the 'Managers'), the Operating
Partnership and the Company will enter into a non-competition agreement (the
'Non-Competition Agreement'), pursuant to which the Managers have agreed that
until such time as both (i) one year has lapsed since the Management Agreement
has been terminated and neither Mr. Pilevsky nor Ms. Levine is a director or
executive officer of the Company and (ii) neither Mr. Pilevsky nor Ms. Levine
owns beneficially more than fifteen (15%) percent of the outstanding shares of
Common Stock on a
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fully diluted basis (including Units redeemable for shares of Common Stock),
neither the Managers nor any affiliate of the Management Company (within the
meaning of Rule 12b-2 of the Securities Exchange Act of 1934, as amended)
(together with the Managers, the 'Managing Group') shall engage in any way in
the acquisition, ownership, operation, development, management, renovation or
leasing (collectively, 'activities') of any retail shopping center properties
(or mixed properties which are primarily known as retail shopping center
properties based upon relative square footage of each use) or any improvements
thereof located in the United States, except for: (i) the Managing Group's
activities with respect to the Company and the Excluded Properties, including
the expansion of an Excluded Property which is contiguous to such property,
under certain conditions, (ii) the Managing Group's activities with respect to
property located anywhere in the continental United States so long as the retail
shopping center portion of such property does not exceed twenty thousand
(20,000) square feet, (iii) the acquisition by Mr. Pilevsky, Ms. Levine, their
spouses and issue of any property or interest in any property by inheritance,
and (iv) subject to certain conditions, Mr. Pilevsky or Ms. Levine providing
advice or financial assistance to any of their children with regard to projects
initiated by such children involving activities with respect to any retail
shopping center property located anywhere in New York City or outside New York
City so long as such property is not within a two (2) mile radius of property
owned by the Company or the Operating Partnership. Furthermore, in the event
that at any time after the fifth anniversary of the effective date of the Non-
Competition Agreement, Ms. Levine is neither a director or executive officer of
the Company for at least one year nor owns beneficially more than five (5%)
percent of the outstanding shares of Common Stock on a fully diluted basis
(including Units redeemable for shares of Common Stock), then with respect to
Ms. Levine only, the Non-Competition Agreement shall be deemed terminated.
PARTNERSHIP AGREEMENT OF OPERATING PARTNERSHIP
The following summary of the Agreement of Limited Partnership of the
Operating Partnership (the 'Partnership Agreement') and the descriptions of
certain provisions set forth elsewhere in this Proxy Statement/Prospectus are
qualified in their entirety by reference to the Partnership Agreement, a copy of
the form of which is filed as an exhibit to the Registration Statement of which
this Proxy Statement/Prospectus is a part. A copy of the Partnership Agreement
may be examined, and copies obtained, as set forth under the caption 'Available
Information.'
MANAGEMENT
The Operating Partnership has been organized as a Delaware limited
partnership pursuant to the terms of the Partnership Agreement. Generally,
pursuant to the Partnership Agreement and subject to the provisions with respect
to the Interim Managing General Partner described below, the Company, as the
general partner of the Operating Partnership, will have full, exclusive and
complete responsibility and discretion in the management and control of the
Operating Partnership, and the members of the Philips Group, as limited partners
of the Operating Partnership, will have no authority to transact business for,
or participate in the management activities or decisions of, the Operating
Partnership, except as provided in the Partnership Agreement and as required by
applicable law. However, until such time prior to the first anniversary of the
consummation of the Formation Transactions as the Company owns 67% of the
partnership interests in the Operating Partnership, and thereafter until such
time as the Company owns 60% of the partnership interests in the Operating
Partnership, the consent of the holders of at least 51% of the Units held by
limited partners will be required to: (i) engage in a Termination Transaction;
(ii) dissolve, liquidate or wind-up the Operating Partnership; (iii) change the
nature of the business of the Operating Partnership; or (iv) admit, remove or
retain a general partner. Following the consummation of the Formation
Transactions, the Company, as non-managing general partner, will own
approximately a 3.2% partnership interest in the Operating Partnership, and the
full and exclusive control over the affairs of the Operating Partnership will be
held by the Interim Managing General Partner until the completion of an
Offering.
CONTROL BY INTERIM MANAGING GENERAL PARTNER
The Partnership Agreement provides that until completion of an Offering,
the Interim Managing General Partner shall have full, exclusive and complete
responsibility and discretion in the management and control of the Operating
Partnership, and that the Company shall not be entitled to exercise any such
rights as general partner during such period (each subject to the rights
accorded the limited partners and subject to the provision that any transaction
between the Company or the Operating Partnership and Mr. Pilevsky or his
affiliates be approved by
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the independent directors of the Company). To the extent such funds are
available for distribution, the Interim Managing General Partner must cause the
Operating Partnership to make sufficient distributions to the Company to enable
it to make distributions to shareholders to maintain the Company's REIT status.
The sole manager and member of the Interim Managing General Partner will be Mr.
Pilevsky, who, together with certain other persons, own a controlling interest
in each of the Contributing Partnerships. Upon completion of an Offering, the
Interim Managing General Partner will be deemed to have withdrawn for a nominal
amount from the Operating Partnership and the Company will be entitled to
exercise in full the rights and responsibilities to manage the business and
affairs of the Operating Partnership as sole general partner under the
Partnership Agreement. References in this section 'Partnership Agreement of the
Operating Partnership' to the Company as general partner of the Operating
Partnership shall be deemed to be references to the Interim Managing General
Partner as required by the context thereof.
RIGHTS OF THE LIMITED PARTNERS
In addition to the rights accorded the limited partners discussed under
'--Management' above and '--Transferability of Interest' below, the limited
partners have certain rights with respect to amendments to the Partnership
Agreement. Other than with respect to certain nonmaterial or ministerial
amendments, until such time prior to the first anniversary of the consummation
of the Formation Transactions as the Company owns 67% of the partnership
interests in the Operating Partnership, and thereafter until such time as the
Company owns 60% of the partnership interests in the Operating Partnership, the
written consent of holders of at least 51% of the Units held by limited partners
is required to amend the Partnership Agreement. The foregoing notwithstanding,
the written consent of all the limited partners is required to (i) increase the
obligation of any limited partner to make contributions to the capital of the
Operating Partnership; (ii) modify the order of certain allocations of
distributions among the partners (other than as specifically provided for
therein); (iii) change the Operating Partnership to a general partnership; (iv)
reduce the percentage of limited partners required to consent to any matter in
the Partnership Agreement; (v) amend certain provisions in any manner that
prohibits or restricts the ability of a limited partner to exercise its
redemption rights in full; (vi) amend certain 'fair price' provisions applicable
as a result of a Termination Transaction; or (vii) amend the percentage
requirements for amending the Partnership Agreement.
INDEMNIFICATION AND FIDUCIARY STANDARDS
The Partnership Agreement provides that the general partner and its
affiliates, officers, directors, agents and employees shall not be liable for
damages or otherwise to the Operating Partnership or any of the partners or
their successors or assigns for any acts or omissions performed or omitted
within the scope of its authority as general partner, or otherwise conferred on
the general partner and such affiliates, officers, directors, agents and
employees by the Partnership Agreement, so long as such acts or omissions are
taken or omitted in good faith and do not involve willful misconduct or gross
negligence and are otherwise consistent with the general partner's fiduciary
duties of care and loyalty imposed on directors of a corporation formed under
the laws of the State of Delaware as set forth in the General Corporation Law of
the State of Delaware and construed by the courts of the State of Delaware. The
Partnership Agreement also provides that all such individuals and their
respective successors, executors, administrators and personal representatives
will be indemnified and held harmless by the Operating Partnership for any loss,
liability or expense incurred as a result of any act or omission concerning the
business or activities of the Operating Partnership or the general partner
provided such act or omission was not in violation of any term or provision of
the Partnership Agreement. The Partnership Agreement further provides that each
partner will indemnify the Operating Partnership if the Operating Partnership is
made a party to any litigation or otherwise incurs any loss or expense as a
result of or in connection with any partner's personal obligations or
liabilities unrelated to Partnership business. The liability of a partner
pursuant to the indemnity referred to in the immediately preceding sentence is
not limited to such partner's Units but is enforceable against such partner
personally.
The Company's Charter and By-Laws require the Company to indemnify its
directors and officers to the fullest extent permitted from time to time by
Maryland law. The Charter also permits the Company to indemnify employees,
agents and other persons acting on behalf of or at the request of the Company.
The MGCL permits a corporation to indemnify its directors, officers and certain
other parties against judgments, penalties, fines, settlements and reasonable
expenses actually incurred by them in connection with any proceeding to which
they
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may be made a party by reason of their service to or at the request of such
corporation, unless it is established that the act or omission of the
indemnified party was material to the matter giving rise to the proceeding and
(i) was committed in bad faith or was the result of active and deliberate
dishonesty, (ii) the indemnified party actually received an improper personal
benefit, or (iii) in the case of any criminal proceeding, the indemnified party
has reasonable cause to believe that the act or omission was unlawful. See
'Certain Provisions of Maryland Law and the Company's Charter and By-Laws.'
TRANSFERABILITY OF INTERESTS
The Partnership Agreement provides that the Company may not voluntarily
withdraw from the Operating Partnership, or transfer or assign its interest in
the Operating Partnership, without the consent of the holders of at least 51% of
the Units, subject to certain provisions described in the next paragraph.
Pursuant to the Partnership Agreement, members of the Philips Group have agreed,
other than pursuant to the redemption provisions, not to sell, assign, transfer,
pledge, encumber or in any manner dispose of all or any of their interest in the
Operating Partnership without the consent of the Company, which consent may not
be unreasonably withheld. However, each member of the Philips Group has the
right, upon prior written notice to the general partner and subject to
applicable securities laws, to (i) pledge or otherwise encumber all or any
portion of its interest in the Operating Partnership to an unrelated lender as
security for a bona fide obligation (subject, however, to applicable securities
laws) and/or (ii) transfer all or any portion of its interest in the Operating
Partnership to immediate family members and trusts for the benefit of the
members of its immediate family for estate and/or gift tax purposes.
In addition, the Partnership Agreement provides that the Company may not
engage in any Termination Transaction unless all limited partners either will
receive, or will have the right to elect to receive, for each Unit an amount of
cash, securities or other property equal to the product of (i) the number of
shares of Common Stock into which each Unit is convertible and (ii) the greatest
amount of cash, securities or other property paid to the holder of one share of
Common Stock in consideration of one share of Common Stock pursuant to the terms
of the Termination Transaction. If, in connection with the Termination
Transaction, a purchase, tender or exchange offer shall have been made to and
accepted by the holders of the outstanding shares of Common Stock, each holder
of Units will receive, or will have the right to elect to receive, the greatest
amount of cash, securities or other property which such holder would have
received had it exercised its right to redemption and received shares of Common
Stock in exchange for its Units immediately prior to the expiration of such
purchase, tender or exchange offer and had thereupon accepted such purchase,
tender or exchange offer. See 'Comparison of Shareholders' Rights' and
'Partnership Agreement of Operating Partnership--Rights of Limited Partners'.
The Company may also merge or otherwise combine its assets with another
entity if the following conditions are met: (i) substantially all of the assets
directly or indirectly owned by the surviving entity are held directly or
indirectly by the Operating Partnership or another limited partnership or
limited liability company which is the survivor of a merger, consolidation or
combination of assets with the Operating Partnership (in each case, the
'Surviving Partnership'); (ii) the limited partners own a percentage interest of
the Surviving Partnership based on the relative fair market value of the net
assets of the Operating Partnership and the relative fair market value of the
other net assets of the Surviving Partnerships immediately prior to the
consummation of such transaction; (iii) the rights, preferences and privileges
of the limited partners in the Surviving Partnership are at least as favorable
as those in effect immediately prior to the consummation of such transaction and
as those applicable to any other limited partners or non-managing members of the
Surviving Partnership; and (iv) such rights of the limited partners include the
right to exchange their interests in the Surviving Partnership for at least one
of the following: (a) the consideration available to such persons pursuant to
the preceding paragraph, or (b) if the ultimate controlling person of the
Surviving Partnership has publicly traded common equity securities, such common
equity securities, with an exchange ratio based on the relative fair market
value of such securities and the Common Stock. For purposes of this paragraph,
the determination of relative fair market values and rights, preferences and
privileges of the limited partners shall be reasonably determined by the
Company's Board of Directors as of the time of the Termination Transaction and,
to the extent applicable, the values shall be no less favorable to the limited
partners than the relative values reflected in the terms of the Termination
Transaction.
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CAPITAL CONTRIBUTIONS
The Partnership Agreement provides that if the Operating Partnership
requires additional funds at any time or from time to time in excess of funds
available to the Operating Partnership from borrowings or capital contributions,
the Company may borrow such funds from a financial institution or other lender
or through public debt offerings and lend such funds to the Operating
Partnership on the same terms and conditions as are applicable to the Company's
borrowing of such funds. As an alternative to borrowing funds required by the
Operating Partnership, the Company may raise such additional funds pursuant to
the issuance of Common Stock and contribute the net amount of cash so raised as
an additional capital contribution to the Operating Partnership. If the Company
so contributes additional capital to the Operating Partnership, the Company's
partnership interests in the Operating Partnership will be increased on a
proportionate basis. Conversely, the partnership interests of the limited
partners will be decreased on a proportionate basis in the event of additional
capital contributions by the Company, unless limited partners contribute their
pro-rata share of the required funds. In addition, the Company may contribute
the stock, assets or other consideration it receives in connection with any
merger, consolidation or other acquisition to the capital of the Operating
Partnership in exchange for additional Operating Partnership Units.
ADDITIONAL CLASSES OF UNITS
The general partner is allowed under the Partnership Agreement to create
and issue additional classes of Operating Partnership Units to new or existing
limited partners with such terms, preferences, conversion or other rights,
voting powers, restrictions, allocations, distribution rights, qualifications
and terms or conditions or redemption as the general partner determines is in
the best commercial interest of the Operating Partnership (which could be either
more or less favorable to the holders thereof than the currently outstanding
Units).
AWARDS UNDER STOCK OPTION PLANS
If options granted in connection with stock option plans of the Company are
exercised at any time or from time to time, the Partnership Agreement requires
the Company to contribute to the Operating Partnership as an additional capital
contribution the exercise price received by the Company in connection with the
issuance of shares of Common Stock to such exercising participant. Although the
Company will contribute to the Operating Partnership an amount equal to the
exercise price received by the Company, for purposes of recalculating the
Company's partnership interest the Company will be considered to have
contributed an amount equal to the fair market value of the shares of Common
Stock issued to the exercising party.
REDEMPTION RIGHTS
Beginning on the first anniversary of the consummation of the Formation
Transactions, members of the Philips Group will be able to exercise rights which
will, subject to certain limitations, enable them to require the Operating
Partnership to redeem part or all of their Units for Common Stock (on a
one-for-one basis, subject to certain anti-dilution adjustments and exceptions)
or cash (based upon the fair market value of an equivalent number of shares of
Common Stock at the time of such redemption). The obligation to redeem the
Philips Group's Units may be assumed by the Company in exchange for, at the
Company's election, either cash or shares of Common Stock (on a one-for-one
basis), provided that the Company may not pay for such redemption with shares of
Common Stock to the extent that it would result in a member of the Philips Group
beneficially or constructively owning shares of Common Stock in excess of the
Ownership Limit or Mr. Pilevsky and his affiliates beneficially or
constructively owning shares of Common Stock in excess of the Philips Ownership
Limit. See 'Description of Capital Stock--Restrictions on Transfer'.
REGISTRATION RIGHTS
For a description of certain registration rights held by members of the
Philips Group, see 'Shares Available for Future Sale--Registration Rights.'
TAX MATTERS
Pursuant to the Partnership Agreement, and subject to the rights accorded
the Interim Managing General Partner therein, the Company will be the tax
matters partner of the Operating Partnership and, as such, will have authority
to make tax elections under the Code on behalf of the Operating Partnership.
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The net income or net loss of the Operating Partnership will generally be
allocated to the Company and the limited partners in accordance with their
respective percentage interests in the Operating Partnership, subject to
compliance with the provisions of Sections 704(b) and 704(c) of the Code and the
regulations promulgated thereunder.
OPERATIONS
The Partnership Agreement requires that the Operating Partnership be
operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT for federal income tax purposes.
The Partnership Agreement provides that the net operating cash revenues of
the Operating Partnership, as well as net sales and refinancing proceeds, will
be distributed from time to time as determined by the Company (but not less
frequently than quarterly) pro rata in accordance with the partners' respective
percentage interests.
DUTIES AND CONFLICTS
The Partnership Agreement provides that all business activities of the
Company, including all activities pertaining to the acquisition, development,
management and operation of any real properties, must be conducted through the
Operating Partnership.
TERM
The Operating Partnership will continue in full force and effect until
December 31, 2097, unless a majority in interest elects to continue the
Partnership, or until sooner dissolved pursuant to the terms of the Partnership
Agreement.
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COMPARISON OF SHAREHOLDERS' RIGHTS
Upon consummation of the Formation Transactions, the shareholders of
National will receive shares of Common Stock of the Company, a Maryland
corporation. Differences between the provisions of the MBCL and the MGCL, and
differences between the Declaration of Trust of National and the Charter and
By-Laws of the Company, may be relevant to the National shareholders. It is not
practical to summarize all such provisions here or to cover all of the respects
in which Maryland law may differ from Massachusetts law. Although the Company
and National believe that the following are all of the material differences in
the rights of the Company's shareholders and National shareholders, shareholders
are advised to review the Charter and the By-Laws of the Company and the
Declaration of Trust of National and the Trustees Regulations of National, which
are available as described under 'Available Information'; and the following
summary is qualified in its entirety by reference to the MBCL and the MGCL, the
Charter and By-Laws of the Company and the Declaration of Trust of National.
National's Declaration of Trust and relevant provisions of Massachusetts law are
summarized below under the caption 'National', and the Company's Charter and
By-Laws and relevant provisions of Maryland law are summarized below under the
caption 'Certain Provisions of Maryland Law and of the Company's Charter and
By-Laws'.
The following defined term applies to this discussion of the National
Declaration of Trust: 'Affiliate' means (i) any person directly or indirectly
controlling, controlled by or under common control with another person, (ii) any
person owning or controlling 5% or more of the outstanding voting securities or
beneficial interests of such other person, (iii) any officer, retired officer,
director, trustee, employee or general partner of such person and (iv) if such
other person is an officer, director, trustee or partner of another entity, then
the entity for which that person acts in any such capacity.
BOARD OF TRUSTEES AND BOARD OF DIRECTORS
National. The Declaration of Trust of National provides that National's
Board of Trustees must consist of at least three but not more than 15 persons.
The Declaration of Trust of National provides that trustees may be removed
either with or without cause by the affirmative vote (or written consent) of the
holders of record of at least a majority of the outstanding National Shares
entitled to vote or with cause by all the remaining Trustees.
The Declaration of Trust of National requires that a vacancy on the Board
of Trustees be filled by a majority of the remaining trustees or trustee in
office, or by the shareholders.
See 'Risk Factors--Benefits to the Trustees from the Formation
Transactions' for information with respect to compensation of the Trustees.
The Company. The Charter provides that the Board of Directors must consist
of at least three persons. The Charter does not require that a majority of the
Company's Board of Directors be independent.
The Charter provides that a director may be removed only for cause and only
by the affirmative vote of holders of two-thirds of the aggregate number of
shares of Common Stock then entitled to be cast generally in the election of
directors.
The Company's Charter and By-Laws provide that vacancies on the Board of
Directors may be filled by a majority of the remaining directors, though less
than a quorum, or by the shareholders; provided, however, that vacancies created
by newly created directorships may be filled only by a majority of the entire
Board of Directors or by the shareholders. See 'Certain Provisions of Maryland
Law and the Company's Charter and By-Laws--Number of Directors; Removal;
Filling Vacancies.'
See 'Management--Compensation of Directors' for information with respect to
compensation of Directors of the Company.
ISSUANCE OF CAPITAL STOCK
National. National is authorized by its Declaration of Trust to issue an
unlimited number of National Shares. Preferred stock is not authorized.
The Company. The authorized capital stock of the Company consists of one
hundred fifty million shares of Common Stock, and thirty million shares of
Preferred Stock, in such classes or series and with such rights, preferences,
limitations, terms and conditions, as determined by the Board of Directors.
47,660 shares of Common Stock and 1,940 shares of Series A Preferred Stock will
be issued in connection with the Formation Transactions. See '--Anti-Takeover
Provisions' and 'Description of Capital Stock of the Company.'
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DISTRIBUTIONS TO SHAREHOLDERS
National. The Declaration of Trust of National provides that holders of
National Shares are entitled to receive, as declared by National's Board of
Trustees, dividends and distributions and further provides that the Trustees
shall make cash distributions to holders of National Shares in amounts at least
sufficient to enable National to qualify as a REIT (and the Trustees may make
distributions in excess of such amount).
The Company. The Charter provides that, subject to certain exceptions, the
holder of shares of Capital Stock in excess of 6.5% (by number of shares or
value, whichever is more restrictive) of the outstanding shares of Capital Stock
are not entitled to distributions or to voting rights. See 'Description of
Capital Stock of the Company--Common Stock' and '--Restrictions on Ownership and
Transfer.'
SHAREHOLDER MEETINGS
National. The Declaration of Trust of National requires that National hold
an annual meeting of shareholders and furnish to each shareholder an annual
report no later than 120 days after the close of National's fiscal year. A
special meeting of shareholders may be called by a majority of trustees and will
be called upon the written request of the holders of at least 10% of the
outstanding National Shares.
The Company. The MGCL and the Company's By-Laws require that the Company
hold an annual meeting of shareholders. A special meeting of shareholders may be
called by the Board of Directors, the Chief Executive Officer or the President,
and will be called upon written request of the holders of a majority of the
outstanding shares of Common Stock.
SHAREHOLDER APPROVAL OF CERTAIN ACTIONS
National. Shareholder approval is required for amendments to the
Declaration of Trust, changes to the investment objectives and policies of
National, mergers, share exchanges and sales of all or substantially all of
National's assets. Such approval requires the affirmative vote of a majority of
all votes entitled to be cast on the matter. Such matters also require the
approval of a majority of the trustees.
The Company. Consolidations, mergers, share exchanges and sales of
substantially all of the assets (other than in the ordinary course of business)
of the Company require approval by the affirmative vote of a majority of
outstanding shares of Common Stock. The recommendation of the Board of Directors
and the affirmative vote of the holders of a majority of the outstanding shares
of Common Stock is required to amend the Company's Charter, including the
provisions relating to termination of REIT status and ownership limits.
Directors may be removed only for cause and only by the affirmative vote of the
holders of two-thirds of the aggregate number of shares of Common Stock then
entitled to be cast generally in the election of directors. The By-Laws of the
Company may only be adopted, altered or repealed by a majority of the Board of
Directors. See 'Certain Provisions of Maryland Law and the Company's Charter and
By-Laws.'
RESTRICTIONS ON CORPORATE ACTIVITIES
National. The Declaration of Trust of National provides that National may
not, among other things: (a) invest in the ownership of, or participations in
the ownership of, raw land or in agricultural properties or the issuance of
mortgage loans secured by raw land or agricultural properties; (b) invest in any
foreign currency, commodities, commodity futures contracts, bullion or chattels;
(c) invest in any contracts for the sale of real estate, except in connection
with the acquisition of interests in real property and unless such real estate
contracts are recordable in the chain of title; (d) issue 'redeemable
securities' as defined in Section 2(a)(32) of the Investment Company Act of
1940; (e) hold equity securities, including the shares of other REITs; (f)
engage in trading as compared with investment activities or engage in the
business of underwriting or agency distribution of securities issued by others;
(g) allow the aggregate borrowings of National to exceed one hundred percent
(100%) of the net assets, in the absence of a determination by a majority of the
Trustees that a higher level of borrowings (which in no event shall exceed three
hundred percent (300%) of the net assets) is appropriate and in the best
interest of National; (h) issue securities in exchange for certain real estate
investments; (i) invest in securities or interests in persons primarily engaged
in real estate activities or invest in securities of other issuers for the
purpose of exercising control; (j) hold property primarily for sale to customers
in the ordinary course of business of National other than in connection with the
liquidation of National; (k) except as otherwise permitted, make or invest in
certain mortgage loans; (l) engage in any short sale, or borrow, on an unsecured
basis, if such borrowing will result in an asset coverage of less than 300%,
except that such borrowing limitation shall not apply to a first mortgage trust;
(m) issue debt securities unless the historical debt service coverage (in the
most recently
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completed fiscal year of National) as adjusted for known changes is sufficient
to properly service that higher level of debt; (n) engage in joint ventures or
other lawful combination or associations with any person in connection with the
acquisition and ownership of investments in real property; (o) sell any real
property to any person or entity; (p) repurchase its shares except as otherwise
permitted; (q) acquire securities in any company holding investments or engaging
in activities prohibited by the Declaration of Trust; or (r) invest in real
property under construction or under contract for development, with certain
exceptions.
The Company. Neither the Company's Charter nor the MGCL contain similar
restrictions on the Company's activities.
INTERESTED PARTY TRANSACTIONS
National. Under National's Declaration of Trust, a contract, act or other
transaction, between National and any other person, or in which National is
interested, shall be valid and no Trustee, employee or agent of National shall
have any liability as a result of entering into any such contract, act or
transaction, even though (a) one (1) or more of the Trustees, employees or
agents are directly or indirectly interested in or connected with, or are
trustees, partners, directors, employees, officers or agents of such other
person, or (b) one (1) or more of the Trustees, employees or agents of National,
individually or jointly with others, is a party or are parties to, or directly
or indirectly interested in, or connected with, such contract, act or
transaction, provided that such interest or connection is disclosed or known to
the Trustees and thereafter the Trustees authorize or ratify such contract, act
or other transaction by affirmative vote of a majority of the Trustees who are
not interested in the transaction or affiliated with any other entity in the
transaction.
National shall not engage in a transaction with (a) any Trustee, employee
or agent (acting in his individual capacity) of National, (b) any director,
trustee, partner, officer, employee or agent acting in his individual capacity
as an advisor or contractor of National, (c) an advisor or contractor of
National or (d) an Affiliate of any of the foregoing, except to the extent that
such transaction has, after disclosure of such affiliation, been approved or
ratified by the affirmative vote of a majority of the Trustees who are not
interested or affiliated with any such person involved in the transaction,
including a majority of Trustees who have made certain determinations to the
extent applicable that: (i) such transaction is fair and reasonable to National
and its shareholders; (ii) based upon an appraisal, the total consideration is
not in excess of the appraised value of the interest in real property being
acquired, if an acquisition is involved, or less than the appraised value of the
interest in real property being disposed of, if a disposition is involved; and
(iii) if such transaction involves payments by National for services rendered to
National by a person in a capacity other than that of Trustee, officer, employee
or agent, (1) the compensation is not in excess of the compensation, if any,
paid to such person by any other person who is not an Affiliate of such person
for any comparable services in the same geographic area, and (2) the
compensation is not greater than the charges for comparable services generally
available in the same geographic area from other persons who are competent and
not affiliated with any of the parties involved.
The Company. Under the MGCL, any contract or transaction between the
Company and any director, officer or any entity in which the director or officer
has a material financial interest is not void or voidable if it is approved,
after disclosure of the interest, by the affirmative vote of a majority of
disinterested directors (even if they constitute less than a quorum of the Board
of Directors).
OWNERSHIP LIMIT
National. Whenever the National Board of Trustees deems it to be
reasonably necessary to protect the status of National as a REIT, the National
Board of Trustees may require a statement or affidavit from each shareholder or
proposed transferee of National Shares setting forth the number of shares
already owned by the shareholder or proposed transferee and any related person.
If, in the opinion of the National Board of Trustees, which will be conclusive,
any proposed transfer would jeopardize the status of National as a REIT, the
Trustees may refuse to permit such transfer. Any attempt to acquire National
Shares which would result in the disqualification of National as a REIT will be
null and void.
The Company. The Charter provides, subject to certain exceptions, that the
holder of shares of Capital Stock exceeding 6.5% (by number of shares or value,
whichever is more restrictive) of the total outstanding shares of Capital Stock
are not entitled to vote or to receive distributions and are subject to certain
other restrictions on transfer. Actual or constructive ownership of shares of
capital stock in excess of the applicable ownership limit will cause the
violative transfer or ownership to be void with respect to the transferee or
owner as to that number of shares the ownership of which by such owner or
transferee results in such owner or transferee
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or any other person violating any of the ownership limits, and such shares will
be automatically transferred to a trust for the benefit of a qualified
charitable organization. Such transferee or owner shall have no right to vote
such shares or be entitled to dividends or other distributions with respect to
such shares.The Board of Directors has waived the Ownership Limit for Mr.
Pilevsky and his affiliates. See 'Description of Capital Stock of the
Company--Restriction on Ownership and Transfer.'
ANTI-TAKEOVER PROVISIONS
National. As a Massachusetts business trust, National is not subject to
any of Massachusetts' anti-takeover laws, including the Massachusetts Control
Share Acquisition Act, the Massachusetts Business Combination Law and Chapter
110C of the Massachusetts General Law (the first generation of Massachusetts'
anti-takeover laws). Certain provisions of the Declaration of Trust require the
approval of shareholders for mergers and transactions with affiliates which
could inhibit a change of control. See 'Interested Party Transactions' and
'Shareholder Approval of Certain Actions' for a description of these provisions.
The Company. See 'Certain Provisions of Maryland Law and the Company's
Charter and By-Laws--Statutory Requirements for Certain Transactions' for a
description of the anti-takeover provisions of the MGCL. The By-Laws exempt the
Company from these provisions. The Partnership Agreement contains certain 'anti-
takeover' and 'fair price' provisions with respect to the rights of the limited
partners which may inhibit a change in control of the Company under the
circumstances that could give the holders of Common Stock the opportunity to
realize a premium over then-prevailing market prices. See 'Partnership Agreement
of Operating Partnership--Rights of Limited Partners.'
INDEMNIFICATION
National. National's Declaration of Trust provides that any person made a
party to any action, suit or proceeding or against whom a claim or liability is
asserted by reason of the fact that he was or is a shareholder, Trustee,
employee or agent of National shall be indemnified and held harmless by National
against any and all losses, liabilities, damages, fines, claims and judgments
and amounts paid on account thereof (whether in settlement or otherwise) and
shall be indemnified and held harmless against and, upon payment thereof, shall
be entitled to reimbursement for reasonable expenses, including attorneys' fees,
actually and reasonably incurred by him; provided, however, that no such
Trustee, employee or agent shall be so indemnified or reimbursed for any loss,
damage, fine, claim, judgment or liability and amounts paid on account thereof
(or expenses related thereto) which shall have been adjudicated to have arisen
out of or to have been based upon his gross negligence or willful or wanton
misconduct or with respect to any Trustee, employee or agent of National if the
same arises from any violation by them of federal or state securities laws.
The rights to indemnification set forth in National's Declaration of Trust
are not exclusive of any rights to which a person seeking indemnification may be
entitled under any agreement, vote of shareholders or disinterested Trustees,
common law or otherwise and such rights continue after the person seeking
indemnification ceases to be a Trustee, advisor, employee or agent of National
and inures to the benefit of the heirs, executors and administrators of such
person. The Declaration of Trust also limits the liabilities of Trustees,
employees and agents for their acts, except for gross negligence or willful or
wanton misconduct.
The Company. The Company's Charter contains certain provisions concerning
the indemnification of directors and officers. See 'Certain Provisions of
Maryland Law and the Company's Charter and By-Laws--Limitations of Liability
and Indemnification.'
NOMINATION OF TRUSTEES/DIRECTORS BY SHAREHOLDERS
National. The Declaration of Trust of National requires that the Trustees
nominate persons to be elected as Trustees.
The Company. Pursuant to the Company's By-Laws, no nominations for
directors, except those made by the directors themselves, shall be voted upon at
an annual or special meeting of the shareholders unless nominations made by
shareholders are made in writing and delivered to the Secretary of the Company
at least seventy-five (75) but not more than ninety (90) days prior to the
anniversary date of the immediately preceding annual meeting (or special meeting
in lieu thereof). See 'Certain Provisions of Maryland Law and the Company's
Charter and By-Laws--Advance Notice of Director Nominations and New Business.'
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CAPITALIZATION
The following table sets forth the combined historical capitalization, as
of September 30, 1997, of the contributed properties and interests on an
historical basis and of the Company, the Equity Investees and Philips
International Realty, L.P. on a pro forma basis and as adjusted to give effect
to the Formation Transactions. The information set forth in the following table
should be read in conjunction with the financial statements and the pro forma
financial information and notes thereto included elsewhere in this Proxy
Statement/Prospectus and the discussion contained in 'Management's Discussion
and Analysis of Financial Condition and Results of Operations.'
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------------------------------------------------------------------
(IN THOUSANDS)
PRO FORMA
HISTORICAL -----------------------------------------
---------------------------------------------------- PHILIPS PHILIPS
MERRICK/ PHILIPS INT'L INT'L INT'L EQUITY
PHILIPS MILL BASIN NATIONAL REALTY CORP. REALTY CORP. REALTY L.P. INVESTEES
-------- ---------- -------- -------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Debt(1):
Mortgages and notes
payable.......... $151,244 $ 25,854 $ 550 $ -- $ -- $ -- $ 177,022
-------- ---------- -------- ------ ------------ ------------ ---------
Equity (Deficit):
Preferred
Stock(2)......... -- -- -- -- 1,940 -- --
Common Stock(3)..... -- -- -- -- -- -- --
Paid in capital..... -- -- -- 1 2,595 -- --
Equity (deficit).... (5,218) 1,094 455 (14) (2,233) 13,681 11,380
-------- ---------- -------- ------ ------------ ------------ ---------
Total equity
(deficit)...... (5,218) 1,094 455 (13) 2,302 13,681 11,380
-------- ---------- -------- ------ ------------ ------------ ---------
Total Capitalization.. $146,026 $ 26,948 $1,005 $ (13) $ 2,302 $ 13,681 $ 188,402
-------- ---------- -------- ------ ------------ ------------ ---------
-------- ---------- -------- ------ ------------ ------------ ---------
</TABLE>
- ------------------
(1) See notes to financial statements for the respective entities for
information pertaining to mortgages and notes payable.
(2) On a pro forma basis--Philips International Realty Corp. Preferred Stock,
authorized 30,000,000 shares, $.01 par value, 1,940 convertible redeemable
shares of Series A Preferred Stock issued and outstanding. On a historical
basis no preferred stock of Philips International Realty Corp. was
authorized.
(3) On a pro forma basis--Philips International Realty Corp. Common Stock,
authorized 150,000,000 shares, $.01 par value, 47,660 shares issued and
outstanding. On a historical basis--Philips International Realty Corp.
Common Stock; authorized 3,000 shares, issued and outstanding 20 shares.
THE COMPANY'S STRATEGY FOR GROWTH
The Company will seek to maximize shareholder value through aggressive
growth of its cash flow per share to be accomplished through an integrated,
multi-faceted strategy capitalizing on the Company's existing strengths and the
substantial expertise of its executive officers, directors and the Management
Company in the real estate industry. Such strategy is comprised of the following
components:
INTERNAL GROWTH
Operations. The Company will continue to utilize its aggressive asset and
property management style to maximize cash flow from its properties. The
Company, through management's extensive knowledge of retail demand and shopping
center operations accumulated in over 20 years of shopping center ownership and
development throughout the United States, and through its extensive, direct
relationships with the tenant community, will continue its program of (a)
seeking optimal tenant mix at the most favorable rental structure, (b)
maximizing occupancy, (c) minimizing property operating expenses, and (d)
superior physical maintenance. The Company also will continue to selectively
engage in property expansion, re-leasing and redevelopment where the economics
of such are favorable to shareholder value. For example, the Philips Group
purchased the Palm Springs Mile Property in Hialeah, Florida in 1984 and has
increased net operating income by aggressively expanding the center, re-leasing
to achieve higher rentals and capitalize on below-market rents in place and
enhancing the tenant mix by focusing on leasing to strong national tenants such
as Circuit City Stores Inc., Toys
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'R' Us Inc., Kids R' Us, Burlington Co., Uptons Inc., Blockbuster Videos Inc.,
Walgreen Co., Pier 1 Imports Co. and Winn-Dixie Stores Inc. Such strong anchor
tenants have dramatically increased traffic flow, resulting in significantly
higher rents on new leases from local store tenants.
Balance Sheet Management and Cost Control. The Company intends to
aggressively manage its capital and cost structures so as to maximize total
return to shareholders. The Company intends to restructure its balance sheet to
reduce leverage, appropriately match assets and liabilities and to continuously
seek more favorable forms of capital with which to fulfill its business
objectives and enhance its cash flow per share. Consistent with this strategy,
the Company intends, subject to market conditions, to complete a public or
private equity offering, at such time as it deems it advantageous to do so, and,
simultaneously therewith, to obtain a revolving credit facility to fund
acquisitions and for working capital purposes. The Company, in order to more
appropriately match its overhead to the size of its portfolio, initially will
utilize the services of the Management Company for certain non-executive
functions, but intends as the portfolio grows to hire directly the individuals
providing such services.
Self-Management. The Company believes that direct management and leasing
of its properties is desirable and has begun to work towards achieving full
self-management. The Company will manage its properties initially through the
services and personnel of the Management Company under the supervision of the
directors and executive officers of the Company. Although no precise time table
can be given, the Company plans to become a fully integrated, self-managed REIT
in the next 18 to 36 months by growth through access to the capital markets and
through acquisitions of additional properties. The Company believes that its
access to the capital markets and its ability to issue Units will enable it to
make continued acquisitions of additional properties, which acquisitions should
position the Company such that it will become economically advantageous for the
Company to perform all of the functions of all of the day-to-day development,
leasing, acquisition, property management, construction management, accounting
and portfolio management on an 'in-house' basis rather than relying on the
Management Company for certain of these functions. The Company intends to
develop accounting and property management information systems and hire and
train personnel to enable the Company to integrate its property management
activities. It is contemplated that the Company eventually will employ a
significant number of those individuals who currently perform such functions on
behalf of the Management Company. See 'Risk Factors--Conflicts of Interest with
and Dependence on The Management Company.'
EXTERNAL GROWTH
Acquisitions. The Company intends to acquire additional properties at
initially attractive returns which are capable of being further enhanced through
the use of management's proven, value-added expertise, including opportunities
to expand or redevelop properties to attract tenants at higher rent levels. The
Company will seek to acquire properties at below replacement cost in markets
with strong demographics, emphasizing locations where retail demand exceeds
supply and the creation of new supply is hindered. As a result, it is
anticipated that most new acquisitions will occur in major urban-suburban
markets. The Company, through its management team, will apply the same asset and
property management philosophy which it has successfully used for over 20 years,
embodied in the assets to be contributed by the Contributing Partnership upon
the closing of the Formation Transactions. Future acquisition activity will be
facilitated by use of the extensive broker and partner network developed by the
Company's principals over the last 20 years.
When advantageous, the Company also intends to (a) capitalize on the trend
toward public ownership of real estate by pursuing purchases of other retail
companies with property portfolios possessing similar characteristics to those
the Company will be seeking as part of its ordinary acquisition program, and (b)
pursue joint venture opportunities, generally with the Company having control,
which serve to leverage the Company's activities and expertise to the
shareholders' benefit. The Company may acquire properties, in whole or in part,
through the issuance of Units, which will enable sellers to defer the payment of
taxes on properties contributed to the Operating Partnership until such time as
the Units are redeemed for Common Stock. The Company believes that this will
create a competitive advantage over cash purchasers when negotiating
acquisitions with privately-owned real estate enterprises.
Referrals of Potential Shopping Center Acquisitions. The Philips Group's
long-standing relationships in the real estate brokerage community should give
the Company a competitive advantage in identifying potential acquisition
candidates which fit the Company's investment objectives. Furthermore, the
numerous individuals and institutions who have invested with the members of the
Philips Group in past and present real estate projects should also provide a
referral source of potential future retail shopping center acquisition
candidates. In addition,
75
<PAGE>
certain members of the Philips Group, including Mr. Pilevsky, have significant
equity interests in retail shopping center properties which may over time become
desirable acquisition targets for the Company. Such properties were not included
in the Formation Transactions for various reasons, including the asset size,
type, quality or geographic location was not consistent with the Company's
acquisition criteria, the required valuation of such property would be
economically undesirable from the Company's standpoint at such time, and
partnership and lender consent issues precluded including certain property in
the Company's property portfolio. Any acquisition of properties owned in part or
in whole by Mr. Pilevsky or any other member of the Philips Group must be
approved by the Company's independent directors. The Company has no agreement
with respect to the acquisition of any of these excluded properties, and,
therefore, no assurances can be made that such acquisitions will be consummated.
Development. The Company intends to use its familiarity with its markets,
its tenant relationships and active, demonstrated development ability to
selectively develop retail assets in areas where the highest quality tenant
demand is the greatest. The development program, centered on identified tenant
demand, will be applied in those instances where economic return is reasonably
determined to be well in excess of existing property acquisition returns, the
effect on cash flow per share can be optimized and the Company is well insulated
from development risk.
Geographic Expansion. The Company will initially focus its activities in
the New England, Mid-Atlantic and Southeast regions of the United States,
utilizing the initial Properties as a foundation for the Company's anticipated
geographic expansion. The Company, upon closing of the Formation Transactions,
will have two offices, one located at the mid-point of the New England and
Mid-Atlantic regions, in New York, New York, and one located in the Southeast
region in Hialeah, Florida. The Company intends to utilize its existing presence
in these regions for expansion throughout the major markets of the eastern
United States.
DISTRIBUTION POLICY
The Company currently expects to make periodic distributions to its
shareholders to comply with the REIT requirements. See 'Management's Discussion
and Analysis of Financial Condition and Results of Operations--The Company (Pro
Forma)--Liquidity and Capital Resources.' Distributions by the Company to
holders of Common Stock will be determined by the Board of Directors. However,
such determinations will be subject to the discretion of the Interim Managing
General Partner pending completion of an Offering because the Company cannot
declare a distribution unless it receives a distribution from the Operating
Partnership. The Company currently expects that the principal factors the Board
will consider in setting distributions prior to a subsequent public offering of
Common Stock will be the annual REIT distribution requirements (described below)
and the Board's determination of the relative benefits of distribution versus
re-investment in the Company. The Board will also consider the actual net cash
flow of the Company, the Company's financial condition and capital and debt
service requirements, and such other factors as the Board of Directors deems
relevant.
In order to qualify to be taxed as a REIT, each year the Company must make
distributions to shareholders of at least 95% of its REIT taxable income (which
does not include capital gains). Because the Company's 'REIT taxable income' is
calculated without reference to cash flow, under certain circumstances the
Company may not have sufficient cash available to make the distributions
required under the REIT provisions of the Code. See 'Federal Income Tax
Considerations--Requirements for Qualification as a REIT--Annual Distribution
Requirements.'
The Company anticipates that cash available for distribution will exceed
its earnings and profits due to non-cash expenses, consisting primarily of
depreciation. Distributions by the Company to the extent of its current or
accumulated earnings and profits for federal income tax purposes will be taxable
to shareholders as ordinary dividend income. Distributions in excess of earnings
and profits generally will be treated as a non-taxable reduction of a
shareholder's basis in its Common Stock, to the extent of its basis, and
thereafter as taxable gain. Distributions treated as a non-taxable reduction of
basis will have the effect of deferring taxation until the shareholder's
disposition of the Common Stock. If the Company distributes only 95% of its
estimated REIT taxable income, no portion of the distributions to be paid to the
holders of Common Stock is expected to represent a return of capital. For
additional discussion of the tax treatment of distributions to the holders of
the Common Stock, see 'Federal Income Tax Considerations--Taxation of
Shareholders--Taxable Shareholder--Dividend Income.'
76
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating information
for (i) Philips International Realty Corp. (the 'Company'), on a pro forma
basis, (ii) for The Philips Company ('Philips') on a combined historical basis,
(iii) for the Merrick Commons and Mill Basin Plaza Properties ('Merrick/Mill
Basin') on a combined historical basis, (iv) for National on a historical basis,
(v) for Philips, Merrick/Mill Basin and National, all on a combined historical
basis and as modified for the pro forma adjustments (collectively, the 'Equity
Investees') and (vi) for Philips International Realty, L.P. (the 'Operating
Partnership') on a pro forma basis. This information should be read in
conjunction with all of the financial statements and the notes thereto included
elsewhere in this Proxy Statement/Prospectus. The unaudited historical financial
information presented herein is based upon the separate historical financial
statements of the respective entities and the notes thereto which appear
elsewhere in this Proxy Statement/Prospectus and should be read in conjunction
with such financial statements. The unaudited pro forma financial information
presented herein is based upon the pro forma financial statements of Philips
International Realty Corp., the Equity Investees, the Operating Partnership and
the notes thereto which appear elsewhere in this Proxy Statement/Prospectus and
should be read in conjunction with such financial statements. Reference should
also be made to 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' in conjunction with the review of all historical and pro
forma financial and operating information set forth herein.
Upon completion of the Formation Transactions, Philips International Realty
LLC will become the 'Interim Managing General Partner' of the Operating
Partnership and each of the property partnerships with a .001% interest in each
and the Company will have directly or indirectly a non-managing general
partnership interest and therefore will record its investment in the Operating
Partnership on the equity method. The Interim Managing General Partner's
interests will be redeemed by the respective partnerships upon consummation of a
future equity offering of at least $25 million. The Company's pro forma
adjustments are derived from the pro forma financial statements of the Equity
Investees property partnerships as set forth in the notes to the pro forma
financial statements.
The unaudited pro forma operating information for the Company, the Equity
Investees and the Operating Partnership has been presented as if the Formation
Transactions had occurred as of January 1, 1996, and as if the Company had
qualified as a REIT, distributed all of its taxable income and, therefore,
incurred no federal income tax expense during the period. The unaudited pro
forma balance sheets for the Company, the Equity Investees and the Operating
Partnership as of September 30, 1997 are presented as if the Formation
Transactions had occurred on September 30, 1997. The unaudited pro forma balance
sheet of the Equity Investees combines the respective balance sheets of the
property partnerships as of September 30, 1997, subject to certain pro forma
adjustments. The pro forma balance sheet of the Operating Partnership reflects
its equity interest in the Equity Investees and the pro forma balance sheet of
the Company reflects its equity interest in the Operating Partnership.
The pro forma financial information is not necessarily indicative of what
the Company's, the Equity Investees' or the Operating Partnership's actual
financial position and results of operations would have been as of and for the
period indicated, nor does it purport to represent the future financial position
or results of operations of the Company, the Equity Investees or the Operating
Partnership.
77
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP., PHILIPS INTERNATIONAL REALTY L.P., EQUITY
INVESTEES,
THE PHILIPS COMPANY AND THE MERRICK COMMONS AND MILL BASIN PLAZA PROPERTIES
SELECTED COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------------------------------------------------- ------------
PRO FORMA HISTORICAL PRO FORMA
------------------------------------- ---------------------------------------- ------------
1997 1997 1996 1996
------------------------------------- ------------------- ------------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
PHILIPS INT. EQUITY MERRICK/ MERRICK/
PHILIPS INT. L.P. INVESTEES PHILIPS MILL BASIN PHILIPS MILL BASIN PHILIPS INT.
------------ ------------ --------- ------- ---------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA: (1)
Revenues from rental
property.................. $ -- $ -- $23,865 $19,508 $ 3,725 $19,338 $3,531 $ --
--- --- --------- ------- -------- ------- ------ ---
Property operating
expenses.................. -- -- 3,919 3,618 436 3,646 559 --
Real estate taxes.......... -- -- 3,432 2,792 612 2,742 552 --
Interest................... -- -- 11,936 9,909 1,581 8,584 2,570 --
Depreciation and
amortization.............. -- -- 3,946 2,867 422 2,480 470 --
General and
administrative............ -- 14 1,364 206 47 230 38 --
--- --- --------- ------- -------- ------- ------ ---
Total expenses............. -- 14 24,597 19,392 3,098 17,682 4,189 --
--- --- --------- ------- -------- ------- ------ ---
(732) 116 627 1,656 (658)
Equity in income (loss) of
investees................. (27) (709) -- 285 -- 15 -- (6)
Allocation of income on
Preferred Units........... 131 -- -- -- -- -- -- 175
Other income............... -- -- 23 22 1 17 949 --
--- --- --------- ------- -------- ------- ------ ---
Income (loss) before
extraordinary items ...... 104 (723) $ (709) $ 423 $ 628 $ 1,688 $ 291 169
--- --- --------- ------- -------- ------- ------ ---
--- --- --------- ------- -------- ------- ------ ---
Preferred Stock unit
distribution ............ (131) (131) (175)
--- --- ---
Net loss attributable to
General and Limited
Partners.................. $ (854)
---
---
Net loss attributable to
common shares ............ $ (27) $ (6)
--- ---
--- ---
Net loss attributable to
General partners.......... -- $ (27) --
Net loss attributable to
Limited partners ......... -- $ (827) --
Loss per share before
extraordinary items(2).... $ (.57) $ (.13)
--- ---
--- ---
<CAPTION>
HISTORICAL
----------------------------------------------------------------------
1996 1995 1994 1993
------------------- ------------------- ------------------- -------
PHILIPS INT. EQUITY MERRICK/ MERRICK/ MERRICK/ (UNAUDITED)
L.P. INVESTEES PHILIPS MILL BASIN PHILIPS MILL BASIN PHILIPS MILL BASIN PHILIPS
------------ ----------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA: (1)
Revenues from rental
property.................. $ -- $33,239 $25,947 $4,949 $23,187 $4,810 $22,192 $2,308 $22,337
--- ------- ------- ------ ------- ------ ------- ------ -------
Property operating
expenses.................. -- 5,677 5,054 710 5,008 712 4,834 553 4,218
Real estate taxes.......... -- 4,451 3,671 744 3,591 671 3,554 370 3,446
Interest................... -- 16,168 11,728 3,496 11,097 2,054 9,695 873 9,524
Depreciation and
amortization.............. -- 5,134 3,417 576 3,072 540 2,896 322 2,738
General and
administrative............ -- 1,847 306 38 201 53 222 20 270
--- ------- ------- ------ ------- ------ ------- ------ -------
Total expenses............. -- 33,277 24,176 5,564 22,969 4,030 21,201 2,138 20,196
--- ------- ------- ------ ------- ------ ------- ------ -------
(38) 1,771 (615) 218 780 991 170 2,141
Equity in income (loss) of
investees................. (15) -- 95 -- 54 -- 6 -- (89)
Allocation of income on
Preferred Units........... -- -- -- -- -- -- -- -- --
Other income............... -- 23 22 1,307 35 3 48 2 46
--- ------- ------- ------ ------- ------ ------- ------ -------
Income (loss) before
extraordinary items ...... (15) $ (15) $ 1,888 $ 692 $ 307 $ 783 $ 1,045 $ 172 $ 2,098
--- ------- ------- ------ ------- ------ ------- ------ -------
--- ------- ------- ------ ------- ------ ------- ------ -------
Preferred Stock unit
distribution ............ (175)
---
Net loss attributable to
General and Limited
Partners.................. $ (190)
---
---
Net loss attributable to
common shares ............
Net loss attributable to
General partners.......... $ (6)
Net loss attributable to
Limited partners ......... $ (184)
Loss per share before
extraordinary items(2)....
<CAPTION>
1992
--------------------
(UNAUDITED)
(*)MERRICK/ (*)MERRICK/
MILL BASIN PHILIPS MILL BASIN
----------- ------- -----------
<S> <C> <C> <C>
OPERATING DATA:
Revenues from rental
property.................. $ 503 $22,622 $ 799
----- ------- -----
Property operating
expenses.................. 198 3,805 580
Real estate taxes.......... 199 3,393 374
Interest................... 337 10,044 484
Depreciation and
amortization.............. 44 2,724 117
General and
administrative............ 23 192 8
----- ------- -----
Total expenses............. 801 20,158 1,563
----- ------- -----
(298) 2,464 (764)
Equity in income (loss) of
investees................. -- (225) --
Allocation of income on
Preferred Units........... -- -- --
Other income............... 1 23 14
----- ------- -----
Income (loss) before
extraordinary items ...... $ (297) $ 2,262 $ (750)
----- ------- -----
----- ------- -----
Preferred Stock unit
distribution ............
Net loss attributable to
General and Limited
Partners..................
Net loss attributable to
common shares ............
Net loss attributable to
General partners..........
Net loss attributable to
Limited partners .........
Loss per share before
extraordinary items(2)....
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-----------------------------------------------------------------------
PRO FORMA HISTORICAL
------------------------------------------- -----------------------
(UNAUDITED) (UNAUDITED)
PHILIPS INT. EQUITY MERRICK/
PHILIPS INT. L.P. INVESTEES PHILIPS MILL BASIN
------------ ------------ --------- -------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Rental properties, at cost before accumulated
depreciation................................ $ -- $ -- $198,700 $165,066 $ 26,341
Investment in Operating Partnership/Equity
Investees................................... 2,321 11,379
Total assets................................. 2,323 13,852 197,375 154,036 27,661
Mortgage notes payable....................... -- -- 177,022 151,244 25,854
Stockholders/Owners' equity (deficit)........ 2,308 13,852 11,380 (5,218) 1,094
OTHER DATA:
Funds from operations(4)..................... 99 3,092 3,237 3,449 --
Net cash provided by (used in) operating
activities.................................. (27) (723) 3,237 21 --
Net cash provided by (used in) financing
activities.................................. 131 (131) (1,324 ) 18,687 --
Net cash (used in) investing activities...... -- -- (2,635 ) (19,369) --
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
MERRICK/ MERRICK/ MERRICK/
PHILIPS MILL BASIN PHILIPS MILL BASIN PHILIPS MILL BASIN
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Rental properties, at cost before accumulated
depreciation................................ $137,399 $ 26,161 $124,892 $ 25,783 $118,307 $ 25,509
Investment in Operating Partnership/Equity
Investees...................................
Total assets................................. 129,841 27,575 116,856 31,813 108,188 25,957
Mortgage notes payable....................... 133,609 26,049 131,740 24,075 131,187 19,606
Stockholders/Owners' equity (deficit)........ (11,166) 586 (22,091) 6,011 (24,611) 5,056
OTHER DATA:
Funds from operations(4)..................... 5,574 -- 3,590 -- 4,050 --
Net cash provided by (used in) operating
activities.................................. 3,567 -- 3,535 -- 3,639 --
Net cash provided by (used in) financing
activities.................................. 6,086 -- 2,160 -- (876) --
Net cash (used in) investing activities...... (9,359) -- (6,604) -- (3,354) --
<CAPTION>
1993 1992
----------------------- -----------------------
(UNAUDITED) (UNAUDITED)
MERRICK/ MERRICK/
PHILIPS MILL BASIN PHILIPS MILL BASIN
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Rental properties, at cost before accumulated
depreciation................................ $114,953 $ 11,468 $113,748 $6,791
Investment in Operating Partnership/Equity
Investees...................................
Total assets................................. 109,474 11,186 108,770 6,833
Mortgage notes payable....................... 132,125 5,967 133,541 5,967
Stockholders/Owners' equity (deficit)........ (25,771) 3,555 (26,071) 1,429
OTHER DATA:
Funds from operations(4)..................... -- -- -- --
Net cash provided by (used in) operating
activities.................................. -- -- -- --
Net cash provided by (used in) financing
activities.................................. -- -- -- --
Net cash (used in) investing activities...... -- -- -- --
</TABLE>
- ------------------
(*) In 1992 and 1993, Merrick/Mill Basin consisted of only the Merrick Commons
Property. During this period such Property was undergoing significant
renovations.
78
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING DATA:
Revenues from rental property.............. $ 268 $ 260 $ 341 $ 311 $ 294 $ 307 $ 422
----------- ----------- ------ ------ ------ ------ ------
Property operating expenses................ 70 77 96 90 105 111 282
Real estate taxes.......................... 28 23 36 33 31 29 33
Interest................................... 43 47 60 46 32 47 61
Depreciation and amortization.............. 41 37 50 46 45 50 --
General and administrative................. 75 73 119 64 353 323 30
----------- ----------- ------ ------ ------ ------ ------
Total expenses............................. 257 257 361 279 566 560 406
----------- ----------- ------ ------ ------ ------ ------
Operating income........................... 11 3 (20) 32 (272) (253) 16
Other income expenses), net................ 1 1 1 1 -- 92 (24)
----------- ----------- ------ ------ ------ ------ ------
Net income (loss).......................... $ 12 $ 4 $ (19) $ 33 $ (272) $ (161) $ (8)
----------- ----------- ------ ------ ------ ------ ------
----------- ----------- ------ ------ ------ ------ ------
Net income (loss) per share(3)............. $0.02 $ 0.01 $(0.03) $ 0.05 $(0.39) $(0.24) $(0.01)
----------- ----------- ------ ------ ------ ------ ------
----------- ----------- ------ ------ ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, AS OF DECEMBER 31,
------------- ----------------------------------------------
1997 1996 1995 1994 1993 1992
------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Rental properties, at cost before accumulated
depreciation........................................ $ 1,700 $1,608 $1,548 $1,518 $1,510 $1,486
Total assets.......................................... 1,068 1,051 1,102 1,014 1,210 1,067
Mortgage notes payable................................ 550 571 598 399 400 --
Shareholders' equity.................................. 455 406 461 387 629 790
OTHER DATA:
Funds from operations(4).............................. 51 23 72 (230) (111) (8)
Net cash provided by (used in) operating activities... 47 60 (65) (54) (344) (11)
Net cash provided by (used in) financing activities... 15 (63) 200 19 360 --
Net cash (used in) investing activities............... (92) (60) (30) (7) (24) (15)
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, AS OF DECEMBER 31,
------------- ----------------------------------------------
1997 1996 1995 1994 1993 1992
------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
OTHER DATA (IN THOUSANDS):
Cash and cash equivalents............................. $ 14 $ 44 $ 108 $ 3 $ 45 $ 53
Total assets at book value............................ 1,068 1,051 1,102 1,014 1,210 1,067
Total assets at the value assigned for purposes of the
Formation Transactions.............................. 2,211 -- -- -- -- --
Total liabilities..................................... 613 645 642 628 581 277
Shareholders' equity.................................. 455 406 461 387 629 790
Net increase (decrease) in cash and cash
equivalents......................................... (30) (64) 105 (42) (344) (11)
Net cash provided by (used in) operating activities... 47 60 (65) (54) (8) (26)
Dividends............................................. 0 36 0 0 0 0
OTHER DATA:
Ratio of earnings to fixed charges.................... 1.24 0.73 1.99 (6.69) (2.40) 0.87
Earnings (loss) per Share............................. 0.02 (0.03) 0.05 (0.39) (0.24) (0.01)
Book value per Share.................................. 0.61 0.56 0.64 0.54 0.92 1.15
Value assigned for the purposes of the Formation
Transactions per Share.............................. 2.13 -- -- -- -- --
Dividends per Share -- return of capital.............. 0.00 0.05 0.00 0.00 0.00 0.00
</TABLE>
79
<PAGE>
(Footnotes from previous pages)
- ------------------
(1) The following is a reconciliation of historical operating results to pro
forma results for the Equity Investees:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Historical income (loss) before minority interest and extraordinary
item:
The Philips Company, less equity in income of
the Merrick/Mill Basin Properties................................ $ 138 $ 1,793
The Merrick/Mill Basin Properties.................................. 628 692
National Properties Investment Trust............................... 12 (19)
-------- --------
778 2,466
Adjustments relating to the purchase of the non-sponsor interests in
exchange for cash and Units:
Increase in depreciation related to purchase accounting............ (616) (1,090)
Increase in interest cost associated with financings of the
purchase of partners' interests and transaction fees............. (403) (884)
Increase in rental revenue related to partners' interests
purchased........................................................ 364 695
-------- --------
Combined historical, as adjusted..................................... 123 1,187
Pro forma changes in operating expenses due to organizational
changes:
Reduction in management fees....................................... 241 228
Increase in general and administrative expenses to support future
operations....................................................... (1,073) (1,430)
-------- --------
Pro forma loss before minority interests and extraordinary items..... $ (709) $ (15)
-------- --------
-------- --------
</TABLE>
(2) Pro forma net loss attributable to common shares items is calculated based
upon 47,660 shares of Common Stock assumed to be outstanding for the nine
months ended September 30, 1997 and the year ended December 31, 1996. The
anti-dilutive effect of the Warrants has not been considered in the
calculation for either period. In February 1997 the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128
('FAS 128') which is effective for periods ending after December 15, 1997.
Had FAS 128 been adopted there would be no effect on the pro forma net loss
attributable to common shares.
(3) Net income (loss) per share is based upon 742,000, 719,000, 718,000,
719,000, 693,000, 671,000 and 684,000 weighted average numbers of shares of
beneficial interest outstanding for the nine months ended September 30, 1997
and 1996 (unaudited) and the years ended December 31, 1996, 1995, 1994, 1993
and 1992, respectively.
(4) 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 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.
80
<PAGE>
Funds from Operations was calculated as follows:
<TABLE>
<CAPTION>
PHILIPS INTERNATIONAL PHILIPS INTERNATIONAL REALTY EQUITY
REALTY CORP. L.P. INVESTEES
PRO FORMA PRO FORMA PRO FORMA
---------------------------- ---------------------------- -------------
NINE MONTHS NINE MONTHS NINE MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1997 1996 1997
------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net loss attributable to common shares........ $ (27) $ (6)
Income (loss) before minority interest and
extraordinary items......................... $ (723) $ (15) $ (709)
Depreciation and amortization................. -- -- 3,946
Allocation of income to preferred units....... -- -- (131) (175) --
Adjustment for unconsolidated joint
ventures.................................... 126 164 3,946 5,134 --
------------- ------------ ------------- ------------ -------------
Funds from Operations......................... $ 99 $ 158 $ 3,092 $4,944 $ 3,237
------------- ------------ ------------- ------------ -------------
------------- ------------ ------------- ------------ -------------
<CAPTION>
THE PHILIPS COMPANY HISTORICAL
--------------------------------------------------------
NINE MONTHS
YEAR ENDED ENDED YEARS ENDED DECEMBER 31,
DECEMBER 31, SEPTEMBER 30, ------------------------
1996 1997 1996 1995 1994
------------ ------------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net loss attributable to common shares........
Income (loss) before minority interest and
extraordinary items......................... $ (15) $ 566 $1,888 $ 307 $1,045
Depreciation and amortization................. 5,134 2,867 3,417 3,072 2,896
Allocation of income to preferred units....... -- -- -- -- --
Adjustment for unconsolidated joint
ventures.................................... -- 159 269 211 109
------------ ------------- ------ ------ ------
Funds from Operations......................... $5,119 $ 3,592 $5,574 $3,590 $4,050
------------ ------------- ------ ------ ------
------------ ------------- ------ ------ ------
</TABLE>
81
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS OF THE PHILIPS COMPANY
OVERVIEW
The following discussion should be read in conjunction with 'Selected
Combined Financial Data', and the Combined Financial Statements of The Philips
Company and the Combined Statements of Revenues and Certain Expenses of The
Merrick/Mill Basin Properties, and the notes thereto, appearing elsewhere in
this Proxy Statement/Prospectus. For purposes of this discussion, The Philips
Company includes the Merrick/Mill Basin Properties reflected on the equity
method. Where appropriate, the following discussion includes analysis of the
effects of the Formation Transactions. These effects are reflected in the Pro
Forma Financial Statements of Philips International Realty Corp., Philips
International Realty, L.P. and the Equity Investees and notes thereto, appearing
elsewhere in this Proxy Statement/Prospectus.
The Philips Company receives income primarily from rental revenue
(including recoveries from tenants) from its shopping centers, and actively
seeks to enhance its property cash flows and values through an on-going property
redevelopment program. As a result, the financial data generally shows increases
in total revenue from year to year, largely attributable to expansion and
retenanting of The Philips Company's properties during the year and the benefit
of a full period of rental and other revenue from expansions and retenanting
occurring in the preceding year.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED
SEPTEMBER 30, 1996.
Total revenue increased to $19,508,000 for the nine months ended September
30, 1997, as compared with $19,338,000 for the nine months ended September 30,
1996. This net increase is attributable to (i) growth in base rental revenues
associated with the expansion and leasing of available premises primarily at
Palm Springs Mile in Hialeah, Florida and Forest Avenue Shoppers Town in Staten
Island, New York, (ii) partially offset by lower expense recoveries from tenants
due to a reduction in total operating expenses between these periods. Overall
occupancy increased between periods by approximately 1% to 96.4%.
Property operating expenses were $3,618,000 and $3,646,000 for the nine
months ended September 30, 1997 and 1996, respectively. This $28,000 or .8%
decrease is primarily attributable to a reduction in snow removal costs incurred
by Properties located in the northeastern part of the country during the
respective periods. Property real estate taxes fluctuated by less than 2%
between the corresponding periods, reflecting the effect of increased
assessments associated with property expansions and renovations, offset by The
Philips Company's continuing efforts to secure property tax reductions.
Depreciation and amortization expenses increased by $387,000 or 15.6% to
$2,867,000 for the nine months ended September 30, 1997, as compared with
$2,480,000 for the nine months ended September 30, 1996. This increase reflects
the amortization of capital expenditures associated with the recent expansion,
renovation and retenanting of properties in Hialeah, Florida, Branhaven and
Enfield, Connecticut, and Staten Island, New York and the depreciation and
amortization related to the acquisition of non-sponsor interests in the Staten
Island, Branhaven and Hialeah properties.
Interest charges increased by $1,325,000 or 13.4% to $9,909,000 for the
nine months ended September 30, 1997, as compared with $8,584,000 for the
corresponding period in 1996, primarily representing financing costs on amounts
borrowed to fund The Philips Company's property expansion and renovation
programs and the purchase of certain partnership interests.
In May 1996, The Philips Company acquired a 49% interest in a shopping
center property located in Brooklyn, New York. This investment had the effect of
improving The Philips Company's equity in income of investees from $15,000 for
the nine months ended September 30, 1996 to $285,000 for the nine months ended
September 30, 1997.
The Philips Company's income before extraordinary items decreased by
$1,265,000 to $423,000 for the nine months ended September 30, 1997, as compared
with $1,688,000 for the nine months ended September 30, 1996. This decrease
reflects increased interest costs associated with property refinancings
partially offset by higher rents related to retenanting and leasing efforts and
The Philips Company's equity participation in a new joint venture property.
The extraordinary expense of $164,000 for the nine months ended September
30, 1997 represents the write-off of deferred financing costs related to a
mortgage which was satisfied as a result of a restructuring of the debt
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<PAGE>
encumbering a certain property. The extraordinary income of $2,284,000 for the
nine months ended September 30, 1996 reflects gains related to the settlement of
debt obligations on three of the Properties.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995.
Total revenue increased by $2,760,000 or 11.9% to $25,947,000 for the year
ended December 31, 1996, as compared to $23,187,000 for the year ended December
31, 1995. Growth in base rental revenues comprised the majority of this revenue
expansion, increasing $1,859,000 between years, as a result of (i) the leasing
of available premises in the portfolio which improved overall occupancy by 4.7%
from 90.7% to 95.4%, and (ii) higher rentals achieved on renewed and
renegotiated leases. Increased tenant expense recoveries associated with (i)
higher occupancy levels and (ii) slightly higher operating costs and real estate
taxes between years, as well as other property revenues including real estate
tax refunds, contributed to the balance of the revenue growth.
Property operating expenses for the year ended December 31, 1996 increased
less than 1% to $5,054,000 from $5,008,000 for the year ended December 31, 1995.
Property real estate taxes increased by $80,000 or 2.2% to $3,671,000 during
1996, as compared with $3,591,000 for 1995. This increase in real estate taxes
reflects assessments related to property expansions and renovations in the
portfolio, and generally higher tax rates imposed by various municipalities.
Depreciation and amortization expenses increased by $345,000 or 11.2% to
$3,417,000 from $3,072,000 in 1995. This increase is primarily attributable to
the amortization of capital expenditures associated with the recent expansions
and renovations of properties in Hialeah, Florida, Staten Island, New York and
Branhaven, Connecticut.
Interest expense for the year ended December 31, 1996 increased by $631,000
or 5.7% to $11,728,000 as compared to $11,097,000 for the year ended December
31, 1995. This net increase reflects (i) financing costs on amounts expended to
fund recent property expansions and renovations , offset by (ii) decreases
associated with the repayment of $3,397,000 in certain mortgage indebtedness
during the periods.
In May 1996, The Philips Company acquired a 49% interest in a shopping
center property located in Brooklyn, New York. This investment had the effect of
improving The Philips Company's equity in the net income of investees from
$54,000 in 1995 to $95,000 in 1996.
The Philips Company's income before extraordinary items increased from
$307,000 in 1995 to $1,888,000 in 1996. This improved performance is primarily
attributable to leasing activity which resulted in a 4.7% improvement in
portfolio occupancy levels, and higher rents on new and renegotiated leases,
which strengthened operating profitability. The extraordinary item in 1996 is
reflective of gains related to the settlement of debt obligations on three of
the properties.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994.
Total revenue increased by $995,000 or 4.5% to $23,187,000 for the year
ended December 31, 1995, as compared with $22,192,000 for the year ended
December 31, 1994. This increase is primarily attributable to increases in base
rental revenues of $948,000 associated with (i) the leasing of available
premises in the portfolio which improved overall occupancy by 2.5% and (ii)
higher rents achieved on renewed and renegotiated leases, most notably as
related to properties in Hialeah, Florida, and Freeport and Staten Island, New
York. Tenant expense recoveries increased modestly between years reflecting
improved occupancy levels and slightly increased operating costs and real estate
taxes in 1995 as compared with 1994.
Property operating expenses were $5,008,000 and $4,834,000 for the years
ended December 31, 1995, and 1994, respectively. This 3.6% increase in costs is
primarily attributable to an expansion of Palm Springs Mile Property in Hialeah,
Florida. Property taxes increased by $37,000 or 1.0% to $3,591,000 for the year
ended December 31, 1995, as compared to $3,554,000 for the year ended December
31, 1994. This increase reflects the combined effect of slight rate and
assessment increases at various Properties.
Depreciation and amortization expense for the year ended December 31, 1995
increased by $176,000 or 6.1% to $3,072,000 from $2,896,000 for the year ended
December 31, 1994, primarily reflecting increased amortization of capital
expenditures associated with recent expansions and renovations of the properties
in Hialeah, Florida and Staten Island, New York.
Interest expense for 1995 increased by $1,402,000 or 14.5% to $11,097,000
compared to $9,695,000 for 1994. This increase in financing costs reflects the
impact of higher short-term rates on The Philips Company's floating rate
indebtedness, as well as a greater level of borrowing to fund property
expansions and renovations.
Income before extraordinary item decreased from $1,045,000 in 1994 to
$307,000 in 1995. This decline in profitability is due primarily to a rise in
short-term interest rates which increased the costs of property financing.
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PRO FORMA OPERATING RESULTS
The pro forma condensed statements of operations reflect the Company's
investments in the operating partnership and property partnerships on the equity
method, whereas the historical financial statements were prepared on a combined
basis. Upon the occurrence of an equity offering of at least $25 million, the
interests of the interim managing general partner will be redeemed by the
respective partnerships and the Company will then consolidate its investments.
The differences between the results in the condensed pro forma statements of
operations and the historical combined financial statements are a result of the
pro forma adjustments effecting the operating partnership and property
partnerships as discussed below.
COMPARISON OF PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 1997 TO HISTORICAL NINE
MONTHS ENDED SEPTEMBER 30, 1997.
On a pro forma basis, the income before extraordinary items would have been
$104,000 for the nine months ended September 30, 1997, compared to historical
income before extraordinary items of $566,000 for the same period. This
reduction in pro forma income before extraordinary items is the result of the
Company's share of the following pro forma adjustments to the Equity Investees
(i) the inclusion of the Merrick/Mill Basin Properties and the National Property
properties and (ii) adjustments aggregating $(798,000) required to reflect the
acquisition of partnership interests. The adjustment for acquisition of
partnership interests consists of increased depreciation of $616,000 and
increased interest expense of $546,000, offset by an increase in straight-line
rental revenue of $364,000. In addition, income is further reduced by a net
increase in expenses of $832,000 attributable to organizational changes required
to support future operations.
COMPARISON OF PRO FORMA YEAR ENDED DECEMBER 31, 1996 TO HISTORICAL YEAR ENDED
DECEMBER 31, 1996.
On a pro forma basis, the income before extraordinary items would have been
$169,000 for the year ended December 31, 1996, compared to historical income
before extraordinary items of $1,888,000 for the same period. This reduction in
pro forma income before extraordinary items is the result of the Company's share
of the following pro forma adjustments to the Equity Investees (i) the inclusion
of the Merrick/Mill Basin Properties and the National Property as wholly-owned
properties and (ii) adjustments aggregating $(1,279,000) required to reflect the
acquisition of partnership interests. The adjustment for acquisition of
partnership interests consists of increased depreciation of $1,090,000,
increased interest expense of $884,000, offset by an increase in straight-line
rental revenue of $695,000. In addition, income is further reduced by a net
increase in expenses of $1,202,000 attributable to organizational changes
required to support future operations.
LIQUIDITY AND CAPITAL RESOURCES
The Philips Company has historically relied on fixed and floating rate
mortgage financing to fund acquisitions and refinance maturing debt. Working
capital and funds necessary for distributions, debt service and capital
expenditures have generally been 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 have been 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
have been generally made based upon 100% of excess cash over identified,
near-term requirements.
The Company currently expects to make periodic distributions at least
annually to its shareholders and Unit holders as may be necessary to comply with
REIT requirements. The Operating Partnership's income will be derived primarily
from lease revenue from the Properties. Such income currently is not expected to
be sufficient to allow the Operating Partnership, using only cash from
operations, to retire all of its debt as it becomes due and, therefore, the
Operating Partnership will continue to require funds from Company debt and/or
equity financings to repay maturing debt.
Subject to market conditions, it is the intent of the Company to complete a
public or private offering of its shares of Common Stock as soon as reasonably
practicable following completion of the Formation Transactions, with the net
proceeds of such offering being used to reduce debt and to fund a working
capital reserve. The Company intends to maintain a conservative debt-to-total
capitalization ratio of less than 50%.
Although no assurances can be given, a public stock offering would be
expected to sufficiently reduce the Company's leverage to enable it to obtain a
credit facility which would primarily be used to fund acquisitions. The facility
would also be available to provide for temporary working capital, to meet
unanticipated cash expenditures and to fund near-term capital and leasing
expenditures for assets acquired. The Company expects that it will also have
additional borrowing capacity through the independent financing of acquired
properties and from future issuances of both debt and equity.
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Prior to completion of an equity offering, the Company will balance the
timing and amount of periodic distributions against (i) the requirements imposed
on it by tax law for maintenance of REIT status and (ii) the maturity schedule
of its debt. Notwithstanding the completion of an offering in the amounts
anticipated and the use of proceeds to reduce outstanding indebtedness, the size
of post-offering distributions will likely require the Company to remain
dependent, although to a much lesser extent, upon the debt and/or equity markets
for funds necessary to repay remaining debt as it becomes due in the near term.
Upon completion of the Formation Transactions, the Company will have
outstanding debt of approximately $176.8 million. After giving effect to options
to extend the maturity of certain loans, there will remain approximately $63.5
million of debt which matures within one year. The Company's total debt expected
to be outstanding of $176.8 million will be a mix of floating and fixed-rate
debt. The floating rate debt of approximately $96.8 million will bear a weighted
average rate of approximately 8% at September 30, 1997 and will be all
pre-payable without penalty or premium. The approximately $80 million of fixed
rate debt will bear an average rate of 7.62%, have a weighted average maturity
of 5.2 years and generally will not be prepayable without the payment of
penalties based on make-whole formulae.
As of the closing of the Formation Transactions, the Company's total debt
will represent approximately 70% of the sum of (i) the Net Asset Value of the
Company's assets and (ii) the Company's total debt.
On a pro forma basis as of September 30, 1997, the Company had a negative
cash position of approximately $1.1 million. Although no assurances can be
given, the Company expects that its net cash flow from operations during the
period subsequent to September 30, 1997 and preceding consummation of the
Formation Transactions will be sufficient to substantially, if not fully, fund
the related transaction costs and eliminate such pro forma cash deficiency.
Alternatively, the Company may arrange short-term debt financing to eliminate
any cash deficiency arising upon closing of the Formation Transactions. Such
financing could be more difficult to obtain given the Company's highly leveraged
capital structure. Failure to finance such cash deficiency, whether out of net
cash flow from operations or from the proceeds of a short-term debt financing,
could adversely affect the Company's ability to repay its obligations or make
distributions to shareholders.
COMPUTER SYSTEMS AND YEAR 2000 ISSUES
The 'Year 2000' issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from the
application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions. Given
that the Company's principal property management systems are licensed from and
maintained by a third party software development company, which company is
currently modifying its real estate products to address the Year 2000 issue,
management does not anticipate any significant costs, problems or uncertainties
associated with becoming Year 2000 compliant. The Company is currently
developing a plan to insure that its other internally generated operating
systems are similarly modified on a timely basis.
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 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.
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On a pro forma basis after giving effect to the Formation Transactions,
Funds from Operations for the nine months ended September 30, 1997, and for the
year ended December 31, 1996, respectively, are as follow:
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------------------------------------------------------
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------------------------------- -----------------------------------------
PHILIPS PHILIPS PHILIPS PHILIPS
INT. INT'L L.P. EQUITY INVESTEE INT. INT'L L.P. EQUITY INVESTEE
--------- ----------- --------------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net loss attributable to
common shares............ $ (27,000) $ (6,000)
Loss before extraordinary
items.................... -- $ (723,000) $ (709,000) -- $ (15,000) $ (15,000)
Depreciation and
amortization............. -- -- 3,946,000 -- -- 5,134,000
Adjustment for
unconsolidated joint
ventures................. 126,000 3,946,000 -- 164,000 5,134,000 --
Allocation of income to
preferred units.......... -- (131,000) -- (175,000)
--------- ----------- --------------- -------- ---------- ---------------
Funds from Operations...... $ 99,000 $ 3,092,000 $ 3,237,000 158,000 $4,944,000 $ 5,119,000
--------- ----------- --------------- -------- ---------- ---------------
--------- ----------- --------------- -------- ---------- ---------------
Net cash provided by
operating activities..... $ (27,000) $ (723,000) $ 3,237,000 $ (6,000) $ (15,000) $ 5,119,000
Net cash provided by (used
in) financing
activities............... $ 131,000 $ (131,000) $(1,324,000) $175,000 $ (175,000) $(1,068,000)
Net cash (used in)
investing activities..... -- -- $(2,635,000) -- -- $(3,878,000)
--------- ----------- --------------- -------- ---------- ---------------
--------- ----------- --------------- -------- ---------- ---------------
</TABLE>
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. In addition, the
Company periodically evaluates its exposure to interest rate fluctuations and
may enter into interest rate protection agreements which mitigate, but do not
eliminate, the effect of changes in interest rates on its floating-rate loans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF NATIONAL
The following discussion should be read in conjunction with 'Selected
Financial Data of National' and the financial statements of National, and the
notes thereto, appearing elsewhere in this Proxy Statement/Prospectus.
LIQUIDITY AND CAPITAL RESOURCES
National's primary cash requirements are for capital expenditures and
operating expenses, including utilities, insurance, sales taxes, maintenance and
management costs. Historically, National's primary sources of cash have been
from operations and bank borrowings.
At September 30, 1997, National has cash of approximately $14,492, which is
comprised almost entirely of net income from operations.
On August 11, 1997, National and the Trustees entered into the Contribution
and Exchange Agreement with the Company for the exchange of National's sole
property for 32,000 shares of Common Stock of the Company and the assumption of
the existing mortgage note payable in the amount of $550,000 as of September 30,
1997. The Company is expected to qualify as a REIT and will have 10 retail
properties at its inception, nine to be contributed by affiliates of the Company
and one by National. All shareholders of National will receive a distribution of
a portion of the Common Stock and the remaining Common Stock will be held by
National. The Company will pay all expenses of National (including attorney's
and accountants' fees) in connection with the negotiation, documentation and
consummation of the Formation Transactions.
The Contribution and Exchange Agreement provides terms under which the
agreement may be terminated, and under certain circumstances National may be
required to pay a termination fee of $500,000 to $750,000 plus the expenses of
the Company and National incurred in connection with the Formation Transactions.
Shareholders of National will receive a proxy statement/prospectus pursuant
to which they will be asked to approve the proposed business combination with
the Company.
It is contemplated that this transaction will be completed by December 31,
1997.
The principal assets of National consist of an equity position in an
income-producing commercial property and cash.
INFLATION
Inflation has been consistently low during the periods presented in these
financial statements and, as a result, has not had a significant effect on the
operations of National.
COMPETITION
National's remaining property investment is subject to competition from
similar types of properties in the vicinity in which it is located. While the
market in which the property operates is experiencing a recovery, the property
values generally remain below the highs realized in the mid-1980's. The
property's current 100% occupancy rate, and National's holding of several
long-term leases with automatic escalation clauses, are indicators that National
is not currently facing heavy competition for tenants.
RESULTS OF OPERATIONS
For the quarter ended September 30, 1997, National reported net income from
property operations of $1,625 as compared to a net loss from property operations
of $1,752 for the quarter ended September 30, 1996. This improved operating
profitability is attributable to (i) increases in gross rental income associated
with higher occupancy levels ($5,641) and rent escalations ($5,167) which
resulted in a $10,808, or 13.2%, increase in rents to $92,636 in 1997 from
$81,828 in 1996, offset by (ii) increases in general and administrative expenses
of $6,815, or 31.1%, from $21,890 in 1996 to $28,705 in 1997, primarily due to
expenses incurred by the Trust in connection with the proposed sale ($3,602) and
increased health insurance premiums ($1,939). For the nine months ended
September 30, 1997, National reported net income from property operations of
$11,412 as compared to net income from property operations of $2,278 for the
nine months ended September 30, 1996. Also, National had net income of $1,759
and $11,943 for the quarter and nine months ended September 30, 1997,
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respectively, compared to a net loss of $1,443 and net income of $3,620 for the
quarter and nine months ended September 30, 1996, respectively.
The Managing Trustee was paid $12,000 and $36,000 for the quarter and nine
months ended September 30, 1997, respectively. In addition, National's offices
are located at premises owned by the Managing Trustee. No rent was charged to
National in the quarter and nine months ended September 30, 1997, although
National paid utility bills for the office of $435 and $1,571 in the quarter and
nine months ended September 30, 1997, respectively.
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
For the year ended December 31, 1996, National reported a net loss from
property operations of $20,187 as compared to net income from property
operations of $32,192 for the year ended December 31, 1995. Significant
variances from 1995 are as follows: repairs and maintenance expenses were higher
due to repairs to the sprinkler system, septic system and air conditioning
systems; interest expense increased due to the refinancing and additional
borrowing on October 25, 1995; property management costs increased due to a
monthly Trustee fee paid to the Managing Trustee as a result of the conversion
of National to a self-managed REIT; telephone expenses increased due to
increased contact with shareholders, contact with contractors in Florida, and
contacts by the Managing Trustee when he is traveling; and revenues increased
due to increased occupancy and rent escalations.
The appraised market value of The Shoppes at Lake Mary was $2,050,000 as of
October 15, 1993, based upon an appraisal prepared by Pomeroy Appraisal
Associates of Florida, Inc. This increase in value over the September, 1991
appraisal reflects the stabilization of the tenancy, the increased occupancy at
the center and the firming of the local real estate market in general.
National's administrative expenses consist of shareholder reporting, legal
expenses, recordkeeping and audit expense, all of which are necessary but
provide an unfair burden on a single property.
The Advisor began, and at December 31, 1996 the Managing Trustee was
continuing, conversations with other REIT and real estate portfolios concerning
merging in order for both entities to benefit from the ability to share
overhead. The Trustee's primary goal is to protect the shareholders' current
investment and to enhance their current return by reduced general and
administrative costs. These conversations were preliminary at December 31, 1996.
Compensation paid to the Managing Trustee was $46,000 for the year ended
December 31, 1996.
Year Ended December 31, 1995 compared to Year Ended December 31, 1994
For the year ended December 31, 1995, National reported net income from
property operations of $32,192, as compared to a net loss from property
operations of $272,220 for the year ended December 31, 1994. Significant
variances from 1994 are as follows: general and administrative expenses were
reduced due to the waiving of the advisor fees by the advisor due to the
limitation of operating expenses per the Declaration of the Trust and a
reduction in travel expenses and costs related to the evaluation of new
investments; repairs and maintenance expenses were lower due to substantial
reductions in the costs of contracted services and less than average repairs
were performed; promotion and administration expense variances are the result of
different expense classifications between years; interest expense increased due
to increases in interest rates and the refinancing and additional borrowing on
October 27, 1995; and revenues increased due to increased occupancy and rent
escalations.
On October 27, 1995, National changed its operating structure to become a
self-administered trust. The Advisor and the Managing Trustee have made a
concerted effort to reduce the operating expenses and general and administrative
expenses of National. They have terminated the lease for their administrative
offices located in Connecticut and are operating out of an office provided by
the Managing Trustee. The travel and investigative expenses have been curtailed
to a level which the Managing Trustee feels will be supported by National's cash
flow. National has entered into a new leasing contract with a local (Florida)
real estate company to find new tenants, and the leasing commission is to be
paid on an annual basis, rather than entirely up front. This contract should
reduce the strain on cash flow due to substantial prepaid fees.
There was no agreement with regards to compensation of the Managing Trustee
and no compensation was provided for the period of October 27, 1995 to December
31, 1995.
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BUSINESS AND PROPERTIES
GENERAL
Upon consummation of the Formation Transactions, the Company will own 100%
of ten shopping center properties located in metropolitan and suburban areas in
five states in the New England, Mid-Atlantic and Southeast regions of the United
States. The Properties consist of shopping centers located in Merrick, Brooklyn,
Staten Island and Freeport, New York; Lake Mary and Hialeah, Florida; Enfield
and Branford, Connecticut; Delran, New Jersey; and Foxborough, Massachusetts.
The Properties are well established community and neighborhood shopping
centers strategically located in densely populated, generally middle and upper
income markets and are conveniently located and easily accessible from major
transportation arterials. The Properties contain a total of approximately 2.4
million square feet of GLA. As of September 30, 1997, the Properties were
approximately 96.3% leased to over 260 tenants. The Company's principal tenants
include many national and regional retailers, such as Pergament Home Centers,
Inc., APW Supermarkets, Inc. (Waldbaum's), Toys 'R' Us Inc., Giant Food Stores,
Inc., Walgreen Co. Mervyn's, United Artists Communications, Inc., The TJX
Companies (TJ Maxx), Winn-Dixie Stores Inc. and Michaels Stores Inc. Other
typical tenancies represented in the portfolio include Modell's Sporting Goods,
Marshall's, Circuit City Stores Inc., Fabric Bonanza and Radio Shack, as well as
a wide variety of apparel, service, fast-food and other convenience shopping
alternatives catering to more localized target markets.
The Company's properties range in size from approximately 38,000 to
1,200,000 square feet. The Company has maintained a policy of retaining its
shopping centers for long-term investment, and consequently has pursued a
program of regular physical maintenance together with major renovations and
refurbishing to preserve and increase the value of the properties. These
projects usually include renovating existing facades, installing uniform
signage, resurfacing parking lots and increasing parking lot lighting.
SHOPPING CENTER PROPERTIES
Geographic Markets. The Properties are located in 10 different commercial
real estate markets throughout the New England, Mid-Atlantic and Southeast
regions of the United States. The following table presents information about the
Properties by geographic market as of September 30, 1997:
<TABLE>
<CAPTION>
TOTAL
ANNUALIZED PERCENTAGE
STATE & TOTAL PERCENTAGE BASE OF TOTAL
NUMBER OF GLA OF TOTAL GLA PERCENTAGE RENT ANNUALIZED
PROPERTIES (SQ. FT.) (SQ. FT.)(%) LEASED(1)(%) ($000) BASE RENT(%)
- ------------------------ --------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
New York(4)............. Forest Ave. Shoppers Town 177,002 3,071
Meadowbrook Commons 173,027 3,029
Merrick Commons 106,393 1,737
Mill Basin Plaza 80,708 2,104
--------- ---------- ------
537,130 22.5 99.6 9,941 41.6
Florida(2).............. Palm Springs Mile 1,175,346 10,491
The Shoppes at Lake Mary 38,125 309
--------- ---------- ------
1,213,471 50.8 94.4 10,800 45.2
Connecticut(2).......... Branhaven Plaza 187,829 1,319
Elm Plaza 168,852 582
--------- ---------- ------
356,681 15.0 98.8 1,901 7.9
New Jersey(1)........... Millside Plaza 161,128 6.8 98.2 761 3.2
Massachusetts(1)........ Foxboro Plaza 117,831 4.9 91.2 513 2.1
--------- ------ ----- ---------- ------
Total................... 2,386,241 100.0 96.4 23,916 100.0
--------- ------ ----- ---------- ------
--------- ------ ----- ---------- ------
</TABLE>
- ------------------
(1) Percent of GLA leased as of September 30, 1997.
(2) Total annualized contractual base rent as of September 30, 1997, excluding
(i) percentage rent, (ii) additional rent payable by tenants such as common
area maintenance, real estate taxes and other expense reimbursements, and
(iii) future contractual rent escalations or cost of living increases.
89
<PAGE>
Rentals and Major Tenants. A substantial portion of the Company's income
consists of rent received under long-term leases which generally range from 5 to
10 years for non-anchor tenants and 15 to 25 years for anchor tenants. Most of
the leases provide for the payment of fixed base rentals monthly in advance and
for the payment by tenants of a pro-rata share of the real estate taxes,
insurance, utilities and common area maintenance of the shopping center. Many of
the Company's 260 leases also provide for the payment of additional rent
calculated as a percentage of a tenant's gross sales above predetermined
thresholds ('percentage rents'). Minimum base rental revenues and operating
expense reimbursements accounted for approximately 96% and 95% of the Company's
total rental revenues for the nine months ended September 30, 1997 and the year
ended December 31, 1996, respectively. Although a majority of the leases require
the Company to make roof and structural repairs as needed, a number of tenant
leases place that responsibility on the tenant, and the Company's standard small
store lease provides for roof repairs to be reimbursed by the tenant as part of
common area maintenance. The Company's management places a strong emphasis on
sound construction and safety at its properties.
The Company's community and neighborhood shopping centers are usually
anchored by a national or regional retailer. As a long-time participant in the
shopping center industry and a significant owner and manager of shopping
centers, the Company has established close relationships with a large number of
major national and regional retailers. As of September 30, 1997, no tenant
accounted for more than 6.1% of total annualized base rental revenues.
The following table summarizes certain information regarding tenants which
individually accounted for 2.00% or more of the total annualized contractual
base rent at September 30, 1997.
<TABLE>
<CAPTION>
TOTAL PERCENT OF
TOTAL PERCENT OF TOTAL ANNUALIZED TOTAL
GLA UNDER TOTAL ANNUALIZED BASE RENT ANNUALIZED
NUMBER LEASE LEASED BASE RENT(2) $/SQ. BASE
TENANT OF LEASES (SQ. FT.) GLA(%)(1) ($000'S) FT.(3) RENT(%)(4)
- ----------------------------------- --------- --------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Pergament Home Centers, Inc........ 1 58,200 2.4 1,463 25.14 6.1
Waldbaum's/APW Supermarkets,
Inc.............................. 4 180,859 7.6 1,256 6.95 5.3
Toys 'R' Us Inc.................... 3 113,358 4.8 979 8.64 4.1
Giant Food Stores, Inc............. 1 46,753 2.0 634 13.56 2.7
Mervyn's........................... 1 79,118 3.3 515 6.51 2.2
United Artists Communications,
Inc.............................. 1 39,214 1.6 510 13.00 2.1
Walgreen Co........................ 3 32,143 1.3 501 15.60 2.1
The TJX Companies (TJ Maxx)........ 1 34,798 1.5 500 14.37 2.1
Winn-Dixie Stores Inc.............. 1 53,820 2.3 489 9.09 2.0
Michaels Stores Inc................ 2 35,353 1.5 480 13.58 2.0
--
--------- ------------- ------------ ---------- ----------
Total/Weighted Average........... 18 673,616 28.3 7,327 10.88 30.7
--
--
--------- ------------- ------------ ---------- ----------
--------- ------------- ------------ ---------- ----------
</TABLE>
- ------------------
(1) Total GLA under lease to tenant divided by total GLA under lease to all
tenants in the Company's portfolio as of September 30, 1997.
(2) Total annualized contractual base rent as of September 30, 1997, excluding
(i) percentage rent, (ii) additional rent payable by tenant such as common
area maintenance, real estate taxes and other expense reimbursements, and
(iii) future contractual rent escalations or cost of living increases.
(3) Total annualized contractual base rent from tenant divided by total GLA
under lease to tenant as of September 30, 1997.
(4) Total annualized contractual base rent from tenant divided by total
annualized contractual base rent from all tenants in the Company's portfolio
as of September 30, 1997.
90
<PAGE>
Property Data. The following table sets forth certain information relating
to each of the Properties as of September 30, 1997. All of the Properties will
be 100% owned by the Company after completion of the Formation Transactions.
<TABLE>
<CAPTION>
PERCENTAGE TOTAL
TOTAL OF TOTAL ANNUALIZED
YEAR TOTAL PERCENT OF ANNUALIZED ANNUALIZED BASE RENT/ PERCENT
BUILT/ GLA TOTAL GLA BASE RENT BASE RENT SQ. FT. LEASED
PROPERTY LOCATION RENOVATED (SQ. FT.) (%) ($000)(1) (%) $ (2) (3)(%)
- ---------------------------------------- --------- ----------- ---------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Forest Avenue 1957/1996 177,002 7.4 3,071 12.8 17.51 99.1
Shoppers Town,
Staten Island, NY
Meadowbrook Commons 1990 173,027 7.2 3,029 12.7 17.50 100.0
Sunrise Highway,
Freeport, NY
Merrick Commons 1960/1994 106,393 4.4 1,737 7.3 16.38 99.7
Merrick Road
Merrick, NY
Mill Basin Plaza 1991 80,708 3.4 2,104 8.8 26.07 100.0
5700-5716 Avenue U
Brooklyn, NY
Palm Springs Mile 1958/1985 - 1,175,346 49.3 10,491 43.9 9.47 94.3
419 West 49th St. 1997
Hialeah, FL
The Shoppes at Lake Mary 1985 38,125 1.6 309 1.3 8.10 100.0
101 N. Country Club Rd.
Lake Mary, FL 32746
Branhaven Plaza 1971/1996 187,829 7.9 1,319 5.5 7.04 99.8
1060 West Main St.
Branhaven, CT
Elm Plaza 1973/1995 168,852 7.1 582 2.4 3.53 97.6
95 Elm Street
Enfield, CT
Millside Plaza 1977 161,128 6.8 761 3.2 4.81 98.3
Route 130 & Haines Mill Rd.
Delran, NJ
Foxboro Plaza 1982 117,831 4.9 513 2.1 4.77 91.2
Route 140 &
Commercial St.
Foxborough, MA
--------- ----- ---------- ----- ----- -------
2,386,241 100.0 23,916 100.0 10.40 96.4
--------- ----- ---------- ----- ----- -------
--------- ----- ---------- ----- ----- -------
<CAPTION>
ANCHOR TENANTS (GREATER THAN 25,000
SQ. FT.)(YEAR OF LEASE EXPIRATION;
PROPERTY LOCATION PRIMARY/OPTION TERM)
- ---------------------------- ---------------------------------
<S> <C>
Forest Avenue The TJX Companies (TJ Maxx)
Shoppers Town, (2005, 2020)
Staten Island, NY APW Supermarkets, Inc.
(Waldbaum's) (2001, 2011)
Meadowbrook Commons Giant Food Stores, Inc. (2025)
Sunrise Highway, Toys 'R' Us, Inc. (2020, 2040)
Freeport, NY Marshall's (2001, 2016)
Merrick Commons APW Supermarkets, Inc.
Merrick Road (Waldbaum's)(2013, 2041)
Merrick, NY
Mill Basin Plaza Pergament Home Centers Inc.(2011,
5700-5716 Avenue U 2021)
Brooklyn, NY
Palm Springs Mile United Artists Communications,
419 West 49th St. Inc. (2010, 2030)
Hialeah, FL Mervyn's (2011, 2031)
Publix Supermarket Inc.(2002)
Kids 'R'Us(2016, 2026)
Burlington Co. (2002, 2022)
Toys 'R' Us Inc.(2002, 2033)
Circuit City Stores, Inc. (2009,
2029)
RTG Furniture (2000, 2005)
The Shoppes at Lake Mary
101 N. Country Club Rd.
Lake Mary, FL 32746
Branhaven Plaza Caldor, Inc. (2002, 2022)
1060 West Main St. APW Supermarkets, Inc.
Branhaven, CT (Waldbaum's) (2016, 2038)
Elm Plaza Caldor Inc. (2001, 2021)
95 Elm Street APW Supermarkets, Inc.
Enfield, CT (Waldbaum's) (2014, 2034)
Millside Plaza Kmart Corp. (2002, 2017)
Route 130 & Haines Mill Rd. Shop Rite (2001, 2016)
Delran, NJ
Foxboro Plaza Bradlees (Stop N Shop) (2002,
Route 140 & 2022)
Commercial St.
Foxborough, MA
</TABLE>
- ------------------
(1) Total annualized contractual base rent as of September 30, 1997, excluding
(i) percentage rent, (ii) additional rent payable by tenants such as common
area maintenance, real estate taxes and other expense reimbursements, and
(iii) future contractual rent escalations and cost of living increases.
(2) Total annualized contractual base rent divided by total GLA leased as of
September 30, 1997.
(3) Percent of GLA leased as of September 30, 1997.
91
<PAGE>
Occupancy and Average Rentals. The following table sets forth the
aggregate average percent leased and average total annualized contractual base
rent per leased square foot for the Properties as of the dates indicated:
<TABLE>
<CAPTION>
AVERAGE TOTAL ANNUALIZED
AVERAGE PERCENT BASE RENT PER
YEAR LEASED(%)(1) LEASED SQUARE FOOT($)(2)
- --------------------------------------------------- --------------- ------------------------
<S> <C> <C>
September 30, 1997................................. 96.4 10.40
December 31, 1996.................................. 95.4 10.26
December 31, 1995.................................. 90.7 9.94
December 31, 1994.................................. 88.2 9.64
December 31, 1993.................................. 88.4 8.93
December 31, 1992.................................. 89.5 8.46
</TABLE>
- ------------------
(1) Average total GLA leased for all Properties in the portfolio as of the date
indicated.
(2) Average total annualized contractual base rents for all Properties in the
portfolio as of the date indicated divided by total GLA leased as of such
date.
Leasing Activity. The following table sets forth certain information
concerning the Company's leasing activities over the past two year, nine-month
period:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, 1997 1996 1995
-------------------- -------------------- --------------------
ANCHOR NON-ANCHOR ANCHOR NON-ANCHOR ANCHOR NON-ANCHOR
TENANTS TENANTS TENANTS TENANTS TENANTS TENANTS
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
NEW LEASES
Number of leases signed....................... -- 20 2 36 1 21
GLA leased (sq.ft.)........................... -- 70,647 100,127 149,981 28,105 97,393
Base rent/square foot ($/sq.ft.)(1)........... -- $14.54 $ 6.26 $ 15.16 $ 7.00 $ 14.42
Tenant improvements/square foot
($/sq.ft.)(2)............................... -- $ 2.27 -- $ 2.35 -- $ 0.31
Leasing commissions & costs/square foot
($/sq.ft.)(3)............................... -- $ 2.32 $ 0.47 $ 3.25 -- $ 3.64
Effective rent/square foot ($/sq.ft.)(4)...... -- $13.87 $ 6.23 $ 14.44 $ 7.00 $ 13.94
RENEWALS
Number of leases signed....................... -- 4 -- 12 -- 3
GLA leased (sq.ft.)........................... -- 10,363 -- 23,380 -- 7,886
Base rent/square foot ($/sq.ft.)(1)........... -- $13.82 -- $ 14.93 -- $ 15.87
Tenant improvements/square foot
($/sq.ft.)(2)............................... -- -- -- $ 2.62 -- --
Leasing commissions & costs/square foot
($/sq.ft.)(3)............................... -- $ 0.85 -- $ 0.25 -- $ 1.98
Effective rent/square foot ($/sq.ft.)(4)...... -- $13.60 -- $ 14.45 -- $ 15.59
TOTAL NEW AND RENEWED LEASES SIGNED
Number of new and renewed leases signed....... -- 24 2 48 1 24
GLA leased (sq.ft.)........................... -- 81,010 100,127 173,361 28,105 105,279
Base rent/square foot ($/sq.ft.)(1)........... -- $14.45 $ 6.26 $ 15.13 $ 7.00 $ 14.53
Tenant improvements/square foot
($/sq.ft.)(2)............................... -- $ 1.98 -- $ 2.39 -- $ 0.28
Leasing commissions & costs/square foot
($/sq.ft.)(3)............................... -- $ 2.13 $ 0.47 $ 2.85 -- $ 3.52
Effective rent/square foot ($/sq.ft.)(4)...... -- $13.83 $ 6.23 $ 14.44 $ 7.00 $ 14.07
</TABLE>
(Footnotes on next page)
92
<PAGE>
(Footnotes from previous page)
- ------------------
* All tenants which have occupied space for less than one year have been omitted
from this table.
(1) Initial total annualized contractual base rent divided by square feet
leased.
(2) Tenant improvements (defined as capital costs incurred by the Company for
leasehold improvements including, but not limited to, costs for items such
as HVAC, plumbing, electrical upgrades, interior walls, wall finishes,
ceiling treatment and floor covering) divided by square feet leased.
(3) Leasing commissions (defined as brokerage commission fees and related
expenses paid by the Company in connection with new leases or lease
renewals) divided by square feet leased.
(4) Initial total annualized contractual base rent minus amortization of tenant
improvements and leasing commissions related to such leases divided by the
total square feet leased.
Lease Expirations. The following table sets out a schedule of the lease
expirations for the Properties for the approximate ten year period beginning in
October 1997 and ending in December 2007, assuming that none of the tenants
exercises renewal options or termination rights:
<TABLE>
<CAPTION>
TOTAL TOTAL PERCENT OF
ANNUALIZED ANNUALIZED PERCENT OF TOTAL
BASE RENT BASE RENT/ TOTAL GLA ANNUALIZED
GLA UNDER UNDER SQUARE FOOT LEASED BASE RENT
NUMBER OF EXPIRING EXPIRING UNDER REPRESENTED REPRESENTED
LEASES (SQ. FT.) LEASES(2) EXPIRING BY EXPIRING BY EXPIRING
YEAR OF LEASE EXPIRATION EXPIRING LEASES(1) ($000'S) LEASES($) LEASES(%) LEASES(%)
- ----------------------------------- --------- --------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
10/1/97--12/31/97.................. 21 43,701 474 10.86 1.9 2.0
1998............................... 32 92,985 1,259 13.54 4.0 5.3
1999............................... 30 115,081 1,632 14.18 5.0 6.8
2000............................... 30 154,200 1,697 11.00 6.7 7.1
2001............................... 39 371,309 3,730 10.05 16.2 15.6
2002............................... 36 501,300 2,409 4.81 21.8 10.1
2003............................... 11 48,829 647 13.25 2.1 2.7
2004............................... 9 57,997 623 10.74 2.5 2.6
2005............................... 12 131,614 1,475 11.21 5.7 6.2
2006............................... 13 92,182 1,233 13.38 4.0 5.2
2007............................... 7 35,773 718 20.04 1.6 3.0
--- --------- ---------- ----------- ----- -----
Total/Weighted Average........... 240 1,644,971 15,897 9.66 71.5 66.6
--- --------- ---------- ----------- ----- -----
--- --------- ---------- ----------- ----- -----
</TABLE>
- ------------------
(1) All month to month tenants as of September 30, 1997 are considered to have a
lease expiry in the 1997 year.
(2) Total annualized contractual base rents as of September 30, 1997 for tenant
leases expiring in respective periods.
Tax Basis and Real Estate Taxes. The aggregate cost basis of depreciable
real property for federal income tax purposes in the Properties as of September
30, 1997 was approximately $128 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, 1996 was approximately $4.4 million, or approximately $1.86
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.
93
<PAGE>
GOVERNMENT REGULATIONS
Many laws and governmental regulations are applicable to the Properties and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
Cost of Compliance with Americans with Disabilities Act. Under the
Americans With Disabilities Act, as amended (the 'ADA'), all places of public
accommodation, effective beginning in 1992, are required to meet certain federal
requirements related to access and use by disabled persons. Compliance with the
ADA might require removal of structural barriers to handicapped access in
certain public areas where such removal is 'readily achievable.' Noncompliance
with the ADA could result in the imposition of fines or an award of damages to
private litigants. The Company believes that the Properties are currently in
substantial compliance with all such regulatory requirements and the Company
expects to maintain substantial compliance with all regulatory requirements. If
required changes involve a greater amount of expenditures than the Company
currently anticipates or if the changes must be made on a more accelerated
schedule than the Company currently anticipates, the Company's ability to make
any distributions to shareholders could be adversely affected.
Environmental Matters. Under various federal, state and local laws,
ordinances and regulations, an owner or operator of real estate is liable for
the costs of removal or remediation of certain hazardous or toxic substances on
or in such property. Such laws often impose such liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of
such hazardous or toxic substances. The presence of such substances, or the
failure to properly remediate such substances, may adversely affect the owner's
or operator's ability to sell or rent such property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances may also be liable for the costs of removal or
remediation of such substances at a disposal or treatment facility, whether or
not such facility is owned or operated by such person. Certain environmental
laws impose liability for release of asbestos-containing materials into the air,
and third parties may seek recovery from owners or operators of real properties
for personal injuries associated with asbestos-containing materials. In
connection with the ownership (direct or indirect), operation, management and
development of real properties, the Company may be considered an owner or
operator of such properties or as having arranged for the disposal or treatment
of hazardous or toxic substances and, therefore, may be potentially liable for
removal or remediation costs, as well as certain other costs, including
governmental fines and injuries to persons and property.
The Company believes that the Properties are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances or petroleum products. The Company has
not been notified by any governmental authority, and is not otherwise aware, of
any material noncompliance, liability or claim relating to hazardous or toxic
substances or petroleum products in connection with any of its properties.
All of the Properties have been subject to a Phase I environmental
assessment or update (which involves general inspections without soil sampling
or ground water analysis) completed within the last year 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 such material environmental
liability. Nonetheless, it is possible that the Company's assessments do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, there can be no assurance
that (i) future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks), or by third parties unrelated to the Company. If
compliance with the various laws and regulations, now existing or hereafter
adopted, exceeds the Company's budgets for such items, the Company's ability to
make any distributions to shareholders could be adversely affected.
Other Regulations. The Properties are also subject to various federal,
state and local regulatory requirements such as state and local fire and life
safety requirements. Failure to comply with these requirements could result in
the imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that the Properties are currently in
material compliance with all such regulatory requirements. However, if
requirements are changed or new requirements are imposed which would require
significant unanticipated expenditures by the Company, such events could have an
adverse effect on the Company's funds from operations and any distributions.
94
<PAGE>
Except as described in this Proxy Statement/Prospectus, 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. See 'Certain Provisions of Maryland Law
and of the Company's Charter and Bylaws,' 'Federal Income Tax Consequences' and
'ERISA Considerations.'
EMPLOYEES
The Company initially will employ approximately 27 persons, 19 of whom are
directly engaged in the management, leasing and day-to-day operations of Palm
Springs Mile. In addition, certain employees of Philips Private Company who
currently manage the Partnership Properties will perform the day-to-day leasing,
development, acquisition, property and portfolio management, and related
administrative functions, of the Properties pursuant to the Management Agreement
as employees of the Management Company. The Company believes that relations with
its employees are good. None of the employees are unionized.
LEGAL PROCEEDINGS
Except as set forth herein, none of the Company, the Operating Partnership,
any of the Holding Partnerships, any of the Philips Subs, any of the
Contributing Partnerships or any of the Properties is subject to any material
litigation nor, to the Company's knowledge, is any material litigation
threatened against any of them, other than routine litigation arising in the
ordinary course of business, which is expected to be covered by liability
insurance.
In connection with certain real estate activities, certain affiliated
entities of Mr. Pilevsky were involved in proceedings under the federal
bankruptcy laws and/or similar state law proceedings during the 1980's and
earlier 1990's, substantially all of which proceedings have been resolved as of
the date of this Proxy Statement/Prospectus. From July 1, 1992, such proceedings
included eight foreclosures of, and three bankruptcy filings with respect to,
retail shopping center properties and six foreclosures of, and nine bankruptcy
filings with respect to, non-retail shopping center properties. None of the
Contributing Partnerships were involved in any such proceedings, other than the
partnership holding fee title to the Meadowbrook Commons Property, as described
below.
Philips Freeport Associates, L.P. ('Philips Freeport'), the owner of
Meadowbrook Commons, was party to certain notes with Chemical Bank which notes
were secured by mortgages on such property (the 'Loan'). Although Philips
Freeport was able to service the Loan from the revenues of the property, it was
unable to repay the full principal amount of the Loan upon maturity in November
1992. On January 21, 1994, Philips Freeport voluntarily commenced a proceeding
to reorganize pursuant to Chapter 11 of the Bankruptcy Code. The bankruptcy
proceeding resulted in an agreement between Philips Freeport and Chemical Bank
to modify and restate the Loan pursuant to the Debtor's Second Amended Chapter
11 Plan of Reorganization (the 'Plan'). The Plan, which also provided for the
payment in full of all trade claims over a two-year period, was confirmed by
order of the Bankruptcy Court dated March 30, 1995 and subsequently modified by
orders dated April 12, and April 28, 1995.
SIGNIFICANT PROPERTIES
Since the 1996 gross revenues for each of the Company's Palm Springs Mile,
Forest Avenue Shoppers Town and Meadowbrook Commons shopping centers amounted to
more than 10% of the aggregate gross revenues for the Properties during such
year, additional information regarding these Properties is provided below.
PALM SPRINGS MILE
Palm Springs Mile is a super-regional center with 1.2 million square feet
of GLA and approximately 140 tenants, located in Hialeah, Florida, within the
greater Miami-Hialeah metropolitan area. Hialeah is situated north of the Miami
International Airport, west of the municipalities of Miami, Miami Beach and
Aventura, and south of Broward County and Fort Lauderdale. Palm Springs Mile is
a unique, one-mile retail shopping complex that fronts both sides of West 49th
Street, forming a strategic section of the primary business corridor of Hialeah.
The property's 90 acres facilitates the expansion or reconfiguration of existing
space, and it has been regularly expanded since 1985, with the most recent
expansion of 11,400 square feet completed in 1997. Management believes that this
makes Palm Springs Mile an attractive site for larger retailers, and considers
it to be one of the strongest regional retail centers in the greater Miami area.
95
<PAGE>
Palm Springs Mile was acquired by the Company in 1985 and consists of 139
stores, including nationally recognized retailers, two supermarkets, a multiplex
movie theater and office space. Its major tenants include Publix Supermarket
Inc., Circuit City Stores Inc. and Toys 'R' Us, Inc.
The following table sets forth certain information regarding the Company's
leasing activities over the past two year, nine-month period for Palm Springs
Mile.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, 1997 1996 1995
-------------------- -------------------- --------------------
ANCHOR NON-ANCHOR ANCHOR NON-ANCHOR ANCHOR NON-ANCHOR
TENANTS TENANTS TENANTS TENANTS TENANTS TENANTS
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
NEW LEASES
Number of leases signed.................... -- 11 1 18 1 13
GLA leased (sq.ft.)........................ -- 40,782 53,820 64,120 28,105 52,724
Base rent/square foot ($/sq.ft.)(1)........ -- $ 13.19 $ 9.09 $ 16.56 $ 7.00 $ 15.55
Tenant improvements/square foot
($/sq.ft.)(2)............................ -- -- -- $ 3.51 -- --
Leasing commissions & costs/square foot
($/sq.ft.)(3)............................ -- $ 0.30 -- $ 4.11 -- $ 4.42
Effective rent/square foot ($/sq.ft.)(4)... -- $ 13.13 $ 9.09 $ 15.67 $ 7.00 $ 15.07
RENEWALS
Number of leases signed.................... -- 1 -- 3 -- 2
GLA leased (sq.ft.)........................ -- 750 -- 5,103 -- 1,771
Base rent/square foot ($/sq.ft.)(1)........ -- $ 17.00 -- $ 14.53 -- $ 17.34
Tenant improvements/square foot
($/sq.ft.)(2)............................ -- -- -- -- -- --
Leasing commissions & costs/square foot
($/sq.ft.)(3)............................ -- -- -- $ 1.17 -- --
Effective rent/square foot ($/sq.ft.)(4)... -- $ 17.00 -- $ 14.26 -- $ 17.34
TOTAL NEW AND RENEWED LEASES SIGNED
Number of new and renewed leases signed.... -- 12 1 21 1 15
GLA leased (sq.ft.)........................ -- 41,532 53,820 69,223 28,105 54,495
Base rent/square foot ($/sq.ft.)(1)........ -- $ 13.26 $ 9.09 $ 16.41 $ 7.00 $ 15.61
Tenant improvements/square foot
($/sq.ft.)(2)............................ -- -- -- $ 3.25 -- --
Leasing commissions & costs/square foot
($/sq.ft.)(3)............................ -- $ 0.29 -- $ 3.89 -- $ 4.28
Effective rent/square foot ($/sq.ft.)(4)... -- $ 13.20 $ 9.09 $ 15.57 $ 7.00 $ 15.14
</TABLE>
- ------------------
(1) Initial total annualized contractual base rent divided by square feet
leased.
(2) Tenant improvements (defined as capital costs incurred by the Company for
leasehold improvements including, but not limited to, costs for items such
as HVAC, plumbing, electrical upgrades, interior walls, wall finishes,
ceiling treatment and floor covering) divided by square feet leased.
(3) Leasing commissions (defined as brokerage commission fees and related
expenses paid by the Company in connection with new leases or lease
renewals) divided by square feet leased.
(4) Initial total annualized contractual base rent minus amortization of tenant
improvements and leasing commissions related to such leases divided by the
total square feet leased.
96
<PAGE>
The following table sets out a schedule of lease expirations for Palm
Springs Mile for the approximate ten year period beginning in October 1997 and
ending in December 2007, assuming that none of the tenants exercises renewal
options or termination rights:
<TABLE>
<CAPTION>
PERCENT OF
TOTAL GLA PERCENT OF TOTAL
GLA TOTAL ANNUALIZED TOTAL ANNUALIZED LEASED ANNUALIZED BASE
NUMBER OF UNDER BASE RENT UNDER BASE RENT/SQ FT REPRESENTED RENT REPRESENTED
YEAR OF LEASE LEASES EXPIRING EXPIRING LEASES UNDER EXPIRING BY EXPIRING BY EXPIRING
EXPIRATION EXPIRING LEASES (SQ.FT.)(1) ($000)(2) LEASES($) LEASES(%) LEASES(%)
- ---------------------- --------- ------------------ ---------------- ------------------ ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
10/1/97 - 12/31/97.... 15 33,239 339 10.21 3.0 3.2
1998.................. 16 48,081 686 14.27 4.3 6.5
1999.................. 15 76,471 848 11.09 6.9 8.1
2000.................. 14 97,339 678 6.94 8.8 6.4
2001.................. 20 104,164 1,367 13.12 9.4 13.0
2002.................. 18 230,102 1,110 4.83 20.8 10.6
2003.................. 8 40,388 509 12.59 3.6 4.8
2004.................. 6 43,143 511 11.84 3.9 4.9
2005.................. 8 83,533 744 8.90 7.5 7.1
2006.................. 3 33,415 518 15.50 3.0 4.9
2007.................. 1 5,100 82 16.00 0.5 0.8
--- ---------- ------- ------ ----- -----
Total/Weighted
Average............. 124 794,975 7,392 9.30 71.7 70.3
--- ---------- ------- ------ ----- -----
--- ---------- ------- ------ ----- -----
</TABLE>
- ------------------
(1) All month to month tenants as of September 30, 1997 are considered to have a
lease expiry in the 1997 year.
(2) Total annualized contractual base rents as of September 30, 1997 for tenant
leases expiring in respective periods.
The following table sets forth the average percent leased and average total
annualized contractual base rent per leased square foot for Palm Springs Mile as
of the dates indicated:
<TABLE>
<CAPTION>
AVERAGE TOTAL ANNUALIZED BASE
AVERAGE PERCENT RENT PER LEASED SQUARE
YEAR LEASED(%)(1) FOOT($)(2)
- ---------------------------- ------------------------- -----------------------------
<S> <C> <C>
September 30, 1997.......... 94.3 9.47
December 31, 1996........... 93.8 9.57
December 31, 1995........... 85.5 8.94
December 31, 1994........... 85.2 8.63
December 31, 1993........... 85.3 8.10
December 31, 1992........... 85.7 7.74
</TABLE>
- ------------------
(1) Average total GLA leased as of the date indicated.
(2) Average total annualized contractual base rent as of the date indicated
divided by total GLA leased as of such date.
The aggregate cost basis of depreciable real property for federal income
tax purposes for Palm Springs Mile of December 31, 1996 was approximately $47.6
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, 1996 was
approximately $1.6 million, or approximately $1.38 per square foot of GLA.
FOREST AVENUE SHOPPERS TOWN
Forest Avenue Shoppers Town contains 177,002 square feet of GLA and 25
tenants, and is located along Forest Avenue in north central Staten Island, New
York. The Company believes that Forest Avenue Shoppers Town is one of the
dominant shopping centers in northern Staten Island, a densely populated
residential area in New York City, which functions as a bedroom community for
Manhattan. Forest Avenue Shoppers Town's major tenants include Waldbaum's,
Michaels Stores and The TJX Companies (TJ Maxx).
97
<PAGE>
The following table sets forth certain information regarding the Company's
leasing activities over the past two year, nine-month period for Forest Avenue
Shoppers Town:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997 YEAR ENDED DECEMBER 31,
--------------------- ----------------------------------------------
1996 1995
--------------------- ---------------------
ANCHOR NON-ANCHOR ANCHOR NON-ANCHOR ANCHOR NON-ANCHOR
TENANTS TENANTS TENANTS TENANTS TENANTS TENANTS
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
NEW LEASES
Number of leases signed................. -- 2 -- 2 -- 1
GLA leased (sq.ft.)..................... -- 12,555 -- 15,208 -- 17,573
Base rent/square foot ($/sq.ft.)(1)..... -- $ 21.09 -- $ 21.91 -- $ 13.50
Tenant improvements/square foot
($/sq.ft.)(2)......................... -- -- -- -- -- --
Leasing commissions & costs/square foot
($/sq.ft.)(3)......................... -- $ 7.07 -- $ 2.58 -- $ 4.68
Effective rent/square foot
($/sq.ft.)(4)......................... -- $ 20.35 -- $ 21.68 -- $ 13.06
RENEWALS
Number of leases signed................. -- -- -- 1 -- --
GLA leased (sq.ft.)..................... -- -- -- 980 -- --
Base rent/square foot ($/sq.ft.)(1)..... -- -- -- $ 25.00 -- --
Tenant improvements/square foot
($/sq.ft.)(2)......................... -- -- -- -- -- --
Leasing commissions & costs/square foot
($/sq.ft.)(3)......................... -- -- -- -- -- --
Effective rent/square foot
($/sq.ft.)(4)......................... -- -- -- $ 25.00 -- --
TOTAL NEW AND RENEWED LEASES SIGNED
Number of new and renewed leases
signed................................ -- 2 -- 3 -- 1
GLA leased (sq.ft.)..................... -- 12,555 -- 16,188 -- 17,573
Base rent/square foot ($/sq.ft.)(1)..... -- $ 21.09 -- $ 22.09 -- $ 13.50
Tenant improvements/square foot
($/sq.ft.)(2)......................... -- -- -- -- -- --
Leasing commissions & costs/square foot
($/sq.ft.)(3)......................... -- $ 7.07 -- $ 2.42 -- $ 4.68
Effective rent/square foot
($/sq.ft.)(4)......................... -- $ 20.35 -- $ 21.88 -- $ 13.06
</TABLE>
- ------------------
(1) Initial total annualized contractual base rent divided by square feet
leased.
(2) Tenant improvements (defined as capital costs incurred by the Company for
leasehold improvements including, but not limited to, costs for items such
as HVAC, plumbing, electrical upgrades, interior walls, wall finishes,
ceiling treatment and floor covering) divided by square feet leased.
(3) Leasing commissions (defined as brokerage commission fees and related
expenses paid by the Company in connection with new leases or lease
renewals) divided by square feet leased.
(4) Initial total annualized contractual base rent minus amortization of tenant
improvements and leasing commissions related to such leases divided by the
total square feet leased.
98
<PAGE>
The following table sets out a schedule of lease expirations for Forest
Avenue Shoppers Town for the approximate ten year period beginning in October
1997 and ending in December 2007, assuming that none of the tenants exercises
renewal options or termination rights.
<TABLE>
<CAPTION>
PERCENT OF
TOTAL GLA PERCENT OF TOTAL
GLA TOTAL ANNUALIZED TOTAL ANNUALIZED LEASED ANNUALIZED BASE
NUMBER OF UNDER BASE RENT UNDER BASE RENT/SQ FT REPRESENTED RENT REPRESENTED
YEAR OF LEASE LEASES EXPIRING EXPIRING LEASES UNDER EXPIRING BY EXPIRING BY EXPIRING
EXPIRATION EXPIRING LEASES (SQ.FT.)(1) ($000) (2) LEASES($) LEASES(%) LEASES(%)
- ---------------------- --------- ------------------ ---------------- ------------------ ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
10/1/97 - 12/31/98.... -- -- -- -- -- --
1999.................. 6 19,190 579 30.18 10.9 18.9
2000.................. 2 9,975 228 22.91 5.7 7.4
2001.................. 4 44,963 444 9.88 25.6 14.5
2002.................. 2 4,198 129 30.80 2.4 4.2
2003.................. -- -- -- -- -- --
2004.................. 1 900 26 28.64 0.5 0.8
2005.................. 2 40,578 610 15.03 23.1 19.9
2006.................. 3 22,888 335 14.62 13.0 10.9
2007.................. 2 15,317 347 22.66 8.7 11.3
--- ---------- ------- ------ ----- -----
Total/Weighted
Average............. 22 158,009 2,698 17.08 89.9 87.9
--- ---------- ------- ------ ----- -----
--- ---------- ------- ------ ----- -----
</TABLE>
- ------------------
(1) All month to month tenants as of September 30, 1997 are considered to have a
lease expiry in the 1997 year.
(2) Total annualized contractual base rents as of September 30, 1997 for tenant
leases expiring in respective periods.
The following table sets forth the average percent leased and average total
annualized contractual base rent per leased square foot for Forest Avenue
Shoppers Town as of the dates indicated:
<TABLE>
<CAPTION>
AVERAGE TOTAL ANNUALIZED BASE
AVERAGE PERCENT RENT PER LEASED SQUARE
YEAR LEASED%(1) FOOT($)(2)
- ---------------------------- ------------------------- -----------------------------
<S> <C> <C>
September 30, 1997.......... 99.1 17.51
December 31, 1996........... 98.6 16.73
December 31, 1995........... 95.0 16.71
December 31, 1994........... 86.7 16.91
December 31, 1993........... 90.3 12.31
December 31, 1992........... 82.8 11.27
</TABLE>
- ------------------
(1) Average total GLA leased as of the date indicated.
(2) Average total annualized contractual base rent as of the date indicated
divided by total GLA leased as of such date.
The aggregate cost basis of depreciable real property for federal income
tax purposes for Forest Avenue Shoppers Town as of December 31, 1996 was
approximately $10.4 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 Forest Avenue Shoppers Town during the fiscal year ended
December 31, 1996 was approximately $0.8 million, or approximately $4.39 per
square foot of GLA.
99
<PAGE>
MEADOWBROOK COMMONS
Meadowbrook Commons, which contains 173,027 square feet of GLA and 13
tenants, is located in Nassau County, Long Island, one of the most densely
populated suburbs in the New York metropolitan area. The shopping center is
situated on Sunrise Highway, a major east-west artery along the south shore of
Long Island. The center is leased to regional and national retailers, including
Giant Food Stores Inc., Toys 'R' Us Inc. and Walgreen Co.
The Company believes that Meadowbrook Commons is well positioned as one of
the strongest regional shopping 'power' centers on the south shore of Long
Island due to its excellent location and the growth in the Nassau County
economy.
The following table sets forth certain information regarding the Company's
leasing activities over the past two year, nine-month period for Meadowbrook
Commons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, 1997 1996 1995
--------------------- --------------------- ---------------------
ANCHOR NON-ANCHOR ANCHOR NON-ANCHOR ANCHOR NON-ANCHOR
TENANTS TENANTS TENANTS TENANTS TENANTS TENANTS
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
NEW LEASES
Number of leases signed..................... -- -- -- 2 -- --
GLA leased (sq. ft.) -- -- -- 13,400 -- --
Base rent/square foot ($/sq. ft.)(1)........ -- -- -- $ 22.57 -- --
Tenant improvements/square foot
($/sq. ft.)(2)............................ -- -- -- -- -- --
Leasing commissions & costs/square foot
($/sq. Ft.)(3)............................ -- -- -- $ 4.21 -- --
Effective rent/square foot ($/sq. ft.)(4)... -- -- -- $ 22.03 -- --
RENEWALS
Number of leases signed..................... -- -- -- -- -- --
GLA leased (sq. ft.)........................ -- -- -- -- -- --
Base rent/square foot ($/sq. ft.)(1)........ -- -- -- -- -- --
Tenant improvements/square foot
($/sq. ft.)(2)............................ -- -- -- -- -- --
Leasing commissions & costs/square foot
($/sq. ft.)(3)............................ -- -- -- -- -- --
Effective rent/square foot ($/sq. ft.)(4)... -- -- -- -- -- --
TOTAL NEW AND RENEWED LEASES SIGNED
Number of new and renewed leases signed..... -- -- -- 2 -- --
GLA leased (sq. ft.)........................ -- -- -- 13,400 -- --
Base rent/square foot ($/sq. ft.)(1)........ -- -- -- $ 22.57 -- --
Tenant improvements/square foot
($/sq. ft.)(2)............................ -- -- -- -- -- --
Leasing commissions & costs/square foot
($/sq. ft.)(3)............................ -- -- -- $ 4.21 -- --
Effective rent/square foot ($/sq. ft.)(4)... -- -- -- $ 22.03 -- --
</TABLE>
(Footnotes on next page)
100
<PAGE>
(Footnotes from previous page)
- ------------------
(1) Initial total annualized contractual base rent divided by square feet
leased.
(2) Tenant improvements (defined as capital costs incurred by the Company for
leasehold improvements including, but not limited to, costs for items such
as HVAC, plumbing, electrical upgrades, interior walls, wall finishes,
ceiling treatment and floor covering) divided by square feet leased.
(3) Leasing commissions (defined as brokerage commission fees and related
expenses paid by the Company in connection with new leases or lease
renewals) divided by square feet leased.
(4) Initial total annualized contractual base rent minus amortization of tenant
improvements and leasing commissions related to such leases divided by the
total square feet leased.
The following table sets out a schedule of lease expirations for
Meadowbrook Commons for the approximate ten year period beginning in October
1997 and ending in December 2007, assuming that none of the tenants exercises
renewal options or termination rights:
<TABLE>
<CAPTION>
TOTAL
ANNUALIZED PERCENT OF
BASE RENT TOTAL GLA PERCENT OF TOTAL
UNDER TOTAL ANNUALIZED LEASED ANNUALIZED BASE
NUMBER OF GLA UNDER EXPIRING BASE RENT/SQ. FT. REPRESENTED RENT REPRESENTED
YEAR OF LEASE LEASES EXPIRING LEASES UNDER EXPIRING BY EXPIRING BY EXPIRING
EXPIRATION EXPIRING LEASES (SQ. FT.)(1) ($000)(2) LEASES($) LEASES(%) LEASES(%)
- ----------------------------- --------- ------------------- ---------- ----------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
10/1/97 - 12/31/98........... -- -- -- -- -- --
1999......................... 1 1,950 46 24.00 1.1 1.5
2000......................... 2 19,539 455 23.31 11.3 15.0
2001......................... 3 44,765 837 18.69 25.9 27.6
2002......................... 2 6,747 175 25.94 3.9 5.8
2003-2006.................... -- -- -- -- -- --
2007......................... 2 7,908 174 21.95 4.6 5.7
-- ------- ---------- ----- ----- -----
Total/Weighted Average....... 10 80,909 1,687 20.86 46.8 55.6
-- ------- ---------- ----- ----- -----
-- ------- ---------- ----- ----- -----
</TABLE>
- ------------------
(1) All month to month tenants as of September 30, 1997 are considered to have a
lease expiry in the 1997 year.
(2) Total annualized contractual base rents as of September 30, 1997 for tenant
leases expiring in respective periods.
The following table sets forth the average percent leased and average total
annualized contractual base rent per leased square foot for Meadowbrook Commons
as of the dates indicated:
<TABLE>
<CAPTION>
AVERAGE ANNUAL RENT PER
AVERAGE PERCENT LEASED SQUARE
YEAR LEASED(%)(1) FOOT($)(2)
- --------------------------------- ------------------------- -----------------------
<S> <C> <C>
September 30, 1997............... 100.0 17.50
December 31, 1996................ 100.0 17.40
December 31, 1995................ 100.0 17.27
December 31, 1994................ 100.0 16.81
December 31, 1993................ 80.0 17.41
December 31, 1992................ 100.0 18.18
</TABLE>
- ------------------
(1) Average total GLA as of the date indicated.
(2) Average total annualized contractual base rent as of the date indicated
divided by total GLA leased as of such date.
The aggregate cost basis of depreciable real property for federal income
tax purposes for Meadowbrook Commons as of December 31, 1996 was approximately
$17.5 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 Meadowbrook Commons during the fiscal year ended December 31,
1996 was approximately $0.7 million, or approximately $4.16 per square foot of
GLA.
101
<PAGE>
EXCLUDED PROPERTIES
Certain retail properties beneficially owned and controlled by the
principals of Philips Private Company will not be transferred to the Company in
the Formation Transactions (the 'Excluded Properties'). The Excluded Properties
were excluded from the Company's property portfolio for various reasons,
including the following: (i) partnership and lender consent issues precluded the
inclusion of certain properties in the Formation Transactions; (ii) due to
geographic location, inclusion of the property at this time could hinder the
Company's growth strategy, which centers upon an expansion from its initial
(core asset) market hubs, and inclusion of the property would result in either
an economically undesirable administrative burden on the Company or detract from
the Company's near term expansion goals, both to the detriment of shareholder
return; (iii) the Property's contribution to net cash flow, either initially or
over the next few years, is either unquantifiable, uncertain or likely to be
highly uneven, and inclusion of such an asset could contradict the Company's
philosophy, embodied by the assets to be contributed, that a stable base of the
highest quality assets is a prerequisite for the Company's sustained growth and
the maximization of shareholder return; (iv) the valuation of certain
properties, including debt encumbering such properties, make the properties
economically undesirable to acquire at this time; and (v) the asset profile is
not consistent with the Company's acquisition criteria. Mr. Pilevsky, Ms. Levine
and the Management Company have agreed to conduct all their future management,
operations, acquisitions and development of retail shopping center properties in
accordance with the terms of the Non-Competition Agreement.
The Excluded Properties consist of the following (not including non-retail
properties and retail properties with less than 20,000 rentable square feet):
seven properties located in California, Washington, Minnesota and Illinois,
aggregating approximately 769,300 square feet of GLA and individually ranging
from 72,655 to 164,281 square feet of GLA; six properties located in
Connecticut, Delaware, Pennsylvania and Kentucky, aggregating approximately
872,600 square feet of GLA and individually ranging from 90,077 to 202,701
square feet of GLA; thirteen properties located in New Jersey, New York and
Florida, aggregating approximately 1,533,900 square feet of GLA and individually
ranging from 24,000 to 381,498 square feet of GLA; a 100 acre development site
in New Jersey currently under contract; a 60,000 square foot renovation site in
New York, currently under contract; and a retail property under consideration in
connection with a hotel development project in South Beach, Florida. Of the
Excluded Properties, only two properties, located in Uniondale and Massapequa,
New York are potentially competitive with Properties of the Company
(specifically, with Merrick Commons and Meadowbrook Commons, respectively),
based on the size and location of such properties. The Uniondale property was
not included in the Company's property portfolio because the property was under
substantial construction, it is not multi-tenanted and it is subject to
substantial indebtedness. The Massapequa property was not included in the
Company's property portfolio because the property is under substantial
redevelopment, it has numerous vacancies and is subject to various partnership
consent issues. The Excluded Properties will continue to be managed by Philips
Private Company, independent of the Company.
102
<PAGE>
ASSUMED INDEBTEDNESS
The following table and related footnotes set forth, as of September 30,
1997, existing debt (in thousands) encumbering the Properties or the partnership
interests in the entity holding title to a Property. In connection with the
Formation Transactions, such indebtedness will be assumed by the Company.
<TABLE>
<CAPTION>
BALANCE INTEREST
AS OF RATE AS OF
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997 MATURITY DATE
------------------ ------------------------- ----------------
<S> <C> <C> <C>
NEW ENGLAND
Branhaven Plaza(1)................... $ 9,415 Lower of LIBOR plus 3.50% November 1998
or Prime plus 0.75%
Elm Plaza(2)
First Mortgage.................... 3,401 9.00% July 2000
Second Mortgage................... 499 No interest due July 2000
Foxboro Shopping Center(2)
First Mortgage.................... 4,286 9.00% July 2000
Second Mortgage................... 214 No interest due July 2000
MID-ATLANTIC
Meadowbrook Commons(3)............... 25,831 LIBOR plus 2.50% March 1998
Merrick Commons and
Mill Basin Plaza.................. 25,854 7.28% January 2003
Forest Avenue Shoppers Town(4)(6).... 23,940 LIBOR plus 1.75% June 1998
Millside Plaza(2)
First Mortgage.................... 4,477 9.00% July 2000
Second Mortgage................... 223 No interest due July 2000
SOUTHEAST
Palm Springs Mile(5)
First Mortgage(7)................. 24,088 LIBOR plus 2.50% June 1998
First Mortgage.................... 42,120 7.83% February 2004
Mortgage note..................... 12,750 LIBOR plus 2.75% June 1998
The Shoppes at Lake Mary
First Mortgage.................... 550 Prime plus 2.00% October 1998
------------------
$177,648
------------------
------------------
</TABLE>
- ------------------
(1) The Company is required to make quarterly amortization payments equal to
fifty percent of the property's preceding quarter's net cash flow. The
Company has two options to extend the maturity date of this loan for six
months each, each upon the payment of a fee equal to 0.5% of principal
balance at the time of exercise.
(2) Elm Plaza, Millside Plaza and Foxboro Shopping Center loans are all
cross-collateralized. Subsequent to September 30, 1997, the lender committed
in writing to, as of the closing of the Formation Transactions, (i) extend
the maturity date to December 2002, fix the interest rate at 175 basis
points above the 5-year U.S. Treasury yield, and commence amortization on a
30-year repayment schedule, and (ii) eliminate the obligation to repay the
second mortgage loan. See Note 3 to The Philips Company Combined Financial
Statements.
(3) The Company is required to make quarterly amortization payments of the
excess cash flow from the preceding quarter.
(4) At the Company's option, the maturity date of this loan may be extended to
either June 2004 or June 2007. The loan requires monthly principal
amortization of $30. The lender has agreed, effective with the January 1,
1998 payment date, to suspend amortization until closing of the Formation
Transactions. Amortization will recommence at a rate of $30 per month
beginning with the first day of the calendar month following closing
(Footnotes continued on next page)
103
<PAGE>
(Footnotes continued from previous page)
of the Formation Transactions and if the loan is extended, amortization
should be based upon a 30-year amortization schedule.
(5) On August 8, 1997 PL Palm Springs LP, a limited partner in Palm Springs Mile
Associates, Ltd. ('Limited') acquired the interest of certain other partners
in Limited for approximately $15,900 payable in cash of $2,900 and $13,000
in notes. The notes bear interest at LIBOR plus 2.75% and are secured by a
pledge of certain of the partnership interests in Limited and a pledge of
certain partnership interests in Forest Avenue Shopping Associates. A
default under these notes will result in a default under the Forest Avenue
Shoppers Town loan. The notes are due June 1998. The notes require monthly
principal amortization of $250. The lender has agreed, effective with the
January 1, 1998 payment date, to suspend amortization until closing of the
Formation Transactions. Amortization will recommence at a rate of $250 per
month beginning with the first day of the calendar month following closing
of the Formation Transactions. The lender has agreed to make an additional
loan to the borrower in the amount of $1,000, resulting in a total
outstanding principal amount of $13,000 at the closing of the Formation
Transactions. This $1,000 additional loan will bear interest at LIBOR plus
1.75% and will mature in June 1998.
(6) The lender has agreed to make a second mortgage loan of $150 to the
borrower, resulting in a total outstanding principal amount of $24,000 at
the closing of the Formation Transactions. The $150 loan will bear interest
at LIBOR plus 1.75% and will mature in June 1998; provided that, at the
Company's option, the maturity date of the $150 loan may be extended to
either June 2004 or June 2007.
(7) Discussions are in progress with the lender concerning (i) the re-advance of
approximately $400 of amortization which has occurred on the loan since
August 1, 1997, and (ii) the suspension of required amortization payments of
$37.5 per month until the first day of the month following closing of the
Formation Transactions. The funds re-advanced would bear interest at LIBOR
plus 2.5%, and would mature in June 1998. The re-advance, if approved, would
occur prior to closing of the Formation Transactions.
104
<PAGE>
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's investment objectives and
policies, financing policies and policies with respect to certain other
activities. These policies may be amended or revised from time to time at the
discretion of the Board of Directors unilaterally and without a vote of the
Company's shareholders. Any such change would be made by the Board of Directors,
however, only after a review and analysis of such change, in light of then
existing business and other circumstances, and then only if, in the exercise of
their business judgment, they believe that it is advisable to do so in the best
interest of the Company. No assurance can be given that the Company's investment
objectives will be attained or that the value of the Company will not decrease.
INVESTMENT OBJECTIVES AND POLICIES
In general, the Company's investment objectives are: (i) to increase the
value of the Company through increases in the cash flows and values of the
Properties (and any shopping centers or related properties hereafter acquired,
developed or expanded); (ii) to achieve long-term capital appreciation, and
preserve and protect the value of its interest in the Properties (and any
shopping centers or related properties hereafter acquired, developed or
expanded); and (iii) to provide quarterly or other periodic cash distributions,
a portion of which is expected to constitute a nontaxable return of capital
because it will exceed the Company's current and accumulated earnings and
profits, as well as to provide growth in distributions over time.
REAL ESTATE INVESTMENT POLICIES AND CRITERIA
The Company plans to invest primarily in neighborhood, community and
non-enclosed regional retail properties in major metropolitan and suburban
areas. In connection with future acquisitions, the Company will analyze various
factors, including, but not limited to:
o the location, accessibitility and visibility of the property,
o demographic profile,
o redevelopment potential of the property,
o the purchase price,
o the current and historical occupancy levels of the shopping centers
and of comparable properties in comparable locations,
o the characteristics of tenants, including anchor tenants, and the
terms of their leases,
o the quality of the construction and design of improvements,
o the relationship or fit of the shopping center with the other assets
owned by the Company,
o existing, proposed and potential competition,
o trade area, and
o local, regional and national economic trends.
The Company plans to invest in properties both for income and for capital
appreciation.
DISPOSITIONS
The Company has no current intention to dispose of any of the Properties,
but does reserve the right to do so if, based upon its periodic review of the
Company's portfolio, it determines that such action would be in the best
interests of the Company.
OTHER INVESTMENTS
Subject to the percentage of ownership limitations and gross income and
asset tests necessary for REIT qualification (see 'Federal Income Tax
Considerations'), the Company may also invest in securities of concerns engaged
in real estate activities or securities of other issuers. The Company may also
invest in the securities of other issuers in connection with acquisitions of
indirect interest in properties (normally general or limited
105
<PAGE>
partnership interests in special purpose partnerships owning properties). The
Company may in the future acquire some, all or substantially all of the
securities or assets of, or may capitalize or recapitalize, other REITs or
similar entities where such investment would be consistent with the Company's
investment policies. However, the Company does not anticipate investing in
issuers of securities (other than REITs in order to acquire interests in real
property) for the purpose of exercising control or acquiring any investments
primarily for sale in the ordinary course of business or holding any investments
with a view to making short-term profits from their sale. The Company may also
acquire loans secured by properties, including properties that the Company
desires to ultimately acquire. In addition, the Company may acquire minority or
controlling joint venture interests in properties. In any event, the Company
does not intend that its investments in securities will require the Company to
register as an 'investment company' under the Investment Company Act of 1940,
and the Company intends to divest securities before any such registration would
be required. The Company has not and does not intend to engage in material
trading, underwriting, agency distribution or sale of securities of other
issuers.
FINANCING
At September 30, 1997, after giving effect to the consummation of the
Formation Transactions, the Company would have a Debt-to-Total Capitalization
Ratio of approximately 70% (assuming a Net Asset Value of $50.00 per share of
Common Stock). See 'Capitalization' and the Company's Pro Forma Condensed
Combined Financial Statements elsewhere in this Proxy Statement/Prospectus. The
Company currently intends to adhere to a policy of maintaining a Debt-to-Total
Capitalization Ratio (based on total market capitalization) of not more than 50%
after completion of an Offering. No assurance can be given in this regard,
however, and the organizational documents of the Company do not limit the amount
or percentage of indebtedness that it may incur. The Company may from time to
time reevaluate its debt financing policy accordingly. As a result, the Company
may increase its Debt-to-Total Capitalization Ratio beyond the limits described
above. See 'Risk Factors--Risks Associated with Debt Financing--No Limitation on
Debt.' If the Board of Directors determines that additional funding is required,
the Company may raise such funds through additional equity offerings, debt
financing or retention of cash flow (subject to provisions in the Code
concerning taxability of undistributed income), or a combination of these
methods.
Indebtedness incurred by the Company may be in the form of purchase money
obligations to the sellers of properties, or in the form of publicly or
privately placed debt instruments, financing from banks, institutional
investors, or other lenders, any of which indebtedness may be unsecured or may
be secured by mortgages or other interests in the Property. Such indebtedness
may be recourse, non-recourse or cross-collateralized and, if recourse, such
recourse may include the Company's general assets and, if non-recourse, may be
limited to the particular property to which the indebtedness relates. In
addition, the Company may invest in properties subject to existing loans secured
by mortgages, deeds of trust or similar liens on the properties, or may
refinance properties acquired on a leveraged basis. The proceeds from any
borrowings by the Company may be used for working capital, to purchase
additional partnership interests in partnerships or joint ventures in which the
Company participates, to refinance existing indebtedness or to finance
acquisitions, expansion or development of new properties. The Company may also
incur indebtedness for other purposes when, in the opinion of the Board of
Directors, it is advisable to do so. In addition, the expected size of the
Company's distributions may not allow the Company, using only cash flow from
operation, to fund 100% of (i) the tenant allowances associated with renewal or
replacement of current tenants as their leases expire and (ii) the retirement of
all of its debt when due, and therefore, the Company may borrow to meet the
taxable income distribution requirements under the Code if the Company does not
have sufficient cash available to meet those distribution requirements.
The Company intends to finance acquisitions with the most appropriate
sources of capital, which may include undistributed Funds from Operations, the
issuance of equity securities including through the operation of any dividend
reinvestment plan adopted by the Company, the sale of assets, bank and other
institutional borrowings and the issuance of debt securities.
The Company does not have a policy limiting the number or amount of
mortgages that may be placed on any particular property, but mortgage financing
instruments may, and usually do, limit additional indebtedness on such
properties.
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<PAGE>
EQUITY CAPITAL
The Board of Directors has the authority, without shareholder approval, to
issue additional shares of Common Stock and Preferred Stock or otherwise raise
capital, including through the issuance of senior securities, in any manner and
on such terms and for such consideration it deems appropriate, including in
exchange for property. Existing shareholders will have no preemptive right to
shares of Common Stock or other shares of capital stock issued in any offering,
and any such offering might cause a dilution of a stockholder's investment in
the Company. Although it has no current plans to do so, the Company may in the
future issues securities in connection with acquisitions.
WORKING CAPITAL RESERVES
The Company will seek to maintain working capital reserves (and when not
sufficient, access to borrowings) in amounts that the Board of Directors
determines to be adequate to meet normal contingencies in connection with the
operation of the Company's business and investments. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources.'
ANNUAL REPORTS
The Company has not issued annual reports to shareholders. Following the
consummation of the Formation Transactions, the Company will issue annual
reports, and other reports to shareholders, as required by the United States
securities laws, and will include annual financial statements certified by
independent public accountants.
OTHER POLICIES
The Company may, under certain circumstances, purchase shares of Common
Stock in the open market or in private transactions with its shareholders, if
such purchases are approved by the Board of Directors. The Board of Directors
has no present intention of causing the Company to repurchase any such shares,
and any such action would only be taken in conformity with applicable federal
and state laws and the applicable requirements for qualifying as a REIT. The
Company may also institute dividend reinvestment programs.
The Company has adopted certain policies to reduce or eliminate potential
conflicts of interest. Following consummation of the Formation Transactions, any
transaction between the Company and Philips Private Company must be approved by
a majority of the Independent Directors. 'Independent Directors' means those
members of the Board of Directors who are not officers or employees of the
Company, or directors, officers or employees of Philips Private Company or their
respective affiliates or any of their predecessors. In addition, the Company has
adopted a policy prohibiting any loans from the Company to the Philips Private
Company. Except as set forth above and the other transactions described herein
between the Company and such parties, any transaction between the Company and
any officer or director or principal shareholder (including any loan to or
borrowing from any such officer, director or principal shareholder or any
acquisition of assets or other property from or sale of assets or other property
to any such officer, director or principal shareholder) must be approved by a
majority of the disinterested directors.
The Company's policies with respect to all activities described may be
reviewed and modified from time to time by the Board of Directors without the
vote of the shareholders and the Board of Directors may, without the approval of
shareholders, alter the Company's investment, acquisition, financing and other
policies if it determines in the future that such a change is in the best
interest of the Company and its shareholders.
At all times, however, the Company intends to make investments in such a
manner as to be consistent with the requirement of the Code to qualify as a REIT
unless, because of circumstances or changes in the Code (or in the Treasury
Regulations), the Board of Directors, with the consent of a majority the holders
of the Common Stock, determines to revoke the Company's REIT election.
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MANAGEMENT
BOARD OF TRUSTEES OF NATIONAL
The current Board of Trustees of National are:
<TABLE>
<CAPTION>
NAME AGE
- -------------------------------------------------------------------- ---
<S> <C>
Peter M. Stein, Managing Trustee.................................... 45
Jay W. Goldman, Trustee............................................. 51
Robert R. Reibstein, Trustee........................................ 41
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Board of Directors of the Company is comprised of seven directors, four
of whom are Independent Directors.
The Board of Directors is responsible for the general policies of the
Company and the general supervision of the Company's activities conducted by its
officers, agents, advisors, managers or independent contractors, as may be
necessary in the course of the Company's business.
The directors and executive officers of the Company (each of whom will
serve as such following consummation of the Formation Transactions) are as
follows:
<TABLE>
<CAPTION>
DIRECTOR
TERM
NAME AGE POSITION EXPIRES
- ------------------------------------------ ---- ------------------------------------------ --------
<S> <C> <C> <C>
Philip Pilevsky........................... 51 Director, Chairman of the Board and Chief 2001
Executive Officer
Louis J. Petra............................ 44 Director and President 1999
Sheila Levine............................. 40 Director, Chief Operating Officer, 2000
Executive Vice President and Secretary
Brian J. Gallagher........................ 41 Chief Financial Officer, Director of N/A
Acquisitions and Treasurer
Andrew Aberham............................ 39 Director of Leasing N/A
Arnold Penner............................. 61 Director 2001
A.F. Petrocelli........................... 54 Director 2000
Elise Jaffe............................... 42 Director 1999
Robert Grimes............................. 53 Director 2001
</TABLE>
Philip Pilevsky. Mr. Pilevsky is Chairman of the Board, Chief Executive
Officer and a Director of the Company, and has served as Chief Executive Officer
and President of Philips International Holding Corp. since its formation in
1982. Mr. Pilevsky has been involved in the real estate business for 25 years,
including the development, leasing, management, operation, acquisition and
disposition of commercial properties. Together with Ms. Levine, he founded the
entities that now comprise Philips International Holding Corp. and its
affiliates. Mr. Pilevsky is a nationally recognized member of the real estate
community, providing the Company with strategic leadership and a broadly-based
network of relationships. Outside the business world he is renowned as an
educator, author in the field of international relations and frequent
commentator for Fox 5 and CNBC. Mr. Pilevsky received a Bachelor of Arts degree
from C.W. Post College and a Masters Degree of Arts and a Masters Degree of
Education from Columbia University. Mr. Pilevsky is the brother of Ms. Levine.
Louis J. Petra. Mr. Petra is President and a Director of the Company.
Prior to joining the Company, he served as Chief Financial Officer, Vice
President and Treasurer of Kimco Realty Corporation from July 1984 through June
1997. Mr. Petra has extensive experience in the financial management,
administration and control of public and private real estate companies, with
particular knowledge of the shopping center industry and the REIT structure. Mr.
Petra received a Bachelor of Science in Accounting from St. John's University
and is a member of the American Institute of Certified Public Accountants and
the New York State Society of Certified Public Accountants.
Sheila Levine. Ms. Levine is Chief Operating Officer, Executive Vice
President and a Director of the Company, and has served as Chief Operating
Officer and Executive Vice President of Philips International Holding Corp.
since 1992. Ms. Levine coordinates and supervises the daily overall operations
of the Company including acquisitions, development, property management, finance
and asset management, construction, leasing and marketing for each property in
the Company's portfolio. Ms. Levine is responsible for property development,
108
<PAGE>
which entails setting the management direction from pre-construction planning to
the marketing and leasing strategies of the ground-up construction project. She
has been involved in the real estate business for 18 years and, together with
Mr. Pilevsky, founded the entities that now comprise Philips International
Holding Corp. and its affiliates. Ms. Levine received a Bachelor of Science in
Business Administration from Hofstra University's School of Business in 1979.
Ms. Levine is the sister of Mr. Pilevsky.
Brian J. Gallagher. Mr. Gallagher is Chief Financial Officer and Director
of Acquisitions of the Company, and has served as the Director of Finance and
Acquisitions of Philips International Holding Corp. since 1989. Mr. Gallagher is
primarily responsible for capital deployment and capital management of the
Company, including obtaining financing and structuring and negotiating
acquisitions and joint ventures. Since joining Philips Private Company, he has
been responsible for transactions valued at over $1 billion. Prior to joining
the Company, Mr. Gallagher held positions in commercial real estate finance with
Credit Alliance Corporation and National Westminister Bank USA where he was
responsible for project finance and major account relationships. He received a
Bachelor of Science and a Master's degree in City and Regional Planning from
Ohio State University.
Andrew Aberham. Mr. Aberham is Director of Leasing of the Company. Mr.
Aberham has been responsible for marketing, development and leasing of the
Philips Private Company retail portfolio since 1995, including leasing and
negotiating over 300 retail lease transactions. From 1986 to 1995, Mr. Aberham
served as leasing director for Irving & Sol Goldman, et al., during which time
he negotiated over 500 lease transactions, leasing in excess of 2.5 million
square feet. Mr. Aberham received a Bachelor of Arts degree from the State
University of New York at Oneonta, and has received additional degrees in real
estate investment and construction management from New York University.
Arnold Penner. Arnold Penner is a Director of the Company. For the past
thirty years Mr. Penner has been active in the real estate market as a real
estate broker and investor in a diverse portfolio of properties, including
office buildings, retail properties and garages. Mr. Penner is a Director of
United Capital Corp., an American Stock Exchange listed company specializing in
the investment and management of real estate assets and the manufacturing and
sale of knitted wire, antenna and transformer products to a global customer
base. Mr. Penner also is involved with several philanthropic organizations
devoted to children's education.
A.F. Petrocelli. Mr. Petrocelli is a Director of the Company. He has
served as Chairman of the Board and Chief Executive Officer of United Capital
Corp. since December 1987 and President since 1991. Mr. Petrocelli currently
owns over 65% of United Capital and has been a Director of United Capital since
1981. United Capital is an American Stock Exchange listed company specializing
in the investment and management of real estate assets and the manufacture and
sale of knitted wire, antenna and transformer products to a global customer
base. Mr. Petrocelli also serves on the Board of Directors of Prime Hospitality
Corp., a New York Stock Exchange listed company, and Nathan's Famous Inc.
Elise Jaffe. Ms. Jaffe is a Director of the Company. Ms. Jaffe has served
as Senior Executive Vice President of Real Estate for Dress Barn, Inc., a major
women's apparel retailer owning approximately 725 stores within the United
States, since 1994. She has been with Dress Barn for 15 years and serves on its
Executive Committee. Ms. Jaffe is on the Advisory Board of the International
Council of Shopping Centers/Value Retail News and is Vice President and the
Treasurer of the Paul Taylor Dance Foundation. Ms. Jaffee graduated magna cum
laude from Tufts University with a Bachelor of Arts in English and Psychology.
Robert Grimes. Mr. Grimes is a Director of the Company. He has served as
President of RS Grimes Co., Inc., an investment company, since September 1987.
Mr. Grimes has also been a Director and Executive Vice President of Auto-By-Tel
Corporation since July 1996. From April 1981 to March 1987, Mr. Grimes was a
partner with the investment firm of Cowen & Company. Mr. Grimes holds a Bachelor
of Science from Wharton School of Commerce and Finance at the University of
Pennsylvania and an L.L.B. from the University of Pennsylvania Law School.
Each of the directors serves from the date of his or her election until the
annual meeting of shareholders relating to the election of such class of
directors. A director may be removed only for cause and only upon the
affirmative vote of shareholders holding at least two-thirds of the outstanding
shares of Common Stock. See 'Certain Provisions of Maryland Law and the
Company's Charter and By-Laws--Number of Directors; Removal; Filling Vacancies.'
109
<PAGE>
The executive officers are chosen by and serve at the discretion of the
Board of Directors. See '--Executive Compensation.'
COMPENSATION OF DIRECTORS
Initially each director who is not an executive officer of the Company will
be paid $10,000 per year plus $750 for attendance in person at each meeting of
the Board of Directors, $500 for attendance in person at each meeting of a
committee thereof, if such meeting is held on a day other than the day of a
Board meeting, and $250 for each telephonic meeting participation. Each director
who is not an executive officer of the Company will also receive a grant of
options to purchase 4,000 shares of Common Stock under the Company's Stock
Option Plan (as defined below) upon his or her initial election to the Board,
which vest equally on the first, second and third anniversaries of the date of
such grant. See '--Stock Option Plan.' Executive Officers of the Company will
not be compensated for their services as directors. Each director will be
reimbursed for expenses relating to attendance at meetings of the Board of
Directors or any committee thereof.
Each of Messrs. Penner, Petrocelli and Grimes and Ms. Jaffe will be granted
options prior to consummation of the Formation Transactions in connection with
his or her initial election to the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. Promptly following the consummation of the Formation
Transactions, the Board will establish an Audit Committee that will consist of
at least two Independent Directors and will not include any members of
management. The Audit Committee will be established to make recommendations
concerning the engagement of independent public accountants, review with the
independent public accountants the plans and results of the audit engagement,
approve professional services provided by the independent public accountants,
review the independence of the independent public accountants, consider the
range of audit and non-audit fees and review any recommendations made by the
Company's auditors regarding the Company's accounting methods and the adequacy
of its systems of internal accounting control. The Audit Committee members will
initially be Mr. Petrocelli and Ms. Jaffe.
Compensation Committee. Promptly following the consummation of the
Formation Transactions, the Board intends to establish a Compensation Committee
that will consist of not less than two Independent Directors. The Compensation
Committee will determine compensation for the Company's executive officers, in
addition to administering the Company's Stock Option Plan and making
recommendations to the directors with respect to the Company's compensation
policies. The Compensation Committee members will initially be Ms. Levine and
Messrs. Penner and Grimes.
EXECUTIVE COMPENSATION
The following table below sets forth the annual base salary rates and other
compensation expected to be paid in 1998 to the Company's Chief Executive
Officer and each of the Company's three other executive officers who are
expected to have a total annual salary in excess of $100,000 (collectively, the
'Named Executive Officers'). The Company has entered into, or will enter into
prior to consummation of the Formation Transactions, an employment agreement
with three of its executive officers as described below. See '--Employment
Agreements.'
<TABLE>
<CAPTION>
1998 BASE OPTIONS
NAME TITLE SALARY RATE GRANTED(1)
- ------------------------------------------- ---------------------------- ------------ ----------
<S> <C> <C> <C>
Philip Pilevsky............................ Chief Executive Officer $ 0 96,000
Louis J. Petra............................. President $175,000 40,000(2)
Sheila Levine.............................. Chief Operating Officer $175,000 40,000(2)
and Executive Vice President
Brian J. Gallagher......................... Chief Financial Officer $150,000 10,000(3)
</TABLE>
- ------------------
(1) All options will be granted pursuant to the Company's Stock Option Plan and
will be exercisable at a price per share equal to $50.00. The number of
options and exercise price per share will be adjusted appropriately in the
event of an Offering.
(2) Upon the completion of an Offering (and following any related stock splits
and anti-dilution adjustments), such number shall increase to a minimum of
100,000 options to purchase shares of Common Stock.
(3) Upon the completion of an Offering (and following any related stock splits
and anti-dilution adjustments), such number shall increase to a minimum of
25,000 options to purchase shares of Common Stock.
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<PAGE>
EMPLOYMENT AGREEMENTS
Sheila Levine Employment Agreement. Ms. Levine will enter into an
employment agreement with the Company (the 'Levine Employment Agreement'),
effective as of consummation of the Formation Transactions, providing for an
initial term of three years, subject to automatic one-year extensions. Ms.
Levine's annual base salary is $175,000, with annual increases in the discretion
of the Board of Directors or Compensation Committee of the Board of Directors.
Ms. Levine is also entitled to receive a minimum of twenty-five (25%) of the
annual bonus pool, with the amount of the Company's annual bonus pool to be
determined in the discretion of the Board of Directors. In addition, the Company
will issue Ms. Levine options which entitle Ms. Levine to acquire 40,000 shares
of Common Stock (increasing to a minimum of 100,000 shares of Common Stock upon
completion of an Offering and following any related stock splits and
anti-dilution adjustments) under the Company's Stock Option Plan (as defined
below), which options vest 33 1/3% on each of the first, second and third
anniversaries of the Levine Employment Agreement. Ms. Levine is required to
devote substantially all of her business time to the affairs of the Company. Ms.
Levine is entitled to a continuation of her annual base salary and bonus through
the end of her employment period should the Company terminate her employment
other than for cause, should she terminate her employment for good reason or
should there be a change in control. In addition, upon such a termination or
upon a change in control, the vesting of all options and restricted share awards
granted shall be accelerated.
Louis J. Petra Employment Agreement. Mr. Petra will enter into an
employment agreement with the Company (the 'Petra Employment Agreement'),
effective as of September 2, 1997, providing for a term of five years four
months. Mr. Petra's initial base salary is $175,000, with an increase to
$200,000 for the 2001 calendar year and $225,000 for the 2002 calendar year. Mr.
Petra is also entitled to receive a portion of the Company's annual bonus pool
to be determined in the discretion of the Board of Directors. Mr. Petra will
receive at the closing of the Formation Transactions options to purchase 40,000
shares of Common Stock (increasing to a minimum of 100,000 shares of Common
Stock upon completion of an Offering and following any related stock splits and
anti-dilution adjustments) under the Company's Stock Option Plan, with 25% of
the options vesting on December 31 of each of 1999, 2000, 2001 and 2002. In
addition, upon closing of an Offering, the Company shall loan on a non-recourse
basis to Mr. Petra $1,000,000, the proceeds of which shall be used to
simultaneously purchase newly issued Common Stock (the 'Acquisition Loan'). The
Acquisition Loan shall be forgiven in two $500,000 installments on December 31,
2000 and December 31, 2002. Mr. Petra is entitled to receive dividends on the
Common Stock purchased with the proceeds of the Acquisition Loan, net of
interest which accrues on the outstanding balance of such loan at 6% per annum.
Mr. Petra is required to devote substantially all of his business time to the
affairs of the Company and is subject to customary non-competition provisions.
If a $100,000,000 public equity offering has not occurred on or before June 1,
1998, either party may terminate Mr. Petra's employment between June 1, 1998 and
September 1, 1998, in which case Mr. Petra shall receive a severance payment
equal to $7,500 for each month elapsed from August 1, 1997 through the date of
termination. Either party may terminate the Petra Employment Agreement on or
after December 31, 2000, in which event Mr. Petra shall receive his accrued but
unpaid salary through his termination date, the balance of his options shall
fully vest, a pro-rata portion (based upon the number of days Mr. Petra's
employment was extended beyond December 31, 2000) of the $500,000 outstanding
balance of the Acquisition Loan shall be forgiven and the repayment of any
remaining outstanding balance thereafter shall be accelerated. If Mr. Petra's
employment is terminated for any reason other than for cause or with good reason
between June 1, 1998 and December 31, 2000, Mr. Petra shall be entitled to
continuation of his salary through December 31, 2000, a pro rata bonus payment,
forgiveness of $500,000 of the Acquisition Loan and the repayment of the
outstanding balance thereafter shall be accelerated. In addition, Mr. Petra
shall have a fully vested non-forfeitable right to any options or restricted
shares granted to him. If Mr. Petra is actively employed on the date of a change
in control, the full outstanding balance of the Acquisition Loan shall be
forgiven, all options and restricted share awards shall be fully vested and the
noncompetition provisions shall no longer apply. If such a change in control
occurs between June 1, 1998 and December 31, 2000 and Mr. Petra's employment is
terminated by the Company or its successor on or after the date of the change in
control, Mr. Petra shall be entitled to receive a pro-rata bonus payment and
continuation of his salary through December 31, 2000.
Brian J. Gallagher Employment Agreement. The Company expects to enter into
an employment agreement with Mr. Gallagher, effective as of consummation of the
Formation Transactions, which will provide, among other things, for (i) a three
year term and an initial base salary of $150,000, (ii) Mr. Gallagher's
participation in the Company's annual bonus pool, with the amount of such bonus
pool to be determined in the discretion of the
111
<PAGE>
Board of Directors, and (iii) the grant of options to acquire 10,000 shares of
Common Stock (increasing to a minimum of 25,000 shares of Common Stock upon
completion of an Offering and following any related stock splits and
anti-dilution adjustments) under the Company's Stock Option Plan, which options
vest 33 1/3% on each of the first, second and third anniversaries of the
Gallagher employment agreement.
Each of the employment agreements will be governed by the laws of the State
of New York. Under New York law, a company cannot specifically enforce an
employment agreement with respect to continued services but may sue for money
damages and seek other relief in the event that an employee materially breaches
its employment agreement.
The foregoing summaries of the Levine Employment Agreement and the Petra
Employment Agreement are qualified in their entirety by reference to the terms
of the respective agreements, copies of the forms of which have been filed as
exhibits to the Registration Statement of which this Proxy Statement/Prospectus
is a part. Copies of each of the employment agreements may be examined, and
copies obtained, as set forth under the caption 'Available Information.'
Although the Company does not expect to enter into an employment agreement
with Mr. Pilevsky, Mr. Pilevsky will have a significant ownership interest in
the Company through his ownership of 10,660 shares of Common Stock
(approximately 22.4% of the outstanding shares of Common Stock, excluding
interests redeemable or convertible therefor and shares of Common Stock issuable
upon exercise of outstanding warrants), 964,641 Units representing approximately
62.5% of the outstanding shares of Common Stock (including interests redeemable
or convertible therefor and the exercise of outstanding warrants), and the grant
of 96,000 options to purchase Common Stock which vest over a three-year period.
In addition, Mr. Pilevsky will be subject to a non-compete agreement which will
limit his ability to engage in certain real estate activities. See 'Management
Agreement and Non-Competition Agreement--Non-Competition Agreement.'
STOCK OPTION PLAN
Effective immediately prior to consummation of the Formation Transactions,
the Company intends to adopt the Philips International Realty Corp. 1997 Stock
Option and Long-Term Incentive Plan (the 'Stock Option Plan') for the purpose of
attracting, retaining and maximizing the performance of executive officers and
key employees, attracting and retaining individuals with renown, ability and
intelligence to serve the Company as directors and consultants, and providing a
direct link between the compensation of such individuals with increases in
shareholder value. A total of 500,000 shares of the authorized shares of Common
Stock (subject to adjustment) have been reserved by the Company for issuance of
awards under the Stock Option Plan. The Stock Option Plan has a term of ten
years.
The Stock Option Plan provides for the grant of 'incentive stock options'
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, non-statutory stock options, and restricted stock awards. The Stock
Option Plan will be administered by the Compensation Committee of the Board of
Directors. The exercise price for incentive stock options and non-statutory
options may not be less than 100% of the fair market value of shares of Common
Stock on the date of grant (110% of fair market value in the case of incentive
stock options granted to employees who hold more than 10% of the voting power of
the Company's issued and outstanding shares of Common Stock).
Options granted under the Stock Option Plan may not have a term of more
than ten years (five years in the case of incentive stock options granted to
employees who hold more than 10% of the voting power of the Company's issued and
outstanding shares of Common Stock) and generally vest over a three-year period.
Options generally terminate three months after the optionee's termination of
employment by the Company for any reason other than death, disability or
retirement, and are generally not transferable by the optionee other than by
will or the laws of descent and distribution.
To the extent that the aggregate fair market value of stock with respect to
which 'incentive stock options' (within the meaning of Section 422 of the Code,
but without regard to Section 422(d) of the Code) are exercisable for the first
time by an optionee during any calendar year (under the Stock Option Plan and
all other incentive stock option plans of the Company, any subsidiary and any
parent corporation) exceeds $100,000, such options shall be taxed as
non-qualified stock options. The rule set forth in the preceding sentence shall
be applied by taking options into account in the order in which they were
granted. For this purpose, the fair market value of stock shall be determined as
of the time that the option with respect to such stock is granted.
112
<PAGE>
The Board of Directors granted options, each with a ten-year term, to
purchase up to 261,600 shares of Common Stock at an exercise price of $50.00 per
share to the following directors, executive officers and employees of the
Company and the Management Company. The number of options granted and exercise
prices of all outstanding options will be appropriately adjusted to reflect a
public stock offering.
<TABLE>
<CAPTION>
NAME OPTIONS GRANTED
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Philip Pilevsky.............................................................. 96,000(1)
Louis Petra.................................................................. 40,000(2)
Sheila Levine................................................................ 40,000(1)
Brian Gallagher.............................................................. 10,000(1)
Andrew Aberham............................................................... 2,000(1)
A.F. Petrocelli.............................................................. 4,000(1)
Elise Jaffe.................................................................. 4,000(1)
Robert Grimes................................................................ 4,000(1)
Arnold Penner................................................................ 4,000(1)
Management Company........................................................... 54,400(1)
Other employees.............................................................. 3,200(1)
---------------
Total........................................................................ 261,600
---------------
---------------
</TABLE>
- ------------------
(1) Options will vest 33 1/3% on each of the first, second and third
anniversaries of the date of such grant. Upon completion of an Offering (and
following any related stock splits and anti-dilution adjustments) Ms.
Levine's options shall increase to a minimum of 100,000 options to purchase
shares of Common Stock and Mr. Gallagher's options shall increase to a
minimum of 25,000 options to purchase shares of Common Stock.
(2) Options will vest 25% on December 31 of each of 1999, 2000, 2001 and 2002.
Such options shall be granted upon the closing of the Formation
Transactions. Upon the completion of an Offering (and following any related
stock splits and anti-dilution adjustments), such number shall increase to a
minimum of 100,000 options to purchase shares of Common Stock.
The Stock Option Plan also provides for restricted stock awards which
consist of grants of shares of Common Stock subject to a restricted period
during which the restricted shares may not be sold, assigned, transferred, made
subject to a gift, or otherwise disposed of, mortgaged, pledged or otherwise
encumbered. At this time the Board of Directors has not granted, and does not
have any plans to grant, restricted shares of Common Stock.
THE 401(K) PLAN
Effective upon the consummation of the Formation Transactions, the Company
intends to establish the Philips International Realty Corp. 401(k) Savings and
Retirement Plan (the '401(k) Plan') to cover eligible employees of the Company
and any designated affiliates.
The 401(k) Plan will permit eligible employees of the Company (and any
designated affiliate) to defer up to 15% of their annual compensation, subject
to certain limitations imposed by the Code. The employees' elective deferrals
are immediately fully vested and non-forfeitable upon contribution to the 401(k)
Plan. The Company currently does not intend to make matching contributions to
the 401(k) Plan; however, it reserves the right to make matching contributions
and/or discretionary profit sharing contributions in the future.
The 401(k) Plan is designed to qualify under Section 401 of the Code so
that contributions by employees or by the Company to the 401(k) Plan, and income
earned thereon, are not taxable to employees until withdrawn from the 401(k)
Plan, and so that contributions by the Company, if any, will be deductible by
the Company when made.
INDEMNIFICATION
For a description of the limitation of liability and indemnification rights
of the Company's officers and directors, see 'Certain Provisions of Maryland Law
and of the Company's Charter and Bylaws.'
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain directors and executive officers of the Company (or members of
their immediate families) and persons who will hold more than 5% of the
outstanding shares of Common Stock (or interests redeemable therefor) have
direct or indirect interests in transactions which have been or will be
consummated by the Company, including the transfer of certain Properties and
entities owning Properties to the Company. See 'Formation Transactions and
Structure of the Company.'
TERMS OF TRANSFERS
The terms of the transfers of the Properties (or entities owning the
Properties) to the Company by the Contributing Partnerships were not determined
through arm's-length negotiations. Mr. Pilevsky had a substantial economic
interest in the entities transferring the Properties. In addition, Messrs. Stein
and Goldman will receive the Trustees Stock and the Trustees Warrants in
consideration of their efforts on behalf of National to arrange and carry out
the Formation Transactions and their agreement to vote their National Shares in
favor of the Transaction Agreements. See 'Risk Factors--Conflicts of Interests'
and 'Formation Transactions and Structure of the Company.'
REGISTRATION RIGHTS
For a description of certain registration rights held by the members of the
Philips Group, see 'Shares Available for Future Sale--Registration Rights.'
NON-COMPETITION AGREEMENT
The Management Company, Mr. Pilevsky and Ms. Levine have agreed that they
will not acquire, develop, lease or manage any retail shopping centers in the
United States other than through the Company and with respect to the Excluded
Properties and passive or de minimis investments. See 'Management Agreement and
Non-Competition Agreement.'
PARTNERSHIP AGREEMENT
Concurrently with the consummation of the Formation Transactions, the
Company will enter into the Partnership Agreement with the various limited
partners of the Operating Partnership. See 'Partnership Agreement of Operating
Partnership.' Mr. Pilevsky and Ms. Levine, who are limited partners of the
Operating Partnership, are directors and officers of the Company. In addition,
Mr. Pilevsky, as sole member of the Interim Managing General Partner, will
control the Operating Partnership until completion of an Offering.
MANAGEMENT AGREEMENT
Pursuant to the Management Agreement, the Management Company will provide
management, development, leasing and other services with respect to the
Properties for certain fees which the Company believes are comparable to those
it would pay on an arms'-length basis. See 'Management Agreement and Non-
Competition Agreement.'
MISCELLANEOUS
Jeffrey Levine, the husband of Ms. Levine, is a partner at the accounting
firm of Chassin Levine Rosen & Co., which firm has in the past provided
accounting and consulting services with respect to the entities owning the
Partnership Properties and is likely to provide similar services to the Company
and Philips Private Company in the future. During the 12-month period ended
December 31, 1996, the entities owning the Partnership Properties paid an
aggregate of approximately $200,000 in fees to Chassin Levine Rosen & Co.
Elise Jaffe, a Director of the Company, is also the Senior Executive Vice
President of Real Estate for Dress Barn, Inc., a tenant of certain of the
Properties and of certain of the Excluded Properties. During the 12-month period
ended December 31, 1996, Dress Barn, Inc. paid an aggregate of approximately
$300,000 in rent under leases for certain of the Partnership Properties.
BENEFITS OF THE FORMATION TRANSACTIONS TO CERTAIN EXECUTIVE OFFICERS AND THE
PHILIPS GROUP
In connection with the Formation Transactions, Mr. Pilevsky, Chief
Executive Officer and Chairman of the Board of Directors of the Company, will
receive Units, and Ms. Levine, Chief Operating Officer and Executive Vice
President, will receive Units and certain benefits under her employment
agreement with the Company. In addition, other members of the Philips Group will
receive benefits in connection with the Formation Transactions. See 'Formation
Transactions and the Structure of the Company--Benefits of the Formation
Transactions to the Philips Group.'
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PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of shares of Common Stock (including Common Stock that may be issued
upon redemption of Units) for (i) each person who is expected to be the
beneficial owner of more than a 5% interest in the Company, (ii) each director
and executive officer of the Company who beneficially owns Common Stock, and
(iii) the directors and executive officers of the Company as a group, in each
case after consummation of the Formation Transactions. Except as noted below,
each person has full voting and investment power over the shares indicated.
Voting power includes the power to direct the voting of the shares held, and
investment power includes the power to direct the disposition of shares held.
The extent to which a person will hold Common Stock directly, as opposed to
Units, is set forth in the footnotes below.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SHARES AND UNITS PERCENTAGE OF OF ALL COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) ALL COMMON STOCK(2) STOCK AND UNITS(1)(3)
- ------------------------------------------------- --------------------- ------------------- ---------------------
<S> <C> <C> <C>
Philip Pilevsky ................................. 975,301(4) 95.6 63.1
c/o Philips International Holding Corp.
417 Fifth Avenue, 3rd Floor
New York, NY 10016
Sheila Levine ................................... 115,137(5) 67.4 7.5
c/o Philips International Holding Corp.
417 Fifth Avenue, 3rd Floor
New York, NY 10016
Norman Stark .................................... 179,538(6) 76.3 11.6
c/o Omni Development & Marketing
757 Third Avenue
New York, NY 10017
National Properties Investment Trust ............ 32,000(7) 57.5 2.1
32 Hanson Road
Canton Center, CT 06020
Prudential Securities Incorporated .............. 38,800(8) 41.1 2.5
One New York Plaza
New York, NY 10292
All directors and executive officers as a
group (9 persons) ............................... 1,090,438 96.0 70.6
</TABLE>
- ------------------
(1) Excludes options to purchase 261,600 shares of Common Stock granted to
executive officers, directors, employees and consultants of the Company on
or prior to consummation of the Formation Transactions.
(2) Assumes 47,660 shares of Common Stock outstanding immediately following
consummation of the Formation Transactions. Assumes that all Units
beneficially held by the identified person (and no other person) are
redeemed for Common Stock, or that all shares of Series A Preferred Stock
beneficially held by the identified person are converted into shares of
Common Stock, as the case may be, and that the Trustees Warrants are all
exercised for Common Stock.
(3) Assumes a total of 1,544,460 shares of Common Stock outstanding immediately
following consummation of the Formation Transactions (assuming that all
outstanding Units are redeemed for Common Stock (although such Units are not
redeemable until the first anniversary of the issuance thereof), all shares
of Series A Preferred Stock are converted into Common Stock and the Trustees
Warrants are all exercised for Common Stock).
(4) Represents 10,660 shares of Common Stock and 964,641 Units.
(5) Represents 115,137 Units.
(6) Represents 179,538 Units.
(7) Represents 32,000 shares of Common Stock.
(8) Represents 1,940 shares of Series A Preferred Stock, convertible into 38,800
shares of Common Stock.
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DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The authorized capital stock of the Company consists of 150,000,000 shares
of Common Stock, par value $.01 per share, and 30,000,000 shares of preferred
stock, par value $.01 per share ('Preferred Stock'). Upon consummation of the
Formation Transactions, 47,660 shares of Common Stock will be issued and
outstanding and 1,940 shares of Series A Preferred Stock will be issued and
outstanding.
Each outstanding share of Common Stock will entitle the holder to one vote
on all matters presented to stockholders for a vote, subject to the provisions
of the Company's Charter regarding the ownership of shares of Common Stock in
excess of the Ownership Limit described below and subject to the rights of
holders of Preferred Stock, if any, to a class vote under certain circumstances.
Holders of shares of Common Stock will have no preemptive rights or cumulative
voting rights. All shares of Common Stock to be issued and outstanding following
the consummation of the Formation Transactions will be duly authorized, fully
paid, and nonassessable. Distributions may be paid to the holder of shares of
Common Stock if and when declared by the Board of Directors of the Company out
of funds legally available therefor. See 'Distribution Policy.'
Under Maryland law, shareholders are generally not liable for the Company's
debts or obligations. If the Company is liquidated, subject to the right of any
holders of Preferred Stock to receive preferential distributions, each
outstanding share of Common Stock will be entitled to participate pro rata in
the assets remaining after payment of, or adequate provision for, all known
debts and liabilities of the Company, including debts and liabilities arising
out of its status of general partner of the Operating Partnership.
The Board of Directors will fix the attributes of any Preferred Stock that
it authorizes for issuance. Since the Board of Directors has the power to
establish the preferences, powers and rights of each series of Preferred Stock,
it may afford the holders of any series of Preferred Stock preferences, powers
and rights, voting or otherwise, senior to the rights of holders of shares of
Common Stock. The issuance of Preferred Stock could have the effect of delaying
or preventing a change in control of the Company.
SERIES A PREFERRED STOCK
The following description of the Series A Preferred Stock and the
descriptions of certain provisions set forth elsewhere in this Proxy
Statement/Prospectus are qualified in their entirety by reference to the
Articles Supplementary of the Series A Preferred Stock, a copy of the form of
which is filed as an exhibit to the Registration Statement of which this Proxy
Statement/Prospectus is a part. A copy of the Articles Supplementary may be
examined, and copies obtained, as set forth under the caption 'Available
Information.'
In connection with the Formation Transactions, a series of 1,940 shares of
convertible redeemable Series A Preferred Stock, par value $0.01 per share, of
the Company will be created and issued to Prudential Securities, with a stated
value of $1,000.00 per share (the 'Stated Value'). The Series A Preferred Stock
is convertible (based on its liquidation preference) into Common Stock at any
time following the six month anniversary of the date of issuance at a conversion
price of $50.00 per share of common stock, subject to adjustment for customary
anti-dilution rights. On the date of issuance, the 1,940 shares of Series A
Preferred Stock would be convertible into 38,800 shares of Common Stock.
Dividends on the Series A Preferred Stock are cumulative and payable quarterly
in arrears, at a rate per annum of nine percent (9%). If any dividend is not
declared or paid on any scheduled dividend payment date, interest shall accrue
on the amount of such accrued and unpaid dividend at the rate per annum of nine
percent (9%) until such time as such accrued and unpaid dividend is paid in
full, such interest to be paid concurrently with the payment of such accrued and
unpaid dividends. No cash dividends shall be payable on the Common Stock unless
and until all accrued and unpaid dividends (together with accrued interest
thereon) have been paid in full.
The Company shall have the right (by notice at least three business days
prior to such occurrence) to redeem all (but not less than all) of the shares of
Series A Preferred Stock outstanding upon the occurrence of an Offering, any
capital reorganization or reclassification of the capital stock of the Company
or consolidation or merger of the Company (in which the Company is not the
surviving corporation) with, or sale of all or substantially all of its assets
to, another person or entity, at a redemption price equal to the liquidation
preference, unless the holder elects to convert the shares of Series A Preferred
Stock into Common Stock on or prior to the date fixed for redemption. If the
date fixed for redemption is prior to the six month anniversary of the date of
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issuance of the Series A Preferred Stock, the holder may still elect to convert
all of the shares of Series A Preferred Stock prior to such date; provided,
however, that the actual conversion date shall not be until the six month
anniversary date of the issuance of the Series A Preferred Stock.
In the event of the voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series A Preferred Stock shall be
entitled to have set apart for them, or to be paid out of the assets of the
Company, before any distribution is made to or set apart for the holders of the
Common Stock, an amount in cash equal to the Stated Value per share plus any
accrued but unpaid dividends thereon (including interest earned thereon, if
any).
Except as otherwise specifically provided by the MGCL, the holders of
shares of Series A Preferred Stock shall not be entitled to vote on any matters
required or permitted to be submitted to the shareholders of the Company for
their approval. While any shares of Series A Preferred Stock are outstanding,
the Company shall not alter or change the rights or preferences, including the
dividend, liquidation or voting rights, or the amendment or consent provisions,
of the Series A Preferred Stock without the affirmative consent (given in
writing or at a meeting duly called for that purpose) of the holders of at least
two-thirds of the outstanding shares of the Series A Preferred Stock.
In the event any shares of Series A Preferred Stock shall be converted or
redeemed, the shares so converted or redeemed shall be canceled, shall return to
the status of authorized but unissued Preferred Stock of no designated class or
series, and shall not be issuable by the Company as Series A Preferred Stock.
The Company may not issue additional shares of Preferred Stock whose
rights, preferences, powers, privileges and restrictions, qualifications and
limitations are senior to the Series A Preferred Stock without the consent of
the holders of two-thirds of the Series A Preferred Stock.
RESTRICTIONS ON TRANSFER
Ownership Limits. The Company's Charter contains certain restrictions on
the number of shares of Capital Stock that individual shareholders may own. For
the Company to qualify as a REIT under the Code, no more than 50% in value of
its outstanding shares of capital stock may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year (other than the first year) or during a
proportionate part of a shorter taxable year. The capital stock must also be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year or during a proportionate part of a shorter taxable year. Since the Company
expects to qualify as a REIT, the Company's Charter contains restrictions on the
acquisition of capital stock intended to ensure compliance with these
requirements.
The Company's Charter, subject to certain exceptions, provides that no
holder may own or to be deemed to own by virtue of the attribution provisions of
the Code, more than 6.5% (by number of shares or value, whichever is more
restrictive) of the issued and outstanding shares of Capital Stock, which
percentage may be increased up to 9.8% upon resolution of the Board of
Directors. The Board of Directors may exempt a person from the Ownership Limit
if evidence satisfactory to the Board of Directors or the Company's tax counsel
is presented that the proposed transfer of stock to the intended transferee will
not then or in the future jeopardize the Company's status as a REIT. As a
condition of such exemption, the intended transferee must give written notice to
the Company of the proposed transfer and must furnish such opinions of counsel,
affidavits, undertakings, agreements and information as may be required by the
Board of Directors no later than the 15th day prior to any transfer which, if
consummated, would result in the intended transferee owning shares in excess of
the Ownership Limit. The foregoing restrictions on transferability and ownership
will not apply if the Board of Directors determines that it is no longer in the
best interests of the Company to attempt to qualify or to continue to qualify as
REIT. Any transfer of shares of Common Stock that would: (i) create a direct or
indirect ownership of shares of stock in excess of the Ownership Limit; (ii)
result in the shares of stock being owned by fewer than 100 persons; or (iii)
result in the Company being 'closely held' within the meaning of Section 856(h)
of the Code shall be null and void, and the intended transferee will acquire no
rights to the shares of Capital Stock.
The Board of Directors has exempted Mr. Pilevsky and his affiliates from
the Ownership Limit following the consummation of Formation Transactions. These
persons may acquire additional shares of Common Stock through the redemption of
Units, through the Stock Option Plan, from other shareholders or otherwise, but
in no
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event will they be permitted to acquire additional shares, either actually or
constructively, in excess of 25% of the outstanding Capital Stock.
Shares of capital stock owned, or deemed to be owned, or transferred to a
shareholder in excess of the Ownership Limit will automatically be deemed shares
of 'Excess Stock' that will be transferred, by operation of law, to the trustee
of a trust for the exclusive benefit of one or more charitable organizations
described in Section 170(b)(1)(A) and 170(c) of the Code (the 'Charitable
Beneficiary'). The trustee of the trust will be deemed to own the Excess Stock
for the benefit of the Charitable Beneficiary on the date of the violative
transfer to the original transferee-shareholder. Any dividend or distribution
paid to the original transferee-shareholder of Excess Stock prior to the
discovery by the Company that capital stock has been transferred in violation of
the provisions of the Company's Charter shall be repaid to the trustee upon
demand. Any dividend or distribution authorized and declared but unpaid shall be
rescinded as void ab initio with respect to the original transferee-shareholder
and shall instead be paid to the trustee of the trust for the benefit of the
Charitable Beneficiary. Any vote cast by an original transferee-shareholder of
shares of capital stock constituting Excess Stock prior to the discovery by the
Company that shares of capital stock have been transferred in violation of the
provisions of the Company's Charter shall be rescinded as void ab initio. While
the Excess Stock is held in trust, the original transferee-shareholder will be
deemed to have given an irrevocable proxy to the trustee to vote the capital
stock for the benefit of the Charitable Beneficiary. The trustee of the trust
may transfer the interest in the trust representing the Excess Stock to any
person whose ownership of the shares of capital stock would be permitted under
the Ownership Limit. If such transfer is made, the interest of the Charitable
Beneficiary shall terminate and the proceeds of the sale shall be payable to the
original transferee-shareholder and to the Charitable Beneficiary as described
herein. The original transferee-shareholder shall receive the lesser of (i) the
price paid by the original transferee-shareholder for the shares of capital
stock that were deemed Excess Stock or, if the original transferee-shareholder
did not give value for such shares (e.g., the stock was received through a gift,
devise or other transaction), the average closing price for the class of shares
from which such shares of capital stock originated for the ten trading days
immediately preceding such sale or gift, and (ii) the price received by the
trustee from the sale or other disposition of the Excess Stock held in trust.
The trustee may reduce the amount payable to the original transferee-shareholder
by the amount of dividends and distributions relating to the shares of Excess
Stock which have been paid to the original transferee-shareholder and are owned
by the original transferee-shareholder to the trustee. Any proceeds in excess of
the amount payable to the original transferee-shareholder shall be paid by the
trustee to the Charitable Beneficiary. Any liquidation distributions relating to
Excess Stock shall be distributed in the same manner as proceeds of a sale of
Excess Stock. If the foregoing transfer restrictions are determined to be void
or invalid by virtue of any legal decision, statute, rule or regulation, then
the original transferee-shareholder of any shares of Excess Stock may be deemed,
at the option of the Company, to have acted as an agent on behalf of the Company
in acquiring the shares of Excess Stock and to hold the shares of Excess Stock
on behalf of the Company.
In addition, the Company will have the right, for a period of 90 days
during the time any shares of Excess Stock are held in trust, to purchase all or
any portion of the shares of Excess Stock at the lesser of (i) the price
initially paid for such shares by the original transferee-shareholder, or if the
original transferee-shareholder did not give value for such shares (e.g., the
shares were received through a gift, devise or other transaction), the average
closing price for the class of stock from which such shares of Excess Stock
originated for the ten trading days immediately preceding such sale or gift, and
(ii) the average closing price for the class of stock from which such shares of
Excess Stock originated for the ten trading days immediately preceding the date
the Company elects to purchase such shares. The Company may reduce the amount
payable to the original transferee-shareholder by the amount of dividends and
distributions relating to the shares of Excess Stock which have been paid to the
original transferee-shareholder and are owed by the original
transferee-shareholder to the trustee. The Company may pay the amount of such
reductions to the trustee for the benefit of the Charitable Beneficiary. The
90-day period begins on the later date of which notice is received of the
violative transfer if the original transferee-shareholder gives notice to the
Company of the transfer or, if no such notice is given, the date the Board of
Directors determines that a violative transfer has been made.
All certificates representing shares of stock will bear a legend referring
to the restrictions described above.
Each shareholder shall upon demand be required to disclose to the Company
in writing any information with respect to the direct, indirect and constructive
ownership of capital stock of the Company as the Board of
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Directors deems necessary to comply with the provisions of the Code applicable
to REITs, to comply with the requirements of any taxing authority or
governmental agency or to determine any such compliance.
The Ownership Limit may have the effect of delaying, deferring or
preventing a change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be Boston
EquiServe Trust Company.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S CHARTER AND BY-LAWS
The following paragraphs summarize certain provisions of the Maryland
General Corporation Law (the 'MGCL') and the Company's Charter and By-Laws. The
summary does not purport to be complete and is subject to and qualified in its
entirety by reference to the MGCL and the Company's Charter and By-Laws, which
will be filed as exhibits to the Registration Statement of which this Proxy
Statement/Prospectus is a part, for complete information.
BOARD OF DIRECTORS
The Company's Charter provides that the number of directors of the Company
may be established by the Board of Directors but may not be fewer than three.
Any vacancy will be filled, at any regular meeting or at any special meeting
called for that purpose, by a majority of the remaining directors or, in the
case of a vacancy resulting from an increase in the number of directors, by a
majority of the entire Board of Directors.
Pursuant to the Company's Charter, the directors are divided into three
classes. One class will hold office initially for a term expiring at the annual
meeting of shareholders to be held in 1999, another class will hold office
initially for a term expiring at the annual meeting of shareholders to be held
in 2000, and a third class will hold office initially for a term expiring at the
annual meeting of shareholders to be held in 2001. As the term of each class
expires, directors in that class will be elected for a term of three years and
until their successors are duly elected and qualified, and the directors in the
other two classes will continue in office. The Company believes that
classification of the Board of Directors will help to assure the continuity and
stability of the Company's business strategies and policies as determined by the
Board of Directors.
The classified director provision could have the effect of making the
removal of incumbent directors more time consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its shareholders. At least two annual meetings of
shareholders, instead of one, will generally be required to effect a change in a
majority of the Board of Directors. Thus, the classified board provision could
increase the likelihood that incumbent directors will retain their positions.
Holders of shares of Common Stock will have no right to cumulative voting for
the election of directors. Consequently, at each annual meeting of shareholders,
the holders of a majority of the shares of Common Stock will be able to elect
all of the successors of the class of directors whose term expires at that
meeting.
REMOVAL OF DIRECTORS
The Company's Charter provides that a director may be removed only for
cause and only by the affirmative vote of at least two-thirds of the votes
entitled to be cast in the election of directors. This provision, when coupled
with the provision in the By-Laws authorizing the Board of Directors to fill
vacant directorships, precludes shareholders form removing incumbent directors
except upon a substantial affirmative vote and filling the vacancies created by
such removal with their own nominees.
BUSINESS COMBINATIONS
Under the MGCL, certain 'business combinations' (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between the Company and
any person who beneficially owns 10% or more of the voting power of the
Company's shares or an affiliate of the Company who, at any time within the
two-year period prior to the date in question, was the
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beneficial owner of 10% or more of the voting power of the Company's then
outstanding shares (an 'Interested Stockholder') or an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. Thereafter, any such business
combination must be recommended by the Board of Directors and approved by the
affirmative vote of a least (a) 80% of the votes entitled to be cast by holders
of outstanding shares of the Company's voting stock and (b) two-thirds of the
votes entitled to be cast by holders of outstanding shares of the Company's
voting stock other than shares held by the Interested Stockholder with whom the
business combination is to be effected, unless, among other things, the
Company's shareholders receive a minimum price (as defined in the MGCL) for
their shares of stock and the consideration is received in cash or in the same
form as previously paid by the Interested Stockholder for its shares. These
provisions of the MGCL do not apply, however, to business combinations that are
approved or exempted by the Board of Directors prior to the time that the
Interested Stockholder becomes an Interested Stockholder. The Company has opted
out of the business combination provisions of the MGCL and has provided that any
decision to opt back in requires the approval of holders of a majority of the
outstanding shares of Common Stock.
In addition, the Partnership Agreement requires that any merger or sale of
all or substantially all of the assets of the Operating Partnership be approved
by the holders of at least 51% of the outstanding Units until such time prior to
the first anniversary of the consummation of the Formation Transactions as the
Company owns 67% of the partnership interests of the Operating Partnership, and
thereafter, until such time as the Company owns 60% of the partnership interests
in the Operating Partnership. See 'Partnership Agreement of the Operating
Partnership--Rights of Limited Partners.'
CONTROL SHARE ACQUISITIONS
The MGCL provides that 'control shares' of the Company acquired in a
'control share acquisition' have no voting rights except to the extent approved
by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares owned by the acquiror or by officers or directors who are
employees of the Company. 'Control shares' are voting shares of stock which, if
aggregated with all other such shares of stock previously acquired by the
acquiror, or in respect of which the acquiror is able to exercise or direct the
exercise of voting power (except solely by revocable proxy), would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (i) one-fifth or more but less than one-third,
(ii) one-third or more but less than a majority or (iii) a majority of all
voting power. 'Control shares' do not include shares of stock the acquiring
person is then entitled to vote as a result of having previously obtained
stockholder approval. A 'control share acquisition' means the acquisition of
control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of shareholders to
be held within 50 days of demand to consider voting rights for the shares. If no
request for a meeting is made, the Company may itself present the question at
any shareholders' meeting.
If voting rights are not approved at the shareholders' meeting or if the
acquiring person does not deliver an acquiring person statement as required by
the MGCL, then, subject to certain conditions and limitations, the Company may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of shareholders at
which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a shareholders' meeting and the
acquiror becomes entitled to vote a majority of the shares of stock entitled to
vote, all other shareholders may exercise appraisal rights. The fair value of
the shares of stock as determined for purposes of such appraisal rights may not
be less than the highest price per share paid by the acquiror in the control
share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the Company is a party to the
transaction, or to acquisitions approved or exempted by the Company's Charter or
By-Laws. Pursuant to the MGCL, the Company's By-Laws exempt the Company from
these provisions of the MGCL and provides that any decision to opt back in
requires the approval of holders of a majority of the outstanding shares of
Common Stock.
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AMENDMENT TO THE ARTICLES OF INCORPORATION
Pursuant to the MGCL, a corporation generally cannot dissolve, amend its
articles or incorporation or merge, unless approved by the affirmative vote or
the written consent of shareholders holding at least two-thirds of the shares
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all of the votes to be cast on the matter) is set forth in the
corporation's articles of incorporation. The Company's Charter does, in fact,
provide for such a lesser percentage and provides that it may be amended by the
affirmative vote of the holders of not less than a majority of all of the votes
entitled to be cast on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Company's By-Laws provide that (a) with respect to an annual meeting of
shareholders, nominations of persons for election to the Board of Directors and
the proposal of business to be considered by shareholders may be made only (i)
pursuant to the Company's notice of the meeting, (ii) by or at the direction of
the Board of Directors or (iii) by a shareholder who, among other things, is
entitled to vote at the meeting and has complied with the advance notice
procedures set forth in the By-Laws, and (b) with respect to special meetings of
shareholders, only the business specified in the Company's notice of meeting may
be brought before the meeting of shareholders and where the Company's notice of
the meeting specifies that directors are to be elected at such special meeting,
nominations of persons for election to the Board of Directors may be made only
(x) pursuant to the Company's notice of the meeting, (y) by or at the direction
of the Board of Directors or (z) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by a shareholder
who, among other things, is entitled to vote at the meeting and has complied
with the advance notice provisions set forth in the By-Laws.
The provisions in the Company's Charter on classification of the Board of
Directors, removal of directors and amendments, and the advance notice
provisions of the By-Laws could have the effect of discouraging a takeover or
other transaction in which the holder of some, or a majority, of the shares of
Common Stock might receive a premium for their shares of Common Stock over the
then prevailing market price or which such holders might believe to be otherwise
in their best interests.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY
The Company's officers and directors are indemnified under Maryland law,
the Charter and By-Laws of the Company and the Partnership Agreement against
certain liabilities. The Charter requires the Company to indemnify its directors
and officers to the fullest extent permitted from time to time by the laws of
the State of Maryland. The By-Laws contain provisions which implement the
indemnification provisions of the Charter.
The MGCL permits a corporation to indemnify its directors and officers,
among others, against judgments, penalties, fines, settlements and reasonable
expenses actually incurred by them in connection with any proceeding to which
they may be made a party by reason of their service in those capacities unless
it is established that the act or omission of the director or officer was
material to the matter giving rise to the proceeding and was committed in bad
faith or was the result of active and deliberate dishonesty, or the director or
officer actually received an improper personal benefit in money, property or
services, or in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful, or the
director or officer was adjudged to be liable to the corporation for the act or
omission. No amendment of the Charter shall limit or eliminate the right to
indemnification provided with respect to acts or omissions occurring prior to
such amendment or repeal. Maryland law permits the Company to provide
indemnification to an officer to the same extent as a director, although
additional indemnification may be provided if such officer is not also a
director.
The MGCL permits the articles of incorporation of a Maryland corporation to
include a provision limiting the liability of its directors and officers to the
corporation and its shareholders for money damages, with specified exceptions.
The MGCL does not, however, permit the liability of directors and officers to
the corporation or its shareholders to be limited, to the extent that (1) it is
proved that the person actually received an improper benefit or profit in money,
property or services (to the extent such benefit or profit was received) or (2)
a judgment or other final adjudication adverse to such person is entered in a
proceeding based on a finding that the person's action, or failure to act, was
the result of active and deliberate dishonesty and was material to the cause of
action adjudicated in the proceeding. The Charter contains a provision
consistent with the MGCL. No amendment of the
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Charter shall limit or eliminate the limitation of liability with respect to
acts or omissions occurring prior to such amendment or repeal.
The Partnership Agreement also provides for indemnification of the Company
and its officers and directors to the same extent indemnification is provided to
officers and directors of the Company in its Charter, and limits the liability
of the Company and its officers and directors to the Operating Partnership and
its partners to the same extent liability of officers and directors of the
Company to its shareholders is limited under the Company's Charter. See
'Partnership Agreement of the Operating Partnership--Indemnification.'
Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
SHARES AVAILABLE FOR FUTURE SALE
GENERAL
Upon consummation of the Formation Transactions, there will be (i) 47,660
shares of Common Stock issued and outstanding, including an aggregate of 10,660
shares of Common Stock held by Mr. Pilevsky, (ii) 1,450,000 Units of the
Operating Partnership issued and outstanding, including an aggregate of 964,641
Units held by Mr. Pilevsky, and (iii) 1,940 shares of Series A Preferred Stock
issued and outstanding, convertible into 38,800 shares of Common Stock. Upon
consummation of the Formation Transactions, the Trustees will receive an
aggregate of 5,000 shares of Common Stock and the Trustees Warrants, which are
immediately exercisable, entitling them to purchase an aggregate of 8,000 shares
of Common Stock. See 'Formation Transactions and Structure of the Company' and
'Principal Shareholders.'
The Common Stock issued to Mr. Pilevsky and the Trustees, the Units, the
Trustees Warrants, the shares issuable upon conversion of the Series A Preferred
Stock and the shares issuable upon redemption of the Units or exercise of the
Trustees Warrants (collectively, the 'Restricted Shares'), will be 'restricted'
securities within the meaning of Rule 144 promulgated under the Securities Act
('Rule 144') and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including
exemptions contained in Rule 144. As described below under 'Registration
Rights,' the Company has granted certain holders of the Restricted Shares
registration rights with respect to the shares of Common Stock underlying the
Units. The Units cannot be redeemed for shares of Common Stock until one year
from their date of issuance.
In general, under Rule 144, as currently in effect, if one year has elapsed
since the later of the date of acquisition of Restricted Shares from the Company
or any 'affiliate' of the Company, as that term is defined under the Securities
Act, the acquiror or subsequent holder thereof is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of (i)
1% of the then outstanding shares of Common Stock (approximately 477 shares upon
consummation of the Formation Transactions) or (ii) the average weekly trading
volume in the Common Stock during the four calendar weeks immediately preceding
such sale, subject to the filing of a Form 144 with respect to such sale and
certain other limitations and restrictions. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. In addition, if
two years have elapsed since the later of the date of acquisition of Restricted
Shares from the Company or from any affiliate of the Company, and the acquiror
or any subsequent holder thereof is not deemed to have been an affiliate of the
Company at any time during the 90 days preceding a sale, such person would be
entitled to sell such shares in the public market under Rule 144(k) without
regard to the above-described requirements.
The Company has established the Stock Option Plan for the purpose of
attracting and retaining directors, executive officers and other key employees.
See 'Management--Stock Option Plan', '--Executive Compensation' and
'--Compensation of Directors.' The Company intends to issue options to purchase
approximately 261,600 shares of Common Stock to directors, executive officers,
certain key employees and consultants upon consummation of the Formation
Transactions, and has reserved 238,400 additional shares for future issuance
under the Stock Option Plan. Prior to the expiration of the initial 12-month
period following consummation of the Formation Transactions, the Company expects
to file a registration statement with the
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Commission with respect to the Common Stock issuable under the Stock Option
Plan, pursuant to which shares may be resold without restriction, unless held by
affiliates.
There is currently no public market for the Common Stock. No prediction can
be made as to the effect, if any, that future sales of Common Stock, or the
availability of Common Stock for future sale or the redemption of Units will
have on the market price of the Common Stock prevailing from time to time should
a public market for the Common Stock be established. Sales of substantial
amounts of Common Stock, the conversion of Series A Preferred Stock, the
redemption of Units or the perception that such sales or redemptions could
occur, could adversely affect prevailing market prices of the shares of Common
Stock and impair the Company's ability to obtain additional capital through the
sale of equity securities. See 'Risk Factors--Absence of Public Market for
Shares.'
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement, the Company has granted the
members of the Philips Group receiving Units in connection with the Formation
Transactions certain 'shelf' registration rights (collectively, the
'Registration Rights') with respect to the shares of Common Stock acquired upon
the redemption of Units (the 'Registrable Shares'). Subject to certain
limitations, the Registration Rights grant such holders of Registrable Shares
the opportunity to have such Registrable Shares registered by the Company on
Form S-3 at any time commencing one year after the consummation of the Formation
Transactions, as may be appropriate under the applicable provisions of the
Securities Act. It is uncertain whether Rule 144 will apply to transfers of the
Units as it is unclear whether certain tacking rules apply to the holding period
of the Units prior to a redemption of such Units for Common Stock. The Company
will bear expenses incident to its registration obligations upon exercise of the
Registration Rights, including the payment of federal securities law and state
blue sky registration fees, except that it will not bear any underwriting
discounts or commissions or transfer taxes relating to registration of
Registrable Shares.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations that may be relevant to a prospective holder of shares of Common
Stock. Pryor, Cashman, Sherman & Flynn, which has acted as tax counsel to the
Company in connection with the formation of the Company and the Company's
election to be taxed as a REIT, has reviewed the following discussion and is of
the opinion that it fairly summarizes the federal income tax considerations that
are likely to be material to a holder of Common Stock. This discussion and such
opinion are based on current law. The following discussion is not exhaustive of
all possible tax considerations. This summary does not give a detailed
discussion of any state, local or foreign tax considerations. Nor does it
discuss all of the aspects of federal income taxation that may be relevant to a
prospective stockholder in light of his or her particular circumstances or to
certain types of shareholders (including insurance companies, tax-exempt
entities, financial institutions or broker-dealer, foreign corporations and
persons who are not citizens or residents of the United States) subject to
special treatment under the federal income tax laws. As used in this section the
term 'Company' refers solely to Philips International Realty Corp.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP AND SALE OF COMMON STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER
TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES
IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General. The Company intends to make an election to be taxed as a REIT
under Sections 856 through 860 of the Code commencing with the taxable year
ending December 31, 1998, but may elect to qualify as a REIT as early as the
taxable year ending December 31, 1997. The Company will elect REIT status for
the year ending December 31, 1997, if the failure to so elect would adversely
affect National's REIT status. The Company believes that, commencing with its
taxable year ending December 31, 1997, it will be organized and will operate in
such a manner as to qualify for taxation as a REIT under the Code, and the
Company intends to continue to
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operate in such a manner. No assurance, however, can be given that the Company
will operate in a manner so as to qualify or remain qualified as a REIT.
In the opinion of Pryor, Cashman, Sherman & Flynn, commencing with the
Company's taxable year ending December 31, 1997 (assuming REIT status is elected
for 1997 and, if not, for the taxable year ending December 31, 1998), and
assuming the consummation of the transactions contemplated herein and a timely
election for REIT status, the Company will be organized in conformity with the
requirements for qualification as a REIT, and its proposed method of operation
will enable it to meet the requirements for qualification and taxation as a REIT
under the Code. This opinion is based on certain assumptions relating to the
organization and operation of the Holding Partnerships in which the Operating
Partnership will hold an interest, and is conditioned upon certain
representations made by the Company as to certain factual matters relating to
the Company's organization and intended or expected manner of operation. Pryor,
Cashman, Sherman & Flynn is not aware of any facts or circumstances that are
inconsistent with these assumptions and representations. The Company's
qualification and taxation as a REIT will depend upon the Company's ability to
meet on a continuing basis, through actual annual operating results,
distribution levels and diversity of stock ownership, the various qualification
tests imposed under the Code discussed below. Pryor, Cashman, Sherman & Flynn
will not review compliance with these tests on a continuing basis, and thus no
assurance can be given that the Company will satisfy such tests on a continuing
basis. See 'Failure to Qualify' below. The opinion of Pryor, Cashman, Sherman &
Flynn is not binding upon the IRS and no assurance can be given that the IRS
will not challenge the Company's eligibility for taxation as a REIT. The opinion
of Pryor, Cashman, Sherman & Flynn is also based upon current law.
The following is a general summary of the Code sections that govern the
federal income tax treatment of a REIT and its shareholders. These sections of
the Code are highly technical and complex, and this summary is qualified in its
entirety by the applicable Code provisions, the regulations promulgated
thereunder ('Treasury Regulations') and administrative and judicial
interpretations thereof, all of which are subject to change.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on taxable income that it currently
distributes to shareholders. This treatment substantially eliminates the 'double
taxation' (at the corporate and stockholder levels) that generally results from
investment in a corporation. However, the Company will be subject to federal
income tax in the following circumstances. First, the Company will be taxed at
regular corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the 'alternative minimum tax' on its items of tax
preference. Third, if the Company has (i) taxable income from the sale or other
disposition of 'foreclosure property' (which is, in general, property acquired
by the Company by foreclosure or otherwise on default on a loan secured by the
property) which is held primarily for sale to customers in the ordinary course
of business or (ii) other non-qualifying income from foreclosure property, it
will be subject to tax at the highest corporate rate on such income. Fourth, if
the Company has taxable income from prohibited transactions (which are, in
general, certain sales or other dispositions of property (other than foreclosure
property) held primarily for sale to customers in the ordinary course of
business), such income will be subject to a 100% tax. Fifth, if the Company
should fail to satisfy the 75% gross income test or the 95% gross income test
(as discussed below), and has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the taxable income attributable to the greater of the amount by which the
Company fails the 75% or 95% test, multiplied by a fraction intended to reflect
the Company's profitability. Sixth, if the Company should fail to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain net income for such year
and (iii) any undistributed taxable income from prior years, the Company would
be subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed. Seventh, if the Company acquires any asset
from a C corporation (i.e., a corporation generally subject to full corporate
level tax) in a transaction in which the basis of the asset in the Company's
hands is determined by reference to the basis of the asset (or any other
property) in the hands of the C corporation, and the Company recognizes gain on
the disposition of such asset during the 10-year period beginning on the date on
which such asset was acquired by the Company, then, to the extent of such
property's 'built-in' gain (the excess of the fair market value of such property
at the time of acquisition by the Company over the adjusted basis in such
property at such time), such gain will be subject to tax at the highest regular
corporate rate applicable (pursuant to Treasury Regulations that
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have not yet been promulgated). The results described above with respect to the
recognition of 'built-in gain' assume that the Company will make an election
pursuant to IRS Notice 88-19.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation but for Sections 856 through 859 of the Code; (4) which
is neither a financial institution nor an insurance company subject to certain
provisions of the Code; (5) the beneficial ownership of which is held by 100 or
more persons; (6) during the last half of each taxable year not more than 50% in
value of the outstanding stock of which is owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities);
and (7) which meets certain other tests, described below, regarding the nature
of its income and assets. The Code provides that conditions (1) through (4),
inclusive, must be met during the entire taxable year and that condition (5)
must be met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. Conditions (5) and
(6) will not apply until after the first taxable year for which an election is
made to be taxed as a REIT. The Company anticipates issuing sufficient shares of
Common Stock in sufficient proportions to allow the Company to satisfy
requirements (5) and (6). In addition, the Company's Charter will provide
restrictions regarding the transfer of its shares that are intended to assist
the Company in continuing to satisfy the share ownership requirements described
in (5) and (6) above. See 'Description of Capital Stock--Restrictions on
Transfer.' Pursuant to the recently enacted Taxpayer Relief Act of 1997 (the
'Act'), effective for the Company's taxable years beginning on or after January
1, 1998, so long as the Company complies with the Treasury Regulations (the
'Stock Ownership Regulations') for ascertaining the ownership of its stock, the
Company will not lose its qualification as a REIT as a result of a violation of
condition (6) if it neither knows nor upon exercising reasonable due diligence
would have known of such violation. In addition, under prior law, the Company's
failure to comply with the Stock Ownership Regulations could have resulted in
its disqualification as a REIT for the taxable year of the failure. For taxable
years beginning on or after January 1, 1998, the Company would be subject to a
financial penalty of $25,000 ($50,000 for intentional violations) for any year
in which it fails to comply with the Stock Ownership Regulations. Furthermore,
if the Company could establish that its failure to comply was due to reasonable
cause and not to willful neglect, no penalty would be imposed.
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company will have a calendar year taxable
year.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership shall retain the same character in
the hands of the REIT for purposes of Section 856 of the Code, including
satisfying the gross income tests and asset tests. Thus, the Company's
proportionate share of the assets, liabilities and items of income of the
Operating Partnership and the Holding Partnerships in which the Operating
Partnership will have an interest will be treated as assets, liabilities and
items of income of the Company for purposes of applying the requirements
described herein.
Income Tests. In order to maintain qualification as a REIT, there are
three gross income requirements that must be satisfied annually. First, at least
75% of the REIT's gross income (excluding gross income from 'prohibited
transactions') for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property (including
'rents from real property' and, in certain circumstances, interest) or from
certain types of temporary investments (the '75% Test'). Second, at least 95% of
the REIT's gross income (excluding gross income from 'prohibited transactions' )
for each taxable year must be derived from such real property investments, and
from dividends, interest and gain from the sale or disposition of stock or
securities, or from any combination of the foregoing (the '95% Test,' and
together with the 75% Test, the 'Gross Income Tests'). Finally, for the 1997
taxable year of the Company ending on December 31, 1997, short-term gain from
the sale or other disposition of stock or securities, gain from 'prohibited
transactions' and gain on the sale or other disposition of real property held
for less than four years (apart from involuntary conversions and sales of
foreclosure property) must represent less than 30% of the REIT's gross income
(including gross income from 'prohibited transactions') for each taxable year.
However, the 30% Test was repealed by the Act for taxable years beginning on or
after January 1, 1988. In addition, pursuant to the Act,
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for taxable years beginning on or after January 1, 1988, except to the extent
provided by regulations, 'qualifying income' for purposes of the Gross Income
Tests would include payments to the Company under an interest rate swap, cap
agreement, option, futures contract, forward rate agreement or any similar
financial instrument entered into by the Company to hedge its indebtedness, as
well as any gain from the disposition of any of the foregoing investments.
Rents received by the Company will qualify as 'rents from real property' in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term 'rents from real
property' solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as 'rents from real property' in satisfying the gross
income tests if the Company or an owner of l0% or more of the Company, actually
or constructively, owns 10% or more of such tenant (a 'Related Party Tenant').
Effective for the Company's taxable years beginning on or after January 1, 1998,
the constructive ownership rules for determining whether a tenant is a Related
Party Tenant are modified with respect to partners and partnerships to provide
that attribution between partners and partnerships occurs only when a partner
owns, directly and/or indirectly, a 25%-or-greater interest in the partnership.
Thus, a tenant will not be treated as a Related Party Tenant with respect to the
Company if shares of the Company are owned by a partnership and a partner that
owns, directly and indirectly, a less-than-25% interest in such partnership also
owns an interest in the tenant. A tenant will also not be a Related Party Tenant
if shareholders of the Company and owners of such tenant are partners in a
partnership in which neither owns, directly and/or indirectly, a 25%-or-greater
interest. Third, if rent attributable to personal property, leased in connection
with a lease of real property is greater than 15% of the total rent received
under the lease (the '15% Limitation'), then the portion of rent attributable to
such personal property will not qualify as 'rents from real property.' The
Company does not anticipate (i) charging rent for any portion of any Property
that is based in whole or in part on the income or profits of any person (except
by reason of being based on a percentage of receipts on sales, which, as
described above, is permitted), (ii) receiving rents in excess of a de minimis
amount from Related Party Tenants, and (iii) deriving rent attributable to
personal property leased in connection with real property in excess of the 15%
Limitation. Finally, for rents received to qualify as 'rents from real
property,' the Company generally must not operate or manage the property or
furnish or render services to tenants, other than through an 'independent
contractor' from whom the Company derives no revenue. The 'independent
contractor' requirement, however, does not apply to the extent the services
provided by the Company are 'usually or customarily rendered' in connection with
the rental of space for occupancy only and are not otherwise considered
'rendered to the occupant.' The Operating Partnership will provide certain
services with respect to the Properties that are intended to comply with the
'usually or customarily rendered' requirement. In the case of any services that
are not 'usual and customary' under the foregoing rules ('Impermissible
Services'), the Company intends to employ independent contractors to perform
such services.
Pursuant to the Act, effective for its tax years beginning on or after
January 1, 1998, the Company may render a de minimis amount of Impermissible
Services to tenants, or in connection with the management of property, without
having otherwise qualifying rents from the property being disqualified as 'rents
from real property.' The receipt of income in respect of such Impermissible
Services ('Impermissible Services Income') does not disqualify otherwise
qualifying income from real property as 'rents from real property' so long as
the Impermissible Services Income from the property does not exceed 1% of the
Company's gross income from the property for that tax year. To qualify for this
1% exception, the Impermissible Services may not be valued at less than 150% of
the Company's direct cost of service. The amount of any Impermissible Services
Income, however, is not treated as 'rents from real property' for purposes of
the 75% and 95% Gross Income Tests and, accordingly, must be considered together
with other nonqualifying income for puposes of satisfying the Gross Income
Tests.
The Operating Partnership may receive fees in consideration of the
performance of management and administrative services with respect to Properties
that are not owned entirely by the Operating Partnership. Although a portion of
such management and administrative fees generally will not qualify under the
Gross Income Tests, the Company believes that the aggregate amount of such fees
(and any Impermissible Services or other non-qualifying income) in any taxable
year will not cause the Company to fail the Gross Income Tests.
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If the Company fails to satisfy one or both of the Gross Income Tests for
any taxable year, it may nevertheless qualify as a REIT for such year if it is
entitled to relief under certain provisions of the Code. These relief provisions
generally will be available if the Company's failure to meet such tests was due
to reasonable cause and not due to willful neglect, the Company attaches a
schedule of the sources of its income to its return, and any incorrect
information on the schedules was not due to fraud with intent to evade tax. It
is not possible, however, to state whether in all circumstances the Company
would be entitled to the benefit of these relief provisions. As discussed above
in '--General,' even if these relief provisions apply, a tax would be imposed
with respect to the excess net income.
Effective for taxable years beginning on or after January 1, 1998, property
that is involuntarily converted will be excluded from the 'prohibited
transaction' rules.
Asset Tests. The Company, at the close of each quarter of its taxable
year, must also satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of the Company's total assets (including its allocable
share of real estate assets held by (i) the Operating Partnership and
partnerships or limited liability companies in which the Operating Partnership
owns an interest or (ii) 'qualified REIT subsidiaries' of the Company) must be
represented by real estate assets, stock or debt instruments held for not more
than one year purchased with the proceeds of a stock offering or long-term (at
least five years) debt offering of the Company, cash, cash items and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets, and the Company may not own more than 10% of any one issuer's
outstanding voting securities. The 5% test must generally be met for any quarter
in which a REIT acquires securities of an issuer.
A REIT which meets the foregoing asset tests at the close of any quarter
will not lose its status as a REIT for failure to satisfy the asset tests at the
end of a later quarter solely by reason of changes in asset values. If the
failure to satisfy the asset tests results from an acquisition of securities or
other property during a quarter (including as a result of the REIT increasing
its interest in any partnership in whcih the REIT is a partner), the failure can
be cured by disposition of sufficient nonqualifying assets within 30 days after
the close of that quarter. The Company intends to maintain adequate records of
the value of its assets to ensure compliance with the asset tests and to take
such other actions within 30 days after the close of any quarter as may be
required to cure any noncompliance. If the Company failed to cure noncompliance
with the asset tests within such time period, the Company would cease to qualify
as a REIT.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its shareholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's 'REIT taxable income' (computed without regard to the dividends paid
deduction and the REIT's net capital gain) and (ii) 95% of the net income (after
tax), if any, from foreclosure property, minus (B) the sum of certain items of
non-cash income. In addition, if the Company disposes of any Built-In Gain Asset
during the Recognition Period, the Company could be required, pursuant to
Treasury Regulations that have not yet been promulgated, to distribute at least
95 percent of any Built-In Gain (after tax) recognized on the disposition of
such asset. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before the Company timely
files its tax return for such year and if paid on or before the first regular
dividend payment after such declaration. To the extent that the Company does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its 'REIT taxable income,' as adjusted, it will be subject to tax
on the undistributed amount at regular capital gains and ordinary corporate tax
rates. As discussed below, shareholders of the Company for taxable years of the
Company beginning on or after January 1, 1998, would receive a tax credit for
the corporate level taxes paid by the Company on any undistributed capital
gains. See 'Taxation of Domestic Shareholders' below. Furthermore, if the
Company should fail to distribute during each calendar year at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax (the 'Excise Tax') on
the excess of such required distribution over the amounts actually distributed.
As discussed more completely below under 'Taxation of Domestic
Shareholders,' the Company may elect pursuant to the Act for its taxable years
beginning on or after January 1, 1998, to retain any long-term capital gain
recognized during a taxable year ('Retained Gains') and pay a corporate level
tax on such Retained Gains.
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The Retained Gains are then considered to have been distributed to holders of
Common Stock. It is unclear whether any Retained Gains would be treated as
having been actually distributed for purposes of the Excise Tax. Absent public
guidance from the IRS or the adoption of corrective statutory provisions, if
Retained Gains were not treated as being actually distributed, any Retained
Gains possibly could be subject to the Excise Tax.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements. In this regard, the Partnership Agreement of
the Operating Partnership authorizes the Company, as general partner, to take
such steps as may be necessary to cause the Operating Partnership to distribute
to its partners an amount sufficient to permit the Company to meet these
distribution requirements. It is possible, however, that the Company, from time
to time, may not have sufficient cash or other liquid assets to meet the 95%
distribution requirement due to timing differences between the actual receipt of
income and actual payment of deductible expenses and the inclusion of such
income and deduction of such expenses in arriving at taxable income of the
Company, or if the amount of nondeductible expenses such as principal
amortization or capital expenditures exceed the amount of non-cash deductions.
In the event that such timing differences occur, in order to meet the 95%
distribution requirement, the Company may, or may cause the Operating
Partnership to, arrange for short-term, or possibly long-term, borrowing to
permit the payment of required dividends. If the amount of nondeductible
expenses exceeds non-cash deductions, the Operating Partnership may refinance
its indebtedness to reduce principal payments and borrow funds for capital
expenditures.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying 'deficiency dividends'
to shareholders in a later year that may be included in the Company's deduction
for dividends paid for the earlier year. Thus, the Company may be able to avoid
being taxed on amounts distributed as deficiency dividends, however, the Company
will be required to pay to the IRS interest based upon the amount of any
deduction taken for deficiency dividends.
Failure to Qualify. If the Company fails to qualify for taxation as a REIT
in any taxable year and the relief provisions do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to shareholders in any year in
which the Company fails to qualify will not be deductible by the Company, nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income, and, subject to certain limitations in the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company also
will be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to
state whether in all circumstances the Company would be entitled to such
statutory relief.
TAXATION OF SHAREHOLDERS
Taxation of Taxable Domestic Shareholders. As long as the Company
qualifies as a REIT, distributions made to the Company's taxable domestic
shareholders out of current or accumulated earnings and profits (and not
designated as capital gain dividends) will be taken into account by them as
ordinary income and will not be eligible for the dividends received deduction
for corporations. Distributions that are designated as capital gain dividends
will be taxed as long-term capital gains (to the extent they do not exceed the
Company's actual net capital gain for the taxable year) without regard to the
period for which the stockholder has held its stock. Although the matter is not
entirely free from doubt, it appears that, pursuant to the Act, the portion of
any such distributions designated as capital gain dividends attributable to gain
recognized after July 28, 1997 with respect to capital assets held by the
Company for more than 18 months on the date of sale will be treated as long-term
capital gain taxable at a maximum rate of 20% (or 25% to the extent any such
gain arises from the recapture of straight-line depreciation deductions
reflected in the basis of real property that has been held by the Company for
more than 18 months as of the date of sale) and any remaining portion of such
capital gain dividends will be treated as long-term capital gain taxable at a
maximum rate of 28%. However, corporate shareholders may be required to treat up
to 20% of certain capital gain dividends as ordinary income. Distributions in
excess of current and accumulated earnings and profits will not be taxable to a
stockholder to the extent that they do not exceed the adjusted basis of the
stockholder's shares of Common Stock, but rather will reduce the adjusted basis
of such shares. Assuming a shareholder holds his shares of Common Stock as a
capital asset, any such distributions in excess of a shareholder's adjusted
basis in his shares of Common Stock will be included in income as long-term
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capital gain taxable at a maximum rate of 20% if the gain is recognized after
July 28, 1997 and the shares have been held for more than 18 months at the time
of sale, long-term capital gain taxable at a maximum rate of 28% if the shares
have been held for more than one year but not more than 18 months and short-term
capital gain taxable at a maximum rate of up to 39.6% if the shares been held
for only one year or less. To the extent that such distributions exceed the
adjusted basis of a stockholder's shares of Common Stock, they will be included
in income as long-term capital gain (or short-term capital gain if the shares
have been held for one year or less), assuming the shares are a capital asset in
the hands of the stockholder. In addition, any dividend declared by the Company
in October, November or December of any year payable to a stockholder of record
on a specific date in any such month shall be treated as both paid by the
Company and received by the stockholder on December 31 of such year, provided
that the dividend is actually paid by the Company during January of the
following calendar year. Shareholders may not include in their individual income
tax any net operating losses or capital losses of the Company.
As indicated above, pursuant to the Act, the Company may elect, for taxable
years of the Company beginning on or after January 1, 1998, to retain gains
recognized by it and pay a corporate level tax on the undistributed amounts. The
maximum rate of tax applicable to corporate capital gains is 35%. To the extent
the Company recognized corporate level long-term capital gains which it retained
rather than distributing, a shareholder owning shares of Common Stock on
December 31 of the year in which such Retained Gains were recognized would be
required to include his proportionate share of the Retained Gains (as designated
by the Company in a notice mailed to the shareholder within the first 60 days of
the next year) in income for that year as long-term capital gain. Each
shareholder would be deemed to have paid a proportionate share of the amount of
tax paid by the Company with respect to the Retained Gains and would be allowed
a credit or refund for the tax deemed to be paid by him. Shareholders receiving
any such Retained Gains would increase their adjusted tax basis in their shares
of Common Stock by an amount equal to the Retained Gains included in their
income reduced by the amount of Company level tax deemed to have been paid by
them.
In general, any loss upon a sale or exchange of shares of Common Stock by a
stockholder who has held such shares for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss to the
extent of distributions from the Company required to be treated by such
stockholder as long-term capital gain.
Backup withholding. The Company will report to its domestic shareholders
and the IRS the amount of dividends paid during each calendar year, and the
amount of tax withheld, if any, with respect thereto. Under the backup
withholding rules, a stockholder may be subject to backup withholding at the
rate of 31% with respect to dividends paid unless such holder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact or (b) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding and otherwise
complies with applicable requirements of the backup withholding rules. A
stockholder who does not provide the Company with its correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the stockholder's
income tax liability. In addition, the Company may be required to withhold a
portion of capital gain distributions made to any shareholders who fail to
certify their non-foreign status to the Company. See '--Taxation of Foreign
Shareholders' below.
Taxation of Tax-Exempt Shareholders. Based upon published rulings by the
IRS, distributions by the Company to a shareholder that is a tax exempt entity
will not constitute 'unrelated business taxable income' ('UBTI'), provided that
the tax exempt entity has not financed the acquisition of its shares with
'acquisition indebtedness' within the meaning of the Code and the shares are not
otherwise used in an unrelated business or trade of the tax exempt entity.
In applying the REIT stock ownership test under the Code, a 'qualified
trust' (generally a pension trust or profit-sharing trust) is treated as holding
the shares of a REIT in proportion to their actuarial interests in such
qualified trust, and thus permits certain pension trusts to acquire more
concentrated ownership of a REIT. A 'qualified trust' owning more than 10% of a
REIT must treat a percentage of dividends from the REIT as UBTI. The percentage
is determined by dividing the REIT's gross income derived from an unrelated
trade or business for the year by the gross income of the REIT for the year in
which the dividends are paid. If this percentage is less than five percent,
however, dividends are not treated as UBTI. In general, the UBTI rule applies to
a REIT where the REIT qualifies as a REIT by reason of the above modification of
the stock ownership test and (i) one
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qualified trust owns more than 25% of the value of the REIT; or (ii) a group of
qualified trusts, each holding more than 10% of the value of the REIT,
collectively own more than 50% of the value of the REIT.
Taxation of Foreign Shareholders. The rules governing U.S. federal income
taxation of nonresident alien individuals, foreign corporations, foreign
partnerships and other foreign shareholders (collectively, 'Non-U.S.
Shareholders') are complex, and no attempt will be made herein to provide more
than a limited summary of such rules. Prospective Non-U.S. Shareholders should
consult with their own tax advisors to determine the impact of U.S. federal,
state and local income tax laws with regard to an investment in Common Stock,
including any reporting requirements.
Accordingly, the discussion does not address all aspects of U.S. federal
income tax and does not address state, local or foreign tax consequences
(including treaty benefits, if any, that may be available in certain instances)
that may be relevant to a Non-U.S. Shareholder in light of its particular
circumstances. In addition, this discussion is based on current law, which is
subject to change, and assumes that the Company qualifies for taxation as a
REIT. Non-U.S. Shareholders should consult with their own tax advisors to
determine the impact of U.S. federal, state and local income tax laws with
regard to an investment in Common Stock, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
the Company of U.S. real property interests and not designated by the Company as
capital gain dividends will be treated as dividends of ordinary income to the
extent that they are made out of current or accumulated earnings and profits of
the Company. Such distributions ordinarily will be subject to a withholding tax
equal to 30% of the gross amount of the distribution unless an applicable tax
treaty reduces that tax. However, if income from the investment in the shares of
Common Stock is treated as effectively connected with the Non-U.S. Stockholder's
conduct of a U.S. trade or business, the Non-U.S. Shareholder generally will be
subject to a tax at graduated rates, in the same manner as U.S. shareholders are
taxed with respect to such dividends (and may also be subject to the 30% branch
profits tax if the stockholder is a foreign corporation). The Company expects to
withhold U.S. income tax at the rate of 30% on the gross amount of any dividends
paid to a Non-U.S. Shareholder unless (i) a lower treaty rate applies and the
required form evidencing eligibility for that reduced rate is filed with the
Company or (ii) the Non-U.S. Shareholder files an IRS Form 4224 with the Company
claiming that the distribution is 'effectively connected' income.
Distributions in excess of current and accumulated earnings and profits of
the Company will not be taxable to a shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's shares of Common Stock, but
rather will reduce the adjusted basis of such shares. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Shareholder's shares, they
will give rise to tax liability if the Non-U.S. Shareholder would otherwise be
subject to tax on any gain from the sale or disposition of his shares of Common
Stock as described below. If it cannot be determined at the time a distribution
is made whether or not such distribution will be in excess of current and
accumulated earnings and profits, such distribution will be subject to
withholding at the rate applicable to dividends. However, the Non-U.S.
Shareholder may seek a refund of such amounts from the IRS if it is subsequently
determined that such distribution was, in fact, in excess of current and
accumulated earnings and profits of the Company.
Under proposed Treasury Regulations, withholding procedures would be
revised. Should the proposal be adopted, withholding generally would be at
either 31 percent or 30 percent unless a new Form W-8 is filed with the Company
by the beneficial owner to establish entitlement to treaty benefits or exemption
based upon the income being 'effectively connected'. In some instances,
additional documentation might be required from the beneficial owner, including
an individual taxpayer identification number from the IRS and a certification of
tax status from the tax authorities of the beneficial owner's country of
residence.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ('FIRPTA'). Under
FIRPTA, these distributions are taxed to a Non-U.S. Shareholder as if such gain
were effectively connected with a U.S. business. Thus, Non-U.S. Shareholders
would be taxed at the normal capital gain rates applicable to U.S. shareholders
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals). Also, distributions subject
to FIRPTA may be subject to a 30% branch profits tax in the hands
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of a corporate Non-U.S. Shareholder not entitled to treaty relief or exemption.
The Company is required by applicable Treasury Regulations to withhold 35% of
any distribution that could be designated by the Company as a capital gain
dividend. This amount is creditable against the Non-U.S. Shareholder's FIRPTA
tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of Common Stock
generally will not be taxed under FIRPTA if a REIT is a domestically controlled
REIT, defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the stock was held directly or
indirectly by foreign persons. It is currently anticipated that the Company will
be a 'domestically controlled REIT,' and therefore the sale of Common Stock will
not be subject to taxation under FIRPTA. However, gain not subject to FIRPTA
will be taxable to a Non-U.S. Shareholder if (i) investment in the Common Stock
is 'effectively connected' with the Non-U.S. Shareholder's U.S. trade or
business, in which case the Non-U.S. Shareholder will be subject to the same
treatment as U.S. shareholders with respect to such gain, or (ii) the Non-U.S.
Shareholder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and has a 'tax home' in the
United States, in which case the nonresident alien individual will be subject to
a 30% tax on the individual's capital gains. If the gain on the sale of Common
Stock were to be subject to taxation under FIRPTA, the Non-U.S. Shareholder
would be subject to the same treatment as U.S. shareholders with respect to such
gain (subject to applicable alternative minimum tax, possible withholding tax
and a special alternative minimum tax in the case of nonresident alien
individuals).
New Withholding Regulations. Final regulations pertaining to withholding
tax on income paid to foreign persons and related matters (the 'New Withholding
Regulations') were issued by the Treasury Department on October 6, 1997 and
published in the Federal Register on October 14, 1997. In general, the New
Withholding Regulations do not significantly alter the substantive withholding
and information reporting requirements, but unify current certification
procedures and forms and clarify reliance standards. For example, the New
Withholding Regulations adopt a certification rule which was in the proposed
regulations, under which a foreign shareholder who wishes to claim the benefit
of an applicable treaty rate with respect to dividends received from a United
States corporation will be required to satisfy certain certification and other
requirements. In addition, the New Withholding Regulations require a corporation
that is a REIT to treat as a dividend the portion of a distribution that is not
designated as a capital gain dividend or return of basis and apply the 30%
withholding tax (subject to any applicable deduction or exemption) to such
portion, and to apply the FIRPTA withholding rules (discussed above) with
respect to the portion of the distribution designated by the REIT as capital
gain dividend. The New Withholding Regulations will generally be effective for
payments made after December 31, 1998, subject to certain transition rules. THE
DISCUSSION SET FORTH ABOVE IN 'TAXATION OF FOREIGN SHAREHOLDERS' DOES NOT TAKE
THE NEW WITHHOLDING REGULATIONS INTO ACCOUNT. PROSPECTIVE FOREIGN SHAREHOLDERS
ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW
WITHHOLDING REGULATIONS.
OTHER TAX CONSIDERATIONS
Effect on REIT Qualification of Tax Status of Operating Partnership and
Other Partnerships. Substantially all of the Company's investments will be held
through the Operating Partnership, which in turn will hold interests in other
partnerships. These partnerships may involve special tax risks, including the
possible challenge by the IRS of (i) allocations of income and expense items,
which could affect the computation of taxable income of the Company, and (ii)
the status of the partnerships as partnerships (as opposed to associations
taxable as corporations) for income tax purposes. This partnership status risk
should be substantially diminished by Treasury Regulations issued on December
17, 1996, permitting election of partnership status effective January 1, 1997 by
the filing of Form 8823 or in certain other ways specified in the new
Regulations. With respect to the Company's existing partnership investments, the
new Regulations provide that (1) previously claimed partnership status, if
supported by a reasonable basis for classification, will generally be respected
for all periods prior to January 1, 1997; and (2) previously claimed partnership
status will generally be retained after January 1, 1997, unless an entity elects
to change its status by filing a formal election. The Company believes that it
has a reasonable basis for the classification of the Operating Partnership, the
Contributing Partnerships and the Holding Partnerships as partnerships for
federal income tax purposes and has neither filed nor does the Company intend to
file an election to be treated otherwise. If any of the partnerships elected to
be treated as an association, they would be taxable as corporations. In such a
situation, if the Company's ownership interest in any of the partnerships
exceeded 10% of the partnership's voting interests or the value of such interest
exceeded
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5% of the value of the Company's assets, the Company would cease to qualify as a
REIT. Furthermore, in such a situation, distributions from any of the
partnerships to the Company would be treated as dividends, which are not taken
into account in satisfying the 75% 'gross income test' described above and which
could therefore make it more difficult for the Company to meet the 75% asset
test described above. Finally, in such a situation the Company would not be able
to deduct its share of losses generated by any of the partnerships in computing
its taxable income. See '--Taxation of the Company--Failure to Qualify' above
for a discussion of the effect of the Company's failure to meet such tests for a
taxable year. The Company believes that the partnerships in which it owns
interests have been and will continue to be treated as partnerships (rather than
as associations taxable as corporations) for federal income tax purposes.
However, no assurance can be given that the IRS may not successfully challenge
the status of any partnerships.
Tax Allocations With Respect to Contributed Properties. Pursuant to
Section 704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated property that is contributed to a partnership in exchange for an
interest in the partnership must be allocated for federal income tax purposes in
a manner such that the contributor is charged with the unrealized gain
associated with the property at the time of the contribution. The amount of such
unrealized gain is generally equal to the difference between the fair market
value of the contributed property at the time of contribution and the adjusted
tax basis of such property at the time of contribution (the 'Book-Tax
Difference'). In general, the fair market value of the interests in the various
Partnerships contributed to the Operating Partnership will be substantially in
excess of their adjusted tax bases. The partnership agreements of each of the
Operating Partnership and the Holding Partnerships require that allocations
attributable to each item of contributed property be made so as to allocate the
tax depreciation available with respect to such property first to the partners
other than the partner that contributed the property, to the extent of, and in
proportion to, their book depreciation, and then, if any tax depreciation
remains, to the partner that contributed the property. Upon the disposition of
any item of contributed property, any gain attributable to an excess at such
time of basis for book purposes over basis for tax purposes would be allocated
for tax purposes to the contributing partner. These allocations are intended to
be consistent with the Treasury Regulations under Section 704(c) of the Code.
In general, the Philips Group will be allocated disproportionately lower
amounts of depreciation deductions for tax purposes relative to their percentage
interests in the Operating Partnership, and disproportionately greater shares
relative to their percentage interests in the Operating Partnership of the
taxable income and gain on the sale by the Partnerships of one or more of the
contributed properties. These tax allocations will tend to reduce or eliminate
the Book-Tax Difference over the life of the Partnerships. The partnership
agreements of the Operating Partnership and the Holding Partnerships will adopt
the 'traditional method' of allocating items under Section 704(c) of the Code,
unless otherwise agreed to between the Company and the contributing partner.
Under the traditional method the amounts of the special allocations of
depreciation and gain under the special rules of Section 704(c) of the Code will
be limited by the so-called 'ceiling rule' and will not always eliminate the
Book-Tax Difference on an annual basis or with respect to a specific transaction
such as a sale. Thus, the carryover basis of the contributed assets in the hands
of the partnerships will cause the Company to be allocated less depreciation
than would be available for newly purchased properties.
State and Local Taxes. The Company and its shareholders may be subject to
state or local taxation in various state or local jurisdictions, including those
in which it or they transact business or reside. The state and local tax
treatment of the Company and its shareholders may not conform to the federal
income tax consequences discussed above. Consequently, prospective shareholders
should consult their own tax advisors regarding the effect of state and local
tax laws on an investment in the Common Stock of the Company.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ('ERISA'), and the
prohibited transaction provisions of Section 4975 of the Code that may be
relevant to a prospective purchaser (including, with respect to the discussion
contained below in '--Status of the Company, the Operating Partnership and the
Holding Partnerships under ERISA', to a prospective purchaser that is not an
employee benefit plan, another tax-qualified retirement plan or an individual
retirement account ('IRA')). This discussion does not purport to deal with all
aspects of ERISA or Section 4975 of the Code or, to the extent not pre-empted,
state law that may be relevant to particular employee benefit plan
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shareholders (including plans subject to Title I of ERISA, other employee
benefit plans and IRAs subject to the prohibited transaction provisions of
Section 4975 of the Code, and governmental plans and church plans that are
exempt from ERISA and Section 4975 of the Code but that may be subject to state
law requirements) in light of their particular circumstances.
A FIDUCIARY MAKING THE DECISION TO INVEST IN SHARES OF COMMON STOCK ON
BEHALF OF A PROSPECTIVE PURCHASER WHICH IS AN ERISA PLAN, A TAX-QUALIFIED
RETIREMENT PLAN, AN IRA OR OTHER EMPLOYEE BENEFIT PLAN IS ADVISED TO CONSULT ITS
OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA,
SECTION 4975 OF THE CODE, AND (TO THE EXTENT NOT PRE-EMPTED) STATE LAW WITH
RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF SHARES OF COMMON STOCK BY SUCH
PLAN OR IRA.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of an employee benefit plan subject to Title I of ERISA (an
'ERISA Plan') should carefully consider whether an investment in shares of
Common Stock is consistent with its fiduciary responsibilities under ERISA. In
particular, the fiduciary requirements of Part 4 of Title I of ERISA require (i)
an ERISA Plan's investments to be prudent and in the best interests of the ERISA
Plan, its participants and beneficiaries, (ii) an ERISA Plan's investments to be
diversified in order to reduce the risk of large losses, unless it is clearly
prudent not to do so, (iii) an ERISA Plan's investments to be authorized under
ERISA and the terms of the governing documents of the ERISA Plan and (iv) that
the fiduciary not cause the ERISA Plan to enter into transactions prohibited
under Section 406 of ERISA. In determining whether an investment in shares of
Common Stock is prudent for purposes of ERISA, the appropriate fiduciary of an
ERISA Plan should consider all of the facts and circumstances, including whether
the investment is reasonably designed, as a part of the ERISA Plan's portfolio
for which the fiduciary has investment responsibility, to meet the objectives of
the ERISA Plan, taking into consideration the risk of loss and opportunity for
gain (or other return) from the investment, the diversification, cash flow and
funding requirements of the ERISA Plan, and the liquidity and current return of
the ERISA Plan's portfolio. A fiduciary should also take into account the nature
of the Company's business, the length of the Company's operating history and
other matters described under 'Risk Factors.'
The fiduciary of an IRA or of an employee benefit plan not subject to Title
I of ERISA because it is a governmental or church plan or because it does not
cover common law employees (a 'Non-ERISA Plan') should consider that such an IRA
or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents, not prohibited under Section 4975 of the Code
and permitted under applicable state law.
STATUS OF THE COMPANY, THE OPERATING PARTNERSHIP AND THE HOLDING PARTNERSHIPS
UNDER ERISA
In determining whether the fiduciary requirements of ERISA and the
prohibited transactions provisions of ERISA and the Code apply to an entity's
operations because one or more investors in the entity's equity interest is an
ERISA Plan or is a Non-ERISA Plan or IRA subject to Section 4975 of the Code, it
is necessary to determine whether such plan or IRA is deemed also to own a
undivided interest in the assets of that entity under Department of Labor
regulations defining 'plan assets' (the 'DOL Regulation'). An ERISA Plan
fiduciary should also consider the relevance of these principles to ERISA's
prohibition on improper delegation of control over or responsibility for 'land
assets' and ERISA's imposition of co-fiduciary liability on a fiduciary who
participates in, permits (by action or inaction) the occurrence of, or fails to
remedy a known breach by another fiduciary. The DOL Regulation provides that if
such a plan or IRA acquires 'publicity offered securities' sold pursuant to an
effective registration statement under the Securities Act and subsequently
registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934,
as amended, which are widely held by at least 100 holders independent of the
issuer and each other and freely transferable, such plan or IRA would not be
deemed to own an undivided interest in the assets of such entity. The DOL
Regulation provides that whether a security is 'freely transferable' is a
factual question based on all facts and circumstances.
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OTHER BUSINESS
The Board of Trustees does not intend to bring any other matters before the
Meeting and does not know of any matters to be brought before the Meeting by
others. If any other matter should come before the Meeting, it is the intention
of the persons named in the accompanying proxy to vote the proxy on behalf of
the shareholders they represent in accordance with their best judgment.
Proxies are being solicited on behalf of the Board of Trustees. All
expenses of this solicitation, including the cost of preparing and mailing this
Proxy Statement/Prospectus, will be borne by National and reimbursed by the
Company. In addition to solicitation by use of the mails, proxies may be
solicited by the Trustees of National in person or by telephone, telegram or
other means of communication. The Trustees will not be additionally compensated,
but may be reimbursed for out-of-pocket expenses in connection with such
solicitation. Arrangements will also be made with custodians, nominees and
fiduciaries for forwarding the proxy solicitation material to beneficial owners
of National Shares held of record by such persons, and National may reimburse
such custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith. In addition, The Herman Group, Inc. has been engaged to
solicit proxies on behalf of National for a fee of $10,000, excluding any
additional expenses which might be incurred.
EXPERTS
The financial statements of Philips International Realty Corp. as of
September 30, 1997, the combined financial statements of The Philips Company as
of December 31, 1996 and 1995 and for each of the three years in the period
ended December 31, 1996, and the statements of revenues and certain expenses of
the Merrick/Mill Basin Properties for each of the three years in the period
ended December 31, 1996, all appearing in this Proxy Statement/Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
The financial statements of National Properties Investment Trust as of
December 31, 1996 and 1995 and for each of the two years in the period ended
December 31, 1996, all appearing in this Proxy Statement/Prospectus and
Registration Statement, have been audited by Bernardi, Alfin & Koos, L.L.C.,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
The financial statements of National Properties Investment Trust as of
December 31, 1994 and for the year then ended, appearing in this Proxy
Statement/Prospectus and Registration Statement, have been audited by Kostin,
Ruffkess & Company, LLC, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
LEGAL MATTERS
Certain legal matters in connection with the Formation Transactions as well
as certain legal matters described under 'Federal Income Tax Considerations'
will be passed upon for the Company by Pryor, Cashman, Sherman & Flynn, New
York, New York. Legal matters relating to Maryland law, including the validity
of the issuance of shares of the Common Stock offered hereby, will be passed
upon for the Company by Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland.
Legal matters relating to Massachusetts law as well as certain legal matters
described under 'Formation Transactions and Structure of the Company--Certain
Federal Income Tax Consequences' will be passed upon for National by Bingham
Dana LLP, Boston, Massachusetts.
134
<PAGE>
GLOSSARY OF CERTAIN DEFINED TERMS
Affiliate means (i) any person directly or indirectly controlling,
controlled by or under common control with another person, (ii) any person
owning or controlling 5% or more of the outstanding voting securities or
beneficial interests of such other person, (iii) any officer, retired officer,
director, trustee, employee or general partner of such person and (iv) if such
other person is an officer, director, trustee or partner of another entity, then
the entity for which that person acts in any such capacity.
Book-Tax Difference means the difference between the fair market value of
the contributed property at the time of contribution and the adjusted tax basis
of such property at the time of contribution.
Board of Directors means the Board of Directors of the Company.
Board of Trustees means the Board of Trustees of National.
By-Laws mean the Company's Amended and Restated By-Laws.
Capital Stock means the capital stock of the Company.
Charter means the Company's Amended and Restated Articles of Incorporation.
Closing means the closing of the transactions contemplated by the
Contribution and Exchange Agreement.
Code means the Internal Revenue Code of 1986, as amended.
Commission means the Securities and Exchange Commission.
Common Stock means the common stock, $.01 par value per share, of the
Company.
Company means Philips International Realty Corp., a Maryland corporation.
Contributing Partnerships mean certain contributing partnerships or limited
liability companies affiliated with Philips Private Company that will contribute
the Partnership Properties pursuant to the Contribution and Exchange Agreement.
Contribution and Exchange Agreement means the Contribution and Exchange
Agreement, dated as of August 11, 1997, among National, the Board of Trustees,
the Company, the Operating Partnership and the Contributing Partnerships.
Control share acquisition means the acquisition of Control shares, subject
to certain exceptions.
Control shares mean those voting shares of stock which, if aggregated with
all other such shares of stock previously acquired by the acquiror, or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power (except solely by revocable proxy), would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of voting power: (i) one-fifth or more but less than one-third, (ii) one-third
or more but less than a majority or (iii) a majority of all voting power;
provided, however that 'Control shares' do not include shares of stock the
acquiring person is then entitled to vote as a result of having previously
obtained shareholder approval.
Counsel means Pryor, Cashman, Sherman & Flynn, counsel to the Company.
Debt-to-Total Capitalization Ratio means the ratio of total debt of the
Company to the sum of the aggregate Net Asset Value plus the total debt of the
Company.
Declaration of Trust means the Restated Declaration of Trust of National.
DOL Regulation means Department of Labor regulations.
ERISA means the Employee Retirement Income Security Act of 1974, as
amended.
ERISA Plan means an employee benefit plan subject to Title I of ERISA.
Exchange Act means the Securities Exchange Act of 1934, as amended.
Excluded Properties means those retail shopping center properties
beneficially owned and controlled by the principals of Philips Private Company
that will not be transferred to the Company in the Formation Transactions.
135
<PAGE>
Executive Officers means Mr. Philip Pilevsky, Ms. Sheila Levine, Mr. Louis
Petra and Mr. Brian Gallagher.
FIRPTA means the Foreign Investment in Real Property Tax Act of 1980.
Formation Transactions mean the transactions resulting in the formation of
the Company and the Operating Partnership, including the contribution of nine
properties by the Philips Group and the acquisition of the National Property.
GLA means gross leasable area.
Holding Partnerships means certain newly formed limited partnerships which
will receive, pursuant to the Contribution and Exchange Agreement, fee title to
the Properties located in New York and Connecticut and the general partnership
interests of those Contributing Partnerships that are general partnerships.
Interested Stockholder means any person who beneficially owns 10% or more
of the voting power of the Company's shares or an affiliate of the Company who,
at any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the Company's then
outstanding shares.
Independent Directors means those members of the Board of Directors of the
Company who are not officers or employees of the Company, or directors, officers
or employees of Philips Private Company or their respective affiliates or any of
their predecessors.
Interim Managing General Partner means Philips International Realty, LLC, a
Delaware limited liability company.
IRA means an individual retirement account.
Management Agreement means a management agreement by and among the Company,
the Operating Partnership and the Management Company.
Management Company means Philips International Holding Corp., an affiliate
of Philips Private Company.
MBCL means the Massachusetts Business Corporation Law.
Meeting means the Meeting of Shareholders of National to be held on
December 30, 1997, at the offices of Pryor, Cashman, Sherman & Flynn, 410 Park
Avenue, New York, New York 10022, at 3:00 p.m., local time, and any adjournment
thereof.
MGCL means the Maryland General Corporation Law.
NAREIT means the National Association of Real Estate Investment Trusts.
National means National Properties Investment Trust, a Massachusetts
business trust, f/k/a Richard Roberts Real Estate Growth Trust I.
National Property means the Lake Mary, Florida shopping center property
owned by National.
National Shares means shares of beneficial interest of National.
Net Asset Value means the pro forma net asset value of the Company at the
closing of the Formation Transactions, after taking into account all allocated
expenses in connection therewith, determined as set forth in 'Formation
Transactions and Structure of the Company--Calculation of Net Asset Value'.
Non-Competition Agreement means the non-competition agreement by and among
the Operating Partnership, the Company, the Management Company, Mr. Pilevsky and
Ms. Levine.
Non-ERISA Plan means an employee benefit plan not subject to Title I of
ERISA because it is a governmental or church plan or because it does not cover
common law employees.
Non-U.S. Shareholders mean nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign shareholders.
Offering means one or more public offerings or private equity placements of
securities of the Company with gross proceeds aggregating in excess of $25
million.
136
<PAGE>
Operating Partnership means Philips International Realty, L.P., a Delaware
limited partnership.
Opinion means the opinion of Prudential Securities.
Ownership Limit means the restriction contained in the Company's Charter
providing that, subject to certain exceptions, no holder may own, or be deemed
to own by virtue of the constructive ownership provisions of the Code, more than
6.5% (by number or value, whichever is more restrictive) of the outstanding
shares of Capital Stock of the Company.
Partnership Agreement means the Agreement of Limited Partnership of the
Operating Partnership.
Partnership Properties mean the interests and/or assets of certain
partnerships, limited liability companies and affiliates of the Philips Group in
a portfolio of nine shopping center properties to be contributed to the Company
pursuant to the Contribution and Exchange Agreement.
Philips Group means Philip Pilevsky and certain other persons who will
receive Units in connection with the contribution of properties of, or
partnership or membership interests in, the Contributing Partnerships.
Philips Private Company means a private real estate firm controlled by Mr.
Philip Pilevsky.
Philips Subs mean newly formed wholly owned subsidiaries of the Company
which will receive, pursuant to the Contribution and Exchange Agreement, all of
the general partnership interests or managing membership interests in those
Contributing Partnerships that are limited partnerships or limited liability
companies and which do not own fee title to Properties located in New York and
Connecticut.
Preferred Stock means the 30,000,000 shares of preferred stock, par value
$.01 per share, of the Company.
Properties mean the National Property and the Partnership Properties.
Proxy Statement/Prospectus means this Proxy Statement and Prospectus.
Prudential Securities means Prudential Securities Incorporated
Record Date means the close of business on December 4, 1997.
Registrable Shares mean the shares of Common Stock acquired upon the
redemption of Units.
Registration Rights mean the certain 'shelf' registration rights with
respect to the Registrable Shares granted by the Company to the members of the
Philips Group receiving Units in connection with the Formation Transactions.
Registration Rights Agreement means the Registration Rights Agreement
between the Company and the holders of the Units to be entered into upon
consummation of the Formation Transactions.
Registration Statement means the Company's registration statement on Form
S-4 filed with the Commission under the Securities Act with respect to the
securities offered pursuant to the Proxy Statement/Prospectus.
REIT means a real estate investment trust.
Related Party Tenant means a tenant of which the Company or an owner of l0%
or more of the Company, directly or constructively, owns 10% or more.
Restricted Shares mean the Common Stock issued to Mr. Pilevsky and the
Trustees, the Units, the Trustees Warrants and the shares issuable upon
redemption of the Units or exercise of the Trustees Warrants.
Rule 144 means Rule 144 promulgated under the Securities Act.
Securities Act means the Securities Act of 1933, as amended.
Series A Preferred Stock means the convertible redeemable Series A
Preferred Stock, liquidation preference $1,000 per share, of the Company.
Surviving Partnership means the surviving entity of a merger or other
combination of assets involving the Company and another entity in which
substantially all of the assets directly or indirectly owned by the surviving
entity are held directly or indirectly by the Operating Partnership or another
limited partnership or limited
137
<PAGE>
liability company which is the survivor of a merger, consolidation or
combination of assets with the Operating Partnership.
Termination Transaction means the Company's merger, consolidation or other
combination with or into another person, the Company's sale of all or
substantially all of its assets or any reclassification, recapitalization or
change of the Company's outstanding equity interests.
Transaction Agreements mean the Contribution and Exchange Agreement and the
amendment to the Declaration of Trust.
Treasury Regulations mean the regulations promulgated under the Code.
Trustees means each of the members of the Board of Trustees of National.
Trustees Securities means the Trustees Stock and the Trustees Warrants.
Trustees Stock means the 5,000 shares of Common Stock issued to Messrs.
Stein and Goldman pursuant to the Contribution and Exchange Agreement.
Trustees Warrants mean warrants issued to Messrs. Stein and Goldman
pursuant to the Contribution and Exchange Agreement to purchase an aggregate of
8,000 shares of Common Stock at an exercise price of $25.00 per share.
UBTI means unrelated business taxable income.
Unaffiliated Shareholders means the shareholders of National who are not
Affiliates of National.
Units mean the units of limited partnership interests of the Operating
Partnership.
138
<PAGE>
INDEX TO FINANCIAL INFORMATION
<TABLE>
<S> <C>
NATIONAL PROPERTIES INVESTMENT TRUST
Financial Statements:
Accountants' Review Report............................................................................. F-2
Comparative Balance Sheet as of September 30, 1997 (unaudited) and December 31, 1996................... F-3
Comparative Statement of Operations for the Quarters and Nine Months Ended September 30, 1997 and 1996
(unaudited)........................................................................................... F-4
Comparative Statement of Changes in Shareholders' Equity for the Nine Months Ended September 30, 1997
and 1996.............................................................................................. F-5
Comparative Statement of Cash Flows for the Nine Months ended September 30, 1997 and 1996.............. F-6
Notes to the Financial Statements...................................................................... F-7
Reports of Independent Auditors........................................................................ F-11
Comparative Balance Sheet as of December 31, 1996 and 1995............................................. F-13
Comparative Statement of Operations for the Years Ended December 31, 1996, 1995 and 1994............... F-14
Comparative Statement of Changes in Shareholders' Equity for the Years Ended December 31, 1996, 1995
and 1994.............................................................................................. F-15
Comparative Statement of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994............... F-16
Comparative Schedule of Rental Expenses for the Years Ended December 31, 1996, 1995
and 1994............................................................................................. F-17
Notes to the Financial Statements...................................................................... F-18
Schedule III, Real Estate and Accumulated Depreciation as of December 31, 1996......................... F-24
PHILIPS INTERNATIONAL REALTY CORP.
Pro Forma Condensed Financial Statements (unaudited):
Pro Forma Condensed Balance Sheet as of September 30, 1997........................................... F-27
Pro Forma Condensed Statements of Operations for the Year Ended December 31, 1996.................... F-29
Pro Forma Condensed Statements of Operations for the Nine Months Ended September 30, 1997............ F-29
Historical
Report of Independent Auditors....................................................................... F-40
Balance Sheet as of September 30, 1997............................................................... F-41
Statement of Operations and Deficit for the Period August 31, 1997 (inception) to September 30,
1997................................................................................................ F-42
Statement of Cash Flows for the Period August 31, 1997 (inception) to September 30, 1997............. F-43
Notes to Financial Statements........................................................................ F-44
PHILIPS INTERNATIONAL REALTY L.P.
Pro Forma Condensed Financial Statements (unaudited)
Pro Forma Condensed Balance Sheet as of September 30, 1997........................................... F-30
Pro Forma Condensed Statement of Operations for the Year Ended December 31, 1996..................... F-32
Pro Forma Condensed Statement of Operations for the Nine Months Ended September 30, 1997............. F-32
EQUITY INVESTEES
Pro Forma Condensed Financial Statements (unaudited)
Pro Forma Condensed Combined Balance Sheet as of September 30, 1997.................................. F-33
Notes to Pro Forma Condensed Combined Balance Sheet.................................................. F-34
Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 1996............ F-36
Pro Forma Condensed Combined Statement of Operations for the Nine Months Ended September 30, 1997.... F-37
Notes to Pro Forma Condensed Combined Statement of Operations........................................ F-38
THE PHILIPS COMPANY
Combined Financial Statements:
Report of Independent Auditors....................................................................... F-46
Combined Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996
and 1995........................................................................................... F-47
Combined Statements of Income for the Nine Months Ended September 30, 1997 and 1996 (unaudited) and
for the Years Ended December 31, 1996, 1995 and 1994................................................ F-48
Combined Statements of Owners' Deficit for the Nine Months Ended September 30, 1997 (unaudited) and
for the Years Ended December 31, 1996, 1995 and 1994................................................ F-49
Combined Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996 (unaudited)
and for the Years Ended December 31, 1996, 1995 and 1994............................................ F-50
Notes to Combined Financial Statements............................................................... F-51
Schedule III--Real Estate and Accumulated Depreciation as of December 31, 1996....................... F-62
MERRICK COMMONS AND MILL BASIN PLAZA PROPERTIES
Combined Statement of Revenue and Certain Expenses
Report of Independent Auditors....................................................................... F-64
Combined Statements of Revenues and Certain Expenses for the Nine Months Ended
September 30, 1997 and 1996 (unaudited) and for the Years Ended December 31, 1996, 1995 and 1994... F-65
Notes to Combined Statements of Revenues and Certain Expenses........................................ F-66
</TABLE>
F-1
<PAGE>
[letterhead of Bernardi, Alfin & Koos, LLC.]
Trustees
National Properties Investment Trust
P.O. Box 148
Canton Center, Connecticut 06020
We have reviewed the accompanying balance sheet of National Properties
Investment Trust as of September 30, 1997 and the related statements of
operations for the quarter and nine months ended September 30, 1997 and 1996,
and changes in shareholders' equity and cash flows for the nine months ended
September 30, 1997 and 1996, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants. All information included in these financial statements is
the representation of the management of National Properties Investment Trust.
A review of interim financial information consists principally of inquiries
of company personnel and analytical procedures applied to financial data. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of December 31, 1996, and the related statements
of operations, shareholders' equity and cash flows for the year then ended (not
presented herein). In our reports dated March 18, 1997 and October 7, 1997, we
expressed an unqualified opinion on those financial statements. In our opinion,
the information set forth in the accompanying balance sheet as of December 31,
1996 is fairly stated in all material respects in relation to the balance sheet
from which it has been derived.
Respectfully submitted,
/s/ Bernardi, Alfin & Koos, L.L.C.
BERNARDI, ALFIN & KOOS, L.L.C.
Certified Public Accountants
[West Hartford, Connecticut]
November 5, 1997
F-2
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
COMPARATIVE BALANCE SHEET
SEE ACCOUNTANTS' REVIEW REPORT
<TABLE>
<CAPTION>
SEPTEMBER
30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Investments in real estate and personal property.................................. $ 1,006,333 $ 948,583
Cash and cash equivalents......................................................... 14,492 44,403
Receivables....................................................................... 22,121 18,248
Other assets...................................................................... 24,681 39,633
------------ ------------
Total assets...................................................................... $ 1,067,627 $ 1,050,867
------------ ------------
------------ ------------
LIABILITIES
Accounts payable and accrued expenses............................................. $ 36,509 $ 53,107
Security deposits held and prepaid rent........................................... 26,958 20,821
Mortgage payable.................................................................. 549,636 571,258
------------ ------------
Total liabilities................................................................. 613,103 645,186
------------ ------------
SHAREHOLDERS' EQUITY
Shares of beneficial interest, no par value, unlimited authorization, shares
issued and outstanding were 749,276 in 1997 and 718,860 in 1996................. 11,791,866 11,754,966
Accumulated deficit............................................................... (11,337,342) (11,349,285)
------------ ------------
Total shareholders' equity........................................................ 454,524 405,681
------------ ------------
Total liabilities and shareholders' equity........................................ $ 1,067,627 $ 1,050,867
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
COMPARATIVE STATEMENT OF OPERATIONS
SEE ACCOUNTANTS' REVIEW REPORT
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Property operations:
Gross rental income............................................ $ 92,636 $ 81,828 $268,323 $260,265
Rental expenses................................................ (62,306) (61,690) (182,268) (184,054)
General and administrative expenses............................ (28,705) (21,890) (74,643) (73,933)
-------- -------- -------- --------
Net income (loss) from property operations.................. 1,625 (1,752) 11,412 2,278
Other income (expense):
Interest income................................................ 134 309 531 1,342
-------- -------- -------- --------
Net income (loss)................................................ $ 1,759 $ (1,443) $ 11,943 $ 3,620
-------- -------- -------- --------
-------- -------- -------- --------
Income per share of beneficial interest.......................... $ -- $ -- $ 0.02 $ 0.01
-------- -------- -------- --------
-------- -------- -------- --------
Average number of shares of beneficial interest.................. 749,276 718,860 742,394 718,860
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
COMPARATIVE STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
SEE ACCOUNTANTS' REVIEW REPORT
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
------- ------------ ------- ------------
<S> <C> <C> <C> <C>
Shares of beneficial interest
Balance--beginning of the period.......................... 718,860 $ 11,754,966 718,860 $ 11,735,447
Shares issued............................................. 30,416 36,900 -- --
------- ------------ ------- ------------
Balance--end of the period.................................. 749,276 $ 11,791,866 718,860 $ 11,735,447
------- ------------ ------- ------------
------- ------------ ------- ------------
Accumulated deficit
Balance--beginning of the period.......................... $(11,349,285) $(11,274,829)
Net income................................................ 11,943 3,620
Dividends paid.............................................. -- (36,339)
------------ ------------
Balance--end of the period.................................. $(11,337,342) $(11,307,548)
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
COMPARATIVE STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SEE ACCOUNTANTS' REVIEW REPORT
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................................. $ 11,943 $ 3,620
-------- --------
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization............................................................ 40,838 37,329
Changes in assets and liabilities
Receivables........................................................................... (3,873) (9,285)
Other assets.......................................................................... 8,220 4,709
Accounts payable and accrued expenses................................................. (16,598) 3,454
Security deposits held and prepaid rent............................................... 6,137 --
-------- --------
Total adjustments................................................................... 34,724 36,207
-------- --------
Net cash provided by operating activities.................................................. 46,667 39,827
-------- --------
Cash flows from investing activities:
Purchase of personal property.............................................................. (91,856) (17,348)
-------- --------
Cash flows from financing activities:
Principal payments on debt................................................................. (21,622) (19,167)
Proceeds from the issuance of shares....................................................... 36,900 --
Dividends paid............................................................................. -- (36,339)
-------- --------
Net cash provided by (used in) financing activities...................................... 15,278 (55,506)
-------- --------
Net increase (decrease) in cash and cash equivalents....................................... (29,911) (33,027)
Cash and cash equivalents, beginning of the period......................................... 44,403 108,081
-------- --------
Cash and cash equivalents, end of the period............................................... $ 14,492 $ 75,054
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES
A. ORGANIZATION:
National Properties Investment Trust (formerly Richard Roberts Real Estate
Growth Trust I) (the 'Trust') was organized on January 16, 1985 as a
Massachusetts Business Trust. The Trust invests directly in equity interests in
commercial, industrial and/or residential properties in the United States which
have income-producing capabilities and intends to hold its properties for
long-term investment. The Trust currently owns a single property located in
central Florida. The results of the Trust's operations depend upon the Trust's
property's competitive position in its respective leasing market. The Shoppes at
Lake Mary, a strip shopping center located in Lake Mary, Florida, is the Trust's
sole remaining property.
B. BASIS OF PRESENTATION:
The accompanying unaudited financial statements of the Trust have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three- and nine-month periods ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. For further information, refer to
the financial statements and accompanying footnotes thereto included in the
Trust's annual report on Form 10-K for the year ended December 31, 1996.
C. METHOD OF ACCOUNTING:
The financial statements of the Trust have been prepared on the accrual
basis of accounting.
D. CASH EQUIVALENTS:
For financial statement purposes, the Trust considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
E. INCOME TAXES:
The Trust has made for prior years, and intends to make for 1997, an
election to file as a real estate investment trust (REIT) for federal tax
purposes, and if so qualified, will not be taxed on earnings distributed to
shareholders. Accordingly, no provision for federal income taxes has been made
for the periods ended September 30, 1997 and September 30, 1996. However, the
Trust is subject to state income taxes, where applicable.
F. REAL ESTATE ASSETS AND DEPRECIATION:
The Trust recognizes impairment losses for long-lived assets, on a property
by property basis, used in operations when indicators of impairment are present
and the undiscounted future cash flows are not sufficient to recover the asset's
carrying value. If such indicators are present, an impairment loss is recognized
based on the excess of the carrying amount of the impaired asset over its fair
value during the period that the indicators are present.
For long-lived assets to be disposed of, impairment losses are recognized
when the fair value of the asset, less the estimated cost to sell, is less than
the carrying value of the asset measured at the time management commits to a
plan to dispose of the asset. Assets are classified as assets to be disposed of
when management has committed to sell and is actively marketing the property.
Assets to be disposed of are carried at the lower of carrying value or fair
value less cost to dispose, determined on an asset by asset basis. Depreciation
is not recorded during the period in which assets are held for disposal and
gains (losses) from initial and subsequent adjustments to the carrying value of
the assets, if any, are recorded as a separate component of income from
continuing operations.
F-7
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
No impairment losses have been recognized since the Trust's adoption of
Statement of Financial Accounting Standards ('SFAS') No. 121 'Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.'
Depreciation was computed using the straight-line method over an estimated
depreciable life of 40 years for real property, 7 years for personal property,
and over the life of the related lease for tenant improvements.
G. ACCUMULATED DEFICIT:
The accumulated deficit, reported as a reduction of Shareholders' Equity,
includes net losses recognized and distributions made to Shareholders as a
return of capital invested.
H. USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
NOTE 2--RELATED PARTY TRANSACTIONS
The Trust has entered into a temporary management agreement with the
Managing Trustee for a one-year term. The agreement calls for the Managing
Trustee to be paid $4,000 per month plus Trust related expenses. The Trust paid
the Managing Trustee $12,000 and $36,000 as compensation for managing the Trust
property for the quarter and nine months ended September 30, 1997, respectively.
In addition, the Trust offices are located at premises owned by the Managing
Trustee. No rent was charged to the Trust in the quarter and nine months ended
September 30, 1997, although the Trust paid utility bills for the office of $435
and $1,571 in the quarter and nine months ended September 30, 1997,
respectively.
On March 3, 1997, the Trust issued 30,416 shares of beneficial interest to
an IRA for the benefit of a Trustee of the Trust. The shares were issued for
$1.2132 per share, totaling $36,900.
NOTE 3--EARNINGS PER SHARE
Earnings per Share of Beneficial Interest are computed on the weighted
average number of Shares of Beneficial Interest outstanding during the period.
NOTE 4--INVESTMENT IN REAL ESTATE AND PERSONAL PROPERTY
The Trust purchased The Shoppes at Lake Mary, a 38,125 square foot shopping
center located in Lake Mary, Florida on March 31, 1986 for $3,200,000. Pursuant
to the purchase agreement, the seller guaranteed that the revenues generated by
the project during the first two years of its operation would be at least equal
to the aggregate of all expenses incurred in connection with the use and
operation of the project during each such year plus $360,000. The seller placed
$300,000 of the purchase price in an interest bearing escrow account as security
for the guarantee. On September 26, 1986, the Trust released the seller from the
guarantee in consideration for the funds held in escrow. The funds held in
escrow were forwarded to the Trust on October 2, 1986. The basis of the property
acquired has been reduced by the amount received under the terms of the cash
flow guarantee. On December 31, 1991 the Trust reduced the book value of real
property by $1,677,901 to its net realizable value.
All of the Trust's property is recorded at historical cost, except for its
real property which is recorded at its historical cost, less $310,762 for the
reduction in basis due to the release of funds escrowed at closing, and less a
$1,677,901 loss reserve to reduce the property value to its net realizable
value.
F-8
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--INVESTMENT IN REAL ESTATE AND PERSONAL PROPERTY--(CONTINUED)
The Trust's property and equipment are as follows:
<TABLE>
<CAPTION>
THE SHOPPES AT LAKE MARY
-----------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Land............................................................ $ 313,807 $ 230,299
Buildings....................................................... 1,147,584 1,147,584
Tenant improvements............................................. 219,090 210,742
Furnishings and equipment....................................... 19,544 19,544
------------- ------------
Total......................................................... 1,700,025 1,608,169
Less: accumulated depreciation.................................. (693,692) (659,586)
------------- ------------
Net investment in real estate and personal property............. $ 1,006,333 $ 948,583
------------- ------------
------------- ------------
</TABLE>
NOTE 5--RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
9/30/97 12/31/96
------------- ------------
<S> <C> <C>
Tenant receivables.............................................. $ 22,121 $ 18,248
Allowance for doubtful accounts................................. -- --
------------- ------------
Tenant receivables net of allowance............................. $ 22,121 $ 18,248
------------- ------------
------------- ------------
</TABLE>
NOTE 6--MORTGAGES PAYABLE
<TABLE>
<CAPTION>
9/30/97 12/31/96
------------- ------------
<S> <C> <C>
Mortgage payable in monthly installments of $7,201 of principal
and interest at 2% over prime on the outstanding balance. The
balance of principal and interest is due in full in October
1998. The loan is secured by a first mortgage lien on The
Shoppes at Lake Mary.......................................... $ 549,636 $ 571,258
------------- ------------
------------- ------------
</TABLE>
The following sets forth the principal payments due on the mortgage payable
for the twelve months ended:
<TABLE>
<S> <C>
September 30, 1998............................................. 31,528
September 30, 1999............................................. 518,108
</TABLE>
NOTE 7--TENANT LEASES
The Trust has entered into operating lease agreements with tenants of its
rental property, which have various termination dates. Certain leases also
contain provisions for inflationary increases and the pass through of a portion
of operating expenses under specified circumstances. Future minimum lease
payments under noncancellable operating leases are as follows:
<TABLE>
<S> <C>
1998.......................................................... $277,458
1999.......................................................... 181,817
2000.......................................................... 93,715
2001.......................................................... 24,324
2002.......................................................... 14,236
Thereafter.................................................... 32,018
--------
Total......................................................... $623,568
--------
--------
</TABLE>
F-9
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--AGREEMENT FOR THE SALE OF REAL PROPERTY
On August 11, 1997, the Trust and the Trustees entered into a Contribution
and Exchange Agreement with a newly-formed entity (the 'Company') for the
exchange of the Trust's sole property for 32,000 shares of common stock of the
Company and the assumption of the existing mortgage note payable in the amount
of $550,000 (unaudited) as of September 30, 1997. The Company is expected to
qualify as a REIT and will have 10 retail properties at its inception, nine to
be contributed by affiliates of the Company and one by the Trust. All
shareholders of the Trust will receive a distribution of a portion of the
Company stock and the remaining Company stock will be held by the Trust. The
Company will pay all expenses of the Trust (including attorney's and
accountants' fees) in connection with the negotiation, documentation and
consummation of the formation transactions.
The Contribution and Exchange Agreement provides terms under which the
agreement may be terminated, and under certain circumstances the Trust may be
required to pay a termination fee of $500,000 to $750,000 plus the expenses of
the Company and the Trust incurred in connection with the formation
transactions.
Shareholders of the Trust will receive a proxy statement/prospectus
pursuant to which they will be asked to approve the proposed business
combination with the Company.
It is contemplated that this transaction will be completed by December 31,
1997.
NOTE 9--CONTINGENCIES
Salvatore R. Carabetta, an Independent Trustee, resigned on June 30, 1996.
A successor Trustee was not appointed until June 16, 1997, which is greater than
the 60 day period required by the Declaration of Trust for the appointment of a
successor Trustee. The Declaration of the Trust requires a new Trustee to be
appointed within 60 days. On June 16, 1997, Robert Reibstein was appointed as
Trustee of the Trust.
On January 6, 1996, the Managing Trustee, Peter Stein, declared a dividend
without the express approval of Mr. Carabetta. Mr. Stein believes that the
request for a vote sent to Mr. Carabetta twice by certified mail, and not
responded to, constitutes a presence at a vote and abstention from the vote.
Additionally, until June 25, 1996 when Jay Goldman was elected as Trustee of the
Trust, Peter Stein, the Managing Trustee, had been acting on behalf of the Trust
without the express approval of the majority of the Trustees. Peter Stein and
Salvatore Carabetta were the sole remaining Trustees and since a majority of
Trustees needed to be present to have a vote, both Trustees need to be present
to hold a vote. On June 16, 1997, a Trustee meeting was held and the Trustees
acknowledged that the Trust was operating without the full complement of
Trustees and approved and ratified all actions carried out by the officers of
the Trust.
On June 16, 1997, the Trustees adopted an Amended and Restated Declaration
of Trust, which provides that the Trust may choose to elect officers, including
a President who shall act as Managing Trustee, and which further defines the
powers and limitations of the officers of the Trust. As of September 30, 1997,
no officers of the Trust have been appointed to oversee the management of the
Trust.
Management is unable to determine the effects the above events will have on
the financial condition of the Trust, if any.
NOTE 10--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
9-30-97 9-30-96
------- -------
<S> <C> <C>
Cash paid during the nine months ended
Income taxes.......................................................... $ -- $ --
Interest.............................................................. $43,187 $46,618
</TABLE>
NOTE 11--RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
F-10
<PAGE>
[letterhead of Bernardi, Alfin & Koos, LLC.]
Trustees
National Properties Investment Trust
P.O. Box 148
Canton Center, Connecticut 06020
We have audited the accompanying balance sheet of National Properties Investment
Trust as of December 31, 1996 and December 31, 1995, and the related statements
of operations, changes in shareholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of National Properties
Investment Trust as of December 31, 1994 were audited by other auditors whose
reports dated March 15, 1995, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Properties Investment
Trust as of December 31, 1996 and December 31, 1995 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles. Also in our opinion, the financial
statement schedules, when considered in relation to the basic financial
statements, presents fairly in all material respects the information shown
therein.
Respectfully submitted,
/s/ BERNARDI, ALFIN & KOOS, L.L.C.
BERNARDI, ALFIN & KOOS, L.L.C.
Certified Public Accountants
[West Hartford, Connecticut]
March 18, 1997,
except for Comparative Statement of Operations
and Notes 1, 2 and 13, as to which
the date of October 7, 1997
F-11
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Trustees and Shareholders
National Properties Investment Trust
We have audited the accompanying statements of operations, stockholders' equity
and cash flows of National Properties Investment Trust for the year ended
December 31, 1994. These financial statements are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statements of operations, stockholders' equity and
cash flows are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statements of
operations, stockholders' equity and cash flows. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the statements of
operations, stockholders' equity and cash flows. We believe that our audit of
the statements of operations, stockholders' equity and cash flows provide a
reasonable basis for our opinion.
In our opinion, the statements of operations, stockholders' equity and cash
flows referred to above present fairly, in all material respects, the results of
its operations and its cash flows for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the statements of
operations, stockholders' equity and cash flows taken as a whole. The
supplemental schedules listed in the index to item 14 are presented for purposes
of complying with the Securities and Exchange Commission's rules and are not a
required part of the statements of operations, stockholders' equity and cash
flows. The supplemental schedules have been subjected to the auditing procedures
applied in the audits of the statements of operations, stockholders' equity and
cash flows and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the statements of
operations, stockholders' equity and cash flows of National Properties
Investment Trust, taken as a whole.
/s/ KOSTIN, RUFFKESS & COMPANY, LLC
KOSTIN, RUFFKESS & COMPANY, LLC
West Hartford, Connecticut
March 15, 1995
F-12
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
COMPARATIVE BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS:
Investments in real estate and personal property.................................. $ 948,583 $ 930,294
Cash and cash equivalents......................................................... 44,403 108,081
Receivables....................................................................... 18,248 13,911
Prepaid expenses.................................................................. 21,019 22,772
Deposits.......................................................................... 2,160 1,800
Deferred expenses................................................................. 16,454 25,430
------------ ------------
Total assets...................................................................... $ 1,050,867 $ 1,102,288
------------ ------------
------------ ------------
LIABILITIES:
Accounts payable.................................................................. $ 17,307 $ 18,896
Accrued expenses.................................................................. 35,800 6,225
Prepaid rent and security deposits................................................ 20,821 18,196
Mortgage payable.................................................................. 571,258 598,353
------------ ------------
Total liabilities................................................................. 645,186 641,670
------------ ------------
SHAREHOLDERS' EQUITY:
Shares of beneficial interest, no par value, unlimited authorization, shares
issued and outstanding were 718,496 in 1996 and 718,860 in 1995................. 11,754,966 11,754,966
Accumulated deficit............................................................... (11,349,285) (11,294,348)
------------ ------------
Total shareholders' equity........................................................ 405,681 460,618
------------ ------------
Total liabilities and shareholders' equity........................................ $ 1,050,867 $ 1,102,288
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-13
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
COMPARATIVE STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Property operations:
Gross rental income...................................................... $ 340,768 $ 311,383 $ 293,883
Rental expenses.......................................................... (241,778) (214,790) (212,679)
General and administrative expenses...................................... (119,177) (64,401) (353,424)
--------- --------- ---------
Net income from property operations................................... (20,187) 32,192 (272,220)
Other income (expense):
Interest income.......................................................... 1,589 1,260 --
--------- --------- ---------
Net income (loss).......................................................... $ (18,598) $ 33,452 $(272,220)
--------- --------- ---------
--------- --------- ---------
Income (loss) per share of beneficial interest............................. $ (0.03) $ 0.05 $ (0.39)
--------- --------- ---------
--------- --------- ---------
Average number of shares of beneficial interest............................ 718,496 718,649 693,436
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
COMPARATIVE STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------------ ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
SHARES OF BENEFICIAL INTEREST
Balance--January 1,...................... 718,860 $ 11,754,966 714,395 $ 11,714,600 684,395 $ 11,684,600
Shares issued.......................... -- -- 847 847 30,000 30,000
Contributed capital.................... -- -- -- 39,519 -- --
Corrections of errors.................. (364) -- 3,618 -- -- --
------- ------------ ------- ------------ ------- ------------
Balance--December 31,.................... 718,496 $ 11,754,966 718,860 $ 11,754,966 714,395 $ 11,714,600
------- ------------ ------- ------------ ------- ------------
------- ------------ ------- ------------ ------- ------------
ACCUMULATED DEFICIT
Balance--January 1,...................... $(11,294,348) $(11,327,800) $(11,055,580)
Net income (loss)...................... (18,598) 33,452 (272,220)
Dividends paid......................... (36,339) -- --
------------ ------------ ------------
Balance--December 31,.................... $(11,349,285) $(11,294,348) $(11,327,800)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
COMPARATIVE STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $(18,598) $ 33,452 $(272,220)
-------- --------- ---------
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization........................................ 50,899 46,131 45,338
Issuance of shares of beneficial interest in lieu of cash............ -- -- 30,000
Changes in assets and liabilities:
Receivables.......................................................... (4,337) 1,510 24,884
Prepaid expenses..................................................... 1,753 13,188 89,980
Deferred expenses.................................................... -- (26,927) 4,516
Other................................................................ (360) 12,957 (3,444)
Accounts payable..................................................... (1,589) (57,119) 30,070
Accrued expenses..................................................... 29,575 414 (3,392)
Prepaid rent and security deposits................................... 2,625 (3,056) 487
Due to Advisor....................................................... -- (85,481) --
-------- --------- ---------
Total adjustments.................................................... 78,566 (98,383) 218,439
-------- --------- ---------
Net cash provided by (used in) operating activities......................... 59,968 (64,931) (53,781)
-------- --------- ---------
Cash flows from investing activities:
Purchase of personal property............................................. (60,212) (30,113) (7,300)
-------- --------- ---------
Cash flows from financing activities:
Principal payments on debt................................................ (27,095) (400,253) (26,395)
Mortgage proceeds......................................................... -- 600,000 --
Dividends paid............................................................ (36,339) -- --
Proceeds from note........................................................ -- -- 45,848
-------- --------- ---------
Net cash provided by (used in) financing activities......................... (63,434) 199,747 19,453
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents........................ (63,678) 104,703 (41,628)
Cash and cash equivalents, beginning of the year............................ 108,081 3,378 45,006
-------- --------- ---------
Cash and cash equivalents, end of the year.................................. $ 44,403 $ 108,081 $ 3,378
-------- --------- ---------
-------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-16
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
COMPARATIVE SCHEDULE OF RENTAL EXPENSES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Rental Expenses:
Personnel.................................................................. $ -- $ -- $ 6,291
Promotion and administration............................................... 21,170 21,193 13,206
Property management........................................................ -- 15,569 16,500
Leasing commissions........................................................ 12,713 12,688 12,662
Utilities.................................................................. 21,264 18,596 12,256
Maintenance and repair..................................................... 26,234 11,811 12,540
Contract services.......................................................... -- -- 22,368
Insurance.................................................................. 13,309 9,451 8,528
Property taxes............................................................. 35,896 33,339 30,571
Interest expense and late charges.......................................... 60,293 46,012 32,419
Amortization............................................................... 8,976 7,481 2,992
Depreciation............................................................... 41,923 38,650 42,346
-------- -------- --------
Total Rental Expenses................................................... $241,778 $214,790 $212,679
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-17
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES:
A. Organization:
National Properties Investment Trust (formerly Richard Roberts Real Estate
Growth Trust I) (the 'Trust') was organized on January 16, 1985 as a
Massachusetts Business Trust. The Trust invests directly in equity interests in
commercial, industrial and/or residential properties in the United States which
have income-producing capabilities and intends to hold its properties for
long-term investment. The Trust currently owns a single property located in
central Florida. The results of the Trust's operations depend upon the Trust's
property's competitive position in its respective leasing market. The Shoppes at
Lake Mary, a strip shopping center located in Lake Mary, Florida, is the Trust's
sole remaining property.
B. Method of Accounting:
The financial statements of the Trust have been prepared on the accrual
basis of accounting.
C. Cash Equivalents:
For financial statement purposes, the Trust considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
D. Income Taxes:
The Trust has made for prior years, and intends to make for 1996, an
election to file as a real estate investment trust (REIT) for federal tax
purposes, and if so qualified, will not be taxed on earnings distributed to
shareholders. Accordingly, no provision for federal income taxes has been made
for the periods ended December 31, 1996 and 1995. However, the Trust is subject
to state income taxes, where applicable.
E. Real Estate Assets and Depreciation:
On January 1, 1996, the Trust adopted the provisions of Statement of
Financial Accounting Standards ('SFAS') No. 121 'Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of.' The statement
requires impairment losses to be recognized for long-lived assets, on a property
by property basis, used in operations when indicators of impairment are present
and the undiscounted future cash flows are not sufficient to recover the assets'
carrying value. If such indicators are present, an impairment loss is recognized
based on the excess of the carrying amount of the impaired asset over its fair
value.
For long-lived assets to be disposed of, impairment losses are recognized
when the fair value of the asset, less the estimated cost to sell, is less than
the carrying value of the asset measured at the time management commits to a
plan to dispose of the asset. Assets are classified as assets to be disposed of
when management has committed to sell and is actively marketing the property.
Assets to be disposed of are carried at the lower of carrying value or fair
value less cost to dispose, determined on an asset by asset basis. Depreciation
is not recorded during the period in which assets are held for disposal and
gains (losses) from initial and subsequent adjustments to the carrying value of
the assets, if any, are recorded as a separate component of income from
continuing operations. Adoption of this standard did not have a material impact
on the Trust's financial position or results of operations.
Depreciation was computed using the straight-line method over an estimated
depreciable life of 40 years for real property, 7 years for personal property,
and over the life of the related lease for tenant improvements. The only
property owned by the Trust was written down to its realizable value at December
31, 1991.
F-18
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES:--(CONTINUED)
F. Accumulated Deficit:
The accumulated deficit, reported as a reduction of Shareholders' Equity,
includes net losses recognized and distributions made to Shareholders as a
return of capital invested.
G. Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
NOTE 2--RELATED PARTY TRANSACTIONS:
The Trust paid the Managing Trustee $46,000 and $15,569 as compensation for
managing the Trust property for the years ended December 31, 1996 and 1995,
respectively. In addition, effective in November 1995, the Trust offices are
located at premises owned by the Managing Trustee. No rent was charged to the
Trust in 1996 and 1995, although the Trust paid utility bills for the office of
$1,647 in 1996.
The Trust had entered into an agreement (the 'Advisory Agreement') with
First Investment Properties, Inc. (the 'Advisor'), a Connecticut corporation,
pursuant to which the Advisor is acting as an investment advisor and
administrator of the Trust's day-to-day affairs. Peter Stein, the Managing
Trustee, is the manager of First Investment Properties, Inc. The Advisory
Agreement expired on October 27, 1995 and was not renewed by the Trust.
Under the terms of the Advisory Agreement, the Trust pays to the Advisor:
(a) a reimbursement for organizational, offering and selling expenses advanced
on behalf of the Trust by the Advisor; (b) an annual Advisory Fee equals to 2.5%
of all cash receipts from operations in the ordinary course of business after
deducting payments for operating expenses, debt service, capital expenditures
with respect to real property investments, amounts set aside for reserves, after
the reimbursement of expenses incurred in the performance of advisory duties
described below, which is subordinate to an annual cumulative (but not
compounded) return to the investors of 10% per annum on the original Price Per
Share to the public in the offering, less all distributions of the net proceeds
from the sale or refinancing of the Trust's properties (the 'Adjusted Price Per
Share'); (c) an Acquisition Fee equal to 6% of the purchase price of any real
property acquired by the Trust, from which fee, the Advisor, will pay all real
estate and mortgage commissions due to unaffiliated parties; (d) a Disposition
Fee equal to 15% of any net proceeds from a sale, refinancing or other capital
transaction with respect to any of its investments, after the Shareholders have
received a return of their capital plus a cumulative (but not compounded) return
of 10% per annum on the Adjusted Price Per Share, of which Disposition Fee, the
Advisor, may pay up to 10% to any consultants; and (e) a Real Estate Brokerage
Commission upon the sale of any Trust real property investments, equal to 3% of
the gross sale price. The Trust will also reimburse the Advisor for any expenses
attributable to the performance of its duties pursuant to the Advisory
Agreement. The Advisor will refund to the Trust within 120 days after the end of
the fiscal year, the greater of the amount, if any, by which the Operating
Expenses of the Trust (as defined in the Prospectus) exceeded either (a) 2% of
the Book Value of Invested Assets (as defined in the Prospectus) or (b) 25% of
net income of the Trust, whichever is greater, or (c) 2% of the Trust's base
assets defined as total assets of the Trust less cash, cash items and unsecured
indebtedness. The Trust had Operating Expenses in excess of the above limits of
$85,481 during 1995 which were applied to a note payable due to the Advisor.
The note payable to the Advisor as a Due to Consultant arose as a result of
the costs associated from replacing the prior Advisor and Trustees in 1993. The
contract with the consultant was entered into with First Investment Properties,
Inc. and the Trust was not a party to the agreement. The Declaration of the
Trust prohibits the Trust from directly paying third party contractors of the
Advisor, but instructs the Trust to pay the Advisor
F-19
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--RELATED PARTY TRANSACTIONS:--(CONTINUED)
directly and the Advisor is responsible for paying the third party. The Trust
has no liability to the consultant. First Investment Properties, Inc. is solely
liable to the consultant. First Investment Properties, Inc. has received $85,481
directly and indirectly as payment of this note. The remaining $19,519 due to
the Advisor has been forgiven by First Investment Properties, Inc. and recorded
as contributed capital. Additionally, First Investment Properties, Inc. has
waived all rights to Advisory fees accrued in 1995 of $32,607 and any fees
accrued in prior years, which are not payable until such time as the
shareholders receive a cumulative, but not compounded ten percent return on
their investment. First Investment Properties, Inc. has agreed to this waiver
due to the fact they recognize that such a condition will never be met.
In March 1995, the Trust issued 847 shares of Beneficial Interest to
Gretchen Stein, spouse of Peter Stein, in exchange for the note payable at $1
per share per the agreement with the Trust in 1994. The remaining $20,000
balance was contributed to the Trust as capital.
In December 1994, the Trust issued 30,000 shares of beneficial interest at
$1 per share to the shareholders of the Advisor in lieu of cash renumeration.
Leasing commissions paid to Keystone Advisors, Inc. amounted to $0, $0, and
$25,845, for the years ended December 31, 1996, 1995 and 1994, respectively.
Due to Advisor is comprised of the following:
<TABLE>
<CAPTION>
12/31/96 12/31/95
-------- --------
<S> <C> <C>
Balance at the beginning of the year.................................. $ -- $105,000
Additions............................................................. -- --
Payments.............................................................. -- (85,481)
Balance written off................................................... -- (19,519)
-------- --------
Balance at the end of the year........................................ $ -- $ --
-------- --------
-------- --------
</TABLE>
NOTE 3--EARNINGS PER SHARE:
Earnings per Share of Beneficial Interest are computed on the weighted
average number of Shares of Beneficial Interest outstanding during the period.
NOTE 4--INVESTMENT IN REAL ESTATE AND PERSONAL PROPERTY:
The Trust purchased The Shoppes at Lake Mary, a 38,125 square foot shopping
center located in Lake Mary, Florida on March 31, 1986 for $3,200,000. Pursuant
to the purchase agreement, the seller guaranteed that the revenues generated by
the project during the first two years of its operation would be at least equal
to the aggregate of all expenses incurred in connection with the use and
operation of the project during each such year plus $360,000. The seller placed
$300,000 of the purchase price in an interest bearing escrow account as security
for the guarantee. On September 26, 1986, the Trust released the seller from the
guarantee in consideration for the funds held in escrow. The funds held in
escrow were forwarded to the Trust on October 2, 1986. The basis of the property
acquired has been reduced by the amount received under the terms of the cash
flow guarantee. On December 31, 1991 the Trust reduced the book value of real
property by $1,677,901 to its net realizable value.
All of the Trust's property is recorded at historical cost, except for its
real property which is recorded at its historical cost, less $310,762 for the
reduction in basis due to the release of funds escrowed at closing, and less
$1,677,901 loss reserve to reduce the property value to its net realizable
value.
F-20
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--INVESTMENT IN REAL ESTATE AND PERSONAL PROPERTY:--(CONTINUED)
The Trust's property and equipment are as follows:
<TABLE>
<CAPTION>
THE SHOPPES AT LAKE MARY
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Land.............................................................. $ 230,299 $ 195,299
Buildings......................................................... 1,147,584 1,147,584
Tenant improvements............................................... 210,742 188,924
Furnishings and equipment......................................... 19,544 16,149
---------- ----------
Total............................................................. 1,608,169 1,547,956
Less: accumulated depreciation.................................... (659,586) (617,663)
---------- ----------
Net investment in real estate and personal property............... $ 948,583 $ 930,293
---------- ----------
---------- ----------
</TABLE>
NOTE 5--RECEIVABLES:
Receivables consist of the following:
<TABLE>
<CAPTION>
12/31/96 12/31/95
-------- --------
<S> <C> <C>
Tenant receivables...................................................... $ 18,247 $ 13,911
Allowance for doubtful accounts......................................... -- --
-------- --------
Tenant receivables net of allowance..................................... $ 18,247 $ 13,911
-------- --------
-------- --------
</TABLE>
Allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
12/31/96 12/31/95
-------- --------
<S> <C> <C>
Balance at the beginning of the year.................................... $ -- $ --
Charged to expense...................................................... -- --
Recoveries.............................................................. -- --
Accounts receivable written off......................................... -- --
-------- --------
Balance at the end of the year.......................................... $ -- $ --
-------- --------
-------- --------
</TABLE>
NOTE 6--ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
12/31/96 12/31/95
-------- --------
<S> <C> <C>
Accrued real estate taxes............................................... $ 35,800 $ --
Accrued interest........................................................ -- 6,225
-------- --------
Accrued expenses........................................................ $ 35,800 $ 6,225
-------- --------
-------- --------
</TABLE>
NOTE 7--MORTGAGE PAYABLE:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Mortgage payable in monthly installments of $7,201 of principal plus
interest at 2% over prime on the outstanding balance. The balance of
principal and interest is due in full in October 1998. The loan is
secured by a first mortgage lien on The Shoppes at Lake Mary......... $571,258 $598,353
-------- --------
-------- --------
</TABLE>
F-21
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--MORTGAGE PAYABLE:--(CONTINUED)
The following sets forth the principal payments due on the mortgage
payable:
<TABLE>
<S> <C>
1997.......................................................... 29,205
1998.......................................................... 542,053
</TABLE>
NOTE 8--CORRECTION OF ERRORS:
In May, 1993 the First Investment Properties, Inc. entered into a
consulting agreement with a company, owned by a relative of the former Advisor,
to help with the transfer of the Advisor, the resignations of the original
Trustees, and the transfer of management of the Lake Mary property. The Trust
was not a party to the agreement and is not liable on the note payable. The
liability should have been properly classified as an amount Due to Advisor.
During 1996 and 1995, the Trust has updated its shareholder records and has
corrected several errors by the previous transfer agent. These are reflected in
1996 and 1995 as corrections in the number of shares.
NOTE 9--TENANT LEASES:
The Trust has entered into operating lease agreements with tenants of its
rental property, which have various termination dates. Certain leases also
contain provisions for inflationary increases and the pass through of a portion
of operating expenses under specified circumstances. Future minimum lease
payments under noncancellable operating leases are as follows:
<TABLE>
<S> <C>
1997.......................................................... $279,903
1998.......................................................... 215,880
1999.......................................................... 145,864
2000.......................................................... 67,486
2001.......................................................... 6,300
--------
Total......................................................... $715,433
--------
--------
</TABLE>
NOTE 10--DIVIDENDS PAID TO SHAREHOLDERS:
The Trust declared and paid cash dividends on a monthly basis from February
1986 through September 1988. On April 11, 1989, the Trustees voted to suspend
the quarterly shareholders' dividend effective with the scheduled distribution
for the first quarter of 1989.
A one time dividend was declared in January 1996, paid in February 1996,
and payable to shareholders of record as of September 30, 1995, of $0.05 per
share. This dividend was a return of capital to the shareholders. The dividend
was declared by the sole vote of the Managing Trustee.
A specific date of re-establishment of the quarterly shareholders' dividend
has not yet been determined. Distributions made by the Trust are at the
discretion of the Trustees. Future distributions, if any, will be dependent upon
the earnings and cash flow of the Trust, its financial condition and other
relevant factors.
Dividends declared per share are based upon the actual number of shares
outstanding on the date of declaration and not upon the weighted average number
of shares outstanding during the period used in computing earnings per share.
F-22
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--CONTINGENCIES:
George Knude, an Independent Trustee, resigned on November 13, 1995. A
successor Trustee had not been appointed until June 25, 1996, which was greater
than the 60 days provided in the Declaration of Trust.
Salvatore R. Carabetta, an Independent Trustee, resigned on June 30, 1996.
A successor Trustee has not been appointed to date, which is more than the 60
day period required by the Declaration of Trust for the appointment of a
successor Trustee. The Declaration of the Trust requires a new Trustee to be
appointed within 60 days. Additionally, until June 25, 1996 when Jay Goldman was
elected as Trustee of the Trust, Peter Stein, the Managing Trustee, had been
acting on behalf of the Trust without the express approval of the majority of
the Trustees. Peter Stein and Salvatore Carabetta were the sole remaining
Trustees and since a majority of Trustees need to be present to have a vote,
both Trustees need to be present to hold a vote.
On January 6, 1996, the Managing Trustee declared a dividend without the
express approval of Mr. Carabetta. Mr. Stein believes that the request for a
vote sent to Mr. Carabetta twice by certified mail, and not responded to,
constitutes a presence at a vote and abstention from the vote.
Management is unable to determine the effects the above events will have on
the financial condition of the Trust, if any.
NOTE 12--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash paid during the year
Income taxes......................................................... $ -- $ -- $ --
Interest............................................................. $60,293 $46,012 $30,202
Non-cash Transactions
Issuance of shares of beneficial interest in exchange for debt....... $ -- $ 847 $
Cancellation of indebtedness on Due to Advisor....................... $ -- $19,519 $ --
Conversion of note payable to contributed capital.................... $ -- $20,000 $
</TABLE>
NOTE 13--RESTATEMENT OF FINANCIAL STATEMENTS:
The Comparative Statement of Operations has been restated to reflect that
general and administrative expenses are a component of income from operations in
accordance with generally accepted accounting principles. Previously, general
and administrative expenses were reported as other expenses. This change has no
effect on the income (loss) reported by the Trust.
The Comparative Statement of Financial Position, the Comparative Statement
of Operations, the Comparative Statement of Changes in Shareholders' Equity and
the Comparative Statement of Cash Flows for the year ended December 31, 1995
have been restated to reflect the write-off of $19,519 due to First Investment
Properties, Inc. as being reclassified to contributed capital.
Note 1 of these financial statements has been amended to reflect the
adoption of Statement of Financial Accounting Standards ('SFAS') No. 121
'Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of.' Adoption of this standard did not have a material impact on the
Trust's financial position or results of operations.
F-23
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
COSTS GROSS AMOUNT
CAPITALIZED AT WHICH
INITIAL SUBSEQUENT CARRIED AT
COST TO CLOSE OF
TO TRUST ACQUISITION PERIOD
------------ ------------ ------------
BUILDING, BUILDING, BASIS REDUCTIONS BUILDING,
LAND AND LAND AND AND IMPAIRMENT LAND AND ACCUMULATED
DESCRIPTION ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS WRITEDOWNS IMPROVEMENTS DEPRECIATION
- ----------------------------- ------------ ------------ ------------ ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
The Shoppes at Lake Mary
Land....................... (1) $ 432,840 $ 35,000 $ (237,541) $ 230,299 $ 497
Building................... (1) 2,898,706 -- (1,751,122) 1,147,584 475,036
Tenant improvements and
furniture & fixtures.... (1) -- 230,286 -- 230,286 184,053
------------ ------------ ---------------- ------------ -----------
Total................... $3,331,546 $ 265,286 $ (1,988,663) $1,608,169 $ 659,586
------------ ------------ ---------------- ------------ -----------
------------ ------------ ---------------- ------------ -----------
<CAPTION>
ESTIMATED
USEFUL LIFE
USED IN
DATE OF DATE COMPUTING
DESCRIPTION CONSTRUCTION ACQUIRED DEPRECIATION
- ----------------------------- ------------ -------- ------------
<S> <C> <C> <C>
The Shoppes at Lake Mary
Land....................... 3/31/86 --
Building................... 9/85 3/31/86 40
Tenant improvements and
furniture & fixtures.... Various Various (2)
Total...................
</TABLE>
- ------------------
(1) Refer to the Notes on the following page.
(2) See Notes 1, 4 and 7 of the Notes to the Financial Statements.
F-24
<PAGE>
NATIONAL PROPERTIES INVESTMENT TRUST
CANTON CENTER, CONNECTICUT
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996--(CONTINUED)
NOTES TO SCHEDULE III
(1) Mortgage payable in monthly installments of $7,201 of principal plus
interest at 2% over prime on the outstanding balance. The balance of
principal and interest is due in full in October 1998. The loan is secured
by a first mortgage lien on the real property.
(2) The useful lives of tenant improvements are determined based on the
remaining lease term and vary lease to lease.
(3) The aggregate cost of properties owned at December 31, 1996 for federal
income tax purposes is $1,608,169.
(4) Reconciliation of Investment Properties Owned:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance at the beginning of the period......................... $1,547,956 $1,517,843 $1,510,543
Additions during the period:
Sewer lines.................................................. 35,000
Tenant improvements and furniture & fixtures................. 25,213 30,113 7,300
Deductions during the period:
None......................................................... -- -- --
---------- ---------- ----------
Balance at the end of the period............................... $1,608,169 $1,547,956 $1,517,843
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(5) Reconciliation of Accumulated Depreciation:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance at the beginning of the period..................... $ 617,662 $ 579,012 $ 536,666
Additions during the period:
Depreciation expense....................................... 41,924 38,650 42,346
Deductions during the period:
None....................................................... -- -- --
---------- ---------- ----------
Balance at the end of the period........................... $ 659,586 $ 617,662 $ 579,012
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(6) The Trust recorded a basis reduction of $310,762 in October 1986 for the
reduction in basis due to the release of funds escrowed at closing from the
seller, and recorded an impairment writedown of $1,677,901 on December 31,
1991.
F-25
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
PRO FORMA CONDENSED FINANCIAL STATEMENTS
Upon completion of the Formation Transactions, Philips International
Realty, LLC will become the 'Interim Managing General Partner' of the Operating
Partnership and each of the property partnerships with a .001% interest in each.
Although the Company will have a non-managing general partnership interest, it
will exercise significant influence over the management and operations of the
Operating Partnership and therefore will record its investment in the Operating
Partnership on the equity method. The Interim Managing General Partner's
interest will be redeemed by the respective partnerships upon consummation of a
future equity offering of at least $25 million. The Company's pro forma
adjustments are derived from the pro forma financial statements of the Operating
Partnership and the Equity Investees' property partnerships as set forth in the
respective pro forma financial statements.
The pro forma condensed balance sheet of the Company, the Operating
Partnership and the Equity Investees as of September 30, 1997 has been prepared
as if the Formation Transactions had been consummated on September 30, 1997. The
pro forma condensed statements of operations for the nine months ended September
30, 1997 and for the year ended December 31, 1996 are presented as if completion
of the Formation Transactions, including those reflected in the historical
financial statements (see Note 1 of The Philips Company financial statements),
occurred at January 1, 1996 and the effect thereof was carried forward through
the nine month period ended September 30, 1997.
The pro forma financial statements do not purport to represent what the
Company's, the Operating Partnership's and the Equity Investees' financial
position or results of operations would have been assuming the completion of the
Formation Transactions on such date or at the beginning of such period
indicated, nor do they purport to project the Company's, the Operating
Partnership's and the Equity Investees' financial position or results of
operations at any future date or for any future period. The pro forma condensed
combined financial statements should be read in conjunction with the financial
statements included elsewhere herein.
F-26
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
PRO FORMA CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PHILIPS
INTERNATIONAL PRO
REALTY FORMA
CORP. ADJUST. PRO FORMA
------------- ------- ---------
<S> <C> <C> <C>
ASSETS
Rental property.......................................................... $ -- $ 2,150(C) $ --
(2,150)(D)
Cash..................................................................... -- 533(A) --
(533)(D)
Other assets............................................................. 2 1,940(B) 2
(1,940)(D)
Investment in Operating Partnership...................................... -- 4,073(D) 2,321
(1,752)(E)
----- ------- ---------
$ 2 $ 2,321 $ 2,323
----- ------- ---------
----- ------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities:
Mortgage payable......................................................... $ -- $ 550(C) $ --
(550)(D)
Due to related parties................................................... 15 15
----- ------- ---------
Total Liabilities.......................................................... 15 0 15
----- ------- ---------
Shareholders' Equity
Preferred stock (G)...................................................... -- 1,940(B) 1,940
Common Stock (G).........................................................
Paid in capital.......................................................... 1 533(A) 2,595
461(F)
1,600(C)
Equity (deficit)......................................................... (14) (1,752)(E) (2,227)
(461)(F)
----- ------- ---------
Total Shareholders' Equity (deficit)....................................... (13) 2,321 2,308
----- ------- ---------
Total Liabilities and Shareholders' Equity................................. $ 2 $ 2,321 $ 2,323
----- ------- ---------
----- ------- ---------
</TABLE>
- ------------------
(A) To reflect proceeds of $533 from sale of 10,660 shares of common stock to
Philip Pilevsky at $50 per share.
(B) To reflect Prudential Securities Incorporated (or an affiliate) receipt of
1,940 shares of Series A Convertible Redeemable Preferred Stock in lieu of
the financial advisory fee payable by National upon consummation of the
Formation Transaction and assumed by the Company under the Contribution and
Exchange Agreement at a stated value of $1,940.
(C) Purchase of Shoppes at Lake Mary from National Properties Investment Trust
in exchange for the issuance of 32,000 shares of common stock valued at
$1,600 and the assumption of the existing mortgage note payable of $550.
(D) To reflect the contribution of the fee title interest in the Shoppes at Lake
Mary and the associated debt of $550, deferred offering cost of $1,940 and
the cash received from Philip Pilevsky to the Operating Partnership in
exchange for 1,940 preferred non-managing general partnership units at a
stated value of $1,940 and 47,660 non-managing general partnership units.
(E) To reflect the dilution resulting from the deficiency in book value of the
Equity Investees at the time of contribution of the assets to the Operating
Partnership off-set, in part, by other Formation Transactions. The
(Footnotes continued on next page)
F-27
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
PRO FORMA CONDENSED BALANCE SHEET--(CONTINUED)
AS OF SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(Footnotes continued from previous page)
investment represents a 3.2% interest in the pro forma combined equity,
exclusive of the value of the preferred units, plus the $1,940 value of the
preferred equity.
(F) To reflect the issuance of 5,000 shares of common stock valued at $250 and
warrants issued with a value of $211 (based on the Black Scholes Valuation
Model) to two members of the Board of Trustees of National as consideration
for arranging the Formation Transaction and their agreement to vote in favor
of the transaction agreements. The expense associated with the issuance of
the shares and units have been treated as a nonrecurring charge.
(G) The number of shares authorized, issued and outstanding for each class of
stock is as follows:
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------- -----------
<S> <C> <C>
Preferred Stock
Authorized........................................................ -- 30,000,000
Issued............................................................ -- 1,940
Outstanding....................................................... -- 1,940
Common Stock
Authorized........................................................ 3,000 150,000,000
Issued............................................................ 20 47,660
Outstanding....................................................... 20 47,660
</TABLE>
F-28
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PHILIPS
INTERNATIONAL
REALTY PRO FORMA
CORP. ADJUST. PRO FORMA
------------- --------- ---------
<S> <C> <C> <C>
Allocation of income on preferred units................................. $ -- $ 175 (a) $ 175
Equity in loss before extraordinary items of Operating Partnership,
adjusted for allocation of income to preferred units.................. -- (6 )(b) (6 )
------------- --------- ---------
Net income............................................................ -- 169 169
Preferred stock distribution............................................ -- (175 )(c) (175 )
------------- --------- ---------
Net loss attributable to common shares................................ -- $ (6 ) $ (6 )
------------- --------- ---------
------------- --------- ---------
Net loss per common share............................................. $ (.13 )(e)
---------
---------
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PHILIPS
INTERNATIONAL
REALTY PRO FORMA PRO FORMA
CORP. ADJUST. ADJUSTED
------------- --------- ---------
<S> <C> <C> <C>
Allocation of income on preferred units................................. $ -- $ 131 (a) $ 131
Equity in loss before extraordinary items of Operating Partnership,
adjusted for allocation of income to preferred units.................. -- (27 )(b) (27 )
General and administrative expenses..................................... (14) 14 (d) --
------------- --------- ---------
Net income (loss)..................................................... (14) 118 104
Preferred stock distribution............................................ -- (131 )(c) (131 )
------------- --------- ---------
Net loss attributable to common shares................................ $ (14) $ (13 ) $ (27 )
------------- --------- ---------
------------- --------- ---------
Net loss per common share............................................. $ (.57 )(e)
---------
---------
</TABLE>
- ------------------
(a) Allocation of income on preferred units from Operating Partnership.
(b) To reflect 3.2% interest in loss before extraordinary items of Operating
Partnership, as adjusted for allocation of income to preferred units,
accounted for on the equity method.
(c) To reflect the 9% dividend on the Series A preferred stock.
(d) To reflect reimbursement of costs by Operating Partnership.
(e) Loss per common share is calculated based upon 47,660 shares of common stock
assumed to be outstanding for the year ended December 31, 1996 and for the
nine months ended September 30, 1997. The antidilutive effect of the
warrants has not been considered in the calculation.
F-29
<PAGE>
PHILIPS INTERNATIONAL REALTY, L.P.
PRO FORMA CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PHILIPS
INTERNATIONAL PRO
REALTY FORMA
L.P. ADJUST. PRO FORMA
------------- ------- ---------
<S> <C> <C> <C>
ASSETS
Rental property........................................................ $ -- $ 2,150(A) $ --
(2,150)(C)
Cash................................................................... -- 533(A) 533
Other assets........................................................... -- 1,940(A) 1,940
Investment in Equity Investees......................................... -- 15,746(B) 11,379
1,600(C)
(5,967)(D)
----- ------- ---------
$ -- $13,852 $13,852
----- ------- ---------
----- ------- ---------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgage payable....................................................... $ -- $ 550(A) $ --
(550)(C)
----- ------- ---------
Total Liabilities........................................................ -- -- --
----- ------- ---------
Partners' Capital
Preferred Units (E).................................................... -- 1,940(A) 1,940
General Partner (E).................................................... -- 2,133(A) 381
(1,752)(D)
Limited Partners (E)................................................... -- 15,746(B) 11,531
-- (4,215)(D)
----- ------- ---------
Total Partners' Capital.................................................. -- 13,852 13,852
----- ------- ---------
Total Liabilities and Shareholders' Equity............................... $ -- $13,852 $13,852
----- ------- ---------
----- ------- ---------
</TABLE>
- ------------------
(A) To reflect the contribution of the fee title interest in the Shoppes at Lake
Mary and the associated debt of $550, deferred offering costs of $1,940 and
cash of $533 from Philips International Realty Corp. in exchange for 1940
non-managing preferred general partner units representing a 2.5% interest in
the Operating Partnership and 47,660 non-managing common general partner
units representing a 3.2% interest in the Operating Partnership. Partners'
capital is increased by $1,940 for the preferred units issued in exchange
for the deferred costs and $2,133 for the contribution of the other net
assets in exchange for the general partnership interest.
(B) To reflect the contribution of the partnership or membership interest, as
the case may be, in the Property Partnerships and properties from the
Contributing Partnerships in exchange for 1,450,000 limited partner units
and the simultaneous contribution of such assets to the Equity Investees in
exchange for a limited partner/non-managing member interest in each Equity
Investee.
(C) To reflect the contribution of the fee title interest in the Shoppes at Lake
Mary and the associated debt to the Equity Investees.
(D) To reflect the dilution resulting from the deficiency in book value of the
Equity Investees at the time of contribution of the assets off-set in part
by other Formation Transactions. The investment in Equity Investees
represents a 99.989% interest in the Equity Investees pro forma combined
equity.
F-30
<PAGE>
PHILIPS INTERNATIONAL REALTY, L.P.
PRO FORMA CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
(E) The number of Units issued and outstanding for each class of Unit is as
follows:
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------- ---------
<S> <C> <C>
Preferred Units
Issued.................................................................................. -- 1,940
Outstanding............................................................................. -- 1,940
General Partner Units
Issued.................................................................................. 3,000 47,660
Outstanding............................................................................. 20 47,660
Limited Partner Units
Issued.................................................................................. -- 1,450,000
Outstanding............................................................................. -- 1,450,000
</TABLE>
F-31
<PAGE>
PHILIPS INTERNATIONAL REALTY L.P.
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PHILIPS
INTERNATIONAL
REALTY PRO FORMA
L.P. ADJUST. PRO FORMA
------------- --------- ---------
<S> <C> <C> <C>
Equity in loss before extraordinary items of Equity Investees........... $ -- $ (15 )(a) $ (15 )
------------- --------- ---------
Net loss.............................................................. -- (15 ) (15 )
Preferred unit distribution............................................. -- (175 )(b) (175 )
------------- --------- ---------
Net loss attributable to General and Limited Partners................. $ -- $ (190 ) $ (190 )
------------- --------- ---------
------------- --------- ---------
General Partners...................................................... $ (6 ) $ (6 )
--------- ---------
--------- ---------
Limited Partners...................................................... $ (184 ) $ (184 )
--------- ---------
--------- ---------
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PHILIPS
INTERNATIONAL
REALTY PRO FORMA PRO FORMA
L.P. ADJUST. ADJUSTED
------------- --------- ---------
<S> <C> <C> <C>
Equity in loss before extraordinary items of Equity Investees........... $ -- $ (709 )(a) $ (709 )
General and administrative expenses..................................... -- (14 )(c) (14 )
------------- --------- ---------
Net (loss)............................................................ -- (723 ) (723 )
Preferred unit distribution............................................. -- (131 )(b) (131 )
------------- --------- ---------
Net loss attributable to General and Limited Partners................. $ -- $ (854 ) $ (854 )
------------- --------- ---------
------------- --------- ---------
General Partners...................................................... $ (27 ) $ (27 )
--------- ---------
--------- ---------
Limited Partners...................................................... $ (827 ) $ (827 )
--------- ---------
--------- ---------
</TABLE>
- ------------------
(a) To reflect 99.989% interest in income (loss) before extraordinary items of
Equity Investees.
(b) To reflect the 9% distribution on the Series A preferred units.
(c) To reflect reimbursement of costs incurred by Philips International Realty
Corp.
F-32
<PAGE>
EQUITY INVESTEES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
----------------------------------------------------------------
THE MERRICK/ EQUITY
PHILIPS MILL BASIN NATIONAL PRO FORMA INVESTEES
COMPANY PROPERTIES PROPERTY ADJUST. PRO FORMA
-------- ---------- -------- --------- ---------------
<S> <C> <C> <C> <C> <C>
(1) (2) (3) (4)
ASSETS
Rental properties--Net............................. $138,249 $ 23,712 $2,150 $17,759(a) $ 183,700
1,830(d)
Cash and cash equivalents.......................... 124 43 (1,830)(d)
1,663(e)
Accounts receivable................................ 5,216 1,284 (1,667)(a) 4,833
Related party receivables.......................... 2,638 1,324 (3,962)(g)
Investment in partnerships......................... 979 (979)(b)
Deferred charges, net.............................. 3,369 901 (346)(a) 3,924
Other assets....................................... 3,461 397 60(c) 4,918
250(c)
750(f)
-------- ---------- -------- --------- ---------------
Total assets....................................... $154,036 $ 27,661 $2,150 $13,528 $ 197,375
-------- ---------- -------- --------- ---------------
-------- ---------- -------- --------- ---------------
LIABILITIES AND OWNERS' EQUITY (DEFICIT)/PARTNERS' CAPITAL
Liabilities:
Mortgages and notes payable...................... $151,244 $ 25,854 $ 550 (936)(c) $ 177,022
60(c)
250(c)
Accounts payable and accrued expenses............ 4,796 460 1,663(e) 7,669
750(f)
Related party payables........................... 1,910 253 (2,163)(h)
Other liabilities................................ 1,304 1,304
-------- ---------- -------- --------- ---------------
Total liabilities.................................. 159,254 26,567 550 (376) 185,995
-------- ---------- -------- --------- ---------------
Owners' equity (deficit)/partners' capital......... (5,218) 1,094 1,600 15,746(a)
(979)(b)
936(c)
(3,962)(g)
2,163(h)
(11,380)(i)
Partners capital
General partners/managing members................ 1(i) 1
Limited partners/non managing members............ 11,379(i) 11,379
-------- ---------- -------- --------- ---------------
Total liabilities and owners' equity
(deficit)/partners' capital...................... $154,036 $ 27,661 $2,150 $13,528 $ 197,375
-------- ---------- -------- --------- ---------------
-------- ---------- -------- --------- ---------------
</TABLE>
F-33
<PAGE>
EQUITY INVESTEES
NOTES TO PRO FORMA CONDENSED
COMBINED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
(1) Represents historical combined balance sheet of seven properties comprising
The Philips Company.
(2) Represents historical combined balance sheet of The Merrick Commons and Mill
Basin Plaza Properties in which the The Philips Company has an equity
interest and which will be wholly-owned after the Formation Transactions.
(3) Contribution of Shoppes at Lake Mary from the Company to the Equity
Investees.
(4) Adjustments to the Pro Forma Condensed Balance Sheet as of September 30,
1997 are as follows:
(a) In accordance with APB #16, purchase of the non-sponsor interests in the
contributing partnerships and limited liability companies at fair market
value aggregating $14,267. The fair market value purchase price by
location is reflective of the non-sponsor percentage interest(s)
acquired in the respective partnership or limited liability company
multiplied by the net asset value for such respective shopping center
property. The net asset values were calculated based upon a
capitalization of the individual property pro forma net operating income
at 9% less related mortgage debt and allocated transaction costs, all as
negotiated and agreed among the parties to the Contribution and Exchange
Agreement. The sponsor interests, comprising Philip Pilevsky and his
family members, are recorded at historical cost. Sponsor and non-sponsor
interests will receive an aggregate 1,165 and 285 units, respectively,
in the Operating Partnership.
<TABLE>
<CAPTION>
HISTORICAL
BOOK VALUE
NON-SPONSOR PURCHASE PRO FORMA
INTERESTS PRICE ADJUSTMENTS
----------- -------- -----------
<S> <C> <C> <C>
The Philips Company:
Freeport............................................. $ (2,697) $ 2,615 $ 5,312
Enfield.............................................. 401 660 259
Delran............................................... 79 1,756 1,677
Foxborough........................................... 339 259 (80)
----------- -------- -----------
(1,878) 5,290 7,168
Merrick/Mill Basin Properties:
SP Avenue U.......................................... 984 5,070 4,086
Merrick.............................................. (585) 3,907 4,492
----------- -------- -----------
399 8,977 8,578
----------- -------- -----------
$ (1,479) $ 14,267 $15,746
----------- -------- -----------
----------- -------- -----------
Pro forma adjustment has been allocated as follows:
Rental properties--net......................................................... $17,759
Accounts receivable............................................................ (1,667)
Deferred charges............................................................... (346)
-----------
Net adjustment to owners' equity............................................... $15,746
-----------
-----------
</TABLE>
F-34
<PAGE>
EQUITY INVESTEES
NOTES TO PRO FORMA CONDENSED
COMBINED BALANCE SHEET--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C> <C>
(b) Elimination of investment in Merrick/Mill Basin Properties historically accounted for on
the equity method....................................................................... $ (979)
(c) Net reduction in debt due to the following:
During November 1997, the Company reached an agreement with its lender in connection
with the Millside Plaza, Elm Plaza and Foxboro Plaza mortgage. Upon completion of the
proposed transactions, the debt will be modified (i) to extend the maturity date to
the year 2002, with an amortization equal to a 30 year term, (ii) to adjust the
interest rate to 175 basis points above the 30 year U.S. Treasury rate and (iii) to
eliminate the Company's obligation to repay $936 of second mortgage loans. $ (936)
The lender has agreed to make a second mortgage loan of $150 to the Company resulting in
a total outstanding principal amount of $24,000 at the closing of the Formation
Transactions. As of September 30, 1997 the additional financing would amount to $60
which is pledged as collateral and included in other assets........................... $ 60
The lender has agreed to make a second mortgage loan of $1,000 to the Company resulting
in a total outstanding principal amount of $13,000 at the close of the Formation
Transactions. As of September 30, 1997 the additional financing would amount to $250
which is pledged as collateral and included in other assets........................... $ 250
(d) To record property acquisition costs, including title costs, transfer costs,
solicitation fees, engineering costs and other acquisition costs........................ $ 1,830
(e) To reclassify cash and cash equivalent deficiency to accounts payable................... $ 1,663
(f) To record accounting and legal fees in connection with the preparation for an initial
public offering......................................................................... $ 750
(g) To reflect the distribution of related party receivables prior to the completion of the
Formation Transaction................................................................... $ (3,962)
(h) To reflect the distribution of related party payables prior to the completion of the
formation transaction................................................................... $ 2,163
(i) To reflect allocation of owners interest between General Partners/Managing Members and
Limited Partners/Non-Managing Members interest in the Equity Investees.................. $ 11,380
</TABLE>
F-35
<PAGE>
EQUITY INVESTEES
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------------------
THE MERRICK/MILL ACQUISITION OF EQUITY
PHILIPS BASIN NATIONAL PRO FORMA INVESTEES
COMPANY PROPERTIES PROPERTY ADJUST. PRO FORMA
------- ------------- -------------- --------- -----------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Revenue from rental property..................... $25,947 $ 4,959 $341 $ 695(a) $31,942
Interest income from affiliate................... -- 1,297(g) -- -- 1,297
------- ------------- ------ --------- ---------
Total revenue............................... 25,947 6,256 341 695 33,239
------- ------------- ------ --------- ---------
Expenses:
Operating expenses............................. 4,176 476 95 4,747
Real estate taxes.............................. 3,671 744 36 4,451
Management fees to
affiliates.................................. 878 234 46 (228)(d) 930
Interest expense............................... 11,728 3,496(g) 60 884(c) 16,168
General and administrative expenses............ 306 38 73 1,430(e) 1,847
Depreciation and
amortization................................ 3,417 576 51 1,074(a) 5,134
16(f)
------- ------------- ------ --------- ---------
Total Expenses.............................. 24,176 5,564 361 3,176 33,277
------- ------------- ------ --------- ---------
Operating income............................ 1,771 692 (20) (2,481) (38)
Equity in net income of investees................ 95 -- -- (95)(b) --
Other income net................................. 22 -- 1 -- 23
------- ------------- ------ --------- ---------
Income (loss) before extraordinary items....... $1,888 $ 692 $(19) $(2,576) $ (15)
------- ------------- ------ --------- ---------
------- ------------- ------ --------- ---------
</TABLE>
F-36
<PAGE>
EQUITY INVESTEES
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------------------------------
--------------------------------------------------------------------
THE MERRICK/MILL ACQUISITION OF EQUITY
PHILIPS BASIN NATIONAL PRO FORMA INVESTEES
COMPANY PROPERTIES PROPERTY ADJUST. PRO FORMA
------- ------------- -------------- --------- -----------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Revenues from rental property.................... $19,508 $ 3,725 $268 $ 364(a) $23,865
------- ------------- ------ --------- ---------
Expenses:
Operating expenses............................. 2,895 256 70 3,221
Real estate taxes.............................. 2,792 612 28 3,432
Management fees to
affiliates.................................. 723 180 36 (241)(d) 698
Interest expense............................... 9,909 1,581 43 403(c) 11,936
General and administrative expenses............ 206 47 38 1,073(e) 1,364
Depreciation and 604(a)
amortization................................ 2,867 422 41 12(f) 3,946
------- ------------- ------ --------- ---------
Total expenses.............................. 19,392 3,098 256 1,851 24,597
------- ------------- ------ --------- ---------
Operating income................................. 116 627 12 (1,487) (732)
Equity in income of investees.................... 285 -- -- (285)(b) --
Other income (expense), net...................... 22 1 23
------- ------------- ------ --------- ---------
Income (loss) before extraordinary items....... $ 423 $ 628 $ 12 $(1,772) $ (709)
------- ------------- ------ --------- ---------
------- ------------- ------ --------- ---------
</TABLE>
F-37
<PAGE>
EQUITY INVESTEES
NOTES TO PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
(1) Represents historical combined income statement of seven properties
comprising The Philips Company.
(2) Represents historical combined income statement of two properties in which
The Philips Company has an equity interest and will be wholly-owned after
the Formation Transactions.
(3) Represents the income statement of The Shoppes at Lake Mary.
(4) Adjustments to the Pro Forma Operations of the Operating Partnership and
property partnerships for the nine months ended September 30, 1997 and the
year ended December 31, 1996 are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C> <C>
(a) To reflect the adjustment resulting from purchase price
accounting:
Rental revenue--Adjustment to straight line rental
income.................................................. $ 364 $ 695
Depreciation and amortization............................... $ 604 $ 1,074
(b) Elimination of equity in net income of investees which is
included in the operations of Merrick/Mill Basin
Properties................................................ $ (285) $ (95)
(c) Increase in interest expense related to new financing:
Additional financing of $13,000 to purchase certain
partners' interests in Palm Springs Mile and
includes amortization of deferred financing
costs up to date of historical purchase................. $ 550 $ 1,095
Second mortgage of $60 on Forest Avenue..................... 3 4
Second mortgage of $250 on Palm Springs Mile................ 14 19
Historical interest on Dime Savings Bank mortgages.......... (852) (1,158)
Renegotiated interest on Dime Saving Bank
mortgages............................................... 688 924
-------- --------
$ 403 $ 884
-------- --------
-------- --------
(d) Adjustment to management fees paid to affiliates related to
the properties acquired:
Management fees based on historical agreements.............. $ (939) $(1,158)
Management fees based upon agreement effective at
the completion of the Formation Transactions............ 698 930
-------- --------
Net decrease in management fees............................. $ (241) $ (228)
-------- --------
-------- --------
</TABLE>
F-38
<PAGE>
EQUITY INVESTEES
NOTES TO PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(e) Incremental general and administrative expenses associated
with formation transactions
<S> <C> <C> <C>
Salaries, including taxes and benefits...................... $ 589 $ 785
Directors fees.............................................. 30 40
Transfer agent fees......................................... 6 8
Directors & officers liability insurance.................... 94 125
Professional fees........................................... 150 200
Travel and entertainment.................................... 45 60
Rent........................................................ 54 72
Other expenses.............................................. 30 40
State franchise tax......................................... 75 100
-------- --------
$ 1,073 $ 1,430
-------- --------
-------- --------
(f) To reflect depreciation based upon purchase price for The
Shoppes at Lake Mary...................................... $ 12 $ 16
(g) Represents interest income from affiliates on related party receivables which were outstanding for a
portion of 1996 and funded with the proceeds of a mortgage in a similar amount on the Mill Basin
Plaza Property. Interest income earned on the related party receivable is equivalent to the interest
expense incurred on the corresponding mortgage debt.
</TABLE>
F-39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Philips International Realty Corp.
We have audited the accompanying balance sheet of Philips International Realty
Corp. as of September 30, 1997 and the related statement of operations and
deficit and cash flows for the period August 31, 1997 (Inception) to September
30, 1997. 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 audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Philips International Realty
Corp. at September 30, 1997 and the results of its operations and its cash flows
for the period August 31, 1997 to September 30, 1997 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
November 7, 1997
F-40
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
<S> <C>
ASSETS
Cash and cash equivalents..................................................................... $ 171
Other assets.................................................................................. 1,824
------------------
Total assets.................................................................................. $ 1,995
------------------
------------------
LIABILITIES AND SHAREHOLDER'S DEFICIT
Liabilities:
Due to related parties........................................................................ $ 15,000
------------------
Total liabilities............................................................................. 15,000
------------------
Commitments and contingencies (Note 2)
Shareholder's Deficit
Common stock $.01 par value; 3,000 shares authorized and 20 shares issued and outstanding.....
Paid in capital............................................................................... 1,000
Deficit....................................................................................... (14,005)
------------------
Total shareholder's deficit................................................................... (13,005)
------------------
Total liabilities and shareholder's deficit................................................... $ 1,995
------------------
------------------
</TABLE>
See accompanying notes.
F-41
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
STATEMENT OF OPERATIONS
AND DEFICIT
<TABLE>
<CAPTION>
PERIOD
AUGUST 31, 1997
(INCEPTION) TO
SEPTEMBER 30, 1997
------------------
<S> <C>
Revenue....................................................................................... $ --
General and administrative expenses........................................................... 14,005
------------------
Net loss, representing deficit at September 30, 1997.......................................... $ (14,005)
------------------
------------------
</TABLE>
See accompanying notes.
F-42
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD
AUGUST 31, 1997
(INCEPTION) TO
SEPTEMBER 30, 1997
------------------
<S> <C>
Operating activities
Net loss...................................................................................... $ (14,005)
Changes in operating assets and liabilities:
Other assets................................................................................ (1,824)
Due to related parties...................................................................... 15,000
------------------
Net cash used in operating activities......................................................... (829)
------------------
Financing activities:
Contribution from shareholder............................................................... 1,000
------------------
Net cash provided by financing activities..................................................... 1,000
------------------
Net increase in cash and cash equivalents..................................................... 171
Cash and cash equivalents at beginning of period.............................................. --
------------------
Cash and cash equivalents at end of period.................................................... $ 171
------------------
------------------
</TABLE>
See accompanying notes.
F-43
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO FINANCIAL STATEMENTS
1. FORMATION AND PROPOSED TRANSACTION
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 are owned by
partnerships and limited liability companies (the 'Contributing Companies') in
which Philip Pilevsky owns an interest. The Company expects to qualify as a real
estate investment trust ('REIT') under the Internal Revenue Code of 1986, as
amended. A REIT is a legal entity that holds real estate interests and, through
payments of dividends to shareholders, is permitted to reduce or avoid the
payment of federal income taxes at the Company level.
Proposed Transaction
The partners and members of the Contributing Companies intend to transfer
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 as follows:
o With respect to those partnerships which own fee title to properties
located in New York or Connecticut, the partnerships will contribute such
fee title, together with any existing indebtedness relating thereto, to
the Operating Partnership or its designee, which designee is likely to be
a newly-formed limited partnership (in which the Company will indirectly
own a 0.01% general partnership interest), in exchange for Units in the
Operating Partnership;
o With respect to those partnerships that are partnerships or limited
liability companies and which do not own fee title to properties located
in New York or Connecticut, the partners or members, as the case may be,
of such partnerships will contribute all of their partnership interests
or membership interests therein, as the case may be, to the Operating
Partnership in exchange for Units in the Operating Partnership (which
Units, together with those Units described above, comprise a 93.9%
limited partner interest in the Operating Partnership and which, upon
redemption of such Units for Common Stock of the Company, would represent
approximately 93.9% of the outstanding Common Stock of the Company);
o The Company will purchase a shopping center property in Florida from an
existing unaffiliated seller (the 'Seller') in exchange for 32,000 shares
of Common Stock (which shares will represent approximately 2.1% of the
outstanding Common Stock of the Company on a fully-diluted basis) and the
assumption of the existing mortgage note payable in the amount of
$550,000 (unaudited) as of September 30, 1997;
o The trustees of the Seller will be issued 5,000 shares of Common Stock of
the Company, plus warrants to acquire an additional 8,000 shares of
Common Stock of the Company (which shares and warrants represent
approximately 0.8% of the outstanding Common Stock of Company on a
fully-diluted basis);
o An individual partner will purchase 10,660 shares of the Company's Common
Stock (approximately 0.7% of the outstanding Common Stock on a
fully-diluted basis) for a total purchase price of $533,000;
o Prudential Securities will receive, in lieu of the financial advisory fee
payable by National upon consummation of the Formation Transactions and
assumed by the Company under the Contribution and Exchange Agreement,
1,940 shares of Series A Preferred Stock, convertible into 38,800 shares
of Common Stock, which Series A Preferred Stock represents approximately
2.5% of the outstanding shares of Common Stock of the Company (including
interests redeemable or convertible therefor and shares of Common Stock
issuable upon exercise of outstanding warrants);
o The Company will contribute its fee title interest in the Florida
property, together with the cash received from the partner in connection
with the purchase of Common Stock, to the Operating Partnership in
exchange for an approximate 3.2% non-managing general partnership
interest therein; and
o The Operating Partnership and the Property-owning partnerships will be
controlled by Philips International Realty LLC, a Delaware limited
liability company, of which Philip Pilevsky is the sole member, until
such time as the Company completes public or private equity offerings of
its securities
F-44
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. FORMATION AND PROPOSED TRANSACTION--(CONTINUED)
aggregating in excess of $25 million, at which time the Company will
become the sole general partner of the Operating Partnership and the
Property-owning partnerships.
2. COMMITMENTS AND CONTINGENCIES
Management Agreement
The Company will enter into an agreement with the Management Company, an
affiliate of Philip Pilevsky, to provide the day-to-day operations, management
and leasing services for the properties, as described in the Company's Proxy
Statement/Prospectus under the caption 'Management Agreement and Non-Competition
Agreement--Management Agreement.'
Stock Option Plan
The Company intends to adopt a stock option plan designed to attract,
retain and motivate executive officers of the Company and other key employees.
The plan will authorize the issuance of shares of common stock pursuant to
options granted under the plan, as described in the Company's Proxy
Statement/Prospectus under the caption 'Management--Stock Option Plan.'
Employment Agreements
The Company will enter into employment and non-competition agreements with
certain executive officers as described in the Company's Proxy
Statement/Prospectus under the captions 'Management--Employment Agreements' and
'Management Agreement and Non-Competition Agreement--Non-Competition Agreement.'
3. 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 these estimates.
F-45
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners and Members of
The Philips Company
We have audited the accompanying combined balance sheets of The Philips Company
as of December 31, 1996 and 1995, and the related combined statements of income,
owners' deficit and cash flows for each of the three years in the period ended
December 31, 1996. We have also audited the financial statement schedule listed
on the Index to the Financial Statements included in the Proxy
Statement/Prospectus. These financial statements and financial statement
schedule are the responsibility of The Philips Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 referred to above present
fairly, in all material respects, the combined financial position of The Philips
Company at December 31, 1996 and 1995, and the combined results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
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 required to be set
forth therein.
ERNST & YOUNG LLP
New York, New York
April 28, 1997
F-46
<PAGE>
THE PHILIPS COMPANY
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1997 1996 1995
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Rental properties, at cost (Note 3)
Land and improvements................................................... $ 34,850 $ 27,687 $ 25,195
Building and improvements............................................... 130,216 109,712 99,697
------------- -------- --------
165,066 137,399 124,892
Less accumulated depreciation........................................... 26,817 24,277 21,315
------------- -------- --------
138,249 113,122 103,577
Cash and cash equivalents................................................. 124 785 491
Accounts receivable....................................................... 5,216 7,832 8,104
Related party receivables (Note 6)........................................ 2,638 1,216 --
Investments in partnerships (Note 2)...................................... 979 694 598
Deferred charges, net (Note 8)............................................ 3,369 4,605 2,826
Other assets (Note 9)..................................................... 3,461 1,587 1,260
------------- -------- --------
Total assets.............................................................. $ 154,036 $129,841 $116,856
------------- -------- --------
------------- -------- --------
LIABILITIES AND OWNERS' DEFICIT
Liabilities:
Mortgage notes payable (Note 3)......................................... $ 151,244 $133,609 $131,740
Accounts payable and accrued expenses................................... 4,796 3,584 4,510
Related party payables (Note 6)......................................... 1,910 2,067 1,278
Other liabilities....................................................... 1,304 1,747 1,419
------------- -------- --------
Total liabilities......................................................... 159,254 141,007 138,947
------------- -------- --------
Contingencies (Note 7)....................................................
Owners' deficit........................................................... (5,218) (11,166) (22,091)
------------- -------- --------
Total liabilities and owners' deficit..................................... $ 154,036 $129,841 $116,856
------------- -------- --------
------------- -------- --------
</TABLE>
See accompanying notes.
F-47
<PAGE>
THE PHILIPS COMPANY
COMBINED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue from rental property (Notes 1 and 5)........... $ 15,280 $ 15,068 $ 20,230 $ 18,163 $ 17,401
Escalation and reimbursement revenue................... 4,228 4,270 5,717 5,024 4,791
-------- -------- -------- -------- --------
Total Revenue.......................................... 19,508 19,338 25,947 23,187 22,192
-------- -------- -------- -------- --------
Expenses:
Operating expenses (Note 6).......................... 2,895 3,014 4,176 4,193 4,056
Real estate taxes.................................... 2,792 2,742 3,671 3,591 3,554
Management fees to affiliates (Note 6)............... 723 632 878 815 778
Interest expense (Note 3)............................ 9,909 8,584 11,728 11,097 9,695
Depreciation and amortization........................ 2,867 2,480 3,417 3,072 2,896
General and administrative expenses.................. 206 230 306 201 222
-------- -------- -------- -------- --------
Total expenses......................................... 19,392 17,682 24,176 22,969 21,201
-------- -------- -------- -------- --------
116 1,656 1,771 218 991
Equity in income of investees (Note 2)................. 285 15 95 54 6
Other income, net.................................... 22 17 22 35 48
-------- -------- -------- -------- --------
Income before extraordinary items.................... 423 1,688 1,888 307 1,045
Extraordinary items (Note 8)........................... (164) 2,284 2,881 -- 298
-------- -------- -------- -------- --------
Net income........................................... $ 259 $ 3,972 $ 4,769 $ 307 $ 1,343
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
See accompanying notes.
F-48
<PAGE>
THE PHILIPS COMPANY
COMBINED STATEMENTS OF OWNERS' DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Balance at January 1, 1994................................................................... $(25,771)
Distributions.............................................................................. (441)
Contributions.............................................................................. 258
Net income for the year ended December 31, 1994............................................ 1,343
--------
Balance at December 31, 1994................................................................. (24,611)
Distributions.............................................................................. (468)
Contributions.............................................................................. 2,681
Net income for the year ended December 31, 1995............................................ 307
--------
Balance at December 31, 1995................................................................. (22,091)
Distributions.............................................................................. (1,101)
Contributions.............................................................................. 7,257
Net income for the year ended December 31, 1996............................................ 4,769
--------
Balance at December 31, 1996................................................................. (11,166)
Distributions (unaudited).................................................................. (4,183)
Contributions (unaudited).................................................................. 9,872
Net income for the nine months ended September 30, 1997 (unaudited)........................ 259
--------
Balance at September 30, 1997 (unaudited).................................................... $ (5,218)
--------
--------
</TABLE>
See accompanying notes.
F-49
<PAGE>
THE PHILIPS COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- -----------------------------
1997 1996 1996 1995 1994
-------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income................................................ $ 259 $ 3,972 $ 4,769 $ 307 $ 1,343
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 2,867 2,480 3,417 3,072 2,896
Amortization of mortgage discount.................... 31 45 59 56 52
Extraordinary items.................................. 164 (2,284) (2,881) -- (298)
Equity in (income)/loss of investees................. (285) (15) (95) (54) (6)
Changes in operating assets and liabilities:
Accounts receivable.................................. (155) (1,019) (574) (411) (818)
Related party receivables............................ (1,611) (15) (357) 722 375
Deferred charges..................................... (1,286) (796) (2,957) (1,514) (835)
Other assets......................................... (598) (195) 432 527 572
Accounts payable and accrued expenses................ 1,199 (317) (793) (1,587) 2,075
Related party payables............................... (133) 1,431 1,997 249 184
Other liabilities.................................... (431) 60 550 2,168 (1,901)
-------- ------- ------- ------- -------
Net cash provided by operating activities................... 21 3,347 3,567 3,535 3,639
-------- ------- ------- ------- -------
INVESTING ACTIVITIES
Additions to land, buildings and improvements............... (19,369) (2,667) (9,359) (6,604) (3,354)
-------- ------- ------- ------- -------
Net cash used in investing activities....................... (19,369) (2,667) (9,359) (6,604) (3,354)
-------- ------- ------- ------- -------
FINANCING ACTIVITIES
Proceeds from mortgage notes payable...................... 79,400 420 14,835 1,719 --
Payments of mortgage notes payable........................ (61,796) (1,654) (10,742) (1,221) (693)
Contributions from owners................................. 4,941 2,002 2,635 2,130 258
Distributions to owners................................... (3,858) (878) (642) (468) (441)
-------- ------- ------- ------- -------
Net cash provided by (used in) financing activities......... 18,687 (110) 6,086 2,160 (876)
-------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (661) 570 294 (909) (591)
Cash and cash equivalents at beginning of period............ 785 491 491 1,400 1,991
-------- ------- ------- ------- -------
Cash and cash equivalents at end of period.................. $ 124 $ 1,061 $ 785 $ 491 $ 1,400
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
NONCASH INVESTING AND FINANCING ACTIVITIES
Loans to and from affiliates reclassified as capital
contributions and/or distributions:
Contributions............................................. $ 159 $ 2,485 $ 2,524 $ 373 $ --
Distributions............................................. 325 458 459 -- --
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Non cash adjustments relating to purchase of partnership
interests (see Note 1):
Increase in rental properties............................. $ 8,298 $ -- $ 3,148 $ -- $ --
Decrease in accounts receivable........................... (2,771) $ -- (846) -- --
Decrease in deferred charges (net)........................ (755) $ -- (204) -- --
-------- ------- ------- ------- -------
Increase in owners' equity................................ 4,772 -- 2,098 -- --
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Investment in partnerships, included in capital
contributions............................................. $ -- $ -- $ -- $ 178 $
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
</TABLE>
See accompanying notes.
F-50
<PAGE>
THE PHILIPS COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Philips Company (the 'Company') is engaged in the ownership, operation,
leasing and development of seven community and neighborhood shopping center
properties (collectively, the 'Properties') located in New York, Connecticut,
New Jersey, Massachusetts and Florida.
Principles of Combination
The Philips Company is not a legal entity but rather a combination of real
estate properties that are currently organized as general and limited
partnerships and limited liability companies and which are 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 are accounted for under the equity method
(see Note 2). All significant intercompany transactions and balances have been
eliminated in combination.
The specific partnerships and limited liability companies included in the
accompanying combined financial statements are as follows:
<TABLE>
<CAPTION>
ENTITY PROPERTY
- ------------------------------------- -----------------------------------------
<S> <C>
Branhaven Plaza L.L.C. Branhaven Plaza
Palm Springs Mile Associates, Ltd. Palm Springs Mile
Forest Avenue Shopping Associates Forest Avenue Shoppers Town
Philips Freeport Associates, L.P. Meadowbrook Commons
Foxborough Shopping L.L.C. Foxboro Plaza
Enfield Shopping L.L.C. Elm Plaza
Delran Shopping L.L.C. Millside Plaza
</TABLE>
Acquisition of Partnership Interests
Certain partnership/membership interests in the above partnerships and
limited liability companies were acquired by the Sponsors in contemplation of
the Proposed Transactions, as discussed in this Note 1, as follows:
FOREST AVENUE SHOPPING ASSOCIATES. In October, 1996, the Sponsors purchased
interests aggregating 65% of the ownership of Forest Avenue Shopping
Associates from three partners in a negotiated transaction for cash
consideration totalling $5,859.
BRANHAVEN PLAZA L.L.C. In June, 1997, the Sponsors purchased interests
aggregating 50% of the ownership of Branhaven Plaza LLC from two parties in
negotiated transactions for cash consideration totalling $1,073.
PALM SPRINGS MILE ASSOCIATES, LTD. ('LIMITED'). In August, 1997 the Sponsors
purchased the interests of four other partners aggregating 51.5% of the
ownership of Limited in a negotiated transaction for $15.881, payable $2,881
in cash and $13,000 in notes. The notes bear interest at LIBOR + 2.75% and are
collateralized by a pledge of certain of the partnership interests in Limited
and Forest Avenue Shopping Associates. The notes are due in June, 1998,
require monthly principal amortization payments of $250 and a default under
these notes will cause a default under the debt encumbering the Forest Avenue
shopping center. See Note 10.
Rental properties, accounts receivable, deferred charges and owners'
deficit reflect the acquisition and purchase accounting related to these
interests acquired in accordance with the push down basis of accounting
F-51
<PAGE>
THE PHILIPS COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
required by the Securities and Exchange Commissions' Staff Accounting Bulletin
#54. The following reflects the purchase accounting:
<TABLE>
<CAPTION>
PURCHASE
HISTORICAL BOOK ACCOUNTING
VALUE OF NON-SPONSOR ADJUSTMENT
INTEREST AT DATE PURCHASE ------------------
ENTITY OF PURCHASE PRICE 1997 1996
- ----------------------------------- -------------------- -------- ------- -------
<S> <C> <C> <C> <C>
Forest Avenue Shopping Associates.. $ (2,098) $ 5,859 -- $ 7,957
Branhaven Plaza LLC (unaudited).... (439) 1,073 $ 1,512 --
Palm Springs Mile Associates, Ltd.
(unaudited)...................... (4,334) 15,881 20,215 --
------- -------
$21,727 $ 7,957
------- -------
------- -------
</TABLE>
The purchase adjustment has been allocated as follows:
<TABLE>
<S> <C> <C> <C> <C>
Rental properties..................................................... $25,253 $ 9,008
Accounts receivable................................................... (2,771) (846)
Deferred charges...................................................... (755) (205)
------- -------
$21,727 $ 7,957
------- -------
------- -------
</TABLE>
Proposed Transaction
The partners and members of The Philips Company and the Merrick/Mill Basin
Properties (see Note 2) intend to transfer 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 as follows:
o With respect to those partnerships which own fee title to properties
located in New York or Connecticut, the partnerships will contribute
such fee title, together with any existing indebtedness relating
thereto, to Philips International Realty L.P. (a newly-formed
'Operating Partnership') or its designee, which designee is likely
to be a newly-formed limited partnership (in which a subsidiary of
Philips International Realty Corp., a new company intending to
qualify as a real estate investment trust (the 'REIT') will
indirectly own a 0.01% general partnership interest), in exchange
for Units in the Operating Partnership;
o With respect to those partnerships or limited liability companies
which do not own fee title to properties located in New York or
Connecticut, the partners or members, as the case may be, of such
partnerships will contribute all of their partnership interests or
membership interests therein, as the case may be, to the Operating
Partnership in exchange for Units in the Operating Partnership
(which Units, together with those Units described above, comprise a
93.9% limited partners' position in the Operating Partnership and
which, upon redemption of such Units for Common Stock of the REIT,
would represent approximately 93.9% of the outstanding Common Stock
of the REIT);
o The REIT will purchase a shopping center property in Florida from an
existing unaffiliated seller (the 'Seller') in exchange for 32,000
shares of Common Stock (which shares will represent approximately
2.1% of the outstanding Common Stock of the REIT on a fully-diluted
basis) and the assumption of the existing mortgage note payable in
the amount of $550 (unaudited) as of September 30, 1997;
o The trustees of the Seller will be issued 5,000 shares of Common
Stock of the REIT, plus warrants to acquire an additional 8,000
shares of Common Stock of the REIT (which shares and warrants
represent approximately 0.8% of the outstanding Common Stock of the
REIT on a fully-diluted basis);
F-52
<PAGE>
THE PHILIPS COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
o An individual partner will purchase 10,660 shares of the REIT's
Common Stock (approximately 0.7% of the outstanding Common Stock on
a fully-diluted basis) for a total purchase price of $533;
o Prudential Securities will receive, in lieu of the financial
advisory fee payable by National upon consummation of the Formation
Transactions and assumed by the Company under the Contribution and
Exchange Agreement, 1,940 shares of Series A Preferred Stock,
convertible into 38,800 shares of Common Stock, which Series A
Preferred Stock represents approximately 2.5% of the outstanding
shares of Common Stock of the Company (including interests
redeemable or convertible therefor and shares of Common Stock
issuable upon exercise of outstanding warrants);
o The REIT will contribute its fee title interest in the Florida
property, together with the cash received from the partner in
connection with the purchase of Common Stock, to the Operating
Partnership in exchange for approximately 3.2% non-managing general
partnership interest therein; and
o The Operating Partnership and the Property-owning partnerships will
be controlled by Philips International Realty LLC, a Delaware
limited liability company, of which Mr. Pilevsky is the sole member,
until such time as the Company completes public or private equity
offerings of its securities aggregating in excess of $25 million, at
which time the REIT will become the sole general partner of the
Operating Partnership and the Property-owning partnerships.
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
Depreciation is computed by the straight-line method over the estimated
useful lives of the assets which range from fifteen to thirty-nine years for
buildings and improvements. Tenant improvements, which are included in buildings
and improvements in the accompanying combined balance sheets, are amortized over
the lives of the respective leases, using the straight-line method.
During 1996, The Philips 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. 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents.
The Company maintains banking relationships with major financial
institutions and operates its properties through multiple bank accounts to
mitigate exposure to loss of cash balances which may from time to time exceed
federally insured limits.
F-53
<PAGE>
THE PHILIPS COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Revenue Recognition
Minimum revenues from rental property are recognized on a straight-line
basis over the terms of the respective tenant leases.
Deferred Charges
Costs incurred to obtain tenant leases and long term financing, included in
deferred charges in the accompanying combined balance sheets, are amortized over
the terms of the related leases or debt agreements, as applicable.
Income Taxes
The entities comprising the Company are 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 51%, 50% and 50% of the Company's total revenue for the years
ended December 31, 1996, 1995 and 1994, respectively, 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.
Capital Contributions, Distributions and Profits and Losses
Capital contributions, distributions and profits and losses are allocated
in accordance with the terms of the applicable agreements.
Interim Unaudited Financial Information
The accompanying interim unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosure normally included in the financial
statements prepared in accordance with generally accepted accounting principles
may have been condensed or omitted pursuant to such rules and regulations,
although management believes that the disclosures are adequate to make the
information presented not misleading. The unaudited financial statements as of
September 30, 1997 and for the nine month periods ended September 30, 1997 and
1996 include, in the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the financial
information set forth therein.
2. INVESTMENT IN PARTNERSHIPS
The Company holds a limited partnership interest and a minority general
partnership interest in the following two partnerships (the 'Merrick/Mill Basin
Properties') which also own and operate community and neighborhood shopping
centers:
<TABLE>
<CAPTION>
THE PHILIPS COMPANY'S
PARTNERSHIP PROPERTY PERCENTAGE OWNERSHIP
- ----------------------------- ---------------- ----------------------
<S> <C> <C>
Merrick Shopping Associates Merrick Commons 30%
SP Avenue U Associates, L.P. Mill Basin Plaza 49%
</TABLE>
F-54
<PAGE>
THE PHILIPS COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
2. INVESTMENT IN PARTNERSHIPS--(CONTINUED)
As a limited partner and minority general partner, the Company does not
control the activities of the partnerships. These investments, accounted for
under the equity method, are recorded initially at cost and subsequently
adjusted for equity in the net income or loss of investees and cash
contributions and distributions.
Condensed financial statements of the entities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------
1997 1996 1995
---------------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
CONDENSED BALANCE SHEETS
Rental properties, net.......................................... $ 23,712 $23,955 $24,130
Cash and cash equivalents....................................... 43 96 74
Related party receivables....................................... 1,324 1,252 5,445
Accounts receivable............................................. 1,284 1,135 977
Deferred charges, net........................................... 901 1,000 801
Other assets.................................................... 397 137 386
---------------- ------- -------
Total assets.................................................... $ 27,661 $27,575 $31,813
---------------- ------- -------
---------------- ------- -------
Mortgage notes payable.......................................... 25,854 26,049 24,075
Accounts payable and accrued expenses........................... 460 320 507
Related party payables.......................................... 253 620 1,220
Other liabilities............................................... -- -- --
---------------- ------- -------
Total liabilities............................................... 26,567 26,989 25,802
Owners' equity.................................................. 1,094 586 6,011
---------------- ------- -------
Total liabilities and owners' equity............................ $ 27,661 $27,575 $31,813
---------------- ------- -------
---------------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------- ---------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONDENSED STATEMENTS OF OPERATIONS
Revenues from rental property......................... $3,726 $4,479 $4,959 $ 4,813 $2,310
Interest income from affiliate........................ -- -- 1,297 -- --
------ ------ ------ ------- ------
Total revenue......................................... 3,726 4,479 6,256 4,813 2,310
------ ------ ------ ------- ------
Operating and other expenses.......................... 1,095 1,148 1,492 1,436 943
Interest.............................................. 1,581 2,570 3,496 2,054 873
Depreciation and amortization......................... 422 470 576 540 322
------ ------ ------ ------- ------
Total expenses........................................ 3,098 4,188 5,564 4,030 2,138
------ ------ ------ ------- ------
Income before extraordinary item...................... 628 291 692 783 172
Extraordinary item.................................... -- (188) (349) -- --
------ ------ ------ ------- ------
Net income............................................ $ 628 $ 103 $ 343 $ 783 $ 172
------ ------ ------ ------- ------
------ ------ ------ ------- ------
</TABLE>
F-55
<PAGE>
THE PHILIPS COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. MORTGAGE NOTES PAYABLE
As of December 31, 1996, mortgage notes payable aggregated $133,609 and
were collateralized by the Company's properties. Interest rates ranged from 7%
to 14%. Mortgage payments are due in monthly installments of principal and/or
interest and mature on various dates through 2004. The loan agreements contain
customary representations, covenants and events of default. A partner/member in
the entities that hold title to the properties has personally guaranteed the
repayment of mortgage loans with a balance of $38,720.
(A) SCHEDULE OF MORTGAGE NOTES
The following table summarizes mortgage indebtedness as of September 30,
1997 (unaudited), December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------------
PROPERTY MORTGAGE NOTES WITH VARIABLE INTEREST: 1997 1996 1995
- -------------------- --------------------------------------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Forest Avenue First mortgage note with a fixed interest $ -- $ 12,502 $ 12,690
Shoppers Town rate of 9.5% due on August 1, 1997. Payments
$115 each month.
Third mortgage note with a fixed interest -- 5,000 --
rate of 14% due on November 1, 1997. Monthly
payments of interest only.
Millside Plaza First mortgage notes with fixed interest 12,164 12,164 12,164
Elm Plaza rates of 8% originally due on June 30, 1997.
Foxboro Plaza Amended on July 1, 1995 to fixed interest
rates of 9% from July 1, 1995 to June 30,
1999 and 9.375% from July 1, 1999 to July 1,
2000, maturing on July 1, 2000. Further
amended to extend the 9% interest rate from
June 30, 1999 to April 30, 2000. Monthly
payments of interest only. See Note 3(C).
Subordinate mortgages, net of discount, 936 905 845
bearing no interest, except if a default
occurs, matures on July 1, 2000. See Note
3(C).
Second mortgage note satisfied on April 15, -- -- 3,397
1996, bearing fixed interest rate of 7%.
Payments $7 each month.
Palm Springs Mile On February 14, 1997, the Company refinanced 42,120 -- --
a portion of the mortgages collateralized by
a portion of its Palm Springs Mile shopping
center with a life insurance company at a
fixed rate of 7.83%, with maturity in
February 2004.
--------------- --------------- ---------------
TOTAL FIXED RATE NOTES 55,220 30,571 29,096
--------------- --------------- ---------------
Forest Avenue Second mortgage note with variable interest -- 2,048 2,078
Shoppers Town rate based on the prime rate, matures on June
30, 1997.
On June 27, 1997, the Company refinanced 23,940 -- --
three mortgages collateralized by Forest
Avenue Shoppers Town with a financial
</TABLE>
F-56
<PAGE>
THE PHILIPS COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. MORTGAGE NOTES PAYABLE--(CONTINUED)
(A) SCHEDULE OF MORTGAGE NOTES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------------
PROPERTY MORTGAGE NOTES WITH VARIABLE INTEREST: 1997 1996 1995
- -------------------- --------------------------------------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Forest Avenue services institution. An individual that is a
Shoppers Town member in the entity that owns the property
(cont'd) has personally guaranteed $6,000 (subject to
reductions as set forth in the Agreement) of
the new mortgage note. In addition, all
membership interests in Forest Avenue
Shoppers Town LLC and Branhaven Plaza LLC
have been pledged as collateral. Interest is
at the rate of LIBOR plus 1.75%, with a
maturity date of December 1, 1997; however,
either party can decide to extend the loan on
notice, not less than 30 days or more than 90
days prior to maturity, to either January 1,
2004 or 2007, upon the occurrence of certain
events as disclosed in the mortgage
agreement. (See Note 10)
Branhaven Plaza Wrap around mortgage note with a fixed 9,415 9,415 8,711
interest rate of 14.25% originally was
scheduled to mature on July 31, 1999. In
addition to the above interest, loan bore
contingent interest at the lesser of 15% of
gross rents or 15% of $887. Contingent
interest totaled $101 and $88 for 1994 and
1995, respectively. The underlying mortgage
note with a fixed interest rate of 10%
matured on August 1, 1996. On November 1,
1996, the wrap around mortgage notes were
refinanced to provide for variable interest
rate of the lower of LIBOR plus 3.50% or
prime plus 0.75% with maturity on November 1,
1998, with two options to extend the maturity
date for 6 months. The Company is required to
make quarterly amortization payments equal to
fifty percent of the property's preceding
quarter's net cash flow.
Meadowbrook Commons First mortgage note with variable interest of 25,831 26,096 26,696
2.5% plus base LIBOR rate, as defined, or
Floating Rate, as defined, matures on March
31, 1998. The Company is required to make
quarterly amortization payments of the excess
cash flow from the preceding quarter.
Palm Springs Mile First mortgage note collateralized by portion 24,088 65,479 65,159
of property with a variable interest rate of
LIBOR
</TABLE>
F-57
<PAGE>
THE PHILIPS COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. MORTGAGE NOTES PAYABLE--(CONTINUED)
(A) SCHEDULE OF MORTGAGE NOTES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------------
PROPERTY MORTGAGE NOTES WITH VARIABLE INTEREST: 1997 1996 1995
- -------------------- --------------------------------------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Palm Springs Mile plus 2.5%, matures on June 1, 1998. Monthly
(Cont'd) payments of principal of $37.5 plus interest.
In connection with the purchase of the
nonsponsor interest in Palm Springs Mile
Associates, Ltd. (see Note 1), the Company 12,750 -- --
obtained $13,000 in Notes. Such notes are
collateralized by (i) the partnership
interests so acquired, (ii) the pledge of all
limited partners' rights to partnership
distributions until the notes are repaid,
(iii) the personal guarantee of the notes by
an individual limited partner, and (iv) the
pledge of all members' interests in Forest
Avenue Shopping, LLC, an affiliated entity
(see Note 1). The notes bear interest at
LIBOR plus 2.75% and mature on the earlier of
June 1, 1998 or the date the Company has
raised at least $40,000 in equity. The notes
require monthly debt service payments of
principal and interest totaling approximately
$330. In connection with this transaction, a
first mortgage loan encumbering a certain
portion of the Company's Palm Spring Mile
shopping center was modified to provide for
(i) a concurrent principal paydown of $200,
(ii) an acceleration of the maturity date
thereof to June 1, 1998, and (iii) a
guarantee of $12,000 of such outstanding
mortgage loan balance by two limited
partners, such guarantee to increase to the
full amount of this first mortgage loan if
the aforementioned notes are not repaid by
December 31, 1997. See Note 10.
--------------- --------------- ---------------
TOTAL VARIABLE RATE INTEREST NOTES 96,024 103,038 102,644
--------------- --------------- ---------------
TOTAL MORTGAGE NOTES PAYABLE $ 151,244 $ 133,609 $ 131,740
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
F-58
<PAGE>
THE PHILIPS COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. MORTGAGE NOTES PAYABLE--(CONTINUED)
(B) PRINCIPAL MATURITIES
The combined aggregate principal maturities of mortgage notes payable
outstanding as of September 30, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, 1997 1996
------------------ -------------
(UNAUDITED)
<S> <C> <C>
1997.................................... $ 23,940(a) $ 21,206
1998.................................... 72,084(b) 36,172
1999.................................... -- 1,796
2000.................................... 13,100(c) 35,440
2001.................................... -- 784
Thereafter.............................. 42,120 38,211
------------------ -------------
$151,244 $ 133,609
------------------ -------------
------------------ -------------
</TABLE>
- ------------------
(a) Maturity date subseqently extended to June 1998, and then further extendable
at the Company's option to June 2004 or 2007. See Note 10.
(b) Includes $9,415 extendable at Company's option for two periods of six months
each upon payment of 0.5% fee.
(c) Negotiated to (i) extend maturity date of $12,164 to 2002 and (ii) eliminate
obligation to repay $936 second mortgage loans. See Note 10.
(C) MULTIPARTY LOAN AGREEMENT
Delran Shopping L.L.C., Enfield Shopping L.L.C., Foxborough Shopping
L.L.C., and two affiliates, Wallingford Shopping L.L.C. and Freehold Shopping
L.L.C., are subject to a Multiparty Agreement with a savings bank. The five
shopping centers owned by these respective entities are encumbered by separate
first mortgage loans with this bank, and each such loan is cross-collateralized
with the loans encumbering the other four properties. The aggregate balance of
the five first mortgage loans at December 31, 1996 was $26,500, of which $12,164
relates to the Company's properties.
(D) CAPITALIZED INTEREST
Interest costs capitalized for the nine months ended September 30, 1997 and
1996 (unaudited), and for the years ended December 31, 1996, 1995 and 1994, were
$78, $42, $42, $383 and $129, respectively.
(E) INTEREST COST
Interest paid for the nine months ended September 30, 1997 and 1996
(unaudited) and for the years ended December 31, 1996, 1995, 1994 were $8,294,
$8,271, $10,878, $8,732 and $7,499, respectively.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values for the Company's financial instruments were
determined by management using market information available as of December 31,
1996 and appropriate valuation methodologies which included, in the case of debt
instruments, consideration of interest rates available to the Company 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 Company's estimates are not
necessarily indicative of the amounts the Company could realize on disposition
of its 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, 1996.
F-59
<PAGE>
THE PHILIPS COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
Cash equivalents and mortgage notes payable with an aggregate carrying
value of $133,609 are reflected in the accompanying combined balance sheet at
amounts which reasonably approximate their fair values.
5. 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%, 96%, 95%, 96%
and 95% of revenues from rental properties for the nine months ended September
30, 1997 and 1996 (unaudited), and for the years ended December 1996, 1995 and
1994, respectively.
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, 1996 are as
follows:
<TABLE>
<S> <C>
1997.......................................................... $ 16,905
1998.......................................................... 16,395
1999.......................................................... 15,617
2000.......................................................... 14,039
2001.......................................................... 11,811
Thereafter.................................................... 82,333
--------
$157,100
--------
--------
</TABLE>
6. RELATED PARTY TRANSACTIONS
(A) 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.
(B) Advances To/From Partners
Advances to and from partners or members in those entities comprising the
Company and certain affiliated entities are reflected in the financial
statements as related party receivables and payables. Such advances are
generally due upon demand and are non-interest bearing.
(C) 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 nine months ended September 30, 1997
and 1996 (unaudited), and for the years ended December 31, 1996, 1995 and 1994,
were $57, $70, $773, $181 and $546, respectively.
In addition, leasing commissions totaling $195 were paid during 1995 to a
partner in one of the entities comprising the Company.
7. CONTINGENCIES
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.
F-60
<PAGE>
THE PHILIPS COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
8. EXTRAORDINARY ITEMS
The combined statements of income for the nine months ended September 30,
1996 (unaudited) and for the years ended December 31, 1996 and December 31, 1994
include extraordinary gains of approximately $2,284, $2,881 and $298,
respectively, in connection with the settlement of debt obligations on the
Company's shopping center properties. In addition, the combined statement of
income for the nine months ended September 30, 1997 (unaudited), includes an
extraordinary loss of approximately $164 representing the write-off of deferred
financing costs related to the refinancing of debt on a certain shopping center
property.
9. OTHER ASSETS
Other assets in the accompanying combined balance sheet include restricted
real estate tax escrows, capital improvement escrows and tenant security
deposits totaling $1,289, $791 and $558 as of September 30, 1997 (unaudited),
and December 31, 1996 and 1995, respectively.
10. SUBSEQUENT EVENTS (UNAUDITED)
During November 1997, the Company reached an agreement with its lender in
connection with the Millside Plaza, Elm Plaza and Foxboro Plaza mortgage to (i)
sever the Wallingford Shopping LLC and the Freehold Shopping LLC mortgages from
the cross-collateralization provisions of the original loan agreement effective
upon completion of the proposed transactions referred to in Note 1 of these
Notes to Combined Financial Statements, (ii) to extend the maturity date to the
year 2002, with an amortization equal to a 30 year term, (iii) adjust the
interest rate to 175 basis points above the 5 year U.S. Treasury rate and (iv)
eliminate the Company's obligation to repay $936 of second mortgage loans.
During November 1997, the Company reached an agreement with the lender of
the Forest Avenue Shopping LLC mortgage (i) to extend the maturity to June 1,
1998, (ii) to extend to June 1, 1998 the option to extend the maturity date to
June 2004 or 2007, (iii) commencing January 1, 1998 until the completion of the
Formation Transactions, to suspend amortization and (iv) for the lender to make
a new $150 second mortgage loan to Forest Avenue Shopping LLC guaranteed by
Philip Pilevsky. The proceeds of the second mortgage will be placed in a
collateral account to collateralize the guaranty, which guaranty will be amended
to include repayment of the second mortgage.
During November 1997, the Company reached an agreement with the holder of
the Palm Springs Mile Associates, Ltd. partner notes to suspend scheduled
amortization, effective as of January 1, 1998, of $250 per month until the
closing of the Formation Transactions. Amortization will recommence at the rate
of $250 per month beginning with the first day of the calendar month following
the closing of the Formation Transactions. The lender has agreed to make an
additional loan to the borrower in the amount of $1,000 resulting in a total
outstanding principal amount of $13,000 at the closing of the Formation
Transactions. The $1,000 additional loan will bear interest at an annual rate of
LIBOR + 1.75% and will mature in June 1998. The proceeds of the $1,000
additional loan will be placed in a collateral account to secure the
indebtedness.
F-61
<PAGE>
THE PHILIPS COMPANY
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COST CAPITALIZED GROSS AMOUNTS AT WHICH
INITIAL COST SUBSEQUENT TO ACQUISITION CARRIED AT CLOSE OF PERIOD
---------------------------------------- -------------------------- ------------------------------------
BUILDINGS BUILDINGS BUILDINGS
LAND AND AND LAND AND AND LAND AND AND
DESCRIPTION ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS IMPROVEMENTS IMPROVEMENTS IMPROVEMENTS IMPROVEMENTS TOTAL
- ---------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Millside Plaza $ 4,693 $ 960 $ 5,443 $ 26 $ 117 $ 986 $ 5,560 $ 6,546
Delran, NJ
Elm Plaza 3,883 709 4,968 72 167 781 5,135 5,916
Enfield, CT
Branhaven Plaza 9,415 1,883 7,646 -- 233 1,883 7,879 9,762
Branford, CT
Forest Avenue Shoppers 19,550 1,984 8,428 1,801 9,244 3,785 17,672 21,457
Town
Staten Island, NY
Meadowbrook Commons 26,096 5,000 -- 298 17,496 5,298 17,496 22,794
Freeport, NY
Foxboro Plaza 4,493 655 6,055 -- 302 655 6,357 7,012
Foxborough, MA
Palm Springs Mile 65,479 12,864 25,767 1,435 23,064 14,299 48,831 63,130
Hialeah, FL
Construction in 782 782 782
Progress
------------ ------------ ------------ ------ ------------ ------------ ------------ --------
$133,609 $ 24,055 $ 58,307 $3,632 $ 51,405 $ 27,687 $109,712 $137,399
------------ ------------ ------------ ------ ------------ ------------ ------------ --------
------------ ------------ ------------ ------ ------------ ------------ ------------ --------
<CAPTION>
LIFE ON WHICH
ACCUMULATED DATE DEPRECIATION IS
DESCRIPTION DEPRECIATION ACQUIRED COMPUTED
- ---------------------- ----------- -------- ---------------
<S> <C> <C> <C>
Millside Plaza $ 1,412 12/26/86 31.5 - 39 years
Delran, NJ
Elm Plaza 1,331 12/24/86 15 - 39 years
Enfield, CT
Branhaven Plaza 2,178 12/31/85 15 - 39 years
Branford, CT
Forest Avenue Shoppers 2,934 11/16/84 15 - 39 years
Town
Staten Island, NY
Meadowbrook Commons 2,833 11/9/89 15 - 39 years
Freeport, NY
Foxboro Plaza 1,572 11/24/86 15 - 39 years
Foxborough, MA
Palm Springs Mile 12,017 4/1/85 15 - 39 years
Hialeah, FL
Construction in
Progress
-----------
$24,277
-----------
-----------
</TABLE>
F-62
<PAGE>
THE PHILIPS COMPANY
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
The changes in real estate for the three years ended December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period..................................... $124,892 $118,288 $114,934
Improvements....................................................... 12,507 6,604 3,354
-------- -------- --------
Balance at end of period........................................... $137,399 $124,892 $118,288
-------- -------- --------
-------- -------- --------
</TABLE>
The aggregate cost of land, buildings and improvements for Federal income
tax purposes at December 31, 1996 was $126,002.
The changes in accumulated depreciation for the three years ended December
31, 1996 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period......................................... $21,315 $18,628 $16,018
Depreciation for period................................................ 2,962 2,687 2,610
------- ------- -------
Balance at end of period............................................... $24,277 $21,315 $18,628
------- ------- -------
------- ------- -------
</TABLE>
F-63
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Philips International Realty Corp.
We have audited the combined statement of revenues and certain expenses of the
Merrick Commons and Mill Basin Plaza Properties as described in Note 1, for the
three years ended December 31, 1996. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 the 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.
The accompanying combined statements of revenues and certain expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the Proxy
Statement/Prospectus of the Philips International Realty Corp. and is not
intended to be a complete presentation of the Merrick Commons and Mill Basin
Plaza Properties revenues and expenses.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined revenues and certain expenses of the Merrick
Commons and Mill Basin Plaza Properties, as described in Note 1, for each of the
three years ended December 31, 1996 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
New York, New York
April 28, 1997
F-64
<PAGE>
MERRICK COMMONS AND MILL BASIN PLAZA PROPERTIES
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues from rental property, including other income
of $0, $0, $10, $3 and $2, respectively (Note 3)..... $ 2,945 $ 2,794 $ 3,802 $ 3,651 $ 1,771
Escalation and reimbursement revenue................... 780 737 1,157 1,162 539
--------- --------- --------- --------- ---------
3,725 3,531 4,959 4,813 2,310
Certain expenses:
Property taxes....................................... 612 552 744 671 370
Management fees (Note 6)............................. 180 165 234 230 110
Repairs and maintenance.............................. 101 116 150 196 120
Professional fees.................................... 63 99 120 62 160
Cleaning, security and landscaping................... 55 91 112 105 90
Utilities............................................ 37 50 48 79 50
Insurance............................................ 30 32 42 38 21
Other operating expenses............................. 16 44 42 55 22
--------- --------- --------- --------- ---------
1,094 1,149 1,492 1,436 943
--------- --------- --------- --------- ---------
Revenues in excess of certain expenses................. $ 2,631 $ 2,382 $ 3,467 $ 3,377 $ 1,367
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-65
<PAGE>
MERRICK COMMONS AND MILL BASIN PLAZA PROPERTIES
NOTES OF COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
(IN THOUSANDS)
1. BASIS OF PRESENTATION
Presented herein are the combined statements of revenues and certain
expenses related to the operations of the Merrick Commons and Mill Basin Plaza
Properties (the 'Merrick/Mill Basin Properties'), which shopping centers are
located in Merrick, NY and Brooklyn, NY, respectively.
The accompanying combined financial statements have been prepared in
accordance with the applicable rules and regulations of the Securities and
Exchange Commission for the acquisition of real estate properties. Accordingly,
the combined financial statements exclude certain expenses that may not be
comparable to those expected to be incurred by Philips International Realty
Corp. in the future operations of the aforementioned properties. The financial
statements exclude interest income, interest expense, depreciation and certain
general and administrative expenses.
2. 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.
3. REVENUE RECOGNITION
The Merrick/Mill Basin Properties are leased to tenants under operating
leases. Minimum rental revenue is recognized on a straight-line basis over the
terms of the respective leases.
4. MANAGEMENT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Management services for the Merrick/Mill Basin Properties are provided by a
related party, Philips International Holding Corp. Fees paid for such services
are generally based on 3% to 5% of total revenue.
5. LEASE AGREEMENTS
The Merrick/Mill Basin 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
increases in certain operating costs and real estate taxes. Minimum rents and
expense reimbursements represented approximately 99% of revenues from rental
property for each of the nine months ended September 30, 1997 and 1996
(unaudited), and the years ended December 31, 1996, 1995 and 1994.
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 as of December 31, 1996 are
as follows:
<TABLE>
<S> <C>
1997........................................................... $ 3,663
1998........................................................... 3,603
1999........................................................... 3,576
2000........................................................... 3,559
2001........................................................... 3,229
Thereafter..................................................... 37,459
---------
$ 55,089
---------
---------
</TABLE>
F-66
<PAGE>
ANNEX A
PRIVATE AND CONFIDENTIAL
August 7, 1997
The Board of Trustees
National Properties Investment Trust
32 Hanson Road
Canton Center, CT 06020
Gentlemen:
We understand that National Properties Investment Trust, a Massachusetts
business trust electing to be taxed as a real estate investment trust (a 'REIT')
under the Internal Revenue Code of 1986, as amended ('National' or the
'Company'), and Philips International Realty Corp., a Maryland corporation which
expects to qualify as a REIT for federal income tax purposes commencing with the
taxable year ending December 31, 1997 ('Philips'), propose to enter into a
contribution and exchange agreement (the 'Agreement') among the Company,
Philips, Philips International Realty, L.P., a Delaware limited partnership (the
'Operating Partnership') and certain contributing partnerships or limited
liability companies (collectively, the 'Contributing Partnerships') affiliated
with Philips International, a private real estate firm ('Philips Private
Company'). Pursuant to the Agreement, (a) the Company will transfer The Shoppes
at Lake Mary, Florida shopping center owned by it (the 'National Property') to
Philips in exchange for shares of Philips Common Stock (which shares will
represent approximately 2.1% of the outstanding Common Stock of Philips,
including interests redeemable for Common Stock) (the 'Consideration'), (b)
Philips will transfer the National Property and certain other assets to the
Operating Partnership and (c) the Company and the Operating Partnership will own
the National Property and the nine properties owned by the Contributing
Partnerships.
You have requested our opinion as to whether the Consideration to be
received by National for the National Property pursuant to the Agreement is fair
to National from a financial point of view.
In conducting our analysis and arriving at the opinion expressed herein, we
have reviewed such materials and considered such financial and other factors as
we deemed relevant under the circumstances, including:
(i) a draft dated July 31, 1997 of the Agreement;
(ii) a draft dated August 4, 1997 of the Proxy Statement/Prospectus on Form
S-4 (the 'Form S-4');
(iii) the Form 10-K and Form 10-K(A) and related financial information for
the fiscal year ended December 31, 1996 and the Form 10-Q and the
related unaudited financial information for the quarterly period
ended March 31, 1997 for National, and a draft of National's Form
10-Q and the related unaudited financial information for the
quarterly period ended June 30, 1997;
(iv) the draft financial statements of The Philips Company and the Combined
Statement of Revenues and Certain Expenses for Merrick Commons and
Mill Basin Plaza, each for the fiscal year ended December 31, 1996 and
the quarterly period ended March 31, 1997, included in the Form S-4;
(v) the draft pro forma condensed combined financial statements of Philips
for the twelve months ended December 31, 1996 and the three months
ended March 31, 1997, included in the Form S-4;
(vi) certain information relating to the business, earnings, cash flow,
assets and prospects of National, furnished to us by National;
(vii) certain information relating to the business, earnings, cash flow,
assets and prospects of Philips, furnished to us by the management of
Philips Private Company;
(viii) the financial terms of certain recent transactions we deemed
comparable, or otherwise relevant to our inquiry; and
(ix) such other financial studies, analyses and investigations that we
deemed appropriate.
A-1
<PAGE>
We have assumed, with your consent, that the drafts of the Agreement, Form
S-4 and financial information we reviewed (as referred to above) will conform in
all material respects to those documents when in final form.
We have met with the senior management of National and of Philips Private
Company to discuss (i) the prospects for the respective businesses of National
and of Philips, (ii) their estimates of such businesses' future financial
performance, (iii) the financial impact of the transactions contemplated by the
Agreement on the respective companies and (iv) such other matters that we deemed
relevant. We have also visited selected properties of the Contributing
Partnerships.
In connection with our review and analysis and in arriving at our opinion,
we have relied upon the accuracy and completeness of the publicly available
information and all of the financial and other information provided to us by the
Company and Philips Private Company and have not undertaken any independent
verification of such information or any independent valuation or appraisal of
any of the assets or liabilities of the Company or Philips. With respect to
certain projected financial data, provided to us by the Company for the Company
and Philips Private Company for Philips, we have assumed that such information
(and the assumptions and bases therefor) has been reasonably prepared and
represents each respective management's best currently available estimates and
judgment of such management as to the future financial performance of the
Company and of Philips. Further, our opinion is necessarily based on economic,
financial and market conditions as they exist and can be evaluated as of the
date hereof.
Our opinion does not address nor should it be construed to address the
relative merits of the Agreement and alternative business strategies.
As you know, we have been retained by the Board of Trustees of the Company
to provide financial advisory services in connection with a possible transaction
in which control of, or a material interest in, the Company is acquired by a
third party and will receive a fee for such services, which fee is contingent
upon the consummation of the transactions contemplated by the Agreement or
consummation of another transaction involving the acquisition of the control of,
or a material interest in, National or its assets. Also as you know, an
affiliate of ours, Prudential Securities Credit Corporation, is the lender to a
Contributing Partnership and to the partners of a second Contributing
Partnership, and Philips, pursuant to the Agreement, has agreed to assume
certain of your payment and indemnity obligations under our engagement letter
with you and has agreed to engage our services in connection with a future
issuance of Philips' securities on terms to be agreed upon.
This letter and the opinion expressed herein may not be reproduced,
summarized, excerpted from or otherwise publicly referred to or disclosed in any
manner, without our prior written consent; provided, the Company may set forth
in full this letter in any proxy statement relating to the Agreement sent to the
Company's shareholders.
Our advisory services were provided for the use of the Board of Trustees of
the Company in the evaluation of the Agreement, and our opinion is not intended
to be, and does not constitute, a recommendation to any shareholder of the
Company as to how such shareholder should vote in connection with the Agreement.
On the basis of, and subject to, the foregoing, we are of the opinion that,
as of the date hereof, the Consideration to be received by National for the
National Property pursuant to the Agreement is fair to National from a financial
point of view.
Very truly yours,
PRUDENTIAL SECURITIES INCORPORATED
A-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's officers and directors are indemnified under Maryland law,
the Articles of Incorporation of the Company and the Agreement of Limited
Partnership of the Operating Partnership (the 'Partnership Agreement of the
Operating Partnership'), against certain liabilities. The Articles of
Incorporation require the Company to indemnify its directors and officers to the
fullest extent permitted from time to time by the laws of the State of Maryland.
The bylaws contain provisions which implement the indemnification provisions of
the Articles of Incorporation.
The Maryland General Corporation Law ('MGCL') permits a corporation to
indemnify its directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceeding to which they may be made a party by reason of
their service in those capacities unless it is established that the act or
omission of the director or officer was material to the matter giving rise to
the proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty, or the director or officer actually received an improper
personal benefit in money, property or services, or in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful, or the director or officer was adjudged to be liable
to the corporation for the act or omission. No amendment of the Articles of
Incorporation of the Company shall limit or eliminate the right to
indemnification provided with respect to acts or omissions occurring prior to
such amendment or repeal. Maryland law permits the Company to provide
indemnification to an officer to the same extent as a director, although
additional indemnification may be provided if such officer is not also a
director.
The MGCL permits the articles of incorporation of a Maryland corporation to
include a provision limiting the liability of its directors and officers to the
corporation and its shareholders for money damages, with specified exceptions.
The MGCL does not, however, permit the liability of directors and officers to
the corporation or its shareholders to be limited, to the extent that (1) it is
proved that the person actually received an improper benefit or profit in money,
property or services (to the extent such benefit or profit was received) or (2)
a judgment or other final adjudication adverse to such person is entered in a
proceeding based on a finding that the person's action, or failure to act, was
the result of active and deliberate dishonesty and was material to the cause of
action adjudicated in the proceeding. The Articles of Incorporation of the
Company contain a provision consistent with the MGCL. No amendment of the
Articles of Incorporation shall limited or eliminate the limitation of liability
with respect to acts of omissions occurring prior to such amendment or repeal.
The Partnership Agreement of the Operating Partnership also provides for
indemnification of the Company and its officers and directors to the same extent
indemnification is provided to officers and directors of the Company in its
Articles of Incorporation, and limits the liability of the Company and its
officers and directors to the Operating Partnership and its partners to the same
extent liability of officers and directors of the Company to its shareholders is
limited under the Company's Articles of Incorporation.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the 'Act') may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, the registrant
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) List of Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1* -- Form of Amended and Restated Articles of Incorporation of the Company
3.2* -- Form of Articles Supplementary of Series A Preferred Stock
3.3* -- Form of Amended and Restated Bylaws of the Company
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.4* -- Form of Subscription Agreement between the Company and Philip Pilevsky
3.5* -- Form of Certificate of Common Stock
5.1 -- Opinion of Ballard Spahr Andrews & Ingersoll regarding the validity of the securities being
registered
8.1 -- Opinion of Pryor, Cashman, Sherman & Flynn regarding tax matters
8.2 -- Opinion of Bingham Dana LLP regarding tax consequences of the transaction
10.1* -- Form of Amended and Restated Agreement of Limited Partnership of the Operating Partnership
10.2* -- Form of 1997 Stock Option Plan of the Company
10.3* -- Form of Agreement of Limited Partnership for Holding Partnerships
10.4 -- Form of Articles of Incorporation of Philips Subs
10.5* -- Form of Bylaws of Philips Subs
10.6* -- Contribution and Exchange Agreement, dated August 11, 1997, among National, the Board of Trustees,
the Company, the Operating Partnership and certain contributing partnerships or limited liability
companies associated with a private real estate firm controlled by Philip Pilevsky and certain
partners and members thereof
10.7* -- Form of Registration Rights Agreement among the Company and certain holders of limited partnership
interests in the Operating Partnership
10.8* -- Form of Management Agreement among the Company, the Operating Partnership and Philips International
Management Corp.
10.9* -- Form of Non-Competition Agreement among the Company, the Operating Partnership, Philip Pilevsky and
Sheila Levine
10.10* -- Form of Employment Agreement between the Company and Louis Petra
10.11* -- Form of Employment Agreement between the Company and Sheila Levine
10.12* -- Form of Trustee Warrant
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Bernardi, Alfin & Koos, L.L.C.
23.3 -- Consent of Kostin, Ruffkess & Company, LLC
23.4* -- Consent of A.F. Petrocelli
23.5* -- Consent of Elise Jaffe
23.6* -- Consent of Robert Grimes
23.7 -- Consent of Arnold Penner
23.8 -- Consent of Ballard Spahr Andrews & Ingersoll (contained in Exhibit 5.1)
23.9 -- Consent of Pryor, Cashman, Sherman & Flynn (contained in Exhibit 8.1)
23.10 -- Consent of Bingham Dana LLP (contained in Exhibit 8.2)
24 -- Power of Attorney (see Page II-5)
27* -- Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
(b) Financial Statement Schedules
(c) The opinion of Prudential Securities Incorporated is set forth as Annex
A to the Proxy Statement/Prospectus which constitutes part of this Registration
Statement.
II-2
<PAGE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the 'Calculation of Registration Fee' table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b)(1) The undersigned registrant hereby undertakes as follows: that prior
to any public re-offering of the securities registered hereunder
through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c) under the Securities Act of 1933,
the issuer undertakes that such re-offering prospectus will contain
the information called for by the applicable registration form with
respect of re-offerings by persons who may be deemed underwriters,
in addition to the information called for by the other items of the
applicable form.
(2) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding or (ii) that purports
to meet the requirements of section 10(a)(3) under the Securities Act
of 1933 and is used in connection with an offering of securities
subject to Rule 415 under such Act, will be filed as a part of an
amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining
any liability under such Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
(4) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of the
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Act shall be deemed to be a part of this
registration statement as of the time it was declared effective. For
the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11 or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of
responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the
subject of and included in the registration statement when it became
effective.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THIS REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW
YORK, STATE OF NEW YORK, ON DECEMBER 9, 1997.
PHILIPS INTERNATIONAL REALTY CORP.
By: /s/ PHILIP PILEVSKY
----------------------------------
Philip Pilevsky
Chairman of the Board and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Philip Pilevsky or Sheila Levine or any
one of them, his or her attorneys-in-fact and agents, each with full power of
substitution and resubstitution for him or her in any and all capacities, to
sign any or all amendments or post-effective amendments to this Registration
Statement or a Registration Statement prepared in accordance with Rule 462 of
the Securities Act, and to file the same, with exhibits thereto and other
documents in connection herewith or in connection with the registration of the
Common Stock under the Securities Exchange Act of 1934, as amended, with the
Securities and Exchange Commission, granting unto each of such attorneys-in-fact
and agents full power and authority to do and perform each and every act and
thing requisite and necessary in connection with such matters and hereby
ratifying and confirming all that each of such attorneys-in-fact and agents or
his or her substitutes may do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT TO THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON DECEMBER 9, 1997.
<TABLE>
<CAPTION>
TITLE
-----
<S> <C>
/s/ PHILIP PILEVSKY Director, Chief Executive Officer and Chairman of the Board
- ------------------------------------------
Philip Pilevsky
/s/ LOUIS J. PETRA Director and President
- ------------------------------------------
Louis J. Petra
/s/ SHEILA LEVINE Director and Chief Operating Officer
- ------------------------------------------
Sheila Levine
/s/ BRIAN J. GALLAGHER Chief Financial Officer
- ------------------------------------------
Brian J. Gallagher
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ----------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
3.1* -- Form of Amended and Restated Articles of Incorporation of the Company
3.2* -- Form of Articles Supplementary of Series A Preferred Stock
3.3* -- Form of Amended and Restated Bylaws of the Company
3.4* -- Form of Subscription Agreement between the Company and Philip Pilevsky
3.5* -- Form of Certificate of Common Stock
5.1 -- Opinion of Ballard Spahr Andrews & Ingersoll regarding the validity of the securities
being registered
8.1 -- Opinion of Pryor, Cashman, Sherman & Flynn regarding tax matters
8.2 -- Opinion of Bingham Dana LLP regarding tax consequences of the transaction
10.1* -- Form of Amended and Restated Agreement of Limited Partnership of the Operating
Partnership
10.2* -- Form of 1997 Stock Option Plan of the Company
10.3* -- Form of Agreement of Limited Partnership for Holding Partnerships
10.4 -- Form of Articles of Incorporation of Philips Subs
10.5* -- Form of Bylaws of Philips Subs
10.6* -- Contribution and Exchange Agreement, dated August 11, 1997, among National, the Board of
Trustees, the Company, the Operating Partnership and certain contributing partnerships or
limited liability companies associated with a private real estate firm controlled by
Philip Pilevsky and certain partners and members thereof
10.7* -- Form of Registration Rights Agreement among the Company and certain holders of limited
partnership interests in the Operating Partnership
10.8* -- Form of Management Agreement among the Company, the Operating Partnership and Philips
International Management Corp.
10.9* -- Form of Non-Competition Agreement among the Company, the Operating Partnership, Philip
Pilevsky and Sheila Levine
10.10* -- Form of Employment Agreement between the Company and Louis Petra
10.11* -- Form of Employment Agreement between the Company and Sheila Levine
10.12* -- Form of Trustee Warrant
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Bernardi, Alfin & Koos, L.L.C.
23.3 -- Consent of Kostin, Ruffkess & Company, LLC
23.4* -- Consent of A.F. Petrocelli
23.5* -- Consent of Elise Jaffe
23.6* -- Consent of Robert Grimes
23.7 -- Consent of Arnold Penner
23.8 -- Consent of Ballard Spahr Andrews & Ingersoll (contained in Exhibit 5.1)
23.9 -- Consent of Pryor, Cashman, Sherman & Flynn (contained in Exhibit 8.1)
23.10 -- Consent of Bingham Dana LLP (contained in Exhibit 8.2)
24 -- Power of Attorney (see Page II-5)
27* -- Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
<PAGE>
[Letterhead of Ballard Spahr Andrews & Ingersoll]
December 9, 1997
Philips International Realty Corp.
417 Fifth Avenue
New York, New York 10016
Re: Philips International Realty Corp., a Maryland
corporation, (the "Company") - Registration
Statement on Form S-4 (Registration No. 333-
41431) pertaining to Thirty-Two Thousand
(32,000) shares (the "Shares") of common
stock, par value one cent ($.01) per share
-----------------------------------------------
Ladies and Gentlemen:
In connection with the registration of the Shares under the Securities Act
of 1933 as amended (the "Act"), by the Company on Form S-4 filed with the
Securities and Exchange Commission (the "Commission") on or about December 3,
1997, as amended, (the "Registration Statement"), you have requested our opinion
with respect to the matters set forth below.
We have acted as special Maryland corporate counsel to the Company in
connection with the matters described herein. In our capacity as special
Maryland corporate counsel to the Company and for purposes of this letter, we
have examined the following documents: (i) the corporate charter of the Company
(the "Charter") represented by a copy of the Articles of Amendment and
Restatement (the "Articles of Amendment and Restatement") which are to be filed
with the State Department of Assessments and Taxation of Maryland (the "SDAT")
on or before December 31, 1997 (the actual date of such filing is hereinafter
referred to as the "Effective Date"); (ii) the Amended and Restated Bylaws of
the Company (the "Bylaws") which are to be adopted prior to the Effective Date;
(iii) resolutions of the Board of Directors of the Company (the "Directors'
Resolutions"), and resolutions of the sole stockholder of the Company (the
"Stockholder's Resolutions") which are to be adopted prior to the Effective
Date; (iv) the Registration Statement; and (v) such other documents and matters
as we have deemed necessary or appropriate to express the opinions set forth
<PAGE>
BALLARD SPAHR ANDREWS & INGERSOLL
Philips International Realty Corp.
December 9, 1997
Page 2
in this letter, subject to the assumptions, limitations and qualifications
stated herein.
In reaching the opinions set forth below, we have assumed the following:
(a) all documents submitted to us as originals are authentic; all documents
submitted to us as certified, facsimile or photostatic copies conform to the
original docuemnts; all signatures on all documents submitted to us for
examination are genuine; all statements and information contained therein are
true and correct; and all public records reviewed are accurate and complete; (b)
the Charter of the Company will be amended and restated by the filing of the
Articles of Amendment and Restatement, in the form reviewed by us with no
material modifications or revisions, with the SDAT, and the acceptance of the
Articles of Amendment and Restatement for record by the SDAT, on the Effective
Date; (c) the Directors' Resolutions and the Stockholder's Resolutions, in the
form reviewed by us with no material modifications or revisions, will be duly
adopted by the Board of Directors of the Company and the sole stockholder of the
Company, respectively, prior to the Effective Date; (d) the Bylaws, in the form
reviewed by us with no material modifications or revisions, will be duly adopted
by the Board of Directors of the Company prior to the Effective Date, and (e)
none of the Shares will be issued or transferred in violation of the provisions
of Article VI of the Articles of Amendment and Restatement entitled
"Restrictions on Transfer, Acquisition and Redemption of Shares".
Based on the foregoing, and subject to the assumptions and qualifications
set forth herein, it is our opinion that, as of the Effective Date, the Shares
will have been duly authorized by all necessary corporate action on the part of
te Company, and the Shares will, upon issuance and delivery in accordance with
and subject to the terms and conditions described in the Registration Statement
against payment of consideration therefore as determined by the Board of
Directors of the Company or a committee thereof, be validly issued, fully paid
and nonassessable.
We consent to your filing this opinion as an exhibit to the Registration
Statement, and further consent to the filing of this opinion as an exhibit to
the applications to securities commissioners for the various states of the
United States for registration of the Shares. We also consent to the
identification of our firm as Maryland counsel to the Company in the section of
the Prospectus (which is part of the Registration Statement) entitled "Legal
Matters."
<PAGE>
BALLARD SPAHR ANDREWS & INGERSOLL
Philips International Relaty Corp.
December 9, 1997
Page 3
The opinions expressed herein are limited to the laws of the State of
Maryland and we express no opinion concerning any laws other than the laws of
the State of Maryland. Furthermore, the opinions presented in this letter are
limited to the matters specifically set forth herein and no other opinion shall
be inferred beyond the matters expressly stated.
Very truly yours,
<PAGE>
[Pryor, Cashman, Sherman & Flynn letterhead]
December 8, 1997
Philips International Realty Corp.
417 Fifth Avenue
New York, NY 10016
Ladies and Gentlemen:
We have acted as tax counsel to Philips International Realty Corp. (the
"Company") in connection with the proposed transactions described in the Proxy
Statement/Prospectus included as part of that certain Registration Statement on
Form S-4 filed with the Securities and Exchange Commission on December 3, 1997,
1997, and as amended through the date hereof (the "Registration Statement"). In
connection therewith, you have requested our opinion with respect to the
qualification of the Company as a real estate investment trust ("REIT") under
the Internal Revenue Code of 1986, as amended (the "Code"), and the accuracy of
the discussion included in the Registration Statement under the heading "Federal
Income Tax Considerations."
We hereby consent to the use of our opinion as an Exhibit to the
Registration Statement and to any and all references to our firm in the Proxy
Statement/Prospectus that is a part of the Registration Statement, which Proxy
Statement/Prospectus will be delivered to prospective purchasers of shares of
Common Stock in the Company, and we hereby consent to such use of our opinion.
All defined terms used herein shall have the same meaning as used in the
Registration Statement.
<PAGE>
Philips International Realty Corp.
December 8, 1997
Page 2
FACTS AND ASSUMPTIONS RELIED UPON
In rendering the opinions expressed herein, we have examined such documents
as we have deemed appropriate, including (but not limited to) the following:
1. The Proxy Statement/Prospectus and the Registration Statement (including
the exhibits thereto);
2. The Partnership Agreement of the Operating Partnership;
3. The Agreements of Limited Partnership of the Holding Partnerships;
4. The Articles of Incorporation and Bylaws of the Company as in effect on
the date hereof;
5. The Contribution and Exchange Agreement; all as set forth as exhibits to
the Registration Statement, and such other records, certificates and documents
as we have deemed necessary or appropriate for purposes of rendering opinions
set forth herein.
In our examination of documents, we have assumed, with your consent, that
all documents submitted to us are authentic originals, or if submitted as
photocopies, that they faithfully reproduce the originals thereof, that all such
documents have been or will be duly executed to the extent required, that all
representations and statements set forth in such documents are true and correct,
and that all obligations imposed by any such documents on the parties thereto
have been or will be performed or satisfied in accordance with their terms.
We have reviewed the descriptions set forth in the Registration Statement
of the proposed investments, activities, operations and governance of the
Company, the Operating Partnership and the Holding Partnerships. We have relied
upon the facts set forth in the Registration Statement, and we assume that the
Company, the Operating Partnership and the Holding Partnerships will each be
operated in accordance with (i) applicable laws and the terms and conditions of
applicable documents and (ii) the statements and representations made in the
<PAGE>
Philips International Realty Corp.
December 8, 1997
Page 3
Registration Statement. In addition, we are relying upon certain representations
from the Company, the Operating Partnership and the Holding Partnerships that
such entities will continue to be, where applicable, owned and operated as
their predecessors are currently or otherwise in such a manner that the Company
will satisfy the requirements for qualification as a REIT under the Code.
The foregoing representations are all contained in a letter to us dated as
of the date hereof (the "Certificate") . No facts have come to our attention
that are inconsistent with the facts and representations set forth in the
Certificate. To the extent that any of the written representations provided to
us in the Certificate are with respect to matters set forth in the Code or
Treasury Regulations, we have reviewed with the individual making such
representations the relevant provisions of the Code, applicable Treasury
Regulations and published administrative interpretations thereof.
OPINIONS
Based upon and subject to the foregoing, we are of the following opinions:
(1) Assuming that the actions contemplated in the Registration Statement
are completed in a timely fashion and that a timely election for REIT status is
made, the Company will be organized in conformity with the requirements for
qualification as a REIT under the Code and its proposed method of operation will
enable it to qualify as a REIT commencing with the taxable year ending December
31, 1998 (or the short taxable year ending December 31, 1997, if a timely
election is made with respect thereto); and
(2) The discussion contained in that portion of the Registration Statement
under the caption "Federal Income Tax Considerations" fairly summarizes the
federal income tax considerations that are likely to be material to a holder of
Common Stock.
The opinions expressed herein are based upon the Code, the U.S. Treasury
Regulations promulgated thereunder, current administrative positions of the U.S.
Internal Revenue Service, and existing judicial decisions, any of which could be
changed
<PAGE>
Philips International Realty Corp.
December 8, 1997
Page 4
any time, possibly on a retroactive basis. Any such changes could adversely
affect the opinions rendered herein and the tax consequences to the Company and
the investors in the Common Stock. In addition, as noted above, our opinions are
based solely on the documents that we have examined, the additional information
that we have obtained, and the representations that are being made to us, and
cannot be relied upon if any of the facts contained in such documents or in such
additional information are, or later become, inaccurate or if any of the
representations made to us are, or later become, inaccurate.
We express no opinion with respect to the transactions described herein and
in the Registration Statement other than those expressly set forth herein.
Furthermore, the Company's qualification as a REIT will depend on the Company
making a timely election for REIT status and meeting, in its actual operations,
the applicable asset composition, source of income, shareholder diversification,
distribution, recordkeeping and other requirements of the Code necessary for a
corporation to qualify as a REIT. We will not review these operations, and no
assurance can be given that the actual operations of the Company and its
affiliates will meet these requirements or the representations made to us with
respect thereto.
Finally, our opinion is limited to the tax matters specifically covered
hereby, and we have not been asked to address, nor have we addressed, any other
tax consequences of an investment in the Common Stock.
Very truly yours,
/s/ Pryor, Cashman, Sherman & Flynn
<PAGE>
[BINGHAM DANA LLP LETTERHEAD]
As of December 3, 1997
National Properties Investment Trust
32 Hanson Road
Canton Center, CT 06020
Ladies and Gentlemen:
We have acted as tax counsel to National Properties Investment Trust
(the "Company"), a Massachusetts Business Trust organized under the laws of the
Commonwealth of Massachusetts, in connection with the preparation of a joint
proxy statement and prospectus (the "Proxy Statement/Prospectus") furnished to
holders of Company shares (the "Company Shares") and filed with the Securities
and Exchange Commission on December 3, 1997 pursuant to Section 14(a) of the
Securities Exchange Act of 1934. Capitalized terms used herein and not otherwise
defined have the same meaning as in the Proxy Statement/Prospectus.
The Proxy Statement/Prospectus relates to a proposed transaction (the
"Transaction") consisting of a sale of the Company's sole real estate asset to
Philips International Realty Corp. ("Philips"), a Maryland corporation, in
exchange for shares of Philips $.01 value per share common stock (the "Philips
Common Stock"), and the distribution of a portion of such stock to the Company
Shareholders, all as described in the Proxy Statement/Prospectus. You have
requested our opinion regarding the material anticipated federal income tax
consequences of the Transaction to a U.S. holder of the Company Shares.
In rendering our opinion, we have reviewed the Proxy Statement/
Prospectus and such other materials as we have deemed necessary or appropriate
as a basis for our opinion. For purposes of this opinion, we have assumed that
the Formation Transactions will be completed at the time and in the manner
contemplated in the Proxy Statement/Prospectus, as it is currently drafted.
With your permission, we have also assumed, without limitation and
without independent investigation of any of the facts necessary to reach such
conclusions: (i) that Philips will elect to be taxable as a real estate
investment trust pursuant to the provisions of Section 856 et seq. of the
Internal Revenue Code of 1986, as amended (the "Code") and will qualify as
<PAGE>
National Properties Investment Trust
As of December 3, 1997
Page 2
such a real estate investment trust as of the date of the Transaction; (ii) that
the Company qualifies as such a real estate investment trust under the Code
through the date hereof and for all prior open taxable years and will continue
to so qualify at all times after the Transaction through the end of its taxable
year ending December, 1998; and (iii) that the Company will conduct its
operations so as not to have any taxable income or earnings and profits for its
taxable year ending December, 1998.
For the reasons set forth in the discussion of "Certain Federal Income
Tax Consequences" in the Proxy Statement/Prospectus, we have also assumed that
the exchange of the Company's real estate asset for Philips Common Stock will
not qualify under the non-recognition provisions of Code Section 351 or under
the corporate reorganization provisions set forth in Code Section 368(a), and
that the Company will accordingly recognize gain or loss on the transfer of its
real estate asset to Philips in exchange for Philips Common Stock. We also note
in that regard that the Company and Philips have agreed to treat the Formation
Transactions as taxable for federal income tax purposes. We have been advised by
the Company that the resulting gain will be approximately $1.1 million and that
all such gain will be offset for federal income tax purposes by carry-over net
operating losses of the Company.
In rendering our opinion, we have considered the applicable provisions
of the Code, Treasury regulations, pertinent judicial authorities, rulings of
the Internal Revenue Service, and such other authorities as we have considered
relevant. Based upon and subject to the foregoing, it is our opinion that the
U.S. federal income tax consequences materially relevant to the U.S. holders of
Company Shares under current law are as follows:
1. If the planned distribution in 1997 of 3,744 shares of Philips
Common Stock to the Company shareholders is effected on or before December 31,
1997, each shareholder of the Company will recognize gain for federal tax
purposes in an amount equal to the fair market value of the shares of Phillip
Common Stock received by such shareholder as a part of such distribution.
2. The proposed distribution of 20,256 shares of Philips Common Stock
in 1998 will be considered a reduction in basis of the Company Shares held by
each holder and will be taxable as capital gain to a shareholder only to the
extent that the amount of such distribution received by a shareholder exceeds
such shareholder's basis in the Company Shares held by such shareholder.
<PAGE>
National Properties Investment Trust
As of December 3, 1997
Page 3.
3. The income tax basis of the Philips Common Stock received by a
Company shareholder in the Formation Transactions will be equal to the fair
market value of such Philips Common Stock.
4. The holding period of such Philips Common Stock received by a
Company shareholder will begin as of the date such Philips Common Stock is
received by the shareholder.
5. Shareholders will continue to hold their Company Shares on the same
tax basis as prior to the Formation Transactions, subject to any reduction in
basis as contemplated by (2) above.
This opinion is being furnished in connection with the preparation of
the Proxy Statement/Prospectus. We express no opinion with respect to state,
local or foreign income and other tax laws that may be applicable to the
Transaction, nor do we express any opinion with respect to the specific
consequences of any purchase, ownership or disposition of the Company Shares or
Philips Common Stock by any U.S. holder to the extent that such consequences are
affected by specific facts or circumstances that result in treatment that
differs from that described above and in the Proxy Statement/Prospectus. Our
opinion, which is not binding on the Internal Revenue Service, is expressed as
of the date hereof based on existing statutory, regulatory and judicial
authority and therefore is subject to subsequent legislative, regulatory,
interpretive and judicial developments that may be applied with retroactive
effect to the material detriment of holders of the Company Shares or the Philips
Common Stock. Our opinion is limited to the tax matters specifically discussed
above and except to the extent expressly set forth herein we have not been asked
to address, nor have we addressed, any other tax consequences relating to the
Transaction.
This opinion is not to be used, circulated, quoted or otherwise
referred to for any purposes without our express written permission.
Notwithstanding the previous sentence, we hereby consent to the filing of this
form of opinion with the Securities and Exchange Commission as an exhibit to the
Proxy Statement/Prospectus. In giving this consent, we do not admit that we come
within the category of persons whose consent is required.
Very truly yours,
/s/ BINGHAM DANA LLP
<PAGE>
CERTIFICATE OF INCORPORATION
PHILIPS SUB [ ], INC.
* * * * * * * *
First. The name of the corporation (the "Corporation") is: PHILIPS SUB [ ],
INC.
Second. The address of the Corporation's registered office in the State of
Delaware is United Corporate Services, Inc., 15 East North Street, Dover, Kent
County, Delaware. The name of its registered agent at such address is United
Corporate Services, Inc.
Third. (A) Subject to the limitations set forth herein, the purpose for
which the Corporation is organized is to engage solely in the following
activities:
(1) to serve as the managing General Partner of (a) _______ a
_________ general partnership ("Partnership 1"), (b) _____________, a
_________ general partnership ("Partnership 2"), (c) _________________ , a
_________________________ general partnership ("Partnership 3"), (d)
Philips Property Holdings [ ], L.P., a Delaware limited partnership
("Holdings I"), (e) Philips Property Holdings [ ], L.P., a Delaware limited
partnership ("Holdings II"), and (f) Philips Property Holdings [ ], L.P., a
Delaware limited partnership ("Holdings III");
(2) to take any and all actions necessary under and pursuant to (a)
the Amended and Restated Partnership Agreement governing Partnership 1 (as
it may be amended from time to time) between Holdings I and the
Corporation, (b) the Amended and Restated Partnership Agreement governing
Partnership 2 (as it may be amended from time to time) between Holdings II
and the Corporation, (c) the Amended and Restated Partnership Agreement
governing Partnership 3 (as it may be amended from time to time) between
Holdings III and the Corporation, (d) the Amended and Restated Partnership
Agreement governing Holdings I between Philips International Realty, L.P.,
a Delaware limited partnership (the "UPREIT"), and the Corporation, (e) the
Amended and Restated Partnership Agreement governing Holdings II between
the UPREIT and the Corporation, and (f) the Amended and Restated
Partnership Agreement governing Holdings III between the UPREIT and the
Corporation;
(3) to execute and deliver, on behalf of Partnership 1, Partnership 2
and Partnership 3, any and all instruments, agreements, certificates,
documents, notices, papers or other writings as may be necessary or
advisable in connection with the acquisition by Partnership 1, Partnership
2 and Partnership 3 of
<PAGE>
certain office buildings and other properties (the "Properties");
(4) to execute and deliver, on behalf of Partnership 1, Partnership 2
and Partnership 3, mortgages or deeds of trust encumbering any of the
Properties, and any and all assignments, financing statements, security
agreements, certificates, documents, notices, papers or other writings in
connection therewith;
(5) to execute and deliver, on behalf of Partnership 1, Partnership 2
and Partnership 3, a placement, underwriting or similar agreement with any
underwriter that may be retained in connection with the securitization of
any notes or mortgages, and any instruments, agreements, certificates,
documents, notices, papers or other writings as may be necessary or
advisable in connection with such securitization;
(6) to engage, on behalf of Partnership 1, Partnership 2 and
Partnership 3, in any activities necessary to hold, receive, exchange,
otherwise dispose of and otherwise deal in and exercise all rights, powers,
privileges, and all other incidents of ownership or possession with respect
to all of the Properties and any property or interests which may be
acquired by Partnership 1, Partnership 2 and Partnership 3 as a result of
any sale or other disposition of any of the Properties;
(7) to engage in any activities necessary to authorize, execute and
deliver any other instrument, agreement, certificate, notice or document in
connection with the activities described above, including the filing of any
instrument, agreements, certificates, notices, applications and other
documents necessary or advisable to comply with any applicable laws,
statutes, rules and regulations or necessary or advisable to perfect or
protect the above-referenced security interests; and
(8) to engage in such lawful activities and to exercise such powers
permitted to corporations under the laws of the State of Delaware that are
necessarily incident to or connected with the foregoing or necessary or
convenient to accomplish the foregoing and which are consistent with the
limitations set forth in this Paragraph Third and the other Paragraphs
hereof.
(B) The Corporation reserves the right, at any time and from time to time,
substantially to change its purposes in the manner now or hereafter permitted by
statute. Any change of the purposes of the Corporation authorized or approved by
the holders of shares entitling them to exercise the proportion of the voting
power of the Corporation now or hereafter required by statute shall be binding
and conclusive upon every shareholder of the Corporation as fully as if such
shareholder had voted therefor; and no shareholder, notwithstanding that it may
have voted against such
-2-
<PAGE>
change of purposes or may have objected in writing thereto, shall be entitled to
payment of the fair cash value of its shares.
Fourth. The total number of shares of stock which the Corporation has the
authority to issue is 1,000 shares of Common Stock, $.01 par value per share.
Fifth. The following provisions are inserted for the management of the
business and for the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and shareholders:
(1) The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors of the Corporation (the
"Board")
(2) As used herein, the term "Affiliate" shall mean any entity other
than the Corporation (i) which owns beneficially, directly or indirectly,
10% or more of the outstanding shares of the Corporation's common stock,
(ii) which is in control of the Corporation, as "control" is defined under
Section 230.405 of the Rules and Regulations of the Securities and Exchange
Commission, 17 C.F.R. ss. 230.405, as in effect on the date hereof, (iii)
of which 10% or more of the outstanding shares of such entity's common
stock is owned beneficially, directly or indirectly, by any entity
described in clause (i) or (ii) above, or (iv) which is controlled by any
entity described in clause (i) or (ii) above, as "controlled by" is defined
under such Section 230.405; provided, however, that Philips International
Realty Corp., a Maryland corporation, the UPREIT, Holdings I, Holdings II,
Holdings III and Partnership 1, Partnership 2 and Partnership 3 shall each
be considered an Affiliate.
(3) The Corporation shall not commingle its funds with those of any
Affiliate or any other entity. Funds and other assets of the Corporation
shall be separately identified and segregated. All of the Corporation's
assets shall at all times be held on behalf of the Corporation, and, if
held on behalf of the Corporation by another entity, shall at all times be
kept identifiable (in accordance with customary usages) as assets owned by
the Corporation. The Corporation shall maintain its own separate bank
accounts, payroll and books of account.
(4) The Corporation shall pay from its own assets all obligations of
any kind incurred by the Corporation (other than organizational expenses)
(5) The Corporation shall take all appropriate action necessary to
ensure its existence as a corporation in good standing under the laws of
the State of Delaware.
(6) The Corporation shall at all times maintain its principal
executive office separate from that of any other entity
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<PAGE>
and will identify such office as its office; provided, however, that,
subject to clause (9) below, the Corporation may lease office space from an
Affiliate. All financial statements, accounting records and other corporate
documents of the Corporation shall be maintained at such office separate
from those of any Affiliate or any other entity.
(7) The Corporation shall observe all legal and customary formalities
regarding its corporate existence, including holding regular meetings of
its Board and its shareholders and maintenance of current minute books.
Regular meetings of the Board shall be held at least quarterly. A quorum of
the Board must be present in person or by means of conference telephone or
similar communications equipment.
(8) The annual financial statements of the Corporation shall disclose,
in accordance with and to the extent required under generally accepted
accounting principles, any transactions between the Corporation and any
Affiliate.
(9) All business transactions entered into by the Corporation with any
Affiliate shall be on terms and conditions that are no less favorable to
the Corporation than the terms and conditions that would be expected to
have been obtained, at the time of such transaction and under similar
circumstances, from unaffiliated persons. In addition, all such
transactions shall be approved by the unanimous written consent of the
Board of Directors. The Corporation shall not guarantee any liabilities or
obligations of any Affiliate, nor shall it assume any indebtedness or other
liabilities or obligations of any Affiliate.
(10) The Corporation shall at all times hold itself out to the public
(including any Affiliate's creditors) as a separate and distinct corporate
entity operating under the Corporation's own name and the Corporation shall
act solely in its own corporate name and through its own authorized
officers and agents.
(11) The Corporation shall pay out of its own funds fees, if any, for
its directors and salaries, if any, of its officers and employees, and
shall reimburse any Affiliate for any service provided to the Corporation
by such Affiliate (including those to be provided pursuant to any lease,
administrative or management services agreement or other contract between
the Corporation and any Affiliate) in accordance with the terms of any such
lease, agreement or other contract.
(12) The Board shall have the power without the assent or vote of the
stockholders to make, alter, amend, change, add to or repeal the By-laws of
the Corporation.
Sixth. In the absence of fraud, no contract or other transaction between
this Corporation and any other corporation or
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any firm, partnership, association or person shall be affected or invalidated by
the fact that any director or officer of this Corporation is pecuniarily or
otherwise interested in such contract or other transaction, or is a director,
member or officer of such other corporation or of such firm, association or
partnership or is a party to or is pecuniarily or otherwise interested in such
contract or other transaction or in any way connected with any person or
persons, firm, association, partnership or corporation pecuniarily or otherwise
interested therein; any director may be counted in determining the existence of
a quorum at any meeting of the Board of Directors of this Corporation for the
purpose of authorizing any such contract or transaction with like force and
effect as if he were not so interested, or were not a director, member or
officer of such other corporation, firm, association or partnership.
Seventh. The Corporation by action of its Board of Directors may purchase
or otherwise deal in any shares of the capital stock of the Corporation to the
extent not prohibited by law. The directors are authorized, from time to time,
in their discretion, to grant to such persons, for such periods and upon such
terms as the directors deem advisable, rights or options to purchase such number
of shares of the capital stock of the Corporation as the directors deem
advisable.
Eighth. No holder of shares of the Corporation of any class shall have any
pre-emptive, preferential or other right to purchase or subscribe for any
unissued shares of the Corporation.
Ninth. No holder of shares of any class of the Corporation shall have the
right to cumulate voting power in the election of directors, and the right to
cumulate voting powers described in Delaware General Corporation Law Section 214
is hereby specifically denied to holders of shares of any class of the
Corporation.
Tenth. No director shall be liable to the corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except with respect to (1) a breach of the director's duty of loyalty to the
Corporation or its stockholders, (2) acts or omissions not in good faith or
which involves intentional misconduct or a knowing violation of law, (3)
liability under Section 174 of the Delaware General Corporation Law or (4) a
transaction from which the director derived an improper personal benefit, it
being the intention of _the foregoing provision to eliminate the liability of
the Corporation's directors to the Corporation or its stockholders to the
fullest extent permitted by Section 102(b) (7) of the Delaware General
Corporation Law, as amended from time to time. The Corporation shall indemnify
to the fullest extent permitted by Sections 102(b) (7) and 145 of the Delaware
General Corporation Law, as amended from time to time, each person that such
Sections grant the Corporation the power to indemnify.
IN WITNESS WHEREOF, the undersigned hereby executes this document and
affirms that the facts set forth herein are true under the penalties of perjury
this __ day of ____, 1997.
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Name:
Sole Incorporator
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Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated (i) November 7, 1997 with respect to the Financial
Statements of Philips International Realty Corp. for the period August 31, 1997
(inception) to September 30, 1997; (ii) April 28, 1997 with respect to the
Financial Statements of The Philips Company for each of the three years in the
period ended December 31, 1996; and (iii) April 28, 1997 with respect to the
Statement of Revenues and certain expenses of Merrick Commons and Mill Basin
Plaza Properties for each of the three years ended December 31, 1996 included in
the Proxy Statement of National Properties Investment Trust that is made a part
of the Registration Statement Form S-4 dated December 10, 1997 and prospectus of
Philips International Realty Corp. for the Registration of 32,000 shares of its
common stock.
/s/ Ernst & Young
New York, New York
December 9, 1997
<PAGE>
CONSENT OF BERNARDI, ALFIN & KOOS, L.L.C.
The Board of Directors
Philips International Realty Corp.
We consent to the use of our reports included in the Proxy
Statement/Prospectus and to the reference to our firm under the heading
"Experts" in the Proxy Statement/Prospectus which is part of the Registration
Statement filed by Philips International Realty Corp. on Form S-4 with the
Securities and Exchange Commission, and any amendments thereto.
Dated: December 9, 1997
By: /s/ Bernardi, Alfin & Koos, L.L.C.
-----------------------------------
Bernardi, Alfin & Koos, L.L.C.
<PAGE>
[Letterhead of Kostin, Ruffkess & Company, LLC]
CONSENT TO INCLUDE REPORT ON STATEMENT OF OPERATIONS,
STOCKHOLDERS' EQUITY AND CASH FLOWS AND
SCHEDULES IN PROXY STATEMENT
We consent to the use of our report dated March 15, 1995 included in the Proxy
Statement/Prospectus and to the reference of our firm under the heading
"Experts" in the Proxy Statement/Prospectus which is part of the Registration
Statement filed by Philips International Realty Corp. on Form S-4 with the
Securities and Exchange Commission and any amendments thereto.
KOSTIN, RUFFKESS & COMPANY, LLC
/s/ Kostin, Ruffkess & Company, LLC
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West Hartford, Connecticut
December 9, 1997
<PAGE>
EXHIBIT 23.7
CONSENT OF ARNOLD PENNER
I hereby consent to being named a proposed director of Philips
International Realty Corp., and to the use of my name under the heading
"Management" in the Proxy Statement/Prospectus which is part of the Registration
Statement filed by Philips International Realty Corp. on Form S-4, and to the
use of my name wherever appearing in the Registration Statement and the related
Proxy Statement/Prospectus, and any amendments thereto.
Dated: December 9, 1997
By: /s/ Arnold Penner
-----------------------------
Arnold Penner
