<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1998.
REGISTRATION NO. 333-47975
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PHILIPS INTERNATIONAL REALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
------------------------
417 FIFTH AVENUE
NEW YORK, NEW YORK 10016
(212) 545-1100
(ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
PHILIP PILEVSKY
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
PHILIPS INTERNATIONAL REALTY CORP.
417 FIFTH AVENUE
NEW YORK, NEW YORK 10016
(212) 545-1100
(NAME, ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
JONATHAN A. BERNSTEIN LYNN TOBY FISHER
BLAKE HORNICK KAYE, SCHOLER, FIERMAN,
PRYOR CASHMAN SHERMAN & FLYNN LLP HAYS & HANDLER, LLP
410 PARK AVENUE 425 PARK AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10022
(212) 421-4100 (212) 836-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
- ------------------------------------.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ------------------------------------.
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ------------------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
AGGREGATE OFFERING AMOUNT OF
TITLE OF SECURITIES BEING REGISTERED PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, par value $.01 per share................. $173,880,000 $51,295
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Act.
------------------------
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 THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION -- DATED APRIL 17, 1998
PROSPECTUS
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7,200,000 Shares
PHILIPS INTERNATIONAL REALTY CORP.
Common Stock
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Philips International Realty Corp. (the 'Company') is a self-advised real estate
investment trust (a 'REIT') formed to continue and expand the shopping center
business of certain affiliated companies owned or controlled by Philip Pilevsky
(the 'Philips Group'). For more than 15 years, Mr. Pilevsky has led an
integrated operation focused on owning, acquiring for redevelopment and
developing neighborhood and community shopping centers predominantly
concentrated in the New York and Miami metropolitan markets. The Company
currently owns 13 shopping center properties (collectively, the 'Properties'),
encompassing 2.4 million square feet of gross leaseable area ('GLA'), of which
ten were redeveloped or developed by the Philips Group. As of December 31, 1997,
approximately 96% of the total GLA was leased to over 260 tenants. The Company
intends to make regular quarterly distributions to its shareholders beginning
with a distribution for the period ending June 30, 1998.
All of the shares of common stock of the Company, par value $.01 per share (the
'Common Stock'), offered hereby (the 'Offering') are being sold by the Company
and will represent approximately 73.3% of the Common Stock of the Company (or
interests redeemable therefor) outstanding after consummation of the Offering.
Upon consummation of the Offering, the Company's executive officers and
directors will own in the aggregate 19.4% of the outstanding Common Stock (or
interests redeemable therefor). See 'Principal Shareholders.' To assist the
Company in maintaining its qualification as a REIT for federal income tax
purposes, ownership by any person is generally limited to 8% of the then
outstanding Common Stock.
Prior to the Offering, there has been no active public market for the Common
Stock of the Company. It is currently anticipated that the public offering price
will be between $19.00 and $21.00 per share. See 'Underwriting' for a discussion
of the factors to be considered in determining the public offering price. The
shares of Common Stock offered hereby have been approved for listing on the New
York Stock Exchange (the 'NYSE') under the symbol 'PHR,' subject to official
notice of issuance. See 'Glossary' beginning on page 98 for definitions of
certain terms used in this Prospectus.
At the request of the Company, up to 720,000 shares of the Common Stock offered
hereby have been reserved for sale by the Company to certain of its affiliates.
The price per share of Common Stock to be sold to such affiliates will be the
public offering price. See 'Underwriting.'
SEE 'RISK FACTORS' ON PAGES 14 TO 22 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS WHICH SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY,
INCLUDING:
o Geographic concentration of the Properties in the New York and Miami
metropolitan areas and the dependence of such Properties on the
conditions of those economies and markets; and the significance of
certain Properties to the Company's revenue and cash available for
distribution.
o The engagement of, and reliance by executive officers of the Company on,
a property management company affiliated with the Philips Group for
execution of the Company's day-to-day property level operations creates
conflicts of interest.
o Mr. Pilevsky may have conflicts of interest in connection with the
Company's ongoing business because he will continue to hold significant
interests in real properties not contributed to the Company.
o Material benefits to, conflicts of interest with and controlling
influence of, the Philips Group in connection with the formation of the
Company, the Offering and the operation of the Company's ongoing
business.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
<S> <C> <C> <C>
Per Share................................................... $ $ $
Total(3).................................................... $ $ $
</TABLE>
(1) The Company and the Operating Partnership have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the 'Securities Act'). See
'Underwriting.'
(2) Before deducting expenses of the Offering payable by the Company estimated
to be $4,300,000.
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 1,080,000 additional shares of Common Stock on the
same terms and conditions as set forth above. If all such additional shares
are purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discounts and Commissions will be
$ and the total Proceeds to Company will be $ . See
'Underwriting.'
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The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and acceptance by the Underwriters, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. Delivery
of the shares to the Underwriters is expected to be made through the facilities
of the Depository Trust Company, New York, New York, on or about , 1998.
PRUDENTIAL SECURITIES INCORPORATED RAYMOND JAMES & ASSOCIATES, INC.
May ,1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE 'UNDERWRITING.'
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.............................. 1
The Company..................................... 1
Risk Factors.................................... 2
Strategies for Growth........................... 4
Financing Strategy.............................. 5
Credit Facility................................. 6
Existing Mortgage Debt.......................... 6
Tax Status of the Company....................... 6
Property Summary Data........................... 7
Management...................................... 8
Formation and Structure of the Company.......... 8
The Offering.................................... 11
Distributions................................... 11
Restrictions on Transfer of Capital Stock....... 11
Restrictions on Ownership of Common Stock....... 11
Summary Selected Financial Data................. 12
RISK FACTORS.................................... 14
Dependence on Certain Properties and Markets.... 14
Conflicts of Interest........................... 14
Dependence on Key Personnel..................... 15
Acquisition, Redevelopment and Development
Activities May Not Perform As Expected........ 15
Aggregate Market Value of Company May Exceed
Company's Total Net Assets.................... 15
Real Estate Investment Risks.................... 15
Real Estate Financing Risks..................... 17
Cash Available for Distribution May Not be
Sufficient to Make Distributions.............. 18
Inability to Make Required Distributions to
Shareholders Could Affect REIT Status......... 18
Tax Risks....................................... 18
Necessity to Maintain Ownership Limit Required
to Maintain REIT Qualification................ 19
Limits on Ownership and Change in Control;
Potential Anti-Takeover Effect................ 19
Changes in Investment and Financing Policies
Without Shareholder Vote...................... 20
Shares Eligible for Future Sale................. 21
Immediate and Substantial Dilution.............. 22
Adverse Effect of Increasing Market Interest
Rate Levels on Price of Common Stock.......... 22
Absence of Active Public Market for Common
Stock; Market Price of Common Stock........... 22
Computer Systems and Year 2000 Issues........... 22
THE COMPANY..................................... 23
STRATEGIES FOR GROWTH........................... 24
Acquisitions for Redevelopment.................. 24
<CAPTION>
PAGE
----
<S> <C>
Development..................................... 25
Expansion....................................... 25
Asset Management................................ 25
USE OF PROCEEDS................................. 27
DISTRIBUTION POLICY............................. 27
CAPITALIZATION.................................. 28
DILUTION........................................ 29
SELECTED FINANCIAL DATA......................... 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................... 32
Overview........................................ 32
Results of Operations........................... 32
Pro Forma Operating Results..................... 33
Liquidity and Capital Resources................. 34
Cash Flows...................................... 34
Funds from Operations........................... 35
Computer Systems and Year 2000 Issues........... 35
Inflation....................................... 35
OVERVIEW OF THE COMPANY'S PRIMARY MARKETS....... 36
BUSINESS AND PROPERTIES......................... 42
Property Summary Data........................... 43
National, Regional and Local Tenant Summary..... 44
Anchor and Non-Anchor Tenant Summary ........... 45
Retailer Type Tenant Summary.................... 46
Major Tenants................................... 47
Lease Expirations............................... 47
Historical Leasing Activity..................... 48
Tax Basis and Real Estate Taxes................. 48
Capital Expenditures............................ 48
Mortgage Indebtedness........................... 49
Credit Facility................................. 49
Insurance....................................... 50
Government Regulations.......................... 50
Employees....................................... 51
Legal Proceedings............................... 51
SIGNIFICANT PROPERTIES.......................... 52
Hialeah, Florida Properties..................... 52
Forest Avenue Shoppers Town..................... 53
Meadowbrook Commons............................. 54
MANAGEMENT...................................... 55
Directors and Executive Officers................ 55
Compensation of Directors....................... 57
Committees of the Board of Directors............ 57
Executive Compensation.......................... 57
Employment Agreements........................... 58
Stock Option Plan............................... 59
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
401(k) Plan..................................... 60
Indemnification................................. 60
FORMATION TRANSACTIONS AND STRUCTURE OF THE
COMPANY....................................... 61
Formation Transactions.......................... 61
Benefits of the Formation Transactions to
Certain Parties............................... 62
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES..... 63
Investment Objectives and Policies.............. 63
Real Estate Investment Policies and Criteria.... 63
Dispositions.................................... 63
Other Investments............................... 63
Financing....................................... 63
Equity Capital.................................. 64
Working Capital Reserves........................ 64
Annual Reports.................................. 64
Other Policies.................................. 65
PARTNERSHIP AGREEMENT OF OPERATING
PARTNERSHIP................................... 65
Management...................................... 65
Rights of the Limited Partners.................. 66
Indemnification and Fiduciary Standards......... 66
Transferability of Interests.................... 66
Termination Transactions........................ 66
Capital Contributions........................... 67
Additional Classes of Units..................... 67
Awards Under Stock Option Plans................. 68
Redemption Rights............................... 68
Registration Rights............................. 68
Tax Matters..................................... 68
Operations...................................... 68
Duties and Conflicts............................ 68
Term............................................ 68
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.................................. 69
Management Agreement............................ 69
Excluded Properties............................. 69
Non-Competition Agreement....................... 70
Terms of Transfers.............................. 70
Registration Rights............................. 70
Partnership Agreement........................... 70
Miscellaneous................................... 70
<CAPTION>
PAGE
----
<S> <C>
Benefits of the Formation Transactions to
Certain Executive Officers and the Philips
Group......................................... 71
PRINCIPAL SHAREHOLDERS.......................... 71
DESCRIPTION OF CAPITAL STOCK.................... 72
General......................................... 72
Common Stock.................................... 72
Preferred Stock................................. 72
Restrictions on Ownership and Transfer.......... 73
Transfer Agent and Registrar.................... 75
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
COMPANY'S CHARTER AND BY-LAWS................. 76
Board of Directors.............................. 76
Removal of Directors............................ 76
Business Combinations........................... 76
Control Share Acquisitions...................... 77
Amendment to the Articles of Incorporation...... 78
Advance Notice of Director Nominations and New
Business...................................... 78
Limitation of Directors' and Officers'
Liability..................................... 78
SHARES ELIGIBLE FOR FUTURE SALE................. 79
General......................................... 79
Registration Rights............................. 80
FEDERAL INCOME TAX
CONSIDERATIONS................................ 81
Taxation of the Company as a REIT............... 81
Taxation of Shareholders........................ 87
Other Tax Considerations........................ 91
Proposed Legislation............................ 93
ERISA CONSIDERATIONS............................ 93
Employee Benefit Plans, Tax-Qualified Retirement
Plans and IRAs................................ 94
Status of the Company, the Operating Partnership
and the Property Partnerships Under ERISA..... 94
UNDERWRITING.................................... 95
EXPERTS......................................... 97
LEGAL MATTERS................................... 97
ADDITIONAL INFORMATION.......................... 97
GLOSSARY........................................ 98
INDEX TO FINANCIAL STATEMENTS................... F-1
</TABLE>
ii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data, including the financial statements and notes
thereto, included elsewhere in this Prospectus. Unless otherwise indicated, the
information contained in this Prospectus assumes (i) a public offering price of
$20.00 per share of Common Stock (representing the mid-point of the range set
forth on the cover page of this Prospectus), and (ii) that the Underwriters'
over-allotment option will not be exercised. Unless the context otherwise
requires (i) the 'Company' includes Philips International Realty Corp., a
Maryland corporation, and its subsidiaries (including Philips International
Realty, L.P., a Delaware limited partnership (the 'Operating Partnership')),
(ii) 'Units' means the limited partnership interests in the Operating
Partnership and (iii) 'Unitholders' means those persons or entities who received
Units in connection with the contribution of the Properties in the formation of
the Company. Upon consummation of the Offering, the Company will be the sole
general partner of, will own an approximate 74.8% economic interest in, and will
conduct all of its operations through, the Operating Partnership. See 'Glossary'
beginning on page 98 for the definitions of other terms used herein. All
references to the historical activities of the Company refer to the activities
of the Philips Group (as defined herein). Unless otherwise indicated, all Common
Stock information reflects the Company's 1.7051 for 1 Common Stock split which
will be effective immediately prior to consummation of the Offering.
THE COMPANY
The Company is a self-advised real estate investment trust formed to
continue and expand the shopping center business of certain affiliated companies
owned or controlled by Philip Pilevsky (the 'Philips Group'). For more than 15
years, the Philips Group has been engaged in the ownership, acquisition for
redevelopment and development of neighborhood and community shopping centers
predominantly concentrated in two major, densely populated, East Coast
metropolitan regions: (i) the New York, Northern New Jersey, Long Island and
Connecticut consolidated metropolitan statistical area (the 'New York CMSA') and
(ii) the Miami-Fort Lauderdale consolidated metropolitan statistical area (the
'Miami CMSA').
Philip Pilevsky, Chairman of the Board of Directors and Chief Executive
Officer, leads a management team whose executive officers have an average of
approximately 15 years experience in acquiring, redeveloping and developing
retail properties. The Philips Group has acquired, redeveloped and/or developed
a total of 66 retail properties encompassing over 5.1 million square feet within
the New York CMSA and Miami CMSA markets. Upon consummation of the Offering, Mr.
Pilevsky and the other executive officers and directors will beneficially own in
the aggregate approximately 19.4% of the outstanding Common Stock (or interests
redeemable therefor).
The Company's strategy is to acquire for redevelopment and develop quality
neighborhood and community shopping centers, located in demographically strong,
under-stored markets which serve the daily needs of the surrounding community.
The Company's portfolio consists of 13 well-established neighborhood and
community shopping center properties (each a 'Property,' and collectively, the
'Properties'), encompassing 2.4 million square feet of GLA. Ten of the
Properties were redeveloped or developed by the Philips Group, of which nine are
located in the New York CMSA or the Miami CMSA markets. Eight of the Properties
are anchored by national or regional supermarkets such as Publix Supermarkets,
Inc., Winn-Dixie Stores, Inc., and Waldbaums/APW Supermarkets, Inc. The Company
believes the strength of these grocery retailers, as well as other key anchor
tenants, provide the Properties with consistent consumer traffic and enables the
Company to attract additional quality anchor retailers, as well as quality
national, regional and local non-anchor retailers. As of December 31, 1997, the
Properties were 96.3% leased to 268 tenants with 82.9% of the total GLA leased
to national and regional retailers.
The Company focuses its activities primarily in the New York CMSA, and
secondarily in the Miami CMSA. Management believes its extensive experience,
market knowledge and network of industry contacts within these regions gives the
Company a competitive advantage and enhances its ability to identify and
capitalize on acquisitions for redevelopment and development opportunities. The
Company believes that the New York CMSA and Miami CMSA are both attractive
regions in which to own and develop retail properties for long-term investment.
The New York CMSA, with almost 20 million people, is by far the most densely
populated region in the country (more than 50% higher than the next most densely
populated CMSA). Furthermore, the Company believes the New York CMSA population
has significant buying power with the highest per capita personal
1
<PAGE>
income among CMSAs around the country (approximately 30% higher than the
national average), and is significantly under-stored with a gross leaseable area
per person of only 8.6 square feet (less than half the national average of 19.2
square feet of GLA per person). Similarly, the Miami CMSA ranks third in the
nation in terms of population density. The Miami CMSA has a population growth
rate among the highest in the nation, and the Company believes this market is
under-stored because its density in relation to its GLA per person (20.1 square
feet) is only slightly above the national average.
The Company's day-to-day operations are strategically directed by its
executive officers and implemented through a management agreement (the
'Management Agreement') with a property management company affiliated with the
Philips Group (the 'Management Company'). The Management Agreement provides for
the payment of fees, not to exceed prevailing market rates, and can be canceled,
in whole or in part, at any time by the Company as it internalizes property
management services. This agreement enables the Company to utilize the Philips
Group's infrastructure on a cost-effective basis. Going forward, the Company is
committed to internalize property management functions as its portfolio grows.
Based on its current business plan, the Company expects to become a fully
integrated, self-managed operation within 24 months following the consummation
of the Offering. The Management Company is owned and controlled by Mr. Pilevsky
and Sheila Levine, the Company's Chief Operating Officer, who have agreed not to
receive any remuneration or consideration of any kind in connection with the
Company's integration of property management services.
The Company seeks to maximize the cash flow from its portfolio by
continuing its aggressive asset management to maintain high occupancy rates,
increase rental rates as leases expire and as opportunities arise to expand
space for key tenants, and to reduce property operating costs. The Company also
seeks to grow through the acquisition for redevelopment and development of
quality shopping center properties. The Company believes that opportunities
exist at this time, particularly within the New York CMSA markets, for shopping
center acquisitions at attractive capitalization rates, with the potential to
significantly enhance the cash flow through the redevelopment, expansion,
retenanting and repositioning of such acquisitions, and for shopping center
development at favorable risk-adjusted returns. The Company believes that the
experience, long-term relationships and proven track record of its executive
officers, as well as its capital resources as a public company, will provide it
with the competitive advantages necessary to successfully identify and complete
such acquisition and development opportunities.
In the first twelve months following the consummation of the Offering, the
Company expects sources of growth in its cash available for distribution will
include the following activities: (i) recapturing below market leases and
re-leasing such space at higher rental rates, including two leases, aggregating
44,000 square feet, with respect to which the Company is currently negotiating;
(ii) leasing available space in the portfolio, including 25,000 square feet with
respect to which the Company is currently negotiating; (iii) re-leasing space
scheduled to expire during such period at higher rental rates; (iv) expansion of
certain Properties; and (v) the acquisition for redevelopment of strategic
properties with Units and/or available cash and borrowings under its revolving
credit facility (the 'Credit Facility').
The Company was incorporated in Maryland on July 16, 1997. Its executive
offices are located at 417 Fifth Avenue, New York, New York 10016, and it
telephone number is (212) 545-1100.
RISK FACTORS
An investment in shares of the Common Stock involves various material
risks. Prospective investors should carefully consider the following risk
factors, in addition to the other information set forth in this Prospectus, in
connection with an investment in the shares of Common Stock offered hereby. Such
risks include, among others:
o the dependence of the Company's income and cash flow on four Properties
located in Hialeah, Florida and on the economic conditions and continued
demand for shopping centers and retail space in the New York CMSA and
Miami CMSA markets;
o the Management Agreement with a property management company affiliated
with the Philips Group creates conflicts of interest, including conflicts
with certain personnel of the Management Company who will continue to
manage properties of the Philips Group;
2
<PAGE>
o reliance by the executive officers on the Management Company for
execution of day-to-day property management services;
o Mr. Pilevsky may have conflicts of interest since he will continue to
hold significant interests in real properties not contributed to the
Company and will continue to spend time and effort overseeing these
interests;
o Unitholders, including Mr. Pilevsky and Ms. Levine, may have conflicts of
interest in connection with the operation of the Company's ongoing
business, including more adverse tax consequences to Unitholders than the
Company upon the sale or refinancing of certain of the Properties, or a
reduction of indebtedness encumbering such Properties. Thus, Mr. Pilevsky
and Ms. Levine, as directors and executive officers, may have different
objectives than other shareholders regarding the appropriate pricing and
timing of the sale or refinancing of certain Properties, and they will be
in a position to influence the Company not to sell or refinance a
Property, and to influence the Company to refinance a Property with a
higher level of debt than would be in the best interests of the Company;
o dependence on key personnel, whose continued service is not guaranteed;
o material benefits to the Unitholders in connection with the formation of
the Company, 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 property redevelopment and development may cost more and take longer than
anticipated, and such projects may therefore be uneconomical or result in
losses that exceed the Company's investment in such projects;
o there were no appraisals of the Properties in connection with the
Offering, and therefore the aggregate market value of the Common Stock
(and interests redeemable therefor) may exceed the value of the Company's
total net assets;
o general real estate investment risks, including: the ability of the
Company to attract and retain tenants; the ability of tenants to pay
rents; the possibility that leases will be renewed on terms less
favorable to the Company; a general lack of liquidity of investments in
real estate; potential unknown or future environmental liabilities and
potential losses in the event of an uninsurable casualty and uninsured
losses from title defects; the ability of the Properties to generate
sufficient cash flow to meet operating expenses, including debt service;
and competition in seeking properties for acquisition and in seeking
tenants; which risks, individually or in the aggregate, may negatively
impact on the Company's ability to make distributions;
o risks associated with debt financing, including the possibility that the
Company will not have sufficient funds from operating activities
available to make balloon payments of principal upon maturity of its
mortgage debt, 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 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;
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 8% of the outstanding shares, a classified Board
of Directors and other Charter and statutory provisions and provisions in
the partnership agreement of the Operating Partnership (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;
3
<PAGE>
o the ability of the Board of Directors to revise the Company's strategies
and policies without shareholder approval, including its ability to incur
more debt and thereby increase the Company's debt service and decrease
cash flow;
o the possible issuance of additional shares of Common Stock, including
2,472,395 shares of Common Stock issuable upon redemption of the Units
and 667,641 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;
o potential immediate and substantial dilution in the net tangible book
value per share of the shares of Common Stock purchased by new investors
in the Offering;
o potential adverse effects on the value of the shares of Common Stock as a
result 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 lack of a prior active 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 sustained, 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 the public
offering price.
STRATEGIES FOR GROWTH
The Company's objective is to maximize shareholder value through aggressive
growth of its cash flow per share and through the appreciation of the value of
its portfolio. The Company will seek to accomplish this objective by continuing
its multi-faceted strategy of: (i) acquisition for redevelopment of retail
properties in demographically strong, under-stored markets and where supply is
constrained; (ii) development of retail properties in similar markets; (iii)
expansion of properties within its portfolio; and (iv) aggressive asset
management of its portfolio.
Acquisitions for Redevelopment. Management expects that a significant part
of the Company's growth will be achieved through continuing its program of
acquiring an optimal, risk-adjusted mix of additional shopping centers for
redevelopment at attractive initial returns, including: (i) well established,
stable properties which the Company believes are currently leased at below
market rents; (ii) underperforming, poorly managed properties; and (iii)
properties with additional land for new development or expansion. The Philips
Group has a history of identifying such acquisition opportunities and
significantly enhancing property performance through its redevelopment,
repositioning and re-merchandising initiatives and has acquired and redeveloped
48 properties encompassing over 3.8 million square feet within the New York CMSA
and Miami CMSA markets.
The Company seeks to acquire shopping centers at below replacement cost in
markets with strong demographics, emphasizing locations where retail demand
exceeds supply and the creation of new supply is constrained. The Company
believes there are significant opportunities within the markets in which it
operates to acquire such properties, including property portfolios, and it is
currently in discussions with a number of owners to purchase properties. In
addition, the nature of the Company's markets, particularly New York City and
the surrounding boroughs, is such that retail properties often incorporate
complementary non-retail uses. The Company further believes that the markets in
which it operates are mature, established markets in which property owners may
have low tax bases, and therefore exposure to significant taxable gains upon
sale. Management believes that the Company's ability to acquire properties for
Units enabling such sellers to defer taxable gain, coupled with its extensive
market expertise and contacts, as well as its access to capital as a public
company, will enable the Company to successfully execute its acquisition
strategy.
The Company has entered into a letter of intent to acquire a portfolio
comprised primarily of thirteen retail properties located in the borough of
Queens, New York. This market has a population density of approximately 18,000
people per square mile and a retail GLA of 1.2 square feet per person. The
Company believes that these properties will generate attractive current returns
on investment, and will provide the opportunity to significantly enhance future
cash flow and value through selective redevelopment and repositioning of the
assets. The transaction is valued at approximately $71 million, which the
Company currently anticipates will be paid in cash and/or Units, to be agreed
upon by the parties.
4
<PAGE>
In addition, the Company has entered into an agreement to purchase a 77,000
square foot shopping center located in Munsey Park, New York, for approximately
$23 million in cash and assumed indebtedness. This property is situated at the
intersection of Northern Boulevard, a major east-west thoroughfare, and
Searingtown Road in Nassau County, Long Island, one of the most densely
populated suburbs in the New York CMSA, directly across from the Americana
'Miracle Mile' shopping corridor. The Company considers the Miracle Mile one of
the premier retail markets on Long Island. The Company will seek to increase
cash flow and enhance the value of this property by capitalizing on existing
below market leases and expansion opportunities.
Development. The Company balances its acquisition activities through its
selective development of additional quality neighborhood and community shopping
centers, primarily in the New York CMSA markets. The Company capitalizes on
management's extensive development experience, market knowledge, network of
industry contacts and relationships and its proven track record. The Philips
Group has developed 18 retail properties encompassing over 1.3 million square
feet within the New York CMSA markets. In order to minimize the risk and the
commitment of capital for prolonged periods usually associated with development,
the Company has historically focused on two strategies to secure its development
projects: (i) pursuing requests for proposal ('RFPs') or similar municipally
sponsored development opportunities; and (ii) entering into land purchase
contracts which are subject to the satisfactory resolution of key development
contingencies, such as obtaining approvals and permits. Management believes that
these and similar strategies afford the Company the time to ensure that project
economics are reasonably assured through substantial pre-leasing before the
Company commits significant capital, and minimize the time between the
commitment of capital and the generation of cash flow from the project.
The Company is currently in advanced discussions with respect to an RFP
submission concerning a 250,000 square foot shopping center development in
Brooklyn, New York. The Company believes the demographics of this market,
characterized by a population density of approximately 32,000 people per square
mile and a retail GLA of 1.1 square feet per person, create the potential for
significant returns on capital invested to develop the property.
Expansion. As part of its ongoing strategy to enhance the value of its
assets, management of the Company regularly engages in the expansion and
renovation of properties within its portfolio. The Philips Group has expanded 18
properties, encompassing over 579,000 square feet of new retail space, including
approximately 230,000 square feet within the Properties.
Asset Management. The Company will continue to utilize its long-standing
asset and property management practices to maximize cash flow from its existing
Properties and enhance their long-term value through its extensive knowledge of
the retail industry and shopping center operations. Management believes that the
value of its Properties will be enhanced further by their quality and desirable
locations in demographically strong markets. During the past five years, the
Company has increased the occupancy rate of the Properties from 88.4% as of
December 31, 1993 to 96.3% as of December 31, 1997, while also increasing the
total annualized contractual base rent from $8.93 to $10.44 per leased square
foot.
There can be no assurance that the Company will meet any of its growth
strategy objectives. In addition, each of the aforementioned acquisition and
development transactions is subject to the completion of due diligence and
satisfaction of other customary conditions, and there can be no assurance that
any of these acquisition and development transactions will be completed.
FINANCING STRATEGY
The Company's financing strategy is determined by the Board of Directors.
The Company intends to closely manage its capital and cost structures so as to
maximize total return to shareholders and presently intends to maintain a ratio
of debt to total market capitalization (defined as the market value of the
outstanding Common Stock, including the Units redeemable for Common Stock, plus
the total debt of the Company) of not more than 50%. However, such objective may
be altered without the consent of the Company's shareholders and the Company's
organizational documents do not limit the amount of indebtedness that the
Company may incur. Upon consummation of the Offering, total debt of the Company
will constitute approximately 23.3% of its total market capitalization (21.5% if
the Underwriters' over-allotment option is exercised in full). The Company
5
<PAGE>
intends to access a number of capital sources to fund its future acquisition,
development and expansion programs. These capital sources may include
undistributed cash flow, borrowings under the Credit Facility, proceeds from
bank and/or institutional long-term mortgage financing, construction financing
to facilitate development activities, as well as proceeds from the issuance of
equity or debt securities.
CREDIT FACILITY
The Company has entered into a commitment letter with Prudential Securities
Credit Corporation ('PSCC'), subject to final documentation, for a $100 million
senior revolving credit facility. The Company anticipates the Credit Facility
will be available upon the consummation of the Offering to finance acquisition,
redevelopment and development activities and for general corporate purposes.
Borrowings under the Credit Facility will bear interest at rates ranging from
1.25% to 1.75% over the 30-day London Interbank Offered Rate ('LIBOR') based on
the level of borrowings outstanding relative to collateral value. The
availability of funds under the Credit Facility will be subject to the Company's
compliance with a number of customary financial and other covenants. Borrowings
under the Credit Facility will be secured by certain Properties with recourse to
the Company. The Credit Facility matures in two years, subject to PSCC's right,
upon 90 days notice, to terminate the Credit Facility one year after the
consummation of the Offering. See 'Business and Properties--Credit Facility.'
EXISTING MORTGAGE DEBT
Upon the consummation of the Offering, there will be a total of
approximately $59.5 million of secured fixed-rate debt encumbering certain
Properties. This debt will have a weighted average maturity of 5.3 years (with
the earliest maturity being December 31, 2002) and a weighted average fixed
interest rate of 7.6%. See 'Business and Properties--Mortgage Indebtedness.'
TAX STATUS OF THE COMPANY
The Company intends to elect to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year ended December 31,
1997. The Company believes its organization and proposed method of operation
will enable it to meet the requirements for qualification as a REIT. As a REIT,
the Company generally will not be subject to federal income tax on income it
distributes currently to its shareholders, and will be 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 and
may not be able to qualify as a REIT for the four subsequent taxable years. See
'Risk Factors--Tax Risks--Adverse Tax Consequences of Failure to Qualify as a
REIT' and 'Federal Income Tax Considerations--Taxation of the Company as a
REIT--Failure to Qualify' 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 federal, state and
local taxes on its income and property. See 'Federal Income Tax
Considerations--Taxation of the Company as a REIT.'
In the opinion of Pryor Cashman Sherman & Flynn LLP, 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 ended December 31, 1997 for which it anticipates timely
electing 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, LLP 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 Internal Revenue Service
(the 'IRS') and no assurance can be given that the IRS will not challenge the
Company's eligibility for taxation as a REIT.
6
<PAGE>
PROPERTY SUMMARY DATA
The following table sets forth certain information relating to each of the
Properties at December 31, 1997. All of the Properties are 100% owned by the
Company.
<TABLE>
<CAPTION>
ANNUALIZED CONTRACTUAL
BASE RENT AT 12/31/97(1)
YEAR BUILT/ ----------------------------------------
RENOVATED TOTAL % OF % LEASED % OF BASE
-------------- GLA TOTAL AT BASE PORTFOLIO RENT/SQ. FT.
PROPERTY AND LOCATION YR. ACQUIRED (SQ. FT.) GLA 12/31/97 RENT ($000) BASE RENT (2) ($)
- ----------------------------- -------------- --------- ----- -------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NEW YORK CMSA
Forest Avenue Shoppers Town 1957/1996 177,002 7.4 99.1 3,071 12.8 17.51
Forest Avenue 1984
Staten Island, New York
Meadowbrook Commons 1990 173,027 7.2 100.0 3,028 12.6 17.50
Sunrise Highway (3)
Freeport, New York
Merrick Commons 1960/1994 108,066 4.5 98.6 1,724 7.2 16.18
Merrick Road 1985
Merrick, New York
Mill Basin Plaza 1991 80,708 3.4 100.0 2,104 8.8 26.07
Avenue U (3)
Brooklyn, New York
Branhaven Plaza 1971/1996 191,496 8.0 100.0 1,375 5.7 7.18
U.S. 1 1985
Branford, Connecticut
--------- ----- -------- ----------- --------- -----
TOTAL/WEIGHTED AVERAGE 730,299 30.5 99.6 11,302 47.1 15.54
MIAMI CMSA
Mall on the Mile (4) 591,369 24.7 97.0 4,185 17.4 7.30
Palm Springs Mile 1985
Hialeah, Florida
Palm Springs Village (4) 309,380 12.9 91.9 2,657 11.1 9.34
Palm Springs Mile 1985
Hialeah, Florida
The Shops on 49th Street (4) 167,009 7.0 97.7 2,824 11.7 17.30
Palm Springs Mile 1985
Hialeah, Florida
Philips Plaza (4) 109,263 4.6 79.4 887 3.7 10.23
Palm Springs Mile 1985
Hialeah, Florida
--------- ----- -------- ----------- --------- -----
TOTAL/WEIGHTED AVERAGE 1,177,021 49.2 94.1 10,553 43.9 9.53
NEIGHBORING MARKETS
Elm Plaza 1973/1995 168,852 7.1 97.6 584 2.4 3.54
Rte. 220/I-91 1986
Enfield, Connecticut
Millside Plaza 1977 161,128 6.8 98.3 761 3.2 4.81
U.S. 130 1986
Delran, New Jersey
Foxboro Plaza 1982 117,831 4.9 91.2 513 2.1 4.77
Rte. 140/I-95 1986
Foxborough, Massachusetts
The Shoppes at Lake Mary 1985 36,725 1.5 100.0 322 1.3 8.77
Country Club Road 1997
Lake Mary, Florida
--------- ----- -------- ----------- --------- -----
TOTAL/WEIGHTED AVERAGE 484,536 20.3 96.5 2,180 9.0 4.66
PORTFOLIO TOTAL/WEIGHTED AVERAGE 2,391,856 100.0 96.3 24,035 100.0 10.44
--------- ----- -------- ----------- --------- -----
--------- ----- -------- ----------- --------- -----
<CAPTION>
KEY TENANTS (YEAR OF LEASE
PROPERTY AND LOCATION EXPIRATION/OPTION TERM)
- ----------------------------- --------------------------------
<S> <C>
NEW YORK CMSA
Forest Avenue Shoppers Town TJ Maxx (The TJX Companies,
Forest Avenue Inc.), (2005/2020); APW
Staten Island, New York Supermarkets, Inc. (Waldbaum,
Inc.) (2001/2011)
Meadowbrook Commons Giant Food Stores, Inc. (2025);
Sunrise Highway Toys 'R' Us, Inc. (2020/2040);
Freeport, New York Marshall's of MA, Inc.
(2001/2016)
Merrick Commons APW Supermarkets, Inc.
Merrick Road (Waldbaum, Inc.) (2013/2041)
Merrick, New York
Mill Basin Plaza Pergament Home Centers, Inc.
Avenue U (2011/2021); Walgreens Co.
Brooklyn, New York (2024)
Branhaven Plaza Caldor, Inc. (2002/2022); APW
U.S. 1 Supermarkets, Inc. (Waldbaum,
Branford, Connecticut Inc.) (2016/2038); CVS
(2001/2011)
TOTAL/WEIGHTED AVERAGE
MIAMI CMSA
Mall on the Mile Builders Square (2002/2022);
Palm Springs Mile Mervyn's (2011/2031); Toys 'R'
Hialeah, Florida Us, Inc. (2002/ 2017); Publix
Supermarkets, Inc. (2002)
Palm Springs Village Winn-Dixie Stores, Inc.
Palm Springs Mile (2016/2035); Upton, Inc.
Hialeah, Florida (1999/2009); Fabulous Diamonds
of Hialeah, Inc. (2001)
The Shops on 49th Street Smart & Final Stores Corporation
Palm Springs Mile (2016/2021); Pier One Imports
Hialeah, Florida (U.S.) Inc. (2001/2021)
Philips Plaza Michael's Stores, Inc.
Palm Springs Mile (2006/2016); Ideal Corporation
Hialeah, Florida (2005)
TOTAL/WEIGHTED AVERAGE
NEIGHBORING MARKETS
Elm Plaza Caldor Inc. (2001/2021); APW
Rte. 220/I-91 Supermarkets, Inc. (Waldbaum,
Enfield, Connecticut Inc.) (2014/2034)
Millside Plaza Kmart Corporation (2002/2017);
U.S. 130 Shop Rite (Delran Supermarket,
Delran, New Jersey Inc.) (2001/2016)
Foxboro Plaza Bradlees Stores, Inc.
Rte. 140/I-95 (2002/2022)
Foxborough, Massachusetts
The Shoppes at Lake Mary
Country Club Road
Lake Mary, Florida
TOTAL/WEIGHTED AVERAGE
PORTFOLIO TOTAL/WEIGHTED AVER
</TABLE>
- ------------------
(1) Total annualized contractual base rent for all leases in place at December
31, 1997. Amount excludes (i) future contractual rent escalations and cost
of living increases, (ii) percentage rent and (iii) additional rent payable
by tenants such as common area maintenance, real estate taxes and other
expense reimbursements.
(2) Total annualized contractual base rent divided by total GLA leased at
December 31, 1997.
(3) Property was developed by the Company.
(4) Development of these Properties commenced in 1958. Substantial redevelopment
and expansion has been ongoing since 1985, when the Properties were acquired
by the Philips Group.
7
<PAGE>
MANAGEMENT
The Company's senior management includes Mr. Pilevsky, Chairman of the
Board and Chief Executive Officer, Louis J. Petra, President, Ms. Levine, Chief
Operating Officer and Executive Vice President, Brian J. Gallagher, Chief
Financial Officer and Acquisitions Director, and Andrew J. Aberham, Leasing
Director. Management has an average of over 15 years experience in all aspects
of the retail real estate industry, and has developed many long-term
relationships with tenants, brokers, property owners, lenders, contractors,
suppliers and others in the retail real estate industry throughout the New York
CMSA and Miami CMSA markets. In addition, Mr. Petra has 13 years prior capital
markets experience as a senior executive with a publicly-traded real estate
investment trust that focused on the retail shopping center business. Upon
consummation of the Offering, the Company's executive officers and directors
will own in the aggregate 19.4% of the outstanding Common Stock (or interests
redeemable therefor), excluding options.
FORMATION AND STRUCTURE OF THE COMPANY
Formation Transactions. The Company was incorporated in Maryland on July
16, 1997. On December 31, 1997, the Company and certain members of the Philips
Group completed the formation transactions (the 'Formation Transactions'),
pursuant to which the Properties, or partnership or membership interests in the
Properties, were contributed to the Operating Partnership. In connection with
the Formation Transactions, the Company entered into: (i) employment agreements
with each of Messrs. Petra and Gallagher and Ms. Levine; (ii) the Management
Agreement with the Management Company; and (iii) a non-competition agreement
(the 'Non-Competition Agreement') with Mr. Pilevsky, Ms. Levine and the
Management Company. See 'Management--Employment Agreements,' 'Certain
Relationships and Related Transactions--Management Agreement' and
'--Non-Competition Agreement.'
Additional information regarding the Formation Transactions is set forth
under 'Formation Transactions and Structure of the Company.'
In connection with the Offering:
o The Company will sell 7,200,000 shares of Common Stock in the
Offering and will contribute the net proceeds therefrom to the
Operating Partnership in exchange for general partnership interests
(resulting in an approximately 74.8% economic interest in the
Operating Partnership).
o Approximately $126.8 million or 97.8% of the estimated net proceeds
of the Offering will be used to repay mortgage and other
indebtedness (including accrued expenses incurred in connection with
the Formation Transactions). See 'Use of Proceeds.'
o The Company will enter into the Credit Facility.
Structure of the Company. Upon consummation of the Offering, the Company
will be the sole general partner of the Operating Partnership. The Company will
conduct substantially all of its business and will hold substantially all of its
interests in the Properties through the Operating Partnership, either directly
or indirectly through partnerships or limited liability companies holding fee
title to the Properties (collectively, the 'Property Partnerships'). As the sole
general partner of the Operating Partnership, the Company will have exclusive
power to manage and conduct the business of the Operating Partnership, subject
to certain customary exceptions. See 'Partnership Agreement of Operating
Partnership.' The outstanding Units are redeemable, subject to certain lock-up
agreements, beginning on December 31, 1998 (the first anniversary of the
consummation of the Formation Transactions), at the Unitholder's request; such
Units will be redeemed, at the Company's option and in its sole discretion,
either for shares of Common Stock on a one-for-one basis (subject to certain
anti-dilution adjustments and exceptions) and/or cash (based upon the fair
market value of an equivalent number of shares of Common Stock at the time of
redemption). See 'Partnership Agreement of Operating Partnership--Redemption
Rights' and 'Underwriting.'
8
<PAGE>
Upon completion of the Offering, the structure and ownership of the Company
will be as follows:
[G:\15257\CHART1.VSD\VISEO4\8-25-97\JA]
- ------------------
(1) After giving effect to the Offering, if all Units of the Operating
Partnership were redeemed by the Company for Common Stock and all
outstanding warrants were exercised for Common Stock, the Company would
be owned approximately 80.6% by its public shareholders and
approximately 19.4% by its executive officers and directors. Units are
redeemable, subject to certain lock-up agreements, beginning on
December 31, 1998 (the first anniversary of the consummation of the
Formation Transactions), at the holder's request; such Units will be
redeemed, at the Company's option and in its sole discretion, either
for shares of Common Stock on a one-for-one basis (subject to certain
anti-dilution adjustments and exceptions) and/or cash (based on the
fair market value of an equivalent number of shares of Common Stock at
the time of redemption). See 'Partnership Agreement of Operating
Partnership--Redemption Rights.' Officers, directors and employees of
the Company, and certain senior employees of the Management Company
whom the Company anticipates will become employees of the Company upon
the integration of property management services, have been granted
stock options to acquire an aggregate of 654,000 shares of Common
Stock, which could reduce the percentage owned by public shareholders
to 76.9% (on a fully-diluted basis). Upon consummation of the Offering,
Mr. Pilevsky will own 16.9%, and Ms. Levine will own 2.0%, of the
outstanding Common Stock (or interests redeemable therefor), excluding
options.
9
<PAGE>
Benefits to Certain Parties. Mr. Pilevsky and Ms. Levine proposed the
Formation Transactions and the Offering to the Philips Group based on their
belief that the benefits of the organization of the Company for the Philips
Group outweighed the detriments. Such benefits include:
o improved liquidity of their interests in the Properties and
increased diversification of investment with deferral of the tax
consequences of the contribution of their interests in the
Properties to the Operating Partnership;
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 Mr. Pilevsky and Ms. Levine 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 provides a fee to the Management
Company, owned by Mr. Pilevsky and Ms. Levine, in connection with
management of the Properties. In addition, certain senior employees
of the Management Company, whom the Company currently anticipates
will become employees of the Company upon the integration of the
services provided to the Management Company, received options to
purchase Common Stock.
In addition, Prudential Securities Incorporated, the lead managing
underwriter of the Offering, and an affiliate of Prudential Securities
Incorporated will receive, out of the net proceeds of the Offering,
approximately $44.5 million in repayment of interim financing provided to the
Company in connection with the Formation Transactions.
See 'Formation Transactions and Structure of the Company--Benefits of the
Formation Transactions to Certain Parties' and 'Underwriting.'
Conflicts of Interest. The Unitholders, including Mr. Pilevsky and Ms.
Levine, may have interests that conflict with the interests of the Company and
its other shareholders. In particular, the consummation of certain business
combinations, the sale of properties or a reduction of indebtedness could have
adverse tax consequences to Unitholders. The Company has adopted certain
policies that are designed to eliminate or minimize certain potential conflicts
of interest. See 'Policies with Respect to Certain Activities--Other Policies,'
'Risk Factors--Conflicts of Interest' and 'Formation Transactions and Structure
of the Company--Benefits of the Formation Transactions to Certain Parties.' In
addition, Mr. Pilevsky and Ms. Levine will continue to hold through the Philips
Group significant interests in real properties not contributed to the Company in
the Formation Transactions, including certain retail properties. See 'Certain
Relationships and Related Transactions--Excluded Properties.' Mr. Pilevsky and
Ms. Levine have agreed to conduct all of their future retail shopping center
activities through the Company in accordance with the Non-Competition Agreement.
See 'Certain Relationships and Related Transactions--Non-Competition Agreement.'
Upon consummation of the Offering, Mr. Pilevsky will own 16.9%, and Ms. Levine
will own 2.0%, of the outstanding Common Stock (or interests redeemable
therefor), excluding options.
10
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered Hereby.......................................... 7,200,000 shares
Common Stock to be Outstanding after the Offering.................... 9,806,160 shares(1)
Use of Proceeds...................................................... To repay $126.8 million of existing debt,
pay transaction costs and expenses, and
for general corporate purposes. See 'Use
of Proceeds.'
NYSE Symbol.......................................................... PHR
</TABLE>
- ------------------
(1) Includes 2,472,395 shares of Common Stock that may be issued upon the
redemption of Units. Excludes 852,550 shares of Common Stock reserved for
issuance pursuant to the Company's 1997 Stock Option and Long-Term Incentive
Plan (the 'Stock Option Plan'), of which options for 654,000 shares are
currently outstanding, and 13,641 shares of Common Stock issuable upon
exercise of warrants issued in connection with the Formation Transactions
(the 'Warrants').
DISTRIBUTIONS
The Company intends to make regular quarterly distributions to holders of
the Common Stock. The Company intends to pay a pro rata distribution with
respect to the period commencing upon the consummation of the Offering and
ending on June 30, 1998, based upon $0.3375 per share for a full quarter. On an
annualized basis, this would be $1.35 per share, or an annual distribution rate
of 6.75%. The Company intends to maintain this distribution rate for at least
twelve months following consummation of the Offering unless actual results of
operations, economic conditions or other factors change significantly.
Distributions by the Company will be determined by the Board of Directors and
will be dependent upon a number of factors. In addition, in order to maintain
its qualification as a REIT under the Internal Revenue Code of 1986, as amended
(the 'Code'), the Company is, in general, required to distribute currently 95%
of its taxable income. See 'Distribution Policy' and 'Federal Income Tax
Considerations--Taxation of the Company as a REIT--Annual Distribution
Requirements.' The Company does not intend to reduce the expected distribution
per share if the Underwriters' over-allotment option is exercised.
RESTRICTIONS ON TRANSFER OF CAPITAL STOCK
All of the Common Stock and Units held by Mr. Pilevsky and the other
executive officers and directors of the Company are subject to lock-up
agreements for a period of one year following consummation of the Offering. See
'Formation Transactions and Structure of the Company' and 'Underwriting.'
RESTRICTIONS ON OWNERSHIP OF COMMON STOCK
Because of limitations imposed by the Code on the concentrations of ownership of
stock of a REIT, the Board of Directors has, as permitted by the Charter,
adopted resolutions which generally prohibit any shareholder, directly or
through attribution, from owning more than 8% (by number of shares or value,
whichever is more restrictive) of the outstanding capital stock of the Company.
The Board of Directors has waived the ownership limitation with respect to Mr.
Pilevsky and has permitted Mr. Pilevsky to actually or constructively own up to
17.5% of the outstanding capital stock of the Company (excluding interests
redeemable 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--Restrictions on
Ownership and Transfer,' 'Certain Provisions of Maryland Law and of the
Company's Charter and By-Laws' and 'Federal Income Tax Considerations.'
11
<PAGE>
SUMMARY SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating information
for: (i) Philips International Realty Corp. on a pro forma and an historical
basis as of and for the year ended December 31, 1997 (see footnote 2 to the
following table); (ii) the Operating Partnership on an historical basis as of
December 31, 1997; (iii) the combined balance sheet of the Property Partnerships
(consisting of the thirteen Properties) upon consummation of the Formation
Transactions as of December 31, 1997; and (iv) The Philips Company (consisting
of ten Properties accounted for on a combined basis and two Properties accounted
for on an equity basis) on a combined historical basis. This information should
be read in conjunction with all of the financial statements and the notes
thereto included elsewhere in this Prospectus. The audited historical financial
information as of and for the year ended December 31, 1994 and the unaudited
historical financial information as of and for the year ended December 31, 1993
presented herein are based upon the separate historical financial statements of
the respective entities and the notes thereto which do not appear in this
Prospectus. The unaudited pro forma financial information presented herein is
based upon the pro forma financial statements of Philips International Realty
Corp. and the notes thereto which appear elsewhere in this 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.
The unaudited pro forma operating information for the Company has been
presented as if the Offering and the Formation Transactions had occurred as of
January 1, 1997, 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 sheet for the Company as of
December 31, 1997 is presented as if the Offering and the Formation Transactions
had occurred on December 31, 1997.
The pro forma financial information is not necessarily indicative of what
the Company'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.
12
<PAGE>
THE COMPANY (PRO FORMA AND HISTORICAL) AND THE PHILIPS COMPANY (COMBINED
HISTORICAL)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
PRO FORMA COMBINED HISTORICAL
----------- --------------------------------------------------------------
1997 1997 1996 1995 1994 1993
----------- ------- -------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA(1):
Rental revenue:
Base rent............... $24,514 $19,788 $19,659 $17,311 $16,436 $16,142
Percentage rent......... 1,028 1,028 571 852 965 1,490
Expense
reimbursements........ 7,206 6,075 5,717 5,024 4,791 4,705
----------- ------- -------- -------- -------- -----------
Total rental revenue..... 32,748 26,891 25,947 23,187 22,192 22,337
----------- ------- -------- -------- -------- -----------
Property operating
expenses................ 5,347 4,937 5,054 5,008 4,834 4,218
Real estate taxes........ 4,682 3,819 3,671 3,591 3,554 3,446
Interest................. 4,905 12,966 11,728 11,097 9,695 9,524
Depreciation and
amortization............ 5,691 4,015 3,417 3,072 2,896 2,738
General and
administrative
expenses................ 2,350 165 306 201 222 270
----------- ------- -------- -------- -------- -----------
Total expenses........... 22,975 25,902 24,176 22,969 21,201 20,196
----------- ------- -------- -------- -------- -----------
9,773 989 1,771 218 991 2,141
Minority interest........ (2,464)
Equity in income (loss)
of investees............ -- 339 95 54 6 (89)
Other income............. 42 38 22 35 48 46
----------- ------- -------- -------- -------- -----------
Income before
extraordinary items..... $ 1,366 $ 1,888 $ 307 $ 1,045 $ 2,098
----------- ------- -------- -------- -------- -----------
------- -------- -------- -------- -----------
Net income............... $ 7,351
-----------
-----------
Net income per share of
Common Stock(3)
Basic................... $ 1.00
-----------
-----------
Diluted................. $ 1.00
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------------------------------------------------
HISTORICAL(2)
--------------------------------------
PROPERTY OPERATING
PRO FORMA PARTNERSHIPS PARTNERSHIP COMPANY COMBINED HISTORICAL(4)
----------- ------------ ----------- ------- -----------------------------------------------
1997 1996 1995 1994 1993
----------- -------------------------------------- -------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Rental properties, at
cost before accumulated
depreciation............ $ 199,428 $199,428 $ -- $ -- $137,399 $124,892 $118,307 $ 114,953
Investment in Operating
Partnership/Property
Partnerships............ -- -- 13,869 2,287
Total assets............. 197,041 195,616 17,978 2,287 129,841 116,856 108,188 109,474
Mortgage notes payable... 59,903 176,602 -- -- 133,609 131,740 131,187 132,125
Shareholders'/Owners'
equity (deficit)........ 100,777 13,869 12,759 2,203 (11,166) (22,091) (24,611) (25,771)
OTHER DATA:
Funds from
operations(5)........... 15,506 -- -- -- 5,574 3,590 4,050 --
Net cash provided by
operating activities ... -- -- -- -- 3,567 3,535 3,639 --
Net cash provided by
(used in) financing
activities.............. -- -- -- 533 6,086 2,160 (876) --
Net cash (used in)
investing activities.... -- -- -- (533 ) (9,359) (6,604) (3,354) --
GLA (sq. ft.) (at end of
period)................. 2,391,856 2,391,856 -- -- 2,348,117 2,348,117 2,348,117 2,325,448
Occupancy of Properties
owned (%) (at end of
period) ................ 96.3 96.3 -- -- 95.4 90.7 88.2 88.4
</TABLE>
- ------------------
(1) The Company was formed in July 1997 and incurred general and administrative
expenses of $543 for the period ended December 31, 1997. However, it did
not commence operations until the consummation of the Formation
Transactions as of the close of business on December 31, 1997. Therefore,
separate summary historical data for the Company is not presented above.
See Philips International Realty Corp. Statement of Operations, including
the notes thereto, appearing elsewhere in this Prospectus.
(2) Upon consummation of the Offering, the Company will be the sole general
partner of the Operating Partnership and the Property Partnerships. Until
the consummation of the Offering, the Company is required to account for
its interest in these partnerships on the equity method rather than
consolidating the partnerships. Accordingly, (i) the Company's interest in
the Operating Partnership and the Property Partnerships is reflected in its
balance sheet as 'Investment in Operating Partnership/Property
Partnerships', (ii) the Operating Partnership's balance sheet reflects its
investment in the Property Partnerships and (iii) the Property
Partnerships' balance sheet combines the thirteen Properties.
(3) Pro forma net income per share of Common Stock is based upon 7,333,765
shares of Common Stock expected to be outstanding upon consummation of the
Offering. As each Operating Partnership Unit is redeemable for one share of
Common Stock, the calculation of earnings per share upon redemption of
outstanding Units will be unaffected, as Unitholders and shareholders are
entitled to equal distributions on a per Unit and per share basis in the
net income of the Company. Basic earnings per share excludes any dilutive
effect of outstanding options. Diluted earnings per share includes the
dilutive effect of the outstanding options and Warrants calculated under
the treasury stock method.
(4) No 1997 historical balance sheet or other data is presented for The Philips
Company as of December 31, 1997 because the Formation Transactions were
consummated as of the close of business on such date and the Properties
were transferred to the Property Partnerships.
(5) 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.
13
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock involves various risks.
Prospective investors should carefully consider the following risk factors, in
addition to the other information contained in this Prospectus, in connection
with an investment in the shares of Common Stock in the Offering.
When used in this Prospectus, the words 'may,' 'will,' 'expect,'
'anticipate,' 'continue,' 'estimate,' 'project,' 'intend' and similar
expressions are intended to identify forward-looking statements regarding
events, conditions and financial trends that may affect the Company's future
plans of operations, business strategy, results of operations and financial
position. Prospective investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those included
within the forward-looking statements as a result of various factors. Factors
that could cause or contribute to such differences include, but are not limited
to, those described below, under the heading 'Management's Discussion and
Analysis of Financial Condition and Results of Operations' and elsewhere in this
Prospectus.
DEPENDENCE ON CERTAIN PROPERTIES AND MARKETS
Dependence on Certain Properties. As of December 31, 1997, the total
annualized contractual base rents due under leases with tenants at the Company's
four Properties located in Hialeah, Florida represented 43.9% of the total
annualized contractual base rents due under all of the Company's leases. The
Company's revenues and cash available for distributions to shareholders would be
disproportionately and adversely affected if these Properties were to be subject
to a materially adverse event. See 'Significant Properties--Hialeah, Florida
Properties.'
Dependence on Certain Markets. As of December 31, 1997, the total
annualized contractual base rents due under leases with tenants at the Company's
nine Properties located in the New York CMSA or Miami CMSA markets represented
91.0% of the total annualized contractual base rents due under all of the
Company's leases. To the extent that general economic or other relevant
conditions in these markets decline and result in a decrease in consumer demand
in these markets, the Company's performance may be adversely affected.
CONFLICTS OF INTEREST
The Management Company. The Company's day-to-day operations are
strategically directed by the executive officers and implemented through the
Management Company, owned and controlled by Mr. Pilevsky and Ms. Levine,
pursuant to the terms of the Management Agreement, which provides for the
payment of fees, not to exceed prevailing market rates. Management Company
personnel will not devote their efforts full-time to the property management of
the Company's portfolio of properties, but will in fact devote a material amount
of their time to the management of the business and properties of the Philips
Group, certain of which properties could be considered directly competitive with
certain Properties. The failure of the Management Company personnel to
adequately perform services for the Company could adversely affect the business
of the Company. See '--The Philips Group/Other Real Estate Activities.'
The Philips Group/Other Real Estate Activities. The Unitholders have
contributed twelve of the thirteen Properties to the Operating Partnership.
However, certain Unitholders, including Mr. Pilevsky and Ms. Levine, continue to
hold significant interests in real properties, including certain retail
properties, which were not contributed to the Company as part of the Formation
Transactions. The Non-Competition Agreement places certain restrictions on the
ability of Mr. Pilevsky, Ms. Levine and the Management Company to acquire,
operate, manage or develop retail shopping center properties, other than through
the Company, but does not restrict their activities with respect to their
existing retail properties not transferred to the Company, certain of which
could be directly competitive with certain Properties. Although Mr. Pilevsky
will spend a substantial portion of his professional time overseeing the
management of the Properties and the growth of the Company, he will also spend a
material amount of time on the excluded properties and other assets unrelated to
the business of the Company. See '--The Management Company,' 'Certain
Relationships and Related Transactions-- Management Agreement,' '--Excluded
Properties' and '--Non-Competition Agreement.'
The Unitholders. The Unitholders, including Mr. Pilevsky and Ms. Levine,
have interests that may conflict with the interests of the Company and its other
shareholders with respect to business decisions affecting the Company and the
Operating Partnership. In particular, the Unitholders may suffer different
and/or more adverse
14
<PAGE>
tax consequences than the Company and its shareholders upon the sale or
refinancing of certain Properties or a reduction of indebtedness encumbering
such Properties. Thus, the Unitholders, including 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 the 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 prior holdings in the Properties) than would be in the
best interests of the Company. See 'Formation Transactions and Structure of the
Company' and 'Partnership Agreement of Operating Partnership.'
DEPENDENCE ON KEY PERSONNEL. The executive officers have substantial
experience in owning, operating, managing, acquiring, redeveloping 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 employment agreements with Ms. Levine and Messrs. Petra and Gallagher. See
'Management.' Although the Company does not expect to enter into an employment
agreement with Mr. Pilevsky, he will have a significant ownership interest in
the Company. In addition, Mr. Pilevsky and Ms. Levine are subject to the
Non-Competition Agreement which limits their ability to engage in certain real
estate activities. See 'Certain Relationships and Related
Transactions--Non-Competition Agreement.' There can be no assurance that any of
the executive officers will remain with the Company.
ACQUISITION, REDEVELOPMENT AND DEVELOPMENT ACTIVITIES MAY NOT PERFORM AS
EXPECTED. 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. The
Company actively pursues properties which need substantial renovation or
repositioning and development projects. In connection with any redevelopment 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 redevelopment or development
project, the Company's loss could exceed its investment in such project. In
addition, the Company anticipates that property redevelopment and 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 redevelopment and 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 acquisitions or
new development. As a result, if permanent debt or equity financing were not
available on acceptable terms to refinance acquisitions or new development, cash
available for distribution might be adversely affected.
AGGREGATE MARKET VALUE OF COMPANY MAY EXCEED COMPANY'S TOTAL NET
ASSETS. No appraisals of the Properties were obtained by the Company in
connection with the Offering. The total market capitalization of the Company at
the public offering price may not be indicative of, and may exceed, the
aggregate value of the individual Properties. The public offering price,
however, will be determined based on negotiations between the Company and the
Underwriters, and the factors to be considered in determining such price
include, in addition to prevailing market conditions, the expected results of
operations of the Company, estimates of the business potential and earning
prospects of the Company, and the current state of the economy as a whole. See
'Underwriting.'
REAL ESTATE INVESTMENT RISKS
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, leasing commissions and other
capital expenditures, the Company's income and ability to make distributions to
its shareholders may be adversely affected. Income from the Properties may be
adversely
15
<PAGE>
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.
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.
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. Persons who arrange for the disposal or treatment of
hazardous or toxic substances may also be liable for the costs of removal or
remediation of such substances at a disposal or treatment facility, whether or
not such facility is owned or operated by such person. Certain environmental
laws impose liability for release of asbestos-containing materials into the air,
and third parties may seek recovery from owners or operators of real properties
for personal injuries associated with asbestos-containing materials. In
connection with the ownership (direct or indirect), operation, management and
development of real properties, the Company may be considered an owner or
operator of such properties or as having arranged for the disposal or treatment
of hazardous or toxic substances and, therefore, may be potentially liable for
removal or remediation costs, as well as certain other costs, including
governmental fines and injuries to persons and property.
All of the Properties have been subject to a Phase I environmental
assessment (which involves general inspections without soil sampling or ground
water analysis) 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 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.
General Uninsured Losses. The Company carries 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 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
16
<PAGE>
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. 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 an adverse effect. 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 Stores Inc. leases 60,000 square feet at Foxboro Plaza. The
total 1997 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 Stores Inc. 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
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 the Properties to determine continuing compliance with
existing laws and any additional laws that are hereafter promulgated, additional
legislation may impose further requirements on owners with respect to access by
disabled persons. 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.
REAL ESTATE FINANCING RISKS
No Limitation on Debt. The Company does not have a policy limiting the
amount of its debt or its ratio of debt to total market capitalization, 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 adversely affect 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.'
Inability to Pay Debt Service. The Company will be subject to the risk
that its cash flow will be insufficient to meet required payments of principal
and interest.
Effect of Cross-Collateralization. Certain of the mortgages encumbering
the Properties have 'cross-default' and 'cross-collateralization' provisions
that entitle the lender secured thereby to exercise certain remedies (including
foreclosure) against more than one Property. See 'Business and
Properties--Mortgage Indebtedness.'
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 or more of the Properties
upon disadvantageous terms, which might result in losses to the Company and
which
17
<PAGE>
might adversely affect its 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.
CASH AVAILABLE FOR DISTRIBUTION MAY NOT BE SUFFICIENT TO MAKE
DISTRIBUTIONS. If the Company were not able to pay its annual distribution of
$1.35 per share out of cash available for distribution, the Company could be
required to borrow under its Credit Facility (if available) to provide funds for
such distribution, or to reduce the amount of such distribution. In the event
the Underwriters' over-allotment option is exercised, the Company's ability to
pay such distribution out of cash available for distribution may be further
adversely affected.
INABILITY TO MAKE REQUIRED DISTRIBUTIONS TO SHAREHOLDERS COULD AFFECT REIT
STATUS. To obtain the 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 (determined without regard
to the dividends paid deduction and by excluding capital gains). The Company
will be subject to income tax at regular corporate rates on any undistributed
REIT taxable income (including net capital gains) 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, 95% of its capital gain net income and 100% of its undistributed income
from prior years.
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 its allocable share 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 by the Company through its Board of Directors.
The Board of Directors 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) and 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. See 'Federal Income Tax
Considerations--Taxation of the Company as a REIT--Annual Distribution
Requirements.'
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 ended December 31, 1997. 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 (determined without regard
to the dividends paid deduction and by excluding net capital gains). 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 complexity of these Code provisions and of the applicable
regulations promulgated thereunder (the 'Treasury Regulations') is greater in
the case of a REIT that holds its assets in partnership form. 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 a REIT.
Moreover, no assurance can be given that legislation, new regulations,
administrative interpretations or court decisions will not significantly 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 LLP, counsel to the Company, to the effect that,
based on various assumptions relating to the organization and operation of the
18
<PAGE>
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 a REIT. Such legal opinion is not
binding on the IRS or any court. 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 Considerations--Other Tax
Considerations.'
Proposed Legislation. Certain recent federal budget proposals include a
number of provisions affecting REITS, which, if enacted as currently drafted,
may materially impede the ability of the Company to engage in third-party
management or similar activities. See 'Federal Income Tax
Considerations--Proposed Legislation.'
NECESSITY TO MAINTAIN OWNERSHIP LIMIT REQUIRED TO MAINTAIN REIT
QUALIFICATION. 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, 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.
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. In addition, distributions to shareholders would no longer be required
to be made. See 'Federal Income Tax Considerations--Taxation of the Company as a
REIT--Failure to Qualify.'
LIMITS ON OWNERSHIP AND CHANGE IN CONTROL; POTENTIAL ANTI-TAKEOVER EFFECT
Certain Anti-Takeover Provisions May Inhibit a Change in Control. Certain
provisions of the Maryland General Corporation Law (the 'MGCL') and the Charter
and the By-Laws of the Company and the Partnership Agreement of the Operating
Partnership may have the effect of delaying, deferring or preventing a change in
control of the Company or the removal of existing management and, as a result,
could prevent the shareholders of the Company from being paid a premium for
their shares of Common Stock 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 the Limited Partners'
and '--Termination Transactions.' 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.'
New Classes and Series of Securities. 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-- General.'
Staggered Board of Directors. The Board of Directors of the Company is
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.'
Ownership Limit. As permitted by the Charter, the Board of Directors has
adopted resolutions which provide, subject to certain exceptions, that no person
may acquire or own (either actually or constructively under
19
<PAGE>
the applicable attribution rules of the Code) more than 8% (by number of shares
or value, whichever is more restrictive) of the outstanding shares of Capital
Stock of the Company (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 permitting Mr. Pilevsky to own up to
17.5% of the outstanding shares of Capital Stock. See 'Description of Capital
Stock--Restrictions on Ownership and Transfer.'
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 of Capital Stock the ownership of which
violates such limit. 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--Restrictions on Ownership and Transfer' for additional information
regarding the aforementioned limit.
The Ownership Limit may (i) discourage a change of control of the Company,
(ii) deter tender offers for Capital Stock, which offers may be attractive to
the Company's shareholders, or (iii) limit the opportunity for shareholders to
receive a premium for their Capital Stock that might otherwise exist if an
investor attempted to assemble a block of Capital Stock in excess of the
Ownership Limit or to effect a change of control of the Company.
Rights of Limited Partners. Certain provisions of the Partnership
Agreement provide that the Company may not engage in any Termination Transaction
(as defined herein) 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 for which each Unit is redeemable 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 'Partnership Agreement of Operating Partnership--Rights of
the Limited Partners' and '--Termination Transactions.'
CHANGES IN INVESTMENT AND FINANCING POLICIES WITHOUT SHAREHOLDER VOTE
General. The Board of Directors determines the Company's investment and
financing policies, its growth strategy, and its debt, capitalization,
distribution and operating policies. Although the Board of Directors has no
present intention to revise or amend these strategies and policies, the Board of
Directors may do so 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, including its ability to distribute cash to its shareholders. See
'Policies with Respect to Certain Activities--Financing.'
Issuance of Additional Securities. Subject to certain limitations under
the NYSE rules and regulations, 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.
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
20
<PAGE>
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 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--Taxation of the Company as a REIT--Requirements for
Qualification.' 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, the Company's ability to make required distributions to
shareholders could be adversely affected.
SHARES ELIGIBLE FOR FUTURE SALE. Upon consummation of the Offering, the
Company will have outstanding 7,333,765 shares of Common Stock (8,413,765 shares
if the Underwriters' over-allotment option is exercised in full). Of these
shares, the 7,200,000 shares of Common Stock offered hereby (8,280,000 shares if
the Underwriters' over-allotment option is exercised in full) and 54,563 of the
81,265 shares of Common Stock currently outstanding are or will be freely
tradeable without restriction or further registration under the Securities Act
by persons other than 'affiliates' of the Company, as defined under the
Securities Act.
Upon consummation of the Offering, the Company will also have 2,472,395
Units outstanding which are redeemable for an equal number of shares of Common
Stock, options and Warrants outstanding to purchase 667,641 shares of Common
Stock and 52,500 restricted shares of Common Stock held by executive officers.
In addition, options for the purchase of 198,550 shares will remain available
for issuance under the Stock Option Plan. See 'Management--Stock Option Plan'
and 'Shares Eligible for Future Sale.' The shares of Common Stock which: (i)
were issued without registration under the Securities Act; (ii) are held by
'affiliates'; or (iii) are issuable upon redemption or exercise of the
outstanding Units, Warrants and stock options are, or when issued will be,
'restricted securities' within the meaning of Rule 144 promulgated under the
Securities Act and may not be transferred unless registered under the Securities
Act or an exemption from registration is available, including any exemption from
registration provided under Rule 144. In general, upon satisfaction of certain
conditions, Rule 144 permits the sale of certain amounts of restricted
securities one year following the date of acquisition of the restricted
securities from the Company and, after two years, permits unlimited sales by
persons unaffiliated with the Company. In addition, in connection with the
Formation Transactions, Unitholders were granted certain 'shelf' registration
rights to have the shares of Common Stock acquired upon the redemption of Units
registered for sale under the Securities Act.
The Company, the Operating Partnership, and Philip Pilevsky and the other
executive officers and directors of the Company have agreed not to, directly or
indirectly, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of any option to purchase or other sale or disposition) of any shares of
Common Stock or other Capital Stock of the Company or Units or other partnership
interests of the Operating Partnership, or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock or other Capital Stock
of the Company or Units or other partnership interests of the Operating
Partnership, for a period of 180 days (one year in the case of the executive
officers and directors) after the consummation of the Offering, except, in the
case of the Company and the Operating Partnership: (i) pursuant to a dividend
reinvestment plan of the Company;
21
<PAGE>
(ii) pursuant to the Stock Option Plan; and (iii) in connection with the
acquisition by the Company of real property or interests in entities holding
real property, provided that the recipient or transferee of such securities or
interests agrees in writing to be subject to the lock-up provisions contained in
this paragraph for a period ending on the date that is 180 days after the date
of the Offering. Prudential Securities Incorporated may, in its sole discretion,
at any time and without prior notice, release all or any portion of the shares
of Common Stock or other securities subject to such lock-up agreements.
No predictions can be made of the effect, if any, that the sale or
availability for sale of additional shares of Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Common Stock offered
hereby will experience an immediate and substantial dilution of $6.39 per share
(based on an assumed public offering price of $20.00) in the net tangible book
value of the Common Stock. As set forth more fully under 'Dilution,' the pro
forma net tangible book value per share of the assets of the Company after the
Offering will be substantially less than the public offering price per share in
the Offering, in part because certain assets are reflected in the Company's
financial statements at historical depreciated costs. See 'Dilution.'
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.
ABSENCE OF ACTIVE PUBLIC MARKET FOR COMMON STOCK; MARKET PRICE OF COMMON
STOCK. Prior to the Offering, there has been no active public market for the
Common Stock and there can be no assurance that an active trading market will
develop as a result of the Offering, or if a trading market does develop, that
it will be sustained or that shares of Common Stock can be resold at or above
the public offering price. The public offering price of the Common Stock will be
determined by negotiations between the Company and the Underwriters and may not
be indicative of the market price for the Common Stock after the Offering. See
'Underwriting.' The market value of the Common Stock could be substantially
affected by general market conditions, including changes in interest rates.
Moreover, numerous other factors, such as governmental regulatory action and
changes in tax laws, could have a significant impact on the future market price
of the Common Stock.
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. 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. Accordingly, management does not
anticipate any significant costs, problems or uncertainties associated with
becoming Year 2000 compliant. The Company currently is 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.
22
<PAGE>
THE COMPANY
The Company is a self-advised REIT formed to continue and expand the
shopping center business of the Philips Group. For more than 15 years, the
Philips Group has been engaged in the ownership, acquisition for redevelopment
and development of neighborhood and community shopping centers predominantly
concentrated in two major, densely populated regions, the New York CMSA and
Miami CMSA. The Company believes that these markets are both attractive regions
in which to own and develop retail properties for long-term investment. See
'Overview of the Company's Primary Markets.' The Company's portfolio consists of
13 well-established neighborhood and community shopping center properties,
encompassing 2.4 million square feet of GLA, generally situated in densely
populated areas and conveniently located on, or easily accessible from, major
transportation thoroughfares.
The Company's Properties are leased to a diverse group of national,
regional and local companies. Eight of the Properties are anchored by national
or regional supermarkets such as Publix Supermarkets, Inc., Winn-Dixie Stores,
Inc., and APW Supermarkets, Inc./Waldbaums. The Company believes the strength of
each grocery retailer provides the Properties with consistent consumer traffic
and enables the Company to attract additional quality anchor retailers, as well
as quality national, regional and local non-anchor retailers. As of December 31,
1997, the Properties were 96.3% leased to 268 tenants with 82.9% of the total
GLA leased to national and regional retailers.
The following tables set forth certain summary information regarding the
Company's portfolio:
<TABLE>
<CAPTION>
ANNUALIZED CONTRACTUAL
BASE RENT AT 12/31/97(1)
% ---------------------------------------
TOTAL % OF LEASED % OF
NUMBER OF GLA PORTFOLIO AT BASE RENT PORTFOLIO BASE RENT/
REGION PROPERTIES (SQ. FT.) GLA 12/31/97 ($000) BASE RENT SQ. FT.(2)($)
- -------------------------------- --------- ----------- --------- -------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
New York CMSA................... 5 730,299 30.5 99.6 11,302 47.1 15.54
Miami CMSA...................... 4 1,177,021 49.2 94.1 10,553 43.9 9.53
Neighboring Markets............. 4 484,536 20.3 96.5 2,180 9.0 4.66
--------- ----------- --------- -------- --------- --------- -------------
Total/Weighted Average........ 13 2,391,856 100.0 96.3 24,035 100.0 10.44
--------- ----------- --------- -------- --------- --------- -------------
--------- ----------- --------- -------- --------- --------- -------------
</TABLE>
<TABLE>
<CAPTION>
ANNUALIZED CONTRACTUAL
% OF BASE RENT AT 12/31/97(1)
TOTAL TOTAL ---------------------------------------
LEASED LEASED % OF
GLA GLA AT BASE RENT PORTFOLIO BASE RENT/
TENANT TYPE (SQ. FT.) 12/31/97 ($000) BASE RENT SQ. FT.(2)($)
- -------------------------------- --------- -------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
National(3)................................................ 1,613,632 70.1 14,963 62.3 9.27
Regional(3)................................................ 293,746 12.8 4,235 17.6 14.42
Local(3)................................................... 394,946 17.1 4,837 20.1 12.25
--------- -------- --------- --------- -------------
Total/Weighted Average................................... 2,302,324 100.00 24,035 100.00 10.44
--------- -------- --------- --------- -------------
--------- -------- --------- --------- -------------
Anchor(4).................................................. 1,344,514 58.4 9,134 38.0 6.79
Non-Anchor(4).............................................. 957,810 41.6 14,901 62.0 15.56
--------- -------- --------- --------- -------------
Total/Weighted Average................................... 2,302,324 100.0 24,035 100.0 10.44
--------- -------- --------- --------- -------------
--------- -------- --------- --------- -------------
Retailers Providing Daily Necessities(5)................... 1,033,244 44.9 10,200 42.4 9.87
Other...................................................... 1,269,080 55.1 13,835 57.6 10.90
--------- -------- --------- --------- -------------
Total/Weighted Average................................... 2,302,324 100.00 24,035 100.00 10.44
--------- -------- --------- --------- -------------
--------- -------- --------- --------- -------------
</TABLE>
- ------------------
(1) Total annualized contractual base rent for all leases in place at December
31, 1997. Amount excludes (i) future contractual rent escalations and cost
of living increases, (ii) percentage rent and (iii) additional rent payable
by tenants such as common area maintenance, real estate taxes and other
expense reimbursements.
(2) Total annualized contractual base rent divided by total GLA leased at
December 31, 1997.
(3) The Company defines a national tenant as any tenant that operated in at
least four metropolitan areas located in more than one region (i.e.
northwest, northeast, midwest, southwest or southeast); a regional tenant as
any tenant that operates in two or more metropolitan areas located within
the same region; and a local tenant as any tenant that operates stores only
within the same metropolitan area as the shopping center.
(4) The Company defines anchors as tenants which lease 25,000 square feet or
more and non-anchors as tenants which lease less than 25,000 square feet.
(5) The Company defines retailers providing daily necessities as grocery, drug,
discount, apparel and shoe stores and retailers providing personal services.
23
<PAGE>
STRATEGIES FOR GROWTH
The Company's objective is to maximize shareholder value through aggressive
growth of its cash flow per share and through the appreciation of the value of
its portfolio. The Company will seek to accomplish this objective by continuing
its multi-faceted strategy of: (i) acquisition for redevelopment of retail
properties in demographically strong, under-stored markets and where supply is
constrained; (ii) development of retail properties in similar markets; (iii)
expansion of properties within its portfolio; and (iv) aggressive asset
management of its portfolio.
ACQUISITIONS FOR REDEVELOPMENT
Management expects that a significant part of the Company's growth will be
achieved through continuing its program of acquiring an optimal, risk-adjusted
mix of additional shopping centers for redevelopment at attractive initial
returns, including: (i) well established, stable properties which the Company
believes currently are leased at below market rents; (ii) underperforming,
poorly managed properties; and (iii) properties with additional land for new
development or expansion. The Philips Group has a history of identifying such
acquisition opportunities and signficantly enhancing property performance
through its redevelopment, repositioning and re-merchandising initiatives and
has acquired and redeveloped 48 properties encompassing over 3.8 million square
feet within the New York CMSA and Miami CMSA markets.
For example, the Properties located in Hialeah, Florida were all acquired
in 1985 at an aggregate purchase price of approximately $40.0 million. Over the
last twelve years, the Company has invested approximately $26.0 million to
expand and re-tenant these Properties. As a result of the Company's efforts, the
aggregate net operating income for these Properties has been significantly
increased, from approximately $3.2 million for the year ended December 31, 1986
to approximately $9.7 million for the year ended December 31, 1997.
The Company seeks to acquire shopping centers at below replacement cost in
markets with strong demographics, emphasizing locations where retail demand
exceeds supply and the creation of new supply is constrained. The Company
believes there are significant opportunites within the markets in which it
operates to acquire such properties, including property portfolios, and it is
currently in discussions with a number of owners to purchase properties. In
addition, the nature of the Company's markets, particularly New York City and
the surrounding boroughs, is such that retail properties often incorporate
complementary non-retail uses. The Company further believes that the markets in
which it operates are mature, established markets in which long-term property
owners may have low tax bases, and therefore exposure to significant taxable
gains upon sale. Management believes that the Company's ability to acquire
properties for Units enabling such sellers to defer taxable gain, coupled with
its extensive market expertise and contacts and access to capital as a public
company, will enhance the Company's ability to successfully execute its
acquisition strategy.
The Company has entered into a letter of intent to acquire a portfolio
comprised primarily of thirteen retail properties located in the borough of
Queens, New York. This market has a population density of approximately 18,000
people per square mile and a retail GLA of 1.2 square feet per person. The
Company believes that these properties will generate attractive current returns
on investment, and will provide the opportunity to significantly enhance future
cash flow and value through selective redevelopment and repositioning of the
assets. The transaction is valued at approximately $71 million, which the
Company currently anticipates will be paid in cash and/or Units, to be agreed
upon by the parties.
In addition, the Company has entered into an agreement to purchase a 77,000
square foot shopping center located in Munsey Park, New York, for approximately
$23 million in cash and assumed indebtedness. This property is situated at the
intersection of Northern Boulevard, a major east-west thoroughfare, and
Searingtown Road in Nassau County, Long Island, one of the most densely
populated suburbs in the New York CMSA, directly across from the Americana
'Miracle Mile' shopping corridor. The Company considers the Miracle Mile one of
the premier retail markets on Long Island. The Company will seek to
significantly increase cash flow and enhance the value of this property by
capitalizing on existing below market leases and expansion opportunities.
24
<PAGE>
DEVELOPMENT
The Company balances its acquisition activities through its selective
development of additional quality neighborhood and community shopping centers,
primarily in the New York CMSA markets. The Company capitalizes on management's
extensive development experience, market knowledge, network of industry contacts
and relationships and its proven track record. The Philips Group has developed
18 retail properties encompassing over 1.3 million square feet within the New
York CMSA markets. In order to minimize the risk and the commitment of capital
for prolonged periods usually associated with development, the Company has
historically focused on two strategies to secure its development projects: (i)
pursuing RFPs or similar municipally sponsored development opportunities; and
(ii) entering into land purchase contracts which are subject to the satisfactory
resolution of key development contingencies, such as obtaining approvals and
permits. Management believes that these and similar strategies afford the
Company the time to ensure that project economics are reasonably assured through
substantial pre-leasing before the Company commits significant capital, and
minimize the time between the commitment of capital and the generation of cash
flow from the project.
For example, the Meadowbrook Commons Property, an RFP development project,
was substantially pre-leased prior to closing the contract to purchase the
development site, and the time period from the commencement of construction to
the receipt of rental income was approximately twelve months. The net operating
income for 1991 (the first full year of operation) was approximately $2.7
million per annum and the total project costs were approximately $22.4 million,
which equates to an initial unleveraged return on cost of approximately 12.0%.
The Company intends to pursue the development of (i) free-standing single
tenant retail projects generally leased to national retailers and (ii)
neighborhood and community shopping centers. With respect to free-standing
retail development, the projects are typically 100% pre-leased to a national or
regional drug store retailer with whom the Company has established
relationships, and involve constructing the retailer's standardized format,
thereby minimizing the risk profile of the project. With respect to neighborhood
and community shopping center development, the projects are usually the result
of municipally sponsored RFPs involving urban sites where the Company is able to
obtain all approvals and permits, as well as substantially pre-lease the
project, prior to purchasing the land. The Company is currently in discussions
with certain municipalities regarding such developments.
The Company is currently in advanced discussions with respect to an RFP
submission concerning a 250,000 square foot shopping center development in
Brooklyn, New York. The Company believes the demographics of this market,
characterized by a population density of approximately 32,000 people per square
mile and a retail GLA of 1.1 square feet per person, create the potential for
significant returns on capital invested to develop the property.
EXPANSION
As part of its ongoing strategy to enhance the value of its assets,
management of the Company regularly engages in the expansion and renovation of
properties within its portfolio. The Philips Group has expanded 18 properties,
encompassing over 579,000 square feet of new retail space, including
approximately 230,000 square feet within the Properties.
ASSET MANAGEMENT
The Company will continue to utilize its long-standing asset and property
management practices to maximize cash flow from its existing Properties and
enhance their long-term value through its extensive knowledge of the retail
industry and shopping center operations accumulated in over 15 years of shopping
center ownership and operation, and its extensive, direct relationships with the
retail community. Management believes that the value of its Properties will be
enhanced further by their quality and desirable locations in demographically
strong markets.
25
<PAGE>
During the past five years the Company has increased its portfolio
occupancy and total annualized contractual base rent per square foot, as
indicated in the table below:
<TABLE>
<CAPTION>
TOTAL ANNUALIZED
CONTRACTUAL BASE RENT PER
DATE % LEASED LEASED SQUARE FOOT ($)(1)
- -------------------------------------------------------- -------- -------------------------
<S> <C> <C>
December 31, 1997....................................... 96.3 10.44
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
</TABLE>
- ------------------
(1) Total annualized contractual base rent for all leases in place at December
31 for the respective years indicated, divided by total GLA leased at such
dates. Amount excludes (i) future contractual rent escalations and cost of
living increases, (ii) percentage rent and (iii) additional rent payable by
tenants such as common area maintenance, real estate taxes and other expense
reimbursements.
The Company seeks to produce cash flow growth from its portfolio primarily
from: (i) recapturing below market leases and re-leasing such space at higher
rental rates, including two leases, aggregating 44,000 square feet, with respect
to which the Company is currently negotiating; (ii) leasing available space in
the portfolio, including 25,000 square feet with respect to which the Company is
currently negotiating; and (iii) re-leasing space scheduled to expire at higher
rental rates.
As an example of management's ability to enhance cash flow through
recapturing below market leases, the Company recently entered into an agreement
with an existing tenant in which the tenant agreed to terminate its lease,
originally scheduled to expire in March 2000, in exchange for a lump sum payment
from the Company. The existing tenant was paying an annual base rent of $1.30
per square foot with minimal reimbursement of property expenses, resulting in a
net cost to the Company of $1.98 per square foot for the year ended December 31,
1997 (based on property expenses of $3.38 per square foot). The Company expects
to enter into a new, ten-year lease with a national retailer for an annual
effective rent (annual contractual base rent, less amortized lease recapture and
tenant improvement costs) of $5.45 per square foot, plus $3.03 per square foot
reimbursement of property expenses.
There can be no assurance that the Company will be able to meet any of its
growth strategy objectives. In addition, each of the aforementioned acquisition
and development transactions is subject to the completion of due diligence and
satisfaction of other customary conditions, and there can be no assurance that
any of these acquisition and development transactions will be completed.
26
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock in the
Offering, assuming a public offering price of $20.00, after the deduction of
underwriting discounts and commissions and estimated offering expenses, are
expected to be approximately $129.6 million (approximately $149.7 million if the
Underwriters' over-allotment option is exercised in full). The net proceeds of
the Offering will be used to (i) repay approximately $126.8 million of
outstanding indebtedness (including accrued expenses incurred in connection with
the Formation Transactions), including $42.5 of indebtedness to an affiliate of
Prudential Securities Incorporated incurred in connection with the Formation
Transactions and (ii) redeem the Series A Preferred Stock held by Prudential
Securities Incorporated for $1.94 million plus accrued and unpaid dividends,
with the remaining approximately $1.0 million to be available for general
corporate purposes. The debt to be repaid upon completion of the Offering
consists primarily of mortgage and other secured debt, which had a weighted
average interest rate of approximately 7.96% and a weighted average remaining
term to maturity of approximately 1.3 years as of December 31, 1997. In the
event that the Underwriters' over-allotment option is exercised, the net
proceeds thereof will be available to the Company as additional working capital
and will be primarily used for future acquisitions and for development of
properties not yet identified. Pending application of such net proceeds, the
Company will invest the net proceeds in short-term, investment-grade
interest-bearing securities which are consistent with the Company's intention to
qualify for taxation as a REIT. Such investments may include government and
government agency securities, certificates of deposit and interest-bearing bank
deposits.
DISTRIBUTION POLICY
Subsequent to the Offering, the Company intends to make regular quarterly
distributions to the holders of its Common Stock. The first distribution, for
the period commencing upon the consummation of the Offering and ending June 30,
1998, is anticipated to be in an amount approximately equivalent to a quarterly
distribution of $0.3375 per share (which, if annualized, would equal $1.35 per
share), or an annual yield of 6.75% based on an assumed public offering price
per share of $20.00. The Company does not intend to reduce the expected
distribution per share if the Underwriters' over-allotment option is exercised.
The Company believes that its historical cash flows, as adjusted to give
effect to the Offering, provide a reasonable basis for setting its distribution
rate. The Company presently intends to maintain this distribution rate for at
least 12 months following the consummation of the Offering unless actual results
of operations, economic conditions or other factors change significantly.
Distributions by the Company will be subject to the requirements of the MGCL and
the annual distribution requirements under the REIT provisions of the Code (see
'Federal Income Tax Considerations--Taxation of the Company as a REIT--Annual
Distribution Requirements') and will depend on the actual cash flow of the
Company, its financial condition, its capital requirements, and such other
factors as the Board of Directors deems relevant. There can be no assurance that
any distributions will be made or that the expected level of distributions will
be maintained by the Company. See 'Risk Factors.'
The Company may in the future implement a distribution reinvestment program
pursuant to which holders of shares of Common Stock may elect to have their
distributions automatically reinvested to purchase additional shares of Common
Stock. If the Company adopts a distribution reinvestment program, it will
solicit participation in the program after the Offering by means of a separate
prospectus, and a purchase of shares of Common Stock in the Offering does not
entitle any investor to participate in any such program.
The Company anticipates that its distributions will exceed earnings and
profits for income tax reporting purposes due to non-cash expenses, primarily
depreciation and amortization, to be incurred by the Company. Therefore,
approximately 7% (or $0.10 per share of Common Stock) of the distributions
anticipated to be paid by the Company for the first 12 months subsequent to the
Offering are expected to represent a return of capital for federal income tax
purposes and in such event will not be subject to federal income tax under
current law to the extent such distributions do not exceed a shareholder's basis
in his or her Common Stock. The nontaxable distributions will reduce the
shareholder's tax basis in the Common Stock and, therefore, the gain (or loss)
recognized on the sale of such Common Stock or upon liquidation of the Company
will be increased (or decreased) accordingly. The percentage of shareholder
distributions that represents a nontaxable return of capital may vary
substantially from year to year.
27
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 on an historical basis, and on a pro forma basis as adjusted
to give effect to the Offering and the application of the estimated net proceeds
therefrom as described under the caption 'Use of Proceeds.' 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 Prospectus and the discussion contained in 'Management's
Discussion and Analysis of Financial Condition and Results of Operations.'
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------
HISTORICAL PRO FORMA
--------------- ---------
(IN THOUSANDS)
<S> <C> <C>
Debt (1):
Mortgages and notes payable........................................................ $ 180,182 $ 59,903
--------------- ---------
Minority interests in Operating Partnership (2)...................................... -- 33,969
--------------- ---------
Shareholders' Equity (3):
Preferred Stock, $.01 par value and $1000 stated value; 30,000,000 shares
authorized; 1,940 shares of Series A Preferred Stock issued and outstanding;
none issued and outstanding on a pro forma basis................................ 1,940 --
Common Stock, $.01 par value; 150,000,000 shares authorized; 81,265
shares issued and outstanding; 7,333,765 issued and outstanding on a pro forma
basis (4)....................................................................... -- 73
Paid in capital.................................................................... 806 105,977
Officer stock purchase loans receivable............................................ -- (1,050 )
(Deficit).......................................................................... (543) (4,223 )
--------------- ---------
Total shareholders' equity...................................................... 2,203 100,777
--------------- ---------
Total Capitalization................................................................. $ 182,385 $194,649
--------------- ---------
--------------- ---------
</TABLE>
- ------------------
(1) The historical debt presented represents the debt of the Operating
Partnership and Property Partnerships, which will be consolidated by the
Company after the Offering. See notes to financial statements for the
respective entities for information pertaining to mortgages and notes
payable.
(2) Assumes no redemption of the outstanding Units. If all of the Units were
redeemed for shares of Common Stock, 9,806,160 shares of Common Stock would
be outstanding.
(3) All pro forma share amounts are after giving effect to the 1.7051 to 1 stock
split authorized by the Company.
(4) Includes 7,200,000 shares of Common Stock to be issued in the Offering,
52,500 restricted shares of Common Stock to be purchased by two executive
officers and 81,265 shares of Common Stock currently outstanding. Does not
include: (i) 2,472,395 shares of Common Stock that may be issued beginning
December 31, 1998 upon the redemption of Units issued in connection with the
Formation Transactions; (ii) 13,641 shares of Common Stock that may be
issued upon exercise of the outstanding Warrants, which are immediately
exercisable; (iii) 654,000 shares of Common Stock subject to options granted
under the Stock Option Plan; or (iv) 1,080,000 shares of Common Stock that
are issuable upon exercise of the Underwriters' over-allotment option.
28
<PAGE>
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution of the net tangible book value of their Common Stock
from the assumed public offering price, in part because certain assets are
reflected in the Company's financial statements at historical depreciated costs.
At December 31, 1997, the Company had a combined net tangible book value of
approximately $5.8 million, or $2.26 per share of Common Stock. After giving
effect to: (i) the sale of the shares of Common Stock offered hereby at an
assumed public offering price of $20.00 per share of Common Stock; (ii) the
deduction of underwriting discounts and commissions and estimated Offering
expenses; and (iii) the repayment of approximately $126.8 million of outstanding
indebtedness (including accrued expenses incurred in connection with the
Formation Transactions), the pro forma net tangible book value at December 31,
1997 would have been approximately $133.5 million, or $13.61 per share of Common
Stock. This amount represents an immediate dilution in pro forma net tangible
book value of $6.39 per share of Common Stock to new public investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price........................................................ $20.00
Pro forma net tangible book value before the Offering (1).......................... $ 2.26
Increase in pro forma net tangible book value attributable to the Offering......... 11.35
------
Pro forma net tangible book value after the Offering (2)............................. 13.61
------
Dilution in pro forma net tangible book value to new investors (3)................... $ 6.39
------
------
</TABLE>
- ------------------
(1) Net tangible book value per share of Common Stock before the Offering is
determined by dividing net tangible book value (total tangible assets less
total liabilities) of the Company by the number of shares of Common Stock
and Units of the Company.
(2) Based on pro forma net tangible book value of approximately $133.5 million
divided by 9,806,160 shares of Common Stock and Units outstanding.
(3) Dilution is determined by subtracting pro forma net tangible book value per
share of Common Stock and Units after giving effect to the Offering from the
assumed public offering price paid by a new investor for a share of Common
Stock.
The following table sets forth, on a pro forma basis giving effect to the
Offering: (i) the number of shares of Common Stock to be sold by the Company in
the Offering; (ii) the net tangible book value as of December 31, 1997; and
(iii) the net tangible book value of the average contribution per share based on
total contributions. See 'Risk Factors--Immediate and Substantial Dilution.'
<TABLE>
<CAPTION>
COMMON STOCK BOOK VALUE OR CASH
ISSUED/UNITS CONTRIBUTIONS
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- -------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
New investors (1)............................ 7,252,500 74.0% $127,691(3) 95.7% $ 20.00(4)
Common Stock issued in connection with the
Formation Transactions (2)................. 81,265 0.8% 183 0.1% $ 2.26(5)
Units issued in connection with the Formation
Transactions............................... 2,472,395 25.2% 5,583 4.2% $ 2.26(5)
--------- ------- -------- -------
Total................................... 9,806,160 100.0% $133,457 100.0%
--------- ------- -------- -------
--------- ------- -------- -------
</TABLE>
- ------------------
(1) Reflects the shares of Common Stock offered hereby and the purchase of
52,500 restricted shares by two executive officers.
(2) Excludes Warrants and outstanding options.
(3) This amount is based on the assumed public offering price of $20.00 per
share.
(4) Before deducting the underwriting discounts and commissions and estimated
Offering expenses.
(5) Based on the December 31, 1997 pro forma combined book value of the assets
of the Company, the Operating Partnership and the Property Partnerships and
after reduction for intangible assets and prepayment penalties to be
incurred and net of redemption value of Series A Preferred Stock.
29
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating information
for: (i) Philips International Realty Corp. on a pro forma and an historical
basis as of and for the year ended December 31, 1997 (see footnote 2 to the
following table); (ii) for the Operating Partnership on an historical basis as
of December 31, 1997; (iii) for the combined balance sheet of the Property
Partnerships (consisting of the thirteen Properties) upon consummation of the
Formation Transactions as of December 31, 1997; and (iv) for The Philips Company
(consisting of ten Properties accounted for on a combined basis and two
Properties accounted for on an equity basis) on a combined historical basis.
This information should be read in conjunction with all of the financial
statements and the notes thereto included elsewhere in this Prospectus. The
audited historical financial information as of and for the year ended December
31, 1994 and the unaudited historical financial information as of and for the
year ended December 31, 1993; presented herein are based upon the separate
historical financial statements of the respective entities and the notes thereto
which do not appear in this Prospectus. The unaudited pro forma financial
information presented herein is based upon the pro forma financial statements of
Philips International Realty Corp. and the notes thereto which appear elsewhere
in this 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.
The unaudited pro forma operating information for the Company has been
presented as if the Offering and the Formation Transactions had occurred as of
January 1, 1997, 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 sheet for the Company as of
December 31, 1997 is presented as if the Offering and the Formation Transactions
had occurred on December 31, 1997.
The pro forma financial information is not necessarily indicative of what
the Company'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.
30
<PAGE>
THE COMPANY (PRO FORMA AND HISTORICAL) AND THE PHILIPS COMPANY (COMBINED
HISTORICAL)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
COMBINED HISTORICAL
---------------------------------------------------------------
1997 1996 1995 1994
-------- -------- -------- --------
PRO FORMA
-----------
1997 1993
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA(1):
Rental revenue:
Base rent............... $24,514 $19,788 $19,659 $17,311 $16,436 $16,142
Percentage rent......... 1,028 1,028 571 852 965 1,490
Expense
reimbursements........ 7,206 6,075 5,717 5,024 4,791 4,705
----------- -------- -------- -------- -------- -----------
Total rental revenue..... 32,748 26,891 25,947 23,187 22,192 22,337
----------- -------- -------- -------- -------- -----------
Property operating
expenses................ 5,347 4,937 5,054 5,008 4,834 4,218
Real estate taxes........ 4,682 3,819 3,671 3,591 3,554 3,446
Interest................. 4,905 12,966 11,728 11,097 9,695 9,524
Depreciation and
amortization............ 5,691 4,015 3,417 3,072 2,896 2,738
General and
administrative
expenses................ 2,350 165 306 201 222 270
----------- -------- -------- -------- -------- -----------
Total expenses........... 22,975 25,902 24,176 22,969 21,201 20,196
----------- -------- -------- -------- -------- -----------
9,773 989 1,771 218 991 2,141
Minority interest........ (2,464)
Equity in income (loss)
of investees............ -- 339 95 54 6 (89)
Other income............. 42 38 22 35 48 46
----------- -------- -------- -------- -------- -----------
Income before
extraordinary items..... $ 1,366 $ 1,888 $ 307 $ 1,045 $ 2,098
----------- -------- -------- -------- -------- -----------
-------- -------- -------- -------- -----------
Net income............... $ 7,351
-----------
-----------
Net income per share of
Common Stock(3)
Basic................... $ 1.00
-----------
-----------
Diluted................. $ 1.00
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------------------------------------------------
HISTORICAL(2)
--------------------------------------
OPERATING
PARTNERSHIP COMPANY
PRO FORMA ----------- -------
-----------
1997
COMBINED HISTORICAL(4)
PROPERTY -------------------------------------------------
PARTNERSHIPS
------------
1997 1996 1995 1994
-------------------------------------- ---------- -------- --------
----------- 1993
-----------
(UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Rental properties, at
cost before
accumulated
depreciation............ $ 199,428 $ 199,428 $ -- $ -- $ 137,399 $124,892 $118,307 $ 114,953
Investment in Operating
Partnership/
Property Partnerships... -- -- 13,869 2,287
Total assets............. 197,041 195,616 17,978 2,287 129,841 116,856 108,188 109,474
Mortgage notes payable... 59,903 176,602 -- -- 133,609 131,740 131,187 132,125
Shareholders'/Owners'
equity (deficit)........ 100,777 13,869 12,759 2,203 (11,166) (22,091) (24,611) (25,771)
OTHER DATA:
Funds from
operations(5)........... 15,506 -- -- -- 5,574 3,590 4,050 --
Net cash provided by
operating activities.... -- -- -- -- 3,567 3,535 3,639 --
Net cash provided by
(used in) financing
activities.............. -- -- -- 533 6,086 2,160 (876) --
Net cash (used in)
investing activities.... -- -- -- (533 ) (9,359) (6,604) (3,354) --
GLA (sq. ft.) (at end of
period)................. 2,391,856 2,391,856 -- -- 2,348,117 2,348,117 2,348,117 2,325,448
Occupancy of Properties
owned (%) (at end of
period) ................ 96.3 96.3 -- -- 95.4 90.7 88.2 88.4
</TABLE>
- ------------------
(1) The Company was formed in July 1997 and incurred general and administrative
expenses of $543 for the period ended December 31, 1997. However, it did
not commence operations until the consummation of the Formation
Transactions as of the close of business on December 31, 1997. Therefore,
separate summary historical data for the Company is not presented above.
See Philips International Realty Corp. Statement of Operations, including
the notes thereto, appearing elsewhere in this Prospectus.
(2) Upon consummation of the Offering, the Company will be the sole general
partner of the Operating Partnership and the Property Partnerships. Until
the consummation of the Offering, the Company is required to account for
its interest in these partnerships on the equity method rather than
consolidating the partnerships. Accordingly, (i) the Company's interest in
the Operating Partnership and the Property Partnerships is reflected in its
balance sheet as 'Investment in Operating Partnership/Property
Partnerships', (ii) the Operating Partnership's balance sheet reflects its
investment in the Property Partnerships and (iii) the Property
Partnerships' balance sheet combines the thirteen Properties.
(3) Pro forma net income per share of Common Stock is based upon 7,333,765
shares of Common Stock expected to be outstanding upon consummation of the
Offering. As each Operating Partnership Unit is redeemable for one share of
Common Stock, the calculation of earnings per share upon redemption of
outstanding Units will be unaffected, as Unitholders and shareholders are
entitled to equal distributions on a per Unit and per share basis in the
net income of the Company. Basic earnings per share excludes any dilutive
effect of options outstanding. Diluted earnings per share includes the
dilutive effect of the outstanding options and Warrants calculated under
the treasury stock method.
(4) No 1997 historical balance sheet or other data is presented for The Philips
Company as of December 31, 1997 because the Formation Transactions were
consummated as of the close of business on such date and the Properties
were transferred to the Property Partnerships.
(5) 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.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with 'Selected
Financial Data', and the Combined Financial Statements of The Philips Company
and the Combined Statements of Revenues and Certain Expenses of the Merrick
Commons and Mill Basin Plaza Properties, and the notes thereto, appearing
elsewhere in this Prospectus. For purposes of this discussion, The Philips
Company includes the Merrick Commons and Mill Basin Plaza Properties reflected
on the equity method. Where appropriate, the following discussion includes
analysis of the effects of the Offering and the Formation Transactions. These
effects are reflected in the Pro Forma Condensed Consolidated Financial
Statements of Philips International Realty Corp., and notes thereto, appearing
elsewhere in this Prospectus.
The Philips Company received 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 ongoing 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 Year Ended December 31, 1997 to Year Ended December 31, 1996.
Total revenue increased $944,000 or 3.6% to $26,891,000 for the year ended
December 31, 1997, as compared with $25,947,000 for the year ended December 31,
1996. This net increase is primarily attributable to growth in base rental
revenues associated with the expansion and leasing of available premises
primarily at the Properties in Hialeah, Florida. Overall occupancy increased
approximately 1% from 95.4% at December 31, 1996 to 96.3% at December 31, 1997.
Property operating expenses decreased $117,000 or 2.3% from $5,054,000 for
the year ended December 31, 1996 to $4,937,000 for the year ended December 31,
1997. This decrease is primarily attributable to a reduction in snow removal
costs incurred with respect to Properties located in the northeastern part of
the country during the respective periods. Property real estate taxes increased
by approximately 4% between the corresponding periods, reflecting the effect of
increased assessments associated with property expansions and renovations,
offset by management's continuing efforts to secure property tax reductions.
Depreciation and amortization expenses increased $598,000 or 17.5% to
$4,015,000 for the year ended December 31, 1997, as compared with $3,417,000 for
the year ended December 31, 1996. This increase reflects the depreciation and
amortization of (i) capital expenditures associated with the recent expansion,
renovation and retenanting of Properties in Hialeah, Florida, Branford and
Enfield, Connecticut, and Staten Island, New York and (ii) costs related to the
acquisition of non-sponsor interests in the Staten Island, Branford and Hialeah
properties.
Interest charges increased $1,238,000 or 10.6% to $12,966,000 for the year
ended December 31, 1997, as compared with $11,728,000 for the year ended
December 31, 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 $95,000 for
the year ended December 31, 1996 to $339,000 for the year ended December 31,
1997.
Income before extraordinary items decreased $522,000 to $1,366,000 for the
year ended December 31, 1997, as compared with $1,888,000 for the year ended
December 31, 1996. This decrease reflects increased interest costs associated
with property refinancings, partially offset by higher rents related to
retenanting and leasing efforts and the equity participation in a joint venture
property acquired during 1996.
32
<PAGE>
The extraordinary income of $671,000 for the year ended December 31, 1997
reflects a gain related to the restructuring of a loan encumbering three
Properties in connection with the Formation Transactions. The gain is net of an
extraordinary loss of approximately $265,000 representing the write-off of
deferred financing costs related to the refinancing of debt on certain
properties. The extraordinary income of $2,881,000 for the year ended December
31, 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 $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
growth, increasing $2,067,000 from year to year, 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 from year to year, 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 $345,000 or 11.2% to
$3,417,000 in 1996 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 Branford, Connecticut.
Interest expense for the year ended December 31, 1996 increased $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 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.
Income before extraordinary items increased $1,581,000 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.
PRO FORMA OPERATING RESULTS
Comparison of Pro Forma Year Ended December 31, 1997 to Historical Year Ended
December 31, 1997.
On a pro forma basis, the income before extraordinary items would have been
$7,351,000 for the year ended December 31, 1997, compared to historical income
before extraordinary items of $1,366,000 for the same period. This $5,985,000
increase is primarily the result of: (i) the utilization of a portion of the net
proceeds of the Offering to satisfy existing mortgage indebtedness which will
result in a reduction of interest expense; (ii) an increase in general and
administrative expenses associated with public company status and the
establishment of a corporate infrastructure to support the Company's growth
strategy objectives; and (iii) the inclusion of the Merrick Commons and Mill
Basin Plaza Properties and the National Property on a consolidated basis.
33
<PAGE>
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 believes the Offering will improve its financial position
principally through substantial reductions in its overall debt and
debt-to-equity ratio. In connection with the Offering, the Company will repay
all of its existing floating rate mortgage debt. As a result, the total
principal amount of outstanding mortgage debt will be reduced by approximately
$116.7 million. The Company will have approximately $59.5 million of secured
fixed rate debt with a weighted average interest rate of 7.61% and a weighted
average maturity of 5.25 years. This will result in a significant reduction in
annual mortgage interest expense as a percentage of total revenue (15.0% on a
pro forma basis as compared to 44.7% for the historical year ended December 31,
1997), and cash from operations required to fund debt service requirements will
decrease substantially. Based on the assumed public offering price of $20.00 per
share, the Company's ratio of debt to total market capitalization ratio will be
approximately 23.3% (21.5% if the Underwriters' over-allotment option is
exercised in full). The Credit Facility combined with this reduced leverage will
enhance the Company's ability to pursue its identified growth strategies.
The Company expects to make regular quarterly distributions from cash
available for distributions, which the Company believes will exceed historical
cash available for distributions through the reduction in debt service
associated with the repayment of indebtedness and growth in its portfolio. The
Company expects to invest cash in short-term, investment-grade interest bearing
securities, such as securities of the United States government or its agencies,
high-grade commercial paper and bank deposits.
The Company expects to meet its short-term liquidity requirements generally
through net cash provided by operations. The Company believes that its net cash
provided by operations will be sufficient to allow the Company to make
distributions necessary to enable the Company to continue to qualify as a REIT.
The Company also believes that the foregoing sources of liquidity will be
sufficient to fund its short-term liquidity needs for the forseeable future.
The Company expects to meet its long-term liquidity requirements, such as
property acquisition and development, scheduled debt maturities, renovations,
expansions and other non-recurring capital improvements through long-term
secured and unsecured indebtedness and the issuance of additional equity or debt
securities. The Company also expects to use funds available under the Credit
Facility to finance acquisition and development activities and capital
improvements on an interim basis.
CASH FLOWS
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996.
Net cash provided by operating activities decreased $729,000 to $2,838,000
for the year ended December 31, 1997, as compared to $3,567,000 for the year
ended December 31, 1996. This net decrease reflects changes in operating assets
and liabilities. Net cash used in investing activities increased $9,827,000 to
$19,186,000 for the year ended December 31, 1997, as compared to $9,359,000 for
the year ended December 31, 1996. This increase is primarily attributable to the
acquisition of non-sponsor partner interests in certain Properties in connection
with the Formation Transactions. Net cash provided by investing activities
increased $9,766,000 to $15,852,000 for the year ended December 31, 1997, as
compared to $6,086,000 for the year ended December 31, 1996. This increase
reflects debt incurred in connection with the purchase of the aformentioned
non-sponsor interests.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995.
Net cash provided by operating activities remained stable between the years
ended December 31, 1996 and 1995, changing only $32,000, or less than 1%. Net
cash used in investing activities increased $2,755,00 to $9,359,000 for the year
ended December 31, 1996, as compared to $6,604,000 for the year ended December
31,
34
<PAGE>
1995. This increase is primarily attributable to the acquisition of non-sponsor
partner interests in certain of the Properties. Net cash provided by financing
activities increased $3,926,000 to $6,086,000 for the year ended December 31,
1996, as compared with $2,160,000 for the year ended December 31, 1995. This
increase reflects mortgage debt incurred in connection with the expansion and
renovation of certain Properties.
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.
On a pro forma basis, after giving effect to the Offering, and reflecting
the effects of the Formation Transactions completed as of December 31, 1997,
funds from operations for the year then ended would be as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
--------------------
<S> <C>
Income before extraordinary items....................................... $ 7,351,000
Add:
Minority interests provision.......................................... 2,464,000
Depreciation and amortization......................................... 5,691,000
--------------------
Funds from operations................................................... $ 15,506,000
--------------------
--------------------
</TABLE>
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. 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. Accordingly,
management does not anticipate any significant costs, problems or uncertainties
associated with becoming Year 2000 compliant. The Company currently is
developing a plan to insure that its other internally generated operating
systems are similarly modified on a timely basis.
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.
35
<PAGE>
OVERVIEW OF THE COMPANY'S PRIMARY MARKETS
The Company retained Rosen Consulting Group ('Rosen'), nationally
recognized experts in real estate consulting and urban economics, to study the
New York-Northern New Jersey-Long Island consolidated metropolitan statistical
area (the 'New York CMSA')1 and the Miami-Fort Lauderdale consolidated
metropolitan statistical area (the 'Miami CMSA')2 regions in which nine of the
Company's thirteen properties are located (representing approximately 80% of the
total GLA). The discussion below is taken from the findings set forth in 'The
New York & Miami Regional Economic Outlook & Retail Market Conditions' report
prepared by Rosen (the 'Rosen Report'). The Company believes the demographic,
economic and retail characteristics discussed below are important factors in
evaluating the strength of the Company's markets for owning and operating retail
properties. While the Company believes Rosen's analysis of demographic and
economic trends are reasonable, there can be no assurance that the trends will
in fact continue.
The New York CMSA, with almost 20 million people, is by far the most
densely populated region in the country, both in terms of absolute population
and in density per square mile. With more than 1,900 people per square mile in
1996, the New York CMSA's population density was more than 50% higher than the
next most densely populated CMSA. The Miami CMSA is the third most densely
populated CMSA in the country, with 1,114 people per square mile, and the
twelfth largest CMSA by absolute population.
POPULATION DENSITY
[INSERT CHART A]
- ------------------
1) The New York-Northern New Jersey-Long Island CMSA includes the following
metropolitan areas: New York (including the five boroughs and Putnam,
Rockland and Westchester counties), Nassau, Suffolk and Dutchess County in
New York; Newark, Bergen-Passaic, Middlesex-Somerset-Hunterdon, Jersey City,
Monmouth-Ocean, Trenton in New Jersey; and Stamford, New Haven, Bridgeport,
Danbury, and Waterbury in Connecticut. It encompasses all or part of 31
counties or towns.
2) The Miami CMSA includes the primary statistical areas ('PMSAs') of Miami and
Fort Lauderdale, Florida.
36
<PAGE>
The Company believes that the New York and Miami CMSAs are both
significantly under-stored. The New York CMSA has a retail gross leasable area
per person of only 8.6 square feet, less than half the national average of 19.2
square feet of retail gross leasable area per person. The Miami CMSA has a
population growth rate more than 1.5 times the national average and a population
density third only to the New York and Chicago CMSAs, yet has a retail gross
leasable area per person only slightly above the national average.
1996 GROSS LEASEABLE AREA PER PERSON
[INSERT CHART B]
37
<PAGE>
From 1992 to 1997, the New York and Miami CMSAs experienced a steady rate
of population growth. The New York CMSA population increased from 19,650,829
persons in 1992 to an estimated 20,024,228 persons in 1997. The Miami CMSA
population increased from 3,305,779 persons in 1992 to an estimated 3,568,600
persons in 1997.
POPULATION TRENDS
[INSERT CHART C]
38
<PAGE>
The New York CMSA has experienced significant employment growth since 1992,
with an increase from 8,581,500 persons employed in 1992 to an estimated
9,025,300 persons employed in 1997. Employment in the Miami CMSA has also had a
significant growth rate, increasing 16% from 1,370,700 persons employed to an
estimated 1,592,500 persons employed during the same period.
EMPLOYMENT TRENDS
[INSERT CHART D]
39
<PAGE>
The Company believes that personal income is an important demographic
indicator of retail demand. In real terms, per capita personal income for the
New York CMSA has grown faster than the national average during the past two
years, with an increase of 2.5% in 1995 and an estimated increase of 2.4% in
1996. The per capita personal income for the Miami CMSA also increased 2.5% in
1995, and is estimated to have increased 2.3% during 1996.
REAL PER CAPITA PERSONAL INCOME TRENDS
[INSERT CHART E]
40
<PAGE>
Real retail sales in the New York CMSA increased from $124.1 billion in
1992 to an estimated $129.8 billion in 1997. Real retail sales in the Miami CMSA
increased from $28.3 billion in 1992 to an estimated $41.0 billion in 1997.
REAL RETAIL SALES TRENDS
[INSERT CHART F]
The Company believes that the high population density in the New York and
Miami CMSAs, coupled with positive population, employment and real retail sales
growth and insufficient retail space, create attractive regions in which to own
and develop retail properties for long-term investment.
41
<PAGE>
BUSINESS AND PROPERTIES
The Company's portfolio consists of 13 well-established neighborhood and
community shopping center Properties, encompassing 2.4 million square feet of
GLA, of which ten were developed or redeveloped by the Philips Group. Nine of
the Properties, representing approximately 80% of the total GLA, are located in
the New York CMSA or the Miami CMSA markets, with the remaining 20% of the total
GLA located in neighboring markets.
The Company's community and neighborhood shopping centers usually are
anchored by national or regional retailers. As long-time participants in the
shopping center industry, management has established close relationships with a
large number of major national and regional retailers. At December 31, 1997, the
Properties were 96.3% leased to 268 tenants with 82.9% of the total GLA leased
to national and regional retailers. Eight of the Properties are anchored by
national or regional supermarkets such as Publix Supermarkets, Inc., Winn-Dixie
Stores Inc., and Waldbaums/APW Supermarkets, Inc. The Company believes the
strength of these grocery retailers, as well as other key anchor tenants,
provide the Properties with consistent consumer traffic and enable the Company
to attract additional quality anchor retailers, as well as quality national,
regional and local non-anchor retailers.
Management believes that its strong tenant relationships and leasing
strategies have been instrumental in enabling it to maintain high occupancy
rates and realize sustained cash flow growth at the Properties. The Company's
principal leasing objective is to maintain an appropriate mix of retailers
providing day-to-day shopping necessities targeted to each Property's consumer
base and market environment while maximizing its rental revenues. To achieve
this objective, the Company enters into leases which generally range from 15 to
25 years for anchor tenants and from 5 to 10 years for non-anchor tenants. The
long-term anchor tenant leases promote stability and enhance customer traffic
while the shorter-term non-anchor leases enable the Company to take advantage of
improving market rents and address changes in retailing formats and consumer
preferences.
The Company's leases provide for the payment of base rents and, in most
cases, for the payment by each tenant of its pro rata share of the real estate
taxes, insurance, utilities and common area maintenance of the shopping center,
either directly or through a formula based on increases in the Consumer Price
Index. Certain of the Company's leases also provide for the payment of
additional rent when a tenant's gross sales exceed certain predetermined
thresholds. 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.
42
<PAGE>
PROPERTY SUMMARY DATA
The following table sets forth certain information relating to each of the
Properties at December 31, 1997. All of the Properties are 100% owned by the
Company.
<TABLE>
<CAPTION>
ANNUALIZED CONTRACTUAL
BASE RENT AT 12/31/97(1)
YEAR BUILT/ ------------------------------------
RENOVATED TOTAL % OF % LEASED % OF BASE
-------------- GLA TOTAL AT BASE PORTFOLIO RENT/SQ. FT.
PROPERTY AND LOCATION YR. ACQUIRED (SQ. FT.) GLA 12/31/97 RENT ($000) BASE RENT (2) ($)
- ----------------------------- -------------- --------- ----- -------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NEW YORK CMSA
Forest Avenue Shoppers Town 1957/1996 177,002 7.4 99.1 3,071 12.8 17.51
Forest Avenue 1984
Staten Island, New York
Meadowbrook Commons 1990 173,027 7.2 100.0 3,028 12.6 17.50
Sunrise Highway (3)
Freeport, New York
Merrick Commons 1960/1994 108,066 4.5 98.6 1,724 7.2 16.18
Merrick Road 1985
Merrick, New York
Mill Basin Plaza 1991 80,708 3.4 100.0 2,104 8.8 26.07
Avenue U (3)
Brooklyn, New York
Branhaven Plaza 1971/1996 191,496 8.0 100.0 1,375 5.7 7.18
U.S. 1 1985
Branford, Connecticut
<CAPTION>
--------- ----- -------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL/WEIGHTED AVERAGE 730,299 30.5 99.6 11,302 47.1 15.54
MIAMI CMSA
Mall on the Mile (4) 591,369 24.7 97.0 4,185 17.4 7.30
Palm Springs Mile 1985
Hialeah, Florida
Palm Springs Village (4) 309,380 12.9 91.9 2,657 11.1 9.34
Palm Springs Mile 1985
Hialeah, Florida
The Shops on 49th Street (4) 167,009 7.0 97.7 2,824 11.7 17.30
Palm Springs Mile 1985
Hialeah, Florida
Philips Plaza (4) 109,263 4.6 79.4 887 3.7 10.23
Palm Springs Mile 1985
Hialeah, Florida
<CAPTION>
--------- ----- -------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL/WEIGHTED AVERAGE 1,177,021 49.2 94.1 10,553 43.9 9.53
NEIGHBORING MARKETS
Elm Plaza 1973/1995 168,852 7.1 97.6 584 2.4 3.54
Rte. 220/I-91 1986
Enfield, Connecticut
Millside Plaza 1977 161,128 6.8 98.3 761 3.2 4.81
U.S. 130 1986
Delran, New Jersey
Foxboro Plaza 1982 117,831 4.9 91.2 513 2.1 4.77
Rte. 140/I-95 1986
Foxborough, Massachusetts
The Shoppes at Lake Mary 1985 36,725 1.5 100.0 322 1.3 8.77
Country Club Road 1997
Lake Mary, Florida
<CAPTION>
--------- ----- -------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL/WEIGHTED AVERAGE 484,536 20.3 96.5 2,180 9.0 4.66
PORTFOLIO TOTAL/WEIGHTED AVERAGE 2,391,856 100.0 96.3 24,035 100.0 10.44
<CAPTION>
--------- ----- -------- ----------- --------- ------------
--------- ----- -------- ----------- --------- ------------
<CAPTION>
KEY TENANTS (YEAR OF LEASE
PROPERTY AND LOCATION EXPIRATION/OPTION TERM)
- ----------------------------- -------------------------------
<S> <C>
NEW YORK CMSA
Forest Avenue Shoppers Town TJ Maxx (The TJX Companies,
Forest Avenue Inc.) (2005/2020); APW
Staten Island, New York Supermarkets, Inc. (Waldbaum,
Inc.) (2001/2011)
Meadowbrook Commons Giant Food Stores, Inc. (2025);
Sunrise Highway Toys 'R' Us, Inc. (2020/2040);
Freeport, New York Marshall's of MA, Inc.
(2001/2016)
Merrick Commons APW Supermarkets, Inc.
Merrick Road (Waldbaum, Inc.) (2013/2041)
Merrick, New York
Mill Basin Plaza Pergament Home Centers, Inc.
Avenue U (2011/2021); Walgreens Co.
Brooklyn, New York (2024)
Branhaven Plaza Caldor, Inc. (2002/2022); APW
U.S. 1 Supermarkets, Inc. (Waldbaum,
Branford, Connecticut Inc.) (2016/2038); CVS
(2001/2011)
<S> <C>
TOTAL/WEIGHTED AVERAGE
MIAMI CMSA
Mall on the Mile Builders Square (2002/2022);
Palm Springs Mile Mervyn's (2011/2031); Toys 'R'
Hialeah, Florida Us, Inc. (2002/2017); Publix
Supermarkets, Inc. (2002)
Palm Springs Village Winn-Dixie Stores, Inc.
Palm Springs Mile (2016/2035); Upton, Inc.
Hialeah, Florida (1999/2009); Fabulous Diamonds
of Hialeah, Inc. (2001)
The Shops on 49th Street Smart & Final Stores
Palm Springs Mile Corporation (2016/2021); Pier
Hialeah, Florida One Imports (U.S.) Inc.
(2001/2021)
Philips Plaza Michael's Stores, Inc.
Palm Springs Mile (2006/2016); Ideal Corporation
Hialeah, Florida (2005)
<S> <C>
TOTAL/WEIGHTED AVERAGE
NEIGHBORING MARKETS
Elm Plaza Caldor Inc. (2001/2021); APW
Rte. 220/I-91 Supermarkets, Inc. (Waldbaum,
Enfield, Connecticut Inc.) (2014/2034)
Millside Plaza Kmart Corporation (2002/2017);
U.S. 130 Shop Rite (Delran Supermarket,
Delran, New Jersey Inc.) (2001/2016)
Foxboro Plaza Bradlees Stores, Inc.
Rte. 140/I-95 (2002/2022)
Foxborough, Massachusetts
The Shoppes at Lake Mary
Country Club Road
Lake Mary, Florida
<S> <C>
TOTAL/WEIGHTED AVERAGE
PORTFOLIO TOTAL/WEIGHTED AVER
</TABLE>
- ------------------
(1) Total annualized contractual base rent for all leases in place at December
31, 1997. Amount excludes (i) future contractual rent escalations and cost
of living increases; (ii) percentage rent and (iii) additional rent payable
by tenants such as common area maintenance, real estate taxes and other
expense reimbursements.
(2) Total annualized contractual base rent divided by total GLA leased at
December 31, 1997.
(3) Property was developed by the Company.
(4) Development of the Properties commenced in 1958. Substantial redevelopment
and expansion has been ongoing since 1985, when the Properties were acquired
by the Philips Group.
43
<PAGE>
NATIONAL, REGIONAL AND LOCAL TENANT SUMMARY
The following table sets forth certain information regarding the Company's
national, regional and local tenants at each Property at December 31, 1997:
<TABLE>
<CAPTION>
NATIONAL TENANTS(1) REGIONAL TENANTS(1) LOCAL TENANTS(1)
------------------------ ------------------------ ------------------------
% OF % OF % OF
% OF PROPERTY % OF PROPERTY % OF PROPERTY
PROPERTY ANN. PROPERTY ANN. PROPERTY ANN.
PROPERTY LEASED GLA BASE RENT(2) LEASED GLA BASE RENT(2) LEASED GLA BASE RENT(2)
- ------------------------------------------- ---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
NEW YORK CMSA
Forest Avenue Shoppers Town.............. 82.6 74.3 3.7 5.0 13.7 20.7
Meadowbrook Commons...................... 85.5 81.4 14.5 18.6 0.0 0.0
Merrick Commons.......................... 58.2 57.4 20.7 18.0 21.0 24.6
Mill Basin Plaza......................... 16.4 17.3 83.6 82.7 0.0 0.0
Branhaven Plaza.......................... 82.4 63.2 6.1 9.9 11.5 26.8
WEIGHTED AVERAGE........................... 72.3 61.7 18.3 25.7 9.4 12.6
MIAMI CMSA
Mall on the Mile......................... 79.1 72.8 11.9 14.1 8.9 13.1
Palms Springs Village.................... 60.7 54.3 0.9 1.2 38.4 44.5
The Shops on 49th Street................. 52.9 59.7 13.4 12.8 33.7 27.5
Philips Plaza............................ 42.8 67.6 0.0 0.0 57.2 32.4
WEIGHTED AVERAGE........................... 67.7 64.2 8.4 9.3 23.9 26.5
NEIGHBORING MARKETS
Elm Plaza................................ 93.8 77.0 0.0 0.0 6.2 23.0
Millside Plaza........................... 74.8 62.8 22.2 26.9 3.0 10.3
Foxboro Plaza............................ 57.7 50.3 30.5 27.4 11.8 22.3
The Shoppes at Lake Mary................. 8.0 10.2 0.0 0.0 92.0 89.8
WEIGHTED AVERAGE........................... 72.3 55.9 14.5 15.8 13.2 28.3
PORTFOLIO WEIGHTED AVERAGE................. 70.1 62.3 12.8 17.6 17.1 20.1
</TABLE>
- ------------------------
(1) The Company defines national tenants as any tenant that operates in at least
four metropolitan areas located in more than one region (i.e., northwest,
northeast, midwest, southwest or southeast); regional renants as any tenant
that operates in two or more metropolitan areas located within the same
region; and local tenants as any tenant that operates stores only within the
same metropolitan area as the shopping center.
(2) Total annualized contractual base rent for all leases in place at December
31, 1997. Amount excludes (i) future contractual rent escalations and cost
of living increases, (ii) percentage rent and (iii) additional rent payable
by tenants such as common area maintenance, real estate taxes and other
expense reimbursements.
44
<PAGE>
ANCHOR AND NON-ANCHOR TENANT SUMMARY
The following table sets forth certain information regarding anchor and
non-anchor tenants at December 31, 1997:
<TABLE>
<CAPTION>
ANCHOR TENANTS(1) NON-ANCHOR TENANTS(1)
------------------------- -------------------------
% OF % OF
% OF PROPERTY % OF PROPERTY
PROPERTY ANN. PROPERTY ANN.
PROPERTY LEASED GLA BASE RENT(2) LEASED GLA BASE RENT(2)
- ------------------------------------------------------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
NEW YORK CMSA
Forest Avenue Shoppers Town................................ 39.2 20.6 60.8 79.4
Meadowbrook Commons........................................ 64.5 54.0 35.5 46.0
Merrick Commons............................................ 41.7 37.7 58.3 62.3
Mill Basin Plaza........................................... 62.0 59.7 38.0 40.3
Branhaven Plaza............................................ 69.7 35.1 30.3 64.9
WEIGHTED AVERAGE............................................. 56.2 41.2 43.8 58.8
MIAMI CMSA
Mall on the Mile........................................... 71.2 57.6 28.8 42.4
Palm Springs Village....................................... 56.9 38.3 43.1 61.7
The Shops on 49th Street................................... 0.0 0.0 100.0 100.0
Philips Plaza.............................................. 41.5 9.1 58.5 90.9
WEIGHTED AVERAGE............................................. 54.7 33.3 45.3 66.7
NEIGHBORING MARKETS
Elm Plaza.................................................. 91.3 69.6 8.7 30.4
Millside Plaza............................................. 75.6 42.0 24.4 58.0
Foxboro Plaza.............................................. 55.8 46.8 44.2 53.2
The Shoppes at Lake Mary................................... 0.0 0.0 100.0 100.0
WEIGHTED AVERAGE............................................. 70.6 44.3 29.4 55.7
PORTFOLIO WEIGHTED AVERAGE................................... 58.4 38.0 41.6 62.0
</TABLE>
- ------------------------
(1) Anchors defined as single tenants which lease 25,000 square feet or more;
non-anchors defined as tenants which lease less than 25,000 square feet.
(2) Total annualized contractual base rent for all leases in place at December
31, 1997. Amount excludes (i) future contractual rent escalations and cost
of living increases, (ii) percentage rent and (iii) additional rent payable
by tenants such as common area maintenance, real estate taxes and other
expense reimbursements.
45
<PAGE>
RETAILER TYPE TENANT SUMMARY
The following table sets forth certain information regarding the Company's
retail tenant types at each Property at December 31, 1997:
<TABLE>
<CAPTION>
RETAILERS PROVIDING
DAILY NECESSITIES(1) OTHER RETAILERS
------------------------- -------------------------
% OF % OF
% OF PROPERTY % OF PROPERTY
PROPERTY ANN. PROPERTY ANN.
PROPERTY LEASED GLA BASE RENT(2) LEASED GLA BASE RENT(2)
- ------------------------------------------------------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
NEW YORK CMSA
Forest Avenue Shoppers Town................................ 58.0 50.1 42.0 49.9
Meadowbrook Commons........................................ 56.7 52.4 43.3 47.6
Merrick Commons............................................ 84.0 80.8 16.0 19.2
Mill Basin Plaza........................................... 13.7 13.1 86.3 86.9
Branhaven Plaza............................................ 42.0 58.9 58.0 41.1
WEIGHTED AVERAGE............................................. 52.4 49.6 47.6 50.4
MIAMI CMSA
Mall on the Mile........................................... 18.3 19.7 81.7 80.3
Palm Springs Village....................................... 40.9 49.2 59.1 50.8
The Shops on 49th Street................................... 35.1 34.8 64.9 65.2
Philips Plaza.............................................. 15.0 22.7 85.0 77.3
WEIGHTED AVERAGE............................................. 26.4 31.4 73.6 68.6
NEIGHBORING MARKETS
Elm Plaza.................................................. 92.5 73.4 7.5 26.6
Millside Plaza............................................. 84.3 63.7 15.7 36.3
Foxboro Plaza.............................................. 55.8 46.8 44.2 53.2
The Shoppes at Lake Mary................................... 39.0 38.7 61.0 61.3
WEIGHTED AVERAGE............................................. 71.1 58.6 22.9 41.4
PORTFOLIO WEIGHTED AVERAGE................................... 44.9 42.4 55.1 57.6
</TABLE>
- ------------------------
(1) The Company defines retailers providing daily necessities as grocery, drug,
discount, apparel and shoe stores and retailers providing personal services.
(2) Total annualized contractual base rent for all leases in place at December
31, 1997. Amount excludes (i) future contractual rent escalations and cost
of living increases, (ii) percentage rent and (iii) additional rent payable
by etenants such as common area maintenance, real estate taxes and other
expense reimbursements.
46
<PAGE>
MAJOR TENANTS
The following table sets forth certain information regarding tenants which
individually accounted for 2.0% or more of the total annualized contractual base
rent at December 31, 1997:
<TABLE>
<CAPTION>
ANNUALIZED CONTRACTUAL
BASE RENT AT 12/31/97(1)
TOTAL -------------------------------------
GLA UNDER % OF
NUMBER LEASES % OF TOTAL BASE RENT PORTFOLIO BASE RENT/
TENANT OF LEASES (SQ. FT.) LEASED GLA ($000) BASE RENT SQ. FT.(2)($)
- ----------------------- --------- --------- ------------ --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pergament Home Centers, Inc.............. 1 58,200 2.5 1,463 6.1 25.14
Waldbaum's/APW Supermarkets, Inc......... 4 181,221 7.9 1,256 5.2 6.93
Toys 'R' Us Inc.......................... 3 113,358 4.9 979 4.1 8.64
Giant Food Stores, Inc................... 1 46,753 2.0 634 2.6 13.56
Mervyn's................................. 1 79,118 3.4 515 2.1 6.51
United Artists Communications, Inc....... 1 39,214 1.7 510 2.1 13.00
Walgreen Co.............................. 3 32,143 1.4 501 2.1 15.60
The TJX Companies (TJ Maxx).............. 1 34,798 1.5 500 2.1 14.37
Winn-Dixie Stores Inc.................... 1 53,820 2.3 489 2.0 9.09
Michaels Stores Inc...................... 2 35,256 1.5 479 2.0 13.59
<CAPTION>
--------- --------- ------------ --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL/WEIGHTED AVERAGE.............. 18 673,881 29.3 7,327 30.4 10.87
<CAPTION>
--------- --------- ------------ --------- --------- -------------
--------- --------- ------------ --------- --------- -------------
</TABLE>
- ------------------
(1) Total annualized contractual base rent for all leases in place at December
31, 1997. Amount excludes (i) future contractual rent escalations and cost
of living increases (ii) percentage rent and (iii) additional rent payable
by tenants such as common area maintenance, real estate taxes and other
expense reimbursements.
(2) Total annualized contractual base rent divided by total GLA leased at
December 31, 1997.
LEASE EXPIRATIONS
The following table sets forth all scheduled lease expirations for the
Properties beginning January 1, 1998, assuming that none of the tenants
exercises renewal options or termination rights:
<TABLE>
<CAPTION>
ANNUALIZED CONTRACTUAL
TOTAL BASE RENT AT 12/31/97(1)
GLA UNDER -------------------------------------
NUMBER EXPIRING % OF
LEASE EXPIRATION OF LEASES LEASES % OF TOTAL BASE RENT PORTFOLIO BASE RENT/
YEAR YEAR EXPIRING (SQ. FT.) EXPIRING GLA ($000) BASE RENT SQ. FT.(2)($)
- ----------------------- ---------------- --------- --------- ------------ --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1...................... 1998 45 122,975 5.3 1,599 6.7 13.00
2...................... 1999 29 113,431 4.9 1,626 6.8 14.33
3...................... 2000 31 156,330 6.8 1,747 7.3 11.17
4...................... 2001 40 374,792 16.3 3,752 15.6 10.01
5...................... 2002 39 505,393 22.0 2,491 10.4 4.93
6...................... 2003 12 53,271 2.3 702 2.9 13.08
7...................... 2004 9 57,997 2.5 623 2.6 10.74
8...................... 2005 12 133,076 5.8 1,485 6.2 11.16
9...................... 2006 12 70,132 3.1 1,155 4.8 16.47
10..................... 2007 8 57,823 2.5 794 3.3 13.73
11 and after........... 2008 and after 31 656,654 28.5 8,061 33.5 12.28
<CAPTION>
--------- --------- ------------ --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL/WEIGHTED AVERAGE.............. 268 2,302,324 100.0 24,035 100.0 10.44
<CAPTION>
--------- --------- ------------ --------- --------- -------------
--------- --------- ------------ --------- --------- -------------
</TABLE>
- ------------------------
(1) Total annualized contractual base rent for all leases in place at December
31, 1997. Amount excludes (i) future contractual rent escalations and cost
of living increases, (ii) percentage rent and (iii) additional rent payable
by tenants such as common area maintenance, real estate taxes and other
expense reimbursement.
(2) Total annualized contractual base rent divided by total GLA leased at
December 31, 1997.
47
<PAGE>
HISTORICAL LEASING ACTIVITY
The following table sets forth certain information concerning the Company's
leasing activities over the past three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
NEW LEASES
Number of leases signed................................................ 20 38 22
GLA leased (sq.ft.).................................................... 80,741 250,108 125,498
Base rent/square foot ($/sq.ft.)(1).................................... $ 13.67 $ 11.60 $ 12.76
Tenant improvements/square foot ($/sq.ft.)(2).......................... $ 2.67 $ 1.41 $ 0.24
Leasing commissions & costs/square foot ($/sq.ft.)(3).................. $ 1.93 $ 2.14 $ 2.83
Effective rent/square foot ($/sq.ft.)(4)............................... $ 12.97 $ 11.15 $ 12.39
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).......................... $ 0.00 $ 2.62 $ 0.00
Leasing commissions & costs/square foot ($/sq.ft.)(3).................. $ .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 50 25
GLA leased (sq.ft.).................................................... 91,104 273,488 133,384
Base rent/square foot ($/sq.ft.)(1).................................... $ 13.69 $ 11.88 $ 12.94
Tenant improvements/square foot ($/sq.ft.)(2).......................... $ 2.37 $ 1.51 $ 0.22
Leasing commissions & costs/square foot ($/sq.ft.)(3).................. $ 1.81 $ 1.98 $ 2.78
Effective rent/square foot ($/sq.ft.)(4)............................... $ 13.04 $ 11.44 $ 12.58
</TABLE>
- ------------------
(1) Initial 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.
TAX BASIS AND REAL ESTATE TAXES
The aggregate cost basis of depreciable real property for federal income
tax purposes in the Properties as of December 31, 1997 was approximately $74
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, 1997 was approximately
$4.7 million, or approximately $1.98 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.
CAPITAL EXPENDITURES
The following table sets forth information relating to historical capital
expenditures with respect to the Company's Properties:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Total capital expenditures.............................................. $ 703,000 $ 878,000 $ 211,000
Average number of square feet(1)........................................ 2,351,624 2,348,117 2,348,117
Capital expenditures per square foot.................................... $ 0.30 $ 0.37 $ 0.09
Three-year average capital expenditure per square foot.................. $ 0.25
</TABLE>
- ------------------
(1) Represents the average aggregate amount of square feet owned by the Company
during the year.
48
<PAGE>
MORTGAGE INDEBTEDNESS
Upon the consummation of the Offering, the Properties will be encumbered by
the following mortgage indebtedness:
<TABLE>
<CAPTION>
PRINCIPAL
BALANCE
OUTSTANDING FIXED
AT CONSUMMATION INTEREST
OF THE OFFERING($000)(1) RATE(%) MATURITY DATE
------------------------ --------- -------------
<S> <C> <C> <C>
Forest Avenue Shoppers Town................................... --
Meadowbrook Commons........................................... --
Merrick Commons............................................... 12,461(2) 7.31 1/19/03
Mill Basin Plaza.............................................. 13,194(2) 7.31 1/19/03
Branhaven Plaza............................................... --
Mall on the Mile.............................................. 24,901(3) 7.83 2/01/04
Palm Springs Village.......................................... 16,830(3) 7.83 2/01/04
The Shops on 49th Street...................................... --
Philips Plaza................................................. --
Elm Plaza..................................................... 3,391(4) 7.48 12/31/02
Millside Plaza................................................ 4,464(4) 7.48 12/31/02
Foxboro Plaza................................................. 4,274(4) 7.48 12/31/02
The Shoppes at Lake Mary...................................... --
<CAPTION>
------------------------ --------- -------------
<S> <C> <C> <C>
TOTAL/WEIGHTED AVERAGE.................................... 79,515(1) 7.61 5.25 years
<CAPTION>
------------------------ --------- -------------
------------------------ --------- -------------
</TABLE>
- ------------------
(1) The Company will repay an additional $20 million principal amount of
mortgage debt with net proceeds of the Offering.
(2) Represented by a single note secured by mortgages encumbering the Merrick
Commons and Mill Basin Plaza Properties, allocated above based upon the
respective release prices.
(3) The notes secured by these Properties are cross-defaulted and
cross-collateralized.
(4) The notes secured by these Properties are cross-defaulted and
cross-collateralized.
Aggregate future principal payments, by year, on the indebtedness to remain
outstanding upon completion of the Offering are as follows (in millions):
<TABLE>
<CAPTION>
SCHEDULED TOTAL
AMORTIZATION BALLOON SCHEDULED
YEAR PAYMENTS(2) PAYMENTS(2) PAYMENTS(2)
- -------------------------------------------------------------- ------------ ----------- ------------
<S> <C> <C> <C>
1998(1)....................................................... $ 0.6 $ -- $ 0.6
1999.......................................................... 1.1 -- 1.1
2000.......................................................... 1.1 -- 1.1
2001.......................................................... 1.2 -- 1.2
2002.......................................................... 1.3 11.6 12.9
2003.......................................................... 0.9 24.2 25.1
2004.......................................................... 0.1 37.4 37.5
<CAPTION>
------------ ----------- ------------
<S> <C> <C> <C>
Total......................................................... $ 6.3 $ 73.2 $ 79.5
<CAPTION>
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
- ------------------
(1) Represents payments from date of Offering through December 31, 1998.
(2) Does not reflect an additional $20 million to be repaid with net proceeds of
the Offering.
CREDIT FACILITY
The Company has entered into a commitment letter with PSCC, subject to
final documentation, for a $100 million senior revolving credit facility. The
Company anticipates the Credit Facility will be available upon the consummation
of the Offering to finance acquisition, redevelopment and development activities
and for general corporate purposes. Borrowings under the Credit Facility will
bear interest at rates ranging from 1.25% to 1.75% over LIBOR based on the level
of borrowings outstanding relative to collateral value. The availability of
funds under the Credit Facility will be subject to the Company's compliance with
a number of customary financial and other covenants. Borrowings under the Credit
Facility will be secured by substantially all of the Company's unencumbered
Properties with recourse to the Company and the Operating Partnership. The
Credit Facility matures in two years, subject to PSCC's right, upon 90 days
notice, to terminate the Credit Facility one year after the consummation of the
Offering.
49
<PAGE>
INSURANCE
The Company carries comprehensive liability, public area liability, boiler
and machinery, fire, flood, earthquake, extended coverage and rental loss
insurance covering the Properties, with policy specifications and insured limits
which the Company believes are adequate and appropriate under the circumstances.
There are, however, certain types of losses that are not generally insured
because it is not economically feasible to insure against such losses. Should an
uninsured loss or a loss in excess of insured limits occur, the Company could
lose its capital invested in the Property, as well as the anticipated future
revenue from the Property and, in the case of debt which is with recourse to the
Company, would remain obligated for any mortgage debt or other financial
obligations related to the Property. Any such loss would adversely affect the
Company. The Company believes that the Properties are adequately insured,
although no assurance can be given that material losses in excess of insurance
proceeds will not occur in the future.
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 of 1990, 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. These laws often impose liability without regard to whether
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. The costs of investigation, removal or
remediation of such substances may be substantial and the presence of such
substances may adversely affect the owner's or operator's ability to sell or
rent the 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
50
<PAGE>
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 to
shareholders.
Except as described in this 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 'Risk Factors--Real Estate Investment
Risks--Regulation,' 'Certain Provisions of Maryland Law and of the Company's
Charter and By-Laws,' 'Federal Income Tax Considerations' and 'ERISA
Considerations.'
EMPLOYEES
At April 1, 1998, the Company had 26 employees, 20 of whom are maintenance,
security and clerical personnel at the Properties located in Hialeah, Florida.
The Company believes that relations with its employees are good. None of the
employees are unionized.
LEGAL PROCEEDINGS
Except as set forth herein, none of the Company, the Operating Partnership,
any of their subsidiaries 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, subject to standard deductibles.
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 1980s and
earlier 1990s, substantially all of which proceedings have been resolved as of
the date of this 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 entities owning
the Company's Properties were involved in any such proceedings, other than the
partnership holding fee title to the Meadowbrook Commons Property. 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. The Loan will be repaid in full with the net
proceeds of the Offering.
51
<PAGE>
SIGNIFICANT PROPERTIES
Since the 1997 gross revenues for each of (i) the Company's four Properties
located in Hialeah, Florida, aggregated, (ii) Forest Avenue Shoppers Town, and
(iii) 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.
HIALEAH, FLORIDA PROPERTIES
The Hialeah, Florida Properties consist of four adjacent Properties, Mall
on the Mile, Palm Springs Village, The Shops on 49th Street, and Philips Plaza,
with an aggregate of 1.2 million square feet of GLA. Hialeah is situated in the
greater Miami metropolitan area, north of the Miami International Airport, west
of the municipalities of Miami, Miami Beach and Aventura, and south of Broward
County and Fort Lauderdale. The four Properties form a unique, one-mile retail
shopping corridor that fronts both sides of West 49th Street, locally known as
'Palm Springs Mile.' The collective 90 acres of the four Properties facilitate
the expansion or reconfiguration of existing space, which has been regularly
expanded by the Company since 1985. Management believes that this makes Palm
Springs Mile an attractive location for larger retailers, and considers it to
comprise one of the strongest retail districts in the greater Miami area.
The following table sets forth all scheduled lease expirations for Palm
Springs Mile beginning January 1, 1998, assuming that none of the tenants
exercises renewal options or termination rights:
<TABLE>
<CAPTION>
ANNUALIZED CONTRACTUAL
BASE RENT AT
12/31/97(1)
----------------------
% OF TOTAL % OF
NUMBER OF SQUARE FOOTAGE PROPERTY PROPERTY
LEASE LEASES UNDER EXPIRING BASE RENT BASE
YEAR EXPIRATION YEAR EXPIRING EXPIRING LEASES GLA ($000) RENT
- -------------------------- --------------- --------- ------------------ ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
1........................ 1998 28 76,761 6.9 1,013 9.6
2........................ 1999 14 75,221 6.8 843 8.0
3........................ 2000 14 97,339 8.8 676 6.4
4........................ 2001 21 105,784 9.5 1,382 13.1
5........................ 2002 19 230,852 20.8 1,123 10.6
6........................ 2003 8 40,388 3.6 509 4.8
7........................ 2004 6 43,143 3.9 511 4.8
8........................ 2005 8 84,783 7.7 757 7.2
9........................ 2006 3 33,415 3.0 517 4.9
10........................ 2007 1 5,100 0.5 82 0.8
11 and after.............. 2008 and after 16 314,963 28.4 3,141 29.8
<CAPTION>
--------- ------------------ ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
TOTAL/WEIGHTED AVERAGE.... 138 1,107,749 100.0 10,553 100.0
<CAPTION>
--------- ------------------ ----------- --------- --------
--------- ------------------ ----------- --------- --------
<CAPTION>
BASE RENT/
YEAR SQ. FT.(2)($)
- -------------------------- -------------
<S> <C>
1........................ 13.20
2........................ 11.21
3........................ 6.95
4........................ 13.06
5........................ 4.87
6........................ 12.59
7........................ 11.84
8........................ 8.93
9........................ 15.47
10........................ 16.00
11 and after.............. 9.97
-------------
<S> <C>
TOTAL/WEIGHTED AVERAGE.... 9.53
-------------
-------------
</TABLE>
- ------------------
(1) Total annualized contractual base rent for all leases in place at December
31, 1997. Amount excludes (i) future contractual rent escalations and cost
of living increases, (ii) percentage rent and (iii) additional rent payable
by tenants such as common area maintenance, real estate taxes and other
expense reimbursements.
(2) Total annualized contractual base rent divided by total GLA leased at
December 31, 1997.
The following table sets forth the percent leased and total annualized
contractual base rent per leased square foot for Palm Springs Mile as of the
dates indicated:
<TABLE>
<CAPTION>
TOTAL ANNUALIZED CONTRACTUAL BASE
DATE % LEASED RENT PER LEASED SQUARE FOOT($)(1)
- ------------------------------------ -------- -----------------------------------
<S> <C> <C>
December 31, 1997................... 94.1 9.53
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
</TABLE>
- ------------------
(1) Total annualized contractual base rent for all leases in place at December
31 for the respective years indicated, divided by total GLA leased at such
dates. Amount excludes (i) future contractual rent escalations and cost of
living increases, (ii) percentage rent and (iii) additional rent payable by
tenants such as common area maintenance, real estate taxes and other expense
reimbursements.
52
<PAGE>
The aggregate cost basis of depreciable real property for federal income
tax purposes for Palm Springs Mile at December 31, 1997 was approximately $27.0
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, 1997 was
approximately $1.7 million, or approximately $1.45 per square foot of GLA.
In connection with the Formation Transactions, one of the Company's lenders
did not consent to the transfer of interests in the partnerships which own The
Shops on 49th Street and Philips Plaza. If such transfers were determined to
violate the terms of the mortgage, the lender could be entitled to accelerate
the maturity date of the loan and commence foreclosure proceedings against the
mortgaged Properties. The lender has taken no action with respect to this
matter. This loan will be repaid in full with the net proceeds from the
Offering.
FOREST AVENUE SHOPPERS TOWN
Forest Avenue Shoppers Town is a grocery-anchored neighborhood shopping
center encompassing 177,002 square feet of GLA, 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.
The following table sets forth all scheduled lease expirations for Forest
Avenue Shoppers Town beginning January 1, 1998, assuming that none of the
tenants exercises renewal options or termination rights:
<TABLE>
<CAPTION>
ANNUALIZED CONTRACTUAL
BASE RENT AT
12/31/97(1)
----------------------
% OF TOTAL % OF
LEASE NUMBER OF SQUARE FOOTAGE PROPERTY PROPERTY
EXPIRATION LEASES UNDER EXPIRING BASE RENT BASE
YEAR YEAR EXPIRING EXPIRING LEASES GLA ($000) RENT
- -------------------------- --------------- --------- ------------------ ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
1........................ 1998 -- -- -- -- --
2........................ 1999 6 19,190 10.9 579 18.9
3........................ 2000 2 9,975 5.7 228 7.4
4........................ 2001 4 44,963 25.6 444 14.5
5........................ 2002 2 4,198 2.4 129 4.2
6........................ 2003 -- -- -- -- --
7........................ 2004 1 900 0.5 26 0.8
8........................ 2005 2 40,578 23.1 610 19.9
9........................ 2006 3 22,888 13.0 335 10.9
10........................ 2007 2 15,317 8.7 347 11.3
11 and after.............. 2008 and after 3 17,383 9.9 373 12.1
<CAPTION>
--------- ------------------ ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
TOTAL/WEIGHTED AVERAGE.... 25 175,392 100.0 3,071 100.0
<CAPTION>
--------- ------------------ ----------- --------- --------
--------- ------------------ ----------- --------- --------
<CAPTION>
BASE RENT/
YEAR SQ. FT.(2)($)
- -------------------------- -------------
<S> <C>
1........................ --
2........................ 30.18
3........................ 22.91
4........................ 9.88
5........................ 30.80
6........................ --
7........................ 28.64
8........................ 15.03
9........................ 14.62
10........................ 22.66
11 and after.............. 21.44
-------------
<S> <C>
TOTAL/WEIGHTED AVERAGE.... 17.51
-------------
-------------
</TABLE>
- ------------------
(1) Total annualized contractual base rent for all leases in place at December
31, 1997. Amount excludes (i) future contractual rent escalations and cost
of living increases, (ii) percentage rent and (iii) additional rent payable
by tenants such as common area maintenance, real estate taxes and other
expense reimbursements.
(2) Total annualized contractual base rent divided by total GLA leased at
December 31, 1997.
The following table sets forth the percent leased and total annualized
contractual base rent per leased square foot for Forest Avenue Shoppers Town as
of the dates indicated:
<TABLE>
<CAPTION>
TOTAL ANNUALIZED CONTRACTUAL BASE
DATE % LEASED RENT PER LEASED SQUARE FOOT($)(1)
- ---------------------------------- -------- ---------------------------------
<S> <C> <C>
December 31, 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
</TABLE>
- ------------------
(1) Total annualized contractual base rent for all leases in place at December
31 for the respective years indicated, divided by total GLA leased at such
dates. Amount excludes (1) future contractual rent escalations and cost of
living increases, (ii) percentage rent and (iii) additional rent payable by
tenants such as common area maintenance, real estate taxes and other expense
reimbursements.
53
<PAGE>
The aggregate cost basis of depreciable real property for federal income
tax purposes for Forest Avenue Shoppers Town at December 31, 1997 was
approximately $5.0 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 $4.47 per
square foot of GLA.
MEADOWBROOK COMMONS
Meadowbrook Commons is a grocery-anchored neighborhood shopping center,
encompassing 173,027 square feet of GLA, located in Nassau County, Long Island,
one of the most densely populated suburbs in the New York CMSA. The shopping
center is situated on Sunrise Highway, a major east-west thoroughfare along the
south shore of Long Island.
The following table sets forth all scheduled lease expirations for
Meadowbrook Commons beginning January 1, 1998, assuming that none of the tenants
exercises renewal options or termination rights:
<TABLE>
<CAPTION>
ANNUALIZED CONTRACTUAL
BASE RENT AT
12/31/97(1)
----------------------
% OF TOTAL % OF
LEASE NUMBER OF SQUARE FOOTAGE PROPERTY PROPERTY
EXPIRATION LEASES UNDER EXPIRING BASE RENT BASE
YEAR YEAR EXPIRING EXPIRING LEASES GLA ($000) RENT
- -------------------------- -------------------- --------- ------------------ ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
1........................ 1998 -- -- -- -- --
2........................ 1999 1 1,950 1.1 47 1.5
3........................ 2000 2 19,539 11.3 455 15.0
4........................ 2001 3 44,765 25.9 837 27.6
5........................ 2002 2 6,747 3.9 175 5.8
6........................ 2003 -- -- -- -- --
7........................ 2004 -- -- -- -- --
8........................ 2005 -- -- -- -- --
9........................ 2006 -- -- -- -- --
10........................ 2007 2 7,908 4.6 174 5.7
11 and after.............. 2008 and after 3 92,118 53.2 1,340 44.3
<CAPTION>
--------- ------------------ ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
TOTAL/WEIGHTED AVERAGE.... 13 173,027 100.0 3,028 100.0
<CAPTION>
--------- ------------------ ----------- --------- --------
--------- ------------------ ----------- --------- --------
<CAPTION>
BASE RENT/
YEAR SQ. FT.(2)($)
- -------------------------- -------------
<S> <C>
1........................ --
2........................ 24.00
3........................ 23.31
4........................ 18.69
5........................ 25.94
6........................ --
7........................ --
8........................ --
9........................ --
10........................ 21.95
11 and after.............. 14.56
-------------
<S> <C>
TOTAL/WEIGHTED AVERAGE.... 17.50
-------------
-------------
</TABLE>
- ------------------
(1) Total annualized contractual base rent for all leases in place at December
31, 1997. Amount excludes (i) future contractual rent escalations and cost
of living increases, (ii) percentage rent and (iii) additional rent payable
by tenants such as common area maintenance, real estate taxes and other
expense reimbursements.
(2) Total annualized contractual base rent divided by total GLA leased at
December 31, 1997.
The following table sets forth the percent leased and total annualized
contractual base rent per leased square foot for Meadowbrook Commons as of the
dates indicated:
<TABLE>
<CAPTION>
TOTAL ANNUALIZED CONTRACTUAL BASE
DATE % LEASED RENT PER LEASED SQUARE FOOT($)(1)
- ---------------------------------- -------- ---------------------------------
<S> <C> <C>
December 31, 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
</TABLE>
- ------------------
(1) Total annualized contractual base rent for all leases in place at December
31 for the respective years indicated, divided by total GLA leased at such
dates. Amount excludes (i) future contractual rent escalations and cost of
living increases, (ii) percentage rent and (iii) additional rent payable by
tenants such as common area maintenance, real estate taxes and other expense
reimbursements.
The aggregate cost basis of depreciable real property for federal income
tax purposes for Meadowbrook Commons at December 31, 1997 was approximately
$14.0 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,
1997 was approximately $0.8 million, or approximately $4.49 per square foot of
GLA.
54
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Company is comprised of seven directors, four
of whom are Independent Directors. 'Independent Director' means a director of
the Company who is not an employee or officer of the Company or an affiliate of
the Company, or a relative of a principal executive officer, and who is not an
individual member of an organization acting as an advisor, consultant or legal
counsel receiving compensation on a continuing basis from the Company in
addition to director's fees.
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 following table sets forth information regarding the Company's
directors, executive officers and key employees:
<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, N/A
Acquisitions Director and Treasurer
Andrew Aberham............................ 40 Leasing Director N/A
Robert Grimes............................. 53 Director 2001
Elise Jaffe............................... 42 Director 1999
Arnold S. Penner.......................... 61 Director 2001
A.F. Petrocelli........................... 54 Director 2000
</TABLE>
The following is a biographical summary of the experience of the directors
and executive officers of the Company:
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 real estate industry he is renowned as an
educator, author in the field of international relations and frequent
commentator for Fox 5 and CNBC. Mr. Pilevsky received a Bachelor of Arts degree
from C.W. Post College and a Masters Degree of Arts and a Masters Degree of
Education from Columbia University.
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, a public REIT, 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 industry. 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.
55
<PAGE>
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. Ms.
Levine oversees the daily 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 also responsible for overseeing property development, which entails setting
the management direction from pre-construction planning to the marketing and
leasing strategies. 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. Ms. Levine is the sister of Mr. Pilevsky.
Brian J. Gallagher. Mr. Gallagher is Chief Financial Officer and
Acquisitions Director of the Company, and served from March 1989 until December
31, 1997 as the Director of Finance of Philips International Holding Corp. 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 the Philips Group, 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 Leasing Director of the Company. Mr.
Aberham has been responsible for marketing, development and leasing of the
Philips Group retail portfolio since 1995, including leasing and negotiating
over 300 retail lease transactions. From 1986 to 1995, Mr. Aberham served as
leasing director for BLDG Management Co., Inc., 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.
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.
Elise Jaffe. Ms. Jaffe is a Director of the Company. Ms. Jaffe has served
since 1994 as Senior Vice President of Real Estate for Dress Barn, Inc. ('Dress
Barn'), a major women's apparel retailer owning approximately 725 stores within
the United States. She has been with Dress Barn for 16 years and serves on its
Executive Committee. Ms. Jaffe is on the Advisory Board of the International
Council of Shopping Centers/Value Retail News and is Vice President and the
Treasurer of the Paul Taylor Dance Foundation. Ms. Jaffe graduated magna cum
laude from Tufts University with a Bachelor of Arts in English and Psychology.
Arnold S.Penner. Mr. 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 parking facilities. Mr. Penner is a
Director of United Capital Corp. ('United Capital'), an American Stock
Exchange-listed company specializing in the investment and management of real
estate assets and the manufacturing and sale of antenna and transformer products
to a global customer base. Mr. Penner also is involved with several
philanthropic organizations devoted to children's education.
A.F. Petrocelli. Mr. Petrocelli is a Director of the Company. He has
served as Chairman of the Board and Chief Executive Officer of United Capital
since December 1987 and President since 1991. Mr. Petrocelli currently owns over
65% of United Capital and has been a Director of United Capital since 1981. Mr.
Petrocelli also serves on the Board of Directors of Prime Hospitality Corp., a
New York Stock Exchange listed company, Nathan's Famous Inc., Metex Corporation
and Boyar Value Fund, Inc.
56
<PAGE>
Directors are divided into three classes serving staggered three-year terms
with each of the directors serving 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.'
The executive officers are chosen by and serve at the discretion of the
Board of Directors. See '--Executive Compensation.'
COMPENSATION OF DIRECTORS
Each director who is not an executive officer of the Company is 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 has also received a grant of options to
purchase 10,000 shares of Common Stock at the public offering price under the
Stock Option Plan, which options vest in three equal installments on January 1,
1999, 2000 and 2001. See '--Stock Option Plan.' Executive officers of the
Company are not 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.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. The Board has established an Audit Committee that
consists of two Independent Directors and does not include any members of
management. The Audit Committee wasestablished 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 are
Mr. Petrocelli and Ms. Jaffe.
Compensation Committee. The Board has established a Compensation Committee
that consists of three members, including two Independent Directors. The
Compensation Committee determines compensation for the Company's executive
officers, in addition to administering the Stock Option Plan and making
recommendations to the directors with respect to the Company's compensation
policies. The Compensation Committee members are Ms. Levine and Messrs. Penner
and Grimes.
EXECUTIVE COMPENSATION
The following table sets forth the annual base salary rates and other
compensation expected to be paid in 1998 to the Chief Executive Officer and the
Company's other executive officers who are expected to have a total annual
compensation in excess of $100,000. The Company has entered into employment
agreements with certain 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................. Chairman of the Board and -- 240,000
Chief Executive Officer
Louis J. Petra.................. President $175,000 100,000
Sheila Levine................... Chief Operating Officer, $175,000 100,000
Executive Vice President and Secretary
Brian J. Gallagher.............. Chief Financial Officer, $150,000 25,000
Acquisitions Director and Treasurer
</TABLE>
- ------------------
(1) All options were granted pursuant to the Stock Option Plan and are
exercisable at the public offering price.
57
<PAGE>
EMPLOYMENT AGREEMENTS
The summaries of the following employment agreements are qualified in their
entirety by reference to the terms of the respective agreements, copies of which
have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. Copies of each of the employment agreements may be
examined, and copies obtained, as set forth under the caption 'Additional
Information.'
Louis J. Petra Employment Agreement. Mr. Petra entered 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. On January 1, 1998, Mr.
Petra received options to purchase 100,000 shares of Common Stock under the
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 the Offering, the
Company will lend on a non-recourse basis to Mr. Petra $1,000,000 (the 'Petra
Loan'), the proceeds of which will be used to simultaneously purchase newly
issued Common Stock at the public offering price. The Petra Loan will 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 Petra Loan, net of interest which accrues on the
outstanding balance of such loan at 6% per annum. Either party may terminate the
Petra Employment Agreement on or after December 31, 2000, in which event Mr.
Petra will receive his accrued but unpaid salary through his termination date,
the balance of his options will 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 Petra Loan will be forgiven and the
balance, if any, will be immediately payable. If the Company terminates Mr.
Petra's employment other than for cause, or if Mr. Petra terminates his
employment for good reason, in either case between June 1, 1998 and December 31,
2000, Mr. Petra will be entitled to continuation of his salary through December
31, 2000, a pro rata bonus payment and forgiveness of $500,000 of the Petra Loan
and the balance, if any, will be immediately payable. In addition, all options
and restricted share awards will vest and the non-competition provisions will no
longer apply. If Mr. Petra is employed on the date of a change in control, the
outstanding balance of the Petra Loan will be forgiven, all options and
restricted share awards will vest and the noncompetition provisions will 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 will also be
entitled to receive a pro rata bonus payment and continuation of his salary
through December 31, 2000. Mr. Petra is subject to a non-compete for a period of
one year following termination of his employment, except as described above.
Sheila Levine Employment Agreement. Ms. Levine entered 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 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, on January 1, 1998, the Company issued
options which entitle Ms. Levine to acquire 100,000 shares of Common Stock under
the Stock Option Plan, which options vest 33 1/3% on December 31 of each of
1998, 1999 and 2000. If the Company terminates Ms. Levine's employment other
than for cause, if Ms. Levine terminates her employment for good reason or if
there is a change in control, Ms. Levine will be entitled to her annual base
salary and bonus through the end of the contractual employment period. In
addition, in such event, all options and restricted share awards will vest. Ms.
Levine is subject to the Non-Competition Agreement. See 'Certain Relationships
and Related Transactions-- Non-Competition Agreement.'
Brian J. Gallagher Employment Agreement. Mr. Gallagher entered into an
employment agreement with the Company (the 'Gallagher Employment Agreement'),
effective as of consummation of the Formation Transactions, providing for, among
other things: (i) a three year term and an initial base salary of $150,000; (ii)
a minimum of 10% 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;
and (iii) the grant of options to acquire 25,000 shares of Common Stock under
the Stock Option Plan, which options vest 33 1/3% on December 31 of each of
1998, 1999 and 2000. In addition, upon consummation of the Offering, the Company
will lend on a non-recourse basis to
58
<PAGE>
Mr. Gallagher $50,000, the proceeds of which will be used to simultaneously
purchase newly issued Common Stock at the public offering price.
Each of the employment agreements is 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.
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 18,176 shares of Common Stock and 962,324
Units representing in the aggregate approximately 16.9% of the outstanding
shares of Common Stock (or interests redeemable therefor) after giving effect to
the Offering, and options to purchase 240,000 shares of Common Stock which vest
over a three-year period. In addition, Mr. Pilevsky has agreed to conduct all of
his future retail shopping center activities through the Company, subject to
certain exceptions. See 'Certain Relationships and Related
Transactions--Non-Competition Agreement.'
STOCK OPTION PLAN
Effective upon consummation of the Formation Transactions, the Company
adopted the Stock Option Plan for the purpose of attracting, retaining and
maximizing the performance of executive officers, key employees and directors,
providing a direct link between the compensation of such individuals and
increases in shareholder value. A total of 852,550 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 Code, non-qualified 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-qualified 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 vest ratably over a five-year period,
unless otherwise provided in an agreement with an optionee. Exercisable options
terminate three months after the optionee's termination of employment by the
Company for any reason other than death, disability or retirement unless
otherwise provided in an agreement with an optionee; non-exercisable options
expire on the date employment terminates. If the optionee's employment
terminates because of death, disability or retirement, then exercisable options
shall remain exercisable for the remainder of their term unless otherwise
provided in an agreement with an optionee. Options are subject to certain
restrictions on transfer.
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.
59
<PAGE>
Effective January 1, 1998, the Board of Directors granted options, each
with a ten-year term, to purchase up to 654,000 shares of Common Stock at the
public offering price to the following directors, executive officers and
employees of the Company and certain senior employees of the Management Company.
The number of options granted and exercise prices of all outstanding options
reflect adjustments made in connection with the Offering.
<TABLE>
<CAPTION>
NAME OPTIONS GRANTED
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Philip Pilevsky.............................................................. 240,000(1)
Louis J. Petra............................................................... 100,000(2)
Sheila Levine................................................................ 100,000(3)
Brian J. Gallagher........................................................... 25,000(3)
Andrew Aberham............................................................... 5,000(1)
A.F. Petrocelli.............................................................. 10,000(1)
Elise Jaffe.................................................................. 10,000(1)
Robert Grimes................................................................ 10,000(1)
Arnold S. Penner............................................................. 10,000(1)
Management Company employees................................................. 136,000(1)(4)
Other employees.............................................................. 8,000(1)
---------------
Total........................................................................ 654,000
---------------
---------------
</TABLE>
- ------------------
(1) Options will vest 33 1/3% on each of the first, second and third
anniversaries of the date of grant.
(2) Options will vest 25% on December 31 of each of 1999, 2000, 2001 and 2002.
(3) Options will vest 33 1/3% on December 31 of each of 1998, 1999 and 2000.
(4) Options granted to certain senior employees of the Management Company whom
the Company anticipates will become employees of the Company upon the
integration of property management services.
The Stock Option Plan also provides for restricted stock awards which
consist of grants of shares of Common Stock subject to a 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.
401(K) PLAN
Effective upon consummation of the Formation Transactions, the Company
established a 401(k) Savings and Retirement Plan (the '401(k) Plan') to cover
eligible employees of the Company and any designated affiliates.
The 401(k) Plan permits eligible employees of the Company (and any
designated affiliate) to defer up to 15% of their annual compensation, subject
to certain limitations imposed by the Code. The employees' elective deferrals
are immediately fully vested and non-forfeitable upon contribution to the 401(k)
Plan. The Company 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, will not be taxable to employees until withdrawn from the 401(k)
Plan, and so that contributions by the Company, if any, will be deductible by
the Company when made.
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 By-Laws.'
60
<PAGE>
FORMATION TRANSACTIONS AND STRUCTURE OF THE COMPANY
FORMATION TRANSACTIONS
The Company, the Operating Partnership, the other formation entities and
their partners or members consummated the Formation Transactions on December 31,
1997 to enable the Company to continue and expand the shopping center business
of the Philips Group, 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 Properties and to insulate each Property from the
liabilities of the other Properties. The Formation Transactions are as follows:
(i) Pursuant to the Contribution and Exchange Agreement dated as of
August 11, 1997, among the Company, the Operating Partnership, National
Properties Investment Trust ('National'), and the other parties named
therein, as amended by Amendment No. 1, dated as of December 29, 1997 (the
'Contribution and Exchange Agreement'):
(a) the contributing parties contributed either fee title, together
with any existing indebtedness relating thereto, to the Operating
Partnership's designee, a newly formed limited partnership (in which the
Company owns indirectly a 0.01% general partnership interest through
wholly-owned subsidiaries of the Company (the 'Philips Subs')) or all of
their partnership interests or membership interests in the entities
holding fee title to the Properties in exchange for Units;
(b) any cash collateral posted by a contributing party as security
for indebtedness assumed by the Operating Partnership in connection with
the Formation Transactions was contributed to the Operating Partnership
or its designated affiliates and remained as cash collateral for such
indebtedness and the relevant contributing parties were credited (in the
form of additional Units) for such contribution;
(c) The Company purchased The Shoppes at Lake Mary Property from
National (the 'National Property') in exchange for 54,563 shares of
Common Stock and the assumption of approximately $547,000 of debt;
(d) National dividended approximately 40,922 of such shares of
Common Stock to its shareholders on a pro rata basis and retained
approximately 13,641 shares of Common Stock for working capital
purposes; and
(e) Certain trustees of National (the 'Trustees') received 8,526
shares of Common Stock (the 'Trustees Stock' and together with the
Warrants, the 'Trustees Securities') and Warrants to purchase 13,641
shares of Common Stock 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 related
agreements;
(ii) Mr. Pilevsky purchased 18,176 shares of Common Stock for a total
purchase price of $533,000;
(iii) Ms. Levine, as Chief Operating Officer and Executive Vice
President, and Messrs. Petra and Gallagher, as President and Chief
Financial Officer, respectively, each entered into an employment agreement
with the Company;
(iv) The Company contributed 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 3.2% non-managing general partnership interest therein;
(v) Philips International Realty, LLC, a Delaware limited liability
company whose sole member is Mr. Pilevsky (the 'Interim Managing General
Partner'), made a pro rata contribution to the Operating Partnership and to
each of the Property Partnerships in exchange for its 0.001% managing
general partnership interest therein or managing member interest therein;
(vi) The Company made capital contributions upon the consummation of
the Formation Transactions to the Philips Subs to enable them to be 0.01%
owners of the Property Partnerships, as general partner or managing member;
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(vii) In order to permit the Unitholders to defer the recognition of
gain for federal income tax purposes, the Unitholders either (A) entered
into an agreement with the Operating Partnership whereby such Unitholder
agreed to restore any deficit in such Unitholder's capital account for
federal income tax purposes upon a liquidation of the Operating Partnership
or the liquidation of such Unitholder's interest in the Operating
Partnership, or (B) executed a guarantee of 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;
(viii) The Company and the Operating Partnership entered into the
Management Agreement with the Management Company; and
(ix) Mr. Pilevsky, Ms. Levine and the Management Company entered into
the Non-Competition Agreement with the Company.
On April 14, 1998, the Company authorized a 1.7051 for 1 split of its
Common Stock to be effected immediately prior to the consummation of the
Offering. As a result, the number of outstanding shares of Common Stock will
increase to 81,265, the number of outstanding Units will increase to 2,472,395,
the number of outstanding stock options (none of which are currently vested)
will increase to 654,000 and the number of shares of Common Stock subject to
outstanding Warrants will increase to 13,641.
Upon consummation of the Offering, the Interim Managing General Partner
will be deemed to have withdrawn from the Operating Partnership and each of the
Property Partnerships 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.
In connection with the Formation Transactions, Mr. Pilevsky and Ms. Levine
have made certain representations and warranties in favor of the Company
concerning the Properties and have agreed to indemnify the Company against
breaches of such representations and warranties with respect to claims made on
or before the first anniversary of the consummation of the Offering. The
indemnification obligations of Mr. Pilevsky and Ms. Levine will be subject to a
maximum liability equal to 1,236,198 Units received by them in the Formation
Transactions, which constitute approximately 50% of the total Units issued to
all parties in connection with the Formation Transactions.
BENEFITS OF THE FORMATION TRANSACTIONS TO CERTAIN PARTIES
Mr. Pilevsky and Ms. Levine proposed the Formation Transactions and the
Offering to the Philips Group based on their belief that the benefits of the
organization of the Company for the Philips Group outweighed the detriments.
Such benefits include:
o improved liquidity of their interests in the Properties and
increased diversification of investment with deferral of the tax
consequences of the contribution of their interests in the
Properties to the Operating Partnership;
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 Mr. Pilevsky and Ms. Levine 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 provides a fee to the Management
Company, owned by Mr. Pilevsky and Ms. Levine, in connection with
management of the Properties. In addition, certain senior employees
of the Management Company, whom the Company currently anticipates
will become employees of the Company upon the integration of the
services provided by the Management Company, received options to
purchase Common Stock.
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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 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 and its shareholders. 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 and community retail
properties in major metropolitan and suburban areas. In connection with future
acquisitions, the Company will analyze various factors, including the location
of the property, its redevelopment potential, occupancy levels and the tenant
roster, quality of construction and other factors that affect the long-term
value and potential of the property.
DISPOSITIONS
The Company has no current intention to dispose of any of the Properties,
although it reserves the right to do so if, based upon its periodic review of
the Company's portfolio, the Board of Directors 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, the Company may also invest in
securities of entities engaged in real estate activities or securities of other
issuers. See 'Federal Income Tax Considerations.' The Company may also invest in
the securities of other issuers in connection with acquisitions of indirect
interest in properties (normally general or limited 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
Upon the consummation of the Offering, the Company will have a ratio of
debt to total market capitalization of approximately 23.3% (21.5% if the
Underwriters' over-allotment option is exercised in full). See 'Capitalization'
and the Company's Pro Forma Condensed Financial Statements elsewhere in this
Prospectus.
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The Company presently intends to maintain a ratio of debt to total market
capitalization of not more than 50% after completion of the 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 ratio of debt to total
market capitalization beyond the limits described above. See 'Risk Factors--
Real Estate Financing Risks--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
operations, 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 access a number of capital sources to fund its
future acquisition, development and expansion programs. These capital sources
may include undistributed cash flow, borrowings under the Credit Facility,
proceeds from bank and/or institutional long-term mortgage financing,
construction financing to facilitate development activities, as well as proceeds
from the issuance of other equity or 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.
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 shareholder'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 maintain working capital reserves in amounts that the
Board of Directors determines from time to time 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 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.
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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. Any transaction between the Company and the Philips Group
must be approved by a majority of the Independent Directors. In addition, the
Company has adopted a policy prohibiting any loans from the Company to the
Philips Group. 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 of the
holders of the Common Stock, determines to revoke the Company's REIT election.
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 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 Prospectus is
a part. A copy of the Partnership Agreement may be examined, and copies
obtained, as set forth under the caption 'Additional Information.'
MANAGEMENT
The Operating Partnership has been organized as a Delaware limited
partnership pursuant to the terms of the Partnership Agreement. Generally, upon
consummation of the Offering, the Company, as the general partner of the
Operating Partnership, will have full and exclusive responsibility and
discretion in the management and control of the Operating Partnership. The
Unitholders, as limited partners of the Operating Partnership, 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
December 31, 1998 (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 (as defined herein); (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 consummation of the Offering, the Company will own
approximately a 74.8% partnership interest in the Operating Partnership.
Until consummation of the Offering, the Interim Managing General Partner
shall have full, exclusive and complete responsibility and discretion in the
management and control of the Operating Partnership. The sole manager and member
of the Interim Managing General Partner is Mr. Pilevsky. Upon consummation of
the 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.
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RIGHTS OF THE LIMITED PARTNERS
In addition to the rights accorded the limited partners discussed under
'--Management', '--Transferability of Interests' and '--Termination
Transactions,' 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 December 31,
1998 (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.
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 under '--Termination
Transactions.' Pursuant to the Partnership Agreement, the Unitholders 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 of the Unitholders 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.
TERMINATION TRANSACTIONS
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
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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.
A '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.
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.
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 Capital Stock and contribute the net amount of cash so raised as
an additional capital contribution to the Operating Partnership. If the Company
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. Limited partners have no preemptive right
to make additional capital contributions. 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 partnership interests in the
Operating Partnership.
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).
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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
Units are redeemable, subject to certain lock-up agreements, beginning on
December 31, 1998 (the first anniversary of the consummation of the Formation
Transactions), at the holder's request; such Units will be redeemed, at the
Company's option and in its sole discretion, either for shares of Common Stock
on a one-for-one basis (subject to certain anti-dilution adjustments and
exceptions) and/or cash (based on the fair market value of an equivalent number
of shares of Common Stock at the time of redemption), provided that the Company
may not pay for such redemption with shares of Common Stock to the extent that
it would result in a Unitholder beneficially or constructively owning shares of
Common Stock in excess of the Ownership Limit or Mr. Pilevsky beneficially or
constructively owning shares of Common Stock in excess of the Philips Ownership
Limit. See 'Description of Capital Stock--Restrictions on Ownership and
Transfer.'
REGISTRATION RIGHTS
For a description of certain registration rights held by the Unitholders,
see 'Shares Eligible for Future Sale--Registration Rights.'
TAX MATTERS
Pursuant to the Partnership Agreement, 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. 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 Treasury
Regulations.
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 generally 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 unless sooner dissolved pursuant to the terms of the Partnership
Agreement.
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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.'
The summaries of the following agreements are qualified in their entirety
by reference to the terms of the respective agreements, copies of which have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part. Copies of these agreements may be examined, and copies obtained, as set
forth under the caption 'Additional Information.'
MANAGEMENT AGREEMENT
Pursuant to the Management Agreement, under the direction of the executive
officers, the Management Company provides property management and leasing
services for the Properties, including, among other things, (i) operating,
leasing and maintaining the Properties; (ii) the collection of rents; and (iii)
overseeing the construction of improvements and additions to the Properties. The
Management Company receives a management fee from the Company equal to 3% of
gross rental collections received from the Properties, leasing commissions (not
to exceed local current market rates) and a construction supervisory fee (up to
10% of the cost of a project) with regard to tenant improvements and
construction matters relating to the Properties. In addition, the Management
Company is reimbursed for out-of-pocket expenses.
The Management Agreement has an initial term of three years, commencing
December 31, 1997, subject to automatic one-year renewals. The Management
Agreement may be terminated by the Company, at any time, (i) in whole or in
part, upon thirty days' written notice, in the event that the Company elects to
perform one or more of such management functions on an 'in-house' basis (with a
commensurate reduction in fees), and (ii) in whole, immediately, upon the
occurrence of certain other events, including upon the gross negligence or
willful misconduct of the Management Company, or if all or substantially all of
the Properties are sold.
This agreement enables the Company to utilize the Philips Group's
infrastructure on a cost-effective basis. Going forward, the Company is
committed to internalize property management functions as its portfolio grows.
Based on the Company's current business plan, the Company expects to become a
fully integrated, self-managed operation within 24 months following the
consummation of the Offering. The Management Company is owned and controlled by
Mr. Pilevsky and Ms. Levine who have agreed not to receive any remuneration or
consideration of any kind in connection with the Company's integration of
property management services.
The Company has granted options under the Stock Option Plan to certain
senior employees of the Management Company who are actively involved in the
management of the Properties and whom the Company anticipates will join the
Company upon integration of the property management services.
EXCLUDED PROPERTIES
Mr. Pilevsky and Ms. Levine have economic interests in certain retail
properties which were not transferred to the Company in the Formation
Transactions (the 'Excluded Properties'). The Excluded Properties were not
included in the Company's portfolio either because of the inability to obtain
necessary partnership and lender consents or the asset profile being
inconsistent with the Company's criteria. The Excluded Properties consist of 17
properties aggregating approximately 2.4 million square feet of GLA located
outside the Company's existing markets and 21 properties aggregating
approximately 1.9 million square feet of GLA and two development sites located
within the Company's existing markets (in each case excluding non-retail
properties and retail properties with less than 10,000 leasable square feet).
The Company believes that only two Excluded Properties, located in Uniondale and
Massapequa, New York, are potentially competitive with two Properties
(specifically, with Merrick Commons and Meadowbrook Commons, respectively).
These properties were not included in the Company's portfolio because
partnership consents could not be obtained. Fourteen of the Excluded Properties
are managed by the Management Company.
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Mr. Pilevsky, Ms. Levine and the Management Company will conduct all their
future retail shopping center activities in accordance with the Non-Competition
Agreement. In addition, Mr. Pilevsky has granted the Company a right of first
refusal on the sale or transfer by Mr. Pilevsky of his partnership interest in
any of the Excluded Properties, except for a transfer of Mr. Pilevsky's interest
to an existing partner of such property or a family member, or a sale of the
entire property, in which case Mr. Pilevsky will use reasonable efforts to cause
such property to be offered to the Company.
NON-COMPETITION AGREEMENT
Mr. Pilevsky, Ms. Levine and the Management Company have agreed pursuant to
the Non-Competition Agreement to conduct all their future retail shopping center
activities through the Company, except for their activities with respect to the
Excluded Properties and retail properties under 10,000 square feet. The Non-
Competition Agreement is in effect until such time as (i) neither Mr. Pilevsky
nor Ms. Levine owns beneficially more than 15% of the outstanding shares of
Common Stock (including interests redeemable therefor) and (ii) one year has
lapsed since the Management Agreement has been terminated and neither Mr.
Pilevsky nor Ms. Levine is a director or executive officer of the Company. In
addition, in the event that at any time after December 31, 2002, Ms. Levine is
neither a director or executive officer of the Company for at least one year,
nor owns beneficially more than five percent of the outstanding shares of Common
Stock (including interests redeemable therefor), then the Non-Competition
Agreement will terminate as to Ms. Levine.
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. 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 Unitholders,
see 'Shares Eligible for Future Sale--Registration Rights.'
PARTNERSHIP AGREEMENT
Concurrently with the consummation of the Formation Transactions, the
Company entered into the Partnership Agreement with the various limited partners
of the Operating Partnership. The Interim Managing General Partner, solely owned
by Mr. Pilevsky, is the managing general partner of the Operating Partnership
and each Property Partnership until the consummation of the Offering. 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.
MISCELLANEOUS
Jeffrey Levine, the husband of Ms. Levine, is a partner at the accounting
firm of Chassin Levine Rosen & Company, LLP which firm has in the past provided
accounting and consulting services with respect to the entities owning certain
of the Properties and is likely to provide similar services to the Company and
the Management Company in the future. During the 12-month period ended December
31, 1997, the entities owning the Properties paid an aggregate of approximately
$270,000 in fees to Chassin Levine Rosen & Company, LLP.
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, 1997, Dress Barn, Inc. paid an aggregate of approximately
$379,000 in rent under leases for certain of the Properties.
Upon consummation of the Offering, pursuant to the Petra Employment
Agreement and Gallagher Employment Agreement, the Company will lend on a
non-recourse basis to Messrs. Petra and Gallagher $1,000,000 and $50,000,
respectively, the proceeds of which will be used to simultaneously purchase
newly
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issued Common Stock at the public offering price. These loans will be forgiven
in equal installments pursuant to the terms of the respective employment
agreements. See 'Management--Employment Agreements--Louis J. Petra Employment
Agreement' and '--Brian J. Gallagher Employment Agreement.'
Mr. Pilevsky pledged cash collateral and Units to secure certain interim
financing in connection with the Formation Transactions. Such collateral will be
released upon the consummation of the Offering and the repayment of the related
indebtedness from the net proceeds of the Offering.
BENEFITS OF THE FORMATION TRANSACTIONS TO CERTAIN EXECUTIVE OFFICERS AND THE
PHILIPS GROUP
In connection with the Formation Transactions, Mr. Pilevsky received Units
and Ms. Levine received Units and certain benefits under her employment
agreement with the Company. In addition, Mr. Pilevsky and Ms. Levine received
options under the Stock Option Plan and other members of the Philips Group
received benefits in connection with the Formation Transactions. See 'Formation
Transactions and the Structure of the Company-- Benefits of the Formation
Transactions to Certain Parties.'
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information at April 1, 1998, giving
effect to the Offering, regarding the beneficial ownership of shares of Common
Stock (including Common Stock that may be issued upon redemption of Units on an
as redeemed basis) 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. 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. The address of each
person named below is the Company's principal executive office.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE OF PERCENTAGE OF
BENEFICIALLY ALL COMMON ALL COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) STOCK(2) AND UNITS(1)(3)
- ----------------------------------------------------------------- ------------ ------------- ----------------
<S> <C> <C> <C>
Philip Pilevsky.................................................. 1,659,035(4) 18.5% 16.9%
Louis J. Petra................................................... 50,000 0.7 0.5
Sheila Levine.................................................... 195,551(5) 2.6 2.0
Brian J. Gallagher............................................... 2,500 -- --
Robert Grimes.................................................... -- -- --
Elise Jaffe...................................................... -- -- --
Arnold S. Penner................................................. -- -- --
A.F. Petrocelli.................................................. -- -- --
All directors and executive officers as a group (9 persons)...... 1,907,086 20.8% 19.4%
</TABLE>
- ------------------
(1) Excludes options under the Stock Option Plan to purchase up to 654,000
shares of Common Stock granted to executive officers, directors and
employees of the Company and certain senior employees of the Management
Company.
(2) Assumes that all Units beneficially held by the identified person (and no
other person) are redeemed for Common Stock, and the Warrants are all
exercised for Common Stock.
(3) Assumes that all outstanding Units are redeemed for Common Stock (although
such Units are not redeemable until December 31, 1998), and the Warrants are
all exercised for Common Stock.
(4) Represents 18,176 shares of Common Stock and 1,640,859 Units.
(5) Represents 195,551 Units.
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DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the Company's Capital Stock does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Company's Charter and By-laws, copies of which are filed as
exhibits to the Registration Statement of which this Prospectus is a part. See
'Additional Information.'
GENERAL
The authorized Capital Stock of the Company consists of 150,000,000 shares
of Common Stock and 30,000,000 shares of preferred stock, par value $.01 per
share ('Preferred Stock') of which 1,940 shares have been classified as Series A
Preferred Stock. A 1.7051 for 1 Common Stock split will be effective immediately
prior to consummation of the Offering. Upon consummation of the Offering,
7,333,765 shares of Common Stock will be issued and outstanding and no shares of
Preferred Stock will be issued and outstanding.
COMMON STOCK
Each outstanding share of Common Stock will entitle the holder to one vote
on all matters presented to shareholders for a vote, subject to the provisions
of the Charter regarding the ownership of shares of Common Stock in excess of
the Ownership Limit 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
Offering will be duly authorized, fully paid and nonassessable. Distributions
may be paid to the holders 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 as general partner of the Operating Partnership.
PREFERRED STOCK
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 Prospectus are qualified in their entirety by reference to the Articles
Supplementary of the Series A Preferred Stock (the 'Articles Supplementary'), a
copy of the form of which is filed as an exhibit to the Registration Statement
of which this Prospectus is a part. A copy of the Articles Supplementary may be
examined, and copies obtained, as set forth under the caption 'Additional
Information.'
In connection with the Formation Transactions, a series of 1,940 shares of
convertible redeemable Series A Preferred Stock of the Company was created and
issued to Prudential Securities Incorporated, 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. The 1,940 shares of Series A
Preferred Stock is convertible into 66,158 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 on the Series A Preferred Stock.
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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 with
proceeds of at least $25 million (which includes this 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
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. Any such
alteration or change in the rights or preferences of the Series A Preferred
Stock would necessitate an amendment to the Charter of the Company, which
requires approval by the shareholders of the Company by the affirmative vote of
a majority of all votes entitled to be cast on the matter.
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.
As long as any shares of the Series A Preferred Stock are outstanding, 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.
Upon consummation of the Offering, the Company will redeem the Series A
Preferred Stock, for $1.94 million in cash plus accrued and unpaid dividends,
from the net proceeds of the Offering.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
Ownership Limits. The 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 for which an
election to be treated as a REIT has been made) 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 Charter contains restrictions on the acquisition of
Capital Stock intended to ensure compliance with these requirements.
The Charter, subject to certain exceptions, provides that no holder may own
or 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. As permitted by
the Charter, the Board of Directors has by resolution set the Ownership Limit at
8% (by number of shares or value, whichever is more restrictive) of the issued
and outstanding shares of Capital Stock, effective upon consummation of the
Offering. The Board of Directors may
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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 Capital 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 from the Ownership Limit.
Mr. Pilevsky may acquire additional shares of Capital Stock through the
redemption of Units, through the Stock Option Plan, from other shareholders or
otherwise, but in no event will he be permitted to acquire additional shares,
either actually or constructively, in excess of 17.5% 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), 170(c)(2) and 501(c)(3) of the Code (the
'Charitable Beneficiary') selected by the Company. 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 for distribution to the Charitable
Beneficiary. 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. However, if the Company has already taken irreversible corporate
action, then the trustee shall not have the authority to rescind and recast such
vote. Within 20 days of receiving notice from the Company of the transfer of
Capital Stock to the trust, the trustee of the trust will be required to sell
the Excess Stock to a person or entity 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 owed 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
transfer of the Excess Stock will be void. If any purported transfer of shares
of Capital Stock would cause the Company to be beneficially owned by fewer than
100 persons, such transfer will be null and void in its entirety and the
intended transferee will acquire no rights to the stock.
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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. Upon such a sale to the Company, the
interest of the Charitable Beneficiary in the shares sold shall terminate and
the trustee shall distribute the net proceeds of the sale to the original
transferee-shareholder. 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 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 transaction or a change in control of the Company that might
involve a premium price for the Capital Stock or otherwise be in the best
interest of the shareholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be BankBoston,
N.A.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S CHARTER AND BY-LAWS
The following paragraphs summarize certain provisions of 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 Prospectus is a part. See 'Additional
Information.'
BOARD OF DIRECTORS
The 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 Board of Directors is divided into
three classes. One class holds office initially for a term expiring at the
annual meeting of shareholders to be held in 1999, another class holds office
initially for a term expiring at the annual meeting of shareholders to be held
in 2000, and a third class holds 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 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 from removing incumbent directors except upon a
substantial affirmative vote and from 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, directly or indirectly, 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 (an 'Interested Shareholder') or an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Shareholder became an Interested Shareholder. Thereafter, any such business
combination must be recommended by the Board of Directors and approved by the
affirmative vote of at 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 Shareholder 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 Shareholder for its
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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 Shareholder becomes an Interested Shareholder. The
Company has, by resolution of the Board of Directors, opted out of the business
combination provisions of the MGCL. Such resolutions may not be revoked by the
Board of Directors without the approval of the holders of a majority of the
outstanding shares of Common Stock. As a result of the Company's decision to opt
out of the business combination provisions of the MGCL, a 'business combination'
between the Company and an Interested Shareholder or an affiliate thereof may be
effected without complying with the requirements set forth above.
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
December 31, 1998 (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 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
shareholder 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, and certain limitations and restrictions otherwise applicable
to the exercise of dissenters' rights do not apply in the context of a 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 Charter or By-Laws
prior to the acquisition of such shares. 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 of incorporation or merge, unless approved by the affirmative vote of
shareholders holding at least two-thirds of the shares of Capital Stock 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 the Charter 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
(i) pursuant to the Company's notice of the meeting, (ii) by or at the direction
of the Board of Directors or (iii) 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 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 provides that the Company shall have the power
to obligate itself 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 (i) 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
(ii) a judgment or other final adjudication adverse to such person is entered in
a proceeding based on a finding that the person's
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action, or failure to act, was committed in bad faith or was the result of
active and deliberate dishonesty and was material to the cause of action
adjudicated in the proceeding, or (iii) in the case of any criminal proceeding,
the director had reasonable cause to believe that the act or failure to act was
unlawful. The Charter contains a provision consistent with the MGCL. No
amendment of the 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 the Company and its shareholders is limited under the Charter. See
'Partnership Agreement of Operating Partnership--Indemnification and Fiduciary
Standards.'
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 ELIGIBLE FOR FUTURE SALE
GENERAL
Upon the consummation of the Offering, the Company will have outstanding
7,333,765 shares of Common Stock (8,413,765 shares if the Underwriters'
over-allotment option is exercised in full). In addition, 3,140,036 shares of
Common Stock are reserved for issuance upon redemption of Units or exercise of
Warrants and outstanding options. The shares of Common Stock issued in the
Offering will be freely tradeable by persons other than 'affiliates' of the
Company without restriction under the Securities Act, subject to the limitations
on ownership set forth in the Charter. See 'Description of Capital
Stock--Restrictions on Ownership and Transfer.'
In connection with the Formation Transactions, the Company issued: (i)
18,176 shares of Common Stock to Mr. Pilevsky; (ii) 2,472,395 Units to the
Unitholders, including an aggregate of 1,640,859 Units to Mr. Pilevsky; and
(iii) to the Trustees, an aggregate of 8,526 shares of Common Stock and the
Warrants, which are immediately exercisable, entitling them to purchase an
aggregate of 13,641 shares of Common Stock. In addition, upon consummation of
the Offering, 52,500 shares of Common Stock, which are restricted under the
Securities Act, will be issued to two executive officers of the Company. See
'Formation Transactions and Structure of the Company' and 'Principal
Shareholders.'
The Common Stock issued to the executive officers and the Trustees, the
Units, the Warrants, and the shares issuable upon redemption of the Units or
exercise of the Warrants or outstanding options (collectively, the 'Restricted
Shares'), are or when issued will be 'restricted securities' within the meaning
of Rule 144 promulgated under the Securities Act ('Rule 144') and may not be
transferred unless registered under the Securities Act unless an exemption from
registration is available, including any exemption from registration provided
under Rule 144. As described 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 securities (including
the 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 73,338 shares upon consummation of the Offering) 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
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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, the Operating Partnership, and Philip Pilevsky and the other
executive officers and directors of the Company have agreed not to, directly or
indirectly, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of any option to purchase or other sale or disposition) of any shares of
Common Stock or other Capital Stock of the Company or Units or other partnership
interests of the Operating Partnership, or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock or other Capital Stock
of the Company or Units or other partnership interests of the Operating
Partnership, for a period of 180 days (one year in the case of the executive
officers and directors) after the consummation of the Offering, except, in the
case of the Company and the Operating Partnership: (i) pursuant to a dividend
reinvestment plan of the Company; (ii) pursuant to the Stock Option Plan; and
(iii) in connection with the acquisition by the Company of real property or
interests in entities holding real property, provided that the recipient or
transferee of such securities or interests agrees in writing to be subject to
the lock-up provisions contained in this paragraph for a period ending on the
date that is 180 days after the date of the Offering. See 'Underwriting.'
Prudential Securities Incorporated may, in its sole discretion, at any time and
without prior notice, release all or any portion of the shares of Common Stock
or other securities subject to such lock-up agreements.
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 issued options to purchase up to
654,000 shares of Common Stock to directors, executive officers and certain key
employees of the Company and certain senior employees of the Management Company
upon consummation of the Formation Transactions, and has reserved 198,550
additional shares for future issuance under the Stock Option Plan. Prior to
December 31, 1998 (the expiration of the initial 12-month period following
consummation of the Formation Transactions), the Company expects to file a
registration statement with the 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.
Prior to the Offering, there has been no active public market for the
Common Stock. The shares of Common Stock offered hereby have been approved for
listing on the NYSE, subject to official notice of issuance. No prediction can
be made as to the effect, if any, that future sales of Common Stock (including
sales pursuant to Rule 144) or the availability of Common Stock for future sale
or the redemption of Units or exercise of Warrants or stock options will have on
the market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock, the redemption of Units or exercise of
Warrants or stock options or the perception that such sales, redemptions or
exercise of Warrants or stock options 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 Active Public Market for Common Stock; Market Price of
Common Stock' and '--Shares Eligible for Future Sale.' For a description of
certain restrictions on transfers of Common Stock held by certain shareholders
of the Company, see 'Underwriting' and 'Description of Capital
Stock--Restrictions on Ownership and Transfer.'
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement, the Company has granted the
Unitholders 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 issuance of such Units, as may be appropriate
under the applicable provisions of the Securities Act. 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
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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
Pryor Cashman Sherman & Flynn LLP, 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 Capital Stock. The following summary of
certain federal income tax considerations is based on current law, is for
general information only, and is not tax advice. The tax treatment of a holder
of Capital Stock will vary depending upon the terms of the specific securities
acquired by such holder, as well as his particular situation. This discussion
does not purport to deal with all aspects of taxation that may be relevant to a
prospective stockholder in light of their personal investment or tax
circumstances or to certain types of shareholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States) subject to special treatment under the federal income tax laws.
The REIT provisions of the Code are highly technical and complex. The
following sets forth the material aspects of the sections that govern the
federal income tax treatment of REITs. This summary is qualified in its entirety
by the applicable Code provisions, rules and regulations promulgated thereunder,
and administrative and judicial interpretations thereof, all of which are
subject to change (which change may apply retroactively).
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 CAPITAL 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 AS A REIT
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
ended December 31, 1997. The Company believes that, commencing with its taxable
year ended 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 for such taxable
year, and the Company intends to continue to operate in such a manner in the
future. 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 LLP, commencing with the
Company's taxable year ended December 31, 1997, and assuming 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. It must be emphasized that this opinion is based on various
assumptions, and is conditioned upon such assumptions and certain
representations made by the Company as to certain factual matters. Pryor Cashman
Sherman & Flynn LLP is not aware of any facts or circumstances that are
inconsistent with these assumptions and representations. Moreover, such
qualification and taxation as a REIT depends 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, the results of which will not be reviewed by
Pryor Cashman Sherman & Flynn LLP. Accordingly, no assurance can be given that
the actual results of the Company's operations in any particular taxable year
will satisfy such requirements. See '--Failure to Qualify.' The opinion of Pryor
Cashman Sherman & Flynn LLP 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 LLP is also based upon
current law.
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
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'double taxation' (at the corporate and shareholder levels) that generally
results from investment in a regular corporation. However, the Company will be
subject to federal income tax as follows: first, the Company will be taxed at
regular corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains (although shareholders will receive an
offsetting credit against their own federal income tax liability for federal
income taxes paid by the Company with respect to any such undistributed net
capital gains); second, under certain circumstances, the Company may be subject
to the 'corporate 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 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 held
primarily for sale to customers in the ordinary course of business, other than
certain involuntary conversions or foreclosure property), 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), but has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on an amount equal
to (a) the gross income attributable to the greater of the amount by which the
Company fails the 75% or 95% test, multiplied by (b) 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; and seventh, with respect to
an asset (a 'Built-In Gain Asset') acquired by the Company from a corporation
which is or has been a C corporation (i.e., generally a corporation subject to
full corporate level tax) in a transaction in which the basis of the Built-In
Gain Asset in the hands of the Company is determined by reference to the basis
of the asset in the hands of the C corporation, if the Company recognizes gain
on the disposition of such asset during the 10-year period (the 'Recognition
Period') beginning on the date on which such asset was acquired by the Company,
then, to the extent of the Built-In Gain (i.e., the excess of (a) the fair
market value of such asset over (b) the adjusted basis in such asset determined
as of the beginning of the Recognition Period), such gain will be subject to tax
at the highest corporate tax rate pursuant to IRS regulations that 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 Code Sections 856 through 859, (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. For purposes of conditions
(5) and (6), pension funds and certain other tax-exempt entities are treated as
individuals, subject to a 'look through' exception in the case of condition (6).
The Company anticipates issuing sufficient shares of Capital Stock in sufficient
proportions to allow the Company to satisfy conditions (5) and (6). In addition,
the Company's Articles of Incorporation provides for restrictions regarding
ownership and transfer of the Company's Capital Stock,which restrictions are
intended to assist the Company in continuing to satisfy the share ownership
requirements described in conditions (5) and (6) above. See 'Description of
Capital Stock--Restrictions on Ownership and Transfer.' Prior to 1998, a REIT's
failure to comply with the Treasury Regulations for ascertaining ownership of
its stock (the 'Stock Ownership Regulations') could have resulted in a REIT's
disqualification as a REIT for the taxable year of the failure. Pursuant to the
Taxpayer Relief Act of 1997 (the 'Act'), effective for the Company's taxable
years beginning on or after January 1, 1998, if the Company fails to comply with
the Stock Ownership Regulations, the Company
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will not lose its qualification as a REIT as a result of a violation of the
foregoing requirement if it neither knows nor upon exercising reasonable due
diligence would have known of such violation. Effective for taxable years
beginning on or after January 1, 1998, instead of being disqualified as a REIT
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 can 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. From its inception, the Company has had a
calendar year taxable year.
The Company currently owns and operates the majority of the Properties
through partnerships in which the Operating Partnership and direct, wholly-owned
subsidiaries (the Philips Subs) are partners. Code Section 856(i), as amended by
the Act, provides that a corporation, 100% of whose stock is held by a REIT, is
a 'qualified REIT subsidiary.' A 'qualified REIT subsidiary' is not treated as a
separate corporation, and all assets, liabilities and items of income, deduction
and credit of a 'qualified REIT subsidiary' are treated as assets, liabilities
and such items (as the case may be) of the REIT. Thus, in applying the
requirements described herein, the Company's 'qualified REIT subsidiaries' will
be ignored, and all assets, liabilities and items of income, deduction and
credit of such subsidiaries will be treated as assets, liabilities and items of
the Company. The Company has not, however, sought or received a ruling from the
IRS that any of the Philips Subs is a 'qualified REIT subsidiary.'
In the case of a REIT which is a partner in a partnership, either directly
or indirectly through a 'qualified REIT subsidiary,' 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
Property Partnerships in which the Operating Partnership has an interest will be
treated as assets, liabilities and items of income of the Company for purposes
of applying the requirements described herein. The Company directly controls the
Operating Partnership and intends to operate it consistent with the requirements
for qualification as a REIT.
Income Tests. In order to maintain qualification as a REIT, the Company,
for taxable years beginning on or after January 1, 1998, must satisfy two gross
income requirements annually. First, at least 75% of the Company'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 Company'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 taxable year of the Company
ended 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, 1998. For taxable years
beginning on or after January 1, 1998, 'qualifying income' for purposes of the
95% Test, includes 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 Tests 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 from the property. 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 a direct or constructive owner
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of l0% or more of the Company, directly or constructively owns 10% or more of
such tenant (a 'Related 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 Tenant are modified with respect to
partners and partnerships to provide that attribution between partners and
partnerships only occurs 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 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 Tenant if shareholders of the Company and
owners of such tenant are partners in a partnership in which neither own,
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
and will not (i) charge rent for 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
fixed percentage of receipts on sales, as described above), (ii) rent any
property to a Related Tenant, or (iii) derive rental income attributable to
personal property (other than personal property leased in connection with the
lease of real property, the amount of which is less than 15% of the total rent
received under the lease). 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.' In order to qualify for this de minimis exception, the
value of the Impermissible Services may not exceed 1% of the Company's gross
income from the property and such Impermissible Services may not be valued at
less than 150% of the Company's direct cost of services. Notwithstanding the
foregoing, the amount of any income the Company receives in respect of its
performance of Impermissible Services ('Impermissible Services Income') will not
be treated as 'rents from real property' for purposes of the 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.
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 in
'--General,' even if these relief provisions apply, a 100% tax would be imposed
on an amount equal to the greater amount by which the Company fails either of
the Gross Income Tests, multiplied by a fraction intended to reflect the
Company's profitability.
Certain Prohibited Transactions. The Company, as a REIT, is generally
subject to restrictions that limit its ability to sell real property. The
Company is subject to a tax of 100% on its gain (i.e. the excess, if any, of the
amount realized over the Company's adjusted basis in the property) from each
sale of property (excluding certain
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property obtained through foreclosure and property that is involuntarily
converted in a transaction that is subject to Code Section 1033) in which it is
a dealer. In calculating its gains subject to the 100% tax, the Company is not
allowed to offset gains on sales of property against losses on other sales of
property in which it is a dealer.
Under the Code, the Company would be deemed to be a dealer in any property
that the Company holds primarily for sale to customers in the ordinary course of
its business. Such determination is a factual inquiry, and absolute legal
certainty of the Company's status generally cannot be provided. However, the
Company will not be treated as a dealer in real property if (i) it has held the
property for at least four years, (ii) capitalized expenditures on the property
in the four years preceding sale do not exceed 30% of the net selling price of
the property, (iii) the Company either (a) has seven or fewer sales of property
(excluding involuntarily converted property subject to Code Section 1033 or
certain property obtained through foreclosure) for the year, or (b) the
aggregate adjusted tax basis (as determined for purposes of computing earnings
and profits) of property sold during the taxable year is 10% or less of the
aggregate adjusted tax basis of all assets (as so determined) of the Company as
of the beginning of the taxable year, (iv) as to land or improvements that are
not acquired through foreclosure or lease termination, the Company has held such
property for at least four years for the production of rental income and (v) if
the requirement in clause (iii)(a) is not satisfied, substantially all of the
marketing and development expenditures with respect to the property sold are
made through an independent contractor from whom the Company derives no income.
The sale of more than one property to one buyer as part of one transaction
constitutes one sale; and the term 'sale' does not include transactions where
the net selling price is less than $10,000. However, the failure of the Company
to meet these 'safe harbor' requirements does not necessarily mean that it is a
dealer in real property for purposes of the 100% tax.
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 Company or the Company's qualified
REIT subsidiaries and the Company's allocable share of real estate assets held
by partnerships in which the Company owns an interest, directly and/or
indirectly, and (ii) 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 (at the end of the quarter in which the securities
are acquired) 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.
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 which 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 Company's net capital gain) and (ii) 95% of the net income
(after tax), if any, from foreclosure property, minus (B) the excess of the sum
of certain items of non-cash income (i.e., income attributable to leveled
stepped rents, original issue discount or purchase money debt, or a like-kind
exchange that is later determined to be taxable) over 5% of 'REIT Taxable
Income' as described in (A)(i) above. In addition, if the Company disposes of
any Built-In Gain Asset during the Recognition Period, the Company will 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),
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if any, 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.
Such distributions are taxable to holders of Capital Stock (other than
tax-exempt entities, as discussed below) in the year in which paid, even though
such distributions relate to the prior years for purposes of the Company's 95%
distribution requirement. The amount distributed must not be preferential--that
is, each holder of shares of Capital Stock must receive the same distribution
per share. A REIT may have more than one class of Capital Stock, as long as
distributions within each class are pro rata and nonpreferential. 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 Shareholders--Taxation of
Taxable Domestic Shareholders.' 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 under '--Taxation of Shareholders--Taxation of
Taxable 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. The Retained Gains are then
considered to have been distributed to holders of Capital Stock.
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 to shareholders in a
later year 'deficiency dividends' 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 corporate 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. As a result, the Company's
failure to qualify as a REIT would reduce the cash available for distribution by
the Company to its shareholders. 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.
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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 constitute dividends taxable to its
shareholders 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.
Pursuant to the Act, the portion of any such 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 to shareholders 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 the
portion of such capital gain dividends attributable to gain recognized with
respect to capital assets held for more than one year but not more than 18
months will be treated as long-term capital gain taxable to shareholders 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.
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 its net
long term capital gains recognized during a taxable year ('Retained Gains') and
pay a corporate level tax on such Retained Gains. 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 Capital 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 Capital 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.
Distributions (not designated as capital gain dividends) in excess of
current and accumulated earnings and profits will not be taxable to a domestic
shareholder to the extent that they do not exceed the adjusted tax basis of the
shareholder's shares of Capital Stock, but rather will reduce the adjusted tax
basis of such shares (but not below zero). To the extent that such distributions
exceed the adjusted tax basis of a domestic shareholder's shares of Capital
Stock, they will be included in income as capital gains provided that the shares
have been held as a capital asset. Any such distributions in excess of a
shareholder's adjusted tax basis in his shares of Capital Stock will be included
in income as long-term 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 have been held for only one year or less. In addition, any dividend
declared by the Company in October, November or December of any year payable to
a shareholder of record on a specific date in any such month shall be treated as
both paid by the Company and received by the shareholder 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.
Distributions made by the Company and gain arising from the sale or
exchange by a shareholder of shares of Capital Stock will not be treated as
passive activity income, and, as a result, shareholders generally will not be
able to apply any 'passive losses' against such income or gain. Distributions
made by the Company (to the extent they do not constitute a return of capital)
generally will be treated as investment income for purposes of computing the
investment income limitation. Gain arising from the sale or other disposition of
Capital Stock, however, will not be treated as investment income unless the
shareholder elects to reduce the amount of such shareholder's total net capital
gain eligible for the 28% maximum capital gains rate by the amount of such gain
with respect to such Capital Stock.
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Upon any sale or other disposition of Capital Stock, a shareholder will
recognize gain or loss for federal income tax purposes in an amount equal to the
difference between (i) the amount of cash and the fair market value of any
property received on such sale or other disposition and (ii) the holder's
adjusted basis in such shares of Capital Stock for tax purposes. Such gain or
loss will be capital gain or loss if the shares have been held for more than one
year. In general, any loss upon a sale or exchange of shares of Capital Stock by
a shareholder 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
shareholder 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 shareholder 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
shareholder 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 shareholder'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 foreign status to the Company. See '--Taxation of Foreign
Shareholders.'
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.
Similarly, income from the sale of shares of Capital Stock will not constitute
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.
For tax-exempt shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their own tax advisors concerning these
'set aside' and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
'pension-held REIT' shall be treated as UBTI as to any trust which (i) is
described in Code Section 401(a), (ii) is tax-exempt under Code Section 501(a)
and (iii) holds more than 10% (by value) of the interests in the REIT.
Tax-exempt pension funds that are described in Code Section 401(a) and exempt
from tax under Code section 501(a) are referred to below as 'qualified trusts.'
A REIT is a 'pension-held REIT' if (i) it would not have qualified as a
REIT but for the fact that Code Section 856(h)(3) provides that stock owned by
qualified trusts shall be treated, for purposes of the 'not closely held'
requirement, as owned by the beneficiaries of the trust (rather than by the
trust itself), and (ii) either (a) at least one such qualified trust holds more
than 25% (by value) of the interests in the REIT, or (b) one or more such
qualified trusts, each of whom owns more than 10% (by value) of the interests in
the REIT, hold in the aggregate more than 50% (by value) of the interests in the
REIT. The percentage of any REIT dividend treated as UBTI is equal to the ratio
of (i) the UBTI earned by the REIT (treating the REIT as if it were a qualified
trust and therefore subject to tax on UBTI) to (ii) the total gross income of
the REIT. A de minimis exception applies where the percentage is less than 5%
for any year. The provisions requiring qualified trusts to treat a portion of
REIT distributions as UBTI will not apply if the REIT is able to satisfy the
'not closely held' requirement without relying upon the 'look-through' exception
with respect to qualified trusts. The Company does not expect to be classified
as a 'pension-held REIT.'
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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 Capital 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.
Distributions by the Company to a Non-U.S. Shareholder that are neither
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. Under certain treaties, lower withholding rates generally applicable
to dividends do not apply to dividends from a REIT, such as the Company.
However, if income from the investment in the shares of Capital Stock is treated
as effectively connected with the Non-U.S. Shareholder'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 and are generally not subject to withholding. Any such effectively
connected distributions received by a Non-U.S. Shareholder that is a corporation
may also be subject to an additional branch profits tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty.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 tax basis of the shareholder's shares of Capital Stock, but
rather will reduce the adjusted basis of such shares. For FIRPTA withholding
purposes (discussed below), such distributions will be treated as consideration
for the sale or exchange of shares of Capital Stock. 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 Capital
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.
Distributions to a Non-U.S. Shareholder that are designated by the Company
at the time of distribution as capital gain dividends (other than those arising
from the disposition of a U.S. real property interest) generally will not be
subject to U.S. federal income taxation, unless (i) investment in the Capital
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 (except that a
shareholder that is a foreign corporation may also be subject to the 30% branch
profits tax, as discussed above), or (ii) the Non-U.S. Shareholder is a
nonresident alien individual who is 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.
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
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alien individuals). Also, distributions subject to FIRPTA may be subject to a
30% branch profits tax in the hands 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 United States federal income tax liability.
The Company or any nominee (e.g., a broker holding shares in street name) may
rely on a certificate of foreign status on Form W-8 or Form W-9 to determine
whether withholding is required on gains realized from the disposition of U.S.
real property interests. A U.S. shareholder who holds shares of Capital Stock on
behalf of a Non-U.S. Shareholder will bear the burden of withholding, provided
that the Company has properly designated the appropriate portion of a
distribution as a capital gain dividend.
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 Capital Stock
will not be subject to taxation under FIRPTA. However, because the shares of
Capital Stock will be publicly traded, no assurance can be given that the
Company will continue to be a 'domestically-controlled REIT.' Notwithstanding
the foregoing, gain not subject to FIRPTA will be taxable to a Non-U.S.
Shareholder if (i) investment in the Capital 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 (a Non-U.S. Shareholder that is a foreign corporation
may also be subject to a 30% branch profits tax, as discussed above), 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 Capital 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).
If the Company is not or ceases to be, a 'domestically-controlled REIT,'
whether gain arising from the sale or exchange of shares of Capital Stock by a
Non-U.S. Shareholder would be subject to United States taxation under FIRPTA as
a sale of a 'United States real property interest' will depend on whether the
shares are 'regularly traded' (as defined by applicable Treasury Regulations) on
an established securities market (e.g. the New York Stock Exchange) and on the
size of the selling Non-U.S. Shareholder's interest in the Company. In the case
where the Company is not or ceases to be a 'domestically-controlled REIT' and
the Capital Stock is 'regularly traded' on an established securities market at
any time during the calendar year, a sale of shares of Capital Stock by a
Non-U.S. Shareholder will only be treated as a sale of a 'United States real
property interest' (and thus subject to taxation under FIRPTA) if such selling
shareholder beneficially owns (including by attribution) more than 5% of the
total fair market value of the Capital Stock at any time during the shorter of
the period during which the shareholder held the Capital Stock or the five-year
period ending either on the date of such sale or other applicable determination
date. If gain on the sale or exchange of shares of Capital Stock were subject to
taxation under FIRPTA, the Non-U.S. Shareholder would be subject to regular
United States income tax with respect to such gain in the same manner as a U.S.
shareholder (subject to any applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals); provided,
however, that deductions otherwise allowable will be allowed as deductions only
if the tax returns were filed within the time prescribed by law. In general, the
purchaser of the Capital Stock would be required to withhold and remit to the
IRS 10% of the amount realized by the seller on the sale of such stock.
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
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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 deemed to have been designated by the REIT as a capital gain
dividend. The New Withholding Regulations will generally be effective for
payments made after December 31, 1998, subject to certain transition rules.
EXCEPT AS NOTED, THE DISCUSSION SET FORTH 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 made
through the Operating Partnership, which in turn will hold interests in other
partnerships. In general, partnerships are 'pass-through' entities which are not
subject to federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit of
a partnership, and are potentially subject to tax thereon, without regard to
whether the partners receive a distribution from the partnership. The Company
will include in its income its proportionate share of the foregoing partnership
items for purposes of the Gross Income Tests and in the computation of its REIT
taxable income. Moreover, for purposes of the REIT asset tests, the Company will
include its proportionate share of assets held by the Operating Partnership. See
'--Taxation of the Company as a REIT.'
The ownership of an interest in a partnership may involve special tax
risks. Such risks include 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 Property 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 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 as a REIT--Failure to Qualify' 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.
Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and loss among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Code Section 704(b) and the Treasury Regulations promulgated thereunder.
Generally, Code Section 704(b) and the Treasury Regulations promulgated
thereunder require that partnership allocations respect the economic arrangement
of the partners.
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If an allocation is not recognized for federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The Operating Partnership's
allocations of taxable income and loss are intended to comply with the
reqirements of Code Section 704(b) and the Treasury Regulations promulgated
thereunder.
The Partnership Agreement provides that 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. In addition, allocations of net income or net loss will
be subject to compliance with the provisions of Code Sections 704(b) and 704(c)
and the Treasury Regulations promulgated thereunder.
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 ensuring that the contributor is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain or
unrealized loss 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 certain properties (or
interests in the various Property 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 Property
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, certain persons who acquired interests in the Operating
Partnership in connection with the contribution of property (including interests
in the Property Partnerships) to the Operating Partnership are 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
Property 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 have been and will continue to be limited by the so-called
'ceiling rule' which 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 and possibly an amount of taxable income in the event
of a sale of such contributed assets in excess of the economic or book income
allocated to it as a result of such sale. This may cause the Company to
recognize taxable income in excess of cash proceeds, which might adversely
affect the Company's ability to comply with the REIT distribution requirements.
In addition, as a result of the above described Book-Tax Difference, the Company
will be required to distribute more dividends in order to satisfy the 95%
distribution requirement than it would have had the Company purchased the assets
for cash in a taxable transaction. See '--Taxation of the Company as a
REIT--Annual Distribution Requirements,' for a discussion of distribution
requirements. Finally, the amount of tax-free return of capital to each domestic
shareholder will be less than the amount such shareholder would have realized
had the Company purchased assets for cash in a taxable transaction.
Basis in Operating Partnership Interest. The Company's adjusted tax basis
in its interest in the Operating Partnership generally (i) will be equal to the
amount of cash and the basis of any other property contributed to the Operating
Partnership by the Company, (ii) will be increased by (a) its allocable share of
the Operating Partnership's income and (b) its allocable share of indebtedness
of the Operating Partnership and (iii) will be
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reduced, but not below zero, by the Company's allocable share of (a) losses
suffered by the Operating Partnership, (b) the amount of cash distributed to the
Company and (c) by constructive distributions resulting from a reduction in the
Company's share of indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss exceeds the adjusted tax basis of the Company's partnership
interest in the Operating Partnership, the recognition of such excess loss will
be deferred until such time and to the extent that the Company has adjusted tax
basis in its interest in the Operating Partnership. To the extent that the
Operating Partnership's distributions, or any decrease in the Company's share of
the indebtedness of the Operating Partnership (such decreases being considered a
constructive cash distribution to the partners), exceeds the Company's adjusted
tax basis, such excess distributions (including such constructive distributions)
will constitute taxable income to the Company. Such taxable income will normally
be characterized as a capital gain, and if the Company's interest in the
Operating Partnership has been held for longer than the long-term capital gain
holding period (currently one year), such distributions and constructive
distributions will constitute long-term capital gain.
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 Capital Stock of the Company.
PROPOSED LEGISLATION
On February 2, 1998, the Clinton administration released its budget
proposal for fiscal year 1999. The proposal includes a number of provisions
affecting REITs. One proposed provision would amend the REIT asset tests with
respect to subsidiary corporations other than qualified REIT subsidiaries or
corporations that qualify as REITs (each, an 'Affected Subsidiary'). Under
current law, a REIT is precluded from owning more than 10% of the voting
securities of any Affected Subsidiary. Pursuant to the Clinton administration
proposal, a REIT would remain subject to this restriction and would be precluded
from owning more than 10% of the value of all classes of stock of any Affected
Subsidiary. If the proposal were enacted as currently drafted, existing Affected
Subsidiaries would be 'grandfathered,' i.e., a REIT would be subject only to
current law with respect to such subsidiaries. The grandfathered status would
terminate with respect to an Affected Subsidiary if: (i) the subsidiary engaged
in a new trade or business; (ii) the subsidiary acquired substantial new assets;
or (iii) the REIT made a substantial contribution to the capital of the
subsidiary. The Company recently formed a number of subsidiaries to try to take
advantage of this grandfathered status if the proposal is enacted as currently
drafted and the Company wishes, in the future, to engage in certain third-party
management and other businesses.
Although the administration's budget proposals may affect the manner in
which the Company conducts its business (particularly with respect to the
Company's ability to conduct third party management services and/or other
non-customary services), the proposals should not materially affect either the
status of the Company for federal income tax purposes or its business
operations.
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 in '--Status of the Company, the Operating Partnership and the
Property Partnerships under ERISA', to a prospective purchaser that is 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 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.
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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 PROPERTY PARTNERSHIPS
UNDER ERISA
In determining whether the fiduciary requirements of ERISA and the
prohibited transaction 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 'plan
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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UNDERWRITING
The underwriters named below (the 'Underwriters'), for whom Prudential
Securities Incorporated and Raymond James & Associates, Inc. are acting as
representatives (collectively, the 'Representatives'), have severally agreed,
subject to the terms and conditions contained in the underwriting agreement (the
'Underwriting Agreement'), to purchase from the Company the number of shares of
Common Stock set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ------------------------------------------------------------------------------------------- ---------
<S> <C>
Prudential Securities Incorporated.........................................................
Raymond James & Associates, Inc............................................................
---------
Total.................................................................................... 7,200,000
---------
---------
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby, if any are
purchased.
The Underwriters, through the Representatives, have advised the Company
that they propose to offer the shares of Common Stock to the public at the
public offering price set forth on the cover page of this Prospectus; that the
Underwriters may allow to certain selected dealers a concession of not in excess
of $ per share, and that such dealers may re-allow a concession not in excess
of $ per share to certain other dealers. After the public offering, the
offering price and the concessions may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 1,080,000 additional shares
of Common Stock at the public offering price, less the underwriting discounts
and commissions, as set forth on the cover page of this Prospectus. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of shares of Common Stock offered hereby.
To the extent such option to purchase is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Common Stock as the number set forth
next to such Underwriter's name in the preceding table bears to 7,200,000.
The Company and the Operating Partnership have agreed to indemnify the
several Underwriters against or to contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales of Common Stock to any accounts over
which they exercise discretionary authority.
The Company, the Operating Partnership, and Philip Pilevsky and the other
executive officers and directors of the Company have agreed not to, directly or
indirectly, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of an option to purchase or other sale or disposition) of any shares of
Common Stock or other Capital Stock of the Company or Units or other partnership
interests of the Operating Partnership, or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock or other Capital Stock
of the Company or Units or other partnership interests of the Operating
Partnership, for a period of 180 days (one year in the case of the executive
officers and directors) after the consummation of the Offering, except, in the
case of the Company or the Operating Partnership: (i) pursuant to a dividend
reinvestment plan of the Company; (ii) pursuant to the Stock Option Plan; and
(iii) in connection with the acquisition by the Company of real property or
interests in entities holding real property, provided that the recipient or
transferee of such securities or interests agrees in writing to be subject to
the lock-up provisions contained in this paragraph for a period ending on the
date that is 180 days after the date of the Offering. Prudential Securities
Incorporated may, in its sole discretion, at any time and without prior notice,
release all of any portion of the shares of Common Stock or other securities
subject to such lock-up agreements.
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The shares of Common Stock offered hereby have been approved for listing on
the NYSE, subject to official notice of issuance. In order to meet one of the
requirements for listing the shares of Common Stock on the NYSE, the
Underwriters have undertaken to sell (i) lots of 100 or more shares to a minimum
of 2,000 beneficial holders, (ii) a minimum of 1.1 million shares and (iii)
shares with a minimum aggregate market value of $40.0 million.
Prior to the Offering, there has been no active public market for the
Common Stock. The public offering price for the shares of Common Stock will be
determined through negotiations between the Company and the Representatives.
Among the factors to be considered in such determination are prevailing market
conditions, dividend yields and financial characteristics of publicly traded
REITs that the Company and the Representatives believe to be comparable to the
Company, the present state of the Company's financial and business operations,
the Company's management, estimates of the business and earnings potential of
the Company and the prospects for the industry in which the Company operates.
An affiliate of Prudential Securities Incorporated will receive
approximately $42.5 million from the net proceeds of the Offering as repayment
of outstanding indebtedness in connection with interim financing that such
affiliate made to the Company. In addition, in connection with the Formation
Transactions the Company assumed certain payment obligations under a financial
advisory engagement letter between National and Prudential Securities
Incorporated. Pursuant to this undertaking, the Company issued to Prudential
Securities Incorporated 1,940 shares of Series A Preferred Stock, which the
Company intends to redeem upon consummation of the Offering at the redemption
price of $1.94 million plus accrued and unpaid dividends.
The Company will pay to Prudential Securities Incorporated an advisory fee
equal to 0.75% of the gross proceeds of the Offering (also applicable to the
gross proceeds from the Underwriters' over-allotment option, if exercised) for
financial advisory services relating to the structuring of the Formation
Transactions and the Offering.
Prudential Securities Credit Corporation, an affiliate of Prudential
Securities Incorporated, has agreed to provide directly or through an affiliate
the Credit Facility to the Company. See 'Business and Properties--Credit
Facility.'
At the request of the Company, up to 720,000 shares of the Common Stock
offered hereby have been reserved for sale by the Company to Mr. Pilevsky and
certain other directors, officers and employees of the Company and their
business affiliates and related parties who have expressed an interest in
purchasing such shares. The price per share of Common Stock to be sold to such
persons will be the public offering price and the Underwriters will receive no
compensation with respect to such sales. The aggregate number of shares of
Common Stock available for sale to the public in the Offering will be reduced to
the extent such persons purchase such shares of Common Stock. Any reserved
shares of Common Stock not so purchased will be offered by the Underwriters to
the public on the same basis as the other shares of Common Stock offered hereby.
In connection with the Offering, certain Underwriters (and selling group
members, if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M promulgated by the Commission, pursuant to which
such persons may bid for or purchase Common Stock for the purpose of stabilizing
its market price. The Underwriters may also create a short position for the
account of the Underwriters by selling more Common Stock in connection with the
Offering than they are committed to purchase from the Company, and in such case
may purchase Common Stock in the open market following the closing of the
Offering to cover all or a portion of such short position. The Underwriters may
also cover all or a portion of such short position, up to 1,080,000 shares of
Common Stock, by exercising the Underwriters' over-allotment option referred to
above. In addition, Prudential Securities Incorporated, on behalf of the
Underwriters, may impose 'penalty bids' under contractual arrangements with the
Underwriters whereby it may reclaim from an Underwriter (or selling group member
participating in the Offering) for the account of the other Underwriters, the
selling concession with respect to Common Stock that is distributed in the
Offering but subsequently purchased for the account of the Underwriters in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price of the Common Stock at a level above that which
might otherwise prevail in the open market. None of the transactions described
in this paragraph is required, and, if they are undertaken, they may be
discontinued at any time.
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EXPERTS
The financial statements of Philips International Realty Corp. as of
December 31, 1997, and for the period from July 16, 1997 (incorporation) to
December 31, 1997, the balance sheet of Philips International Realty, L.P. as of
December 31, 1997, the combined balance sheet of the Property Partnerships as of
December 31, 1997, the combined financial statements of The Philips Company as
of December 31, 1996 and for each of the three years in the period ended
December 31, 1997, and the statements of revenues and certain expenses of the
Merrick Commons and Mill Basin Plaza Properties for each of the three years in
the period ended December 31, 1997, all appearing in this 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 Rosen Report was prepared for the Company by Rosen Consulting Group,
which is a real estate consulting firm with significant expertise relating to
the New York CMSA and Miami CMSA economies and the shopping center markets and
the various submarkets therein. Information relating to the aforementioned
economies and the shopping center markets set forth in 'Overview of the
Company's Primary Markets' is derived from the Rosen Report and is included in
reliance on the Rosen Consulting Group's authority as experts on such matters.
LEGAL MATTERS
Certain legal matters in connection with the Offering as well as certain
legal matters described under 'Federal Income Tax Considerations' will be passed
upon for the Company by Pryor Cashman Sherman & Flynn LLP, New York, New York.
Certain 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. Certain
legal matters will be passed upon for the Underwriters by Kaye, Scholer,
Fierman, Hays & Handler, LLP, New York, New York.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement (of which this Prospectus is
a part) on Form S-11 (the 'Registration Statement') with the Securities and
Exchange Commission (the 'Commission') under the Securities Act and the rules
and regulations promulgated thereunder, with respect to the securities offered
hereby. As permitted by the rules and regulations of the Commission, this
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 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.
The Company is subject to the informational requirements of 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. In addition, the Common Stock will be listed on
the NYSE and similar information concerning the Company can be inspected and
copied at the offices of the NYSE, 20 Broad Street, New York, NY 10005.
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GLOSSARY
'annualized contractual base rent' means total annualized contractual base
rent for all leases in place at December 31, 1997. Amount excludes (i) future
contractual rent escalations and cost of living increases, (ii) percentage rent
and (iii) additional rent payable by tenants such as common area maintenance,
real estate taxes and other expense reimbursements.
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.
By-Laws mean the Company's Second 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.
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
and its consolidated subsidiaries (including Philips International Realty, L.P.,
a Delaware limited partnership).
Contribution and Exchange Agreement means the Contribution and Exchange
Agreement, dated as of August 11, 1997, among National, the Board of Trustees of
National, the Company, the Operating Partnership and the contributing
partnerships, as amended by Amendment No. 1, dated as of December 29, 1997.
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.
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 properties in which Mr. Pilevsky or
Ms. Levine own an economic interest that were not transferred to the Company in
the Formation Transactions.
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 twelve
properties by the contributing partnerships and the acquisition of the National
Property.
GAAP means generally accepted accounting principles.
GLA means gross leasable area.
Interested Shareholder 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 Director means a director of the Company who is not an employee
or officer of the Company or an affiliate of the Company, or a relative of a
principal executive officer, and who is not an individual member of an
organization acting as an advisor, consultant or legal counsel, receiving
compensation on a continuing basis from the Company in addition to director's
fees.
98
<PAGE>
Interim Managing General Partner means Philips International Realty, LLC, a
Delaware limited liability company.
IRA means an individual retirement account.
Management Agreement means the amended and restated management agreement by
and among the Company, the Operating Partnership and the Management Company,
dated as of December 31, 1997.
Management Company means Philips International Holding Corp., a corporation
owned and controlled by Mr. Pilevsky and Ms. Levine.
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.
National Property means the Lake Mary, Florida shopping center property
acquired by the Company from National in the Formation Transactions.
Non-Competition Agreement means the amended and restated non-competition
agreement by and among the Operating Partnership, the Company, the Management
Company, Mr. Pilevsky and Ms. Levine, dated as of December 31, 1997.
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.
NYSE means the New York Stock Exchange, Inc.
Offering means the public offering of shares of Common Stock of the Company
pursuant to and as described in this Prospectus.
Operating Partnership means Philips International Realty, L.P., a Delaware
limited partnership.
Ownership Limit means the restriction set by resolutions adopted by the
Board of Directors, as permitted by 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 8% (by number or
value, whichever is more restrictive) of the outstanding shares of Capital Stock
of the Company.
Partnership Agreement means the amended and restated Agreement of Limited
Partnership of the Operating Partnership, dated as of December 31, 1997.
Philips Group means certain affiliated companies owned or controlled by Mr.
Philip Pilevsky.
Philips Subs mean wholly owned subsidiaries of the Company which are
general partners of the Property Partnerships.
Preferred Stock means the 30,000,000 shares of preferred stock, par value
$.01 per share, of the Company.
Properties mean the interests and/or assets of certain partnerships,
limited liability companies and affiliates of the Philips Group in a portfolio
of thirteenshopping center properties contributed to the Company pursuant to the
Formation Transactions.
Property Partnerships means those limited partnerships or limited liability
companies which hold fee title to the Properties, which are 99.99% owned by the
Operating Partnership as limited partner or non-managing member and 0.01% owned
by the Philips Subs, as general partner or managing member.
Prospectus means this prospectus relating to the sale of up to 8,280,000
shares of Common Stock of the Company in the Offering, which includes the shares
subject to the Underwriters' over-allotment option.
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 Unitholders in
connection with the Formation Transactions.
Registration Rights Agreement means the Registration Rights Agreement
between the Company and the Unitholders entered into upon consummation of the
Formation Transactions.
99
<PAGE>
Registration Statement means the Company's registration statement on Form
S-11 filed with the Commission under the Securities Act with respect to the
securities offered pursuant to this 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.
Representatives mean Prudential Securities Incorporated and Raymond James &
Associates, Inc., as representatives of the Underwriters.
Restricted Shares mean the Common Stock issued to Mr. Pilevsky and the
Trustees, the Units, the Warrants and the shares issuable upon redemption of the
Units or exercise of the 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 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.
Treasury Regulations mean the regulations promulgated under the Code.
Trustees means Peter Stein and Jay Goldman.
Trustees Securities means the Trustees Stock and the Warrants.
Trustees Stock means the 8,526 shares of Common Stock issued to the
Trustees in the Formation Transactions pursuant to the Contribution and Exchange
Agreement.
UBTI means unrelated business taxable income.
Underwriters means each of the underwriters named in the section of this
Prospectus entitled 'Underwriting.'
Underwriting Agreement means the Underwriting Agreement between the Company
and the Representatives relating to the purchase of the Common Stock offered
hereby.
Unitholders means Philip Pilevsky and certain other persons who received
Units in connection with the contribution of properties of, or partnership or
membership interests in, the contributing partnerships.
Units mean the units of limited partnership interests of the Operating
Partnership.
UPREIT means a REIT conducting business through a partnership.
Warrants mean warrants issued to the Trustees in the Formation Transactions
to purchase an aggregate of 13,641 shares of Common Stock.
100
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PHILIPS INTERNATIONAL REALTY CORP.
Pro Forma Condensed Consolidated Financial Statements (unaudited):
Pro Forma Condensed Consolidated Balance Sheet as of December 31, 1997.............................. F-2
Notes to Pro Forma Condensed Consolidated Balance Sheet as of December 31, 1997..................... F-3
Pro Forma Condensed Consolidated Statement of Income for the Year Ended December 31, 1997........... F-4
Notes to Pro Forma Condensed Consolidated Statement of Income for the Year Ended December 31,
1997............................................................................................... F-5
Historical
Report of Independent Auditors...................................................................... F-6
Balance Sheet as of December 31, 1997............................................................... F-9
Statement of Operations for the Period July 16, 1997 (Incorporation) to December 31, 1997........... F-10
Statement of Shareholders' Equity for the Period July 16, 1997 (Incorporation) to December 31,
1997............................................................................................... F-11
Statement of Cash Flows for the Period July 16, 1997 (Incorporation) to December 31, 1997........... F-12
Notes to Financial Statements....................................................................... F-13
PHILIPS INTERNATIONAL REALTY, L.P.
Report of Independent Auditors...................................................................... F-7
Balance Sheet as of December 31, 1997............................................................... F-9
Notes to Financial Statement........................................................................ F-13
PROPERTY PARTNERSHIPS
Report of Independent Auditors...................................................................... F-8
Combined Balance Sheet as of December 31, 1997...................................................... F-9
Schedule III--Real Estate and Accumulated Depreciation as of December 31, 1997...................... F-22
Notes to Combined Financial Statement............................................................... F-13
THE PHILIPS COMPANY
Report of Independent Auditors...................................................................... F-24
Combined Balance Sheet as of December 31, 1996...................................................... F-25
Combined Statements of Income for the Years Ended December 31, 1997, 1996 and 1995.................. F-26
Combined Statements of Owners' Deficit for the Years Ended December 31, 1997, 1996 and 1995......... F-27
Combined Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.............. F-28
Notes to Combined Financial Statements.............................................................. F-29
MERRICK COMMONS AND MILL BASIN PLAZA PROPERTIES
Combined Statements of Revenues and Certain Expenses:
Report of Independent Auditors...................................................................... F-38
Combined Statements of Revenues and Certain Expenses for the Years Ended December 31, 1997, 1996 and
1995............................................................................................... F-39
Notes to Combined Statements of Revenues and Certain Expenses....................................... F-40
</TABLE>
F-1
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATION OFFERING
ADJUSTMENTS ADJUSTMENTS PRO FORMA
HISTORICAL ------------- ----------- -------------
------------- (B)
(A)
<S> <C> <C> <C> <C>
ASSETS
Rental properties--net...................................... $ $ 184,872 $ $ 184,872
Cash and cash equivalents................................... 2,215 132,750C 2,956
(2,752)D
(4,476)E
(122,279)F
(562)G
(1,940)I
Accounts receivable......................................... 5,419
5,419
Related party receivables................................... 367 (367)D
Investment in partnerships.................................. 2,287 (2,287)
Deferred costs, net......................................... 4,909 (1,680)F 1,851
562G
(1,940)I
Other assets................................................ 1,943
1,943
------------- ------------- ----------- -------------
Total assets................................................ $ 2,287 $ 197,438 $ (2,684) $ 197,041
------------- ------------- ----------- -------------
------------- ------------- ----------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages and notes payable............................... $ $ 180,182 $(120,279)F $ 59,903
Accounts payable and accrued expenses..................... 3,501 (2,820)E 681
Related party payables.................................... 84 1,572 (1,656)
Other liabilities......................................... 1,711
1,711
------------- ------------- ----------- -------------
Total liabilities........................................... 84 186,966 (124,755) 62,295
------------- ------------- ----------- -------------
Minority interests.......................................... 10,472 23,497J 33,969
Shareholders' Equity:
Series A Convertible Redeemable Preferred Stock, $.01 par
value and $1,000 stated value; 30,000,000 shares
authorized; 1,940 shares (Historical) no shares (Pro
forma) issued and outstanding.......................... 1,940
(1,940)I
Common Stock, $.01 par value; 150,000,000 shares
authorized; 81,265 shares (Historical) 7,333,765 shares
(Pro forma) issued and outstanding..................... 73C 73
Additional paid in capital................................ 806
132,677C 105,977
(3,119)D
1,050H
(1,940)I
(23,497)J
Deficit..................................................... (543)
(3,680)F (4,223)
------------- ------------- ----------- -------------
2,203
99,624 101,827
Officer stock purchase loans receivable.....................
(1,050)H (1,050)
------------- ------------- ----------- -------------
Total shareholders' equity.................................. 2,203
98,574 100,777
------------- ------------- ----------- -------------
Total liabilities and shareholders' equity.................. $ 2,287 $ 197,438 $ (2,684) $ 197,041
------------- ------------- ----------- -------------
------------- ------------- ----------- -------------
</TABLE>
F-2
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
(A) Represents the historical balance sheet of Philips International Realty Corp.
(B) To reflect on a consolidated basis the acquisition by the Company of the managing general
partner's interest in the Operating Partnership.
(C) To reflect the issuance of 7,200 shares at an assumed price of $20 per share:
Gross proceeds $144,000
Less: Underwriting discount (10,080)
Other Offering costs (1,170)
------------
Net proceeds $132,750
------------
------------
(D) To reimburse sponsor for Offering costs of $3,119 net of related party receivables. $ 2,752
(E) To repay costs incurred prior to December 31, 1997 in connection with the Formation Transactions
and the Offering.
Accounts payable $ 2,820
Related party payables 1,656
------------
$ 4,476
------------
------------
(F) To reflect the satisfaction of certain mortgages and notes payable payment of prepayment
penalties and write-off of deferred financing costs associated therewith, with net proceeds of
the Offering
Write off of deferred financing costs and prepayment penalties $ 3,680
Mortgages and notes payable, including prepayment penalties $122,279
(G) To reflect commitment fees associated with the establishment of an acquisition revolving credit
facility. $ 562
(H) To record officers' stock purchase loans. $ 1,050
(I) The transfer of Offering costs satisfied through the issuance of Series A Preferred Stock and
redemption of the Series A Preferred Stock with proceeds from Offering. $ 1,940
(J) To reflect the limited partnership interest as a minority interest based on its percentage
ownership as follows:
Total owners' equity $134,746
Limited partners' interest 25.21%
------------
Minority interest 33,969
Minority interest included in (B) above 10,472
------------
Adjustment $ 23,497
------------
------------
</TABLE>
F-3
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PHILIPS
THE MERRICK/MILL FORMATION INTERNATIONAL
PHILIPS BASIN NATIONAL TRANSACTIONS OFFERING REALTY CORP
COMPANY PROPERTIES PROPERTY ADJUSTMENTS CONSOLIDATED ADJUSTMENTS PRO FORMA
PHILIPS ------- ------------ ----------- ------------ ------------ ----------- -------------
INTERNATIONAL (2) (3) (4) (5) (6)
REALTY
CORP.
-------------
(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES FROM RENTAL
PROPERTIES......... $ -- $26,891 $4,969 $ 350 $ 538(a) $ 32,748 $ $32,748
----- ------- ------ ----- ------------ ------------ ----------- -------------
EXPENSES:
Operating
expenses......... -- 3,936 380 101 4,417 4,417
Real estate
taxes............ -- 3,819 820 43 4,682 4,682
Management fees to
affiliates....... -- 1,001 240 -- (311)(c) 930 930
Interest expense... -- 12,966 2,045 59 (431)(a) 14,639 (9,734)(a) 4,905
Depreciation and
amortization..... -- 4,015 824 63 770(a) 5,691 5,691
19(e)
General and
administrative
expenses......... 543 165 23 125 1,577(d) 1,972 217(b) 2,350
(461)f 161(c)
----- ------- ------ ----- ------------ ------------ ----------- -------------
Total expenses... 543 25,902 4,332 391 1,163 32,331 (9,356) 22,975
----- ------- ------ ----- ------------ ------------ ----------- -------------
Operating income
(loss)......... (543) 989 637 (41) (625) 417 9,356 9,773
Minority interests... -- -- -- -- -- -- (2,464)(d) (2,464)
Equity in income of
investee........... -- 339 -- -- (339)(b) -- -- --
Other income, net.... -- 38 3 1 -- 42 -- 42
----- ------- ------ ----- ------------ ------------ ----------- -------------
Income (loss)
before
extraordinary
items............ $(543) $1,366 $ 640 $ (40) $ (964) $ 459 $ 6,892 $ 7,351
----- ------- ------ ----- ------------ ------------ ----------- -------------
----- ------- ------ ----- ------------ ------------ ----------- -------------
Income per share (7)
Basic.............. $ 1.00
-------------
-------------
Diluted............ $ 1.00
-------------
-------------
</TABLE>
F-4
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS)
(1) Represents historical statement of operations of Philips International
Realty Corp. from July 16, 1997 (Incorporation) through December 31, 1997.
(2) Represents historical combined statement of income of The Philips Company.
(3) Represents historical combined statement of income of two properties in
which The Philips Company held an equity interest.
(4) Represents the historical statement of operations of The Shoppes at Lake
Mary.
(5) Adjustments to reflect the completion of the Formation Transactions.
(a) To reflect the adjustment resulting from purchase price accounting:
<TABLE>
<C> <S> <C>
Rental revenue--adjustment to straight line rental income........................... $ 538
Depreciation and amortization....................................................... $ 770
Interest expense.................................................................... $ (431)
(b) Elimination of equity in income of investees as a result of accounting for all
properties as wholly owned.......................................................... $ (339)
(c) Adjustment to management fees paid to affiliates related to the properties acquired:
Management fees based on historical agreements...................................... $ (1,241)
Management fees based upon agreement effective at the completion of the Formation
Transactions...................................................................... 930
-------------
Net decrease in management fees..................................................... $ (311)
-------------
-------------
(d) Incremental general and administrative expenses associated with the Formation
Transactions........................................................................ $ 1,577
(e) To reflect depreciation based upon purchase price for The Shoppes at Lake Mary...... $ 19
(f) To reflect elimination of non-recurring compensation expense related to the issuance
of Common Stock and Warrants in connection with the completion of the Formation
Transactions........................................................................ $ (461)
</TABLE>
(6) Adjustments to reflect the completion of the Offering.
<TABLE>
<C> <S> <C>
(a) To reflect the decrease in interest expense, associated with the satisfaction of
certain mortgages with the proceeds of the Offering, net of amortization of the
revolving credit facility commitment fees........................................... $ (9,734)
(b) To reflect as compensation expense the forgiveness of loans extended to officers to
purchase Common Stock in connection with the Offering............................... $ 217
(c) To reflect incremental general and administrative expenses associated with
broad-based equity ownership of the Company and NYSE listing........................ $ 161
(d) Represents the 25.21% interest of the minority in the Operating Partnership......... $ 2,464
</TABLE>
(7) Pro forma basic income per common share is based upon 7,334 shares of Common
Stock expected to be outstanding after the Offering. As each Operating
Partnership Unit is redeemable for one share of Common Stock, the
calculation of earnings per share upon redemption will be unaffected as
Unitholders and shareholders are entitled to equal distributions on a per
Unit and per share basis in the net income of the Company. Basic earnings
per share excludes any dilutive effects of the options and warrants
outstanding. Diluted earnings per share includes the dilutive effect of the
outstanding options and warrants calculated under the treasury stock method.
F-5
<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 December 31, 1997 and the related statement of operations,
shareholders' equity and cash flows for the period July 16, 1997 (Incorporation)
to December 31, 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. as of December 31, 1997 and the results of its operations and its cash
flows for the period July 16, 1997 to December 31, 1997 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
March 6, 1998
F-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Philips International Realty Corp.
We have audited the accompanying balance sheet of Philips International Realty,
L.P. as of December 31, 1997. This financial statement is the responsibility of
the management of Philips International Realty, L.P. Our responsibility is to
express an opinion on this financial statement 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 balance sheet referred to above presents fairly, in all
material respects, the financial position of Philips International Realty, L.P.
as of December 31, 1997 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
New York, New York
March 6, 1998
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Philips International Realty Corp.
We have audited the accompanying combined balance sheet of Property Partnerships
as of December 31, 1997. We have also audited the financial statement schedule
listed on the Index to Financial Statements included in the Prospectus. The
combined financial statement and financial statement schedule are the
responsibility of the management of Property Partnerships. Our responsibility is
to express an opinion on the financial statement and financial statement
schedule 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 combined balance sheet referred to above presents fairly, in
all material respects, the financial position of Property Partnerships as of
December 31, 1997 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 statement taken as a whole,
presents fairly, in all material respects, the information set forth therein.
ERNST & YOUNG LLP
New York, New York
March 6, 1998
F-8
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.,
PHILIPS INTERNATIONAL REALTY, L.P.
AND
PROPERTY PARTNERSHIPS
BALANCE SHEETS
DECEMBER 31, 1997
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PROPERTY
PHILIPS PHILIPS PARTNERSHIPS
INTERNATIONAL INTERNATIONAL ------------
REALTY CORP. REALTY, L.P.
------------- ------------- (COMBINED)
<S> <C> <C> <C>
ASSETS
Rental properties, at cost (Note 5):....................................
Land and improvements................................................. $ $ $ 49,143
Building and improvements............................................. 150,285
------------
199,428
Less accumulated depreciation......................................... (14,556)
------------
184,872
Cash and cash equivalents............................................... 1,779 436
Accounts receivable..................................................... 5,419
Related party receivables............................................... 367
Deferred charges, net (Note 4).......................................... 1,940 2,969
Other assets (Note 4)................................................... 23 1,920
Investment in partnerships (Note 3).....................................
Philips International Realty, L.P..................................... 2,286
Property Partnerships................................................. 1 13,869
------------- ------------- ------------
Total assets............................................................ $ 2,287 $ 17,978 $ 195,616
------------- ------------- ------------
------------- ------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY/PARTNERS' CAPITAL
Liabilities:
Mortgages and notes payable (Note 5).................................. $ $ 3,580 $ 176,602
Accounts payable and accrued expenses................................. 83 3,418
Related party payables (Notes 8)...................................... 84 1,556 16
Other liabilities..................................................... 1,711
------------- ------------- ------------
Total liabilities....................................................... 84 5,219 181,747
------------- ------------- ------------
Contingencies and other comments (Notes 7, 8 and 9)
Shareholders' Equity/Partners' Capital
Partners' Capital
Preferred units....................................................... 1,940
General Partners...................................................... 346
Limited Partners...................................................... 10,473 13,869
Series A Convertible Redeemable Preferred Stock,
$.01 par value; $1,000 stated value; 30,000,000 shares authorized and
1,940 shares issued and outstanding................................... 1,940
Common Stock, $.01 par value; 150,000,000 shares authorized and 47,660
shares issued and outstanding.........................................
Additional paid in capital.............................................. 806
Deficit................................................................. (543)
------------- ------------- ------------
Total partners' capital................................................. 12,759 13,869
Total shareholders' equity.............................................. 2,203
------------- ------------- ------------
Total liabilities, shareholders' equity and partners' capital........... $ 2,287 $ 17,978 $ 195,616
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
See accompanying notes.
F-9
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
STATEMENT OF OPERATIONS
PERIOD JULY 16, 1997 (INCORPORATION) TO DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Revenue.................................................................................................. $ --
General and administrative expenses...................................................................... 543
------
Net loss................................................................................................. $ (543)
------
------
</TABLE>
See accompanying notes.
F-10
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD JULY 16, 1997 (INCORPORATION) TO DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
PREFERRED COMMON DISTRIBUTIONS TOTAL
STOCK AT STOCK AT PAID-IN IN EXCESS SHAREHOLDERS'
STATED VALUE PAR VALUE CAPITAL OF NET INCOME EQUITY
------------ --------- ------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Net loss......................................... $(543) $ (543)
Sale of stock
Preferred...................................... $ 1,940 1,940
Common......................................... $ 2,133 2,133
Issuance of common stock and warrants............ 461 461
Reallocation of equity to minority partners in
the Operating Partnership...................... (1,788) (1,788)
------------ --------- ------- ------ -------
Balance December 31, 1997........................ $ 1,940 -- $ 806 $(543) $2,203
------------ --------- ------- ------ -------
------------ --------- ------- ------ -------
</TABLE>
See accompanying notes.
F-11
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
STATEMENT OF CASH FLOWS
PERIOD JULY 16, 1997 (INCORPORATION) TO DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Operating activities
Net loss............................................................................................... $ (543)
Adjustments to reconcile net loss to net cash provided by operating activities:
Non-cash compensation................................................................................ 461
Changes in operating assets and liabilities:
Due to related parties............................................................................... 82
--------
Net cash used in operating activities.................................................................. --
Investing activities:
Investment in Philips International Realty, L.P...................................................... (533)
--------
Net cash used in investing activities................................................................ (533)
--------
Financing activities:
Proceeds from issuance of common stock............................................................... 533
--------
Net cash provided by financing activities.............................................................. 533
--------
Net increase in cash and cash equivalents.............................................................. --
Cash and cash equivalents at beginning of period....................................................... --
--------
Cash and cash equivalents at end of period............................................................. $ --
--------
--------
</TABLE>
Additional non-cash transactions during the period consisted of the
following:
(a) Issuance of Series A Preferred Stock in payment of financial
advisory fee ($1,940). The deferred asset was contributed to Philips
International Realty, L.P. in exchange for Preferred Units.
(b) Acquisition of The Shoppes at Lake Mary, Florida property in
exchange for Common Stock of the Company ($1,600) and assumption of
mortgage debt ($547). The property and mortgage debt were contributed to
Philips International Realty, L.P. in exchange for general partnership
interests.
(c) The investment in Philips International Realty, L.P. and
additional paid in capital were reduced to reflect the dilution ($1,788) of
the Company's interest therein.
See accompanying notes.
F-12
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.,
PHILIPS INTERNATIONAL REALTY, L.P.
AND
PROPERTY PARTNERSHIPS
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. FORMATION TRANSACTIONS AND PROPOSED OFFERING
Philips International Realty Corp. (the 'Company'), a Maryland corporation,
and Philips International Realty, L.P. (the 'Operating Partnership'), a Delaware
limited partnership, were formed in July 1997 for the purpose of combining
certain real estate properties (the 'Properties') which were owned by
partnerships and limited liability companies (the 'Contributing Companies') in
which Philip Pilevsky owned an interest. The Operating Partnership had no
operations in 1997. The Company expects to qualify as a real estate investment
trust ('REIT') under the Internal Revenue Code of 1986, as amended, for the
taxable year ended December 31, 1997. The interests in the Property Partnerships
(see Note 3) were acquired by the Company and the Operating Partnership at the
close of business on December 31, 1997; accordingly, no operations are reflected
in the financial statements relating to such acquisitions for the year then
ended.
Formation Transactions
On December 31, 1997, the partners and members of the Contributing
Companies transferred their shopping center assets or, in certain instances,
their partnership or membership interests in the entities which hold title to
such shopping center assets, to certain newly-formed entities as follows:
o With respect to those partnerships which owned fee title to properties
located in New York or Connecticut, the partnerships contributed such fee
title, together with any existing indebtedness relating thereto, to a
designee of the Operating Partnership, which designee was a newly-formed
limited partnership (in which the Company indirectly owns a 0.01% general
partnership interest), in exchange for Units in the Operating
Partnership;
o With respect to those entities that were partnerships or limited
liability companies and which did not own fee title to properties located
in New York or Connecticut, the partners or members, as the case may be,
of such partnerships contributed 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 96.8%
limited partner interest in the Operating Partnership at December 31,
1997);
o The Company purchased a shopping center property in Florida from an
existing unaffiliated seller (the 'Seller') in exchange for 32,000 shares
(54,563 shares after proposed stock split) of Common Stock (which shares
represent approximately 2.1% of the outstanding Common Stock of the
Company and interests redeemable therefor) and the assumption of the
existing mortgage note payable in the amount of $547;
o The trustees of the Seller were issued 5,000 shares (8,526 shares after
proposed stock split) of Common Stock of the Company, plus warrants to
acquire an additional 8,000 shares (13,641 shares after proposed stock
split) of Common Stock of the Company at an exercise price of $25.00 per
share ($14.66 after proposed stock split) (which shares and warrants
represent approximately 0.8% of the outstanding Common Stock of Company
and interests redeemable therefor);
o An individual partner purchased 10,660 shares (18,176 shares after
proposed stock split) of the Company's Common Stock (approximately 0.7%
of the outstanding Common Stock and interests redeemable therefor) for a
total purchase price of $533;
o Prudential Securities Incorporated received, in lieu of the financial
advisory fee payable by the Seller upon consummation of the Formation
Transactions and assumed by the Company under a Contribution and Exchange
Agreement, 1,940 shares of Series A Preferred Stock, convertible into
Common Stock, or approximately 2.5% of the outstanding shares of Common
Stock of the Company (including interests redeemable therefor); and
F-13
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.,
PHILIPS INTERNATIONAL REALTY, L.P.
AND
PROPERTY PARTNERSHIPS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. FORMATION TRANSACTIONS AND PROPOSED OFFERING--(CONTINUED)
o The Company contributed its fee title interest in the Florida property
acquired, 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.
The Operating Partnership and the Property Partnerships are controlled by
Philips International Realty, LLC, a Delaware limited liability company, of
which Philip Pilevsky is the sole member, until the Company completes public or
private equity offerings of its securities aggregating in excess of $25,000, at
which time the Company will become the sole general partner of the Operating
Partnership and the Property Partnerships.
Proposed Offering
The Company expects to issue shares of its Common Stock through a public
offering (the 'Offering'). The net proceeds from the Offering will be used to
(i) repay approximately $127,000 of outstanding indebtedness (including
prepayment penalties and expenses accrued in connection with the Offering and
Formation Transactions) and (ii) redeem the Series A Preferred Stock for $1,940
plus the accrued dividends thereon, with the remaining proceeds to be available
for general corporate purposes.
Credit Facility
The Company expects to establish a revolving credit facility concurrently
with the consummation of the Offering. The availability of funds under the
credit facility will be subject to the Company's compliance with a number of
customary financial and other covenants on an on-going basis. The credit
facility will be used primarily to finance its acquisitions and redevelopment
activities. Borrowings under the credit facility are expected to be
collateralized by certain shopping center properties with recourse to the
Company and the Operating Partnership.
2. SIGNIFICANT ACCOUNTING POLICIES
Equity Method of Accounting
The Company has a 3.2% general partnership interest in the Operating
Partnership, and the Operating Partnership has a 99.989% interest in the
Property Partnerships. Since the Operating Partnership and Property Partnerships
initially are controlled by Philips International Realty, LLC (see Note 1), the
Company and the Operating Partnership account for their investments on the
equity method.
Principles of Combination
The Property Partnerships are not a legal entity but rather a combination
of real estate properties that are currently organized as limited partnerships
and limited liability companies which are under the common control of Philips
International Realty, LLC. All significant inter-company balances have been
eliminated in combination.
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.
Real Estate Properties
Building and improvements will be depreciated on the straight-line method
over the estimated useful lives of the assets which range from fifteen to
thirty-nine years, and tenant improvements (included in buildings and
improvements in the accompanying balance sheet) will be amortized over the lives
of the respective leases using the straight-line method.
In accordance with Statement of Financial Accounting Standards No. 121
('SFAS No. 121'), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, the Company reviews
F-14
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.,
PHILIPS INTERNATIONAL REALTY, L.P.
AND
PROPERTY PARTNERSHIPS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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. No impairment
losses have been recorded.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with an
original maturity of three months or less from date of purchase.
Banking relationships are maintained with major financial institutions. The
properties are operated through multiple bank accounts to mitigate exposure to
loss of cash balances which may from time to time exceed federally insured
limits.
Revenue Recognition
Minimum revenues from rental property will be 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 balance sheet, are amortized over the terms
of the related leases or debt agreements, as applicable. Costs incurred in
connection with the proposed Offering will be charged to paid in capital at the
completion of the planned equity offering.
Income Taxes
The Company intends to elect to be taxed as a REIT under section 856(c) of
the Internal Revenue Code of 1986, as amended, commencing with its taxable year
ended December 31, 1997. As a REIT, the Company generally will not be subject to
federal income tax to the extent it distributes its REIT taxable income to its
shareholders and meets certain other requirements. If the Company fails to
qualify as a REIT in any taxable year, the Company will be subject to federal
income tax on its taxable income at regular corporate rates. As a REIT, the
Company may be subject to certain state and local taxes on its income and
property and federal income and excise taxes on any undistributed taxable
income.
Earnings per share:
The Company and the Operating Partnership received their interest in the
Properties at the close of business on December 31, 1997 and had no operations
as a public entity and therefore the Company has not presented earnings (loss)
per share. If the 47,660 shares were outstanding since the Company's
incorporation, the Company's basic and diluted loss per share (as calculated
pursuant to FASB No. 128) would have been ($11.39). Basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share includes the dilutive effect of options, warrants and
convertible securities calculated under the treasury stock method. The
anti-dilutive effect of the warrants has not been considered in the diluted
calculation.
The Company has authorized a Common Stock split of 1.7051 to 1 effective
immediately prior to the completion of the Offering. Had this stock split
occurred, basic and diluted loss per share would have been ($6.68).
Preferred Stock
The Series A Preferred Stock is convertible 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 ($29.32 after proposed stock split),
subject to adjustment for customary anit-dilutive rights. Dividends on the
Series A
F-15
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.,
PHILIPS INTERNATIONAL REALTY, L.P.
AND
PROPERTY PARTNERSHIPS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Preferred Stock are cumulative and payable quarterly in arrears at a rate of 9%.
The Company has the right to redeem all of the Series A Preferred Stock
outstanding upon the occurrance of certain transactions at an amount in cash
equal to the stated value per share plus any accrued but unpaid dividends
hereon.
Upon consummation of the Offering, the Company plans to redeem the Series A
Preferred Stock for $1,940 in cash plus accrued and unpaid dividends from the
net proceeds of the Offering.
The holders of the Series A Preferred Stock have no voting rights.
Segment Disclosure
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (Statement 131), which is effective for years
beginning after December 15, 1997. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. Management has not completed its review
of Statement 131, but does not anticipate that the adoption of this statement
will have a significant effect on the Company's financial statements.
3. INVESTMENT IN PROPERTY PARTNERSHIPS
The Property Partnerships own the following neighborhood and community
shopping center properties:
Forest Avenue Shoppers Town, Staten Island, New York
Meadowbrook Commons, Freeport, New York
Merrick Commons, Merrick, New York
Mill Basin Plaza, Brooklyn, New York
Branhaven Plaza, Branford, Connecticut
Mall on the Mile, Hialeah, Florida
Palm Springs Village, Hialeah, Florida
The Shops on 49th Street, Hialeah, Florida
Philips Plaza, Hialeah, Florida
Elm Plaza, Enfield, Connecticut
Millside Plaza, Delran, New Jersey
Foxboro Plaza, Foxborough, Massachusetts
The Shoppes at Lake Mary, Lake Mary, Florida
In accordance with Accounting Principles Board Opinion No. 16, the purchase
of the non-sponsor interests in the Property Partnerships were accounted for at
fair market value. The fair market value purchase price is reflective of the
non-sponsor percentage interests acquired in the respective partnership
multiplied by the net asset value for such respective shopping center property,
which aggregated approximately $14,636. The non-sponsors received 292,712 units
(499,103 units proposed stock split) in the Operating Partnership in connection
with the formation transactions. (see Note 1). The sponsor interests
('Sponsors'), comprising Philip Pilevsky and his family members, are recorded at
historical cost.
Had the Company and the Operating Partnership acquired their interest in
the Property Partnerships on January 1, 1997, their share of equity in income of
investees would have been $9 and $265, respectively, and their net (loss) income
would be ($535) and $265, respectively.
F-16
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
PHILIPS INTERNATIONAL REALTY, L.P.
AND
PROPERTY PARTNERSHIPS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
4. DEFERRED COSTS AND OTHER ASSETS
Deferred Costs:
Deferred costs in the accompanying balance sheet are comprised as follows:
<TABLE>
<CAPTION>
PHILIPS INTERNATIONAL
REALTY, L.P. PROPERTY PARTNERSHIPS
--------------------- ---------------------
<S> <C> <C>
Deferred financing....................................................... $ $ 3,145
Deferred leasing......................................................... 1,908
Deferred offering........................................................ 1,940
------- -------
1,940 5,053
Less accumulated amortization............................................ 2,084
------- -------
$ 1,940 $ 2,969
------- -------
------- -------
</TABLE>
Other Assets:
Other assets in the accompanying combined balance sheet of the Property
Partnerships include restricted real estate tax escrows, capital improvement
escrows and tenant security deposits totaling $1,091 as of December 31, 1997.
5. MORTGAGES AND NOTES PAYABLE
As of December 31, 1997, mortgage notes payable aggregated $176,602 and
were collateralized by the shopping center properties. 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.
The following table summarizes the Property Partnerships' mortgage
indebtedness as of December 31, 1997:
<TABLE>
<CAPTION>
PROPERTY MORTGAGE NOTES WITH FIXED INTEREST:
- -------------------- ---------------------------------------------
<S> <C> <C>
Millside Plaza First mortgage notes with fixed interest $12,164
Elm Plaza rates of 7.48% due December 31, 2002. The
Foxboro Plaza notes are cross-defaulted and cross-
collateralized. Monthly payments of principle
and interest total $83.
Mall on the Mile First mortgage notes with a life insurance 41,977
Palm Springs Village company with a fixed interest rate of 7.83%
due in February 2004. The notes are cross-
defaulted and cross-collateralized. Monthly
payments of principal and interest total
$322.
Merrick Commons First mortgage note payable to a bank with a 25,762
and Mill Basin Plaza fixed interest rate of 7.28% due in January
2003. The note is collateralized by mortgages
on both properties. Monthly payments of
principal and interest total $178.
---------
TOTAL FIXED RATE NOTES 79,903
---------
</TABLE>
F-17
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
PHILIPS INTERNATIONAL REALTY, L.P.
AND
PROPERTY PARTNERSHIPS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
5. MORTGAGES AND NOTES PAYABLE--(CONTINUED)
<TABLE>
<CAPTION>
PROPERTY MORTGAGE NOTES WITH VARIABLE INTEREST:
- -------------------- ---------------------------------------------
<S> <C> <C>
Forest Avenue On June 27, 1997, the Company refinanced 24,000
Shoppers Town three mortgages collateralized by Forest
Avenue Shopping L.L.C. with a financial
services institution. A Sponsor 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% (7.44% at
December 31, 1997) and the mortgage note has
a maturity date of June 1, 1998; 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.
Branhaven Plaza Mortgage provides for variable interest rate 9,415
of the lower of LIBOR plus 3.50% or prime
plus 0.75% (9.22% at December 31, 1997) with
maturity on November 1, 1998, with two
options to extend the maturity date for six
months. The Company is required to make
quarterly amortization payments equal to 50%
of the property's preceding quarter's net
cash flow.
Meadowbrook Commons First mortgage note with variable interest of 25,781
2.5% plus base LIBOR rate (8.22% at December
31, 1997), 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.
23,975
The Shops on First mortgage note with a variable interest
49th Street rate of LIBOR plus 2.5% (8.22% at December
Philips Plaza 31, 1997), matures on June 1, 1998. Monthly
payments of principal of $37.5 plus interest.
This loan balance is guaranteed by two of the
Sponsors.
Mall on the Mile In connection with the purchase of the 13,000
Palm Springs Village partnership interest in Palm Springs Mile
The Shops on Associates, Ltd., the Company borrowed
49th Street $13,000 from a financial services
Philips Plaza institution. 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 a Sponsor, and (iv)
the pledge of all members' interests in
Forest Avenue Shoppers Town LLC, an
affiliated entity. The notes bear interest at
LIBOR plus 1.75% (7.44% at December 31, 1997)
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.
</TABLE>
F-18
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
PHILIPS INTERNATIONAL REALTY, L.P.
AND
PROPERTY PARTNERSHIPS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
5. MORTGAGES AND NOTES PAYABLE--(CONTINUED)
<TABLE>
<CAPTION>
PROPERTY MORTGAGE NOTES WITH VARIABLE INTEREST:
- -------------------- ---------------------------------------------
<S> <C> <C>
The Shoppes at Lake Mortgage payable in monthly installments of 528
Mary $7 of principal and interest at 2% over prime
on the outstanding balance. The balance of
principal and interest is due in full October
1998.
---------
TOTAL VARIABLE RATE INTEREST NOTES 96,699
---------
TOTAL MORTGAGE NOTES PAYABLE $176,602
---------
---------
</TABLE>
One of the Company's lenders did not consent to the transfer of interests
in The Shops on 49th Street and Philips Plaza properties which occurred in
connection with the Formation Transactions. If such transfer were determined to
violate the terms of the mortgage, the lender could be entitled to accelerate
the maturity date of the loan and commence foreclosure proceedings against the
mortgaged properties. The lender has taken no action with respect to this
matter. The mortgage loan on Meadowbrook Commons is scheduled to mature on March
31, 1998. The Company has reached an agreement in principle with the mortgagor
pursuant to which the mortgagor will forebear with respect to such loan for a
90-day period. These mortgages secure floating rate loans that are prepayable
without penalty, at the option of the Company, which are expected to be repaid
in full with proceeds from the Offering.
The Operating Partnership's note payable represents advances under a $10
million line of credit which bears interest at the rate of LIBOR plus 1.75%
(7.69% at December 31, 1997) and is due the earlier of June 1998 or the
completion of the Offering.
The combined aggregate principal maturities of mortgage notes payable
outstanding as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................................... $ 97,668
1999........................................................................... 1,057
2000........................................................................... 1,140
2001........................................................................... 1,230
2002........................................................................... 12,847
Thereafter..................................................................... 62,660
-------------
$ 176,602
-------------
-------------
</TABLE>
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values for the financial instruments were determined by
management using market information available as of December 31, 1997 and
appropriate valuation methodologies which included, in the case of debt
instruments, consideration of interest rates available for the issuance of debt
with terms and maturities similar to its currently outstanding indebtedness.
Considerable judgment is necessary to interpret market data and develop
estimated fair values. Accordingly, the estimates are not necessarily indicative
of the amounts that could be realized on disposition of the financial
instruments. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Although management is not aware of any factors that would significantly affect
its estimates of the fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since
December 31, 1997.
Cash equivalents and mortgage notes payable are reflected in the
accompanying balance sheet at amounts which reasonably approximate their fair
values.
F-19
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
PHILIPS INTERNATIONAL REALTY, L.P.
AND
PROPERTY PARTNERSHIPS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
7. RENTAL INCOME
The shopping center properties are leased to tenants under operating
leases. The minimum rental amounts due under the leases are generally either
subject to scheduled fixed increases or upward adjustments based on certain
inflation indices. The leases generally also require that the tenants reimburse
the Company for increases in certain operating costs and real estate taxes.
The approximate future minimum rents to be received over the next five
years and thereafter, assuming neither renewals nor extensions of leases which
may expire during the period, for leases in effect at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998.......................................................... $ 23,133
1999.......................................................... 21,878
2000.......................................................... 20,704
2001.......................................................... 17,925
2002.......................................................... 15,060
Thereafter.................................................... 123,975
--------
$222,675
--------
--------
</TABLE>
8. RELATED PARTY TRANSACTIONS
Management Agreement
The Company has entered into a management agreement with Philips
International Holding Corp., a related party, which provides for the day-to-day
operations, management and leasing services. Fees payable for such services are
(i) a management fee equal to 3% of gross rental collections, (ii) leasing
commissions in amounts not to exceed local current market rates, and (iii)
construction supervisory fees up to 10% of the costs of a project. In addition,
the Management Company will be reimbursed for certain direct out-of-pocket
expenses.
Related Party Payables
Related party payables of the Operating Partnership represent reimbursement
to be made for certain Formation Transaction and Offering costs that were
previously funded by the limited partners.
9. COMMITMENTS AND CONTINGENCIES
Stock Option Plan
On December 31, 1997, the Company adopted the Philips International Realty
Corp. 1997 Stock Option and Long-Term Incentive Plan ('Stock Option Plan'). A
total of 852,550 shares of authorized Common Stock (subject to adjustment) has
been reserved by the Company for issuance of awards under the Stock Option Plan.
Effective January 1, 1998, the Board of Directors granted options, each with a
ten-year term, to purchase up to 654,000 shares (as adjusted for the proposed
stock split--see Note 2) of Common Stock at the Offering price. The options vest
over three to four years from the date of grant. The options were granted to
directors, executive officers, employees of the Company and the Management
Company.
F-20
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
PHILIPS INTERNATIONAL REALTY, L.P.
AND
PROPERTY PARTNERSHIPS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
9. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Employment Agreements
The Company entered into employment and non-competition agreements with
certain executive officers as described in the Company's Prospectus under the
caption 'Management--Employment Agreements.'
Litigation
The Property Partnerships are 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 Property Partnerships, the Operating
Partnership or the Company.
F-21
<PAGE>
THE PROPERTY PARTNERSHIPS
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COST CAPITALIZED SUBSEQUENT
INITIAL COST TO ACQUISITION
------------------------------------------ ---------------------------
BUILDINGS BUILDINGS
LAND AND AND LAND AND AND
DESCRIPTION ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS IMPROVEMENTS IMPROVEMENTS
- ------------------------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Millside Plaza $ 4,477 $ 960 $ 5,443 $ 297 $ 719
Delran, NJ
Elm Plaza 3,401 709 4,968 17 *(73)
Enfield, CT
Branhaven Plaza 9,415 1,883 7,646 594 1,013
Branford, CT
Forest Avenue Shoppers Town 24,000 1,984 8,428 1,885 8,634
Staten Island, NY
Meadowbrook Commons 25,781 5,000 -- 2,115 21,387
Freeport, NY
Foxboro Plaza 4,286 655 6,055 194 *(626)
Foxborough, MA
Palm Springs Mile 78,952 12,864 25,767 8,442 35,026
Hialeah, FL (4 properties)
Mill Basin Plaza 13,248 5,107 8,696 1,795 2,682
Brooklyn, NY
The Shoppes at 528 362 2,052 -- --
Lake Mary
Lake Mary, FL
Merrick Commons 12,514 2,257 4,191 2,023 7,975
Merrick, NY
Construction in progress 302
------------ ------------ ------------ ------------ ------------
$176,602 $ 31,781 $ 73,246 $ 17,362 $ 77,039
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
<CAPTION>
GROSS AMOUNTS AT WHICH
CARRIED AT CLOSE OF PERIOD
---------------------------------------------------
BUILDINGS LIFE ON WHICH
LAND AND AND ACCUMULATED DATE DEPRECIATION IS
DESCRIPTION IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED COMPUTED
- ------------------------------------------ ------------ -------- ----------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Millside Plaza $ 1,257 $ 6,162 $ 7,419 $ 784 12/26/86 31.5 - 39 years
Delran, NJ
Elm Plaza 726 4,895 5,621 743 12/24/86 15 - 39 years
Enfield, CT
Branhaven Plaza 2,477 8,659 11,136 1,286 12/31/85 15 - 39 years
Branford, CT
Forest Avenue Shoppers Town 3,869 17,062 20,931 1,630 11/16/84 15 - 39 years
Staten Island, NY
Meadowbrook Commons 7,115 21,387 28,502 1,111 11/9/89 15 - 39 years
Freeport, NY
Foxboro Plaza 849 5,429 6,278 869 11/24/86 15 - 39 years
Foxborough, MA
Palm Springs Mile 21,306 60,793 82,099 7,100 4/1/85 15 - 39 years
Hialeah, FL (4 properties)
Mill Basin Plaza 6,902 11,378 18,280 360 9/1/94 39 years
Brooklyn, NY
The Shoppes at 362 2,052 2,414 -- 12/30/97 39 years
Lake Mary
Lake Mary, FL
Merrick Commons 4,280 12,166 16,446 673 1/1/86 15 - 39 years
Merrick, NY
Construction in progress 302 302
------------ ------------ -------- -----------
$ 49,143 $150,285 $199,428 $14,556
------------ ------------ -------- -----------
------------ ------------ -------- -----------
</TABLE>
*Purchase accounting adjustment relating to elimination of accumulated
depreciation against cost of property.
F-22
<PAGE>
THE PROPERTY PARTNERSHIPS
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
(DOLLARS IN THOUSANDS)
The changes in real estate for the three years ended December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period............................................... $137,399 $124,892 $118,288
Property acquisitions and purchase accounting adjustments.................... 20,789 -- --
Improvements................................................................. 41,240 12,507 6,604
-------- -------- --------
Balance at end of period..................................................... $199,428 $137,399 $124,892
-------- -------- --------
-------- -------- --------
</TABLE>
The aggregate cost of land, buildings and improvements for federal income
tax purposes at December 31, 1997 was $134,000.
The changes in accumulated depreciation for the three years ended December
31, 1997 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period.................................................. $ 24,277 $21,315 $18,628
Purchase accounting adjustments................................................. (15,318) -- --
Depreciation for period......................................................... 5,597 2,962 2,687
-------- ------- -------
Balance at end of period........................................................ $ 14,556 $24,277 $21,315
-------- ------- -------
-------- ------- -------
</TABLE>
F-23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Philips International Realty Corp.
We have audited the accompanying combined balance sheet of The Philips Company
as of December 31, 1996 and the related combined statements of income, owners'
deficit and cash flows for each of the years in the period ended December 31,
1997. These financial statements are the responsibility of The Philips Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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 as of December 31, 1996, and the combined results of its operations and
its cash flows for each of the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
March 6, 1998
F-24
<PAGE>
THE PHILIPS COMPANY
COMBINED BALANCE SHEETS
DECEMBER 31, 1996*
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Rental properties, at cost (Note 3)
Land and improvements............................................................................... $ 27,687
Building and improvements........................................................................... 109,712
--------
137,399
Less accumulated depreciation....................................................................... 24,277
--------
113,122
Cash and cash equivalents............................................................................. 785
Accounts receivable................................................................................... 7,832
Related party receivables (Note 6).................................................................... 1,216
Investments in partnerships (Note 2).................................................................. 694
Deferred charges, net (Note 8)........................................................................ 4,605
Other assets (Note 9)................................................................................. 1,587
--------
Total assets.......................................................................................... $129,841
--------
--------
LIABILITIES AND OWNERS' DEFICIT
Liabilities:
Mortgage notes payable (Note 3)..................................................................... $133,609
Accounts payable and accrued expenses............................................................... 3,584
Related party payables (Note 6)..................................................................... 2,067
Other liabilities................................................................................... 1,747
--------
Total liabilities..................................................................................... 141,007
--------
Contingencies and commitments (Notes 6 and 7)
Owners' deficit....................................................................................... (11,166)
--------
Total liabilities and owners' deficit................................................................. $129,841
--------
--------
</TABLE>
* On December 31, 1997, at the close of the Formation Transactions (see Note 1),
all of the assets and liabilities were transferred to entities owned 99.989%
by Philips International Realty, L.P.
See accompanying notes.
F-25
<PAGE>
THE PHILIPS COMPANY
COMBINED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Minimum and percentage rentals............................................... $ 20,816 $ 20,230 $ 18,163
Expense reimbursements....................................................... 6,075 5,717 5,024
-------- -------- --------
Total revenue (Note 5)......................................................... 26,891 25,947 23,187
-------- -------- --------
Expenses:
Operating expenses (Note 6).................................................. 3,936 4,176 4,193
Real estate taxes............................................................ 3,819 3,671 3,591
Management fees to affiliates (Note 6)....................................... 1,001 878 815
Interest expense (Note 3).................................................... 12,966 11,728 11,097
Depreciation and amortization................................................ 4,015 3,417 3,072
General and administrative expenses.......................................... 165 306 201
-------- -------- --------
Total expenses................................................................. 25,902 24,176 22,969
-------- -------- --------
989 1,771 218
Equity in income of investees (Note 2)......................................... 339 95 54
Other income, net............................................................ 38 22 35
-------- -------- --------
Income before extraordinary items............................................ 1,366 1,888 307
Extraordinary items (Note 8)................................................... 671 2,881 --
-------- -------- --------
Net income................................................................... $ 2,037 $ 4,769 $ 307
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes.
F-26
<PAGE>
THE PHILIPS COMPANY
COMBINED STATEMENTS OF OWNERS' DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Balance at December 31, 1994................................................................. $(24,611)
Distributions.............................................................................. (468)
Contributions.............................................................................. 2,681
Net income................................................................................. 307
--------
Balance at December 31, 1995................................................................. (22,091)
Distributions.............................................................................. (1,101)
Contributions.............................................................................. 7,257
Net income................................................................................. 4,769
--------
Balance at December 31, 1996................................................................. (11,166)
Distributions.............................................................................. (21,489)
Contributions.............................................................................. 24,202
Net income................................................................................. 2,037
--------
Balance at December 31, 1997................................................................. $ (6,416)
--------
--------
</TABLE>
See accompanying notes.
F-27
<PAGE>
THE PHILIPS COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................................................... $ 2,037 $ 4,769 $ 307
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.............................................. 4,015 3,417 3,072
Amortization of mortgage discount.......................................... 32 59 56
Extraordinary items........................................................ (671) (2,881) --
Equity in (income) of investees............................................ (339) (95) (54)
Changes in operating assets and liabilities:
Accounts receivable........................................................ (588) (574) (411)
Related party receivables.................................................. 3 (357) 722
Deferred charges........................................................... (1,055) (2,957) (1,514)
Other assets............................................................... 1,041 432 527
Accounts payable and accrued expenses...................................... (161) (793) (1,587)
Related party payables..................................................... (1,179) 1,997 249
Other liabilities.......................................................... (297) 550 2,168
------- ------- -------
Net cash provided by operating activities......................................... 2,838 3,567 3,535
------- ------- -------
INVESTING ACTIVITIES
Additions to land, buildings and improvements..................................... (19,186) (9,359) (6,604)
------- ------- -------
Net cash used in investing activities............................................. (19,186) (9,359) (6,604)
------- ------- -------
FINANCING ACTIVITIES
Proceeds from mortgage notes payable............................................ 79,400 14,835 1,719
Payments of mortgage notes payable.............................................. (61,792) (10,742) (1,221)
Contributions from owners....................................................... 18,421 2,635 2,130
Distributions to owners......................................................... (20,177) (642) (468)
------- ------- -------
Net cash provided by financing activities......................................... 15,852 6,086 2,160
------- ------- -------
Net increase (decrease) in cash and cash equivalents.............................. (496) 294 (909)
Cash and cash equivalents at the beginning of period.............................. 785 491 1,400
------- ------- -------
Cash and cash equivalents at the end of period.................................... $ 289 $ 785 $ 491
------- ------- -------
------- ------- -------
NONCASH INVESTING AND FINANCING ACTIVITIES
Loans to and from affiliates reclassified as capital contributions and/or
distributions:
Contributions................................................................... $ 1,009 $ 2,524 $ 373
Distributions................................................................... 1,312 459 --
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>
On December 31, 1997, at the close of the Formation Transaction (see Note
1) all of the assets and liabilities were transferred to entities owned 99.989%
by Philips International Realty, L.P.
See accompanying notes.
F-28
<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') was engaged in the ownership,
operation, leasing and development of seven neighborhood and community shopping
center properties (collectively, the 'Properties') located in New York,
Connecticut, New Jersey, Massachusetts and Florida. On December 31, 1997, as
part of the Formation Transactions discussed below, all of the properties were
transferred to entities owned by Philips International Realty, L.P.
Principles of Combination
The Company was not a legal entity, but rather a combination of real estate
properties that were organized as general and limited partnerships and limited
liability companies and which were under the common management and control of
Philip Pilevsky, his family or entities controlled by such parties (the
'Sponsors'). In addition, investments in certain non-controlled limited
partnerships were accounted for under the equity method (see Note 2). All
significant intercompany transactions and balances 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. Mall on the Mile, Palm Springs Village,
The Shops on 49th Street and Philips
Plaza
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 Formation Transactions, as discussed below, 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 L.L.C. 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 + 1.75% 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 3.
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-29
<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 Commission's Staff Accounting Bulletin
No. 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 L.L.C.............. (439) 1,073 $ 1,512 --
Palm Springs Mile Associates,
Ltd.............................. (4,334) 15,881 20,215 --
------- -------
$21,727 $ 7,957
------- -------
------- -------
</TABLE>
The purchase adjustments have 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>
The results of operations attributable to the interests acquired are
reflected in the combined financial statements from the date the interest was
acquired.
Formation Transactions
On December 31, 1997, the partners and members of the Company and the
Merrick/Mill Basin Properties (see Note 2) transferred their shopping center
assets or, in certain instances, their partnership or membership interests in
the entities which held title to such shopping center assets, to certain
newly-formed entities as follows:
o With respect to those partnerships which owned fee title to
properties located in New York or Connecticut, the partnerships
contributed 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 was 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'),
indirectly owns 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 did not own fee title to properties located in New York or
Connecticut, the partners or members, of such partnerships
contributed all of their partnership interests or membership
interests therein, 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 purchased a shopping center property in Florida from an
unaffiliated seller (the 'Seller') in exchange for 32,000 shares
(54,563 shares after proposed stock split) of Common Stock (which
shares represent approximately 2.1% of the outstanding Common Stock
of the REIT on a fully-diluted basis) and the assumption of an
mortgage note payable in the amount of $547;
o Certain trustees of the Seller were issued 5,000 shares (8,526
shares after the proposed stock split) of Common Stock of the REIT,
plus warrants to acquire an additional 8,000 shares (13,641 shares
after proposed stock split) 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-30
<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 purchased 10,660 shares (18,176 shares after
proposed stock split) 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 Incorporated received, 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 (66,158 shares after
proposed stock split) 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 therefor
and shares of Common Stock issuable upon exercise of outstanding
warrants);
o The REIT contributed 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 approximately 3.2% non-managing general partnership
interest therein; and
o The Operating Partnership and the Property-owning partnerships are
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 $25,000, at
which time the REIT will become the sole general partner of the
Operating Partnership and the Property-owning partnerships.
o The REIT has authorized a stock-split of 1.7051 to 1 effective with
the completion of an equity offering.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Real Estate Properties
Buildings and improvements are depreciated on the straight-line method over
the estimated useful lives of the assets which range from fifteen to thirty-nine
years, while tenant improvements (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 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.
F-31
<PAGE>
THE PHILIPS COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with an
original maturity of three months or less from date of purchase.
Banking relationships are maintained with major financial institutions. The
properties are operated through multiple bank accounts to mitigate exposure to
loss of cash balances which may from time to time exceed federally insured
limits.
Revenue Recognition
Minimum revenues from rental property are recognized on a straight-line
basis over the terms of the respective tenant leases.
Deferred Charges
Costs incurred to obtain tenant leases and long term financing, included in
deferred charges in the accompanying combined balance sheet, are amortized over
the terms of the related leases or debt agreements, as applicable.
Income Taxes
The entities comprising the Company were not taxpaying entities for income
tax purposes and, accordingly, no provision or credit has been made in the
accompanying financial statements for income taxes. Owners'/members' allocable
shares of taxable income or loss are reportable on their respective income tax
returns.
Concentration of Revenue and Credit Risk
Approximately 54%, 51% and 50% of the Company's total revenue for the years
ended December 31, 1997, 1996 and 1995, 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 were allocated
in accordance with the terms of the applicable agreements.
2. INVESTMENT IN PARTNERSHIPS
At December 31, 1996, the Company held a limited partnership interest and a
minority general partnership interest in the following two partnerships (the
'Merrick/Mill Basin Properties') which also owned and operated neighborhood and
community shopping centers:
<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>
As a limited partner and minority general partner, the Company did not
control the activities of the partnerships. These investments, accounted for
under the equity method, were recorded initially at cost and subsequently
adjusted for equity in the net income or loss of investees and cash
contributions and distributions.
F-32
<PAGE>
THE PHILIPS COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
2. INVESTMENT IN PARTNERSHIPS--(CONTINUED)
Condensed financial statements of the entities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996
------------
<S> <C>
CONDENSED BALANCE SHEET
Rental properties, net.................................................................... $ 23,955
Cash and cash equivalents................................................................. 96
Related party receivables................................................................. 1,252
Accounts receivable....................................................................... 1,135
Deferred charges, net..................................................................... 1,000
Other assets.............................................................................. 137
------------
Total assets.............................................................................. $ 27,575
------------
------------
Mortgage notes payable.................................................................... $ 26,049
Accounts payable and accrued expenses..................................................... 320
Related party payables.................................................................... 620
Other liabilities......................................................................... --
------------
Total liabilities......................................................................... 26,989
Owners' equity............................................................................ 586
------------
Total liabilities and owners' equity...................................................... $ 27,575
------------
------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF OPERATIONS
Revenues from rental property and other income............................ $4,972 $ 4,959 $4,813
Interest income from affiliate............................................ -- 1,297 --
------ ------- ------
Total revenue............................................................. 4,972 6,256 4,813
------ ------- ------
Operating and other expenses.............................................. 1,463 1,492 1,436
Interest.................................................................. 2,045 3,496 2,054
Depreciation and amortization............................................. 824 576 540
------ ------- ------
Total expenses............................................................ 4,332 5,564 4,030
------ ------- ------
Income before extraordinary item.......................................... 640 692 783
Extraordinary item........................................................ -- (349) --
------ ------- ------
Net income................................................................ $ 640 $ 343 $ 783
------ ------- ------
------ ------- ------
</TABLE>
F-33
<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. At December 31,
1996, a partner/member in the entities that hold title to the properties had
personally guaranteed the repayment of mortgage loans with a balance of $38,720.
The following table summarizes mortgage indebtedness as of December 31,
1996:
<TABLE>
<CAPTION>
PROPERTY MORTGAGE NOTES WITH FIXED INTEREST:
- -------------------- ---------------------------------------------
<S> <C> <C>
Forest Avenue First mortgage note with a fixed interest $ 12,502
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
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(A).
Subordinate mortgages, net of discount, 905
bearing no interest, except if a default
occurs, matures on July 1, 2000. See Note
3(A).
---------------
TOTAL FIXED RATE NOTES 30,571
---------------
MORTGAGE NOTES WITH VARIABLE INTEREST:
---------------------------------------------
Forest Avenue Second mortgage note with variable interest 2,048
Shoppers Town rate based on the prime rate (8.25% at
December 31, 1996), matures on June 30, 1997.
Branhaven Plaza Wrap around mortgage note with a fixed 9,415
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
50% of the property's preceding quarter's net
cash flow.
Meadowbrook Commons First mortgage note with variable interest of 26,096
2.5% plus base LIBOR rate (8.03% at December
31, 1996), 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.
Mall on the Mile First mortgage note collateralized with a 65,479
Palm Springs Village variable interest rate of LIBOR plus 2.5%
The Shops on (8.03% at December 31, 1996), matures on June
49th Street 1, 1998. Monthly payments of principal of
Philips Plaza $37.5 plus interest.
---------------
TOTAL VARIABLE RATE NOTES 103,038
---------------
TOTAL MORTGAGE NOTES PAYABLE $ 133,609
---------------
---------------
</TABLE>
F-34
<PAGE>
THE PHILIPS COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. MORTGAGE NOTES PAYABLE--(CONTINUED)
(A) SCHEDULE OF MORTGAGE NOTES--(CONTINUED)
On February 14, 1997, the Company refinanced its mortgages collateralized
by certain of the properties in Hialeah, Florida with a life insurance company
at a fixed rate of 7.83%, with maturity in February 2004.
In connection with the purchase of the non-sponsor interest in Palm Springs
Mile Associates, Ltd. (see Note 1), the Company issued $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 1.75% 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 The Shops on
49th Street and Philips Plaza shopping centers 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.
On June 27, 1997, the Company refinanced three mortgages collateralized by
Forest Avenue Shoppers Town with a financial services institution. An individual
that is a member in the entity that owns the property 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 Shopping 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.
During November 1997, the Company closed its 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
further to June 2004 or 2007, (iii) to suspend mortgage amortization until the
closing of the Formation Transactions, 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 were 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 closed its agreement with the holder of
the Palm Springs Mile Associates, Ltd. partner notes to suspend scheduled
amortization of $250 per month until the closing of the Formation Transactions.
The lender made 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 bears interest at an
annual rate of LIBOR + 1.75% and matures in June 1998. The proceeds of the
$1,000 additional loan were placed in a collateral account to secure the
indebtedness.
On December 31, 1997, the Company closed its agreement with its lender in
connection with the Millside Plaza, Elm Plaza and Foxboro Plaza mortgage (i) to
sever the Wallingford Shopping LLC and the Freehold Shopping LLC mortgages from
the cross-collateralization provisions of the original loan agreement, (ii) to
extend the maturity date to 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.
F-35
<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 December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997........................................................................... $ 21,206
1998........................................................................... 36,172
1999........................................................................... 1,796
2000........................................................................... 35,440
2001........................................................................... 784
Thereafter..................................................................... 38,211
-------------
$ 133,609
-------------
-------------
</TABLE>
- ------------------
(C) CAPITALIZED INTEREST
Interest costs capitalized for the years ended December 31, 1996 and 1995,
were $42 and $383, respectively.
(D) INTEREST COST
Interest paid for the years ended December 31, 1997, 1996, 1995 were
$11,357, $10,878 and $8,732, 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.
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%, 95% and 96%
of revenues from rental properties for the years ended December 1997, 1996 and
1995, respectively.
F-36
<PAGE>
THE PHILIPS COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
5. RENTAL INCOME--(CONTINUED)
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>
1998.......................................................... $ 19,132
1999.......................................................... 18,016
2000.......................................................... 16,958
2001.......................................................... 14,594
2002.......................................................... 11,785
Thereafter.................................................... 89,698
--------
$170,183
--------
--------
</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 years ended December 31, 1997, 1996
and 1995 were $95, $773 and $181, 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.
8. EXTRAORDINARY ITEMS
The combined statements of income for the years ended December 31, 1997 and
1996 include extraordinary gains of approximately $671 and $2,881, respectively,
in connection with the settlement of debt obligations on the Company's shopping
center properties. The $671 gain for the year ended December 31, 1997, is net of
an extraordinary loss of approximately $265 representing the write-off of
deferred financing costs related to the refinancing of debt on a certain
shopping center properties.
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 $791 as of December 31, 1996.
F-37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Philips International Realty Corp.
We have audited the combined statements of revenues and certain expenses of the
Merrick Commons and Mill Basin Plaza Properties as described in Note 1, for each
of the three years in the period ended December 31, 1997. 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, 1997 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
New York, New York
March 6, 1998
F-38
<PAGE>
MERRICK COMMONS AND MILL BASIN PLAZA PROPERTIES
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues from rental property:
Minimum and percentage rentals, including other income of $3, $10 and $3,
respectively (Note 3 and 5)........................................... $ 3,842 $ 3,802 $ 3,651
Expense reimbursements................................................... 1,130 1,157 1,162
--------- --------- ---------
4,972 4,959 4,813
--------- --------- ---------
Certain expenses:
Property taxes........................................................... 820 744 671
Management fees (Note 4)................................................. 240 234 230
Repairs and maintenance.................................................. 180 150 196
Professional fees........................................................ 63 120 62
Cleaning, security and landscaping....................................... 42 112 105
Utilities................................................................ 50 48 79
Insurance................................................................ 46 42 38
Other operating expenses................................................. 22 42 55
--------- --------- ---------
1,463 1,492 1,436
--------- --------- ---------
Revenues in excess of certain expenses..................................... $ 3,509 $ 3,467 $ 3,377
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-39
<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 years ended December 31, 1997, 1996 and 1995.
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, 1997 are
as follows:
<TABLE>
<S> <C>
1998........................................................... $ 3,785
1999........................................................... 3,716
2000........................................................... 3,678
2001........................................................... 3,324
2002........................................................... 3,275
Thereafter..................................................... 34,277
---------
$ 52,055
---------
---------
</TABLE>
F-40
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
UNTIL , 1998 (25 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary............................. 1
Risk Factors................................... 14
The Company.................................... 23
Strategies for Growth.......................... 24
Use of Proceeds................................ 27
Distribution Policy............................ 27
Capitalization................................. 28
Dilution....................................... 29
Selected Financial Data........................ 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 32
Overview of the Company's Primary Markets...... 36
Business and Properties........................ 42
Significant Properties......................... 52
Management..................................... 55
Formation Transactions and Structure of the
Company...................................... 61
Policies with Respect to Certain Activities.... 63
Partnership Agreement of Operating
Partnership.................................. 65
Certain Relationships and Related
Transactions................................. 69
Principal Shareholders......................... 71
Description of Capital Stock................... 72
Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws................. 76
Shares Eligible for Future Sale................ 79
Federal Income Tax Considerations.............. 81
ERISA Considerations........................... 93
Underwriting................................... 95
Experts........................................ 97
Legal Matters.................................. 97
Additional Information......................... 97
Glossary....................................... 98
Index to Financial Statements.................. F-1
</TABLE>
7,200,000 Shares
[LOGO] WITH TYPE
Common Stock
------------------------
P R O S P E C T U S
------------------------
PRUDENTIAL SECURITIES INCORPORATED
RAYMOND JAMES & ASSOCIATES, INC.
May , 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses paid by the Company in
connection with the issuance and distribution of the securities being registered
hereunder. Except for the Securities and Exchange Commission registration fee,
all amounts are estimates.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................................ $51,295
NASD Fee........................................................................... 17,888
New York Stock Exchange Listing Fee................................................ 108,233
Transfer Agent and Registrar's Fees................................................ *
Printing and Engraving Expenses.................................................... *
Legal Fees and Expenses (other than Blue Sky)...................................... *
Accounting Fees and Expenses....................................................... *
Blue Sky Fees and Expenses......................................................... *
Miscellaneous Expenses............................................................. *
-------
Total......................................................................... $ *
-------
-------
</TABLE>
- ------------------
* To be completed by Amendment.
ITEM 32. SALES TO SPECIAL PARTIES.
See Item 33.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
Upon formation of the Company, Philip Pilevsky was issued 20 shares of
Common Stock for total consideration of $1,000 in order to provide the initial
capitalization of the Company. These shares were repurchased by the Company at
cost upon consummation of the Formation Transactions. In connection with the
Formation Transactions, (i) an aggregate of 2,472,395 Units were issued to
certain members of the Philips Group who transferred interests in the Properties
and certain other assets to the Company in consideration of the transfer of such
Properties and assets; (ii) Mr. Pilevsky was issued 18,176 shares of Common
Stock for total consideration of $533,000 in cash; (iii) the Trustees were
issued 8,526 shares of Common Stock and warrants to purchase an aggregate of
13,641 shares of Common Stock 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 related agreements; and (iv)
Prudential Securities Incorporated was issued 1,940 shares of Series A Preferred
Stock 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. The issuances of the securities described
in this Item 33 were made in reliance upon the exemption from registration
provided by Section 4(2) under the Securities Act.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's officers and directors are indemnified under Maryland law,
the Amended and Restated Articles of Incorporation and the By-Laws of the
Company and the Agreement of Limited Partnership of the Operating Partnership
(the 'Partnership Agreement of the Operating Partnership'), against certain
liabilities. The Amended and Restated Articles of Incorporation provides that
the Company shall have the power to obligate itself 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 Amended and Restated 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
II-1
<PAGE>
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
Amended and Restated 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 (i) 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); (ii) 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
committed in bad faith or was the result of active and deliberate dishonesty and
was material to the cause of action adjudicated in the proceeding; or (iii) in
the case of any criminal proceeding, the person had reasonable cause to believe
that the act or failure to act was unlawful. The Amended and Restated Articles
of Incorporation of the Company contain a provision consistent with the MGCL. No
amendment of the Amended and Restated 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
Amended and Restated 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 Amended and Restated Articles
of Incorporation.
Insofar as indemnification for liabilities arising under the Securities 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 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
<TABLE>
<S> <C>
PHILIPS INTERNATIONAL REALTY CORP.
Pro Forma Condensed Consolidated Financial Statements (unaudited):
Pro Forma Condensed Consolidated Balance Sheet as of December 31, 1997
Notes to Pro Forma Condensed Consolidated Balance Sheet as of December 31, 1997
Pro Forma Condensed Consolidated Statement of Income for the Year Ended December 31, 1997
Notes to Pro Forma Condensed Consolidated Statement of Income for the Year Ended December 31, 1997
Historical
Report of Independent Auditors
Balance Sheet as of December 31, 1997
Statement of Operations for the Period July 16, 1997 (Incorporation) to December 31, 1997
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
Statement of Shareholders' Equity for the period July 16, 1997 (Incorporation) to December 31, 1997
Statement of Cash Flows for the Period July 16, 1997 (Incorporation) to December 31, 1997
Notes to Financial Statements
PHILIPS INTERNATIONAL REALTY, L.P.
Report of Independent Auditors
Balance Sheet as of December 31, 1997
Notes to Financial Statement
PROPERTY PARTNERSHIPS
Report of Independent Auditors
Combined Balance Sheet as of December 31, 1997
Schedule III--Real Estate and Accumulated Depreciation as of December 31, 1997
Notes to Combined Financial Statement
THE PHILIPS COMPANY
Report of Independent Auditors
Combined Balance Sheet as of December 31, 1996
Combined Statements of Income for the Years Ended December 31, 1997, 1996 and 1995
Combined Statements of Owners' Deficit for the Years Ended December 31, 1997, 1996 and 1995
Combined Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995
Notes to Combined Financial Statements
MERRICK COMMONS AND MILL BASIN PLAZA PROPERTIES
Combined Statements of Revenues and Certain Expenses:
Report of Independent Auditors
Combined Statements of Revenues and Certain Expenses for the Years Ended December 31, 1997, 1996 and
1995
Notes to Combined Statements of Revenues and Certain Expenses
</TABLE>
(b) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company's Form
8-K dated December 31, 1997 and incorporated herein by reference)
3.2 Articles Supplementary of Series A Preferred Stock (filed as Exhibit 3.2 to the Company's Form 8-K dated
December 31, 1997 and incorporated herein by reference)
3.3 Second Amended and Restated By-Laws of the Company
3.4 Form of Certificate of Common Stock
5.1* Opinion of Ballard Spahr Andrews & Ingersoll regarding the validity of the Common Stock being registered
8.1* Opinion of Pryor Cashman Sherman & Flynn LLP regarding tax matters
10.1* Amended and Restated Agreement of Limited Partnership of the Operating Partnership
10.2 Form of 1997 Stock Option and Long-Term Incentive Plan of the Company (filed as Exhibit 10.2 to the
Company's Registration Statement on Form S-4, Registration No. 333-41431, and incorporated herein by
reference)
10.3 Form of Agreement of Limited Partnership for Property Partnerships (filed as Exhibit 10.3 to the
Company's Registration Statement on Form S-4, Registration No. 333-41431, and incorporated herein by
reference)
10.4 Form of Articles of Incorporation of Philips Subs (filed as Exhibit 10.4 to the Company's Registration
Statement on Form S-4, Registration No. 333-41431, and incorporated herein by reference)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------------------------------
<C> <S>
10.5 Form of Bylaws of Philips Subs (filed as Exhibit 10.5 to the Company's Registration Statement on Form
S-4, Registration No. 333-41431, and incorporated herein by reference)
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 (filed as Exhibit 10.6 to the Company's Registration Statement on Form S-4, Registration No.
333-41431, and incorporated herein by reference)
10.7 Form of Registration Rights Agreement among the Company and certain holders of limited partnership
interests in the Operating Partnership (filed as Exhibit 10.7 to the Company's Registration Statement on
Form S-4, Registration No. 333-41431, and incorporated herein by reference)
10.8 Amended and Restated Management Agreement among the Company, the Operating Partnership and Philips
International Management Corp. (filed as Exhibit 10.8 to the Company's Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference)
10.9 Amended and Restated Non-Competition Agreement among the Company, the Operating Partnership, Philip
Pilevsky and Sheila Levine (filed as Exhibit 10.9 to the Company's Form 10-K for the year ended December
31, 1997 and incorporated herein by reference)
10.10 Employment Agreement between the Company and Louis J. Petra (filed as Exhibit 10.1 to the Company's Form
8-K dated December 31, 1997 and incorporated herein by reference)
10.11 Employment Agreement between the Company and Sheila Levine (filed as Exhibit 10.2 to the Company's Form
8-K dated December 31, 1997 and incorporated herein by reference)
10.12* Employment Agreement between the Company and Brian J. Gallagher
10.13 Form of Warrant (filed as Exhibit 10.12 to the Company's Registration Statement on Form S-4, Registration
No. 333-41431, and incorporated herein by reference)
10.14 Amendment No. 1 to Contribution and Exchange Agreement, dated as of December 29, 1997 (filed as Exhibit
10.13 to the Company's Form 8-K dated December 31, 1997 and incorporated herein by reference)
10.15 Non-Recourse Secured Promissory Note of National Properties Trust (filed as Exhibit 10.14 to the
Company's Form 8-K dated December 31, 1997 and incorporated herein by reference)
10.16* Credit Agreement among the Company, the Operating Partnership and Prudential Securities Credit
Corporation
10.17 Form of Amended and Restated Mortgage Assignment of Leases, Security Agreement and Spreader Agreement and
Renewal Promissory Note for Mall on the Mile and Palm Springs Village (filed as Exhibit 10.15 to the
Company's Form 10-K for the year ended December 31, 1997 and incorporated herein by reference)
10.18 Form of Letter Agreement with respect to Supplemental Representations and Warranties
10.19 Form of Letter Agreement with respect to Right of First Refusal
21.1 List of Subsidiaries of the Company (filed as Exhibit 21.1 to the Company's Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference)
23.1 Consent of Ernst & Young LLP
23.2 Consent of Rosen Consulting Group
23.3* Consent of Ballard Spahr Andrews & Ingersoll (contained in Exhibit 5.1)
23.4* Consent of Pryor Cashman Sherman & Flynn LLP (contained in Exhibit 8.1)
24.1** Power of Attorney (contained on signature page)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by Amendment
** Previously filed
II-4
<PAGE>
ITEM 39. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the 'Act') may be permitted to directors, officers, and controlling
persons of the Company pursuant to the provisions described under Item 34 above,
or otherwise, the Company 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
Company of expenses incurred or paid by a director, officer, or controlling
person of the Company in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities registered, the Company 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.
The Company hereby undertakes:
(1) 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 the form
of Prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(2) 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.
The Company hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the 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 the 17th day of April, 1998.
PHILIPS INTERNATIONAL REALTY CORP.
By: ________/s/ PHILIP PILEVSKY_______
PHILIP PILEVSKY
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<C> <S> <C>
/s/ PHILIP PILEVSKY Director, Chief Executive Officer and April 17, 1998
- ------------------------------------------ Chairman of the Board
Philip Pilevsky
* Director and President April 17, 1998
- ------------------------------------------
Louis J. Petra
* Director, Chief Operating Officer, April 17, 1998
- ------------------------------------------ Executive Vice President and Secretary
Sheila Levine
* Chief Financial Officer, Acquisitions April 17, 1998
- ------------------------------------------ Director and Treasurer
Brian J. Gallagher
* Director April 17, 1998
- ------------------------------------------
Arnold S. Penner
* Director April 17, 1998
- ------------------------------------------
A. F. Petrocelli
* Director April 17, 1998
- ------------------------------------------
Elise Jaffe
* Director April 17, 1998
- ------------------------------------------
Robert Grimes
* By: /s/ PHILIP PILEVSKY
Philip Pilevsky
Attorney-in-Fact
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- ------------------------------------------------------------------------------------------ -----------
<C> <S> <C>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of the Company (filed as Exhibit 3.1 to the
Company's Form 8-K dated December 31, 1997 and incorporated herein by reference)
3.2 Articles Supplementary of Series A Preferred Stock (filed as Exhibit 3.2 to the Company's
Form 8-K dated December 31, 1997 and incorporated herein by reference)
3.3 Second Amended and Restated By-Laws of the Company
3.4 Form of Certificate of Common Stock
5.1* Opinion of Ballard Spahr Andrews & Ingersoll regarding the validity of the Common Stock
being registered
8.1* Opinion of Pryor Cashman Sherman & Flynn LLP regarding tax matters
10.1* Amended and Restated Agreement of Limited Partnership of the Operating Partnership
10.2 Form of 1997 Stock Option and Long-Term Incentive Plan of the Company (filed as Exhibit
10.2 to the Company's Registration Statement on Form S-4, Registration No. 333-41431, and
incorporated herein by reference)
10.3 Form of Agreement of Limited Partnership for Property Partnerships (filed as Exhibit 10.3
to the Company's Registration Statement on Form S-4, Registration No. 333-41431, and
incorporated herein by reference)
10.4 Form of Articles of Incorporation of Philips Subs (filed as Exhibit 10.4 to the Company's
Registration Statement on Form S-4, Registration No. 333-41431, and incorporated herein by
reference)
10.5 Form of Bylaws of Philips Subs (filed as Exhibit 10.5 to the Company's Registration
Statement on Form S-4, Registration No. 333-41431, and incorporated herein by reference)
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 (filed as Exhibit 10.6 to the
Company's Registration Statement on Form S-4, Registration No. 333-41431, and incorporated
herein by reference)
10.7 Form of Registration Rights Agreement among the Company and certain holders of limited
partnership interests in the Operating Partnership (filed as Exhibit 10.7 to the Company's
Registration Statement on Form S-4, Registration No. 333-41431, and incorporated herein by
reference)
10.8 Amended and Restated Management Agreement among the Company, the Operating Partnership and
Philips International Management Corp. (filed as Exhibit 10.8 to the Company's Form 10-K
for the year ended December 31, 1997 and incorporated herein by reference)
10.9 Amended and Restated Non-Competition Agreement among the Company, the Operating
Partnership, Philip Pilevsky and Sheila Levine (filed as Exhibit 10.9 to the Company's
Form 10-K for the year ended December 31, 1997 and incorporated herein by reference)
10.10 Employment Agreement between the Company and Louis J. Petra (filed as Exhibit 10.1 to the
Company's Form 8-K dated December 31, 1997 and incorporated herein by reference)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- ------------------------------------------------------------------------------------------ -----------
<C> <S>
10.11 Employment Agreement between the Company and Sheila Levine (filed as Exhibit 10.2 to the
Company's Form 8-K dated December 31, 1997 and incorporated herein by reference)
10.12* Employment Agreement between the Company and Brian J. Gallagher
10.13 Form of Warrant (filed as Exhibit 10.12 to the Company's Registration Statement on Form
S-4, Registration No. 333-41431, and incorporated herein by reference)
10.14 Amendment No. 1 to Contribution and Exchange Agreement, dated as of December 29, 1997
(filed as Exhibit 10.13 to the Company's Form 8-K dated December 31, 1997 and incorporated
herein by reference)
10.15 Non-Recourse Secured Promissory Note of National Properties Trust (filed as Exhibit 10.14
to the Company's Form 8-K dated December 31, 1997 and incorporated herein by reference)
10.16* Credit Agreement among the Company, the Operating Partnership and Prudential Securities
Credit Corporation
10.17 Form of Amended and Restated Mortgage Assignment of Leases, Security Agreement and
Spreader Agreement and Renewal Promissory Note for Mall on the Mile and Palm Springs
Village (filed as Exhibit 10.15 to the Company's Form 10-K for the year ended December 31,
1997 and incorporated herein by reference)
10.18 Form of Letter Agreement with respect to Supplemental Representations and Warranties
10.19 Form of Letter Agreement with respect to Right of First Refusal
21.1 List of Subsidiaries of the Company (filed as Exhibit 21.1 to the Company's Form 10-K for
the year ended December 31, 1997 and incorporated herein by reference)
23.1 Consent of Ernst & Young LLP
23.2 Consent of Rosen Consulting Group
23.3* Consent of Ballard Spahr Andrews & Ingersoll (contained in Exhibit 5.1)
23.4* Consent of Pryor Cashman Sherman & Flynn LLP (contained in Exhibit 8.1)
24.1** Power of Attorney (contained on signature page)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by Amendment
** Previously filed
<PAGE>
SECOND AMENDED AND RESTATED
BYLAWS OF
PHILIPS INTERNATIONAL REALTY CORP.
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of the Corporation
shall be located at such place or places as the Board of Directors may
designate.
Section 2. ADDITIONAL OFFICES. The Corporation may have additional
offices at such places as the Board of Directors may from time to time determine
or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE. All meetings of stockholders shall be held at the
principal office of the Corporation or at such other place within the United
States as shall be stated in the notice of the meeting.
Section 2. ANNUAL MEETING. An annual meeting of the stockholders for
the election of directors and the transaction of any business within the powers
of the Corporation shall be held on a date and at the time set by the Board of
Directors during the month of May in each year, unless the Board of Directors
elects to hold the meeting in any other month. Failure to hold an annual meeting
does not invalidate the Corporation's existence or affect any otherwise valid
acts of the Corporation..
Section 3. SPECIAL MEETINGS. The president, chief executive officer or
Board of Directors may call special meetings of the stockholders. Special
meetings of stockholders shall also be called by the secretary of the
Corporation upon the written request of the holders of shares entitled to cast
not less than a majority of all the votes entitled to be cast at such meeting.
Such request shall state the purpose of such meeting and the matters proposed to
be acted on at such meeting. The secretary shall inform such stockholders of the
reasonably estimated cost of preparing and mailing notice of the meeting and,
upon payment to the Corporation by such stockholders of such costs, the
secretary shall give notice to each stockholder entitled to notice of the
meeting. Unless requested by the stockholders entitled to cast a majority of all
the votes entitled to be cast at such meeting, a special meeting need not be
called to consider any matter which is substantially the same as a matter voted
on at any special meeting of the stockholders held during the preceding twelve
months.
Section 4. NOTICE. Not less than ten nor more than 90 days before each
meeting of stockholders, the secretary shall give to each stockholder entitled
to vote at such meeting and to each stockholder not entitled to vote who is
entitled to notice of the meeting written or printed notice stating the time and
place of the meeting and, in the case of a special meeting or as otherwise may
be required by any statute, the purpose for which the meeting is called, either
by mail or by presenting it to such
<PAGE>
stockholder personally or by leaving it at his residence or usual place of
business. If mailed, such notice shall be deemed to be given when deposited in
the United States mail addressed to the stockholder at his post office address
as it appears on the records of the Corporation, with postage thereon prepaid.
Section 5. SCOPE OF NOTICE. Any business of the Corporation may be
transacted at an annual meeting of stockholders without being specifically
designated in the notice, except such business as is required by any statute to
be stated in such notice. No business shall be transacted at a special meeting
of stockholders except as specifically designated in the notice.
Section 6. ORGANIZATION. At every meeting of stockholders, the Chairman
of the Board, if there be one, shall conduct the meeting or, in the case of
vacancy in office or absence of the Chairman of the Board, one of the following
officers present shall conduct the meeting in the order stated: the Vice
Chairman of the Board, if there be one, the President, the Vice Presidents in
their order of rank and seniority, or a Chairman chosen by the stockholders
entitled to cast a majority of the votes which all stockholders present in
person or by proxy are entitled to cast, shall act as Chairman, and the
Secretary, or, in his absence, an assistant secretary, or in the absence of both
the Secretary and assistant secretaries, a person appointed by the Chairman
shall act as Secretary.
Section 7. QUORUM. At any meeting of stockholders, the presence in
person or by proxy of stockholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this section
shall not affect any requirement under any statute or the charter of the
Corporation for the vote necessary for the adoption of any measure. If, however,
such quorum shall not be present at any meeting of the stockholders, the
stockholders entitled to vote at such meeting, present in person or by proxy,
shall have the power to adjourn the meeting from time to time to a date not more
than 120 days after the original record date without notice other than
announcement at the meeting. At such adjourned meeting at which a quorum shall
be present, any business may be transacted which might have been transacted at
the meeting as originally notified.
Section 8. VOTING. A plurality of all the votes cast at a meeting of
stockholders duly called and at which a quorum is present shall be sufficient to
elect a director. Each share may be voted for as many individuals as there are
directors to be elected and for whose election the share is entitled to be
voted. A majority of the votes cast at a meeting of stockholders duly called and
at which a quorum is present shall be sufficient to approve any other matter
which may properly come before the meeting, unless more than a majority of the
votes cast is required by statute or by the charter of the Corporation. Unless
otherwise provided in the charter, each outstanding share, regardless of class,
shall be entitled to one vote on each matter submitted to a vote at a meeting of
stockholders.
Section 9. PROXIES. A stockholder may vote the stock owned of record by
him, either in person or by proxy executed in writing by the stockholder or by
his duly authorized attorney in fact. Such proxy shall be filed with the
secretary of the Corporation before or at the time of the meeting. No proxy
shall be valid after eleven months from the date of its execution, unless
otherwise provided in the proxy.
Section 10. VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the
Corporation registered in the name of a corporation, partnership, trust or other
entity, if entitled to be voted, may be voted by the president or a vice
president, a general partner or trustee thereof, as the case may be, or a proxy
appointed by any of the foregoing individuals, unless some other person who has
been appointed to vote such stock pursuant to a bylaw or a resolution of the
governing body of such corporation or other entity or agreement of the partners
of a partnership presents a certified copy of such bylaw, resolution or
2
<PAGE>
agreement, in which case such person may vote such stock. Any director or other
fiduciary may vote stock registered in his name as such fiduciary, either in
person or by proxy.
Shares of stock of the Corporation directly or indirectly owned by it
shall not be voted at any meeting and shall not be counted in determining the
total number of outstanding shares entitled to be voted at any given time,
unless they are held by it in a fiduciary capacity, in which case they may be
voted and shall be counted in determining the total number of outstanding shares
at any given time.
The Board of Directors may adopt by resolution a procedure by which a
stockholder may certify in writing to the Corporation that any shares of stock
registered in the name of the stockholder are held for account of a specified
person other than the stockholder. The resolution shall set forth the class of
stockholders who may make the certification, the purpose for which the
certification may be made, the form of certification and the information to be
contained in it; if the certification is with respect to a record date or
closing of the stock transfer books, the time after the record date or closing
of the stock transfer books within which the certification must be received by
the Corporation; and any other provisions with respect to the procedure which
the Board of Directors considers necessary or desirable. On receipt of such
certification, the person specified in the certification shall be regarded as,
for the purposes set forth in the certification, the stockholder of record of
the specified stock in place of the stockholder who makes the certification.
Section 11. INSPECTORS. At any meeting of stockholders, the chairman of
the meeting may, or upon the request of any stockholder shall, appoint one or
more persons as inspectors for such meeting. Such inspectors shall ascertain and
report the number of shares represented at the meeting based upon their
determination of the validity and effect of proxies, count all votes, report the
results and perform such other acts as are proper to conduct the election and
voting with impartiality and fairness to all the stockholders.
Each report of an inspector shall be in writing and signed by him or by
a majority of them if there is more than one inspector acting at such meeting.
If there is more than one inspector, the report of a majority shall be the
report of the inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting shall
be prima facie evidence thereof.
Section 12. NOMINATIONS AND STOCKHOLDER BUSINESS
(a) ANNUAL MEETINGS OF STOCKHOLDERS. (1) Nominations of persons for
election to the Board of Directors and the proposal of business to be considered
by the stockholders (except for stockholder proposals included in the proxy
materials pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) may be made at an annual meeting of stockholders
(i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction
of the Board of Directors or (iii) by any stockholder of the Corporation who was
a stockholder of record at the time of giving of notice provided for in this
Section 12 (a), who is entitled to vote at the meeting and who complied with the
notice procedures set forth in this Section 12 (a)
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (iii) of paragraph (a) (1) of
this Section 12, the stockholder must have given timely notice thereof in
writing to the secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered to the secretary at the principal executive offices of
the Corporation not less than 75 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting or special meeting in lieu
thereof; provided, however, that in the event that the date of the annual
meeting
3
<PAGE>
is advanced by more than seven calendar days or delayed by more than 60 days
from such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the 90th day prior to such annual meeting and not
later than the close of business on the later of the 75th day prior to such
annual meeting or the 20th day following the earlier of the day on which public
announcement of the date of such meeting is first made or notice of the meeting
is mailed to stockholders. Such stockholder's notice shall set forth (i) as to
each person whom the stockholder proposes to nominate for election or reelection
as a director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Exchange Act
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected) ; (ii) as to any other
business that the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and of the beneficial owner, if any, on whose
behalf the proposal is made; and (iii) as to the stockholder giving the notice
and the beneficial owner, if any, on whose behalf the nomination or proposal is
made, (x) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (y) the number of shares
of each class of stock of the Corporation which are owned beneficially and of
record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (a)
(2) of this Section 12 to the contrary, in the event that the number of
directors to be elected to the Board of Directors is increased and there is no
public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by the Corporation at least 85
days prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Section 12(a) shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the secretary at the principal executive
offices of the Corporation not later than the close of business on the tenth day
following the day on which such public announcement is first made by the
Corporation.
(b) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) provided that the Board of Directors has determined that
directors shall be elected at such special meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice
provided for in this Section 12 (b), who is entitled to vote at the meeting and
who complied with the notice procedures set forth in this Section 12 (b) . In
the event the Corporation calls a special meeting of stockholders for the
purpose of electing one or more directors to the Board of Directors, any such
stockholder may nominate a person or persons (as the case may be) for election
to such position as specified in the Corporation's notice of meeting, if the
stockholder's notice containing the information required by paragraph (a) (2) of
this Section 12 shall be delivered to the secretary at the principal executive
offices of the Corporation not earlier than the 90th day prior to such special
meeting and not later than the close of business on the later of the 75th day
prior to such special meeting or the tenth day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting.
(c) GENERAL. (1) Only such persons who are nominated in accordance with
the procedures set forth in this Section 12 shall be eligible to serve as
directors and only such business shall be
4
<PAGE>
conducted at a meeting of stockholders as shall have been brought before the
meeting in accordance with the procedures set forth in this Section 12. The
presiding officer of the meeting shall have the power and duty to determine
whether a nomination or any business proposed to be brought before the meeting
was made in accordance with the procedures set forth in this Section 12 and, if
any proposed nomination or business is not in compliance with this Section 12,
to declare that such defective nomination or proposal be disregarded.
(2) For purposes of this Section 12, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Sections 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 12, a
stockholder shall also comply with all applicable requirements of state law and
of the Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Section 12. Nothing in this Section 12 shall be deemed
to affect any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 13. VOTING BY BALLOT. Voting on any question or in any election
may be viva voce unless the presiding officer shall order or any stockholder
shall demand that voting be by ballot.
Section 14. CONTROL SHARES. Notwithstanding any other provision of the
charter of the Corporation or these Bylaws, Title 3, Subtitle 7 of the Maryland
General Corporation Law (or any successor statute) shall not apply to any
acquisition by any person of shares of stock of the Corporation. This section
may be repealed, in whole or in part, at any time, whether before or after an
acquisition of control shares and, upon such repeal, may, to the extent provided
by any successor bylaw, apply to any prior or subsequent control share
acquisition; provided, however, that such repeal may not be effected by the
Board of Directors without the approval by the stockholders of the Corporation
by the affirmative vote of a majority of the issued and outstanding shares of
Common Stock entitled to vote on such matter.
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS; QUALIFICATIONS. The business and affairs of
the Corporation shall be managed under the direction of its Board of Directors.
Section 2. NUMBER, TENURE AND QUALIFICATIONS. At any regular meeting or
at any special meeting called for that purpose, a majority of entire Board of
Directors may establish, increase or decrease the number directors, provided
that the number thereof shall never be less than the minimum number required by
the Maryland General Corporation Law, and further provided that the tenure of
office of a director shall not be affected by any decrease in the number of
directors.
Section 3. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board
of Directors shall be held immediately after and at the same place as the annual
meeting of stockholders, no notice other than this Bylaw being necessary. The
Board of Directors may provide, by resolution, the time and place, either within
or without the State of Maryland, for the holding of regular meetings of the
Board of Directors without other notice than such resolution.
5
<PAGE>
Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the chairman of the board (or any
co-chairman of the board if more than one) , president or by a majority of the
directors then in office. The person or persons authorized to call special
meetings of the Board of Directors may fix any place, either within or without
the State of Maryland, as the place for holding any special meeting of the Board
of Directors called by them.
Section 5. NOTICE. Notice of any special meeting of the Board of
Directors shall be delivered personally or by telephone, facsimile transmission,
United States mail or courier to each director at his business or residence
address. Notice by personal delivery, by telephone or a facsimile transmission
shall be given at least two days prior to the meeting. Notice by mail shall be
given at least five days prior to the meeting and shall be deemed to be given
when deposited in the United States mail properly addressed, with postage
thereon prepaid. Telephone notice shall be deemed be given when the director is
personally given such notice in a telephone call to which he is a party.
Facsimile transmission notice shall be deemed be given upon completion of the
transmission of the message to the number given to the Corporation by the
director and receipt of a completed answer-back indicating receipt. Neither the
business to be transacted at, the purpose of, any annual, regular or special
meeting of the Board of Directors need be stated in the notice, unless
specifically required by statute or these Bylaws.
Section 6. QUORUM. A majority of the directors shall constitute a
quorum for transaction of business at any meeting of the Board of Directors,
provided that, if less than a majority of such directors are present at said
meeting, a majority of the directors present may adjourn the meeting from time
to time without further notice, and provided further that if, pursuant to the
charter of the Corporation or these Bylaws, the vote of a majority of a
particular group of directors is required for action, a quorum must also include
a majority of such group.
The Board of Directors present at a meeting which has been duly called
and convened may continue to transact business until adjournment,
notwithstanding the withdrawal of enough directors to leave less than a quorum.
Section 7. VOTING. The action of the majority of the directors present
at a meeting at which a quorum is present shall be the action of the Board of
Directors, unless the concurrence of a greater proportion is required for such
action by applicable statute.
Section 8. TELEPHONE MEETINGS. Directors may participate in a meeting
by means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person at
the meeting.
Section 9. INFORMAL ACTION BY DIRECTORS. Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting, if a consent in writing to such action is signed by each
director and such written consent is filed with the minutes of proceedings of
the Board of Directors.
Section 10. VACANCIES. If for any reason any or all the directors cease
to be directors, such event shall not terminate the Corporation or affect these
Bylaws or the powers of the remaining directors hereunder (even if fewer than
three directors remain) . Any vacancy on the Board of Directors for any cause
other than an increase in the number of directors shall be filled by a majority
of the remaining directors, although such majority is less than a quorum. Any
vacancy in the number of directors created by an increase in the number of
directors may be filled by a majority vote of the entire Board of
6
<PAGE>
Directors. Any individual so elected as director shall hold office for the
unexpired term of the director he is replacing.
Section 11. COMPENSATION. Directors shall not receive any stated salary
for their services as directors but, by resolution of the Board of Directors,
may receive fixed sums per year and/or per meeting and/or per visit to real
property owned or to be acquired by the Corporation and for any service or
activity they performed or engaged in as directors. Directors may be reimbursed
for expenses of attendance, if any, at each annual, regular or special meeting
of the Board of Directors or of any committee thereof and for their expenses, if
any, in connection with each property visit and any other service or activity
they performed or engaged in as directors; but nothing herein contained shall be
construed to preclude any directors from serving the Corporation in any other
capacity and receiving compensation therefor.
Section 12. LOSS OF DEPOSITS. No director shall be liable for any loss
which may occur by reason of the failure of the bank, trust company, savings and
loan association, or other institution with whom moneys or stock have been
deposited.
Section 13. SURETY BONDS. Unless required by law, no director shall be
obligated to give any bond or surety or other security for the performance of
any of his duties.
Section 14. RELIANCE. Each director, officer, employee and agent of the
Corporation shall, in the performance of his duties with respect to the
Corporation, be fully justified and protected with regard to any act or failure
to act in reliance in good faith upon the books of account or other records of
the Corporation, upon an opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by the adviser, accountants,
appraisers or other experts or consultants selected by the Board of Directors or
officers of the Corporation, regardless of whether such counsel or expert may
also be a director.
Section 15. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND
AGENTS. The directors shall have no responsibility to devote their full time to
the affairs of the Corporation. Any director or officer, employee or agent of
the Corporation, in his personal capacity or in a capacity as an affiliate,
employee, or agent of any other person, or otherwise, may have business
interests and engage in business activities similar to or in addition to or in
competition with those of or relating to the Corporation.
ARTICLE IV
COMMITTEES
Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors
may appoint from among its members an Executive Committee, an Audit Committee, a
Compensation Committee and other committees, composed of two or more directors,
to serve at the pleasure of the Board of Directors.
Section 2. POWERS. The Board of Directors may delegate to committees
appointed under Section 1 of this Article any of the powers of the Board of
Directors, except as prohibited by law.
Section 3. MEETINGS. Notice of committee meetings shall be given in the
same manner as notice for special meetings of the Board of Directors. A majority
of the members of the committee shall
7
<PAGE>
constitute a quorum for the transaction of business at any meeting of the
committee. The act of a majority of the committee members present at a meeting
shall be the act of such committee. The Board of Directors may designate a
chairman of any committee, and such chairman or any two members of any committee
may fix the time and place of its meeting unless the Board shall otherwise
provide. In the absence of any member of any such committee, the members thereof
present at any meeting, whether or not they constitute a quorum, may appoint
another director to act in the place of such absent member. Each committee shall
keep minutes of its proceedings.
Section 4. TELEPHONE MEETINGS. Members of a committee of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or
permitted to be taken at any meeting of a committee of the Board of Directors
may be taken without a meeting, if a consent in writing to such action is signed
by each member of the committee and such written consent is filed with the
minutes of proceedings of such committee.
Section 6. VACANCIES. Subject to the provisions hereof, the Board of
Directors shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace any
absent or disqualified member or to dissolve any such committee.
ARTICLE V
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Corporation shall
include a chief executive officer, a president, a secretary and a treasurer and
may include a chairman of the board (or one or more co-chairmen of the board), a
vice chairman of the board, one or more executive vice presidents, one or more
senior vice presidents, one or more vice presidents, a chief operating officer,
a chief financial officer, one or more assistant secretaries and one or more
assistant treasurers. In addition, the Board of Directors may from time to time
appoint such other officers with such powers and duties as they shall deem
necessary or desirable. The officers of the Corporation shall be elected
annually by the Board of Directors at the first meeting of the Board of
Directors held after each annual meeting of stockholders, except that the chief
executive officer may appoint one or more vice presidents, assistant secretaries
and assistant treasurers. If the election of officers shall not be held at such
meeting, such election shall be held as soon thereafter as may be convenient.
Each officer shall hold office until his successor is elected and qualifies or
until his death, resignation or removal in the manner hereinafter provided. Any
two or more offices except president and vice president may be held by the same
person. In its discretion, the Board of Directors may leave unfilled any office
except that of president, treasurer and secretary. Election of an officer or
agent shall not of itself create contract rights between the Corporation and
such officer or agent.
Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the
Corporation may be removed by the Board of Directors if in its judgment the best
interests of the Corporation would be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed. Any
officer of the Corporation may resign at any time by giving written notice of
his resignation to the Board of Directors, the chairman of the board (or any
co-chairman of the board if more than one), the president or the secretary. Any
resignation shall take effect at any time subsequent to the
8
<PAGE>
time specified therein or, if the time when it shall become effective is not
specified therein, immediately upon its receipt. The acceptance of a resignation
shall not be necessary to make it effective unless otherwise stated in the
resignation. Such resignation shall be without prejudice to the contract rights,
if any, of the Corporation.
Section 3. VACANCIES. A vacancy in any office may be filled by the
Board of Directors for the balance of the term.
Section 4. CHIEF EXECUTIVE OFFICER. The Board of Directors may
designate a chief executive officer. In the absence of such designation, the
chairman of the board (or, if more than one, the co-chairmen of the board in the
order designated at the time of their election or, in the absence of any
designation, then in the order of their election) shall be the chief executive
officer of the Corporation. The chief executive officer shall have general
responsibility for implementation of the policies of the Corporation, as
determined by the Board of Directors, and for the management of the business and
affairs of the Corporation.
Section 5. CHIEF OPERATING OFFICER. The Board of Directors may
designate a chief operating officer. The chief operating officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
Section 6. CHIEF FINANCIAL OFFICER. The Board of Directors may
designate a chief financial officer. The chief financial officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
Section 7. CHAIRMAN OF THE BOARD. The Board of Directors shall
designate a chairman of the board (or one or more co-chairmen of the board) The
chairman of the board shall preside over the meetings of the Board of Directors
and of the stockholders at which he shall be present. If there be more than one,
the co-chairmen designated by the Board of Directors will perform such duties.
The chairman of the board shall perform such other duties as may be assigned to
him or them by the Board of Directors.
Section 8. CHAIRMAN OF THE BOARD EMERITUS. The directors may elect by a
majority vote, from time to time, a chairman of the board emeritus (or one or
more co-chairmen of the board emeritus) . The chairman of the board emeritus
shall be an honorary position and shall have no vote on any matter considered by
the directors. The chairman of the board emeritus shall serve for such term as
determined by the Board of Directors and may be removed by a majority vote of
the Board of Directors with or without cause.
Section 9. PRESIDENT. The president or chief executive officer, as the
case may be, shall in general supervise and control all of the business and
affairs of the Corporation. In the absence of a designation of a chief operating
officer by the Board of Directors, the president shall be the chief operating
officer. He may execute any deed, mortgage, bond, contract or other instrument,
except in cases where the execution thereof shall be expressly delegated by the
Board of Directors or by these Bylaws to some other officer or agent of the
Corporation or shall be required by law to be otherwise executed; and in general
shall perform all duties incident to the office of president and such other
duties as may be prescribed by the Board of Directors from time to time.
Section 10. VICE PRESIDENTS. In the absence of the president or in the
event of a vacancy in such office, the vice president (or in the event there be
more than one vice president, the vice presidents
9
<PAGE>
in the order designated at the time of their election or, in the absence of any
designation, then in the order of their election) shall perform the duties of
the president and when so acting shall have all the powers of and be subject to
all the restrictions upon the president; and shall perform such other duties as
from time to time may be assigned to him by the president or by the Board of
Directors. The Board of Directors may designate one or more vice presidents as
executive vice president or as vice president for particular areas of
responsibility.
Section 11. SECRETARY. The secretary shall (a) keep the minutes of the
proceedings of the stockholders, the Board of Directors and committees of the
Board of Directors in one or more books provided for that purpose; (b) see that
all notices are duly given in accordance with the provisions of these Bylaws or
as required by law; (c) be custodian of the corporate records and of the seal of
the Corporation; (d) keep a register of the post office address of each
stockholder which shall be furnished to the secretary by such stockholder; (e)
have general charge of the share transfer books of the Corporation; and (f) in
general perform such other duties as from time to time may be assigned to him by
the chief executive officer, the president or by the Board of Directors.
Section 12. TREASURER. The treasurer shall have the custody of the
funds and securities of the Corporation and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Corporation and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the Board
of Directors. In the absence of a designation of a chief financial officer by
the Board of Directors, the treasurer shall be the chief financial officer of
the Corporation.
The treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and Board of Directors, at the
regular meetings of the Board of Directors or whenever it may so require, an
account of all his transactions as treasurer and of the financial condition of
the Corporation.
If required by the Board of Directors, the treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, moneys and other property of whatever kind in his possession or under
his control belonging to the Corporation.
Section 13. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
assistant secretaries and assistant treasurers, in general, shall perform such
duties as shall be assigned to them by the secretary or treasurer, respectively,
or by the president or the Board of Directors. The assistant treasurers shall,
if required by the Board of Directors, give bonds for the faithful performance
of their duties in such sums and with such surety or sureties as shall be
satisfactory to the Board of Directors.
Section 14. SALARIES. The salaries and other compensation of the
officers shall be fixed from time to time by the Board of Directors and no
officer shall be prevented from receiving such salary or other compensation by
reason of the fact that he is also a director.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Board of Directors may authorize any officer
or agent to enter
10
<PAGE>
into any contract or to execute and deliver any instrument in the name of and on
behalf of the Corporation and such authority may be general or confined to
specific instances. Any agreement, deed, mortgage, lease or other document
executed by one or more of the directors or by an authorized person shall be
valid and binding upon the Board of Directors and upon the Corporation when
authorized or ratified by action of the Board of Directors.
Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by such officer or agent of the
Corporation in such manner as shall from time to time be determined by the Board
of Directors.
Section 3. DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board of Directors
may designate.
ARTICLE VII
STOCK
Section 1. CERTIFICATES. Each stockholder shall be entitled to a
certificate or certificates which shall represent and certify the number of
shares of each class of stock held by him in the Corporation. Each certificate
shall be signed by the chief executive officer, the president or a vice
president and countersigned by the secretary or an assistant secretary or the
treasurer or an assistant treasurer and may be sealed with the seal, if any, of
the Corporation. The signatures may be either manual or facsimile. Certificates
shall be consecutively numbered; and if the Corporation shall, from time to
time, issue several classes of stock, each class may have its own number series.
A certificate is valid and may be issued whether or not an officer who signed it
is still an officer when it is issued. Each certificate representing shares
which are restricted as to their transferability or voting powers, which are
preferred or limited as to their dividends or as to their allocable portion of
the assets upon liquidation or which are redeemable at the option of the
Corporation, shall have a statement of such restriction, limitation, preference
or redemption provision, or a summary thereof, plainly stated on the
certificate. If the Corporation has authority to issue stock of more than one
class, the certificate shall contain on the face or back a full statement or
summary of the designations and any preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends and other
distributions, qualifications and terms and conditions of redemption of each
class of stock and, if the Corporation is authorized to issue any preferred or
special class in series, the differences in the relative rights and preferences
between the shares of each series to the extent they have been set and the
authority of the Board of Directors to set the relative rights and preferences
of subsequent series. In lieu of such statement or summary, the certificate may
state that the Corporation will furnish a full statement of such information to
any stockholder upon request and without charge. If any class of stock is
restricted by the Corporation as to transferability, the certificate shall
contain a full statement of the restriction or state that the Corporation will
furnish information about the restrictions to the stockholder on request and
without charge.
Section 2. TRANSFERS. Upon surrender to the Corporation or the transfer
agent of the Corporation of a stock certificate duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, the
Corporation shall issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The Corporation shall be entitled to treat the holder of record of any
share of stock as the holder
11
<PAGE>
in fact thereof and, accordingly, shall not be bound to recognize any equitable
or other claim to or interest in such share or on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of the State of Maryland.
Notwithstanding the foregoing, transfers of shares of any class of
stock will be subject in all respects to the charter of the Corporation and all
of the terms and conditions contained therein.
Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the Board
of Directors may direct a new certificate to be issued in place of any
certificate previously issued by the Corporation alleged to have been lost,
stolen or destroyed upon the making of an affidavit of that fact by the person
claiming the certificate to be lost, stolen or destroyed. When authorizing the
issuance of a new certificate, an officer designated by the Board of Directors
may, in his discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or the owner's
legal representative to advertise the same in such manner as he shall require
and/or to give bond, with sufficient surety, to the Corporation to indemnify it
against any loss or claim which may arise as a result of the issuance of a new
certificate.
Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The
Board of Directors may set, in advance, a record date for the purpose of
determining stockholders entitled to notice of or to vote at any meeting of
stockholders or determining stockholders entitled to receive payment of any
dividend or the allotment of any other rights, or in order to make a
determination of stockholders for any other proper purpose. Such date, in any
case, shall not be prior to the close of business on the day the record date is
fixed and shall be not more than 90 days and, in the case of a meeting of
stockholders, not less than ten days, before the date on which the meeting or
particular action requiring such determination of stockholders of record is to
be held or taken.
In lieu of fixing a record date, the Board of Directors may provide
that the stock transfer books shall be closed for a stated period but not longer
than 20 days. If the stock transfer books are closed for the purpose of
determining stockholders entitled to notice of or to vote at a meeting of
stockholders, such books shall be closed for at least ten days before the date
of such meeting.
If no record date is fixed and the stock transfer books are not closed
for the determination of stockholders, (a) the record date for the determination
of stockholders entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day on which the notice of meeting is
mailed or the 30th day before the meeting, whichever is the closer date to the
meeting; and (b) the record date for the determination of stockholders entitled
to receive payment of a dividend or an allotment of any other rights shall be
the close of business on the day on which the resolution of the directors,
declaring the dividend or allotment of rights, is adopted.
When a determination of stockholders entitled to vote at any meeting of
stockholders has been made as provided in this section, such determination shall
apply to any adjournment thereof, except when (i) the determination has been
made through the closing of the transfer books and the stated period of closing
has expired or (ii) the meeting is adjourned to a date more than 120 days after
the record date fixed for the original meeting, in either of which case a new
record date shall be determined as set forth herein.
Section 5. STOCK LEDGER. The Corporation shall maintain at its
principal office or at the office of its counsel, accountants or transfer agent,
an original or duplicate share ledger containing the name and address of each
stockholder and the number of shares of each class held by such stockholder.
12
<PAGE>
Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of Directors
may issue fractional stock or provide for the issuance of scrip, all on such
terms and under such conditions as they may determine. Notwithstanding any other
provision of the charter or these Bylaws, the Board of Directors may issue units
consisting of different securities of the Corporation. Any security issued in a
unit shall have the same characteristics as any identical securities issued by
the Corporation, except that the Board of Directors may provide that for a
specified period securities of the Corporation issued in such unit may be
transferred on the books of the Corporation only in such unit.
ARTICLE VIII
ACCOUNTING YEAR
The Board of Directors shall have the power, from time to time, to fix
the fiscal year of the Corporation by a duly adopted resolution.
ARTICLE IX
DISTRIBUTIONS
Section 1. AUTHORIZATION. Dividends and other distributions upon the
stock of the Corporation may be authorized and declared by the Board of
Directors, subject to the provisions of law and the charter of the Corporation.
Dividends and other distributions may be paid in cash, property or stock of the
Corporation, subject to the provisions of law and the charter of the
Corporation.
Section 2. CONTINGENCIES. Before payment of any dividends or other
distributions, there may be set aside out of any assets of the Corporation
available for dividends or other distributions such sum or sums as the Board of
Directors may from time to time, in its absolute discretion, think proper as a
reserve fund for contingencies, for equalizing dividends or other distributions,
for repairing or maintaining any property of the Corporation or for such other
purpose as the Board of Directors shall determine to be in the best interest of
the Corporation, and the Board of Directors may modify or abolish any such
reserve in the manner in which it was created.
ARTICLE X
INVESTMENT POLICY
Subject to the provisions of the charter of the Corporation, the Board
of Directors may from time to time adopt, amend, revise or terminate any policy
or policies with respect to investments by the Corporation as it shall deem
appropriate in its sole discretion.
ARTICLE XI
SEAL
Section 1. SEAL. The Board of Directors may authorize the adoption of a
seal by the Corporation. The seal shall contain the name of the Corporation and
the year of its incorporation and the words "Corporate Seal Maryland." The Board
of Directors may authorize one or more duplicate seals
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<PAGE>
and provide for the custody thereof.
Section 2. AFFIXING SEAL. Whenever the Corporation is permitted or
required to affix its seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a seal to place the word
"(SEAL)" adjacent to the signature of the person authorized to execute the
document on behalf of the Corporation.
ARTICLE XII
INDEMNIFICATION AND ADVANCES FOR EXPENSES
To the maximum extent permitted by Maryland law in effect from time to
time, the Corporation, without requiring a preliminary determination of the
ultimate entitlement to indemnification, shall indemnify and shall pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any individual who is a present or former director or officer of the
Corporation and who is made a party to the proceeding by reason of his service
in that capacity or (b) any individual who, while a director of the Corporation
and at the request of the Corporation, serves or has served another corporation,
partnership, joint venture, trust, employee benefit plan or any other enterprise
as a director, officer, partner or trustee of such corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise and who is made
a party to the proceeding by reason of his service in that capacity. The
Corporation may, with the approval of its Board of Directors, provide such
indemnification and advance for expenses to a person who served a predecessor of
the Corporation in any of the capacities described in (a) or (b) above and to
any employee or agent of the Corporation or a predecessor of the Corporation.
Neither the amendment nor repeal of this Article, nor the adoption or
amendment of any other provision of the Bylaws or charter of the Corporation
inconsistent with this Article, shall apply to or affect in any respect the
applicability of the preceding paragraph with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.
ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the charter of
the Corporation or these Bylaws or pursuant to applicable law, a waiver thereof
in writing, signed by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be deemed equivalent to the
giving of such notice. Neither the business to be transacted at nor the purpose
of any meeting need be set forth in the waiver of notice, unless specifically
required by statute. The attendance of any person at any meeting shall
constitute a waiver of notice of such meeting, except where such person attends
a meeting for the express purpose of objecting to the transaction of any
business on the ground that the meeting is not lawfully called or convened.
ARTICLE XIV
AMENDMENT OF BYLAWS
Subject to the rights of stockholders provided in Section 14 of Article
II of these Bylaws, the Board of Directors shall have the exclusive power to
adopt, alter or repeal any provision of these Bylaws and to make new Bylaws.
<PAGE>
Temporary Certificate - Exchangeable for Definitive Engraved Certificate
When Ready for Delivery
NUMBER SHARES
[LOGO]
PHILIPS INTERNATIONAL REALTY CORP.
COMMON STOCK
INCORPORATED UNDER THE LAWS SEE REVERSE FOR IMPORTANT
OF THE STATE OF MARYLAND NOTICE ON TRANSFER
RESTRICTIONS AND OTHER
INFORMATION
CUSIP
---------------------
THIS CERTIFIES THAT
-------------------------------------------------------
IS THE RECORD HOLDER OF
----------------------------------------------------
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE, OF
PHILIPS INTERNATIONAL REALTY CORP.
(the "Corporation") transferable on the books of the Corporation by the holder
hereof in person or by his duly authorized attorney, upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are issued and shall be held subject to all of the provisions of the
charter of the Corporation (the "Charter") and the Bylaws of the Corporation and
any amendments thereto. This Certificate is not valid unless countersigned and
registered by the Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed on behalf of its duly authorized officers.
Dated:
PHILIPS INTERNATIONAL REALTY CORP.
/s/ Sheila Levine INCORPORATED /s/ Philip Pilevsky
Secretary 1997 Chairman
MARYLAND
COUNTERSIGNED AND REGISTERED:
BANK BOSTON, N.A.
TRANSFER AGENT AND REGISTRAR
BY /S/ [Illegible]
AUTHORIZED SIGNATURE
<PAGE>
The Corporation is authorized to issue stock of more than one class, consisting
of shares of Common Stock and one or more classes of shares of Preferred Stock
or any class or series of stock other than Common Stock. The Board of Directors
is authorized to determine the preferences, limitations and relative rights of
shares of Preferred Stock before the issuance of any shares of Preferred Stock.
The Corporation will furnish, without charge, to any stockholder making a
written request therefor, a copy of the charter of the Corporation and a written
statement of the designations, relative rights, preferences and limitations
applicable to each such class of stock. Requests for such written statement may
be directed to the Corporate Secretary at the Corporation's principal office.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON
TRANSFER FOR THE PURPOSE OF THE CORPORATION'S MAINTENANCE OF ITS STATUS AS A
REAL ESTATE INVESTMENT TRUST (A "REIT") UNDER THE INTERNAL REVENUE CODE OF 1986,
AS AMENDED. THE BOARD OF DIRECTORS HAS, AS PERMITTED BY THE CHARTER OF THE
CORPORATION, ADOPTED RESOLUTIONS WHICH GENERALLY PROHIBIT ANY SHAREHOLDER,
DIRECTLY OR THROUGH ATTRIBUTION, FROM OWNING MORE THAN 8% (BY NUMBER OF SHARES
OR VALUE, WHICHEVER IS MORE RESTRICTIVE) OF THE OUTSTANDING EQUITY STOCK OF THE
CORPORATION. ANY PERSON WHO ACQUIRES OR ATTEMPTS TO ACQUIRE SHARES OF EQUITY
STOCK IN EXCESS OF THE AFOREMENTIONED LIMITATION, OR ANY PERSON WHO IS OR
ATTEMPTS TO BECOME A TRANSFEREE SUCH THAT EXCESS STOCK RESULTS UNDER THE
PROVISIONS OF THE CHARTER, SHALL IMMEDIATELY GIVE WRITTEN NOTICE OR, IN THE
EVENT OF A PROPOSED OR ATTEMPTED TRANSFER, GIVE AT LEAST 15 DAYS PRIOR WRITTEN
NOTICE TO THE CORPORATION OF SUCH EVENT AND SHALL PROVIDE TO THE CORPORATION
SUCH OTHER INFORMATION AS IT MAY REQUEST IN ORDER TO DETERMINE THE EFFECT ON ANY
SUCH TRANSFER ON THE CORPORATION'S STATUS AS A REIT. ALL CAPITALIZED TERMS IN
THIS LEGEND HAVE THE MEANINGS DEFINED IN THE CHARTER OF THE CORPORATION, A COPY
OF WHICH, INCLUDING THE RESTRICTIONS ON TRANSFER, WILL BE SENT TO ANY
STOCKHOLDER ON REQUEST AND WITHOUT CHARGE. IF THE RESTRICTIONS ON TRANSFER ARE
VIOLATED, THE SECURITIES REPRESENTED HEREBY WILL BE TREATED AS 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.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according the applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in
common
COM PROP - as community property
UNIF MIN ACT - Custodian
---------- -----------
(Cust) (Minor)
under Uniform Gifts to Minors Act
------------------------
(State)
UNIF TRF MIN ACT - Custodian (until age )
---------- ---------
(Cust)
under Uniform Transfers to Minors Act
--------
(Minor)
---------------------
(State)
Additional abbreviations may also be used though not in the above list.
<PAGE>
FOR VALUE RECEIVED, ------------------ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- ----------------------------------------------------------------------- Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- -------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated:
-----------------------------------
X
----------------------------------
X
----------------------------------
NOTICE: THE SIGNATURES TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME (S)
AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE
Signature(s) Guaranteed WHATEVER.
By
-----------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEED MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
<PAGE>
May __, 1998
Philips International Realty Corp.
417 Fifth Avenue
New York, NY 10016
Ladies and Gentlemen:
Reference is made to that certain Contribution and Exchange Agreement,
dated as of December 31, 1997, as amended (the "Contribution and Exchange
Agreement"), by and among Philips International Realty Corp. (the "REIT"),
Philips International Realty, L.P. (the "Operating Partnership" and, together
with the REIT, the "Company"), the Property Partnerships and certain other
parties named therein. Capitalized terms used but not defined herein shall have
the meanings assigned to them in the Contribution and Exchange Agreement.
In connection with the proposed public offering (the
"Offering") of the Common Stock of the Company contemplated by Registration
Statement No. 333-47975 on Form S-11 filed with the Securities and Exchange
Commission on March 13, 1998, as amended, the undersigned, as sponsors of the
Offering, hereby agree (for the benefit of the Company only) that the
representations and warranties of the Property Partnerships and the Partners
under Section 5 of the Contribution and Exchange Agreement, made as of August 8,
1997 and reaffirmed on December 31, 1997, will survive until the first
anniversary of the consummation of the Offering (notwithstanding anything to the
contrary contained in Section 5.4 of the Contribution and Exchange Agreement;
provided, however, that Section 5.4(b) thereunder shall not be affected by the
foregoing), and agree to jointly and severally indemnify and hold harmless the
Company from and against any losses, claims, damages, liabilities and expenses
incurred by the Company in connection with any breach of any representation or
warranty with respect to claims made on or before the first anniversary of the
consummation of the Offering.
Notwithstanding anything to the contrary contained in the Contribution
and Exchange Agreement or herein, the Company's sole recourse and remedy, in the
event of any breach of any representation or warranty by such Property
Partnerships or Partners, shall be limited to claims against those Units held by
the undersigned represented by certificate nos. 2 and 5 (622,643 and 601,778
Units, respectively; each as adjusted to reflect the 1.7051 to 1 split of the
Company's Common Stock), which shall bear a legend reflecting that the Units are
subject to such claims. The undersigned hereby agree that the Units represented
by the foregoing certificates shall not be
<PAGE>
redeemed for Common Stock, or sold, transferred, encumbered or otherwise pledged
during the term of this Agreement, except to Affiliates (as defined in the
Amended and Restated Agreement of Limited Partnership of the Operating
Partnership) who expressly agree to take such Units subject to the Company's
rights hereunder.
Please confirm that the foregoing correctly sets forth our agreement by
signing below. This letter shall constitute a binding agreement as of December
31, 1997, and shall expire by its terms on the first anniversary of the
consummation of the Offering (except that all claims made hereunder on or before
such date shall survive the expiration of this agreement), but shall only be
effective upon the consummation of the Offering.
-------------------------------------
Philip Pilevsky
-------------------------------------
Sheila Levine
Agreed and Accepted:
Philips International Realty Corp.
By:
------------------------------
Name: Louis J. Petra
Title: President
<PAGE>
May __, 1998
Philips International Realty Corp.
417 Fifth Avenue
New York, NY 10016
Ladies and Gentlemen:
Reference is made to that certain Amended and Restated Non-Competition
Agreement, made and entered into on March 30, 1998 and effective as of December
31, 1997 (the "Non-Competition Agreement"), by and among Philips International
Realty Corp. (the "REIT"), Philips International Realty, L.P. (the "Operating
Partnership" and, together with the REIT, the "Company"), Philips International
Holding Corp., Philip Pilevsky and Sheila Levine. Capitalized terms used but not
defined herein shall have the meanings assigned to them in the Non-Competition
Agreement.
In connection with the proposed public offering (the
"Offering") of the Common Stock of the Company contemplated by Registration
Statement No. 333-47975 on Form S-11 filed with the Securities and Exchange
Commission on March 13, 1998, as amended, the undersigned hereby grants the
Company a right of first refusal on the sale or transfer by the undersigned of
his partnership or membership interest (the "Interest") in any of the Excluded
Properties, except for: (i) a sale or transfer to any family member, any trust
for the benefit of a family member or any similar sale or transfer; (ii) a sale
or transfer to an existing partner or member of such property partnership; and
(iii) a sale or transfer of the entire property or 100% of the partnership or
membership interest in the property partnership, in which case the undersigned
will use reasonable efforts to cause such property or partnership or membership
interest to be offered to the Company. The undersigned shall give written notice
(a "Sale Notice") to the Company of the price, terms and conditions of such sale
or transfer (including, without limitation, the identity of the proposed
purchaser), and upon receipt of the Sale Notice, the Company shall have thirty
days thereafter (the "Sale Option Period") to elect by written notice to acquire
the Interest on the terms and conditions of the Sale Notice. If the Company
shall elect to so acquire the Interest on such terms and conditions, the parties
shall execute a contract of sale reflecting such terms and conditions and shall
close on such acquisition as required thereunder.
If the Company shall elect not to so acquire the Interest, or shall
fail to make an election on a timely basis, the undersigned shall have the
right, subject to the immediately following sentence, to sell the Interest to
the purchaser or such other bona fide third party as the undersigned shall elect
on terms and conditions no less favorable than those set forth in the Sale
Notice and at a sale price (the "Minimum Sale Price") of not less than the
greater of (i) 95% of the price stated in the Sale Notice or (ii) the price
stated in the Sale Notice less $500,000. If the
<PAGE>
sale or transfer contemplated by the Sale Notice is not consummated within one
hundred twenty days from the earlier of (i) the date the Company elects not to
acquire such Interest pursuant to the Sale Notice or (ii) the expiration of the
Sale Option Period, or if the undersigned desires to sell or transfer the
Interest on terms and conditions which are less favorable than those set forth
in the Sale Notice or at a price less than the Minimum Sale Price, then the
undersigned shall comply with the procedures set forth above, and the
restrictions set forth above shall remain in force and effect.
In the event the Company shall fail to timely respond to the Sale
Notice or shall elect not to proceed in accordance with same, the Company shall,
upon request of the undersigned, deliver a written notice (the "Sale Waiver
Notice") to the undersigned waiving the Company's rights as set forth above. If
the Company shall fail to deliver the Sale Waiver Notice, then the Company shall
be deemed to have irrevocably and unconditionally waived its rights hereunder
with respect only to the subject sale under the respective Sale Notice.
All notices to be given or sent hereunder shall be sent to the address
of the party set forth herein and may be given personally or may be delivered by
depositing the same with any nationally recognized overnight delivery service.
Notices given by personal delivery service shall be deemed given on the day so
delivered, and notices delivered by a nationally recognized overnight delivery
service shall be deemed given on the first business day following the deposit of
same with such service.
Please confirm that the foregoing correctly sets forth our agreement by
signing below. This letter agreement shall constitute a binding agreement,
effective only upon consummation of the Offering.
----------------------------------
Name: Philip Pilevsky
Address: 417 Fifth Avenue
New York, NY 10016
Agreed and Accepted:
Philips International Realty Corp.
417 Fifth Avenue
New York, NY 10016
By:
----------------------------
Name: Louis J. Petra
Title: President
<PAGE>
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) March 6, 1998 with respect to the historical
financial statements of Philips International Realty Corp. as of December 31,
1997 and for the period July 16, 1997 (incorporation) to December 31, 1997; (ii)
March 6, 1998 with respect to the balance sheet of Philips International Realty,
L.P. as of December 31, 1997; (iii) March 6, 1998 with respect to the combined
balance sheet of the Property Partnerships as of December 31, 1997; (iv) March
6, 1998 with respect to the combined financial statements of The Philips Company
as of December 31, 1996 and for each of the three years in the period ended
December 31, 1997; and (v) March 6, 1998 with respect to the statements of
revenues and certain expenses of Merrick Commons and Mill Basin Plaza Properties
for each of the three years in the period ended December 31, 1997 included in
the Prospectus of Philips International Realty Corp. that is made a part of
Amendment No. 1 to the Registration Statement on Form S-11 dated April 17, 1998
of Philips International Realty Corp. for the Registration of 7,200,000 shares
of its common stock.
Ernst & Young LLP
New York, New York
April 17, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF ROSEN CONSULTING GROUP
We hereby consent to the use of our name and the references to the 'Rosen
Report' wherever appearing in this Amendment No. 1 to the Registration Statement
filed by Philips International Realty Corp. on Form S-11 and the related
Prospectus and any amendments thereto, including but not limited to the
references to our company under the headings 'Overview of the Company's Primary
Markets' and 'Experts' in the Prospectus.
Dated: April 17, 1998
ROSEN CONSULTING GROUP
By/s/ KENNETH T. ROSEN________________
Kenneth T. Rosen
President
