-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GWKKC6HZkiQt2+3xiTlOXlzepqSh+sNwN9pRt8Kx/P5AOTxWyFG8oUbII906NkKz sNzNE9NHfucYNBr24YLSKg== 0000950116-98-002538.txt : 19990101 0000950116-98-002538.hdr.sgml : 19990101 ACCESSION NUMBER: 0000950116-98-002538 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981218 ITEM INFORMATION: FILED AS OF DATE: 19981231 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNSYLVANIA REAL ESTATE INVESTMENT TRUST CENTRAL INDEX KEY: 0000077281 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 236216339 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-06300 FILM NUMBER: 98779304 BUSINESS ADDRESS: STREET 1: 455 PENNSYLVANIA AVE STREET 2: STE 135 CITY: FORT WASHINGTON STATE: PA ZIP: 19034 BUSINESS PHONE: 2155429250 MAIL ADDRESS: STREET 1: 455 PENNSYLVANIA AVE STREET 2: STE 135 CITY: FORT WASHINGTON STATE: PA ZIP: 19034 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported) December 18, 1998 ------------------------------ Pennsylvania Real Estate Investment Trust - ------------------------------------------------------------------------------ (Exact Name of Registrant as Specified in Charter) Pennsylvania 1-6300 23-6216339 - ------------------------------------------------------------------------------ (State or Other Jurisdiction (Commission (IRS Employer of Incorporation) File Number) Identification No.) The Bellevue, 200 S. Broad Street, Philadelphia, Pennsylvania 19102 - ------------------------------------------------------------------------------ (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (215) 875-0700 --------------------------- 455 Pennsylvania Avenue, Fort Washington, Pennsylvania 19034 - ------------------------------------------------------------------------------ (Former Name or Former Address, if Changed Since Last Report) Item 5. Other Events (a) Audited Financial Statements as of and for the four month period ended December 31, 1997 Effective October 14, 1997, the Registrant changed its fiscal year end from August 31 of each year to December 31 of each year. On February 17, 1998, the Registrant filed a Transition Report on Form 10-Q for the transition period from September 1, 1997 to December 31, 1997. The Registrant now desires to provide investors and the public with more recent audited financial statements. The Registrant, therefore, hereby files its audited financial statements for the year ended December 31, 1997. (b) Statement Regarding Adjustment of Earnout Performance Benchmarks Under The TRO Contribution Agreement The Registrant entered into the TRO Contribution Agreement as of July 30, 1997 (the "Agreement"). The Agreement provided, among other things, for distribution of the dilutive effects of the Registrant's offerings among the Registrant and the former shareholders and debtholders of The Rubin Organization, Inc. (collectively the "TRO shareholders"). Pursuant to Section 5.19(b) of the Agreement, at the request of holders of more than one-third of the outstanding Class A Units issued to TRO shareholders and affiliates, a Special Committee of Trustees reviewed the impact of a recent public offering by the Registrant on the earnout performance benchmarks (the "Benchmarks") contained in the Agreement. Based on its analysis, the Special Committee adjusted the Benchmarks to distribute the dilutive effect of the Registrant's December 1997 public offering among the Registrant and the TRO shareholders. The adjustment is provided for in the Statement Regarding Adjustment of Earnout Performance Benchmarks Under The TRO Contribution Agreement, dated December 29, 1998 and filed as an exhibit hereto. (c) Settlement of Berman Litigation On December 18, 1998, the Registrant settled certain litigation with Daniel Berman and Robert Berman and/or entities owned or controlled by them (collectively, the "Bermans"), partners of the Registrant with respect to certain properties, including all claims by the Bermans and counterclaims by the Registrant. The litigation had been ongoing since May of 1994 and was discussed in various of the Registrant's public filings since that date. Pursuant to the settlement, the Registrant received the Bermans' 50% interest in the Fox Run multifamily community in Bear, Delaware (414 units), the Eagle's Nest multifamily community in Coral Springs, Florida (264 units) and an undeveloped 14 acre parcel in Coral Springs, Florida that will accommodate the development of approximately 260 units. The Registrant paid the Bermans $775,000 and assumed the remaining 50% of the debt outstanding on the properties. In addition, the Registrant refinanced the Fox Run property, whereby the existing financing of $14.3 million with a weighted average interest rate of 7.78% was replaced with a new mortgage in the amount of $14.6 million with an interest rate of 6.54% and a maturity in December 2008. The Registrant paid a prepayment penalty of $270,000 in connection with the refinancing. The savings in interest payments will be approximately $150,000, or $.01 per share. The Registrant will assume the management of the Fox Run and Eagle's Nest apartment communities and intends to sell the undeveloped parcel. 1 (d) Exhibits 10.1 Statement Regarding Adjustment of Earnout Performance Benchmarks Under The TRO Contribution Agreement, dated December 29, 1998. 23.1 Consent of Arthur Andersen LLP (independent public accountants of the Registrant) 99.1 Financial Statements Consolidated Balance Sheets at December 31, 1997, August 31, 1997 and August 31, 1996 Consolidated Statements of Income and Shareholders' Equity for the four month period ended December 31, 1997 and for the fiscal years ended August 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the four month period ended December 31, 1997 and for the fiscal years ended August 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Report of Independent Public Accountants 99.2 Management's Discussion and Analysis of Financial Condition and Results of Operations 99.3 Selected Financial Data 2 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. PENNSYLVANIA REAL ESTATE INVESTMENT TRUST Date: December 30, 1998 By: /s/ Jonathan B. Weller ------------------------------------- Jonathan B. Weller President and Chief Operating Officer 3 Exhibit Index
Number Exhibit Page Number - ------ ------- ----------- 10.1 Statement Regarding Adjustment of Earnout Performance Benchmarks Under the TRO Contribution Agreement, dated December 29, 1998 23.1 Consent of Arthur Andersen LLP (independent public accountants of the Registrant) 99.1 Financial Statements 99.2 Management's Discussion and Analysis of Financial Condition and Results of Operations 99.3 Selected Financial Data
4 EX-10 2 EXHIBIT 10.1 Exhibit 10.1 PENNSYLVANIA REAL ESTATE INVESTMENT TRUST (the "Trust") Special Committee of the Board of Trustees Statement Regarding Adjustment of Earnout Performance Benchmarks Under The TRO Contribution Agreement Dated December 29, 1998 Pursuant to Section 5.19(b) of the TRO Contribution Agreement dated as of July 30, 1997 (the "Agreement") by and among the Trust, PREIT Associates, L.P. (the "Partnership"), the former shareholders and debtholders of The Rubin Organization, Inc. (together, the "TRO Shareholders") and certain other persons, the Trust's Board of Trustees formed a special committee of trustees (the "Special Committee") to address and resolve certain matters after closing pertaining to the transactions contemplated by the Agreement. Section 5.19(b) provides that the Special Committee shall, at the request of at least one-third of the Partnership's outstanding Class A Units issued to the TRO Shareholders and affiliates or any trustee of the Trust, consider whether adjustments should be made to the applicable earnout performance benchmarks (the "Benchmarks") contained in the Agreement as the result of, among other things, the raising by the Trust of equity capital. Capitalized terms not otherwise defined herein have the meanings set forth in the Agreement. At the request of holders of more than one-third of the outstanding Class A Units issued to TRO Shareholders and affiliates, the Special Committee has reviewed the impact of the Trust's December 1997 public offering of 4,600,000 Shares (the "Offering") on the Benchmarks, considering financial projections for the Trust both before the Offering and on a pro forma basis, taking into account the issuance of the new Shares and the general performance of the Trust during the period following the closing of the transactions under the Agreement. Based on its analysis, the Special Committee has determined that an adjustment to the Benchmarks as a result of the Offering would be appropriate under Section 5.19 of the Agreement. The Special Committee has concluded that, because the Offering will in the long run enhance the Trust's financial performance, both the TRO Shareholders and the Trust should share the dilutive effect of the Offering on FFO per outstanding share and that the Benchmarks should be adjusted by applying a declining fraction of the dilution resulting from the Offering in each successive year of the earnout. The original Benchmarks and the effect of the new Shares on FFO per outstanding share are set forth below:
Year 1998 1999 2000 2001 2002 - ---- ---- ---- ---- ---- ---- Original Target $ 2.66 $ 2.81 $ 2.94 $ 3.14 $ 2.43 Original Hurdle $ 2.40 $ 2.53 $ 2.65 $ 2.83 $ 2.19 Dilution $(0.36) $(0.40) $(0.42) $(0.48) $(0.38)
Pursuant to Section 5.19 of the Agreement, the Special Committee hereby adjusts the foregoing Benchmarks as follows:
Year 1998 1999 2000 2001 2002 - ---- ---- ---- ---- ---- ---- Percent of Dilution Applied 75% 58% 52% 25% 0% Amount of Dilution Applied $(0.27) $(0.23) $(0.22) $(0.11) $(0.00) Adjusted Target $ 2.39 $ 2.58 $ 2.72 $ 3.03 $ 2.43 Adjusted Hurdle $ 2.13 $ 2.30 $ 2.43 $ 2.72 $ 2.19
The appropriate officers of the Trust are hereby directed to cause the Trust's books and records to reflect the adjusted Benchmarks. The foregoing statement regarding adjustment to the earnout performance benchmarks under the Agreement was adopted and approved as of December 29, 1998 by the undersigned members of the Special Committee of the Board of Trustees of the Trust. This Statement may be executed in two or more counterparts, each of which shall be deemed to be an original, and all of such counterparts together shall be deemed to be one and the same instrument. /s/ Rosemarie Greco /s/ William R. Dimeling /s/ Leonard I. Korman - ------------------- ----------------------- --------------------- Rosemarie Greco William R. Dimeling Leonard I. Korman 1 EX-23.1 3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated December 21, 1998 included in this form 8-K dated December 30, 1998 into the Registrant's previously filed Registration Statements on Forms S-3 (File No. 33-61115 and File No. 333-49817) and Forms S-8 (File No. 33-59771, File No. 33-59773, File No. 33-59767 and File No. 333-69877). /s/ Arthur Andersen LLP Philadelphia, Pennsylvania December 30, 1998 EX-99 4 EXHIBIT-99.1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Trustees of Pennsylvania Real Estate Investment Trust: We have audited the accompanying consolidated balance sheets of Pennsylvania Real Estate Investment Trust (a Pennsylvania Trust) and Subsidiaries as of December 31, 1997, August 31, 1997 and August 31, 1996 and the related consolidated statements of income, shareholders' equity and cash flows for the four month period ended December 31, 1997 and for each of the three years in the period ended August 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements for Lehigh Valley Mall Associates, a partnership in which the Company has a 50 percent interest which is reflected in the accompanying financial statements using the equity method of accounting. The equity in net income of Lehigh Valley Mall Associates represents 19 percent, 23 percent, 31 percent and 32 percent of net income for the four month period ended December 31, 1997 and for the years ended August 31, 1997, 1996, and 1995, respectively. The financial statements of Lehigh Valley Mall Associates were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for Lehigh Valley Mall Associates, is based solely on the report of the other auditors. 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, based upon our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Pennsylvania Real Estate Investment Trust and Subsidiaries as of December 31, 1997, August 31, 1997 and August 31, 1996, and the results of their operations and their cash flows for the four month period ended December 31, 1997 and for each of the three years in the period ended August 31, 1997, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Philadelphia, Pennsylvania December 21, 1998 PENNSYLVANIA REAL ESTATE INVESTMENT TRUST CONSOLIDATED BALANCE SHEETS ASSETS
December 31, August 31, August 31, 1997 1997 1996 ------------ ------------ ------------ INVESTMENTS IN REAL ESTATE, at cost (Notes 1 and 3): Multifamily properties $161,270,000 $159,967,000 $156,102,000 Retail properties 120,209,000 37,398,000 37,362,000 Industrial properties 5,078,000 5,078,000 5,078,000 Properties under development 1,369,000 -- -- ------------ ------------ ------------ Total investments in real estate 287,926,000 202,443,000 198,542,000 Less- Accumulated depreciation 53,171,000 50,711,000 44,693,000 ------------ ------------ ------------ 234,755,000 151,732,000 153,849,000 INVESTMENT IN PREIT-RUBIN, INC., at equity 4,853,000 -- -- INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES, at equity (Notes 1 and 4) 14,505,000 1,039,000 16,995,000 ADVANCES TO PREIT-RUBIN, INC. (Note 3) 3,413,000 -- -- ------------ ------------ ------------ 257,526,000 152,771,000 170,844,000 Less- Allowance for possible losses 1,770,000 1,831,000 2,042,000 ------------ ------------ ------------ 255,756,000 150,940,000 168,802,000 OTHER ASSETS: Cash and cash equivalents 1,324,000 1,399,000 1,030,000 Notes receivable -- -- 1,649,000 Rents and sundry receivables 441,000 590,000 608,000 Deferred costs, prepaid real estate taxes and expenses, net (Note 1) 8,045,000 7,393,000 5,636,000 Deposits on properties -- 5,335,000 -- ------------ ------------ ------------ $265,566,000 $165,657,000 $177,725,000 ============ ============ ============
The accompanying notes are an integral part of these statements. (Continued) 2 PENNSYLVANIA REAL ESTATE INVESTMENT TRUST CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY (Continued)
December 31, August 31, August 31, 1997 1997 1996 ------------- ------------- ------------- LIABILITIES: Mortgage notes payable (Note 6) $ 99,364,000 $ 83,528,000 $ 84,833,000 Bank and other loans payable (Note 6) 4,575,000 33,884,000 39,315,000 Tenants' deposits and deferred rents 1,317,000 1,346,000 1,422,000 Accrued pension and retirement benefits (Notes 1 and 8) 1,011,000 1,091,000 1,207,000 Accrued expenses and other liabilities 4,964,000 4,369,000 3,901,000 ------------- ------------- ------------- 111,231,000 124,218,000 130,678,000 ------------- ------------- ------------- MINORITY INTEREST (Note 3) 15,805,000 540,000 542,000 ------------- ------------- ------------- COMMITMENTS AND CONTINGENCIES (Note 11) -- -- -- SHAREHOLDERS' EQUITY (Notes 1 and 9): Shares of beneficial interest, $1 par; authorized unlimited; issued and outstanding 13,288,848, 8,685,098, and 8,676,098 shares at December 31, 1997, August 31, 1997 and 1996, respectively 13,289,000 8,685,000 8,676,000 Capital contributed in excess of par 144,746,000 53,599,000 53,133,000 Distributions in excess of net income (19,505,000) (21,385,000) (15,304,000) ------------- ------------- ------------- 138,530,000 40,899,000 46,505,000 ------------- ------------- ------------- $ 265,566,000 $ 165,657,000 $ 177,725,000 ============= ============= =============
The accompanying notes are an integral part of these statements. 3 PENNSYLVANIA REAL ESTATE INVESTMENT TRUST CONSOLIDATED STATEMENTS OF INCOME
For the Four Month Period Ended For the Fiscal Years Ended August 31, December 31, ------------------------------------------------- 1997 1997 1996 1995 ------------ ------------ ------------ ------------ REVENUES: Gross revenues from real estate $ 17,170,000 $ 40,231,000 $ 38,985,000 $ 36,978,000 Interest and other income 82,000 254,000 171,000 176,000 ------------ ------------ ------------ ------------ 17,252,000 40,485,000 39,156,000 37,154,000 ------------ ------------ ------------ ------------ EXPENSES: Property operating expenses 6,835,000 16,289,000 16,102,000 14,859,000 Depreciation and amortization 2,695,000 6,259,000 5,908,000 5,286,000 General and administrative expenses 1,088,000 3,324,000 3,119,000 3,091,000 Interest expense 4,349,000 9,086,000 9,831,000 8,908,000 Provisions for losses on investments -- 500,000 -- -- ------------ ------------ ------------ ------------ 14,967,000 35,458,000 34,960,000 32,144,000 ------------ ------------ ------------ ------------ Income before equity in unconsolidated entities, gains on sales of interests in real estate, minority interest and extraordinary item 2,285,000 5,027,000 4,196,000 5,010,000 EQUITY IN INCOME OF PREIT-RUBIN, INC (Notes 3 and 5) 260,000 -- -- -- EQUITY IN INCOME OF PARTNERSHIPS AND JOINT VENTURES (Note 4) 2,101,000 4,337,000 6,258,000 6,381,000 GAINS ON SALES OF INTERESTS IN REAL ESTATE 2,090,000 1,069,000 865,000 119,000 ------------ ------------ ------------ ------------ Income before minority interest and extraordinary item 6,736,000 10,433,000 11,319,000 11,510,000 MINORITY INTEREST (Note 3) (474,000) (198,000) (275,000) (285,000) ------------ ------------ ------------ ------------ INCOME BEFORE EXTRAORDINARY ITEM 6,262,000 10,235,000 11,044,000 11,225,000 EXTRAORDINARY ITEM--LOSS ON EARLY EXTINGUISHMENT OF DEBT (Note 6) (300,000) -- -- -- ------------ ------------ ------------ ------------ NET INCOME $ 5,962,000 $ 10,235,000 $ 11,044,000 $ 11,225,000 ============ ============ ============ ============ BASIC INCOME PER SHARE (Note 7) $ .66 $ 1.18 $ 1.27 $ 1.29 ============ ============ ============ ============ DILUTED INCOME PER SHARE (Note 7) $ .66 $ 1.18 $ 1.27 $ 1.29 ============ ============ ============ ============
The accompanying notes are an integral part of these statements. 4 PENNSYLVANIA REAL ESTATE INVESTMENT TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE FOUR MONTH PERIOD ENDED DECEMBER 31, 1997 AND THE THREE FISCAL YEARS ENDED AUGUST 31, 1997
Shares of Capital Beneficial Contributed Distributions Interest In Excess in Excess of $1 Par of Par Net Income ------------ ------------ ------------ BALANCE, SEPTEMBER 1, 1994 $ 8,670,000 $ 53,039,000 $ (4,961,000) Net income -- -- 11,225,000 Shares issued upon exercise of options (Note 9) 6,000 94,000 -- Distributions paid to shareholders ($1.88 per share) -- -- (16,302,000) ------------ ------------ ------------ BALANCE, AUGUST 31, 1995 8,676,000 53,133,000 (10,038,000) Net income -- -- 11,044,000 Distributions paid to shareholders ($1.88 per share) -- -- (16,310,000) ------------ ------------ ------------ BALANCE, AUGUST 31, 1996 8,676,000 53,133,000 (15,304,000) Net income -- -- 10,235,000 Shares issued upon exercise of options (Note 9) 9,000 166,000 -- Issuance of compensatory stock options (Note 9) -- 300,000 -- Distributions paid to shareholders ($1.88 per share) -- -- (16,316,000) ------------ ------------ ------------ BALANCE, AUGUST 31, 1997 8,685,000 53,599,000 (21,385,000) Net income -- -- 5,962,000 Shares issued upon exercise of options (Note 9) 4,000 64,000 -- New shares issued (Note 9) 4,600,000 91,083,000 -- Distributions paid to shareholders ($.47 per share) -- -- (4,082,000) ------------ ------------ ------------ BALANCE, DECEMBER 31, 1997 $ 13,289,000 $144,746,000 $(19,505,000) ============ ============ ============
The accompanying notes are an integral part of these statements. 5 PENNSYLVANIA REAL ESTATE INVESTMENT TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Four Month Period Ended For the Fiscal Years Ended August 31, December 31, ------------------------------------------------ 1997 1997 1996 1995 ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,962,000 $ 10,235,000 $ 11,044,000 $ 11,225,000 Adjustments to reconcile net income to net cash provided by operating activities- Minority interest 474,000 198,000 275,000 285,000 Depreciation and amortization 2,695,000 6,259,000 5,908,000 5,286,000 Gains on sales of interests in real estate (2,090,000) (1,069,000) (865,000) (119,000) Provision for losses on investments -- 500,000 -- -- Issuance of compensatory stock options -- 300,000 -- -- Loss on early extinguishment of debt 300,000 -- -- -- Equity in income of PREIT-RUBIN, INC (260,000) -- -- -- Decrease in allowance for possible losses (61,000) (710,000) (734,000) (460,000) Change in assets and liabilities- Rents and sundry receivables 149,000 18,000 (192,000) (18,000) Deferred costs, prepaid real estate taxes and expenses (3,075,000) (10,000) (356,000) (837,000) Accrued pension and retirement benefits (80,000) (116,000) (6,000) 130,000 Accrued expenses and other liabilities 296,000 (310,000) (54,000) 1,042,000 Tenants' deposits and deferred rents (29,000) (76,000) 70,000 138,000 ------------ ------------ ------------ ------------ Net cash provided by operating activities 4,281,000 15,219,000 15,090,000 16,672,000 ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Investments in wholly owned real estate (47,972,000) (3,901,000) (3,685,000) (38,058,000) Investment in property under development (1,246,000) -- -- -- Investments in partnerships and joint ventures (9,947,000) (2,649,000) (897,000) (1,732,000) Investment in and advances to PREIT-RUBIN, INC (1,448,000) -- -- -- Cash distributions from partnerships and joint ventures in excess of (less than) equity in income (518,000) 17,605,000 889,000 (127,000) Cash proceeds from sales of real estate investments -- -- 5,163,000 -- Cash proceeds from sales of interests in partnerships 3,862,000 2,069,000 -- -- Cash distributions to minority partners (44,000) (200,000) (261,000) (165,000) Decrease in notes receivable -- 1,649,000 -- -- Deposits on agreement to purchase -- (5,336,000) -- -- Deferred acquisition costs -- (1,488,000) (276,000) -- ------------ ------------ ------------ ------------ Net cash (used in) provided by investing activities (57,313,000) 7,749,000 933,000 (40,082,000) ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal installments on mortgage notes payable (9,318,000) (1,305,000) (1,123,000) (821,000) Increase in mortgage notes payable -- -- 8,800,000 35,000,000 Repayment of bank loans payable (29,309,000) -- -- -- Prepayment of mortgage notes payable -- -- (1,749,000) -- Proceeds from bank loan payable -- -- -- 39,379,000 Decrease in bank loan payable -- (5,431,000) (5,005,000) (35,000,000) Decrease (increase) in deferred financing costs -- 278,000 (704,000) -- Payment of deferred financing costs (859,000) -- -- -- Shares of beneficial interest issued 96,829,000 175,000 -- 100,000 Distributions paid to shareholders (4,082,000) (16,316,000) (16,310,000) (16,302,000) Distributions paid to OP Unit holders (304,000) -- -- -- ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 52,957,000 (22,599,000) (16,091,000) 22,356,000 ------------ ------------ ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (75,000) 369,000 (68,000) (1,054,000) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,399,000 1,030,000 1,098,000 2,152,000 ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,324,000 $ 1,399,000 $ 1,030,000 $ 1,098,000 ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Net assets acquired $ -- $ -- $ -- $ 3,590,000 Liabilities assumed (primarily bank loans payable) -- -- -- (3,804,000) ------------ ------------ ------------ ------------ $ -- $ -- $ -- $ (214,000) ============ ============ ============ ============ Accrual of acquisition costs $ -- $ 778,000 $ -- $ -- ============ ============ ============ ============
The accompanying notes are an integral part of these statements. 6 PENNSYLVANIA REAL ESTATE INVESTMENT TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE FOUR MONTH PERIOD ENDED DECEMBER 31, 1997 AND THE THREE FISCAL YEARS ENDED AUGUST 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Nature of Operations Pennsylvania Real Estate Investment Trust (collectively with its subsidiaries, the "Company") is a fully integrated, self-administered and self-managed real estate investment trust ("REIT") which acquires, develops, redevelops and operates retail and multifamily properties. Substantially all of the Company's properties are located in the Eastern United States, with concentrations in the Mid-Atlantic states and in Florida. The Company's interest in its properties is held through PREIT Associates, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership and, as of December 31, 1997, the Company held a 95.4% interest in the Operating Partnership. The Operating Partnership holds a 95% economic interest in PREIT-RUBIN, INC. (the "Management Company") through its ownership of 95% of the Management Company's non-voting preferred stock. Consolidation The Company consolidates its accounts and the accounts of the Operating Partnership and reflects the remaining interest in the Operating Partnership as minority interest. One partnership in which the Company is a 65% general partner, and has control as provided in the partnership agreement, has been consolidated for financial statement presentation. The minority partner's interest is 35%. All significant intercompany accounts and transactions have been eliminated in consolidation. Investment in Management Company The Company's investment in the Management Company is accounted for using the equity method. See Note 5 for further discussion. Partnership and Joint Venture Investments In accordance with the American Institute of Certified Public Accountants' Statement of Position 78-9, "Accounting for Investments in Real Estate Ventures," the Company accounts for its investment in partnerships and joint ventures which it does not control using the equity method of accounting. These investments, which represent 25% to 70% noncontrolling ownership interests, are recorded initially at the Company's cost and subsequently adjusted for the Company's net equity in income and cash contributions and distributions. 7 Statements of Cash Flows The Company considers all highly liquid short-term investments with an original maturity of three months or less to be cash equivalents. Cash paid for interest was $4,412,000, $8,963,000, $9,962,000 and $8,619,000 for the four month period ended December 31, 1997, and the fiscal years ended August 31, 1997, 1996 and 1995, respectively. Capitalization of Costs It is the Company's policy to capitalize interest and real estate taxes related to construction in progress and to depreciate these costs over the life of the related assets in order to more properly match revenues and expenses. These items are capitalized for income tax purposes and amortized or depreciated in accordance with the provisions of the Internal Revenue Code. For the four month period ended December 31, 1997, the Company capitalized interest and real estate taxes of $247,000. No interest or taxes were capitalized for the fiscal years ended August 31, 1997, 1996 and 1995. The Company has capitalized as deferred costs certain expenditures related to the financing and leasing of certain properties. Capitalized loan fees are being amortized over the term of the related loans and leasing commissions are being amortized over the term of the related leases. During the fiscal year ended August 31, 1997, the Company capitalized certain deposits associated with the planned future purchase of two regional malls. These deposits were applied to the respective properties upon consummation of the transaction described in Note 3. Depreciation The Company, for financial reporting purposes, depreciates its buildings, equipment and leasehold improvements over their estimated useful lives of 10 to 40 years, using the straight-line method of depreciation. For federal income tax purposes, the Company currently uses the straight-line method of depreciation and the useful lives prescribed by the Internal Revenue Code. Allowance for Possible Losses The Company determines asset impairment, if any, in accordance with the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This Statement requires long-lived assets to be held and used by the Company to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss for these assets is based on the fair market value of the assets. During 1997, an impairment loss of approximately $500,000 was recorded following the expiration of an option to sell certain land parcels held by a partnership in which the Company holds an equity interest. 8 Benefit Plans The Company has provided pension benefits since 1970 for all employees, excluding the Chairman, for whom retirement benefits are provided in an employment contract. With regard to the Chairman's employment contract, no provision was required for the four months ended December 31, 1997 or for the fiscal years ended August 31, 1997, 1996 and 1995. Derivative Financial Instruments In managing interest rate exposure on certain floating rate debt, the Company at times enters into interest rate swap and cap agreements. When interest rates change, the differential to be paid or received is accrued as interest expense and is recognized over the life of the swap agreements. The costs of cap transactions are deferred and amortized over the contract period. The amortized costs of cap transactions and interest income and interest expense on swap transactions are included in mortgage and bank loan interest. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. This Statement will be effective for the Company's calendar year 2000. This Statement must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997. The Company does not expect the adoption of this Statement to have a material impact on its financial position or results of operations. Income Taxes The Company has elected to qualify as a real estate investment trust under Sections 856-860 of the Internal Revenue Code and intends to remain so qualified. Accordingly, no provision for Federal income taxes has been reflected in the financial statements. Earnings and profits, which will determine the taxability of distributions to shareholders, will differ from net income reported for financial reporting purposes due to differences in cost basis, differences in the estimated useful lives used to compute depreciation and differences between the allocation of the Company's net income and loss for financial reporting purposes and for tax reporting purposes. The Company is subject to a Federal excise tax computed on a calendar year. The excise tax equals 4% of the excess, if any, of 85% of the Company's ordinary income plus 95% of the Company's capital gain net income for the calendar year over cash distributions during the calendar year, as defined. The Company has in the past distributed a substantial portion of its taxable income in the subsequent fiscal year and may also follow this policy in the future. No provision for excise tax was made for the four months ended December 31, 1997 or for the fiscal years 1997, 1996 and 1995 as no tax was due. The tax status of distributions paid to shareholders was composed of the following for the four month period ended December 31, 1997 and the calendar years ended December 31, 1997, 1996 and 1995: 9
Years Ended December 31, ------------------------------------------------- 1997 1996 1995 ---------------- ----------------- ------------ Ordinary income $ 1.66 $ 1.72 $ 1.88 Capital gains .22 .16 -- --------- --------- --------- $ 1.88 $ 1.88 $ 1.88 ========= ========= =========
The Management Company is subject to Federal and state income taxes. The operating results of the Management Company include a provision for income taxes. 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 reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain prior year amounts have been reclassified to conform with the current period presentation. 2. CHANGE IN FISCAL YEAREND: On October 14, 1997, the Company filed a Form 8-K announcing their intention to change their fiscal yearend from August 31 to December 31. On February 17, 1998, the Company filed a Transition Report on Form 10-Q which included their results for the period September 1, 1997 through December 31, 1997 and the comparable period. Listed below is unaudited income statement information with respect to the four months ended December 31, 1996: Revenues $ 13,397,000 Net income $ 4,842,000 Basic income per share $ .56 Diluted income per share $ .56 10 3. THE TRO TRANSACTION: On September 30, 1997, the Company completed a series of related transactions pursuant to which the Company: (i) transferred substantially all of its real estate interests to PREIT Associates, L.P. of which the Company is the sole general partner; (ii) the Operating Partnership acquired all of the nonvoting common shares of The Rubin Organization, Inc. ("TRO") a commercial real estate development and management firm (renamed "PREIT-RUBIN, Inc."), constituting 95% of the total equity of PREIT-RUBIN, Inc. in exchange for the issuance of 200,000 Class A Operating Partnership ("OP") Units and a provision to issue up to 800,000 additional Class A OP Units over the next five years according to a formula based upon the Company's per share growth in adjusted funds from operations; (iii) the Operating Partnership acquired the interests of certain affiliates of TRO ("TRO Affiliates") in The Court at Oxford Valley, Magnolia Mall, North Dartmouth Mall and Springfield Park; (iv) the Operating Partnership agreed to acquire the interests of TRO Affiliates in Hillview Shopping Center and Northeast Tower Center, at prices based upon a pre-determined formula; and (v) the Operating Partnership acquired the development rights of certain TRO Affiliates, subject to related obligations, in Christiana Power Center (Phases I and II), Red Rose Commons and Blue Route Metroplex. The following pro forma financial information of the Company for the four month period ended December 31, 1997 and the fiscal year ended August 31, 1997 gives effect to the properties acquired as if the purchases had occurred on September 1, 1997.
(Unaudited) Four Month Fiscal Year Period Ended Ended December 31, August 31, 1997 1997 ----------------- ----------------- Pro forma total revenues $ 18,292,000 $ 53,209,000 Pro forma net income $ 6,692,000 $ 10,459,000 Basic pro forma net income per common share $ .71 $ 1.21 Diluted pro forma net income per common share $ .71 $ 1.20
The pro forma financial information presented within this footnote is not necessarily indicative of the results which actually would have occurred if the acquisitions had been consummated on September 1, 1997, nor does the pro forma information purport to represent the results of operations for future periods. As part of the September 30, 1997 transactions discussed above, the Company entered into a contribution agreement (the "TRO Contribution Agreement") which includes a provision to issue up to 800,000 additional Class A OP units over the five-year period beginning October 1, 1997 and September 30, 2002 according to a formula based upon the Company's adjusted funds from operations per share during the five-year period. The TRO Contribution Agreement establishes "hurdle" and "target" levels set forth for the Company's adjusted funds from operations per share during specified earn-out periods to determine whether, and to what extent, the contingent OP units will be issued. The Company intends to account for the issuance of contingent OP units as additional purchase price when such amounts are determinable. 11 All of the acquisitions described above have been recorded by the Company using the purchase method of accounting. The Company accounts for its noncontrolling investment in PREIT-RUBIN, Inc. using the equity method. The excess of the purchase price of PREIT-RUBIN, Inc. over the fair value of net assets acquired is being amortized over 35 years. The following table summarizes the consideration paid to acquire the assets and businesses described above:
Net Other Total Class A Cash Paid Liabilities Transaction Purchase OP Units (Received) Assumed Costs Price -------- ---------- --------------- ---------------- ---------------- Investment in PREIT-RUBIN, Inc. $ 4,680,000 $ (878,000) $ -- $ 793,000 $ 4,595,000 Investment in The Court at Oxford Valley 5,458,000 683,000 -- 688,000 6,829,000 Magnolia Mall 5,000,000 15,165,000 25,154,000 977,000 46,296,000 North Dartmouth Mall -- 35,000,000 -- 986,000 35,986,000 Development Properties -- 6,446,000 -- 1,859,000 8,305,000 --------------- --------------- --------------- ---------------- ---------------- $ 15,138,000 $ 56,416,000 $ 25,154,000 $ 5,303,000 $ 102,011,000 =============== =============== =============== ================ ================
4. INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES: The following table presents summarized financial information as to the Company's equity in the assets and liabilities of 22, 22, and 26 partnerships and joint ventures at December 31, 1997, August 31, 1997 and 1996, respectively, and 3 properties under development at December 31, 1997, and the Company's equity in income for the four month period ended December 31, 1997 and the fiscal years ended August 31, 1997, 1996, and 1995:
August 31, December 31, ------------------------------------- ASSETS 1997 1997 1996 ------ ----------------- ---------------- ------------------- Investments in real estate, at cost: Multifamily properties $ 108,236,000 $ 107,604,000 $ 105,480,000 Industrial property 1,275,000 1,264,000 1,264,000 Retail properties 160,684,000 120,660,000 128,936,000 Properties under development 7,378,000 -- -- Land 4,446,000 4,446,000 4,446,000 ----------------- ---------------- ----------------- Total investments in real estate 282,019,000 233,974,000 240,126,000 Less- Accumulated depreciation 71,155,000 71,838,000 73,989,000 ----------------- ---------------- ----------------- 210,864,000 162,136,000 166,137,000 Cash and cash equivalents 8,442,000 6,031,000 5,589,000 Deferred costs, prepaid real estate taxes and other, net 20,469,000 5,728,000 6,020,000 ----------------- ---------------- ----------------- Total assets 239,775,000 173,895,000 177,746,000 ----------------- ---------------- -----------------
12
August 31, December 31, ------------------------------------- LIABILITIES AND PARTNERS' EQUITY 1997 1997 1996 -------------------------------- ----------------- ---------------- ------------------- Mortgage notes payable 213,018,000 162,097,000 133,578,000 Bank loans payable 6,724,000 8,770,000 9,124,000 Due to the Company 3,371,000 3,118,000 2,795,000 Other liabilities 7,601,000 4,341,000 4,436,000 ----------------- ---------------- ----------------- Total liabilities 230,714,000 178,326,000 149,933,000 ----------------- ---------------- ----------------- Net equity (deficit) 9,061,000 (4,431,000) 27,813,000 Partners' share (5,444,000) (5,470,000) (10,818,000) ----------------- ---------------- ----------------- Investment in and advances to partnerships and joint ventures $ 14,505,000 $ 1,039,000 $ 16,995,000 ================= ================ =================
EQUITY IN INCOME OF PARTNERSHIPS AND JOINT VENTURES
For the Four Month Period Ended For the Fiscal Years Ended August 31, December 31, -------------------------------------------------- 1997 1997 1996 1995 ------------------ --------------- --------------- --------------- Gross revenues from real estate $ 19,258,000 $ 52,446,000 $ 53,209,000 $ 52,339,000 ---------------- --------------- --------------- --------------- Expenses: Property operating expenses 7,122,000 20,774,000 21,724,000 20,477,000 Mortgage and bank loan interest 5,205,000 14,908,000 11,984,000 12,463,000 Depreciation and amortization 2,609,000 6,978,000 6,833,000 6,502,000 ----------------- --------------- --------------- --------------- 14,936,000 42,660,000 40,541,000 39,442,000 ----------------- --------------- --------------- --------------- 4,322,000 9,786,000 12,668,000 12,897,000 Partners' share (2,221,000) (5,449,000) (6,410,000) (6,516,000) ----------------- --------------- --------------- --------------- Equity in income of partnerships and joint ventures $ 2,101,000 $ 4,337,000 $ 6,258,000 $ 6,381,000 ================ =============== =============== ===============
Mortgage notes payable which are secured by the related properties, are due in installments over various terms extending to the year 2016 with interest rates ranging from 7.28% to 10.25% with an average interest rate of 7.93%. Principal payments are due as follows: For the years ended December 31: 1998 $ 13,146,000 1999 9,174,000 2000 20,017,000 2001 4,413,000 2002 4,718,000 2003 and thereafter 161,549,000 ---------------- $ 213,017,000 ================ 13 The liability under each mortgage note is limited to the particular property except for two loans in the amount of $8,334,000 which are guaranteed by the partners of the respective partnerships, including the Company. In addition, one bank loan in the amount of $867,000 has been guaranteed by the partners of the partnership including the Company. The Company's investments in certain partnerships and joint ventures reflect cash distributions in excess of the Company's net investments totaling $5,898,000, $5,833,000 and $5,976,000 for the four month period ended December 31, 1997 and the fiscal years ended August 31, 1997 and 1996, respectively. The Company is generally entitled to a priority return on these investments. The Company has a 50% partnership interest in Lehigh Valley Mall Associates which is included in the amounts above. Summarized financial information as of December 31, 1997, August 31, 1997, 1996 and 1995 and for the four month period ended December 31, 1997 and the fiscal years ended August 31, 1997, 1996 and 1995 for this investment which is accounted for by the equity method is as follows:
For the Four Month Period Ended For the Fiscal Years Ended August 31, December 31, -------------------------------------------------------- 1997 1997 1996 1995 ------------------- ---------------- ---------------- ---------------- Total assets $ 24,943,000 $ 24,645,000 $ 23,552,000 $ 20,858,000 Mortgages payable 53,157,000 53,406,000 22,489,000 22,227,000 Revenues 4,266,000 14,840,000 13,823,000 13,667,000 Property operating expenses 1,508,000 4,657,000 4,198,000 3,412,000 Interest expense 1,289,000 4,638,000 1,998,000 2,040,000 Net income 2,313,000 4,660,000 6,915,000 7,548,000 Equity in income of partnership 1,157,000 2,330,000 3,458,000 3,774,000
5. INVESTMENT IN PREIT-RUBIN, INC.: PREIT-RUBIN, Inc. is responsible for various activities including: management, leasing and real estate development of certain of the Company's properties and for properties on behalf of third parties. Total management fees paid by the Company's properties to PREIT-RUBIN, Inc. are included in property operating expenses in the accompanying consolidated statements of income and amounted to $35,000 for the four month period ended December 31, 1997. 14 Summarized unaudited financial information for PREIT-RUBIN, Inc. as of and for the four month period ended December 31, 1997 is as follows: Total assets $ 13,859,000 =============== Management fees $ 1,377,000 Leasing commissions 1,877,000 Development fees 124,000 Other revenues 2,334,000 --------------- Total revenue $ 5,712,000 =============== Net income $ 303,000 =============== Company's share of net income $ 260,000 =============== 6 MORTGAGE NOTES AND BANK LOANS PAYABLE: Mortgage Notes Payable: Mortgage notes payable which are secured by the related properties are due in installments over various terms extending to the year 2025 with interest at rates ranging from 5.90% to 9.50% with an average interest rate of 8.07%. Principal payments are due as follows: For the years ended December 31: 1998 $ 35,301,000 1999 1,490,000 2000 1,610,000 2001 1,750,000 2002 1,885,000 2003 and thereafter 57,328,000 --------------- $ 99,364,000 =============== The carrying values of the mortgage notes and bank loans payable at December 31, 1997, August 31, 1997 and 1996 were approximately equal to their respective fair values, as determined by using year-end interest rates and market conditions. At December 31, 1997, the fair value of the interest rate protection referred to above was approximately $0. In the event that the Company wanted to terminate the swap agreement referred to above, the amount which would be payable at December 31, 1997 was approximately $132,000. Credit Facility: On September 30, 1997, the Operating Partnership entered into a $150 million revolving credit facility (the "Credit Facility"). The obligations of the Operating Partnership under the Credit Facility have been guaranteed by the Company. The Credit Facility is for an initial term of two years and bears interest, at the borrowers election, at (i) the higher of prime rate, or the Federal Funds lending rate plus .5%, or (ii) the London Interbank Offered Rate plus margins ranging from 1.1% to 1.7%, depending on the Company's consolidated Leverage Ratio, as defined. The Credit Facility requires the Company to maintain ongoing compliance with a number of customary financial and other covenants, including leverage ratios based on gross asset value, fixed charge coverage ratios and a minimum tangible 15 net worth requirement. Until the Company reduces its leverage ratio below 50%, the lending banks will hold unrecorded mortgages on eleven unencumbered properties which the Operating Partnership owns, directly or indirectly, and would be entitled to record such mortgages upon any event of default. As of December 31, 1997, the Operating Partnership had $10.3 million outstanding on the Credit Facility ($4.6 million on wholly-owned properties and $5.7 million on joint venture properties). The weighted average interest rate based on amounts borrowed on the credit facility was 7.48% for the four month period ended December 31, 1997. At December 31, 1997, the Company was in compliance with all debt covenants. During 1995, the Company purchased interest rate protection at a cost of $250,000 on $15,000,000 of outstanding debt limiting the 30-day LIBOR rate to 7.5% for three years. The Company also limited its exposure to increases in LIBOR on $20,000,000 of its floating rate debt by entering into a swap agreement which fixes a rate of 6.12% versus 30-day LIBOR through June 2001. The Company is exposed to credit loss in the event of nonperformance by counterparties to the interest rate protection agreements; however, the Company does not anticipate nonperformance by the counterparties. During the four month period ended December 31, 1997, the Company wrote off unamortized deferred financing costs of $300,000 in connection with the refinancing of its Credit Facility. The write off of these costs has been reflected as an extraordinary loss on the accompanying consolidated statement of income for the four month period ended December 31, 1997. 7. NET INCOME PER SHARE: In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 establishes standards for computing and presenting earnings per share ("EPS"). Basic earnings per share are based on the weighted average number of common shares outstanding during the year. Diluted earnings per share are based on the weighted average number of shares outstanding during the year adjusted to give effect to common 16 shares equivalents. All per share amounts for all periods presented have been restated to conform to SFAS No. 128. A reconciliation between basic and diluted EPS is shown below (in thousands, except per share data).
For the Four Month Period Ended For the Fiscal Years Ended August 31, December 31, ---------------------------------------------------------------------- 1997 1997 1996 1995 --------------------- --------------------- --------------------- --------------------- Basic Diluted Basic Diluted Basic Diluted Basic Diluted ----- ------- ----- ------- ----- ------- ----- ------- Income before extra- ordinary item $ 6,262 $ 6,262 $ 10,235 $ 10,235 $ 11,044 $ 11,044 $ 11,225 $ 11,225 Extraordinary item (300) (300) -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- -------- Net income $ 5,962 $ 5,962 $ 10,235 $ 10,235 $ 11,044 $ 11,044 $ 11,225 $ 11,225 ========= ========= ========= ========= ========= ========= ========= ========= Weighted average shares outstanding 9,049 9,049 8,679 8,679 8,676 8,676 8,671 8,671 Effect of share options issued -- 50 -- 25 -- 16 -- 17 --------- --------- --------- --------- --------- --------- --------- --------- Total weighted average shares outstanding 9,049 9,099 8,679 8,704 8,676 8,692 8,671 8,688 ========= ========= ========= ========= ========= ========= ========= ========= Income per share before extra-ordinary item $ .69 $ .69 $ 1.18 $ 1.18 $ 1.27 $ 1.27 $ 1.29 $ 1.29 Extraordinary item per share (.03) (.03) -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- --------- Net income per share $ .66 $ .66 $ 1.18 $ 1.18 $ 1.27 $ 1.27 $ 1.29 $ 1.29 ========= ========= ========= ========= ========= ========= ========= =========
8. BENEFIT PLANS: During 1995, the Company adopted a 401(k) Plan (the "Plan") in which substantially all of the officers and employees are eligible to participate. The period permits eligible participants, as defined in the plan agreement, to defer up to 15% of their compensation, and the Company, at its discretion, may match a percentage of the employees' contributions. The employees' contributions are fully vested and contributions from the Company vest in accordance with an employee's years of service as defined in the plan agreement. The Company's contributions to the Plan for the four month period ended December 31, 1997 and for the fiscal years ended August 31, 1997, 1996 and 1995 were $43,000, $41,000, $39,000 and $1,000, respectively. During 1995, the Company also adopted a Supplemental Retirement Plan (the "Supplemental Plan") covering certain senior management employees. The Supplemental Plan provides eligible employees through normal retirement date, as defined in the plan agreement, a benefit amount similar to that which would have been received under the provisions of a pension plan which was terminated in 1994. Contributions due by the Company under the provisions of this plan were $11,000, $92,000, $160,000 and $168,000 for the four month period ended December 31, 1997 and for the fiscal years ended August 31, 1997, 1996 and 1995. 17 9. STOCK OPTION PLANS: In December 1990, the shareholders approved an incentive stock option plan for key employees and a stock option plan for nonemployee trustees, covering 200,000 and 100,000 shares of beneficial interest, respectively. Under the terms of the plans, the purchase price of shares subject to each option granted will be at least equal to the fair market value of the shares on the date of grant. Options under the incentive stock option plan may be exercised as determined by the Company, but in no event later than 10 years from the date of grant. In December 1993, the Board of Trustees amended the incentive stock option plan for key employees, to increase the number of shares subject to option to 400,000 shares, to change the name of the plan to "1990 Incentive and Non Qualifying Stock Option Plan" and to expand some provisions of the plan. The stock option plan for nonemployee trustees provides for annual grants of 1,000 options (becoming exercisable in four equal installments). The options expire 10 years after the date of grant. In December 1993, the Board of Trustees adopted a nonqualifying stock option plan covering 100,000 shares. The Company granted options on February 1, 1994 having a term of 10 years and subject to the other terms and conditions set forth in the plan. All 100,000 shares are outstanding at December 31, 1997. On September 30, 1997, the Company adopted an Incentive and Non-Qualified Stock Option Plan (the "1997 Stock Option Plan") in connection with the TRO Transaction. Options on 455,000 Shares were granted to former TRO officers and employees on September 30, 1997 at an exercise price of $25.41 per share. All options granted on September 30, 1997 vest in four equal annual installments commencing January 1, 1999, and on each anniversary date thereof. Changes in options outstanding are as follows:
1997 Stock Plan For Exercise Option Employees Nonemployee Price Plan Plan Trustees -------------- ------------ ------------- ------------- Options outstanding at 8/31/95 $15.75-$25.375 -- 244,625 35,250 Options granted $20.375-$20.75 -- 50,500 6,000 Options exercised -- -- -- -- ------------ -------------- ---------------- Options outstanding at 8/31/96 $15.75-$25.375 -- 295,125 41,250 Options granted $22.375-$24.625 -- 45,000 6,000 Options exercised $15.75-$25.375 -- -- (9,000) ------------ -------------- ---------------- Options outstanding at 8/31/97 $15.75-$25.375 -- 340,125 38,250 Options granted $25.41 455,000 -- -- Options exercised $15.75-$20.375 -- -- (3,750) ------------ -------------- ----------------- Options outstanding at 12/31/97 $15.75-$25.41 455,000 340,125 34,500 ============ ============== ================
At December 31, 1997, options for 223,286 shares of beneficial interest with an aggregate purchase price of $4,853,000, (average of $21.73 per share) were exercisable. 18 During the fourth quarter of 1997, the Board of Trustees extended the exercise dates for 62,500 options previously granted to an officer of the Company and two retiring trustees. As a result, the Company recorded compensation expense of $300,000 for the four month period ended December 31, 1997 relating to this change in terms. During fiscal year 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123 encourages a fair value method of accounting for employee stock options and similar equity instruments. The statement also allows an entity to continue to account for stock-based compensation using the intrinsic value method in APB Opinion No. 25. As provided for in the statement, the Company elected to continue the intrinsic value method of expense recognition. If compensation cost for these plans had been determined using the fair value method prescribed by SFAS No. 123, the Company's net income and net income per share would have reflected the unaudited pro forma amounts indicated below:
For the Four Month For the Fiscal Years Ended Period Ended -------------------------------------- December 31, August 31, August 31, 1997 1997 1996 ---------------- ------------------ ----------------- ------------------------(Unaudited)------------------------ Net income: As reported $ 5,962,000 $ 10,235,000 $ 11,044,000 Pro forma $ 5,861,000 $ 10,212,000 $ 11,033,000 Net income per share: As reported- Basic $ .66 $ 1.18 $ 1.27 Diluted $ .66 $ 1.18 $ 1.27 Pro forma- Basic $ .65 $ 1.18 $ 1.27 Diluted $ .65 $ 1.18 $ 1.27
The pro forma effect on the results may not be representative of the impact in future years because the fair value method was not applied to options granted before 1996. The fair value of each option was estimated on the grant date using the Black-Scholes option pricing model and the assumptions presented below.
For the Four Month For the Fiscal Years Ended Period Ended ------------------------------- December 31, August 31, August 31, 1997 1997 1996 ------------ ---------- ---------- Expected life in years 5 5 5 Risk-free interest rate 6.09% 6.10% 5.58% Volatility 18.38% 17.31% 18.12% Dividend yield 7.65% 7.28% 8.90%
The weighted average fair value of options granted was $2.34, $2.05 and $1.29 for the four month period ended December 31, 1997 and the fiscal years ended August 31, 1997 and 1996, respectively. 19 10. OPERATING LEASES: The Company's apartments are typically leased to residents under operating leases for a period of one year. The Company's shopping centers are leased to tenants under operating leases with expiration dates extending to the year 2012. Future minimum rentals under noncancelable operating leases at December 31, 1997 are as follows: 1998 $ 12,049,000 1999 11,456,000 2000 10,839,000 2001 9,620,000 2002 7,947,000 Thereafter 29,537,000 ---------------- $ 81,448,000 ================ The total future minimum rentals presented above do not include amounts that may be received as tenant reimbursements for charges to cover increases in certain operating costs. 11. COMMITMENTS AND CONTINGENCIES: During 1995 certain environmental matters arose at certain properties in which the Company has an interest. The Company retained environmental consultants in order to investigate these matters. At one property, in which the Company has a 50% ownership interest, groundwater contamination exists which the Company alleges was caused by the former tenant. Estimates to remediate this property, which are subject to the length of monitoring and the extent of remediation required, range in total from $100,000 to $1,000,000. In addition, above normal radon levels have been detected at two wholly owned properties. The estimated remaining cost to remediate these properties is approximately $115,000, which costs were received as a credit from the sellers as part of the initial acquisition. The Company has recorded its share of these liabilities totaling $363,000 related to the consultants evaluation of these matters which, in certain instances, are subject to applicable state approvals of the remediation plans. In Management's opinion, no material incremental cost will be incurred on these properties. The Company will pursue recovery of remediation costs from all of the responsible parties, including its tenants and partners. 12. ACQUISITION: The Company acquired one property during the fiscal year ended August 31, 1995 for approximately $34,000,000 (including improvements) which was accounted for by the purchase method. The results of operations for the acquired property has been included from the respective purchase date. The pro forma financial information presented within this footnote is not necessarily indicative of the results which actually would have occurred if the acquisition had been consummated on September 1, 1994, nor does the pro forma information purport to represent the results of operations for future periods. 20 Fiscal Year Ended August 31, 1995 ----------------- (Unaudited) Pro forma total revenues $ 37,815,000 Pro forma net income $ 11,103,000 Basic pro forma net income per common share $ 1.28 Diluted pro forma net income per common share $ 1.28 13. SUBSEQUENT EVENTS: On January 26, 1998, the Company acquired the remaining 50% interest in a shopping center under construction located in Newark, Delaware, for a purchase price of at least $8.7 million consisting of $6 million in cash, $2.7 million to be paid through the issuance of Operating Partnership (OP) Units upon completion of the shopping center, and a contingent payment to issue additional OP Units at completion based on a predetermined formula which calculates the value of the center. On May 12, 1998, a partnership in which the Company owns a 50% interest acquired a shopping center in Springfield, Pennsylvania for $7.3 million in cash of which the Company's share was approximately $3.7 million. On July 21, 1998, the Company acquired Foulk Plaza (subsequently renamed "Brandywood Plaza") located in Wilmington, Delaware for a purchase price of approximately $4.3 million consisting of $1.3 million in cash and $3.0 million through the issuance of OP units. On August 7, 1998, the Company acquired all of the partnership interests in a partnership that owns The Wood Apartments located in Ambler, Pennsylvania for a purchase price of approximately $21.2 million consisting of $12.2 million in cash, $1.7 million paid through the issuance of OP units and $7.3 million through the assumption of debt. On August 27, 1998, the Company acquired Festival at Oaklands Shopping Center (subsequently renamed, "Festival at Exton") located in Exton, Pennsylvania for a cash purchase price of approximately $17.7 million. On September 17, 1998, the Company acquired all of the beneficial interests in a trust that owns Prince Georges Plaza located in Hyattsville, Maryland for a purchase price of approximately $65.0 million, consisting of $19.0 million in cash, $3.0 million paid through the issuance of OP units and $43.0 million through the assumption of debt. On December 18, 1998, the Company acquired the remaining 50% interest in two multifamily communities and a parcel of undeveloped land located in Coral Springs, Florida and Bear, Delaware. The Company paid $775,000 in cash to acquire the partnership interests and assumed mortgage indebtedness of approximately $29.8 million. 21 14. SUMMARY OF QUARTERLY RESULTS (UNAUDITED): The following presents a summary of the unaudited quarterly financial information for the three months ended December 31, 1997 and for the fiscal years ended August 31, 1997 and 1996. For the three months ended December 31, 1997, revenues totaled $13,831,000, net income was $5,436,000, income before gains on sales of interests in real estate was $3,795,000, and gain on sales of interests in real estate totaled $2,090,000. On a per share basis, net income was $.60 and $.59 per basic and diluted income share, income before gain on sales of interests in real estate was $.42 and $.41 per basic and diluted income per share, and gain on sales of interests in real estate was $.23 for both basic and diluted income per share.
For the Fiscal Year Ended August 31, 1997 (in thousands of dollars, except per share data) ---------------------------------------------------------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ----- Revenues $ 10,063 $ 10,186 $ 10,085 $ 10,151 $ 40,485 ============ ============ ============ ============ ============ Income before gains (loss) on sales of interests in real estate $ 2,639 $ 1,520(1) $ 2,785 $ 2,222(2) $ 9,166 Gains (loss) on sales of interests in real estate -- 1,461 -- (392) 1,069 ------------ ------------ ------------ ------------ ------------ Net income $ 2,639 $ 2,981 $ 2,785 $ 1,830 $ 10,235 ============ ============ ============ ============ ============ Basic income per share: Income before gains (loss) on sales of interests in real estate $ .30 $ .17 $ .32 $ .26 $ 1.06 Gains (loss) on sales of interests in real estate -- .17 -- (.05) .12 ----------- ----------- ----------- ----------- ----------- Total $ .30 $ .34 $ .32 $ .21 $ 1.18 =========== =========== =========== =========== =========== Diluted income per share: Income before gains (loss) on sales of interests in real estate $ .30 $ .17 $ .32 $ .26 $ 1.06 Gains (loss) on sales of interests in real estate -- .17 -- (.05) .12 ----------- ----------- ----------- ------------ ----------- Total $ .30 $ .34 $ .32 $ .21 $ 1.18 =========== =========== =========== =========== ===========
(1) Reflects the recording of a provision for asset impairment (see Note 1) and the Company's share of prepayment fees relating to the refinancing of certain debt at partnerships accounted for under the equity method. (2) Includes additional compensation expense (see Note 9) relating to a change in the terms of certain stock options previously granted. 22
For the Fiscal Year Ended August 31, 1997 (in thousands of dollars, except per share data) ---------------------------------------------------------------------------- For the Year Ended August 31, 1996 ---------------------------------------------------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ----- Revenues $ 9,696 $ 9,667 $ 9,968 $ 9,825 $ 39,156 ============ ============ ============ ============ ============ Income before gains on sales of interests in real estate $ 2,845 $ 2,336 $ 2,625 $ 2,373 $ 10,179 Gains on sales of interests in real estate -- -- 411 454 865 ------------ ------------ ------------ ------------ ------------ Net income $ 2,845 $ 2,336 $ 3,036 $ 2,827 $ 11,044 ============ ============ ============ ============ ============ Basis income per share: Income before gains on sales of interests in real estate $ .33 $ .27 $ .30 $ .27 $ 1.17 Gains on sales of interests in real estate -- -- .05 .05 .10 ----------- ----------- ----------- ----------- ----------- Total $ .33 $ .27 $ .35 $ .32 $ 1.27 =========== =========== =========== =========== =========== Diluted income per share: Income before gains on sales of interests in real estate $ .33 $ .27 $ .30 $ .27 1.17 Gains on sales of interests in real estate -- -- .05 .05 .10 ----------- ----------- ----------- ----------- ----------- Total $ .33 $ .27 $ .35 $ .32 $ 1.27 =========== =========== =========== =========== ===========
23 EX-99 5 EXHIBIT-99.2 PENNSYLVANIA REAL ESTATE INVESTMENT TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The TRO Transaction On September 30, 1997, the Company acquired The Rubin Organization, Inc. ("TRO", renamed "PREIT-RUBIN, Inc."), a commercial property development and management firm, and certain related real estate interests (the "TRO Transaction"). As part of the TRO Transaction, the Company acquired Magnolia Mall, located in Florence, South Carolina, North Dartmouth Mall, located in North Dartmouth, Massachusetts and a 50% interest in the Court at Oxford Valley, located in Langhorne, Pennsylvania. The Company also acquired the development rights of certain affiliates of TRO ("TRO Affiliates"), subject to related obligations, in Christiana Power Center (Phases I and II), Red Rose Commons and Blue Route Metroplex. In addition, the Company agreed to acquire the interests of TRO Affiliates in Hillview Shopping Center and Northeast Tower Center, at prices based upon a pre-determined formula. The TRO Transaction was financed through the issuance of 646,286 Class A Operating Partnership Units in PREIT Associates, L.P. (the "Operating Partnership"), with a value of approximately $15.1 million, assumption of mortgage indebtedness at Magnolia Mall of approximately $25.2 million, and $59.9 million of cash. The cash was obtained primarily from borrowings under a new Credit Facility entered into by the Operating Partnership coincident with the September 30, 1997 closing of the TRO Transaction, with a group of banks led by CoreStates Bank, N.A. The obligations of the Operating Partnership under the new Credit Facility have been guaranteed by the Company. Liquidity and Capital Resources Borrowings under the Credit Facility increased from approximately $34 million at August 31, 1997 to approximately $90 million at September 30, 1997, following the consummation of the TRO Transaction. On December 23, 1997, the Company sold 4,600,000 common shares of beneficial interest at a price of $22.375 per share. The net proceeds to the Company from the public offering, after deducting underwriting discounts and commissions were approximately $97 million. The Company used the net proceeds to prepay the $8.8 million mortgage loan (8.25%) secured by Cobblestone Apartments in Pompano Beach, Florida (the "Cobblestone Mortgage") and to repay approximately $88 million of amounts then outstanding under the Credit Facility. At September 30, 1997, the interest rate on the Credit Facility was set at a margin equal to 1.7% over 30-day LIBOR. As a result of the reduction in the Company's Leverage Ratio, following the December 1997 public offering, the interest rate is expected to be reduced by 30 basis points to a margin of 1.4% over 30-day LIBOR. In addition, the maturity date for the Credit Facility will be extended from September 30, 1999 to December 31, 2000. As of December 31, 1997, $10.3 million of borrowings under the Credit Facility were outstanding ($4.6 million directly by the Operating Partnership and $5.7 million through partnerships and joint ventures) and, subject to the terms and conditions of the Credit Facility, up to $139.7 million was available to fund 1 property acquisitions, scheduled debt maturities and other uses. Subsequent to December 31, 1997, and through December 28, 1998, the Company borrowed additional amounts under the Credit Facility totaling approximately $134.2 million leaving approximately $5.1 million of amounts available for use. These borrowings were used to fund various development projects and property acquisitions during 1998. On March 20, 1998, the Registrant borrowed $33.7 million under the Credit Facility to repay the term loan outstanding which matured in March 1998. The term loan accrued interest at a fixed rate of 8.62% and was secured by three properties. At December 31, 1997, the interest rate on the Credit Facility was 7.42%. In addition to amounts due under the Credit Facility, during the next three years, mortgage loans secured by properties owned by four partnerships in which the Company has an interest mature by their terms. Balloon payments on these loans total $17.0 million, of which the Company's proportionate share is $8.5 million. The Company expects to meet its short-term liquidity requirements generally through its available working capital and net cash provided by operations. The Company believes that the net cash provided by operations will be sufficient to allow the Company to make any distributions necessary to enable the Company to continue to qualify as a REIT under the Code. The Company also believes that the foregoing sources of liquidity will be sufficient to fund its short-term liquidity needs for the foreseeable future, including capital expenditures, tenant improvements and leasing commissions. The Company expects to meet certain long-term liquidity requirements including property acquisitions, scheduled debt maturities, renovations, expansions and other non-recurring capital improvements through borrowings under the Credit Facility, long-term secured and unsecured indebtedness and the issuance of additional equity securities. 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. 2 Funds from operations (FFO) increased by $1,641,000 for the four months ended December 31, 1997, as compared to the same period in 1996 were as follows:
Four Months Ended December 31, ------------------------------------- Funds from Operations 1997 1996 --------------------- ----------- ------------ Income before minority interest and extraordinary item $ 6,736,000 $ 4,959,000 Less: Gains on sales of interests in real estate (2,090,000) (1,461,000) Minority interest in consolidated partnership (80,000) (117,000) Add: Depreciation and amortization- Wholly owned and consolidated partnerships (1) 2,629,000 1,961,000 Unconsolidated partnerships and joint ventures 1,252,000 1,119,000 Excess purchase price over net assets acquired 29,000 -- Refinancing prepayment fees -- 214,000 Less: Depreciation of non-real estate assets (76,000) (73,000) Amortization of deferred financing costs (254,000) (97,000) ----------- ----------- Funds from operations $ 8,146,000 $ 6,505,000 =========== =========== Funds from operations per share and OP Unit (2) $ 0.86 0.75 =========== ===========
Funds from Operations for each of the previous five fiscal years were as follows:
For the Fiscal Years Ended August 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ------------ ----------- (in thousands) Net income ............................................. $ 10,235 $11,044 $11,225 $ 20,687 $ 14,000 Less: Gains on sales of interests in real estate ...... (1,069) (865) (119) (12,362) (3,875) Plus: Provision for losses ............................. 500 -- -- 1,795 320 Depreciation and amortization Wholly owned and consolidated partnerships........ 5,989 5,650 5,044 3,322 2,685 Unconsolidated partnerships and joint ventures.... 3,380 3,334 3,214 3,229 4,119 Refinancing prepayment fees ........................ 1,133 -- -- -- -- Less: Depreciation of non-real estate assets ............ (222) (202) (173) (146) (104) Amortization of deferred financing costs .......... (286) (333) (228) (108) (275) -------- ------- ------- --------- -------- Funds from operations ................................. $ 19,660 $18,628 $18,963 $ 16,417 $ 16,870 ======== ======= ======= ========= ========
(1) Net of minority interest of $67,000 and $88,000 in 1997 and 1996, respectively. (2) Assuming full conversion of the 646,286 Operating Partnership Units into shares of the Company. The weighted average effect for the four months ending December 31, 1997 and 1996 was 484,715 and 0, respectively. Cash Flows Net cash provided by operating activities decreased to $4,281,000 from $4,641,000 for the four months ended December 31, 1997, as compared to the four months ended December 31, 1996. The decrease is primarily attributable to additional operating income provided by Magnolia Mall and North Dartmouth Mall which the Company acquired on September 30, 1997, offset by the prepayment of real estate taxes in the 1997 period and the timing of other working capital changes. Net cash used in investing activities was $57,313,000 for the four months ended December 31, 1997 as compared to net cash provided by investing activities of $17,777,000 in the same period last year. Investing activities in the 1997 period includes the cash portion of the purchase price for the retail properties and development assets acquired in the TRO Transaction of approximately $59 million along with capital expenditures at existing properties of approximately $1.3 million. Cash provided by investing activities in the 1997 period includes the Company's share of the cash proceeds from the sale of Gateway Mall in December 1997 of $3.9 million. Cash provided by financing activities in the 1996 period includes $15.4 million, which represents the Company's share of proceeds 3 from the refinancing of debt at two properties. In December 1996, the Company sold its interests in three shopping centers in Pennsylvania and received net proceeds of $2.1 million. Capital expenditures at existing properties in the four months ended December 31, 1996 were approximately $1.3 million. Net cash provided by financing activities was $52,957,000 for the four months ended December 31, 1997 as compared to net cash used in financing activities of $16,897,000 for the four months ended December 31, 1996. Financing activities in the 1997 period included the net proceeds from the sale of 4.6 million shares of the Company which totaled $96.8 million. The proceeds from the public offering were used to repay outstanding borrowings under the Credit Facility of approximately $29.3 million and to repay an $8.8 million mortgage loan. Financing activities in the 1996 period included net repayments of bank loans totaling $12.4 million and normal amortization of mortgage debt. Distributions paid to shareholders were approximately $4.1 million in both periods. Net cash provided by operating activities increased by approximately 1% to $15.2 million for the year ended August 31, 1997 as compared to $15.1 million the same period last year. Operating cash flow was higher primarily as a result of timing of collections of receivables. Net cash provided by investing activities was $7.7 million for the year ended August 31, 1997 as compared to $0.9 million in the same period last year. For the year ended August 31, 1997, the Company refinanced two properties and received $15.4 million, sold interests in four shopping centers and received proceeds of $2.1 million, invested $6.2 million in real estate and incurred deposits to acquire real estate of $5.3 million. For the year ended August 31, 1996, the Company sold two properties and received net cash proceeds of $5.2 million. Net cash used in financing activities increased by 40% to $22.6 million for the year ended August 31, 1997 as compared to $16.1 million in the same period last year. Financing activities included a $5.4 million reduction in bank loans payable and distributions paid to shareholders of $16.3 million. Financing activities in 1996 included proceeds of a mortgage note payable on Shenandoah Village Apartments of $8.8 million, a $5.0 million reduction in bank loans payable and distributions paid to shareholders of $16.3 million. Results of Operations Four Month Periods Ended December 31, 1997 and 1996 Gross revenues from real estate increased by $3,881,000 to $17,170,000 for the four month period ended December 31, 1997 as compared to the same period in the prior year. The 1997 period included $3,540,000 of revenues attributable to Magnolia Mall and North Dartmouth Mall which the Company acquired on September 30, 1997. Revenues from properties owned during both periods increased by $341,000 primarily as a result of an increase in apartment revenues. Operating expenses increased by $1,400,000 to $6,835,000 The 1997 period included $1,326,000 of expenses attributable to Magnolia Mall and North Dartmouth Mall which the Company acquired on September 30, 1997. Operating expenses from properties owned during both periods increased by $74,000. Depreciation and amortization increased by $646,000 to $2,695,000 primarily as a result of the addition of the Magnolia Mall and North Dartmouth Mall properties ($407,000), and increased amortization of financing costs of approximately $135,000. 4 Interest expense increased by $1,229,000 to $4,349,000 as a result of interest on borrowings against the Company's Credit Facility for acquisitions and working capital needs. Equity in income of partnerships and joint ventures increased by $335,000 to $2,101,000 primarily as a result of the Company's purchase of a 50% interest in Oxford Valley Road Associates on September 30, 1997 ($113,000). The 1996 period includes a prepayment penalty in the amount of $214,000 due to the refinancing of debt at Lehigh Valley Mall. The 1996 period also included income from properties sold during 1996 in the amount of $66,000. Income from properties owned during both periods increased by $74,000. Equity in income of PREIT-RUBIN, Inc. for the 1997 period was $260,000. The gain on the sale of interest in real estate of $2,090,000 in the 1997 period relates to the sale of the Company's 60% interest in Gateway Mall, St. Petersburg, Florida. The prior year gains of $1,461,000 consist of the sale of the Company's 50% interest in three shopping centers in Pennsylvania. Minority interest increased by $357,000 to $474,000 as a result of the Class A OP units issued in connection with the TRO transaction. Extraordinary loss of $300,000 is due to the write-off of remaining deferred financing costs following the early extinguishment of the Company's previous credit facility. Net income for the four months ended December 31, 1997 increased to $5,962,000 from $4,842,000 as reported in the comparable period in the prior year. Fiscal 1997 Compared With Fiscal 1996 Gross revenues from real estate for the fiscal year ended August 31, 1997 increased by 3% to $40.2 million from $39.0 million in the prior year. The 1997 period included $0.4 million of revenues attributable to Forestville Plaza in which the Company acquired its partners' remaining 25% interest in the prior fiscal year. The 1996 period included $0.5 million of revenues attributable to Chateau Apartments which the Company sold in June 1996. Revenues from properties owned during both periods increased by $1.0 million primarily as a result of increases in apartment revenues. Operating expenses for the fiscal year ended August 31, 1997 increased 1% to $16.3 million from $16.1 million in the prior year. The 1997 period included $0.2 million of expenses attributable to Forestville Plaza in which the Company acquired its partners' remaining 25% interest in the prior fiscal year. The 1996 period included $0.3 million of expenses attributable to Chateau Apartments which the Company sold. Operating expenses from properties owned during both periods increased by $0.3 million. Depreciation and amortization for the fiscal year ended August 31, 1997 increased by 7% to $6.3 million from $5.9 million in 1996, primarily as a result of ongoing capital expenditures in apartments. General and administrative expenses increased by 6% to $3.3 million from $3.1 million in 1996, primarily as a result of costs associated with litigation with a partner. Mortgage and bank loan interest expense decreased by 8% to $9.1 million from $9.8 million in 1996, primarily as a result of decreased borrowing against the Company's credit facility. In fiscal year 1996, a partnership in which the Company has a 50% interest signed an option to sell a parcel of land at a stipulated price, subject to the buyer's obtaining certain zoning variance approvals. In fiscal year 1997, the option expired. As a result, management revised its estimate of the property's selling price and recorded a $0.5 million provision for investment losses to reduce the property held for sale to its estimated net realizable value. 5 Equity in income of partnerships and joint ventures decreased in the fiscal year ended August 31, 1997, by 32% to $4.3 million from $6.3 million in 1996, primarily as a result of an increase in mortgage interest expense of $2.9 million ($1.8 million of which was the Company's proportional share). The increase in partnership mortgage interest expense is attributable to prepayment fees of $1.9 million ($1.1 million of which was the Company's proportional share) in connection with refinancings, as well as additional interest expense associated with the refinancings, of Regency Apartments, Lehigh Valley Mall and Cambridge Hall Apartments in 1997. In addition, equity in income from properties owned during both periods exclusive of the increase in mortgage interest mentioned above increased by $0.5 million. Net income for the fiscal year ended August 31, 1997 before gains on sales of interests in real estate decreased 10% to $9.2 million from $10.2 million for the comparable period in 1996. In fiscal year 1997, net gains on the sales of interests in real estate were $1.1 million, as compared to $0.9 million in 1996. The net gains on sales of interests in real estate of $1.1 million in 1997 consisted of gains on the sale of the Company's joint venture interest in shopping centers in Lancaster, Beaver Falls and Waynesburg, PA of $1.5 million, offset by a loss on the sale of a shopping Center in Margate, FL of $0.4 million. The gains in 1996 totaling $0.9 million were derived from the sale of land in Bucks County, PA and the sale of the Chateau Apartments in Midland, TX. In 1997, net income was reduced by an accounting provision of $0.5 million for losses on land held for sale in the Company's investment portfolio and prepayment fees of $1.9 million paid in connection with refinancing of two partnership properties, the Company's share of which was $1.1 million. Fiscal 1996 Compared With Fiscal 1995 Gross revenues from real estate for the fiscal year ended August 31, 1996 increased by 5% to $39.0 million from $37.0 million in 1995. The increase is due primarily to an increase in revenues of $1.2 million from the Boca Palms Apartments, which was acquired in November 1994 and $0.4 million from Forestville Plaza which became wholly owned during the year. Exclusive of Boca Palms Apartments and Forestville Plaza, revenues from properties owned during both periods increased 2% to $33.7 in 1996 from $33.1 million in 1995. Operating expenses in the fiscal year ended August 31, 1996 increased by 8% to $16.1 million from $14.9 million in 1995. The increase is due primarily to $0.4 million of increased expenses from the Boca Palms Apartments, approximately $0.2 million of additional operating expenses as a result of the harsh winter weather in the Mid-Atlantic region and $0.1 million attributable to the increased ownership of Forestville Plaza. Depreciation and amortization increased by 13% to $5.9 million from $5.3 million in 1995, primarily as a result of the acquisition of Boca Palms, the remaining interest in Forestville Plaza, and ongoing capital expenditures. Interest expense increased by 11% to $9.9 million from $8.9 million in 1995 as a result of increased borrowings to finance the Boca Palms acquisition and for general corporate purposes. For fiscal year ended August 31, 1996, $0.7 million was charged against the allowance for investment losses, $0.3 million for carrying costs for land held for sale, and $0.4 million of development expenses incurred at Crest Plaza, Allentown, Pennsylvania, for a potential expansion of the shopping center, including a Caldor store. The lease with Caldor was canceled and the cost was written off following a bankruptcy declaration by Caldor. Equity in income of partnerships and joint ventures decreased by 2% to $6.3 million from $6.4 million in 1995, primarily as a result of a non-recurring lease termination fee received from a shopping center tenant in the amount of $0.2 million for fiscal year 1995. The Company's share of partnership and joint venture income in 1996 was also reduced by approximately $0.1 million as compared to the prior year due to higher operating expenses resulting from the harsh winter weather discussed earlier. Net income for the fiscal year ended August 31, 1996, before gains on sales of interests in real estate, decreased by 8% to $10.2 million from $11.1 million for the comparable period in 1995. In the 1996 period, the gains on the sales of interests in real estate were $0.9 million as compared to the 1995 period which included a gain on sale of interest in real estate of $0.1 million. Net income was reduced by an increase in operating expenses of $0.3 million primarily due to winter conditions in the Mid-Atlantic region and the receipt in the prior year of $0.2 million as a non-recurring termination fee from a shopping center tenant. 6 Year 2000 Issue Many existing computer programs use only two digits to identify a year in the date field. Those programs were designed and developed at a time when data storage was expensive, and the impact of the upcoming century change was not considered. If not corrected, many programs may fail or provide inaccurate results at the turn of the century. The Company uses information systems and control systems which may be affected by the two digit date. The Company has established a Year 2000 Remediation Plan consisting of the following phases: inventorying systems and devices (including information technology ("IT") and non-IT systems) that are vulnerable to the Year 2000 problem, assessment of the criticality of the inventoried items, remediation of the non compliant items, and testing of the corrections that have been applied. The Company has completed the first phase of its Remediation Plan for IT systems and has determined that all mission critical systems are Year 2000 compliant. In addition, the Company has begun the first phase of its Remediation Plan for its non-IT systems (such as elevators, HVAC and lighting systems) and is currently completing an inventory of non-IT systems and assessing the potential risks of noncompliance. The amount of remediation effort is not anticipated to be extensive due to the Company's use of readily available, off-the-shelf software and hardware products that are supported by the manufacturers. After evaluating the Company's required compliance efforts, appropriate contingency plans will be developed based on the outcome of the assessment phase and the survey of its major suppliers. The Company expects to complete the Year 2000 Remediation Plan, including final testing by the beginning of the fourth quarter of 1999. Business partners, suppliers and tenants are also being surveyed relative to their Year 2000 compliance to mitigate the potential impact of Year 2000 issues. Management has determined the approximate total cost of its Year 2000 Remediation Plan and the potential related impact on operations. Amounts incurred to date have been less than $100,000 and the estimated remaining expenses of Year 2000 remediation are also expected to be less than $100,000. All costs related to Year 2000 remediation are expensed as incurred. Although the Company believes its Year 2000 Remediation Plan is adequate to address the Year 2000 issue, there can be no assurance to that effect. If the required remediation efforts are not made, or are not completed timely, the Year 2000 issue could have a material impact on the operations of the Company. Inflation Inflation can have many effects on the financial performance of the Company. Shopping center leases often provide for the payment of rents based on a percentage of sales which may increase with inflation. Leases may also require tenants to bear all or a portion of operating expenses, which may reduce the impact of expense increases on the Company. Apartment leases normally provide for a one-year term, which may allow the Company to seek increased rents as leases are renewed or when new tenants are obtained. 7 EX-99 6 EXHIBIT-99.3 SELECTED FINANCIAL DATA
For the Four Month Period For the Fiscal Years Ended August 31, Ended ------------------------------------------------------------------- December 31, 1997 1997 1996 1995 1994 1993 ----------------- ----------- ----------- ----------- ----------- ----------- (amounts in thousands, except per share data) Income Statement Data: Revenues: Gross revenues from real estate ...... $17,170 $40,231 $38,985 $36,978 $27,640 $21,083 Interest and other income ............ 82 254 171 176 274 542 -------- -------- -------- -------- -------- -------- Total revenues ...................... 17,252 40,485 39,156 37,154 27,914 21,625 Expenses: Property operating expenses ......... 6,835 16,289 16,102 14,859 11,758 8,959 Depreciation and amortization ......... 2,695 6,259 5,908 5,286 3,541 2,784 General and administrative expenses ............................ 1,088 3,324 3,119 3,091 2,528 1,873 Interest expense ...................... 4,349 9,086 9,831 8,908 4,162 2,222 Provision for losses on investments -- 500 -- -- 1,795 320 -------- -------- -------- -------- -------- -------- Total expense ..................... 14,967 35,458 34,960 32,144 23,784 16,158 -------- -------- -------- -------- -------- -------- Income before equity in unconsolidated entities, gains on sales of interests in real estate, minority interest and extraordinary item ................... 2,285 5,027 4,196 5,010 4,130 5,467 Equity in income of partnerships and joint ventures ...................... 2,101 4,337 6,258 6,381 4,416 4,750 Equity in loss of PREIT-RUBIN, Inc. ... 260 -- -- -- -- -- Gains on sales of interests in real estate .............................. 2,090 1,069 865 119 12,362 3,875 Minority interest ..................... (474) (198) (275) (285) (221) (92) Extraordinary loss ..................... (300) -- -- -- -- -- -------- -------- -------- -------- -------- -------- Net income ........................... $ 5,962 $10,235 $11,044 $11,225 $20,687 $14,000 ======== ======== ======== ======== ======== ======== Basic Income Per Share Results: Income before gains on sales of interests in real estate and extraordinary item ................... $.46 $1.06 $1.17 $1.28 $ .96 $1.17 Gains on sales of interests in real estate .............................. .23 .12 .10 .01 1.43 .45 Extraordinary item ..................... (.03) -- -- -- -- -- --------- --------- --------- --------- --------- --------- Net income ........................... $.66 $1.18 $1.27 $1.29 $2.39 $1.62 ========= ========= ========= ========= ========= ========= Weighted average number of shares outstanding (1) ..................... 9,049 8,679 8,676 8,671 8,664 8,643 ========= ========= ========= ========= ========= ========= Diluted Income Per Share Results: Income before gains on sales of interests in real estate and extraordinary item .................... $.46 $1.06 $1.17 $1.28 $.96 $1.17 Gains on sales of interest in real estate .23 .12 .10 .01 1.42 0.45 Extraordinary item ..................... (.03) -- -- -- -- -- --------- --------- --------- --------- --------- --------- Net income ............................. $.66 $1.18 $1.27 $1.29 $2.38 $1.62 ======== ======== ======== ======== ======== ======== Weighted average number of shares outstanding(1) ........................ 9,099 8,704 8,692 8,688 8,679 8,659 ======== ======== ======== ======== ======== ========
For the Four For the Fiscal Month Period Year Ended Ended August 31, December 31, ------------- 1997 1997 ---------------- ------------- (amounts in thousands, except per share data) Balance Sheet Data (at end of period): Investments in real estate, at cost ...... $ 287,926 $ 202,443 Total assets. ........................... 265,566 165,657 Total debt .............................. 103,939 117,412 Minority interest ........................ 15,805 540 Shareholder's equity ..................... 138,530 40,899 Other Data: Cash flows from operating activities....... 4,281 15,219 Cash flows from investing activities....... (57,313) 7,749 Cash flows from financing activities....... 52,957 (22,599) Funds from operations (2) ............... 8,146 19,660 EBITDA (3). .............................. 14,741 35,169 For the Fiscal Years Ended August 31, ---------------------------------------------------------- 1996 1995 1994 1993 ------------- ------------- ------------- ------------- (amounts in thousands, except per share data) Balance Sheet Data (at end of period): Investments in real estate, at cost ...... $ 198,542 $ 195,929 $ 154,281 $ 112,262 Total assets. ........................... 177,725 181,336 142,495 107,854 Total debt .............................. 124,148 122,518 80,155 51,929 Minority interest ........................ 542 528 408 331 Shareholder's equity ..................... 46,505 51,771 56,748 51,852 Other Data: Cash flows from operating activities ...... 15,090 16,672 15,909 13,034 Cash flows from investing activities ...... 933 (40,082) (18,524) (38,683) Cash flows from financing activities ...... (16,091) 22,356 3,305 25,913 Funds from operations (2) ............... 18,628 18,963 16,417 16,870 EBITDA (3). .............................. 34,423 33,936 24,854 27,161
- ------------ (1) Weighted average number of shares outstanding excludes shares issuable upon conversion of outstanding Operating Partnership ("OP") units and includes the dilutive effect of outstanding options. Income allocable to holders of OP units is included in minority interest. (2) 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 flows 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. (3) EBITDA is defined as operating income before interest expense, income taxes, depreciation and amortization. The Company believes EBITDA is useful to investors as an indicator of the Company's ability to service debt and pay cash distributions. EBITDA, as calculated by the Company, may not be comparable to EBITDA reported by other REITs that do not define EBITDA exactly as the Company defines the term. EBITDA does not represent cash generated from operating activities determined in accordance with GAAP and should not be considered as an alternative to operating income or net income determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity. EX-27 7 FINANCIAL DATA SCHEDULE
5 0000077281 PENNSYLVANIA REAL ESTATE INVESTMENT TRUST DOLLARS 4-MOS DEC-31-1997 SEP-01-1997 DEC-31-1997 1 1,324,000 0 32,626,000 1,770,000 0 0 286,557,000 53,171,000 265,566,000 23,097,000 103,939,000 0 0 13,289,000 125,241,000 265,566,000 17,170,000 21,229,000 0 10,618,000 0 0 4,349,000 0 0 6,262,000 0 300,000 0 0 .66 .66
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