<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 000-23463
Philips International Realty Corp.
(Exact name of registrant as specified in its charter)
Maryland 13-3963667
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No)
417 Fifth Avenue, New York, NY 10016
(Address of principal executive offices - Zip Code)
(212) 545-1100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
7,340,474 shares outstanding as of August 12, 1998.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Philips International Realty Corp.:
Condensed Consolidated Financial Statements -
Condensed Consolidated Balance Sheets as of June
30, 1998, and December 31, 1997.
Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1998.
Condensed Consolidated Statement of Cash Flows for
the Six Months Ended June 30, 1998.
Notes to Condensed Consolidated Financial Statements.
The Philips Company:
Condensed Combined Financial Statements -
Condensed Combined Statements of Operations for the
Three and Six Months Ended June 30, 1997.
Condensed Combined Statement of Cash Flows for the
Six Months Ended June 30, 1997.
Notes to Condensed Combined Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 1998
(Unaudited)
ASSETS
Rental properties - net $ 185,047,847
Cash and cash equivalents 2,152,342
Accounts receivable 5,466,499
Deferred charges and prepaid expenses 3,629,712
Other assets 2,540,475
-------------
Total Assets $ 198,836,875
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages and notes payable $ 71,411,381
Accounts payable and accrued expenses 2,926,504
Dividends payable 1,330,095
Other liabilities 1,377,199
-------------
Total Liabilities 77,045,179
-------------
Minority interests 31,030,284
-------------
Shareholders' Equity
Preferred Stock, $.01 par value; 30,000,000 shares --
authorized; no shares issued and outstanding
Common Stock, $.01 par value; 150,000,000 shares 73,405
authorized; 7,340,474 shares issued and outstanding
Additional paid in capital 92,668,007
Cumulative distributions in excess of net income (958,948)
-------------
91,782,464
Stock purchase loans receivable (1,021,052)
-------------
Total Shareholders' Equity 90,761,412
-------------
Total Liabilities and Shareholders' Equity $ 198,836,875
=============
See accompanying notes.
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 1997
ASSETS
Investment in partnerships $ 2,286,000
-----------
Total Assets $ 2,286,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Related party payables $ 81,723
-----------
Total Liabilities 81,723
-----------
Shareholders' Equity
Series A Convertible Redeemable Preferred Stock, 1,940,000
.$01 par value; $1,000 stated value; 30,000,000
shares authorized and 1,940 shares issued and
outstanding
Common Stock, $.01 par value; 150,000,000 shares --
authorized; no shares issued and outstanding
Additional paid in capital 807,000
Accumulated deficit (542,723)
-----------
Total Shareholders' Equity 2,204,277
-----------
Total Liabilities and Shareholders' Equity $ 2,286,000
===========
See accompanying notes.
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Three Months Ended June 30, 1998
(UNAUDITED)
Revenues from rental property $ 4,527,667
-----------
Expenses:
Operating expenses 569,225
Real estate taxes 645,777
Management fees to affiliates 134,945
Interest expense 753,323
Depreciation and amortization 780,295
General and administrative expenses 341,635
-----------
3,225,200
-----------
Operating income 1,302,467
Minority interests in income of Operating Partnership (334,381)
Preferred units income allocation from Operating Partnership 19,493
Equity in net income of Operating Partnership, as adjusted
for the allocation of income to preferred units 2,044
Other income, net 24,969
-----------
Income before extraordinary items 1,014,592
Extraordinary items (65,361)
-----------
Net income $ 949,231
===========
Net income applicable to common shares $ 929,738
===========
Basic and diluted income (loss) per common share
Income before extraordinary items $ 0.25
Extraordinary items (0.02)
-----------
Net income $ 0.23
===========
See accompanying notes.
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Six Months Ended June 30, 1998
(UNAUDITED)
Revenues from rental property $ 4,527,667
-----------
Expenses:
Operating expenses 569,225
Real estate taxes 645,777
Management fees to affiliates 134,945
Interest expense 753,323
Depreciation and amortization 780,295
General and administrative expenses 341,635
-----------
3,225,200
-----------
Operating income 1,302,467
Minority interests in income of Operating Partnership (334,381)
Preferred units income allocation from Operating Partnership 63,143
Equity in net income of Operating Partnership, as adjusted
for the allocation of income to preferred units 6,823
Other income, net 4,322
-----------
Income before extraordinary items 1,042,374
Extraordinary items (65,361)
-----------
Net income $ 977,013
===========
Net income applicable to common shares $ 913,870
===========
Basic and diluted income (loss) per common share
Income before extraordinary items $ 0.48
Extraordinary items (0.03)
-----------
Net income $ 0.45
===========
See accompanying notes.
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED COMBINED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1998
(Unaudited)
Cash flow provided by operating activities: $ 2,662,520
-------------
Cash flow from investing activities:
Acquisitions of land, buildings and improvements (2,200,831)
-------------
Net cash used in investing activities (2,200,831)
-------------
Cash flow from financing activities:
Repayment of mortgage notes payable, exclusive of
scheduled principal amortization (109,303,875)
Principal amortization of mortgage notes payable (29,357)
Redemption of Preferred Stock (1,940,000)
Proceeds from sale of Common Stock 113,027,028
Dividends paid on Preferred Stock (63,143)
-------------
Net cash provided by financing activities 1,690,653
-------------
Net increase in cash and cash equivalents 2,152,342
Cash and cash equivalents, beginning of period 0
-------------
Cash and cash equivalents, end of period $ 2,152,342
=============
Noncash investing and financing activities:
Acquisition of land, building and improvements with
assumed indebtedness $ 184,109,422
=============
Dividends declared and paid in succeeding period $ 1,330,095
=============
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
1. Formation Transactions
Philips International Realty Corp. (the "Company"), a Maryland
corporation, and Philips International Realty, L.P. (the "Operating
Partnership"), a Delaware limited partnership, were formed in July 1997 for
the purpose of combining certain real estate properties which were owned by
various partnerships and limited liability companies (the "Contributing
Companies") in which Mr. Philip Pilevsky owned an interest.
On December 31, 1997, the partners and members of the Contributing
Companies transferred their shopping center assets or, in certain instances,
their partnership or membership interests in the entities which hold title to
such shopping center assets, to certain newly-formed entities (the "Property
Partnerships") as designated by the Operating Partnership in exchange for
limited partnership interests ("Units") therein. Simultaneously, the Company
contributed its fee title interest in another shopping center property plus
$533 in cash to the Operating Partnership in exchange for a non-managing
general partnership interest therein. Philips International Realty, LLC (the
"Interim Managing General Partner"), a Delaware limited liability company
whose sole member was Mr. Pilevsky, made pro rata contributions to the
Operating Partnership and to each of the Property Partnerships in exchange for
managing general partner/member interests therein. Additionally, the Company
capitalized various wholly-owned subsidiaries so as to enable such entities to
similarly obtain general partner or managing member interests in each of the
Property Partnerships. The resultant effect of the foregoing, together with
certain other events constituting the Formation Transactions, was that the
ownership of (A) the Operating Partnership was comprised (i).001% by a
managing general partner interest held by the Interim Managing General Partner
(ii) 3.2% by a non-managing general partner interest held by the Company (iii)
93.899% by limited partner interests held by the Unit holders, and (iv) 2.9%
by non-managing general partnership interests held by others, and (B) the
Property Partnerships were each comprised (i).001% by a managing general
partner/member interest held by the Interim Managing General Partner (ii).01%
by a non-managing general partner/member interest held by subsidiaries of the
Company, and (iii) 99.989% by a limited partner or member interest held by the
Operating Partnership.
Upon completion of the public stock offering discussed in Note 3, the
Interim Managing General Partner withdrew from the Operating Partnership and
each of the Property Partnerships and the Company (directly or through its
subsidiaries) assumed in full the rights and responsibilities associated with
the management of the business and affairs of the Operating Partnership and
each of the Property Partnerships as sole general partner/managing member.
Prior to this time, the Company was required to account for its interests in
the Operating Partnership and the Property Partnerships on the equity method.
The Operating Partnership and the Property Partnerships had no
business operations during 1997. The Company expects to qualify as a real
estate investment trust for its taxable year ended December 31, 1997.
Reference should be made to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, for further information with
regard to the Formation Transactions.
2. Interim Financial Statements
The accompanying Condensed Consolidated Financial Statements include
the accounts of the Company and its subsidiaries, all of which are
wholly-owned, and the Operating Partnership and the Property Partnerships on a
consolidated basis effective as of May 13, 1998. See Note 3. All significant
intercompany accounts and balances have been eliminated in consolidation. The
information furnished is unaudited and reflects all adjustments which are, in
the opinion of management, necessary to reflect a fair presentation of the
results for the interim periods presented, and all such adjustments are of a
normal recurring nature. These Condensed Consolidated Financial Statements
should be read in conjunction with the financial statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
3. Stock Split and Public Stock Offering
On April 14, 1998, the Company authorized a 1.7051 for 1 split of its
Common Stock which was effected immediately prior to the consummation of the
stock offering referred to below. As a result, the number of outstanding
shares of Common Stock, prior to the public stock offering, increased to
81,265 shares from 47,660 shares.
<PAGE>
On May 13, 1998, the Company completed a public stock offering of
7,200,000 shares of Common Stock at $17.50 per share. The proceeds from this
sale of Common Stock, net of related transaction costs of approximately
$13,000, totaling approximately $113,000, have been used primarily to (i)
repay certain mortgage loans and other indebtedness (including accrued
expenses incurred in connection with the Formation Transactions) of the
Operating Partnership and the Property Partnerships, and (ii) to redeem the
Series A Convertible Redeemed Preferred Stock. As a consequence of this use of
proceeds, the ownership of the Operating Partnership is now comprised of a
74.8% general partner interest held by the Company and a 25.2% limited partner
interest held by the Unit holders. Accordingly, the Company has accounted for
its interests in the Operating Partnership and the Property Partnerships on a
consolidated basis effective as of the May 13, 1998, the completion of the
stock offering.
Effective as of the completion of the public stock offering, there
are 7,340,474 shares of Common Stock and 2,472,395 Units outstanding.
4. Income (Loss) per Common Share
Basic income (loss) per share excludes the dilutive effects of any
outstanding options and warrants. Diluted income (loss) per share includes the
dilutive (but not any anti-dilutive) effect of outstanding options and
warrants calculated under the treasury stock method.
Basic and diluted income (loss) per common share in the accompanying
Condensed Consolidated Statements of Income is based upon weighted average
numbers of 3,990,070 and 2,046,465 common shares outstanding for the three and
six months ended June 30, 1998, respectively.
5. Investments in Operating Partnership and Property Partnerships
Prior to completion of the public stock offering referred to in Note
3, the Company and its subsidiaries held a 3.2% non-managing general
partnership interest in the Operating Partnership (which held a 99.989%
limited partner or member interest in each of the Property Partnerships) and
.01% non-managing general partner/member interests in the Property
Partnerships, respectively. Accordingly, the Company accounted for its
investments in the Operating Partnership and the Property Partnerships on the
equity method.
Condensed operating information for the Property Partnerships
(comprising thirteen shopping center properties) for the three and six months
ended June 30, 1998, and for The Philips Company (comprising ten shopping
center properties) and Merrick Commons and Mill Basin Plaza (two shopping
center properties) for the three and six months ended June 30, 1997, follows.
Certain balances have been reclassified to conform with current year
presentations.
Merrick
Commons
and Mill
Property The Philips Basin
Partnerships Company Plaza
------- ------- -------
For the Three Months Ended June 30
(Unaudited)
1998 1997 1997
------- ------- -------
Revenues from rental property ........... $ 8,409 $ 6,162 $ 1,105
------- ------- -------
Expenses:
Operating Expenses ................... 1,057 964 110
Real estate taxes .................... 1,199 936 201
Management fees to affiliates ........ 251 233 54
Interest expense ..................... 2,414 3,348 465
Depreciation and amortization ........ 1,449 938 206
General and administrative expenses .. 5 77 (21)
------- ------- -------
6,375 6,496 1,015
------- ------- -------
Income (loss) from operations $ 2,034 $ (334) $ 90
======= ======= =======
<PAGE>
Merrick
Commons
and Mill
Property The Philips Basin
Partnerships Company Plaza
------- ------- -------
For the Six Months Ended June 30
(Unaudited)
1998 1997 1997
------- ------- -------
Revenues from rental property ............. $16,752 $12,844 $ 2,380
------- ------- -------
Expenses:
Operating Expenses ................... 2,074 1,934 219
Real estate taxes .................... 2,394 1,857 400
Management fees to affiliates ........ 498 479 115
Interest expense ..................... 6,092 6,330 1,021
Depreciation and amortization ........ 2,801 1,846 317
General and administrative expenses .. 55 143 0
------- ------- -------
13,914 12,589 2,072
------- ------- -------
Income from operations ...... $ 2,838 $ 255 $ 308
======= ======= =======
6. Stock Dividends
On June 15, 1998, the Board of Directors declared the Company's
initial Common Stock dividend of $.1812 per share for the period commencing
upon completion of the public stock offering discussed in Note 3 and ended
June 30, 1998. This dividend was paid on July 15, 1998, to common shareholders
of record on July 1, 1998. The rate of dividend represented an amount
approximately equivalent to a quarterly distribution of $.3375 per share
which, if annualized, would equal $1.35 per share.
During March and May 1998 the Board of Directors of the Company
declared dividends on the Series A Convertible Redeemable Preferred Stock at
the rates of $22.50 and $10.04 per share, respectively. These dividends were
paid on March 31 and May 13, 1998, respectively.
7. Extraordinary Items
The accompanying Condensed Consolidated Statements of Income for the
three and six months ended June 30, 1998, include $65 in extraordinary losses
representing the Company's share of prepayment penalties incurred and deferred
financing costs written-off in connection with the repayment of certain
mortgage loans with proceeds of the stock offering discussed in Note 3.
8. Subsequent Events
During July 1998 the Company acquired (i) a 77,000 square foot
shopping center property located in Munsey Park, NY for approximately $21,500
in cash and assumed indebtedness, (ii) a 50% joint venture interest in a
retail/residential site located at the corner of Third Avenue and East 86th
Street in New York City for approximately $7,500 in cash and assumed
indebtedness, and (iii) a 28.6 % interest in a limited partnership, controlled
by a significant shareholder of the Company, which owns nine K-Mart anchored
shopping centers for $12,700 in cash. Purchase of the interest in the
portfolio of K-Mart anchored shopping centers was unanimously approved by the
independent members of the Company's Board of Directors.
The three transactions were financed with approximately $22,400 drawn
under the Company's line of credit, and assumed property indebtedness of
approximately $19,300. With respect to the assumed indebtedness, the weighted
average interest rate and maturity are approximately 8.2% and 7.1 years,
respectively.
<PAGE>
THE PHILIPS COMPANY
CONDENSED COMBINED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997
(Unaudited, Dollars in thousands)
Three Months Six Months
Ended Ended
6/30/97 6/30/97
-------- --------
Revenue from rental property $ 6,162 $ 12,844
-------- --------
Expenses:
Operating expenses 964 1,934
Real estate taxes 936 1,857
Management fees to affiliates 233 479
Interest expense 3,348 6,330
Depreciation and amortization 938 1,846
General and administrative expenses 77 143
-------- --------
Total expenses 6,496 12,589
-------- --------
Operating income (loss) (334) 255
Equity in income of investees 54 143
Other income, net 9 14
-------- --------
Income (loss) before extraordinary items (271) 412
Extraordinary items (164) (164)
-------- --------
Net income (loss) ($ 435) $ 248
======== ========
<PAGE>
THE PHILIPS COMPANY
CONDENSED COMBINED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1997
(Unaudited, Dollars in thousands)
Cash flow used in operating activities: ($ 56)
--------
Cash flow from investing activities:
Additions to land, buildings and improvements (1,186)
--------
Net cash used in investing activities (1,186)
--------
Cash flow from financing activities:
Proceeds from mortgage notes payable 65,000
Repayment of mortgage notes payable (60,793)
Contributions from owners 831
Distributions to owners (3,597)
--------
Net cash provided by financing activities 1,441
--------
Net increase in cash and cash equivalents 199
Cash and cash equivalents, beginning of period 785
--------
Cash and cash equivalents, end of period $ 984
========
Noncash investing and financing activities:
Loans to and from affiliates reclassified as capital
contributions and/or distributions:
Contributions $ 160
Distributions 325
========
<PAGE>
THE PHILIPS COMPANY
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In thousands)
1. Business Description
The Philips Company was engaged in the ownership, operation, leasing
and development of seven community and neighborhood shopping center properties
(collectively, the "Properties") located in New York, Connecticut, New Jersey
Massachusetts and Florida.
Principles of Combination
The Philips Company was not a legal entity, but rather a combination
of real estate properties that were organized as general and limited
partnerships and limited liability companies and which were under the common
ownership and control of Philip Pilevsky and his family. In addition,
investments in certain non-controlled limited partnerships were accounted for
under the equity method (see Note 2). All significant intercompany
transactions and balances were eliminated in combination.
The specific partnerships and limited liability companies included in
the accompanying Condensed Combined Financial Statements are as follows:
Entity Property
------ --------
Branhaven Plaza L.L.C. Branhaven Plaza
Palm Springs Mile Associates, Ltd. Palm Springs Mile
Forest Avenue Shopping Associates Forest Avenue Shoppers Town
Philips Freeport Associates, L.P. Meadowbrook Commons
Foxborough Shopping L.L.C. Foxboro Plaza
Enfield Shopping L.L.C. Elm Plaza
Delran Shopping L.L.C. Millside Plaza
Formation Transactions
The partners and members of The Philips Company and the Merrick/Mill
Basin Properties (see Note 2) transferred their shopping center assets or, in
certain instances, their partnership or membership interests in the entities
which held title to such shopping center assets, to certain newly-formed
entities effective December 31, 1997.
Reference should be made to Note 1 of the accompanying Notes to
Condensed Consolidated Financial Statements of Philips International Realty
Corp. for further information concerning the Formation Transactions.
2. Interim Unaudited Financial Information
The accompanying interim unaudited financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosure normally included in
the financial statements prepared in accordance with generally accepted
accounting principles may have been condensed or omitted pursuant to such
rules and regulations, although management believes that the disclosures are
adequate to make the information presented not misleading. The unaudited
financial statements for the three and six month periods ended June 30, 1997,
include, in the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial information
set forth therein.
<PAGE>
3. Investment in Partnerships
The Philips Company held a limited partnership interest and a
minority general partnership interest in the following two partnerships (the
"Merrick/Mill Basin Properties") which also owned and operated community and
neighborhood shopping centers:
The Philips Company's
Partnership Property Percentage Ownership
----------- -------- --------------------
Merrick Shopping Associates Merrick Commons 30%
SP Avenue U Associates, L.P. Mill Basin Plaza 49%
As a limited partner and minority general partner, The Philips
Company did not control the activities of the partnerships. These investments,
accounted for under the equity method, were recorded initially at cost and
subsequently adjusted for equity in the net income or loss of investees and
cash contributions and distributions.
Condensed operating information for these entities for the three and
six months ended June 30, 1997, was as follows:
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
------ ------
(Unaudited) (Unaudited)
Revenues from rental property ......... $1,105 $2,380
------ ------
Expenses:
Operating and other expenses 344 734
Interest ......................... 465 1,021
Depreciation and amortization .... 206 317
------ ------
Total expenses ................... 1,015 2,072
------ ------
Income from operations ................ $ 90 $ 308
====== ======
4. Extraordinary Items
The Condensed Statements of Income for the three and six months ended
June 30, 1997, include an extraordinary loss of approximately $164
representing the write-off of deferred financing costs related to the
refinancing of debt on a certain shopping center property.
<PAGE>
PART I
(continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the
accompanying Condensed Consolidated Financial Statements and Notes thereto,
and the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997. These unaudited financial statements include all
adjustments which are, in the opinion of management, necessary to reflect a
fair presentation of the results for the interim periods presented, and all
such adjustments are of a normal recurring nature.
When used in this Quarterly Report on Form 10-Q, the words "may",
"will", "expect", "anticipate", "continue", "estimate", "project", "intend"
and similar expressions are intended to identify forward-looking statements
regarding events, conditions and financial trends that may affect the
Company's future plans of operations, business strategy, results of operations
and financial position. Such forward-looking statements are not guarantees of
future performance and are subject to risks and uncertainties. Actual results
may differ materially from those included within the forward-looking
statements as a result of various factors.
Results of Operations
Prior to completion of the public stock offering referred to in Note
3 to the accompanying Condensed Consolidated Financial Statements, the Company
and its subsidiaries held a 3.2% non-managing general partnership interest in
the Operating Partnership (which held a 99.989% limited partner or member
interest in each of the Property Partnerships) and .01% non-managing general
partner/member interests in the Property Partnerships, respectively.
Accordingly, the Company accounted for its investments in the Operating
Partnership and the Property Partnerships on the equity method from January 1
through May 12, 1998.
The following discussion compares the results of property operations
of the Property Partnerships for the three and six months ended June 30, 1998,
with the results of property operations of The Philips Company and the Merrick
Commons and Mill Basin Plaza properties for the three and six months ended
June 30, 1997, as more fully described in Note 5 to the accompanying Condensed
Consolidated Financial Statements.
Comparison of Three Months Ended 6/30/98 to Three Months Ended 6/30/97
Revenues from rental property increased $1,142,000 or 15.7% to
$8,409,000 for the quarter ended June 30, 1998, as compared with $7,267,000
for the quarter ended June 30, 1997. This net increase includes growth in base
rental revenues associated with the leasing of available premises in the
portfolio, higher rent levels achieved on new and renewal leases and the
acquisition of the Lake Mary, Florida property.
Property operating expenses decreased $17,000 from $1,074,000 for the
quarter ended June 30, 1997, to $1,057,000 for the quarter ended June 30,
1998. This net decrease reflects moderate declines in certain seasonal
operating expenses offset by increased expenses associated with the
acquisition of the Lake Mary, Florida property. Property real estate taxes
increased by approximately $62,000 or 5.5% to $1,199,000 for the quarter ended
June 30, 1998, as compared with $1,137,000 for the corresponding period during
1997, reflecting the acquisition of the Lake Mary, Florida property and the
effect of increased assessments associated with property expansions and
renovations, offset by management's continuing efforts to secure property tax
reductions.
Management fees decreased $36,000 to $251,000 for the quarter ended
June 30, 1998, as compared to $287,000 for the quarter ended June 30, 1997.
This decrease reflects the change to a 3% management fee as provided for in
the Management Agreement.
<PAGE>
Interest charges decreased $1,399,000 or 36.7% to $2,414,000 for the
quarter ended June 30, 1998, as compared with $3,813,000 for the quarter ended
June 30, 1997, primarily due to the retirement of indebtedness with proceeds
of the Company's initial public offering as discussed in Note 3.
Depreciation and amortization expenses increased $305,000 or 26.7% to
$1,449,000 for the quarter ended June 30, 1998, as compared with $1,144,000
for the quarter ended June 30, 1997. This increase reflects the depreciation
and amortization of (i) capital expenditures associated with the renovation
and retenanting of properties in the portfolio, (ii) increased carrying values
related to the acquisition of non-sponsor interests in the Company's
properties, and (iii) the acquisition of the Lake Mary, Florida property.
Comparison of Six Months Ended 6/30/98 to Six Months Ended 6/30/97
Revenues from rental property increased $1,528,000 or 10.0% to
$16,752,000 for the six months ended June 30, 1998, as compared with
$15,224,000 for the six months ended June 30, 1997. This net increase is
largely due to growth in base rental revenues associated with the leasing of
available premises in the portfolio, higher rent levels achieved on new and
renewal leases and the acquisition of the Lake Mary, Florida property.
Property operating expenses decreased $79,000 from $2,153,000 for the
six months ended June 30, 1997, to $2,074,000 for the six months ended June
30, 1998. This net decrease reflects moderate declines in certain seasonal
operating expenses offset by increased expenses associated with the
acquisition of the Lake Mary, Florida property. Property real estate taxes
increased by approximately $137,000 or 6.1% between the corresponding periods,
reflecting the acquisition of the Lake Mary Florida property and the effect of
increased assessments associated with property expansions and renovations,
offset by management's continuing efforts to secure property tax reductions.
Management fees decreased $96,000 to $498,000 for the six months
ended June 30, 1998, as compared to $594,000 for the six months ended June 30,
1997. This decrease reflects the change to a 3% management fee as provided for
in the Management Agreement.
Interest charges decreased $1,259.000 or 17.1% to $6,092,0000 for the
six months ended June 30, 1998, as compared with $7,351,000 for the six months
ended June 30, 1997, primarily due to the retirement of indebtedness with
proceeds of the Company's initial public offering as discussed in Note 3.
Depreciation and amortization expenses increased $638,000 or 29.5% to
$2,801,000 for the six months ended June 30, 1998, as compared with $2,163,000
for the six months ended June 30, 1997. This increase reflects the
depreciation and amortization of (i) capital expenditures associated with the
renovation and retenanting of properties in the portfolio, (ii) increased
carrying values related to the acquisition of non-sponsor interests in the
Company's properties, and (iii) the acquisition of the Lake Mary, Florida
property.
Liquidity and Capital Resources
The Philips Company historically relied on fixed and floating rate
mortgage financing to fund acquisitions and refinance maturing debt. Working
capital and funds required for distributions, debt service and capital
expenditures were generally provided through net cash flows from operations
and, in certain instances, capital contributions of partners and/or additional
borrowing. The ability to refinance debt prior to maturity and to fund
acquisitions were generally dependent upon interest rates, the general
availability of both mortgage debt and private equity in the marketplace and
the cash flow and value of the asset to be financed or refinanced.
Distributions were generally made based upon 100% of excess cash over
identified, near-term requirements.
The Company believes its recent public stock offering will improve
its financial position principally through substantial reductions in its
overall debt. In connection with this offering, the Company repaid all of its
existing floating rate mortgage debt. As a result, the total principal amount
of outstanding mortgage debt has been reduced by approximately $109.3 million.
At June 30, 1998, the Company had outstanding approximately $71.4 million of
secured fixed rate debt with a weighted average interest rate of 7.59% and a
weighted average maturity of 5.2 years. This will result in a significant
reduction in annual mortgage interest expense as a percentage of total revenue
(17.6% on a pro forma basis as compared to 44.5% for the historical year ended
December 31, 1997), and cash from operations required to fund debt service
requirements will decrease substantially. Based on the June 30, 1998, closing
price for the Company's common shares in trading on the NYSE of $16.50 per
share, the Company's ratio of debt to total debt and market capitalization at
June 30, 1998, was approximately 30.6%. The credit facility described below
combined with this reduced leverage is expected to enhance the Company's
ability to pursue its identified growth strategies.
<PAGE>
The Company intends to make regular quarterly distributions to the
holders of its Common Stock. The first distribution, for the period commencing
upon consummation of the public stock offering and ended June 30, 1998, was in
an amount approximately equivalent to a quarterly distribution of $0.3375 per
share (which, if annualized, would equal $1.35 per share), or an annual yield
of 8.2% based on the June 30, 1998, closing price per share of $16.50.
The Company expects to invest temporarily available cash in
short-term, investment-grade interest bearing securities, such as securities
of the United States government or its agencies, high-grade commercial paper
and bank deposits.
The Company expects to meet its short-term liquidity requirements
generally through net cash provided by operations. The Company believes that
its net cash provided by operations will be sufficient to allow the Company to
make distributions necessary to enable the Company to continue to qualify as a
REIT. The Company also believes that the foregoing sources of liquidity will
be sufficient to fund its short-term liquidity needs for the foreseeable
future.
The Company expects to meet its long-term liquidity requirements,
such as property acquisition and development, scheduled debt maturities,
renovations, expansions and other non-recurring capital improvements through
long-term secured and unsecured indebtedness and the issuance of additional
equity or debt securities. The Company also expects to use funds available
under its credit facility to finance acquisition and development activities
and capital improvements on an interim basis.
Upon consummation of its public stock offering, the Company entered
into a $100 million senior revolving credit facility with a financial services
institution to finance acquisition, redevelopment and development activities
and for general corporate purposes. Borrowings under the credit facility will
bear interest at rates ranging from 1.25% to 1.75% over the 30-day London
Interbank Offered Rate ("LIBOR") based on the Company's total indebtedness
outstanding relative to total assets, as defined. The availability of funds
under the credit facility will be subject to the Company's compliance with a
number of customary financial and other covenants. Borrowings under the credit
facility will be secured by certain shopping center properties with recourse
to the Company. The credit facility matures in two years, subject to the
lender's right, upon 90 days' notice, to terminate the credit facility one
year after the consummation of the offering.
Funds from Operations
The White Paper on Funds from Operations approved by the Board of
Governors of NAREIT in March 1995 defines Funds from Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of properties, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. The Company believes that Funds from
Operations is helpful to investors as a measure of the performance of an
equity REIT because, along with cash flow from operating activities, financing
activities and investing activities, it provides investors with an indication
of the ability of the Company to incur and service debt, to make capital
expenditures and to fund other cash requirements. The Company computes Funds
from Operations in accordance with standards established by NAREIT which may
not be comparable to Funds from Operations reported by other REITs that do not
define the term in accordance with the current NAREIT definition or that
interpret the current NAREIT definition differently than the Company. Funds
from Operations does not represent cash generated from operating activities in
accordance with GAAP and should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of the Company's
financial performance or to cash flow from operating activities (determined in
accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash requirements,
including its ability to make cash distributions.
On a pro forma basis, after giving effect to the Company's public
stock offering, Funds from Operations for the three and six months ended June
30, 1998 would have been approximately $3,840,000 and $7,565,000,
respectively.
Inflation
Substantially all of the Company's leases contain provisions designed
to mitigate the adverse impact of inflation. Such provisions include clauses
enabling the Company to receive percentage rentals based on tenants' gross
sales, which generally increase as prices rise, and/or escalation clauses,
which generally increase rental rates during the terms of the leases. Such
escalation clauses are often related to increases in the consumer price index
or similar inflation indices. In addition, many of the Company's leases are
for terms of less than 10 years, which permits the Company to seek to increase
rents on re-rental at market rates. Most of the Company's leases require
<PAGE>
the tenant to pay its share of operating expenses, including common area
maintenance, real estate taxes and insurance, thereby reducing the Company's
exposure to increase in costs and operating expenses resulting from inflation.
Computer Systems and Year 2000 Issues
The "Year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting form
the application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions. The
Company's principal property management systems are licensed from and
maintained by a third party software development company, which company is
currently modifying its real estate products to address the Year 2000 issue.
Accordingly, management does not anticipate any significant costs, problems or
uncertainties associated with becoming Year 2000 compliant. The Company
currently is developing a plan to insure that its other internally generated
operating systems are similarly modified on a timely basis.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not presently involved in any litigation, nor to its
knowledge is any litigation threatened against the Company or its
subsidiaries, that in management's opinion, would result in any material
adverse effect on the Company's ownership, management or operation of its
properties, or which is not covered by the Company's liability insurance.
Item 2. Changes in Securities and Use of Proceeds
In conjunction with the Company's initial public stock offering
described in Note 3 to the accompanying Condensed Consolidated Financial
Statements, and pursuant to the terms of their respective Employment
Agreements, each of Mr. Louis J. Petra, President, and Mr. Brian J. Gallagher,
Chief Financial Officer, were extended non-recourse loans by the Company to
purchase 57,143 and 2,857 unregistered shares, respectively, of Common Stock,
par value $.01 per share, at the price to the public of $17.50 per share. The
loans bear interest at 6% per annum and will be forgiven in installments in
accordance with the terms of the respective agreements.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
On July 31, 1998, the Company purchased a shopping center located in
Munsey Park, New York, from TH Associates, LLC and TH Associates II, LLC. The
center was purchased for $21.5 million funded with cash drawn under the
Company's credit facility and assumed indebtedness The property is situated at
the intersection of Northern Boulevard and Searingtown Road in Nassau County,
Long Island, directly across from the Americana "Miracle Mile" shopping
corridor. The fully-occupied center encompasses 77,000 square feet of leasable
space and is anchored by Bed Bath & Beyond and Fresh Fields, a national
specialty grocery chain. Historical financial statements pertaining to the
operations of this shopping center as required pursuant to Rule 3-14 will be
filed under cover of a Form 8-K as soon as is practicable, but in no event
later than October 14, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHILIPS INTERNATIONAL REALTY CORP.
8/13/98 /s/ Philip Pilevsky
- ------------- -------------------------------
(Date) Philip Pilevsky
Chairman of the Board and Chief Executive Officer
8/13/98 /s/ Brian J. Gallagher
- ------------- -------------------------------
(Date) Brian J. Gallagher
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,152
<SECURITIES> 0
<RECEIVABLES> 5,466
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 202,130
<DEPRECIATION> 17,082
<TOTAL-ASSETS> 198,837
<CURRENT-LIABILITIES> 4,257
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 90,688
<TOTAL-LIABILITY-AND-EQUITY> 198,837
<SALES> 0
<TOTAL-REVENUES> 4,553
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,472
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 753
<INCOME-PRETAX> 1,015
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,015
<DISCONTINUED> 0
<EXTRAORDINARY> (65)
<CHANGES> 0
<NET-INCOME> 949
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
