<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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to 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 July 31, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998
Condensed Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1999
Condensed Consolidated Statement of Shareholders' Equity for the
Six Months Ended June 30, 1999
Condensed Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 1999
Condensed Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1998
Condensed Consolidated Statement of Shareholders' Equity for the
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
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosure of Market Risk
</TABLE>
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------ -----------------
(Unaudited) (Note 2)
<S> <C> <C>
ASSETS
Rental properties - net $ 216,260,307 $ 208,914,386
Investments in and advances to real estate joint ventures 57,385,176 34,663,524
Cash and cash equivalents 2,766,523 9,116,070
Accounts receivable 6,571,183 5,986,763
Deferred charges and prepaid expenses 4,655,822 3,879,574
Other assets 3,702,913 1,786,903
------------------ -----------------
Total Assets $ 291,341,924 $ 264,347,220
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages and notes payable $ 165,511,968 $ 137,486,668
Accounts payable and accrued expenses 3,485,122 2,350,799
Dividends payable 2,771,031 2,477,412
Other liabilities 1,464,212 1,715,335
------------------ -----------------
Total Liabilities 173,232,333 144,030,214
------------------ -----------------
Minority interests in Operating Partnership 30,410,969 30,919,150
------------------ -----------------
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 authorized;
7,340,474 shares issued and outstanding 73,405 73,405
Additional paid in capital 92,668,007 92,668,007
Cumulative distributions in excess of net income (4,236,540) (2,435,222)
------------------ -----------------
88,504,872 90,306,190
Stock purchase loans receivable (806,250) (908,334)
------------------ -----------------
Total Shareholders' Equity 87,698,622 89,397,856
------------------ -----------------
Total Liabilities and Shareholders' Equity $ 291,341,924 $ 264,347,220
================== =================
</TABLE>
See accompanying notes.
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six Months Ended June 30, 1999
------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1999 June 30, 1999
---------------- -----------------
<S> <C> <C>
Revenues from rental property $ 9,347,334 $ 18,559,061
------------- --------------
Expenses:
Operating expenses 1,067,258 2,224,260
Real estate taxes 1,428,852 2,847,283
Management fees to affiliates 267,361 543,335
Interest expense 1,939,461 3,746,479
Depreciation and amortization 1,720,275 3,331,620
General and administrative expenses 718,210 1,331,809
------------- --------------
7,141,417 14,024,786
------------- --------------
Operating income 2,205,917 4,534,275
Equity in net income of real estate joint ventures 1,154,565 1,768,196
Minority interests in income of Operating Partnership (646,276) (1,259,582)
Other income (expense), net (794,879) (1,302,146)
------------- --------------
Net income $ 1,919,327 $ 3,740,743
============= ==============
Basic and diluted net income per common share $ 0.26 $ 0.51
============= ==============
</TABLE>
See accompanying notes.
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 1999
-----------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
Common Distributions
Stock Additional Stock in Excess Total
--------------------------- Paid-In Purchase of Net Shareholders'
Shares Amount Capital Loans Income Equity
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 7,340,474 $73,405 $92,668,007 ($908,334) $(2,435,222) $89,397,856
Net income 3,740,743 3,740,743
Dividends on common stock (5,542,061) ($5,542,061)
Amortization of stock purchase loan 102,084 102,084
------------ ------------- ------------- ------------ ------------- --------------
Balance, March 31, 1999 7,340,474 $73,405 $92,668,007 ($806,250) $ (4,236,540) $87,698,622
============ ============= ============= ============ ============= ==============
</TABLE>
See accompanying notes.
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
--------------------------------------
(Unaudited)
Cash flow provided by operating activities: $8,078,556
----------
Cash flow from investing activities:
Acquisitions of land, buildings and improvements (10,459,280)
Investments in and advances to joint ventures (23,227,917)
Purchase of mortgage note, secured by real estate (1,750,000)
----------
Net cash used in investing activities (35,437,197)
-----------
Cash flow from financing activities:
Repayment of notes payable (3,800,000)
Principal amortization of mortgage notes payable (499,418)
Proceeds from debt financing 32,324,718
Dividends paid on Common Stock (5,248,443)
Distributions to minority interests (1,767,763)
----------
Net cash provided by financing activities 21,009,094
----------
Net decrease in cash and cash equivalents (6,349,547)
Cash and cash equivalents, beginning of period 9,116,070
----------
Cash and cash equivalents, end of period $2,766,523
==========
Noncash financing activities:
Dividends declared and paid in succeeding period $2,771,031
==========
See accompanying notes.
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six Months Ended June 30, 1998
------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
----------------- -----------------
<S> <C> <C>
Revenues from rental property $ 4,527,667 $ 4,527,667
-------------- -------------
Expenses:
Operating expenses 569,225 569,225
Real estate taxes 645,777 645,777
Management fees to affiliates 134,945 134,945
Interest expense 753,323 753,323
Depreciation and amortization 780,295 780,295
General and administrative expenses 341,635 341,635
-------------- -------------
3,225,200 3,225,200
-------------- -------------
Operating income 1,302,467 1,302,467
Minority interests in income of Operating Partnership (334,381) (334,381)
Preferred units income allocation from Operating Partnership 19,493 63,143
Equity in net income of Operating Partnership, as adjusted for the
allocation of income to preferred units 2,044 6,823
Other income (expense), net 24,969 4,322
-------------- -------------
Income before extraordinary items 1,014,592 1,042,374
Extraordinary items (65,361) (65,361)
-------------- -------------
Net income $ 949,231 $ 977,013
============== =============
Net income applicable to common shares $ 929,738 $ 913,870
============== =============
Basic and diluted income (loss) per common share
Income before extraordinary items $ 0.25 $ 0.48
Extraordinary items (0.02) (0.03)
-------------- -------------
Net income $ 0.23 $ 0.45
============== ============
</TABLE>
See accompanying notes.
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 1998
--------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Preferred Common
Stock Stock
----------------------------------- ----------------------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 1,940 $ 1,940,000 47,660 $ 477
Net income
Issuance of Common Stock 7,292,814 72,928
Redemption of Preferred Stock (1,940) (1,940,000)
Dividends on Preferred Stock
Dividends on Common Stock
Amortization of stock purchase loan
Reallocation of equity to minority
partners in Operating Partnership
--------------- ---------------- ---------------- ----------------
Balance, June 30, 1998 - $ - 7,340,474 $ 73,405
================ ================ ================ ================
<CAPTION>
Cumulative
Distributions
Additional Stock in Excess Total
Paid-In Purchase of Net Shareholders'
Capital Loans Income Equity
------- ----- ------ ------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $ 805,523 $ (542,723) $ 2,203,277
Net income 977,013 977,013
Issuance of Common Stock 114,004,100 $(1,050,000) 113,027,028
Redemption of Preferred Stock (1,940,000)
Dividends on Preferred Stock (63,143) (63,143)
Dividends on Common Stock (1,330,095) (1,330,095)
Amortization of stock purchase loan 28,948 28,948
Reallocation of equity to minority
partners in Operating Partnership (22,141,616) (22,141,616)
---------------- ---------------- ---------------- ----------------
Balance, June 30, 1998 $92,668,007 $(1,021,052) $ (958,948) $90,761,412
================ ================ ================ ================
</TABLE>
See accompanying notes.
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1998
--------------------------------------
(Unaudited)
<TABLE>
<S> <C>
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
==============
</TABLE>
See accompanying notes.
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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) 6.1% by a
non-managing general partner interest held by the Company, and (iii) 93.899% by
limited partner interests held by the Unit holders and (B) the Property
Partnerships were each comprised (i).001% by a managing general partner/member
interest held by the Interim Managing General Partner (ii).01% by a nonmanaging
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.
Reference should be made to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, 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 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 year ended December 31, 1998.
The balance sheet at December 31, 1998, has been derived from the
audited financial statements at that date but does not include all of the
information and footnote disclosure required by generally accepted accounting
principles for complete financial statements.
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 stock offering increased to 81,265 shares from
47,660 shares.
<PAGE>
On May 13, 1998, the Company completed a primary 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, were used primarily to (i) repay certain
mortgage loans and other indebtedness (including accrued expenses incurred in
connection with the Formation Transactions) of the Operating Partnership and the
Property Partnerships, and (ii) to redeem the Series A Convertible Redeemed
Preferred Stock outstanding. 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 completion of the stock offering. A total 9,812,869 shares
of Common Stock (7,340,474) and Units (2,472,395) have been outstanding since
completion of the stock offering.
4. Income (Loss) per Common Share
Basic net income (loss) per share excludes the dilutive effects of any
outstanding options. Diluted net income (loss) per share includes the dilutive
(but not any anti-dilutive) effect of outstanding options calculated under the
treasury stock method.
Basic and diluted net income per common share in the accompanying
Condensed Consolidated Statements of Income are based upon weighted average
numbers of 7,340,474 and 3,990,070 shares of Common Stock outstanding for the
three months ended June 30, 1999 and 1998, respectively, and 7,340,474 and
2,046,465 shares of Common Stock outstanding for the six months ended June 30,
1999, and 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 6.1% non-managing general partnership
interest in the Operating Partnership (which held a 99.989% limited partner or
member interest in each of the Property Partnerships) and .01% non-managing
general partner/member interests in the Property Partnerships, respectively.
Accordingly, the Company accounted for its investments in the Operating
Partnership and the Property Partnerships on the equity method.
Condensed operating information for the Property Partnerships
(comprising thirteen shopping center properties) for the three and six months
ended June 30, 1998, follows. Certain balances have been reclassified to conform
with current year presentations.
<TABLE>
<CAPTION>
Property Partnerships
--------------------------------
Three Months Six Months
Ended 6/30 Ended 6/30
------------ ----------
<S> <C> <C>
Revenues from rental property ......................................... $ 8,409 $ 16,752
-------- --------
Expenses:
Operating expenses ........................................... 1,057 2,074
Real estate taxes ............................................ 1,199 2,394
Management fees to affiliates ................................ 251 498
Interest expense ............................................. 2,414 6,092
Depreciation and amortization ................................ 1,449 2,801
General and administrative expenses .......................... 5 55
-------- --------
6,375 13,914
-------- --------
Income from operations ..................... $ 2,034 $ 2,838
======== ========
</TABLE>
6. Dividends on Preferred and Common Stock
On March 1 and June 15, 1999, the Board of Directors declared dividends
on its Common Stock of $.3775 per share, which amounts were paid on April 15 and
July 15, 1999, to common shareholders of record on March 31 and June 30, 1999,
respectively. The $.3775 rate of dividend, if annualized, would equal $1.51 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, and the Series A Convertible Redeemable Preferred
Stock was simultaneously redeemed in conjunction with the stock offering
discussed in Note 3.
<PAGE>
7. Segment Information
Management considers the Company's various operating, investing and
financing activities to comprise a single business segment and evaluates real
estate performance and allocates resources based on net income.
8. Subsequent Event
On July 15 1999, the Company acquired nine shopping center properties
(the "Properties") anchored by Kmart and comprising approximately 1.1 million
square feet of leasable space located in the states of Florida, California,
Washington, Minnesota, Illinois and Kentucky. Prior to these acquisitions, the
Company had purchased, through a series of unrelated transactions since July
1998, limited partnership interests in the Properties. The amount invested by
the Company since July 1998 and to acquire the Properties, totaling
approximately $49.5 million, was funded with borrowings under the Company's
revolving line of credit. Future reporting of financial position and results of
operations for the Company pertaining to these Properties will reflect a change
from the equity to consolidation method of accounting.
<PAGE>
PART I
FINANCIAL INFORMATION
(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,
1998. 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 6.1% non-managing general partnership interest in the
Operating Partnership (which held a 99.989% limited partner or member interest
in each of the Property Partnerships) and .01% non-managing general
partner/member interests in the Property Partnerships, respectively.
Accordingly, the Company accounted for its investments in the Operating
Partnership and the Property Partnerships on the equity method from January 1
through May 12, 1998.
The following discussion compares the results of property operations of
the Company for the three and six months ended June 30, 1999, with the results
of property operations of The Property Partnerships for the three and six months
ended June 30, 1998, as more fully described in Note 5 to the accompanying
Condensed Consolidated Financial Statements.
Comparison of Three Months Ended 6/30/99 to Three Months Ended 6/30/98
Revenues from rental property increased $938,000 or 11.2% to $9,347,000
for the quarter ended June 30, 1999, as compared with $8,409,000 for the quarter
ended June 30, 1998. This net increase includes growth in base rental revenues
associated with higher rent levels achieved on new and renewal leases and the
acquisition of three shopping center properties.
Property operating expenses increased $10,000 from $1,057,000 for the
quarter ended June 30, 1998, to $1,067,000 for the quarter ended June 30, 1999.
This net increase reflects increased expenses associated with the acquisition of
three shopping center properties offset by moderate decreases in certain
seasonal operating expenses. Property real estate taxes increased by
approximately $230,000 to $1,429,000 for the quarter ended June 30, 1999, as
compared with $1,199,000 for the corresponding period in 1998, reflecting the
acquisition of the three shopping center properties, and the effect of increased
assessments associated with property expansions and renovations.
Management fees remained constant at approximately 3% of gross revenues
for the quarters ended June 30, 1999, and 1998, as provided for in the
Management Agreement.
Interest charges decreased $475,000 or 19.7% to $1,939,000 for the
quarter ended June 30, 1999, as compared with $2,414,000 for the quarter ended
June 30, 1998, reflecting the repayment of indebtedness with proceeds of the
Company's initial public offering as discussed in Note 3, partially offset by
interest costs on borrowings to fund the acquisition of three shopping center
properties.
Depreciation and amortization expenses increased $271,000 to $1,720,000
for the quarter ended June 30, 1999, as compared with $1,449,000 for the quarter
ended June 30, 1998. This increase reflects the depreciation and
<PAGE>
amortization of capital expenditures associated with the renovation and
retenanting of properties in the portfolio and the acquisition of three shopping
center properties.
Comparison of Six Months Ended 6/30/99 to Six Months Ended 6/30/98
Revenues from rental property increased $1,807,000 or 10.8% to
$18,559,000 for the six months ended June 30, 1999, as compared with $16,752,000
for the six months ended June 30, 1998. 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 three shopping center properties.
Property operating expenses increased $150,000 from $2,074,000 for the
six months ended June 30, 1998, to $2,224,000 for the six months ended June 30,
1999. This net increase reflects increased expenses associated with the
acquisition of three shopping center properties partially offset by moderate
decreases in certain seasonal operating expenses. Property real estate taxes
increased by approximately $453,000 between the corresponding periods,
reflecting the acquisition of three shopping center properties and the effect of
increased assessments associated with property expansions and renovations.
Management fees remained constant at approximately 3% of gross revenues
for the six months ended June 30, 1999, and 1998, as provided for in the
Management Agreement.
Interest charges decreased $2,346,000 or 38.5% to $3,746,000 for the
six months ended June 30, 1999, as compared with $6,092,000 for the six months
ended June 30, 1998, reflecting the repayment of indebtedness with proceeds of
the Company's initial public offering as discussed in Note 3, partially offset
by interest costs on borrowings to fund the acquisition of three shopping center
properties.
Depreciation and amortization expenses increased $531,000 to $3,332,000
for the six months ended June 30, 1999, as compared with $2,801,000 for the six
months ended June 30, 1998. This increase reflects the depreciation and
amortization of capital expenditures associated with the renovation and
retenanting of properties in the portfolio and the acquisition of three shopping
center properties.
Liquidity and Capital Resources
The Property Partnerships historically relied on fixed and floating
rate mortgage financing to fund acquisitions and refinance maturing debt.
Working capital and funds required for distributions, debt service and capital
expenditures were generally provided through net cash flows from operations and,
in certain instances, capital contributions of partners and/or additional
borrowing. The ability to refinance debt prior to maturity and to fund
acquisitions was generally dependent upon interest rates, the general
availability of both mortgage debt and private equity in the marketplace and the
cash flow and value of the asset to be financed or refinanced. Distributions
were generally made based upon 100% of excess cash over identified, near-term
requirements.
The Company believes that its public stock offering improved its
financial position, principally through enabling the Company to substantially
reduce the outstanding indebtedness on its shopping center portfolio. In
connection with this offering, the Company utilized approximately $109.3 million
of the net proceeds to repay all of its then outstanding floating-rate debt and
certain secured, fixed-rate obligations. The secured, fixed-rate debt then
remaining, totaling approximately $71.5 million, had a weighted average interest
rate and term to maturity of 7.6% and 5.2 years, respectively. The significant
reduction in the Company's overall debt served to reduce annual mortgage
interest expense as a percentage of total revenue and the cash from operations
required to fund debt service requirements.
Since completion of its initial public stock offering, the Company has
financed the acquisition of interests in fifteen real estate properties, with
borrowings under its revolving line of credit, assumed property indebtedness and
the placement of new mortgage financing. Indebtedness outstanding at June 30,
1999, totaled $165.5 million, comprised of $88.3 million fixed rate mortgage
debt with a weighted average interest rate and remaining term to maturity of
7.6% and 5.3 years, respectively, and $77.2 million in borrowings under the
Company's line of credit.
<PAGE>
The combined aggregate principal maturities of mortgages and notes payable
outstanding as of June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Fixed Rate Obligations Variable Rate Obligations
---------------------- -------------------------
Rate Amount Rate Amount
---- ------ ---- ------
(000's) (000's)
<S> <C> <C> <C> <C>
7/1/99-12/31/99 ....... $ 557 ----- $ ------
2000 .................. 7.65% 1,195 6.69% 77,200
2001 .................. 6.35% 2,540 ----- ------
2002 .................. 7.50% 12,913 ----- ------
2003 .................. 7.40% 25,365 ----- ------
Thereafter ............ 7.85% 45,742 ----- ------
</TABLE>
The Company considers the availability of funds under its revolving
credit facility described below and its access to other sources of debt and
equity capital sufficient to pursue its identified growth strategies. The
Company intends to make regular quarterly distributions to the holders of its
Common Stock. The distribution for the period ended June 30, 1999, was $0.3775
per share (which, if annualized, would equal $1.51 per share), or an annual
yield of approximately 9% based on the June 30, 1999, closing price of $16.88
per share.
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 bear
interest at rates ranging from 1.25% to 1.75% over the 30-day London Interbank
Offered Rate ("LIBOR") based on the Company's total indebtedness outstanding
relative to total assets, as defined. The availability of funds under the credit
facility will be subject to the Company's compliance with a number of customary
financial and other covenants. Borrowings under the credit facility, totaling
$77,200 at June 30, 1999, are secured by certain shopping center properties with
recourse to the Company. The credit facility matures in May 2000, subject to
extension upon mutual agreement of the parties.
Funds from Operations
The White Paper on Funds from Operations approved by the Board of
Governors of NAREIT in March 1995 defines Funds from Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. The Company believes that Funds from Operations is helpful to
investors as a measure of the performance of an equity REIT because, along with
cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures and to fund
other cash requirements. The Company computes Funds from Operations in
accordance with standards established by NAREIT which may not be comparable to
Funds from Operations reported by other REITs that do not define the term in
accordance with the current NAREIT definition or that interpret the current
NAREIT definition differently than the Company. Funds from Operations does not
represent cash generated from operating activities in accordance with GAAP and
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash requirements, including its ability to make cash
distributions.
Funds from Operations (FFO) increased approximately 20% to $4.6 million
for the three months ended June 30, 1999, as compared to $3.8 million on a pro
forma basis for the three months ended June 30, 1998. FFO for the six months
ended June 30, 1999, totaling $8.9 million, increased approximately 18% over the
corresponding pro forma
<PAGE>
period in 1998. This second quarter 1999 performance also represents an
approximate 7% increase over the first quarter 1999 FFO of $4.3 million. The pro
forma FFO figures for 1998 give retroactive effect as of January 1, 1998 to the
Company's IPO completed May 13, 1998, and reflect adjustments consistent with
those noted in the Company's IPO prospectus.
Calculation of Funds From Operations
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------------------------- -----------------------------
<S> <C> <C>
Net income $1,920 $3,741
Minority interests in Operating Partnership 646 1,259
Depreciation and amortization 1,720 3,331
Adjustment for unconsolidated joint ventures 325(1) 569(1)
------- ------
Funds from Operations $4,611 $8,900
====== ======
Distributions $3,704 $7,408
====== ======
Payout ratio 80% 83%
=== ===
</TABLE>
(1) Company share of depreciation and amortization charges in unconsolidated
real estate joint ventures.
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 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 increases
in costs and operating expenses resulting from inflation.
Computer Systems and Year 2000 Issues
Potential Disruption in Operations Due to Year 2000 Problems. The Year
2000 issue concerns the potential exposures related to the automated generation
of business and financial misinformation resulting from the application of
computer programs which have been written using two digits, rather than four, to
define the applicable year of business transactions. The Company recognizes the
importance of minimizing the frequency and significance of any disruptions in
its business and financial affairs that may occur as a result of Year 2000, and
has adopted a comprehensive compliance program designed to achieve this
objective.
The Company's program encompasses the following:
o the assessment and modification, as necessary, of its
internal information technology systems that may be affected
by the Year 2000 problem;
o the identification and interrogation of third parties,
including tenants, vendors, contractors and joint venture
partners, to enable the Company to evaluate and appropriately
respond to the state of preparedness by such parties to
address Year 2000 problems, and;
o the assessment of property operating systems to avert
operational malfunctions associated with Year 2000.
<PAGE>
Internal Information Technology. We have completed a review of key
computer hardware and software and other equipment, and have modified, upgraded
or replaced all identified hardware and equipment in our offices that we believe
may be affected by problems associated with Year 2000. Such hardware includes
desktop and laptop computers, servers, printers, telecopier machines and
telephones. We, as part of our routine modernization efforts, have also
completed necessary upgrades to identified secondary software systems, such as
word processing, spreadsheet applications, telephone voicemail systems and
computer calendar programs. Consequently, we believe we have adequately
addressed Year 2000 concerns as they related to our internal information
technology and systems and we anticipate minimal, if any, disruption in the
future in this regard.
Third Party Preparedness. While we believe the foregoing initiatives
will minimize Year 2000 problems as pertaining to our internal operations, we
may still be adversely impacted by Year 2000 issues as a result of problems
relating to the state of preparedness of third parties outside our control, such
as the inability of tenants to pay rent when due. In order to assess such risk,
we sent questionnaires to each of our tenants to determine their Year 2000
compliance status. The responses to these questionnaires continue to be
received, reviewed and evaluated. Based on the responses received, we do not
anticipate any material adverse impact on the orderly payment of monthly rent.
Therefore, while there can be no assurance that Year 2000 problems of tenants
will not have a material adverse effect on our operating results or financial
condition, the information available to us indicates such an occurrence is not
likely.
The Company's principal property management systems are licensed from
and maintained by a third party software development company, which has modified
its real estate products to address the Year 2000 issue.
Property Compliance. Our property managers are completing a building by
building survey of all of our properties to determine whether building support
systems such as heat, power, light, security and elevators will be affected by
the advent of the Year 2000. Most of such systems either are already Year 2000
compliant or contain no computerized parts. However, our property managers plan
to timely modify, upgrade or replace non-compliant building systems as may be
required.
We have communicated with vendors of building systems or other services
to our building regarding their Year 2000 compliance. We intend to rely on
representations from these vendors regarding the Year 2000 compliance of their
product or service. We are also relying on assurances requested from utility
providers of their Year 2000 compliance and their continued ability to provide
uninterrupted service to our buildings.
Compliance Costs. The Company's expenditures on its Year 2000 program
initiatives to date have been nominal, and the Company does not anticipate any
significant future costs with becoming Year 2000 compliant.
Risks. The failure to correct material Year 2000 problems could result
in an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third parties, the Company is unable
to determine at this time whether the consequences of failing to adequately
address all Year 2000 concerns will have a material impact on the Company's
results of operations, liquidity or financial condition. However, the Company
expects that its Year 2000 program will significantly reduce its level of
uncertainty about the Year 2000 problem. The Company anticipates that, with
appropriate modification of its information and operating systems and completion
of the program as scheduled, the possibility of significant interruptions of
normal operations should be reduced. The Company is not in a position to assess
or evaluate the impact of a worst case scenario.
Certain statements in this Year 2000 issue discussion regarding the
Company's efforts to become Year 2000 compliant, the timing thereof and costs
associated therewith are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Although the Company believes
the statements and projections are based upon reasonable assumptions, actual
results may differ from those that the Company has projected.
Item 3. Quantitative and Qualitative Disclosure of Market Risk
See Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources.
<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
On July 27, 1999, the Company made certain changes to its Shareholder
Rights Agreement to incorporate language permitted under recent Maryland
legislation.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company convened on May 20,
1999. Proposals relating to (i) the election of Elise Jaffe and Louis J. Petra
to serve as Class I directors until the Annual Meeting of Shareholders to be
held in 2002, and (ii) the ratification of the appointment of Ernst & Young LLP
to serve as independent accountants for the year ending December 31, 1999, were
approved on the votes cast as follows:
Proposal 1. Election of Directors
For All Nominees Instructed Withheld All Nominees
---------------- ---------- ---------------------
6,124,520 600 38,988
Nominee For Withheld
------- --- --------
Elise Jaffe 6,124,520 39,588
Louis J. Petra 6,125,120 38,988
The remaining members of the seven member Board of Directors and their
respective terms of office are as follow: Class II directors, Sheila Levine and
A.F. Petrocelli, whose terms expire at the Annual Meeting of Shareholders to be
held in 2000 and Class III directors, Philip Pilevsky, Robert Grimes and Arnold
S. Penner, whose terms expire at the Annual Meeting of Shareholders to be held
in 2001.
Proposal 2. Ratification of Appointment of Independent Accountants
For Against Abstain
--- ------- -------
6,144,077 12,346 7,685
Proxies tabulated represented 6,164,108 votes, or 83.974% of the
outstanding shares of Common Stock.
Item 5. Other Information
On July 27, 1999, the Board of Directors of the Company amended and
restated the Company's Bylaws to incorporate recent Maryland legislation and for
other general corporate purposes. Also on such date, the Board of Directors of
the Company elected to subject the Company to the provisions of Section 3-804 of
the Maryland General Corporation Law. The Company recently appointed Carl Kraus
as Chief Financial Officer.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 -Amended and Restated Articles of Incorporation of the Company
(filed as Exhibit 3.1 to the Company's Current Report on Form
8-K dated December 31, 1997, and incorporated herein by
reference)
3.2 -Articles Supplementary dated July 27, 1999, (filed as Exhibit
3.1 to the Company's Current Report on Form 8-K dated July 15,
1999, and incorporated herein by reference).
3.3 -Third Amended and Restated By-Laws of the Company dated July
27, 1999,(filed as Exhibit 3.2 to the Company's Current Report
on Form 8-K dated July 15, 1999, and incorporated herein by
reference)
4.1 -Shareholder Rights Agreement, dated as of June 30, 1999,
between the Company and BankBoston, N.A. (filed as Exhibit 4.1
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference)
4.2 -Amendment No. 1, dated July 27, 1999, to Shareholder Rights
Agreement dated as of March 31, 1999, between the Company and
Bank Boston N.A., as Rights Agent (filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K dated July 15, 1999, and
incorporated herein by reference)
4.3 -Articles Supplementary for Series A Junior Participating
Preferred Stock (filed as Exhibit 4.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, and
incorporated herein by reference)
10.1 -Amended and Restated Agreement of Limited Partnership of the
Operating Partnership (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-11, Registration No. 333-
47975, and incorporated herein by reference)
10.2 -First Amendment to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership (filed as
Exhibit 10.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, and incorporated herein by
reference)
10.3 -Contribution and Exchange Agreement, dated August 11, 1997,
among National Properties Investment Trust, the Board of
Trustees, the Company, the Operating Partnership and certain
contributing partnerships or limited liability companies
associated with a private real estate firm controlled by
Philip Pilevsky and certain partners and members thereof
(filed as Exhibit 10.6 to the Company's Registration Statement
on Form S-4, Registration No. 333-41431, and incorporated
herein by reference)
10.4 -Amended and Restated Management Agreement, dated as of March
30, 1998, among the Company, the Operating Partnership and
Philips International Management Corp. (Filed as Exhibit 10-8
to the Company's Form 10-K for the year ended December 31,
1997, and incorporated herein by reference)
10.5 -Amended and Restated Non-Competition Agreement, dated as of
March 30, 1998, among the Company, the Operating Partnership,
Philip Pilevsky and Sheila Levine (filed as Exhibit 10.9 to
the Company's Form 10-K for the year ended December 31, 1997,
and incorporated herein by reference)
10.6 -Amendment No. 1 to Contribution and Exchange Agreement,
dated as of December 29, 1997 (filed as Exhibit 10.13 to the
Company's Form 8-K dated December 31, 1997, and incorporated
herein by reference)
10.7 -Credit Agreement among the Operating Partnership and
Prudential Securities Credit Corporation (filed as Exhibit
10.18 to the Company's Report on Form 10-Q for the period
ended March 31, 1998 and incorporated herein by reference)
27.1*-Financial Data Schedule
-------------
* filed herewith
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated July 30, 1999, to disclose
the acquisition of a portfolio of nine Kmart-anchored shopping centers and the
matters discussed in Part II, Items 2 and 5, above.
<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.
August 12, 1999 /s/ Philip Pilevsky
- --------------- -------------------------------------------------
(Date) Philip Pilevsky
Chairman of the Board and Chief Executive Officer
August 12, 1999 /s/ Carl Kraus
- --------------- -------------------------------------------------
(Date) Carl Kraus
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company's Current
Report on Form 8-K dated December 31, 1997, and incorporated herein by reference)
3.2 Articles Supplementary dated July 27, 1999, (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K
dated July 15, 1999, and incorporated herein by reference)
3.3 Third Amended and Restated By-Laws of the Company dated July 27, 1999,(filed as Exhibit 3.2 to
the Company's Current Report on Form 8-K dated July 15, 1999, and incorporated herein by reference)
4.1 Shareholder Rights Agreement, dated as of June 30, 1999, between the Company and
BankBoston, N.A. (filed as Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, and incorporated herein by reference)
4.2 Amendment No. 1, dated July 27, 1999, to Shareholder Rights Agreement dated as of March 31,
1999, between the Company and Bank Boston N.A., as Rights Agent (filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K dated July 15, 1999, and incorporated herein by reference)
4.3 Articles Supplementary for Series A Junior Participating Preferred Stock (filed as Exhibit 4.2 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated
herein by reference)
10.1 Amended and Restated Agreement of Limited Partnership of the Operating Partnership (filed as
Exhibit 10.1 to the Company's Registration Statement on Form S-11, Registration No. 333- 47975,
and incorporated herein by reference)
10.2 First Amendment to the Amended and Restated Agreement of Limited Partnership of the Operating
Partnership (filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference)
10.3 Contribution and Exchange Agreement, dated August 11, 1997, among National Properties Investment
Trust, the Board of Trustees, the Company, the Operating Partnership and certain contributing
partnerships or limited liability companies associated with a private real estate firm controlled by
Philip Pilevsky and certain partners and members thereof (filed as Exhibit 10.6 to the Company's
Registration Statement on Form S-4, Registration No. 333-41431, and incorporated herein by reference)
10.4 Amended and Restated Management Agreement, dated as of March 30, 1998, among the Company, the
Operating Partnership and Philips International Management Corp. (Filed as Exhibit 10-8 to the
Company's Form 10-K for the year ended December 31, 1997, and incorporated herein by reference)
10.5 Amended and Restated Non-Competition Agreement, dated as of March 30, 1998, among the
Company, the Operating Partnership, Philip Pilevsky and Sheila Levine (filed as Exhibit 10.9 to the
Company's Form 10-K for the year ended December 31, 1997, and incorporated herein by
reference)
10.6 Amendment No. 1 to Contribution and Exchange Agreement, dated as of December 29, 1997 (filed
as Exhibit 10.13 to the Company's Form 8-K dated December 31, 1997, and incorporated herein
by reference)
10.7 Credit Agreement among the Operating Partnership and Prudential Securities Credit Corporation
(filed as Exhibit 10.18 to the Company's Report on Form 10-Q for the period ended March 31,
1998 and incorporated herein by reference)
27.1* Financial Data Schedule
</TABLE>
--------------------
* filed herewith
<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, 1999 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-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,767
<SECURITIES> 0
<RECEIVABLES> 6,571
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 239,391
<DEPRECIATION> 23,131
<TOTAL-ASSETS> 291,342
<CURRENT-LIABILITIES> 6,256
<BONDS> 165,512
0
0
<COMMON> 73
<OTHER-SE> 87,626
<TOTAL-LIABILITY-AND-EQUITY> 291,342
<SALES> 0
<TOTAL-REVENUES> 9,347
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,202
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,939
<INCOME-PRETAX> 1,919
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,919
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,919
<EPS-BASIC> 0.26
<EPS-DILUTED> 0.26
</TABLE>
