<PAGE>
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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 March 31, 1999
[ ] 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 April 30, 1999.
===============================================================================
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998
Condensed Consolidated Statement of Income for the Three Months
Ended March 31, 1999
Condensed Consolidated Statement of Shareholders' Equity for the
Three Months Ended March 31, 1999
Condensed Consolidated Statement of Cash Flows for the Three
Months Ended March 31, 1999
Condensed Consolidated Statement of Income for the Three Months
Ended March 31, 1998
Condensed Consolidated Statement of Shareholders' Equity for the
Three Months Ended March 31, 1998
Condensed Consolidated Statement of Cash Flows for the Three
Months Ended March 31, 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
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
3/31/99 12/31/98
--------------------- ---------------------
(Unaudited) (Note 2)
ASSETS
<S> <C> <C>
Rental properties - net $217,008,903 $208,914,386
Investments in real estate joint ventures 56,205,339 34,663,524
Cash and cash equivalents 886,082 9,116,070
Accounts receivable 6,250,166 5,986,763
Deferred charges and prepaid expenses 4,798,683 3,879,574
Other assets 4,229,866 1,786,903
--------------------- ---------------------
Total Assets $289,379,039 $264,347,220
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages and notes payable $161,714,227 $137,486,668
Accounts payable and accrued expenses 3,779,896 2,350,799
Dividends payable 2,771,031 2,477,412
Other liabilities 1,916,580 1,715,335
--------------------- ---------------------
Total Liabilities 170,181,734 144,030,214
--------------------- ---------------------
Minority interests in Operating Partnership 30,698,022 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; 73,405 73,405
7,340,474 shares issued and outstanding
Additional paid in capital 92,668,007 92,668,007
Cumulative distributions in excess of net income (3,384,837) (2,435,222)
--------------------- ---------------------
89,356,575 90,306,190
Stock purchase loans receivable (857,292) (908,334)
--------------------- ---------------------
Total Shareholders' Equity 88,499,283 89,397,856
--------------------- ---------------------
Total Liabilities and Shareholders' Equity $289,379,039 $264,347,220
===================== =====================
</TABLE>
See accompanying notes.
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Three Months Ended March 31, 1999
-----------------------------------------
(Unaudited)
<TABLE>
<S> <C>
Revenues from rental property $9,211,727
-----------------------
Expenses:
Operating expenses 1,157,002
Real estate taxes 1,418,431
Management fees to affiliates 275,974
Interest expense 1,807,018
Depreciation and amortization 1,611,345
General and administrative expenses 613,599
-----------------------
6,883,369
-----------------------
Operating income 2,328,358
Equity in net income of real estate joint ventures 613,631
Minority interests in income of Operating Partnership (613,306)
Other income (expense), net (507,267)
-----------------------
Net income $1,821,416
=======================
Basic and diluted net income per common share $0.25
=======================
</TABLE>
See accompanying notes.
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 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 1,821,416 $1,821,416
Dividends on common stock (2,771,031) ($2,771,031)
Amortization of stock purchase loan 51,042 $51,042
--------- ------- ----------- --------- ----------- -----------
Balance, March 31, 1999 7,340,474 $73,405 $92,668,007 ($857,292) ($3,384,837) $88,499,283
========= ======= =========== ========= =========== ===========
</TABLE>
See accompanying notes.
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the THREE MONTHS ENDED MARCH 31, 1999
-----------------------------------------
(Unaudited)
<TABLE>
<S> <C>
Cash flow provided by operating activities: $3,731,511
-----------------------
Cash flow from investing activities:
Acquisitions of land, buildings and improvements (9,604,558)
Investments in joint ventures (21,522,654)
Purchase of mortgage note, secured by real estate (1,750,000)
-----------------------
Net cash used in investing activities (32,877,212)
-----------------------
Cash flow from financing activities:
Principal amortization of mortgage notes payable (247,441)
Proceeds from debt financing 24,475,000
Dividends paid on common stock (2,477,412)
Distributions to minority interest (834,434)
-----------------------
Net cash provided by financing activities 20,915,713
-----------------------
Net decrease in cash and cash equivalents (8,229,988)
Cash and cash equivalents, beginning of period 9,116,070
-----------------------
Cash and cash equivalents, end of period $886,082
=======================
Noncash financing activities:
Dividends declared and paid in succeeding period $2,771,031
=======================
</TABLE>
See accompanying notes.
<PAGE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Three Months Ended March 31, 1998
-----------------------------------------
(Unaudited)
(In thousands, except per share data)
<TABLE>
<S> <C>
Preferred units income allocation from Operating Partnership $44
Equity in net income of Operating Partnership, as adjusted for the allocation of income
to preferred units 4
Administrative expenses (20)
-------
Net income $28
=======
Net loss applicable to common shares ($16)
=======
Basic and diluted net loss per common share ($0.20)
=======
</TABLE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 1998
-----------------------------------------
(Unaudited)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Cumulative
Distributions
Preferred Common Additional in Excess Total
Stock Stock Paid-In of Net Shareholders'
Shares Amount Shares Amount Capital Income Equity
------ ------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,940 $1,940 47,660 $0 $806 ($543) $2,203
Net income 28 28
Dividends on preferred stock (44) (44)
------ ------ ------ ------ ---- ------ -----
Balance, March 31, 1998 1,940 $1,940 47,660 $0 $806 ($559) $2,187
====== ====== ====== ====== ==== ====== =====
</TABLE>
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 1998
-----------------------------------------
(Unaudited)
(In thousands)
Cash flow provided by operations $44
Cash flow from financing activities: ---
Preferred stock dividend (44)
---
Net cash flow used in financing activities (44)
---
Change in cash and cash equivalents 0
Cash and cash equivalents, beginning of period 0
---
Cash and cash equivalents, end of period $0
===
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.
On May 13, 1998, the Company completed a primary public stock offering
of 7,200,000 shares of Common
<PAGE>
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 is based upon weighted average
numbers of 7,340,474 and 81,265 shares of Common Stock outstanding for the
three months ended March 31, 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 months ended
March 31, 1998, follows. Certain balances have been reclassified to conform
with current year presentations.
Property
Partnerships
------------
Revenues from rental property ........................... $ 8,343
--------
Expenses:
Operating expenses ............................. 1,017
Real estate taxes .............................. 1,195
Management fees to affiliates .................. 247
Interest expense ............................... 3,678
Depreciation and amortization .................. 1,352
General and administrative expenses ............ 50
--------
7,539
--------
Income from operations ....... $ 804
========
6. Stock Dividends
On March 1, 1999, the Board of Directors declared a common stock
dividend of $.3775 per share, which amount was paid on April 15, 1999, to
common shareholders of record on March 31, 1999. The $.3775 rate of dividend,
if annualized, would equal $1.51 per share.
During March 1998 the Board of Directors of the Company declared a
dividend on the Series A Convertible Redeemable Preferred Stock at the rate of
$22.50 per share. This dividend was paid on March 31, 1998. The Series A
Convertible Redeemable Preferred Stock was redeemed in May 1998 in conjunction
with the stock offering discussed in Note 3.
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.
<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 forwardlooking 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 months ended March 31, 1999, with the results of
property operations of The Property Partnerships for the three months ended
March 31, 1998, as more fully described in Note 5 to the accompanying Condensed
Consolidated Financial Statements.
Comparison of Three Months Ended 3/31/99 to Three Months Ended 3/31/98
Revenues from rental property increased $869,000 or 10.4% to
$9,212,000 for the quarter ended March 31, 1999, as compared with $8,343,000
for the quarter ended March 31, 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 the Palm Beach, FL, and Munsey Park, NY,
properties.
Property operating expenses increased $140,000 from $1,017,000 for the
quarter ended March 31, 1998, to $1,157,000 for the quarter ended March 31,
1999. This net increase reflects moderate increases in certain seasonal
operating expenses and increased expenses associated with the acquisitions of
the Palm Beach, FL, and Munsey Park, NY, properties. Property real estate taxes
increased by approximately $223,000 to $1,418,000 for the quarter ended March
31, 1999, as compared with $1,195,000 for the corresponding period in 1998,
reflecting the acquisition of the Palm Beach, FL, and Munsey Park, NY,
properties, 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 remained constant at 3% of gross revenues for the
quarters ended March 31, 1999, and 1998, as provided for in the Management
Agreement.
Interest charges decreased $1,871,000 or 50.9% to $1,807,000 for the
quarter ended March 31, 1999, as compared with $3,678,000 for the quarter ended
March 31, 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 the Palm Beach, FL and
Munsey Park, NY properties.
Depreciation and amortization expenses increased $259,000 to
$1,611,000 for the quarter ended March 31, 1999, as compared with $1,352,000
for the quarter ended March 31, 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 the Palm
Beach, FL, and Munsey Park, NY, 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 recent 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 approximately $91 million in real estate interests,
with $77 million drawn under the Company's line of credit and assumed property
indebtedness of approximately $14 million. Indebtedness outstanding at March
31, 1999, totaled $161.7 million, comprised of $ 84.7 million fixed rate
mortgage debt with a weighted average interest rate and remaining term to
maturity of 7.6% and 5 years, respectively, and $77 million in borrowings under
the Company's line of credit. As of March 31, 1999, based upon the closing
price for the Company's common shares in trading on the NYSE of $14.19 per
share, the Company's ratio of total debt to total debt and equity market
capitalization was 53.7%.
The combined aggregate principal maturities of mortgages and notes
payable outstanding as of March 31, 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>
4/1/99-12/31/99 ....... 7.71% $ 771 ----- $ ------
2000 .................. 7.71% 1,100 6.19% 77,000
2001 .................. 6.32% 2,438 ----- ------
2002 .................. 7.50% 12,803 ----- ------
2003 .................. 7.40% 25,249 ----- ------
Thereafter ............ 7.91% 42,353 ----- ------
</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 March 31, 1999, was $0.3775
per share (which, if annualized, would equal $1.51 per share), or an annual
yield of 10.6% based on the March 31, 1999, closing price per share of $14.19.
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.
<PAGE>
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 $77,000 at March 31, 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 15.8% to $4.29 million, or $.44
per share for the three months ended March 31, 1999, as compared to $3.73
million, or $.38 per share, on a pro forma basis for the three months ended
March 31, 1998. This first quarter 1999 performance of $.44 per share also
represents a 7.3% increase over the fourth quarter 1998 FFO of $.41 per share.
The pro forma FFO figure for the first quarter of 1998 gives retroactive effect
as of January 1, 1998 to the Company's IPO completed May 13, 1998, and reflects
adjustments consistent with those noted in the Company's IPO prospectus.
Calculation of Funds From Operations
(In thousands)
Three Months Ended
March 31, 1999
----------------------------
Amount Per Share (2)
------ -------------
Net income applicable to common shares $1,821 $ .19
Minority interests in Operating Partnership 613 .06
Depreciation and amortization 1,611 .17
Adjustment for unconsolidated joint ventures 244 (1) .02
------ -------
Funds from Operations $4,289 $ .44
====== ======
Distributions $3,704 $.3775
====== ======
Payout ratio 85.8%
(1) Company share of depreciation and amortization charges in unconsolidated
real estate joint ventures.
(2) Based upon a total 9,812,869 shares of Common Stock (7,340,474) and Units
(2,472,395) outstanding.
<PAGE>
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 increase 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.
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
work 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.
<PAGE>
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
During March, 1999, the Company adopted a Shareholder Rights Plan.
Under the Shareholder Rights Plan, rights to purchase shares of newly issued
Philips International Realty Corp. Series A Junior Participating Preferred
Stock are distributable to shareholders as a non-cash dividend at the rate of
one right for each share of Common Stock held as of the close of business on
March 31, 1999. Each of the rights, which expire on March 31, 2009, will
entitle shareholders to buy one one-thousandth of a share of Preferred Stock at
an exercise price of $55.00 if any person or group becomes the beneficial owner
of 15% or more of the Company's Common Stock. Each Preferred Stock interest,
excluding Preferred Stock interests owned by such person or group, will entitle
its holder to purchase shares of the Company's Common Stock having a value of
twice the right's then current exercise price.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
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 - Second Amended and Restated By-Laws of the Company(filed as
Exhibit 3.3 to the Company's Registration Statement on Form
S-11, Registration No. 333-47975, and incorporated herein by
reference)
4.1 - Shareholder Rights Agreement, dated as of March 31, 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 - 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)
<PAGE>
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
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.
May 14, 1999 /s/ Philip Pilevsky
- ------------------ --------------------------------------------------
(Date) Philip Pilevsky
Chairman of the Board and Chief Executive Officer
May 14, 1999 /s/ Brian J. Gallagher
- ------------------ --------------------------------------------------
(Date) Brian J. Gallagher
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 mended and Restated Articles of Incorporation of the ompany (filed as Exhibit 3.1 to the Company's
Current eport on Form 8-K dated December 31, 1997, and ncorporated herein by reference)
3.2 Second Amended and Restated By-Laws of the Company(filed as Exhibit 3.3 to the Company's
Registration Statement on Form S-11, Registration No. 333-47975, and incorporated herein by
reference)
4.1 Shareholder Rights Agreement, dated as of March 31, 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 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 MARCH
31, 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> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 886
<SECURITIES> 0
<RECEIVABLES> 6,250
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 238,535
<DEPRECIATION> 21,526
<TOTAL-ASSETS> 289,379
<CURRENT-LIABILITIES> 6,551
<BONDS> 161,714
0
0
<COMMON> 73
<OTHER-SE> 88,426
<TOTAL-LIABILITY-AND-EQUITY> 289,379
<SALES> 0
<TOTAL-REVENUES> 9,212
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,076
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,807
<INCOME-PRETAX> 1,821
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,821
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<CHANGES> 0
<NET-INCOME> 1,821
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
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