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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 June 30, 2003
/ / 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 / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes / / No /x/
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, 2003.
INDEX
PART I
FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002........................................ 3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002............. 4
Condensed Consolidated Statements of Shareholders' Equity for the Six Months Ended June 30, 2003 and 2002.............. 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002........................ 6
Notes to Condensed Consolidated Financial Statements .................................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 11
Item 3. Quantitative and Qualitative Disclosure of Market Risk ................................................................ 12
Item 4. Controls and Procedures................................................................................................ 12
PART II
OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings...................................................................................................... 13
Item 2. Changes in Securities and Use of Proceeds............................................................................. 13
Item 3. Defaults Upon Senior Securities....................................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................................................................... 13
Item 5. Other Information..................................................................................................... 13
Item 6. Exhibits and Reports on Form 8-K...................................................................................... 14
Signatures..................................................................................................................... 17
Certification.................................................................................................................. 18
2
PART I - FINANCIAL INFORMATION
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2003 December 31, 2002
(Unaudited) (Note 1)
---------- --------
DISCONTINUED OPERATIONS
ASSETS
Rental properties, net - held for sale $7,730,660 $ 10,102,660
Cash and cash equivalents 4,696,793 5,941,024
Accounts receivable, net 90,719 107,484
Deferred charges and prepaid expenses 426,199 320,827
Other assets 2,229,290 2,206,614
-------------- ---------
Total Assets $ 15,173,661 $ 18,678,609
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $832,297 $961,505
Other liabilities 32,221 44,899
-------------- ------
Total Liabilities 864,518 1,006,404
------- ---------
Minority interests 48,153 59,664
------ ------
Commitments and contingencies
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 (78,480,422) (75,128,871)
------------ ------------
Total Shareholders' Equity 14,260,990 17,612,541
---------- ----------
Total Liabilities and Shareholders' Equity $15,173,661 $ 18,678,609
============ ============
See accompanying notes.
3
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
Discontinued Operations
Revenues from rental property $368,880 $ 734,758 $782,055 $1,622,992
-------- --------- -------- ----------
Expenses:
Operating expenses 49,917 129,768 108,876 236,779
Real estate taxes 28,408 57,069 62,684 147,450
Management fees to affiliates 10,976 19,235 23,464 48,861
General and administrative expenses 217,668 284,731 426,337 515,532
------- -------- ------- -------
306,969 490,803 621,361 948,622
------- ---------- -------- ----------
Operating income from discontinued operations 61,911 243,955 160,694 674,370
Minority interests in (income) loss before gain (loss)
on sale of shopping center properties (248) 20 (633) (1,440)
Other income (expense), net 10,956 (249,703) 25,627 (250,828)
------- ---------- -------- ----------
Income (loss) from discontinued operations before
gain (loss) on sale of shopping center properties 72,619 (5,728) 185,688 422,102
Gain (loss) on sale of shopping center properties, net
of minority share of $454 in 2003 and ($1,861) in 2002 -- (545,356) 132,998 (545,356)
------- ---------- -------- ----------
Net income (loss) from discontinued operations $72,619 ($551,084) $318,686 ($123,254)
======= ========== ======== ==========
Basic and diluted net income (loss) per common share $0.01 ($0.08) $0.04 ($0.02)
======= ========== ======== ==========
See accompanying notes.
4
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 2003 and 2002
(Unaudited)
Cumulative
Distributions in Total
Common Stock Additional Excess of Net Shareholders'
Shares Amount Paid-in Capital Income Equity
--------- ------- --------------- ---------------- --------------
Balance, December 31, 2002 7,340,474 $73,405 $92,668,007 $(75,128,871) $17,612,541
Net income from discontinued
operations 318,686 318,686
Dividends on common stock (3,670,237) (3,670,237)
--------- ------- ----------- ------------- -----------
Balance, June 30 2003 7,340,474 $73,405 $92,668,007 $(78,480,422) $14,260,990
========= ======= =========== ============= ===========
Cumulative
Distributions in Total
Common Stock Additional Excess of Net Shareholders'
Shares Amount Paid-in Capital Income Equity
--------- ------- --------------- ---------------- --------------
Balance, December 31, 2001 7,340,474 $73,405 $92,668,007 $(71,571,286) $ 21,170,126
Net loss from discontinued
operations (123,254) (123,254)
-------- ------- ----------- -------------- ------------
Balance, June 30, 2002 7,340,474 $73,405 $92,668,007 $ (71,694,540) $ 21,046,872
========= ======= =========== ============== ============
See accompanying notes.
5
PHILIPS INTERNATIONAL REALTY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
(Unaudited)
2003 2002
---- ----
Cash flow used in operating activities: $(129,502) $(597,270)
---------- ----------
Cash flow provided by investing activities:
Proceeds from sale of shopping center properties 2,568,106 3,657,023
--------- ----------
Cash flow used in financing activities:
Distributions to minority interests (12,598) --
Dividends paid on common stock (3,670,237) --
----------- ----------
(3,682,835) --
----------- ----------
Net (decrease) increase in cash and cash equivalents (1,244,231) 3,059,753
Cash and cash equivalents, beginning of period 5,941,024 863,005
----------- ----------
Cash and cash equivalents, end of period $4,696,793 $3,922,758
========== ==========
See accompanying notes.
6
PHILIPS INTERNATIONAL REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
1. Interim Financial Statements
The accompanying Condensed Consolidated Financial Statements include
the accounts of the Company and its subsidiaries, all of which are wholly-owned.
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, 2002.
The Condensed Consolidated Balance Sheet at December 31, 2002, 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.
2. Income (Loss) per Common Share
Basic and diluted net income (loss) per common share in the
accompanying Condensed Consolidated Statements of Operations are based upon
weighted average numbers of 7,340,474 shares of common stock outstanding for the
three and six months ended June 30, 2003 and 2002.
3. 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.
As a result of the plan of liquidation, the Company's operations are
presented as discontinued operations. On January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No.144, "Accounting for the
Impairment or Disposal of Long Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
Impaired assets are required to be reported at the lower of cost or fair value.
Assets to be disposed of are required to be reported at the lower of cost or
fair value less cost to sell. The adoption did not have a material impact on the
Company's results of operations or financial position.
4. Plan of Liquidation
On October 13, 1999, the Board of Directors of the Company announced
that it had retained a financial advisor to assist the Company in examining
strategic alternatives to maximize shareholder value. The Board believed that
the Company's then current stock price did not reflect the underlying value of
its assets. Given the changing dynamics of the REIT market place and consistent
with its commitment to realize shareholder value for all investors, the Board
believed that it was prudent to explore the strategic alternatives for the
Company.
At a Special Meeting of Stockholders held on October 10, 2000,
approximately 80% of the Company's 7,340,474 common shares outstanding were
voted with 99.7% of these votes cast in favor of a plan of liquidation.
On October 11, 2000, the Company announced that its stockholders had
approved a plan of liquidation for the Company, pursuant to which the Company
planned to (a) transfer its interests in affiliated entities that owned eight
shopping centers to Kimco Income Operating Partnership, L.P. for cash and the
assumption of indebtedness, (b) transfer its interests in entities that owned
four shopping centers and two redevelopment properties, subject to certain
indebtedness, to Philip Pilevsky, the chief executive officer, and certain of
his affiliates and family members (the "Related Limited Partners") in exchange
for cash and the redemption of units in the Company's operating partnership, (c)
sell its remaining assets for cash, (d) pay or provide for its liabilities and
expenses, (e) distribute the net cash proceeds of the liquidation, then
estimated at $18.25 per share of common stock, to the stockholders in two or
more liquidating distributions, and (f) wind up operations and dissolve. On
December 22, 2000, the Company paid the initial liquidating distribution of $13
per share of common stock upon substantial completion of the transactions
referenced in (a) and (b) above. Subsequent liquidating distributions of $1.00,
$.75, $.50, $.50, and $.50 per share (bringing the total paid to date to $16.25
per share) were paid on July 9, 2001, September 24, 2001, November 19, 2001,
October 22, 2002, and March 18, 2003 (unaudited), respectively, following sales
of the Company's shopping center properties located in Lake Worth, Florida,
Alexandria, Minnesota, Port Angeles, Washington, McHenry, Illinois, Sacramento,
California and Reedley, California. The Company's two remaining shopping centers
are currently being offered for sale. See Note 5.
7
On January 29, 2002, the Company announced that Kmart Corporation's
("Kmart") Chapter 11 bankruptcy filing was likely to delay the sales of the
Company's then five remaining properties pursuant to the Company's plan of
liquidation, and may result in a reduction of the remaining projected
liquidating distributions of $3.00 per common share. Further, the Company
reported that Kmart leased a significant portion of the space in each of the
Company's then five remaining shopping center properties, of which four stores
were currently operating and one Kmart store in Reedley, California was closed.
While operating in bankruptcy, Kmart announced that it would seek immediate
cancellation of leases at closed locations. As a result of the uncertainty
pertaining to the ultimate status of the Kmart leases, the Company expected a
delay in the completion of its plan of liquidation. Also, the potential impact
on the proceeds from sales of the then remaining five properties could not then
be evaluated.
On February 19, 2002, the Company announced that the New York Stock
Exchange (NYSE) had advised the Company that it may be subject to NYSE trading
suspension and delisting if the Company's average market capitalization fell
below $15 million ($2.05 per common share) over a 30-day trading period.
On March 13, 2002, the Company announced that its four properties with
operating Kmart stores (Sacramento, CA, Atwater, CA, McHenry, IL and
Hopkinsville, KY) were not affected by Kmart's recent announcement of store
closings. Kmart has been operating under the protection of Chapter 11 of the
Bankruptcy Code, and the Court approved the cancellation of the Kmart lease at
the Company's then fifth remaining property, located in Reedley, California, in
January. Although none of the Company's remaining Kmart stores were targeted for
closure at such time, there can be no assurance that Kmart will not seek to
cancel additional leases while it is in bankruptcy. Further, the Company
objected to Kmart's request for an extension of the 60-day period in which the
debtor must assume or reject the Company's leases under the Bankruptcy Code.
Kmart was seeking an extension on all remaining leases through July 2003, and
the Courts generally grant such significant extensions. As to the Company's
Kmart leases, the Court approved an agreement with Kmart whereby all leases
which had not been assumed or rejected on or before September 30, 2002 would be
subject to certain protections from October 1, 2002 through January 15, 2003
which, among other things, precluded store closings during this period. In
addition, the Court set March 31, 2003 as the deadline for Kmart to assume or
reject the Company's leases without prejudice to Kmart's right to seek further
extension.
On October 8, 2002, the Company announced management's expectation that
the New York Stock Exchange would commence action to suspend trading and apply
to delist the Company's shares of common stock on the NYSE concurrent with
payment of the fifth liquidating distribution scheduled to be paid on October
22, 2002. If the Company's shares ceased to be traded on the NYSE, the Company
indicated it believed that an alternative trading venue may be available;
however, there could be no assurance that such an alternative market would
develop. If the Company was delisted from the NYSE, the Company further noted
that it had no current intention to seek listing of its common shares on any
other securities exchange or on NASDAQ.
On October 28, 2002, the Company reported that the NYSE had delivered
notice to the Company and issued a press release to advise that it had
determined the common stock of the Company, trading symbol PHR, should be
removed from the list of companies traded on the NYSE. This decision was reached
in view of the fact that the Company had fallen below the NYSE's continued
listing standards as its average global market capitalization over a consecutive
30 day period was less than $15,000,000. Furthermore, the NYSE noted that the
Company has been operating pursuant to a plan of liquidation approved by its
shareholders on October 10, 2000 and has made four liquidating distributions
totaling $15.25 as of such date, with a fifth liquidating distribution of $0.50
to be paid on October 22, 2002. The NYSE indicated it intended to (and did, in
fact) suspend trading in the Company's common stock prior to the opening on
October 23, 2002 in connection with this distribution. Action by the NYSE with
the Securities and Exchange Commission delisting the Company's shares followed
the completion of applicable procedures. The Company did not request a review of
this NYSE determination. The Company has no current intention to seek listing of
its common shares on any other securities exchange or on NASDAQ. However the
Company believes that alternative trading venues, such as the "Pink Sheets" and
the "OTC Bulletin Board," will continue to be available to its shareholders.
While the Company may seek sponsorship by market makers with such quotation
services in the future, there can be no assurance that any such alternative
markets will remain active. Upon the completion of all prescribed delisting
procedures, the Company automatically became a Section 12(g) reporting company,
pursuant to the Securities and Exchange Act, and was no longer a Section 12(b)
reporting company.
On January 24, 2003, Kmart filed a plan of reorganization and related
disclosure statement with the bankruptcy court. Confirmation hearings were
scheduled for April 14 and 15, 2003. Assuming the court approved the disclosure
statement and the plan was confirmed, Kmart's filings indicated it would emerge
from Chapter 11 on or about April 30, 2003. In connection therewith, Kmart filed
a motion dated February 5, 2003 with the court seeking to extend the deadline by
which it must assume or reject certain "go-forward" leases of real property from
March 31, 2003 to the effective date of a plan reorganization, but no later than
May 31, 2003. The Company did not object to this motion as it pertains to its
leases with Kmart at its Atwater, California and Hopkinsville, Kentucky shopping
centers.
8
On April 22, 2003, Kmart announced that the bankruptcy court had
approved its plan of reorganization. Kmart subsequently emerged from Chapter 11
on May 6, 2003. The Company's leases with Kmart at its Atwater, California and
Hopkinsville, Kentucky shopping centers were assumed in connection with this
restructuring.
As a result of the uncertainty that continues to surround Kmart's
long-term viability as a retailer, the Company expects a continued delay in the
completion of its plan of liquidation. Also, the potential impact on the
proceeds from the sale of the Company's two remaining properties, and the
Company's target of approximately $18.25 per share of aggregate liquidating
distributions to shareholders, cannot be currently evaluated. The Company's
ability to achieve a prompt sale(s) of its remaining assets at an acceptable
price(s) remains uncertain.
5. Property Dispositions
Pursuant to its plan of liquidation, on June 14, 2001, the Company
completed the sale of its redevelopment site located in Lake Worth, Florida (the
"Lake Worth Property") to the Related Limited Partners, for approximately $7.6
million in cash, pursuant to the Amended and Restated Purchase and Sale
Agreement dated as of June 20, 2000 (the "Lake Worth Agreement"). The sale of
this property resulted in a gain of approximately $.3 million.
The purchase price paid by the Related Limited Partners under the Lake
Worth Agreement will be adjusted so that the aggregate value per Unit received
by them in connection with the November 2000 distribution to the Related Limited
Partners of the Company's four (4) shopping center properties located in
Hialeah, Florida and the sale to the Related Limited Partners in December 2000
of the Company's redevelopment property located on Third Avenue in New York, New
York ($18.25 per Unit), and the total per share value received by the Company's
stockholders in the liquidation will be the same.
On August 31, 2001, the Company completed the sale of its North Star
Shopping Center in Alexandria, Minnesota for approximately $4.5 million in cash,
pursuant to the Sale and Purchase Agreement dated July 16, 2001 by Philips
Shopping Center Fund L.P., a Delaware limited partnership, and Repco LLP, as
successor to Kordel, Inc., a Minnesota corporation. The sale resulted in a gain
of approximately $4 ,000.
On October 31, 2001, the Company completed the sale of its Highway 101
Shopping Center in Port Angeles, Washington for approximately $4.5 million in
cash, pursuant to the Sale and Purchase Agreement dated June 14, 2001 by Philips
Shopping Center Fund L.P, a Delaware limited partnership, and BDG LLC, as
successor to 3 Puyallup Associates, LLC., a Washington limited liability
company. This transaction resulted in a gain of approximately $39,000.
On April 16, 2002, the Company completed the sale of its McHenry
Commons shopping center property in McHenry, Illinois for approximately $3.9
million in cash, pursuant to a Sale and Purchase Agreement dated November 29,
2001 by and between Philips Shopping Center Fund L.P., a Delaware limited
partnership, as Seller, and GK Development, Inc., an Illinois corporation, and
Star Realty Investors, LLC, an Illinois limited liability company, jointly and
severally as Purchaser. This sale resulted in a gain of approximately $102,000.
On June 28, 2002, the Company entered into a settlement agreement with
the New York City Department of Finance (the "DOF") pursuant to which the
Company paid $903,943, including principal of $650,000 and interest of $253,943,
in full satisfaction of all real property transfer taxes, interest and penalties
assessed by the DOF in May 2002 in connection with the Company's 1997 Formation
Transactions and 1998 initial public stock offering. The shopping center
properties relating to the subject tax assessments have been previously disposed
in connection with the plan of liquidation. Accordingly, the principal and
interest components of the settlement payment have been charged to Gain (loss)
on sale of shopping center properties and Other income (expense), respectively,
in the accompanying Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2002.
On October 3, 2002, the Company completed the sale of its Kmart
Shopping Center in Sacramento, California for approximately $5.9 million in
cash, pursuant to a Purchase and Sale Agreement dated September 24, 2002 by and
between Philips Shopping Center Fund, L.P., a Delaware limited partnership, as
Seller, and M&A Gabaee L.P., a California limited partnership, Mirasa L.L.C., a
California limited liability company, and Corsair L.L.C., a Nevada limited
liability company, jointly and severally as Buyer. This transaction resulted in
a gain of approximately $118,000.
On February 28, 2003, the Company completed the sale of its shopping
center property in Reedley, California for approximately $2.6 million in cash,
pursuant to a Purchase and Sale Agreement dated January 29, 2003 by and between
Philips Shopping Center Fund L.P., a Delaware limited partnership, as Seller,
and D&L Lowe, L.P., a California limited partnership, as Buyer. This transaction
resulted in a gain of approximately $133,000.
9
6. Commitments and Contingencies
Legal Proceedings
On October 2, 2000, a class action was filed in the United States
District Court for the Southern District of New York against the Company and its
directors. The complaint alleged a number of improprieties concerning the
pending plan of liquidation of the Company. The Company believes that the
asserted claims are without merit, and will defend such action vigorously. On
November 9, 2000, the Court, ruling from the bench, denied the plaintiffs motion
for a preliminary injunction. This bench ruling was followed by a written order
dated November 30, 2000 wherein the Court concluded that the plaintiff had
failed to demonstrate either that it was likely to succeed on the merits of its
case or that there were sufficiently serious questions going to the merits of
its case to make it fair ground for litigation.
On February 19, 2002, the Company announced that on February 5, 2002,
the Court denied the plaintiffs motion for class action certification. The
plaintiff may elect to proceed with its claims on its own now that class
certification has been denied. The plaintiff also has asserted derivative claims
for alleged breaches of fiduciary duty by the directors of the Company. The
Company believes such derivative claims are deficient for, among other reasons,
the grounds upon which class certification was denied. The Company believes that
all of the asserted claims are without merit, and will defend such action
vigorously.
On February 28, 2002, the Company announced that the plaintiff had
sought permission from the Court of Appeals for the Second Circuit to appeal the
denial of class certification discussed above. In order for plaintiff to have
obtained permission to appeal, it had to demonstrate that the denial of class
certification effectively terminated the litigation and that the District
Court's decision was an abuse of its discretion. The Company opposed plaintiff's
application. If the Court of Appeals granted plaintiff's request, plaintiff
would then have been able to appeal the District Court's denial of class
certification.
On May 28, 2002, the United States Court of Appeals for the Second
Circuit ordered that the plaintiff's petition to appeal the District Court's
denial of class certification also be denied.
The Company has incurred significant costs in connection with the
defense of this litigation, which it believes are covered under the Company's
directors and officer's insurance policy and included in Other assets in the
accompanying Condensed Consolidated Balance Sheets. However, there can be no
assurance that the carrier will not seek to disqualify certain of such costs.
The Company is also subject to various legal proceedings and claims
that arise in the ordinary course of business. These matters are generally
covered by insurance. Management believes that the final outcome of such matters
will not have a material adverse effect on the financial position, results of
operations or liquidity of the Company.
Other Matters
In March and August 2003, respectively, the DOF and the New York State
Department of Taxation and Finance ("NYSDOF") issued preliminary Notices of Tax
Due with regard to the Company's December 2000 transfer of its New York shopping
center properties to Kimco. These agencies are seeking to impose interest and
penalty charges only relating to the late filing of the subject transfer tax
returns. The Company does not expect to incur any material liability in
connection with such notices.
On June 5, 2003, the Company entered into a settlement agreement with
the NYSDOF pursuant to which the Company paid $147,963.28, in full satisfaction
of all real property transfer taxes assessed by the DOTF in connection with the
Company's 1997 Formation Transactions and 1998 initial public offering.
7. Shopping Center Portfolio
As a consequence of the transactions completed to date pursuant to the
plan of liquidation, the Company's remaining shopping center portfolio comprises
two properties located in Atwater, California and Hopkinsville, Kentucky. These
shopping centers represent an aggregate 200,000 square feet of gross leasable
area. As of June 30, 2003, these properties were 96.9% leased to 21 tenants. The
Company is actively marketing these properties for sale. Although management
will endeavor to consummate a sale transaction(s), there can be no assurance
that a sale(s) will be completed on satisfactory terms, if at all.
10
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,
2002. 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
The Company has continued to divest portions of its shopping center
portfolio pursuant to a plan of liquidation approved by shareholders on October
10, 2000. See Notes 5 and 7 of the accompanying Notes to Condensed Consolidated
Financial Statements. The disposition of these properties gives rise to
significant changes when comparing the Company's results of operations for the
three and six months ended June 30, 2003 and 2002.
Comparison of Three Months Ended June 30, 2003 and 2002
Revenues from rental property was $369,000 for the quarter ended June
30, 2003 compared to $735,000 for the comparable period in 2002. Expenses in the
second quarter of 2003 totaled $307,000, compared to $491,000 in 2002. These
changes result primarily from the disposition of three shopping center
properties pursuant to the plan of liquidation.
Other income (expense), net and Gain (loss) on sale of shopping center
properties for the three months ended June 30, 2002, include $253,943 and
$647,790 (net of minority share of $2,210), respectively, in charges relating to
the settlement of real property transfer tax obligations. See Note 5 of the
accompanying Notes to Condensed Consolidated Financial Statements.
Comparison of Six Months Ended June 30, 2003 and 2002
Revenues from rental property was $782,000 for the six months ended
June 30, 2003 compared to $1,623,000 for the comparable period in 2002. Expenses
in the first six months of 2003 totaled $621,000, compared to $949,000 in 2002.
These changes result primarily from the disposition of three shopping center
properties pursuant to the plan of liquidation.
Other income (expense), net and Gain (loss) on sale of shopping center
properties for the six months ended June 30, 2002, include $253,943 and $647,790
(net of minority share of $2,210), respectively, in charges relating to the
settlement of real property transfer tax obligations. See Note 5 of the
accompanying Notes to Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
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 and long-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 net cash provided by operations from the Company's two
(2) remaining properties is anticipated to be sufficient to fund the operation
of such properties and those of the Company. The Company is actively seeking to
dispose of these properties and to complete its liquidation as soon as
practicable. There can be no assurance, however, that (i) the net cash provided
by the operations of the Company's properties will be sufficient to fund all
such cash requirements, or (ii) the Company will be able to dispose of its
properties in the near future or at prices sufficient to aggregate the estimated
$18.25 total per share liquidating distributions to the shareholders of the
Company, given the uncertainties relating to Kmart's long-term viability as a
retailer.
11
Pending the sale of its remaining shopping center properties, the
Company will continue to utilize its long-standing asset and property management
practices to maximize cash flow from these properties and endeavor to enhance
their value through its knowledge of the shopping center industry.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Cash Flows
Cash flows used in operating activities was $130,000 and $597,000 for
the six months ended June 30, 2003 and 2002, respectively. This change reflects
the above mentioned disposition of three shopping center properties pursuant to
the plan of liquidation, the timing of payments for certain insurance policy
premiums between periods and the settlement of real property transfer tax
obligations relating to the Company's 1997 Formation Transactions and 1998
initial public stock offering during the first half of 2002.
Cash flows provided by investing activities during the six months ended
June 30, 2003 and 2002 was $2,568,000 and $3,657,000, respectively. See Note 5
of the accompanying Notes to Consolidated Financial Statements for information
related to the sale of shopping center properties during the respective periods.
Cash flows used in financing activities during the six months ended
June 30, 2003 was $3,683,000. The Company paid its sixth liquidating
distribution of $.50 per share on March 18, 2003.
Inflation
Substantially all of the Company's leases contain provisions designed
to mitigate the adverse impact of inflation. Such provisions include clauses
enabling the Company to receive percentage rentals based on tenants' gross
sales, which generally increase as prices rise, and/or escalation clauses, which
generally increase rental rates during the terms of the leases. Such escalation
clauses are often related to increases in the consumer price index or similar
inflation indices. In addition, many of the Company's leases are for terms of
less than 10 years, which permits the Company to seek to increase rents upon
re-rental at market rates. Most of the Company's leases require the tenant to
pay their share of operating expenses, including common area maintenance, real
estate taxes and insurance, thereby reducing the Company's exposure to increase
in costs and operating expenses resulting from inflation.
Item 3. Quantitative and Qualitative Disclosure of Market Risk
None.
Item 4. Controls and Procedures
Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer and principal financial
officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and principal financial officer has concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.
Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
12
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On October 2, 2000, a class action was filed in the United States
District Court for the Southern District of New York against the Company and its
directors. The complaint alleged a number of improprieties concerning the
pending plan of liquidation of the Company. The Company believes that the
asserted claims are without merit, and will defend such action vigorously. On
November 9, 2000, the Court, ruling from the bench, denied the plaintiff's
motion for a preliminary injunction. This bench ruling was followed by a written
order dated November 30, 2000 wherein the Court concluded that the plaintiff had
failed to demonstrate either that it was likely to succeed on the merits of its
case or that there were sufficiently serious questions going to the merits of
its case to make it fair ground for litigation.
On February 19, 2002, the Company announced that on February 5, 2002,
the Court denied the plaintiff's motion for class action certification. The
plaintiff may elect to proceed with that claim on its own now that class
certification has been denied. The plaintiff also has asserted derivative claims
for alleged breaches of fiduciary duty by the directors of the Company. The
Company believes that such derivative claims are deficient for, among other
reasons, the grounds upon which class certification was denied. The Company
believes that all of the asserted claims are without merit, and will defend such
action vigorously.
On February 28, 2002, the Company announced that the plaintiff had
sought permission from the Court of Appeals for the Second Circuit to appeal the
denial of class certification discussed above. In order for plaintiff to have
obtained permission to appeal, it had to demonstrate that the denial of class
certification effectively terminated the litigation and that the District
Court's decision was an abuse of its discretion. The Company opposed plaintiff's
application. If the Court of Appeals granted plaintiff's request, plaintiff
would have been able to appeal the District Court's denial of class
certification.
On May 28, 2002, the United States Court of Appeals for the Second
Circuit ordered that the plaintiff's petition to appeal the District Court's
denial of class certification also be denied.
The Company has incurred significant costs in connection with the
defense of this litigation, which it believes are covered under the Company's
directors and officer's insurance policy and included in Other assets in the
accompanying Condensed Consolidated Balance Sheets. However, there can be no
assurance that the carrier will not seek to disqualify certain of such costs.
Except as noted above, 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
None.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
13
Item 6. Exhibits and Reports on Form 8-K
Exhibit
Number Description
- ------ -----------
2.1 Plan of Liquidation and Dissolution of the Company (filed as exhibit
2.1 to the Company's Current Report on Form 8-K dated April 28, 2000,
and incorporated herein by reference).
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 of Series A Preferred Stock (filed as Exhibit
3.2 to the Company's Form 8-K dated December 31, 1997 and incorporated
herein by reference).
3.3 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).
3.4 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).
3.5 Form of Certificate of Common Stock (filed as Exhibit 3.4 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 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 Form of 1997 Stock Option and Long-Term Incentive Plan of the Company
(filed as Exhibit 10.2 to the Company's Registration Statement on Form
S-4, Registration No. 333-41431, and incorporated herein by reference).
10.4 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).
10.5 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).
10.6 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).
14
10.7 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).
10.8 Employment Agreement between the Company and Louis J. Petra (filed as
exhibit 10.1 to the Company's Current Report on Form 8-K dated December
31, 1997 and incorporated herein by reference).
10.9 Employment Agreement between the Company and Sheila Levine (filed as
Exhibit 10.2 to the Company's Current Report on Form 8-K dated December
31, 1997 and incorporated herein by reference).
10.10 Employment Agreement between the Company and Carl Kraus (filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K dated July 15,
1999 and Incorporated herein by reference).
10.11 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).
10.12 Purchase and Sale Agreement dated as of April 28, 2000, by and among
Munsey Park Associates, LLC, a New York limited liability company,
North Shore Triangle, LLC, a New York limited liability company,
Philips Yonkers, LLC, a New York limited liability company, Philips
Henry, LLC, a New York limited liability company, Philips Shopping
Center Fund, L.P., a Delaware limited partnership, and Philips Lake
Mary Associates, L.P., a Delaware limited partnership, and Kimco Income
Operating Partnership, L.P., a Delaware limited partnership (filed as
exhibit 10.1 to the Company's Current Report on Form 8-K dated April
28, 2000, and incorporated herein by reference).
10.13 Redemption Agreement dated as of April 27, 2000, by and among the
Operating Partnership and Philip Pilevsky (filed as exhibit 10.2 to the
Company's Current Report on Form 8-K dated April 28, 2000, and
incorporated herein by reference).
10.14 Asset Contribution, Purchase and Sale Agreement dated as of April 28,
2000, by and among the Company, the Operating Partnership, Certain
Affiliated Parties signatory thereto, KIR Acquisition, LLC, a Delaware
limited liability company and Kimco Income Operating Partnership, L.P.,
a Delaware limited partnership (filed as exhibit 10.3 to the Company's
Current Report on Form 8-K dated April 28, 2000, and incorporated
herein by reference).
10.15 Amended and Restated Redemption Agreement dated as of April 27, 2000,
by and among Philips International Realty, L.P., a Delaware limited
partnership, and Philip Pilevsky (filed as exhibit 10.1 to the
Company's Current Report on Form 8-K dated April 28, 2000, and
incorporated herein by reference).
10.16 Redemption Agreement dated as of April 28, 2000, by and among Philips
International Realty, L.P., a Delaware limited partnership, and Allen
Pilevsky (filed as exhibit 10.2 to the Company's Current Report on Form
8-K dated April 28, 2000, and incorporated herein by reference).
10.17 Redemption Agreement dated as of April 28, 2000, by and among Philips
International Realty, L.P., a Delaware limited partnership, and Fred
Pilevsky (filed as exhibit 10.3 to the Company's Current Report on Form
8-K dated April 28, 2000, and incorporated herein by reference).
10.18 Redemption Agreement dated as of April 28, 2000, by and among Philips
International Realty, L.P., a Delaware limited partnership, and SL
Florida LLC, a Delaware limited liability company (filed as exhibit
10.4 to the Company's Current Report on Form 8-K dated April 28, 2000,
and incorporated herein by reference).
10.19 First Amendment to Asset Contribution, Purchase and Sale Agreement
dated as of May 31, 2000, by and among Philips International Realty,
L.P., a Delaware limited partnership, the Company, certain Affiliated
Parties signatory thereto, KIR Acquisition, LLC, a Delaware limited
liability company, and Kimco Income Operating Partnership, L.P., a
Delaware limited partnership (filed as exhibit 10.5 to the Company's
Current Report on Form 8-K dated April 28, 2000, and incorporated
herein by reference).
10.20 Second Amendment to Asset Contribution, Purchase and Sale Agreement
dated as of June 15, 2000, by and among Philips International Realty,
L.P., a Delaware limited partnership, the Company, certain Affiliated
Parties signatory thereto, KIR Acquisition, LLC, a Delaware limited
liability company, and Kimco Income Operating Partnership, L.P., a
Delaware limited partnership (filed as exhibit 10.6 to the Company's
Current Report on Form 8-K dated April 28, 2000, and incorporated
herein by reference).
10.21 Third Amendment to Asset Contribution, Purchase and Sale Agreement
dated as of June 20, 2000, by and among Philips International Realty,
L.P., a Delaware limited partnership, the Company, certain Affiliated
Parties signatory thereto, KIR Acquisition, LLC, a Delaware limited
liability company, and Kimco Income Operating Partnership, L.P., a
Delaware limited partnership (filed as exhibit 10.7 to the Company's
Current Report on Form 8-K dated April 28, 2000, and incorporated
herein by reference).
15
10.22 Amended and Restated Purchase and Sale Agreement dated as of June 20,
2000, by 1517-25 Third, L.P., a New York limited partnership, Philip
Pilevsky, SL Florida LLC, a Delaware limited liability company, Allen
Pilevsky and Fred Pilevsky (filed as exhibit 10.8 to the Company's
Current Report on Form 8-K dated April 28, 2000, and incorporated
herein by reference).
10.23 Amended and Restated Purchase and Sale Agreement dated as of June 20,
2000, by Philips International Realty, L.P., a Delaware limited
partnership, Philips Lake Worth Corp., a New York corporation, and
Philip Pilevsky (filed as exhibit 10.9 to the Company's Current Report
on Form 8-K dated April 28, 2000, and incorporated herein by
reference).
10.24 Amendment to Amended and Restated Purchase and Sale Agreement dated as
of April 4, 2001, by and between the Company, Philips Lake Worth Corp.,
a New York corporation, and Philip Pilevsky (filed as exhibit 10.24 to
the Company's Annual Report on Form 10-K dated April 17, 2001, and
incorporated herein by reference).
31.1* Certification of the Company's Chief Executive Officer and principal
financial officer, Philip Pilevsky, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1* Certification of the Company's Chief Executive Officer and principal
financial officer, Philip Pilevsky, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- --------------
* filed herewith
(b) Report on Form 8-K
No reports on Form 8-K were filed by the Company during the quarterly
period ended June 30, 2003.
16
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 14, 2003 /s/ Philip Pilevsky
(Date) -------------------
Philip Pilevsky
Chairman of the Board and Chief Executive Officer
17
CERTIFICATION
I, Philip Pilevsky, Chief Executive Officer and principal financial officer of
Philips International Realty Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Philips
International Realty Corp.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
my supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to me by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report my
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 14, 2003 By: /s/ PHILIP PILEVSKY
-------------------
Philip Pilevsky
Chief Executive Officer and
principal financial officer
18