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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
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 OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
295 MADISON AVENUE, 2ND FLOOR, NEW YORK, NY 10017
(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|
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 October 29, 2004.
1
PHILIPS INTERNATIONAL REALTY CORP.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
Item 1. Financial Statements:
Consolidated Statements of Net Assets in Liquidation as of
September 30, 2004 and December 31, 2003 ......................... 3
Consolidated Statement of Changes in Net Assets in Liquidation for
the Nine Months ended September 30, 2004 ......................... 4
Condensed Consolidated Statements of Income for the Three and
Nine Months ended September 30, 2003 ............................. 5
Condensed Consolidated Statements of Shareholders' Equity
for the Three and Nine Months ended September 30, 2003 ........... 6
Condensed Consolidated Statements of Cash Flows
for the Three and Nine Months ended September 30, 2003 ........... 7
Notes to Consolidated Financial Statements ....................... 8-16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....... 17
Item 4. Controls and Procedures .......................................... 17
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings ................................................ 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ...... 20
Item 3. Defaults Upon Senior Securities .................................. 20
Item 4. Submission of Matters to a Vote of Security Holders .............. 20
Item 5. Other Information ................................................ 20
Item 6. Exhibits ......................................................... 20
SIGNATURES.............................................................................. 21
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Philips International Realty Corp.
(In Process of Liquidation)
Consolidated Statements of Net Assets in Liquidation
SEPTEMBER 30,
2004 DECEMBER 31,
(UNAUDITED) 2003
----------- -----------
ASSETS (Liquidation Basis)
Cash and cash equivalents $ 213,986 $ 5,823,934
Accounts receivable, net of allowance
of $50,000 -- 92,174
Prepaid expenses 24,428 49,967
Other assets 1,911,317 2,867,943
----------- -----------
2,149,731 8,834,018
----------- -----------
LIABILITIES (Liquidation Basis)
Accounts payable and accrued expenses (973,698) (1,440,521)
Distributions payable on common stock -- (3,670,237)
Accrual for liquidation expenses (204,000) (885,000)
----------- -----------
(1,177,698) (5,995,758)
----------- -----------
MINORITY INTERESTS
(Liquidation Basis) (2,539) (21,478)
----------- -----------
COMMITMENTS AND CONTINGENCIES
NET ASSETS IN LIQUIDATION $ 969,494 $ 2,816,782
=========== ===========
SEE ACCOMPANYING NOTES.
3
Philips International Realty Corp.
(In Process of Liquidation)
Consolidated Statement of Changes in
Net Assets in Liquidation
For the Nine Months ended September 30, 2004
(Unaudited)
Net Assets in Liquidation, December 31, 2003 $ 2,816,782
Increases (decreases) during the period:
Distributions paid to shareholders (1,835,119)
Interest income 9,406
Amortization of prepaid insurance (21,617)
Minority interests 42
-----------
Net Assets in Liquidation, September 30, 2004 $ 969,494
===========
SEE ACCOMPANYING NOTES.
4
Philips International Realty Corp.
Condensed Consolidated Statements of Income
For the Three and Nine Months ended September 30, 2003
(Unaudited)
DISCONTINUED OPERATIONS
THREE MONTHS ENDED NINE MONTH ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30,2003
------------------ ----------------
Revenues from rental property $ 311,212 $ 1,093,267
----------- -----------
Expenses:
Operating expenses 37,622 146,498
Real estate taxes 21,641 84,325
Management fees to affiliates 9,337 32,801
General and administrative expenses 678,562 1,104,899
----------- -----------
747,162 1,368,523
----------- -----------
Operating loss (435,950) (275,256)
Minority interests in loss before gains on sales
of shopping center properties 1,450 817
Other income (expense), net 9,231 34,858
----------- -----------
Loss from discontinued operations before
gains on sales of shopping center properties (425,269) (239,581)
Gains on sales of shopping center properties
(net of minority share of $1,873 and $2,327) 549,220 682,218
----------- -----------
Net income from discontinued operations $ 123,951 $ 442,637
=========== ===========
Basic and diluted net income per common share $ 0.02 $ 0.06
=========== ===========
SEE ACCOMPANYING NOTES.
5
Philips International Realty Corp.
Condensed Consolidated Statements of Shareholders' Equity
For the Nine Months ended September 30, 2003
(Unaudited)
CUMULATIVE
ADDITIONAL DISTRIBUTIONS TOTAL
COMMON STOCK PAID-IN IN EXCESS OF SHAREHOLDERS'
SHARES AMOUNT CAPITAL NET INCOME EQUITY
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 7,340,474 $ 73,405 $ 92,668,007 $(75,128,871) $ 17,612,541
Net income 442,637 442,637
Dividends on common stock (11,010,711) (11,010,711)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 2003 7,340,474 $ 73,405 $ 92,668,007 $(85,696,945) $ 7,044,467
============ ============ ============ ============ ============
SEE ACCOMPANYING NOTES
6
Philips International Realty Corp.
Condensed Consolidated Statements of Cash Flows
For the Nine Months ended September 30, 2003
(Unaudited)
Cash flow used in operating activities $ (33,051)
------------
Cash flow provided by investing activities:
Proceeds from sales of shopping center properties 8,200,334
------------
Cash flow used in financing activities:
Distributions to minority interests (37,794)
Dividends paid on common stock (11,010,711)
------------
(11,048,505)
------------
Net decrease in cash and cash equivalents (2,881,222)
Cash and cash equivalents, beginning of period 5,941,024
------------
Cash and cash equivalents, end of period $ 3,059,802
============
SEE ACCOMPANYING NOTES.
7
Philips International Realty Corp.
(In process of Liquidation)
Notes to the Consolidated Financial Statements
1. BUSINESS
--------
Philips International Realty Corp. (the "Company") is a real estate investment
trust ("REIT") originally formed to continue and expand the shopping center
business of certain affiliated companies owned or controlled by Philip Pilevsky
(the "Philips Group"). The Philips Group had been engaged for many years in the
ownership, development and acquisition for redevelopment of neighborhood and
community shopping centers predominantly concentrated in the greater New York
and Miami metropolitan areas. The Company historically conducted substantially
all of its business and held its real estate interests through Philips
International Realty, L.P., a Delaware limited partnership (the "Operating
Partnership"). This Operating Partnership was owned 74.8% by the Company, as
General Partner, and 25.2% by Unit holders, as limited partners. The minority
interests of these limited partners were substantially eliminated in conjunction
with the disposition of properties pursuant to the plan of liquidation.
(See Note 2.)
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.
The plan of liquidation approved by stockholders generally provided for (i) the
disposition of the Company's real estate properties for cash, the assumption of
indebtedness and/or the redemption of certain equity interests in the Company,
(ii) payment or provision for the Company's liabilities, (iii) distribution of
the net cash proceeds, then estimated at $18.25 per share of common stock, to
stockholders in two or more liquidating distributions, and (iv) the wind-up of
operations and dissolution of the Company.
The Company completed the disposition of its real estate properties on December
12, 2003, and has distributed to date $18.00 per share in cash to its
stockholders. This has been achieved through a series of ten property sales
and/or redemption transactions, and nine liquidating distributions as more fully
described in Note 2 below.
2. PLAN OF LIQUIDATION
-------------------
The following is a chronology of the events, which have transpired to date
pursuant to the plan of liquidation approved by stockholders on October 10,
2000.
8
In November 2000, the Company completed the distribution of its interest in four
shopping center properties in Hialeah, Florida and the sale of its interest in
one redevelopment site (1517-25 Third Avenue, New York City) for total
consideration of approximately $123 million to former unit holders in the
Operating Partnership, including Philip Pilevsky, the Company's Chairman and
Chief Executive Officer, (collectively, the "Related Limited Partners") ("The
Hialeah Agreements"). The total consideration was comprised of $3.3 million in
cash, $85.3 million in mortgage debt assumption and $34.1 million in redemption
of the Related Limited Partners' entire equity interest in the Operating
Partnership (1,870,873 Units valued at $18.25 per Unit). These transactions
resulted in a gain of approximately $24.4 million, net of $9.3 million of
minority interest.
On December 4, 2000, certain affiliates of the Company disposed of interests in
eight properties aggregating approximately 1,178,000 square feet to Kimco Income
Operating Partnership, L.P. ("Kimco") for a total consideration of $137 million
pursuant to an Asset Contribution, Purchase and Sale Agreement dated as of April
28, 2000. The purchase price was comprised of approximately $71.1 million in
cash, $55.4 million in mortgage debt assumption and $10.5 million of equity
redemption (576,326 Operating Partnership Units valued at $18.25 per Unit). The
properties included four New York shopping centers (Forest Avenue Shoppers Town,
Meadowbrook Commons, Merrick Commons and Mill Basin Plaza), two Connecticut
shopping centers (Branhaven Plaza and Elm Plaza), one shopping center property
in New Jersey (Millside Plaza) and one shopping center property in Massachusetts
(Foxboro Plaza). The disposition of these properties resulted in a gain of
approximately $17.4 million net of $6.6 million in minority interest.
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 an 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, up or down, so that the aggregate value per Unit
received by them in connection with the distribution to the Related Limited
Partners of the Company's four 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 share), 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 pursuant to the
Sale and Purchase Agreement dated July 16, 2001 by Philips Shopping Center Fund
L.P., a Delaware limited partnership, as Seller, and Repco LLP, as successor to
Kordel, Inc., a Minnesota corporation, as Buyer. 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, as Seller, and BDG
LLC, as successor to 3 Puyallup Associates, LLC, a Washington limited liability
company, as Buyer. This sale resulted in a gain of approximately $39,000.
9
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
might 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
(the "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 had
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 was targeted for closure at such
time, there could be no assurance that Kmart would not seek to cancel additional
leases while it was 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 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 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.
10
On October 8, 2002, the Company announced that it expected 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. Upon 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 pertained to its
leases with Kmart at its Atwater, California and Hopkinsville, Kentucky shopping
centers.
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.
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.
11
On August 26, 2003, the Company completed the sale of its shopping center on
Bellevue Road in Atwater, California for the price of $6.0 million in cash,
pursuant to a Purchase and Sale Agreement dated June 23, 2003 by and between
Philips Shopping Center Fund, L.P., a Delaware limited partnership, as Seller,
and Nationwide Properties, LLC, a California limited liability company, as
Buyer. This transaction resulted in a gain of approximately $549,000.
On December 12, 2003, the Company completed the sale of its shopping center on
Fort Campbell Boulevard in Hopkinsville, Kentucky for the price of $2.875
million in cash, pursuant to a Purchase and Sale Agreement dated December 4,
2003 by and between Philips Shopping Center Fund, L.P., a Delaware limited
partnership, as Seller, and Kmart Express LLC, a Michigan limited liability
company, as Buyer. This transaction resulted in a loss of approximately $44,000.
With the completion of such sale, the Company ceased all active business
operations and now exists solely to complete its liquidation.
The Board of Directors of the Company authorized liquidating distributions
generally following each of the foregoing asset dispositions as follows:
PER SHARE
DATE PAID AMOUNT
December 22, 2000 $13.00
July 9, 2001 1.00
September 24, 2001 0.75
November 19, 2001 0.50
October 22, 2002 0.50
March 18, 2003 0.50
September 16, 2003 1.00
January 6, 2004 .50
August 27, 2004 .25
---------
$18.00
========
On July 28, 2004, the United States District Court for the Southern District of
New York entered a stipulation and order providing for voluntary dismissal,
which stipulation and order withdrew, with prejudice and without cost to the
Company or its directors, a certain class action filed against the Company and
its directors in connection with the plan of liquidation. The Board of Directors
of the Company is currently seeking (i) recovery of approximately $2.05 million
expended by the Company in defense of this action pursuant to the terms of its
directors' and officers' insurance policy (see Note 5.) and (ii) to realize the
Company's residual assets, settle all liabilities and resolve any remaining
contingencies. Upon completion of these matters, the Board of Directors
currently intends to declare final liquidating distribution(s) and then will act
to dissolve the corporation. It is possible, however, that the Company's
residual assets, liabilities and contingencies will be transferred into a
liquidating trust. Then, as any such assets were realized, liabilities paid and
contingencies resolved, future liquidating distributions would be made from the
trust at such times and in such amounts as the trustee deems appropriate. There
can be no assurances, pending further research into the economic, tax and
governance issues associated with dissolution of the corporation and creation of
a liquidating trust, as to the manner in which the wind-down of the Company's
operations will proceed.
12
3. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
BASIS OF PRESENTATION:
The Company adopted the liquidation basis of accounting as of December
31, 2003. The liquidation basis of accounting is appropriate when
liquidation appears imminent, a company can no longer be classified as
a going concern, and the net realizable values of a company's assets
are reasonably determinable. Under this method of accounting, assets
and liabilities are stated at their estimated realizable value (on an
undiscounted basis) and estimated costs of liquidating the Company are
provided to the extent reasonably determinable.
In adopting the liquidation basis of accounting, the Company has
accrued what it believes are reasonable estimates of costs to liquidate
its assets. The actual costs to liquidate the Company may differ
significantly depending on a number of factors, including the length of
time it takes to realize its remaining assets. Estimated costs to
liquidate the Company are reflected in the Consolidated Statements of
Net Assets in Liquidation as "Accrual for liquidation expenses."
It is not presently determinable whether, upon completion of the
liquidation, the net assets available for distribution to shareholders
will differ materially from the amount shown in the accompanying
financial statements as "Net Assets in Liquidation."
INTERIM FINANCIAL STATEMENTS:
The accompanying 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 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, 2003.
SEGMENT INFORMATION:
The Company's shopping center properties had historically been anchored
by discount stores, supermarkets, drugstores and other retailers
offering day-to-day shopping necessities. Management considered the
operating, investing and financing activities of its properties to
comprise a single business segment and evaluated real estate
performance and allocated resources based upon net income.
The Company's results of operations were significantly dependant on the
overall health of the retail industry. The Company's tenant base was
comprised almost exclusively of merchants in the retail industry. The
retail industry is subject to external factors such as inflation,
consumer confidence, unemployment rates and consumer tastes and
preferences. A decline in the retail industry could have reduced
merchant sales, which could have adversely affected the operating
results of the Company.
13
As the result of the plan of liquidation, the Company's shopping center
operations had historically been presented as discontinued operations.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could
differ from these estimates.
INCOME PER SHARE:
Basic income per share excludes the dilutive effects of any outstanding
options and warrants. Diluted income per share includes the dilutive
(but not any anti-dilutive) effect of outstanding options and warrants
calculated under the treasury stock method.
Basic and diluted net income per share in the accompanying Condensed
Consolidated Statements of Income is based upon 7,340,474 weighted
average shares of common stock outstanding for the three and nine
months ended September 30, 2003, and is computed by dividing Net income
from discontinued operations by the weighted average number of shares
outstanding for the period.
MINORITY INTERESTS:
The Company historically conducted substantially all of its business
and held its real estate interests through Philips International
Realty, L.P., a Delaware limited partnership (the "Operating
Partnership"). This Operating Partnership was owned 74.8% by the
Company, as General Partner, and 25.2% by Unit holders, as limited
partners. The minority interests of these limited partners were
substantially eliminated in conjunction with the disposition of
properties pursuant to the plan of liquidation. (See Note 2.)
4. OTHER ASSETS
------------
Other assets in the accompanying Consolidated Statements of Net Assets in
Liquidation as of September 30, 2004, and December 31, 2003, were
substantially comprised of legal costs incurred in connection with the
defense of a certain class action (See Note 5). While it is probable that
such defense costs will not be fully recovered since the carrier is now
seeking to disqualify a substantial portion of the costs incurred as
non-covered expenses under the policy, the Company considers the carrier's
assertions to be without merit, in contravention of the policy's
specifications and will take such action as may be necessary to protect the
interests of its shareholders. Other assets also include certain transfer
and real estate tax refunds pending, and amounts due in connection with
certain property sales.
5. 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 against such claims 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.
14
On February 5, 2002, the Court denied the plaintiff's 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
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
against such claims 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.
On July 28, 2004, the United States District Court for the Southern
District of New York entered a stipulation and order providing for
voluntary dismissal which withdrew the class action with prejudice and
without cost to the Company or its directors.
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 officers' insurance policy and which is
included in other assets in the accompanying consolidated financial
statements. While it is probable that such defense costs will not be
fully recovered since the carrier is now seeking to disqualify a
substantial portion of the costs incurred as non-covered expenses under
the policy, the Company considers the carrier's assertions to be
without merit, in contravention of the policy's specifications and will
take such action as may be necessary to protect the interests of its
shareholders. (See Note 4.)
The Company has historically also been subject to various legal
proceedings and claims that arose 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 or liquidity of the Company.
OTHER MATTERS:
In March and August 2003, respectively, the New York City Department of
Finance ("NYCDOF") 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 transfers of its New York shopping center
properties to Kimco. On March 5, 2004, the NYCDOF issued Adjusted
Notices of Tax Due with regard to such transfers. These NYCDOF and
NYSDOF notices have been resolved with no cost to the Company.
15
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 NYSDOF
in connection with the Company's 1997 Formation Transactions and 1998
initial public offering.
6. CONTRACT RIGHTS AGREEMENTS
--------------------------
The Company had maintained a stock option plan pursuant to which a maximum
852,550 shares of the Company's Common Stock could be issued for qualified and
non-qualified options. Options granted under the Plan generally vested ratably
over a three-year term, expired ten years from the date of grant and were
exercisable at the market price on the date of grant, unless otherwise
determined by the Board in its sole discretion.
In conjunction with the Company's adoption of the plan of liquidation and the
disposal of substantially all of its shopping center properties, all options
outstanding at December 31, 2000 (705,500 shares at a weighted average exercise
price per share of $17.43) became fully vested and replaced one-for-one by a
contractual right (a "Contract Right") to receive a cash distribution on the
same basis and at the same time as liquidating distributions are made to
shareholders. The total amount to be paid on each Contract Right will equal the
total per share proceeds distributed to shareholders less the original stock
option exercise price. Contract Rights are retained after termination of
employment. The Company believes it has adequately accrued for amounts, which
may become due and payable pursuant to such Contract Rights.
16
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
consolidated financial statements and notes thereto, and the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003. These 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.
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 adopted the liquidation basis of accounting as of December
31, 2003. Accordingly, comparison of the accompanying interim
consolidated financial statements for the period ended September 30,
2004, with the prior year financial statements is not practical.
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 believes that its net cash reserves will be sufficient to
(i) make distributions necessary to enable the Company to continue to
qualify as a REIT, and (ii) to fund the wind-down of operations and
dissolution of the Company. There can be no assurances, however,
whether the total distributions to stockholders will differ materially
from the amount shown in the accompanying Consolidated Statements of
Net Assets in Liquidation.
OFF-BALANCE SHEET ARRANGEMENTS:
The Company has no off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS:
None.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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/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 Act, 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/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.
17
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.
18
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 against such claims 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 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
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 against such claims
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.
On July 28, 2004, the United States District Court for the Southern District of
New York entered a stipulation and order providing for voluntary dismissal which
withdrew the class action with prejudice and without cost to the Company or its
directors.
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 officers' insurance policy and which is included in other assets in the
accompanying consolidated financial statements. While it is probable that such
defense costs will not be fully recovered since the carrier is now seeking to
disqualify a substantial portion of the costs incurred as non-covered expenses
under the policy, the Company considers the carrier's assertions to be without
merit, in contravention of the policy's specifications and will take such action
as may be necessary to protect the interests of its shareholders. (See Note 4.)
19
The Company has historically also been subject to various legal proceedings and
claims that arose 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
or liquidity of the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY 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.
ITEM 6. EXHIBITS
The exhibits required by this item are set forth on the
Exhibit Index attached hereto.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Philips International Realty Corp.
Date: November 11, 2004 By: /s/ Philip Pilevsky
----------------------------------------
Philip Pilevsky
Chairman of the Board and
Chief Executive Officer
21
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
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 Bank Boston, N.A. (filed as Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q 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 Quarterly Report on
Form 10-Q 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 Quarterly Report on Form 10-Q for the year ended
December 31, 1998, and incorporated herein by reference).
22
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-Q 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-Q for the year ended December 31, 1997, and incorporated
herein by reference).
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).
23
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).
24
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).
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 for the year ended
December 31, 2000, and incorporated herein by reference).
10.25 Stipulation and Order Providing For Voluntary Dismissal dated July
22, 2004 in the matter of the Zemel Family Trust on behalf of
itself, and a class of persons similarly situated against the
Company and its directors (filed as Exhibit 10.25 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004,
and incorporated herein by reference).
16.1 Letter from Ernst & Young LLP to the Company dated July 20, 2004
(filed as Exhibit 16.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2004 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