-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tszo7TN0RwGKvO426Ylc/+tAI1P6o34Ovefcf+Rd0ZKejkYRHPNvJNQp5B6rLhO2 BASDieBU8wkY+FBlZfr87g== 0000731245-99-000004.txt : 19990517 0000731245-99-000004.hdr.sgml : 19990517 ACCESSION NUMBER: 0000731245-99-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRESIDENTIAL REALTY CORP/DE/ CENTRAL INDEX KEY: 0000731245 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 131954619 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08594 FILM NUMBER: 99621783 BUSINESS ADDRESS: STREET 1: 180 S BROADWAY CITY: WHITE PLAINS STATE: NY ZIP: 10605 BUSINESS PHONE: 9149481300 MAIL ADDRESS: STREET 1: 180 SOUTH BROADWAY CITY: WHITE PLAINS STATE: NY ZIP: 10605 10-Q 1 QUARTLY REPORT FOR PRESIDENTIAL REALTY CORP. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 ---------------- OR [ ] 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 1-8594 ------- PRESIDENTIAL REALTY CORPORATION ------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-1954619 --------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 180 South Broadway, White Plains, New York 10605 ------------------------------------------ ------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, indicating area code 914-948-1300 ------------ 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 ------ ------ The number of shares outstanding of each of the issuer's classes of common stock as of the close of business on May 7, 1999 was 478,940 shares of Class A common and 3,138,480 shares of Class B common. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES Index to Form 10-Q For the Three Months Ended March 31, 1999 Part I - Financial Information (Unaudited) Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Part II - Other Information Item 6. Exhibits and Reports on Form 8-K PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
Assets March 31, December 31, 1999 1998 ------------------ ------------------ Mortgage portfolio (Note 2): Sold properties, accrual $29,839,603 $43,440,675 Related parties, accrual 1,648,314 1,698,982 Sold properties, impaired 17,589,027 ------------------ ------------------ Total mortgage portfolio 31,487,917 62,728,684 ------------------ ------------------ Less discounts: Sold properties, accrual 2,232,641 4,049,630 Related parties, accrual 141,467 149,685 Sold properties, impaired 7,597,138 ------------------ ------------------ Total discounts 2,374,108 11,796,453 ------------------ ------------------ Less deferred gains: Sold properties, accrual 12,320,373 12,538,907 Related parties, accrual 924,829 930,057 Sold properties, impaired 6,362,838 ------------------ ------------------ Total deferred gains 13,245,202 19,831,802 ------------------ ------------------ Net mortgage portfolio (of which $1,286,372 in 1999 and $931,393 in 1998 are due within one year) 15,868,607 31,100,429 ------------------ ------------------ Real estate (Note 3) 34,968,594 34,703,657 Less: accumulated depreciation 7,475,080 7,231,639 ------------------ ------------------ Net real estate 27,493,514 27,472,018 ------------------ ------------------ Minority partners' interest (Note 4) 7,694,760 7,552,743 Prepaid expenses and deposits in escrow 2,070,293 2,130,214 Other receivables (net of valuation allowance of $124,418 in 1999 and $120,102 in 1998) 485,847 623,521 Securities available for sale (Note 5) 4,330,053 1,274,734 Cash and cash equivalents 9,531,879 1,764,465 Other assets 1,634,224 1,988,121 ------------------ ------------------ Total Assets $69,109,177 $73,906,245 ================== ================== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
Liabilities and Stockholders' Equity March 31, December 31, 1999 1998 ------------------ ------------------ Liabilities: Mortgage debt (Note 6): Properties owned $39,697,741 $39,728,031 Wrap mortgage debt on sold properties 2,357,499 4,668,462 ------------------ ------------------ Total (of which $776,690 in 1999 and $905,305 in 1998 are due within one year) 42,055,240 44,396,493 Note payable to bank (Note 7) 10,395,361 Executive pension plan liability 1,492,775 1,496,357 Accrued liabilities 2,642,730 2,630,564 Accrued taxes payable (Note 8) 1,566,474 Accrued postretirement costs 559,639 562,167 Deferred income 250,498 565,713 Accounts payable 446,771 235,807 Other liabilities 773,320 772,949 ------------------ ------------------ Total Liabilities 49,787,447 61,055,411 ------------------ ------------------ Stockholders' Equity: Common stock; par value $.10 per share Class A, authorized 700,000 shares, issued and outstanding 478,940 shares 47,894 47,894 Class B March 31, 1999 December 31, 1998 313,971 313,609 ----------- ---------------------- --------------------- Authorized: 10,000,000 10,000,000 Issued: 3,139,711 3,136,092 Treasury: 1,258 11,224 Additional paid-in capital 2,132,525 2,172,368 Retained earnings 16,893,403 10,453,253 Net unrealized gain (loss) on securities available for sale (Notes 5 and 9) (49,235) 15,677 Class B, treasury stock (at cost) (Note 10) (16,828) (151,967) ----------------- ------------------ Total Stockholders' Equity 19,321,730 12,850,834 ----------------- ------------------ Total Liabilities and Stockholders' Equity $69,109,177 $73,906,245 ================== ================== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED MARCH 31, --------------------------------------- 1999 1998 -------------- -------------- Income: Rental $2,603,761 $2,367,466 Interest on mortgages - sold properties 841,053 943,601 Interest on wrap mortgages 299,387 321,432 Interest on mortgages - related parties 55,452 165,000 Investment income 111,407 28,813 Other 10,698 3,850 -------------- -------------- Total 3,921,758 3,830,162 -------------- -------------- Costs and Expenses: General and administrative 666,867 662,425 Interest on note payable and other 185,849 285,031 Interest on wrap mortgage debt 31,322 53,367 Amortization of loan acquisition costs 3,128 8,115 Depreciation on non-rental property 6,255 5,203 Rental property: Operating expenses 1,168,759 1,037,962 Interest on mortgages 746,305 528,137 Real estate taxes 221,575 219,637 Depreciation on real estate 243,441 188,285 Amortization of mortgage costs 221,771 37,292 Minority interest share of partnership income 128,653 172,003 -------------- -------------- Total 3,623,925 3,197,457 -------------- -------------- Income before net gain from sales of properties, notes and securities 297,833 632,705 Net gain from sales of properties, notes and securities (includes a provision for Federal and State taxes of $1,566,474 in 1999) (Notes 2 and 8) 6,718,968 63,569 -------------- -------------- Net Income $7,016,801 $696,274 ============== ============== Earnings per Common Share (basic and diluted) (Note 1-C): Income before net gain from sales of properties, notes and securities $0.08 $0.18 Net gain from sales of properties, notes and securities 1.86 0.01 -------------- -------------- Net Income per Common Share $1.94 $0.19 ============== ============== Cash Distributions per Common Share $0.16 $0.15 ============== ============== Weighted Average Number of Shares Outstanding 3,608,628 3,582,623 ============== ============== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED MARCH 31, -------------------------------------------- 1999 1998 ---------------- ---------------- Cash Flows from Operating Activities: Cash received from rental properties $2,674,090 $2,547,560 Interest received 1,119,661 1,190,351 Miscellaneous income 10,074 3,226 Interest paid on rental property mortgages (751,264) (529,576) Interest paid on wrap mortgage debt (31,322) (53,367) Interest paid on note payable (199,983) (228,775) Cash disbursed for rental property operations (1,052,703) (1,456,900) Cash disbursed for general and administrative costs (392,859) (767,873) ---------------- ---------------- Net cash provided by operating activities 1,375,694 704,646 ---------------- ---------------- Cash Flows from Investing Activities: Payments received on notes receivable 790,446 201,097 Payments disbursed for investments in notes receivable (60,000) Proceeds from sale of notes receivable (net of a $400,000 deposit on sale received in 1998) 20,331,599 Deposit received on contract of sale of property 87,300 Payments disbursed for additions and improvements (267,844) (113,249) Proceeds from sale of property 74,550 Purchases of securities (3,120,231) (41,625) ---------------- ---------------- Net cash provided by investing activities 17,821,270 60,773 ---------------- ---------------- Cash Flows from Financing Activities: Principal payments on mortgage debt: Properties owned (105,600) (158,382) Wrap mortgage debt on sold properties (98,723) (118,577) Mortgage debt payment from proceeds of mortgage refinancing (3,120,190) Mortgage proceeds 3,195,500 2,300,000 Mortgage costs (82,824) (142,527) Principal payments on note payable (10,395,361) (35,671) Cash distributions on common stock (576,651) (537,175) Proceeds from dividend reinvestment and share purchase plan 24,969 49,043 Distributions to minority partners (270,670) (70,502) ---------------- ---------------- Net cash provided by (used in) financing activities (11,429,550) 1,286,209 ---------------- ---------------- Net Increase in Cash and Cash Equivalents 7,767,414 2,051,628 Cash and Cash Equivalents, Beginning of Period 1,764,465 979,712 ---------------- ---------------- Cash and Cash Equivalents, End of Period $9,531,879 $3,031,340 ================ ================ See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED MARCH 31, ------------------------------------------------- 1999 1998 ---------------- ---------------- Reconciliation of Net Income to Net Cash Provided by Operating Activities Net Income $7,016,801 $696,274 ---------------- ---------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 474,595 238,895 Gain from sales of properties, notes and securities (includes a provision for Federal and State taxes of $1,566,474 in 1999) (6,718,968) (63,569) Issuance of treasury stock 5,378 20,880 Amortization of discounts on notes and fees (296,829) (273,187) Minority share of partnership income 128,653 172,003 Changes in assets and liabilities: Decrease (increase) in accounts receivable 137,674 (4,506) Increase (decrease) in accounts payable and accrued liabilities 456,109 (79,987) Increase (decrease) in deferred income (2,515) 73,207 Decrease (increase) in prepaid expenses, deposits in escrow and deferred charges 173,077 (80,191) Increase in security deposit liabilities 2,601 6,495 Other (882) (1,668) ---------------- ---------------- Total adjustments (5,641,107) 8,372 ---------------- ---------------- Net cash provided by operating activities $1,375,694 $704,646 ================ ================ Supplemental noncash disclosures: Property received in satisfaction of debt $11,569 ================ See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. General - Presidential Realty Corporation ("Presidential" or the "Company"), a Real Estate Investment Trust ("REIT"), is engaged principally in the holding of notes and mortgages secured by real estate and in the ownership of income producing real estate. Presidential operates in a single business segment, investments in real estate related assets. B. Principles of Consolidation - The consolidated financial statements include the accounts of Presidential Realty Corporation and its wholly owned subsidiaries. Additionally, the consolidated financial statements include 100% of the account balances of UTB Associates and PDL, Inc. and Associates Limited Co-Partnership ("Home Mortgage Partnership"), partnerships in which Presidential or PDL, Inc., a wholly owned subsidiary of Presidential, is the General Partner. All significant intercompany balances and transactions have been eliminated. C. Net Income Per Share - Basic net income per share data is computed by dividing the net income by the weighted average number of shares of Class A and Class B common stock outstanding during each period. Basic net income per share and diluted income per share are the same for the three months ended March 31, 1999 and 1998. The dilutive effect of stock options is calculated using the treasury stock method. D. Basis of Presentation - The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the results for the respective periods have been reflected. These financial statements and accompanying notes should be read in conjunction with the Company's Form 10-K for the year ended December 31, 1998. E. Management Estimates - In preparing the consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated balance sheets and the reported amounts of income and expense for the reporting period. Actual results could differ from those estimates. 2. MORTGAGE PORTFOLIO The Company's mortgage portfolio includes notes receivable - sold properties and notes receivable - related parties. Notes receivable - sold properties consist of: (1) Long-term purchase money notes from sales of properties previously owned by the Company or notes purchased by the Company. These purchase money notes have varying interest rates with balloon payments due at maturity. (2) Notes receivable from sales of cooperative apartment units. These notes generally have market interest rates and the majority of these notes amortize monthly with balloon payments due at maturity. Notes receivable - related parties are all due from Ivy Properties, Ltd. or its affiliates (collectively "Ivy") and consist of: (1) Purchase money notes resulting from sales of property or partnership interests to Ivy. (2) Notes receivable relating to loans made by the Company to Ivy in connection with Ivy's cooperative conversion business. During the quarter ended March 31, 1999, the Company sold the Fairfield Towers First Mortgage Note and substantially all of the Fairfield Towers Second Mortgage Note (the Fairfield Towers Second Mortgage Note had been classified as an impaired loan). The Company also sold the Grant House wraparound mortgage note which had been classified as an impaired loan. In addition, the Company received a $317,662 prepayment on its Pinewood mortgage note. Fairfield Towers On February 22, 1999, Presidential consummated the sale of its Fairfield Towers First and Second Mortgage Notes (excluding a $4,000,000 portion of the Second Mortgage Note, which it retained). At the date of the sale, the Fairfield Towers First Mortgage Note had an outstanding principal balance of $17,002,695 and a net carrying value of $13,957,284 after deducting a discount of $3,045,411. The Fairfield Towers Second Mortgage Note, which was classified as an impaired loan, had an outstanding principal balance of $14,206,895 and a net carrying value of $1,311,908 after deducting discount and deferred gain of $12,894,987. The aggregate purchase price for the First Mortgage Note and the Second Mortgage Note (excluding the $4,000,000 interest retained by Presidential) was $21,350,000. In connection with this transaction, the $4,000,000 portion of the Second Mortgage Note retained by Presidential was modified to provide for interest at the rate of 9.625% per annum for the first three years and at the rate of 10.5% per annum for the remaining seven years. The $4,000,000 outstanding principal balance is due at maturity on February 18, 2009. To secure this obligation, Presidential obtained subordinate security interests in three apartment properties located in New Jersey as collateral for the Note. As a result of this transaction, Presidential repaid the $10,195,442 outstanding principal balance of its note payable to Fleet Bank, which had been secured by Presidential's interest in the First Mortgage Note. Presidential recognized a gain on sale (before taxes) of $7,617,214 and a net gain on sale of $6,050,740 after accrued taxes of $1,566,474. Grant House On January 28, 1999, the Company sold its equity interest in the $3,235,833 Grant House wraparound mortgage note, which had been classified as an impaired loan. The Company's underlying second mortgage in the outstanding principal amount of $1,023,593 was sold to the purchaser for a purchase price of $500,000. The nonrecourse first mortgage which Presidential's second mortgage wrapped around was assigned to the purchaser. As a result of this transaction, Presidential wrote off the $2,212,240 balance on the first mortgage and the related $2,212,240 mortgage debt, $75,000 of the sales proceeds was applied to accrued and unpaid interest and the Company recognized a gain on sale of $425,000. Pinewood In January, 1999, the Company received a $317,662 principal prepayment on its $417,662 mortgage note which is secured by 316 apartment units at Pinewood in Des Moines, Iowa. As a result of the $317,662 prepayment, the Company recognized a deferred gain on sale of $218,534. At March 31, 1999, all of the notes in the Company's mortgage portfolio are current with the exception of the Mark Terrace mortgage note, which is secured by 172 unsold cooperative apartment units at Mark Terrace Apartments, Bronx, New York. The annual interest on the Mark Terrace note is due in advance in February of each year. The 1999 interest payment of $115,774 has not been received and the Company has accrued interest income of $28,943 for the period. The outstanding principal balance of the note is $2,244,000 and the net carrying value of the note is $1,479,941 after deducting a discount and deferred gain of $764,059. The Company anticipates that the annual interest payment will be received in the second quarter of 1999. 3. REAL ESTATE Real estate is comprised of the following: March 31, December 31, 1999 1998 ----------- ------------ Land $ 5,454,549 $ 5,454,549 Buildings and leaseholds 29,261,542 29,008,677 Furniture and equipment 252,503 240,431 ----------- ----------- Total real estate $34,968,594 $34,703,657 =========== =========== 4. MINORITY PARTNERS' INTEREST Presidential is the General Partner of UTB Associates and PDL, Inc., a wholly owned subsidiary of Presidential, is the General Partner of Home Mortgage Partnership. Presidential has a 66-2/3% interest in UTB Associates, and Presidential and PDL, Inc. have an aggregate 26% interest in Home Mortgage Partnership. As the General Partner of these partnerships, Presidential and PDL, Inc., respectively, exercise effective control over the business of these partnerships, and, accordingly, Presidential consolidates these partnerships in the accompanying financial statements. The minority partners' interest reflects the minority partners' equity in the partnerships. The minority partners' interest in the Home Mortgage Partnership is a negative interest and therefore, minority partners' interest is a net asset on the Company's financial statements. The negative basis for each partner's interest in the Home Mortgage Partnership is due to the refinancing of the mortgage on the property and the distribution of the proceeds to the partners. The mortgage debt, which is included in the Company's financial statements, is substantially in excess of the net carrying amount of the property, but the estimated fair value of the property is significantly greater than the mortgage debt. Thus, the asset recorded as minority partners' interest should be realized upon sale of the property. Minority partners' interest is comprised of the following: March 31, December 31, 1999 1998 ---------- ---------- Home Mortgage Partnership $7,883,107 $7,735,342 UTB Associates (188,347) (182,599) ---------- ---------- Total minority partners' interest $7,694,760 $7,552,743 ========== ========== 5. SECURITIES AVAILABLE FOR SALE The cost and fair value of securities available for sale are as follows: March 31, December 31, 1999 1998 ---------- ---------- Cost $4,379,288 $1,259,057 Gross unrealized gains 9,318 23,433 Gross unrealized losses (58,553) (7,756) ---------- ---------- Fair value $4,330,053 $1,274,734 ========== ========== During the three months ended March 31, 1999 and 1998, there were no sales of securities available for sale. 6. MORTGAGE DEBT In January, 1999, the Company refinanced the mortgage on its Cambridge Green property. The existing mortgage balance of $3,120,190 was paid from the proceeds of the new $3,195,500 mortgage. The new mortgage bears interest at the rate of 6.65% per annum, requires monthly payments of principal and interest of $20,358, and matures on October 1, 2029. As a result of the refinancing of this mortgage, the Company wrote off $166,756 of unamortized mortgage costs and paid a prepayment penalty fee of $31,200 relating to the prior mortgage. 7. NOTE PAYABLE TO BANK In connection with the Company's purchase of the Fairfield Towers First Mortgage in 1996, the Company obtained a bank loan from Fleet Bank, N.A. The note, which was due to mature on October 30, 2001, was secured by a collateral assignment of the Fairfield Towers First Mortgage and was nonrecourse to Presidential except for a limited guarantee. Presidential sold the Fairfield Towers First Mortgage in February, 1999 and repaid the outstanding principal balance of the note to Fleet Bank from the proceeds of the sale. The outstanding principal balance at the date of the sale was $10,195,442. The Company has an unsecured $250,000 line of credit from a lending institution. The interest rate is 1% above the prime rate and the line of credit expires in February, 2000. Presidential pays a 1% annual fee for the line of credit. At March 31, 1999, no advances are outstanding on this line of credit. 8. INCOME TAXES Presidential has elected to qualify as a Real Estate Investment Trust under the Internal Revenue Code. A REIT which distributes at least 95% of its real estate investment trust taxable income to its shareholders each year by the end of the following year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. For the year ended December 31, 1998, the Company had taxable income (before distributions to stockholders) of approximately $1,738,000 ($.48 per share), which included approximately $777,000 ($.21 per share) of capital gains. This amount will be reduced by approximately $199,000 ($.06 per share) of the 1998 distributions that were not utilized in reducing the Company's 1997 taxable income and by any eligible 1999 distributions that the Company may elect to utilize as a reduction of its 1998 taxable income. As previously stated, in order to retain REIT status, Presidential is required to distribute 95% of its REIT taxable income (exclusive of capital gains). As of March 31, 1999, Presidential has distributed all but $.04 per share of the required 95% of its 1998 REIT taxable income. In addition, although no assurances can be given, it is the Company's present intention to distribute all of its 1998 taxable income and therefore, no provision for income taxes was made at December 31, 1998. Furthermore, the Company had taxable income (before distributions to stockholders) for the three months ended March 31, 1999 of approximately $3,398,000 ($.94 per share), which included approximately $3,497,000 ($.97 per share) of capital gains. This amount will be reduced by 1999 distributions that were not utilized in reducing the Company's 1998 taxable income and by any eligible 2000 distributions that the Company may elect to utilize as a reduction of its 1999 taxable income. Presidential intends to continue to maintain its REIT status. The Company intends to retain the $3,560,000 capital gain from the sale of the Fairfield Towers Mortgage Notes and, accordingly, has accrued $1,566,474 for Federal and State income taxes. Retaining this capital gain will not affect Presidential's REIT status. Presidential has, for tax purposes, reported the gain from the sale of certain of its properties using the installment method. 9. COMPREHENSIVE INCOME The Company's only element of other comprehensive income is the change in the unrealized gain (loss) on the Company's securities available for sale. Thus, comprehensive income, which consists of net income plus or minus other comprehensive income, for the three months ended March 31, 1999 and 1998 was $6,951,889 and $704,528, respectively. 10. TREASURY STOCK In March, 1999, three directors of the Company were each given 1,000 shares of the Company's Class B common stock as partial payment for directors fees for the 1999 year. Such shares had been held in treasury at an average cost of approximately $13.54 per share. The average market value for the previous month of the Class B common stock, on which the fees were based, was $7.17 per share. As a result of this transaction, the Company recorded $21,510 in prepaid directors fees (to be amortized during 1999) based on the average market value of the stock. Treasury stock was reduced by a cost of $40,618 and additional paid-in capital was charged $19,108 for the excess of the cost over the market value. In addition, on March 24, 1999, an executive of the Company was given 7,000 shares of the Company's Class B common stock at a market price of $7.0625 per share (the closing price of the stock on the date of issuance). The Company recorded a salary expense of $49,438, reduced treasury stock by a cost of $94,780 and charged additional paid-in capital $45,342 for the excess of the cost over the market value. 11. COMMITMENTS AND CONTINGENCIES Presidential is not a party to any material legal proceedings. The Company may be a party to routine litigation incidental to the ordinary course of its business. In the opinion of management, all of the Company's properties are adequately covered by insurance in accordance with normal insurance practices. The Company is not aware of any environmental issues at any of its properties, with the exception of the environmental expenses incurred in prior years at its Mapletree Industrial Center property in Palmer, Massachusetts. The presence, with or without the Company's knowledge, of hazardous substances at any of its properties could have an adverse effect on the Company's operating results and financial condition. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 Results of Operations Financial Information for the three months ended March 31, 1999 and 1998: - ---------------------------------------------------------------------------- Revenue increased by $91,596 primarily as a result of increases in rental income and investment income. These increases were offset by decreases in interest on mortgages-sold properties and interest on mortgages-related parties. Rental income increased by $236,295 primarily as a result of rental income of $237,628 at the Sunwood Apartments property, which was purchased in August of 1998. Investment income increased by $82,594 primarily as a result of increased dividend income on securities available for sale. Interest on mortgages-sold properties decreased by $102,548 primarily due to the sale of the Fairfield Towers First Mortgage in February of 1999, which decreased interest income by $183,296. This decrease was partially offset by the $39,569 of interest received on the $4,000,000 unsold portion of the Fairfield Towers Second Mortgage and a $30,000 interest payment received on the Fairfield Towers Second Mortgage prior to the sale. Interest on mortgages-related parties decreased by $109,548 primarily as a result of decreases in interest on the Consolidated Loans of $52,282 and decreases in interest on the Overlook loan of $56,988. The decrease in interest on the Overlook loan is a result of principal prepayments received in 1998. Costs and expenses increased by $426,468 primarily due to increases in rental property operating expenses, interest on mortgages and amortization of mortgage costs. These increases were partially offset by a decrease in interest expense on note payable and a decrease in minority interest share of partnership income. Rental property operating expenses increased by $130,797 primarily as a result of the addition of the Sunwood Apartments property which increased operating expenses by $76,957. In addition, operating expenses at the Cambridge Green property increased by $54,760. Interest on mortgages increased by $218,168 primarily as a result of a $109,462 increase in mortgage interest expense on the Home Mortgage Plaza property mortgage. In April, 1998 the Company refinanced the $10,788,825 mortgage for a new $17,500,000 mortgage. In addition, the acquisition of the Sunwood Apartments property increased mortgage interest expense by $79,467 and the new mortgage on the Fairlawn Gardens property which was obtained in March, 1998, increased mortgage interest expense by $34,885. Amortization of mortgage costs increased by $184,479 primarily as a result of the write-off of unamortized mortgage costs of $166,756 and the $31,200 prepayment penalty fee associated with the prior mortgage on the Cambridge Green property. In January, 1999, the Cambridge Green property mortgage was refinanced and the mortgage costs relating to the prior mortgage were written off. Interest on note payable and other decreased by $99,182 primarily as a result of the repayment of the note payable in February, 1999. Minority interest share of partnership income decreased by $43,350 as a result of a decrease in partnership income on the Home Mortgage Plaza property. Net gain from sales of properties, notes and securities are sporadic (as they depend on the timing of sales or the receipt of installments or prepayments on purchase money notes). In 1999, the net gain from sales of properties, notes and securities was $6,718,968 compared with $63,569 in 1998. In the 1999 period, the Company recognized a deferred gain of $6,050,740 (which is net of taxes of $1,566,474) from the sale of the Fairfield Towers First and Second Mortgages. The Company also recognized a deferred gain of $425,000 from the sale of the Grant House wraparound mortgage note. In addition, the Company recognized a deferred gain of $218,534 from the sale of the Pinewood property as a result of the $317,662 principal prepayment received on that note. As a result of principal payments received on the Overlook loan and the Fairfield Towers Second Mortgage (prior to the Fairfield sale), the Company also recognized deferred gains of $5,228 and $19,466, respectively. In the 1998 period, the Company recognized a gain of $40,435 from the sale of a cooperative apartment at Sherwood House. In addition, the Company recognized deferred gains of $6,359 and $16,775, respectively, from principal payments received on the Overlook loan and the Fairfield Towers Second Mortgage. Balance Sheet Net mortgage portfolio decreased by $15,231,822 primarily as a result of the sale of the Fairfield Towers First and Second Mortgage Notes, the sale of the Grant House wraparound mortgage note and the principal prepayment received on the Pinewood note receivable. The sale of the Fairfield Towers First and Second Mortgages resulted in a net decrease of $12,999,827, the sale of the Grant House wraparound mortgage note resulted in a net decrease of $2,224,287 and the principal prepayment of $317,662 received on the Pinewood note receivable resulted in a net decrease of $99,128 after recognizing a deferred gain of $218,534. Securities available for sale increased by $3,055,319 as a result of purchases of $3,120,231 in marketable equity securities, primarily interest-bearing corporate preferred stocks, offset by a $64,912 decline in the fair value of securities available for sale. Cash and cash equivalents increased by $7,767,414 primarily as a result of the $9,711,157 received from the sale of the Fairfield Towers First and Second Mortgages, the $425,000 received from the sale of the Grant House wraparound mortgage and the $317,662 principal prepayment received on the Pinewood note receivable. Wrap mortgage debt on sold properties decreased by $2,310,963 primarily due to the sale of the Grant House wraparound mortgage note. As a result of this sale, the $2,212,240 nonrecourse first mortgage which Presidential's second mortgage wrapped around was assigned to the purchaser. Note payable to bank decreased by $10,395,361 primarily as a result of the sale of the Fairfield Towers First and Second Mortgages. The note payable, which had been secured by Presidential's interest in the First Mortgage Note, was repaid from the proceeds of the sale of the Fairfield Towers First and Second Mortgages. Net unrealized gain (loss) on securities available for sale decreased by $64,912 as a result of the decrease in the fair value of securities available for sale. Treasury stock decreased by $135,139. In March, 1999, three directors of the Company were each given 1,000 shares of the Company's Class B common stock as partial payment for 1999 directors fees. In addition, an officer of the Company was given 7,000 shares of the Company's Class B common stock as additional compensation. Such shares had been held in treasury at an average cost of $13.54 per share. Year 2000 Compliance The Company has completed its assessments of its information technology systems ("IT") and its non-information technology systems ("NIT") for Year 2000 compliance. All Year 2000 sensitive systems have been updated and date sensitivity testing is in progress, with a target completion date of September, 1999. Requests have been sent and responses have been received for Year 2000 compliance confirmations from tenants, mortgagors, third party vendors and the Company's property management company. All responses that have been received by the Company have verified Year 2000 compliance or completion of compliance in a timely manner. At March 31, 1999, there were no additional costs to be incurred in relation to the Year 2000 compliance. At December 31, 1998, the Company had capitalized $32,393 for replacement of equipment and had expensed $4,789 for the upgrading of its systems. The estimated costs to complete date sensitivity testing and further assessments of third party vendors are minimal. The Company does not anticipate any problems in the testing of its IT systems and will be Year 2000 compliant. The responses that the Company has received indicate that the financial institutions, utility companies and major suppliers of services which are utilized by the Company are or will be Year 2000 compliant. However, the Company's business operations could be affected if these third party vendors fail to become Year 2000 compliant. The effect of non-compliance by these third party vendors is not determinable at this time. If a supplier of goods or services were to fail to become Year 2000 compliant, the Company would obtain these goods or services from another source. However, the failure of utility companies (electric, gas, water and telephone) to become Year 2000 compliant could have an adverse effect on the operations of the Company's properties. These services are not readily available from other sources but should be available in some form. The Company does not anticipate that the Year 2000 issue will have an adverse effect on the ability of its mortgagors or tenants to make payments due to the Company in a timely fashion. As a result of the Company's evaluation of its systems and third party vendor systems, no formal contingency plan is required. Forward-Looking Statements Certain statements made in this report may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements regarding the intent, belief or current expectations of the Company and its management and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: general economic and business conditions, which will, among other things affect the demand for apartments or commercial space, availability and creditworthiness of prospective tenants, lease rents and the terms and availability of financing; adverse changes in the real estate markets including, among other things, competition with other companies; risks of real estate development and acquisition; governmental actions and initiatives; and environment/safety requirements. Liquidity and Capital Resources Management believes that the Company has sufficient liquidity and capital resources to carry on its existing business and, barring any unforeseen circumstances, to pay the dividends required to maintain REIT status in the foreseeable future. The Company is seeking to expand its portfolio of real estate equities and plans to utilize for this purpose a portion of its available funds and additional funds that the Company may receive from balloon payments due on the Company's note receivable as they mature, as well as funds that may be available from external sources. However, the Company's plans to expand its portfolio of real estate equities may be adversely affected by limitations on its ability to obtain funds for investment on satisfactory terms from external sources. Except as discussed herein, management is not aware of any other trends, events, commitments or uncertainties that will have a significant effect on liquidity. Presidential obtains funds for working capital and investment from its available cash and cash equivalents, from securities available for sale, from operating activities, from refinancing of mortgage loans on its real estate equities, and from the sales of or repayments on its mortgage portfolio. The Company also has at its disposal a $250,000 unsecured line of credit from a lending institution. At March 31, 1999, Presidential had $9,531,879 in available cash and cash equivalents, an increase of $7,767,414 from the $1,764,465 at December 31, 1998. This increase in cash and cash equivalents was due to cash provided by operating activities of $1,375,694 and investing activities of $17,821,270, offset by cash used in financing activities of $11,429,550. Operating Activities Presidential's principal source of cash from operating activities is from interest on its mortgage portfolio, which was $888,356 in 1999, net of interest payments on wrap mortgage debt and note payable. In 1999, net cash received from rental property operations was $747,453 , which is net of distributions from partnership operations to minority partners but before additions and improvements and mortgage amortization. Investing Activities Presidential holds a portfolio of mortgage notes receivable, which consist primarily of notes arising from sales of real properties previously owned by the Company. Some of these notes wrap around underlying mortgage debt (the "Underlying Debt") which is paid by Presidential only out of funds received on its mortgage portfolio relating to the Underlying Debt. During 1999, the Company received principal payments of $691,723 on its mortgage portfolio (net of any principal payments attributable to the Underlying Debt), of which $659,143 represented prepayments, which are sporadic and cannot be relied upon as a regular source of liquidity. On February 22, 1999, Presidential consummated the sale of its Fairfield Towers First and Second Mortgage Notes (excluding a $4,000,000 portion of the Second Mortgage Note, which it retained). The First Mortgage Note, which had an outstanding principal balance at the date of sale of $17,002,695, was acquired by Presidential in October, 1996 at a discount of $3,500,000. The Second Mortgage Note, which had an outstanding principal balance at the date of sale of $14,206,895, was obtained by Presidential when it sold the Fairfield Towers apartment property in 1984. The aggregate purchase price for the First Mortgage Note and the Second Mortgage Note (excluding the $4,000,000 interest retained by Presidential) was $21,350,000. In connection with this transaction, the $4,000,000 portion of the Second Mortgage Note retained by Presidential was modified to provide for interest payments at the rate of 9.625% ($385,000) per annum for the first three years and at 10.5% ($420,000) per annum for the remaining seven years. The outstanding principal balance of $4,000,000 is due at maturity in 2009. To secure this obligation, Presidential obtained subordinate security interests in three apartment properties located in New Jersey as collateral for the Note. Presidential repaid the $10,195,442 outstanding principal balance of its bank note payable, which had been secured by Presidential's interest in the First Mortgage Note. After payment of the bank loan and expenses related to the transaction, but before payment of any income tax on the capital gain, Presidential retained approximately $10,111,000 from the sale. Presidential expects to pay approximately $1,567,000 of taxes on the retained capital gain and invest the balance of approximately $8,544,000 in rental apartment properties. Presidential recognized a gain on sale of $7,617,214 (before accrued taxes of $1,566,474). In January, 1999, the Company sold its equity portion in the $3,235,833 wraparound mortgage note secured by the Grant House apartment building located in White Plains, New York. Presidential assigned the $2,212,240 nonrecourse first mortgage note to the purchaser and received $500,000 for the sale of its $1,023,593 equity portion of the wraparound mortgage note. As a result of this transaction, the Company wrote off the $2,212,240 outstanding balance on the first mortgage and the related $2,212,240 mortgage debt, and recognized a gain on sale of $425,000. During 1999, the Company invested $267,844 in additions and improvements to its properties. The Company also holds a portfolio of marketable equitable securities which increased by $3,055,319, primarily as a result of the $3,120,231 purchase of interest-bearing corporate preferred stocks, offset by a decrease in the fair value of securities of $64,912. Financing Activities The Company's indebtedness at March 31, 1999, consisted of $42,055,240 of mortgages (including $2,357,499 of underlying indebtedness on properties not owned by the Company but on which the Company holds wraparound mortgages). The mortgage debt, which is secured by individual properties, is nonrecourse to the Company with the exception of the $269,089 Mapletree Industrial Center mortgage, which is secured by the property and a guarantee of repayment by Presidential. In addition, some of the Company's mortgages provide for personal liability for damages resulting from specified acts or circumstances, such as for environmental liabilities and fraud. Generally, mortgage debt repayment is serviced with cash flow from the operations of the individual properties. During 1999, the Company made $105,600 of principal payments on mortgage debt on properties which it owns. In January, 1999, Presidential refinanced the mortgage on its Cambridge Green property. The existing $3,120,190 mortgage was paid from the proceeds of the new $3,195,500 mortgage. The new mortgage bears interest at the rate of 6.65% per annum, requires monthly payments of principal and interest of $20,358, and matures on October 1, 2029. The mortgages on the Company's properties are self-liquidating at fixed rates of interest with the exception of the mortgages on Fairlawn Gardens, Home Mortgage Plaza, Building Industries Center, Sunwood Apartments and Continental Gardens. During 1999, Presidential declared and paid cash distributions of $576,651 to its shareholders and received proceeds from its dividend reinvestment and share purchase plan of $24,969. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit 27. Financial Data Schedule. (b) During the calendar quarter ended March 31, 1999, the Company filed a Form 8-K dated March 1, 1999 which disclosed under Item 5 - Other Events the sale of substantially all of its Fairfield Towers First and Second Mortgage Notes. 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. PRESIDENTIAL REALTY CORPORATION (Registrant) DATE: May 13, 1999 By: /s/ Jeffrey F. Joseph --------------------- Jeffrey F. Joseph President DATE: May 13, 1999 By: /s/ Elizabeth Delgado --------------------- Elizabeth Delgado Treasurer EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1999 MAR-31-1999 9,531,879 4,330,053 16,478,872 124,418 0 17,704,444 34,968,594 7,475,080 69,109,177 5,683,163 41,278,550 0 0 361,865 18,959,865 69,109,177 0 3,921,758 0 1,984,199 0 0 963,476 8,583,275 1,566,474 7,016,801 0 0 0 7,016,801 1.94 1.94
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