10-Q 1 mar03q.txt 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, 2003 ---------------- 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, including 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 ------ ------ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No x --------- --------- The number of shares outstanding of each of the issuer's classes of common stock as of the close of business on May 8, 2003 was 478,840 shares of Class A common and 3,285,855 shares of Class B common. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES Index to Form 10-Q For the Three Months Ended March 31, 2003 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 Quantative and Qualitative Disclosures about Market Risk Controls and Procedures 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, 2003 2002 ------------ ----------- Real estate (Note 2) $49,848,075 $49,739,676 Less: accumulated depreciation 9,541,597 9,216,531 ------------ ----------- Net real estate 40,306,478 40,523,145 ------------ ----------- Mortgage portfolio (Note 3): Sold properties and other - net 17,191,857 17,217,874 Related parties - net 358,934 389,916 ------------ ----------- Net mortgage portfolio (of which $1,925,461 in 2003 and $2,061,050 in 2002 are due within one year) 17,550,791 17,607,790 ------------ ----------- Prepaid expenses and deposits in escrow 1,472,134 1,158,157 Other receivables (net of valuation allowance of $130,024 in 2003 and $99,249 in 2002) 518,758 437,984 Cash and cash equivalents 6,402,520 6,738,768 Other assets 1,307,465 1,314,657 ------------ ----------- Total Assets $67,558,146 $67,780,501 ============ =========== Liabilities and Stockholders' Equity Liabilities: Mortgage debt (of which $451,834 in 2003 and $448,487 in 2002 are due within one year) $37,076,352 $37,191,814 Contractual pension and postretirement benefits liabilities 3,312,150 3,328,083 Defined benefit plan liability 1,721,037 1,772,630 Accrued liabilities 1,188,922 1,269,703 Accrued taxes payable (Note 7) - 498,750 Accounts payable 414,058 218,798 Distributions from partnership in excess of investment and earnings (Note 5) 2,354,745 2,358,164 Other liabilities 820,559 755,333 ------------ ----------- Total Liabilities 46,887,823 47,393,275 ------------ ----------- Minority Interest in Consolidated Partnership (Note 6) 90,951 115,623 ------------ ----------- Stockholders' Equity: Common stock; par value $.10 per share Class A, authorized 700,000 shares, issued 478,940 shares and 100 shares held in treasury 47,894 47,894 Class B March 31, 2003 December 31, 2002 328,192 326,899 ----------- -------------- ----------------- Authorized: 10,000,000 10,000,000 Issued: 3,281,922 3,268,986 Treasury: 1,897 1,897 Additional paid-in capital 3,007,932 2,919,080 Retained earnings 20,224,488 20,007,322 Accumulated other comprehensive loss (Note 8) (2,640,226) (2,640,684) Treasury stock (at cost) (21,408) (21,408) Notes receivable for exercise of stock options (367,500) (367,500) ------------ ----------- Total Stockholders' Equity 20,579,372 20,271,603 ------------ ----------- Total Liabilities and Stockholders' Equity $67,558,146 $67,780,501 ============ =========== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED MARCH 31, --------------------------------- 2003 2002 ------------ ----------- Revenues: Rental $2,461,025 $2,526,868 Interest on mortgages - sold properties and other 623,569 701,505 Interest on mortgages - related parties 101,129 39,897 Other revenues 5,438 4,636 ------------ ----------- Total 3,191,161 3,272,906 ------------ ----------- Costs and Expenses: General and administrative 828,640 829,703 Depreciation on non-rental property 6,290 6,813 Rental property: Operating expenses 1,221,490 1,101,331 Interest on mortgage debt 731,973 741,260 Real estate taxes 257,569 243,865 Depreciation on real estate 325,066 323,708 Amortization of mortgage costs 14,853 14,276 ------------ ----------- Total 3,385,881 3,260,956 ------------ ----------- Other Income: Investment income 26,364 15,134 Equity in income of partnership 82,470 67,329 ------------ ----------- Income (loss) before minority interest and net gain from sales of properties (85,886) 94,413 Minority interest 4,705 4,930 ------------ ----------- Income (loss) before net gain from sales of properties (90,591) 89,483 Net gain from sales of properties 908,492 6,477 ------------ ----------- Income from continuing operations 817,901 95,960 Income from discontinued operations (Note 4) - 41,376 ------------ ----------- Net Income $817,901 $137,336 ============ =========== Earnings per Common Share (basic and diluted) (Note 1-C): Income (loss) before net gain from sales of properties ($0.02) $0.03 Net gain from sales of properties 0.24 0.00 ------------ ----------- Income from continuing operations 0.22 0.03 Income from discontinued operations - 0.01 ------------ ----------- Net Income per Common Share - basic $0.22 $0.04 ============ =========== - diluted $0.22 $0.04 ============ =========== Cash Distributions per Common Share $0.16 $0.16 ============ =========== Weighted Average Number of Shares Outstanding - basic 3,753,072 3,728,479 ============ =========== - diluted 3,756,401 3,732,131 ============ =========== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED MARCH 31, ------------------------------------ 2003 2002 ------------- ------------- Cash Flows from Operating Activities: Cash received from rental properties $2,434,896 $2,575,016 Interest received 723,625 787,823 Distributions received from partnership 79,051 68,000 Miscellaneous income 4,814 4,012 Interest paid on rental property mortgage debt (732,708) (742,242) Cash disbursed for rental property operations (1,536,208) (1,388,867) Cash disbursed for general and administrative costs (1,036,237) (849,473) ------------- ------------- Net cash (used in) provided by continuing operations (62,767) 454,269 Net cash provided by discontinued operations - 41,445 ------------- ------------- Net cash (used in) provided by operating activities (62,767) 495,714 ------------- ------------- Cash Flows from Investing Activities: Cash flows from continuing operations: Payments received on notes receivable 2,476,786 203,669 Payments disbursed for investments in notes receivable (1,500,000) - Payments of taxes payable on gain from sale (498,750) - Payments disbursed for additions and improvements (56,884) (118,284) Purchase of additional interest in partnership (39,443) (118,000) Other (8,216) - ------------- ------------- 373,493 (32,615) ------------- ------------- Cash flows from discontinued operations: Payments disbursed for additions and improvements - (2,864) ------------- ------------- - (2,864) ------------- ------------- Net cash provided by (used in) investing activities 373,493 (35,479) ------------- ------------- Cash Flows from Financing Activities: Cash flows from continuing operations: Principal payments on mortgage debt (115,462) (106,961) Cash distributions on common stock (600,735) (596,638) Proceeds from dividend reinvestment and share purchase plan 69,223 34,901 ------------- ------------- (646,974) (668,698) ------------- ------------- Cash flows from discontinued operations: Principal payments on mortgage debt - (16,278) ------------- ------------- - (16,278) ------------- ------------- Net cash used in financing activities (646,974) (684,976) ------------- ------------- Net Decrease in Cash and Cash Equivalents (336,248) (224,741) Cash and Cash Equivalents, Beginning of Period 6,738,768 1,788,224 ------------- ------------- Cash and Cash Equivalents, End of Period $6,402,520 $1,563,483 ============= ============= See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED MARCH 31, ------------------------------------------ 2003 2002 --------------- --------------- Reconciliation of Net Income to Net Cash (Used in) Provided by Operating Activities Net Income $817,901 $137,336 --------------- --------------- Adjustments to reconcile net income to net cash (used in) provided by continuing operations: Net gain from sales of properties (908,492) (6,477) Income from discontinued operations (41,376) Equity in income of partnership (82,470) (67,329) Depreciation and amortization 346,209 344,797 Issuance of stock for fees and expenses 5,231 4,883 Amortization of discounts on notes and fees (36,464) (44,384) Minority interest 4,705 4,930 Distributions received from partnership 79,051 68,000 Changes in assets and liabilities: Decrease (increase) in other receivables (88,838) 51,274 Increase in accounts payable and accrued liabilities 46,953 414,364 Increase in other liabilities 62,656 74,549 Increase in prepaid expenses, deposits in escrow and deferred charges (308,585) (485,674) Other (624) (624) --------------- --------------- Total adjustments (880,668) 316,933 --------------- --------------- Net cash (used in) provided by continuing operations (62,767) 454,269 --------------- --------------- Discontinued operations: Income from Discontinued Operations - 41,376 --------------- --------------- Adjustments to reconcile income to net cash provided by discontinued operations: Depreciation and amortization - 46,941 Minority interest - 2,737 Net change in assets and liabilities - (49,609) --------------- --------------- Total adjustments - 69 --------------- --------------- Net cash provided by discontinued operations - 41,445 --------------- --------------- Net cash (used in) provided by operating activities ($62,767) $495,714 =============== =============== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2003 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 ownership of income producing real estate and in the holding of notes and mortgages secured by 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, a partnership in which 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 net income by the weighted average number of shares of Class A and Class B common stock outstanding during each period. Diluted net income per share is computed by dividing net income by the weighted average shares outstanding, including the dilutive effect, if any, of stock options outstanding. 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 accounting principles generally accepted in the United States of America for interim financial information. The results for such interim periods are not necessarily indicative of the results to be expected for the year. 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 consolidated financial statements and accompanying notes should be read in conjunction with the Company's Form 10-K for the year ended December 31, 2002. E. Management Estimates - In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, 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. F. Discontinued Operations - The Company complies with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement requires that the operations related to the properties that have been sold or properties that are intended to be sold be presented as discontinued operations in statements of operations for all periods presented and properties intended to be sold are to be designated as "held for sale" on the balance sheet. G. Adoption of Recent Accounting Pronouncements - The Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations" on January 1, 2003. On January 1, 2003, the Company also adopted SFAS No. 145, "Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections" and SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". Implementation of these statements did not have a material impact on the Company's financial statements. H. New Accounting Pronouncements - In December, 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure". This statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS No. 123. Adoption of the provisions of the Statement in 2003 will not have any impact because the Company has chosen to continue to use the instrinsic value method as set forth in Accounting Principles Board Opinion ("APB") No. 25. In November of 2002, the FASB issued Interpretation No. 45 "Guarantors' Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". The Interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure provisions of this Interpretation were effective for the Company's December 31, 2002 financial statements; the Company has no guarantees requiring disclosure under this Interpretation. The initial recognition and initial measurement provisions of this Interpretation are applicable to guarantees issued or modified after December 31, 2002. The Company does not believe that the initial recognition and measurement provisions of this Interpretation will have a material effect on the Company's financial statements. In January of 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities". This Interpretation clarifies the application of existing accounting pronouncements to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of the Interpretation will be immediately effective for all variable interests in variable interest entities created after January 31, 2003, and the Company will need to apply its provisions to any existing variable interests in variable interest entities by no later than the third quarter of 2003. The Company believes that it does not hold any investments in entities that will be deemed variable interest entities and, accordingly, that the implementation of this Interpretation will not have a material effect on the Company's financial statements. 2. REAL ESTATE Real estate is comprised of the following: March 31, December 31, 2003 2002 ----------- ------------- Land $ 7,287,128 $ 7,280,424 Buildings 42,169,407 42,069,582 Furniture and equipment 391,540 389,670 ----------- ------------- Total real estate $49,848,075 $49,739,676 =========== ============= For the period ended March 31, 2003, four of the properties owned by the Company represented 22%, 22%, 16% and 11% of total rental revenue. Four properties represented 24%, 20%, 17% and 11% of total rental revenue for the period ended March 31, 2002. 3. MORTGAGE PORTFOLIO The components of the net mortgage portfolio at March 31, 2003 and December 31, 2002 are as follows: Sold Related March 31, 2003 Properties Parties Total -------------- ---------- ------- ----- Notes receivable $24,572,167 $ 446,337 $25,018,504 Less: Discounts 1,129,832 87,403 1,217,235 Deferred gains 6,250,478 6,250,478 ----------- ---------- ----------- Net mortgage portfolio $17,191,857 $ 358,934 $17,550,791 =========== ========== =========== December 31, 2002 ---------------- Notes receivable $24,653,481 $1,326,512 $25,979,993 Less: Discounts 1,157,565 105,669 1,263,234 Deferred gains 6,278,042 830,927 7,108,969 ---------- ---------- ----------- Net mortgage portfolio $17,217,874 $ 389,916 $17,607,790 =========== ========== =========== At March 31, 2003, all of the notes in the Company's mortgage portfolio are current. In February, 2003, the Company made a $1,500,000 loan secured by ownership interests in Reisterstown Square Associates, LLC, which owns Reisterstown Apartments in Baltimore, Maryland, and by a personal guarantee from the borrower. The loan matures on January 31, 2008 and has an annual interest rate of 10.50% until January 31, 2005 and fluctuates every six months thereafter with a base of 10.50% per annum. In March, 2003, the Company received repayment of its notes secured by Woodland Village in Hartford, Connecticut. Presidential received cash of $2,243,190, of which $873,754 was in repayment of the Overlook loan for which a portion of the Woodland Village notes stood as security. As a result, the Company recognized $873,754 of previously deferred gain. In March, 2003, in response to the borrower's election to prepay the note, the Company modified the terms of its Mark Terrace note. The Company agreed to give the borrower options to extend the maturity date from November 29, 2005 to November 29, 2008 and to fix the interest rate at the current 9.16% per annum until maturity. The Company will receive principal payments of $25,000 each on January 1, 2004 and November 29, 2004. If the borrower exercises its options to extend the note, the Company will receive principal payments of $100,000 on November 30, 2005, November 30, 2006 and November 30, 2007. The note is secured by unsold cooperative apartments at the Mark Terrace property. As apartments are sold, the Company will receive principal payments ranging from $20,000 to $35,000 per unit depending upon the size of the unit. This represents an increase from the $16,000 payment required per unit prior to the modification. During the first quarter of 2003, the Company received $120,000 in principal payments on the Mark Terrace note and the balance of the note at March 31, 2003 was $1,155,000. 4. DISCONTINUED OPERATIONS Income from discontinued operations for the three months ended March 31, 2002 related to the Sunwood Apartments property, the University Towers Professional Space Lease property and the Towers Shoppers Parcade property, all of which were sold during the year ended December 31, 2002. The following table summarizes revenue and expense for these properties sold for the three months ended March 31, 2002. Rental Revenue $283,165 -------- Rental property expenses: Operating expenses 84,794 Interest on mortgage debt 76,554 Real estate taxes 31,178 Depreciation on real estate 44,528 Amortization of mortgage costs 2,413 -------- Total 239,467 -------- Other income - investment income 415 -------- Income before minority interest 44,113 Minority interest 2,737 -------- Income from discontinued operations $ 41,376 ======== 5. DISTRIBUTIONS FROM PARTNERSHIP IN EXCESS OF INVESTMENT AND EARNINGS PDL, Inc. (a wholly owned subsidiary of Presidential) is the General Partner of PDL, Inc. and Associates Limited Co-Partnership ("Home Mortgage Partnership"). The partnership owns and operates an office building in Hato Rey, Puerto Rico. Presidential and PDL, Inc. have an aggregate 31% general and limited partner interest in Home Mortgage Partnership at March 31, 2003. The Company accounts for its investment in this partnership under the equity method, because it exercises significant influence, but not control, over the partnership's affairs. The Company's interest in the Home Mortgage Partnership is a negative interest and therefore is classified as a liability on the Company's consolidated balance sheets, captioned "distributions from partnership in excess of investment and earnings". The negative basis is solely due to the refinancing of the mortgage on the property owned by the partnership and the distribution of the proceeds to the partners in prior years, and not due to partnership operating losses. Summary financial information for Home Mortgage Partnership is as follows:
March 31, December 31, 2003 2002 ------ ----- Condensed Balance Sheets Net real estate $ 4,444,840 $ 4,471,850 Prepaid expenses and deposits in escrow 816,724 804,205 Cash and cash equivalents 796,123 696,220 Receivables and other assets 610,226 622,500 ------------- ----------- Total Assets $ 6,667,913 $ 6,594,775 ============= =========== Nonrecourse mortgage debt $16,683,334 $16,737,569 Other liabilities 666,967 550,624 ------------- ----------- Total Liabilities 17,350,301 17,288,193 Partners' Deficiency (10,682,388) (10,693,418) ------------- ------------ Total Liabilities and Partners' Deficiency $ 6,667,913 $ 6,594,775 ============= =========== On the Company's Consolidated Balance Sheets: Distributions from partnership in excess of investment and earnings $ 2,354,745 $ 2,358,164 ============= =========== Three Months Ended March 31, 2003 2002 ---- ---- Condensed Statements Of Operations Revenues $1,105,806 $1,047,893 Interest on mortgage debt (308,314) (311,875) Other expenses (534,111) (503,077) Investment income 2,650 4,692 ----------- --------- Net Income $ 266,031 $ 237,633 =========== ========== On the Company's Consolidated Statement of Operations: Equity in income of partnership $ 82,470 $ 67,329 =========== ==========
6. MINORITY INTEREST IN CONSOLIDATED PARTNERSHIP Presidential is the General Partner of UTB Associates, a partnership in which Presidential had a 66-2/3% interest at December 31, 2002. In January, 2003, Presidential acquired an additional 8-1/3% interest in UTB Associates for a purchase price of $39,443, thereby increasing its ownership interest to 75%. As the General Partner of UTB Associates, Presidential exercises effective control over this partnership, through its ability to manage the affairs of the partnership in the ordinary course of business, including the ability to approve the partnership's budgets, and through its significant equity interest. Accordingly, Presidential consolidates this partnership in the accompanying financial statements. The minority interest reflects the minority partners' equity in the partnership. 7. INCOME TAXES Presidential has elected to qualify as a Real Estate Investment Trust under the Internal Revenue Code. A REIT which distributes at least 90% 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, 2002, the Company had taxable income (before distributions to stockholders) of approximately $5,234,000 ($1.40 per share), which included approximately $4,935,000 ($1.32 per share) of capital gains. The $5,234,000 was reduced by the $1,425,000 ($.38 per share) of undistributed capital gains designated as paid under Section 857(b)(3)(D). At December 31, 2002, the Company accrued $498,750 for income taxes on the $1,425,000 undistributed capital gain, which tax was paid in January, 2003. The $3,809,000 balance of taxable income will be reduced by the $1,553,000 ($.42 per share) of its 2002 distributions that were not utilized in reducing the Company's 2001 taxable income. In addition, the Company may elect to apply any eligible year 2003 distributions to reduce its 2002 taxable income. As previously stated, in order to retain REIT status, Presidential is required to distribute 90% of its REIT taxable income (exclusive of capital gains). Presidential distributed all of the required 90% ($.07 per share) of its 2002 REIT taxable income in 2002, exclusive of capital gains. In addition, although no assurances can be given, it is the Company's present intention to distribute all of its remaining 2002 taxable income (after the $1,425,000 retained capital gain) and, therefore, no provision for income taxes was made for the $3,809,000 of taxable income at December 31, 2002. Furthermore, the Company had taxable income (before distributions to stockholders) for the three months ended March 31, 2003 of approximately $1,440,000 ($.38 per share), which included approximately $540,000 ($.14 per share) of capital gains. This amount will be reduced by 2003 distributions that were not utilized in reducing the Company's 2002 taxable income and by any eligible 2004 distributions that the Company may elect to utilize as a reduction of its 2003 taxable income. Presidential intends to continue to maintain its REIT status. Presidential has, for tax purposes, reported the gain from the sale of certain of its properties using the installment method. 8. COMPREHENSIVE INCOME The Company's other comprehensive income or loss consists primarily of the changes in the minimum pension liability adjustments. Thus, comprehensive income, which consists of net income plus or minus other comprehensive income, for the three months ended March 31, 2003 and 2002 was $818,359 and $137,907, respectively. 9. 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. 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. 10. SUBSEQUENT EVENT In April, 2003, the Company entered into a contract for the sale of the Continental Gardens property in Miami, Florida for a sales price of $22,800,000. The contract may be terminated by the purchaser prior to the expiration of a forty-five day due diligence period, which expires May 26, 2003. During the three months ended March 31, 2003, the Continental Gardens property had gross revenues of $529,423 and net income of $58,648. At March 31, 2003, the carrying value of the property was $8,502,094 (net of accumulated depreciation of $1,968,849). If the contract is not terminated by the purchaser, the Company has until May of 2004 to close. The gain from the sale is estimated to be approximately $11,919,000. Presidential intends to reinvest the proceeds from the sale in the purchase of another apartment property or properties and treat the sale and purchase as a tax free exchange under Section 1031 of the Internal Revenue Code. There can be no assurances, however, that the sale will close or that the amount ultimately realized will not change from the amount described herein or that a satisfactory exchange property will be found. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 Critical Accounting Policies ---------------------------- In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"), management is required to make estimates and assumptions that affect the financial statements and disclosures. These estimates require management's most difficult, complex or subjective judgments. The Company's critical accounting policies are described in its Form 10-K for the year ended December 31, 2002. There have been no significant changes in the Company's critical accounting policies since December 31, 2002. Results of Operations Financial Information for the three months ended March 31, 2003 and 2002: ------------------------------------------------------------------------- Revenue decreased by $81,745 primarily as a result of decreases in rental revenue and decreases in interest income on mortgages-sold properties and other, offset by an increase in interest income on mortgages-related parties. Rental revenue decreased by $65,843 primarily due to a decrease in rental revenue of $69,680 at Preston Lake Apartments as a result of reduced rental rates for new occupancies. The rental market in the Tucker, Georgia area has continued to be plagued by a struggling economy and although occupancy levels have improved, management has had to reduce rental rates to the current rental market rates in that area. In addition, rental revenue at the Farrington Apartments property decreased by $37,668 as a result of increased vacancies at that property. These decreases were offset by net increases of $41,505 at all other rental properties. Interest on mortgages-sold properties and other decreased by $77,936 primarily due to a $138,309 decrease in interest income and amortization of discount on the Encore note receivable as a result of the $3,750,000 principal payment received in 2002. These decreases were partially offset by interest income of $72,031 earned on two new loans that the Company had made in July, 2002 and February, 2003. See below for a description of the new $1,500,000 loan made in February, 2003. Interest on mortgages-related parties increased by $61,232 primarily as a result of an increase of $60,931 in payments of interest income received on the Consolidated Loans. Payments on the Consolidated Loans are based on a percentage of operating cash flows of an entity related to the debtor. Costs and expenses increased by $124,925 primarily due to increases in rental property operating expenses and real estate tax expense. Rental property operating expenses increased by $120,159 as a result of increases of operating expenses in a majority of areas. Insurance expense increased by $37,917, repairs and maintenance increased by $27,511, bad debt expense increased by $23,208, snow removal increased by $16,843 and fuel and utilities increased by $15,731. Real estate tax expense increased by $13,704 primarily as a result of increased real estate taxes on the Crown Court and Continental Gardens properties. Other income increased by $26,371 primarily as a result of a $15,141 increase in equity in income of partnership. During 2002, the Company purchased an additional 4% interest in the Home Mortgage Partnership increasing its ownership interest from 27% to 31%. The increase in partnership interest increased the Company's share of net income from the partnership. In addition, investment income increased by $11,230 primarily as a result of increased interest earned on higher cash investment balances. Income (loss) from continuing operations before net gain from sales of properties decreased by $180,074, from income of $89,483 in 2002 to a loss of $90,591 in 2003. The $180,074 decrease was primarily a result of a decrease in income from rental property operations of $192,354 as a result of increased losses of $169,037 on the Preston Lake Apartments property and the Farrington Apartments property. Increased losses on these two properties were the result of decreases in rental revenues of $107,348, increases in insurance expense of $20,759, increases in repairs and maintenance of $15,833 and increases in bad debt expense of $14,750. This decrease in income from continuing operations was partially offset by an increase of $15,141 in equity in income of partnership. Net gain from sales of properties consists of recognition of deferred gains from sales in prior years. The recognition of such gains are sporadic (as it depends on the timing of or the receipt of installments or prepayments on purchase money notes). In 2003, the net gain from sales of properties was $908,492 compared with $6,477 in 2002: Gain from sales recognized for the three months ended March 31, 2003 2002 ---- ---- Deferred gains recognized upon receipt of principal payments on notes: Overlook $880,927 $6,477 Towne House - co-op apt. note 27,565 -------- ------ Net gain $908,492 $6,477 ======== ====== Income from discontinued operations was $41,376 in 2002. During 2002, the Company sold the Sunwood Apartments property in Miami, Florida, the Towers Shoppers Parcade property in New Haven, Connecticut and the University Towers Professional Space Lease property in New Haven, Connecticut. Funds from Operations Funds from operations ("FFO") represents net income computed in accordance with GAAP, excluding gains or losses from sales of properties (including properties classified as discontinued operations), plus depreciation and amortization on real estate. FFO is calculated in accordance with the National Association of Real Estate Investment Trusts' ("NAREIT") definition. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance. Management considers FFO a supplemental measure of operating performance and uses FFO as a measure for reviewing the Company's operating performance between periods and for comparing performance to other REITS. FFO, as calculated in accordance with the NAREIT definition, is summarized in the following table: Three months ended March 31, ----------------------- 2003 2002 -------- -------- Net Income $817,901 $137,336 Net gain from sale of properties (908,492) (6,477) Depreciation and amortization on: Real estate 325,066 323,708 Real estate of discontinued operations 44,528 Real estate of partnership 23,757 21,754 -------- -------- Funds From Operations $258,232 $520,849 ======== ======== Distributions paid to shareholders $600,735 $596,638 ======== ======== FFO payout ratio (1) 232.6% 114.6% ========= ======== (1) In the first quarter of 2003 and 2002, the Company decided to maintain its cash dividend at the quarterly rate of $.16 per share despite the fact the dividends paid exceeded funds from operations. As a result of balloon payments received on the Company's mortgage portfolio and proceeds from sales of properties, the Company had funds available to it for distribution to shareholders in addition to funds from operations. See Liquidity and Capital Resources below. Balance Sheet Net mortgage portfolio decreased by $56,999. In March, 2003, the Company received repayment of its notes secured by Woodland Village, in Hartford, Connecticut. Presidential received cash of $2,243,190, of which $873,754 was in repayment of the Overlook loan for which a portion of the Woodland Village notes stood as security. As a result, mortgage receivables decreased by $2,243,190 and deferred gains on sale decreased by $873,754 (a net effect of $1,369,436 on the mortgage portfolio) and an $873,754 deferred gain was recognized. In addition the Company received principal payments of $120,000 on the Mark Terrace note and principal payments of $44,475 on sold co-op apartment notes. These decreases were offset by a $1,500,000 loan made in February, 2003. The $1,500,000 loan is secured by ownership interests in Reisterstown Square Associates, LLC which owns Reisterstown Apartments in Baltimore, Maryland and a personal guarantee from the borrower. The loan matures in January, 2008 and has an annual interest rate of 10.50% until January, 2005 and fluctuates every six months thereafter with a minimum base of 10.50% per annum. Prepaid expenses and deposits in escrow increased by $313,977 as a result of increases of $297,699 in prepaid expenses (primarily insurance and real estate tax) and increases of $16,278 in deposits in escrow. Cash and cash equivalents decreased by $336,248 primarily as a result of a decrease in cash provided by rental property operations. Accounts payable increased by $195,260 primarily as a result of increases in accounts payable for rental property operations. The increases in accounts payable are the result of payment timing and not from insufficient cash flows. In January, 2003 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 2003 year. The shares were valued at $6.974 per share, which was the market value of the Class B common stock at the grant date, and, accordingly, the Company recorded $20,922 in prepaid directors' fees (to be amortized during 2003) based on the market value of the stock. The Company recorded additions to the Company's Class B common stock of $300 at par value of $.10 per share and $20,622 to additional paid-in capital. 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. 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 operating activities, from refinancing of mortgage loans on its real estate equities or from sales of such equities, and from repayments on its mortgage portfolio. The Company also has at its disposal a presently unused $250,000 unsecured line of credit from a lending institution. During the first quarter of 2003 and the year of 2002, the Company paid cash distributions to shareholders which exceeded cash flows from operating activities. Periodically the Company receives balloon payments on its mortgage portfolio and net proceeds from sales of discontinued operations. These payments are available to the Company for distribution to its shareholders or the Company may retain these payments for future investment. The Company may in the future, as it did in the first quarter of 2003 and the year of 2002, pay dividends in excess of its cash flow from operating activities if management believes that the Company's liquidity and capital resources are sufficient to pay such dividends. The Company does not have a specific policy as to the retention or distribution of capital gains. The Company's dividend policy regarding capital gains for future periods will be based upon many factors including, but not limited to, the Company's present and projected liquidity, its desire to retain funds available for additional investment, its historical dividend rate and its ability to reduce taxes by paying dividends. While the Company expects to maintain the annual $.64 dividend rate in 2003, no assurances can be given that the present dividend rate will be maintained in the future. At March 31, 2003, Presidential had $6,402,520 in available cash and cash equivalents, a decrease of $336,248 from the $6,738,768 at December 31, 2002. This decrease in cash and cash equivalents was due to cash used in operating activities of $62,767 and cash used in financing activities of $646,974, offset by cash provided by investing activities of $373,493. Operating Activities Cash from operating activities includes interest on the Company's mortgage portfolio, net cash received from rental property operations and distributions received from partnership, which were $723,625, $165,980 and $79,051 in 2003, respectively. Net cash received from rental property operations 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. During 2003, the Company received principal payments of $2,476,786 on its mortgage portfolio of which $2,441,681 represented prepayments and balloon payments. Prepayments and balloon payments are sporadic and cannot be relied upon as a regular source of liquidity. In February, 2003, the Company made a $1,500,000 mortgage loan. The loan has an annual interest rate of 10.50% until January, 2005 and fluctuates thereafter with a minimum base of 10.50% per annum. The entire principal balance is due at maturity in January, 2008. During 2003, the Company invested $56,884 in additions and improvements to its properties and purchased an additional 8-1/3% interest in the UTB Associates partnership for a purchase price of $39,443. Financing Activities The Company's indebtedness at March 31, 2003, consisted of $37,076,352 of mortgage debt. The mortgage debt, which is collateralized by individual properties, is nonrecourse to the Company with the exception of the $206,183 Mapletree Industrial Center mortgage, which is collateralized 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 2003, the Company made $115,462 of principal payments on mortgage debt. The mortgages on the Company's properties are at fixed rates of interest. Four of the mortgages have balloon payments due at maturity and three mortgages are self-liquidating. During the first quarter of 2003, Presidential declared and paid cash distributions of $600,735 to its shareholders and received proceeds from its dividend reinvestment and share purchase plan of $69,223. Discontinued Operations During the year ended December 31, 2002, the Company sold the University Towers Professional Space Lease, the Towers Shoppers Parcade property and the Sunwood Apartments property. Income from discontinued operations for the three months ended March 31, 2002 was $41,376. Cash from discontinued operations for the three months ended March 31, 2002 was as follows: cash provided by operating activities was $41,445, cash used in investing activities was $2,864 and cash used in financing activities was $16,278. Consolidated Loans Presidential holds two nonrecourse loans (the "Consolidated Loans"), which were collateralized by substantially all of the remaining assets of Ivy Properties, Ltd. and its affiliates ("Ivy"). At March 31, 2003, the Consolidated Loans have an outstanding principal balance of $4,770,050 and a net carrying value of zero. Pursuant to existing agreements, the Company is entitled to receive, as payments of principal and interest on the Consolidated Loans, 25% of the cash flow of Scorpio Entertainment, Inc. ("Scorpio"), a company owned by two of the Ivy principals (Messrs. Baruch and Viertel), to carry on theatrical productions. Scorpio is one of the producers of "The Producers", a much acclaimed Broadway show which opened in April, 2001, and of "Hairspray", another highly acclaimed Broadway musical which opened in August, 2002. "The Producers" recouped its original investment on Broadway in November, 2001 and has distributed profits regularly since then. A national tour commenced performances in September, 2002 and additional tours and productions are scheduled. "Hairspray" recouped its original investment on Broadway in March, 2003 and a national tour commences performances in September, 2003. Amounts received by Presidential from Scorpio will be applied to unpaid and unaccrued interest on the Consolidated Loans and recognized as income. The Company anticipates that these amounts will be significant over the next several years. However, the continued profitability of any theatrical production is by its nature uncertain and management believes that any estimate of payments from Scorpio on the Consolidated Loans for future periods is too speculative to project. During the period ended March 31, 2003, the Company received payments of $61,000 from Scorpio. Loan Modification In March, 2003, in response to the borrower's election to prepay the note, the Company modified the terms of its Mark Terrace note. The Company agreed to give the borrower options to extend the maturity date from November 29, 2005 to November 29, 2008 and to fix the interest rate at the current 9.16% per annum until maturity. The Company will receive principal payments of $25,000 each on January 1, 2004 and November 29, 2004. If the borrower exercises its options to extend the note, the Company will receive principal payments of $100,000 on November 30, 2005, November 30, 2006 and November 30, 2007. The note is secured by cooperative apartments at the Mark Terrace property, and as units are sold, the Company will receive principal payments ranging from $20,000 to $35,000 per unit. This represents an increase from the $16,000 received per unit sold prior to the modification. Subsequent Event In April, 2003, the Company entered into a contract for the sale of the Continental Gardens property in Miami, Florida for a sales price of $22,800,000. The contract may be terminated by the purchaser prior to the expiration of a forty-five day due diligence period, which expires on May 26, 2003. During the three months ended March 31, 2003, the Continental Gardens property had gross revenues of $529,423 and net income of $58,648. At March 31, 2003, the carrying value of the property was $8,502,094 (net of accumulated depreciation of $1,968,849). If the contract is not terminated by the purchaser, the Company has until May of 2004 to close. The proceeds of sale are estimated to be approximately $12,846,000 and the gain from the sale is estimated to be approximately $11,919,000. Presidential intends to reinvest the proceeds from the sale in the purchase of another apartment property or properties and treat the sale and purchase as a tax free exchange under Section 1031 of the Code. There can be no assurances, however, that the sale will close or that the amount ultimately realized will not change from the amount described herein or that a satisfactory exchange property will be found. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments consist primarily of mortgage notes receivable and mortgage notes payable. Substantially all of these instruments bear interest at fixed rates, so the Company's cash flows from them are not directly impacted by changes in market rates of interest. Changes in market rates of interest impact the fair values of these fixed rate assets and liabilities. However, because the Company generally holds its notes receivable until maturity and repays its notes payable at maturity or upon sale of the related properties, any fluctuations in values do not impact the Company's earnings, balance sheet or cash flows. The Company does not own any derivative financial instruments or engage in hedging activities. CONTROLS AND PROCEDURES (a) Within the 90 days prior to the filing of the quarterly report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of its disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in this report. (b) There have been no significant changes in the Company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date we carried out this evaluation. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 99.1 Certification of Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) No reports on Form 8-K have been filed during the quarter ended March 31, 2003. 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 14, 2003 By: /s/ Jeffrey F. Joseph ----------------------- Jeffrey F. Joseph President and Chief Executive Officer DATE: May 14, 2003 By: /s/ Elizabeth Delgado ----------------------- Elizabeth Delgado Treasurer CERTIFICATION I, Jeffrey F. Joseph, Chief Executive Officer of Presidential Realty Corporation (the "Company") certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the Audit Committee of the Board of Directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. DATE: May 14, 2003 By: /s/ Jeffrey F. Joseph -------------------------- Jeffrey F. Joseph Chief Executive Officer CERTIFICATION I, Thomas Viertel, Chief Financial Officer of Presidential Realty Corporation (the "Company") certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the Audit Committee of the Board of Directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. DATE: May 14, 2003 By: /s/ Thomas Viertel -------------------------- Thomas Viertel Chief Financial Officer