-----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, FMI525DLUHu9hAoiT4GEUBQOmMgzUA9qAMpRmlvqNz9/jqGPnAF7piNGx5cptg5F YMDyr7feC0y7Iaaj2bk2pw== 0000731245-04-000013.txt : 20040811 0000731245-04-000013.hdr.sgml : 20040811 20040811114331 ACCESSION NUMBER: 0000731245-04-000013 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040811 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-08594 FILM NUMBER: 04966195 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 10QSB 1 jun04qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 ------------- 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 small business issuer 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) Issuer's telephone number, including area code 914-948-1300 ------------ Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such fling 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 August 6, 2004 was 478,840 shares of Class A common and 3,324,218 shares of Class B common. Transitional Small Business Disclosure Format (check one): Yes No x ----- ------ PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES ------------------------------------------------- Index to Form 10-QSB For the Six Months Ended June 30, 2004 Part I Financial Information (Unaudited) Item 1. Financial Statements Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Item 3. 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)
June 30, December 31, 2004 2003 ----------- ----------- Assets Real estate (Note 2) $11,723,667 $11,646,869 Less: accumulated depreciation 5,792,324 5,650,595 ----------- ----------- Net real estate 5,931,343 5,996,274 ----------- ----------- Mortgage portfolio (Note 3): Sold properties and other - net 21,293,317 21,375,192 Related parties - net 252,570 316,573 ----------- ----------- Net mortgage portfolio (of which $144,014 in 2004 and $112,730 in 2003 are due within one year) 21,545,887 21,691,765 ----------- ----------- Assets related to discontinued operations (Note 4) 9,189,528 31,431,930 Prepaid expenses and deposits in escrow 1,277,142 1,198,753 Other receivables (net of valuation allowance of $241,300 in 2004 and $180,613 in 2003) 909,956 770,360 Cash and cash equivalents (Note 4) 13,415,450 1,372,818 Other assets 595,774 648,868 ----------- ----------- Total Assets $52,865,080 $63,110,768 =========== =========== Liabilities and Stockholders' Equity Liabilities: Mortgage debt (of which $199,199 in 2004 and $191,250 in 2003 are due within one year) $8,966,738 $9,060,091 Liabilities related to discontinued operations (Note 4) 7,694,855 29,221,431 Contractual pension and postretirement benefits liabilities (Note 10) 3,381,292 3,396,393 Defined benefit plan liability (Note 11) 1,367,776 1,393,341 Accrued liabilities 1,335,161 1,129,188 Accounts payable 218,534 344,067 Distributions from partnership in excess of investment and earnings (Note 5) 2,365,000 2,411,112 Other liabilities 383,697 377,382 ----------- ----------- Total Liabilities 25,713,053 47,333,005 ----------- ----------- Minority Interest in Consolidated Partnership (Note 6) 55,578 69,346 ----------- ----------- 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 June 30, 2004 December 31, 2003 332,087 330,667 ----------- ------------- ----------------- Authorized: 10,000,000 10,000,000 Issued: 3,320,874 3,306,674 Treasury: 1,997 1,897 Additional paid-in capital 3,290,833 3,189,840 Retained earnings 26,513,064 15,374,021 Accumulated other comprehensive loss (Note 8) (2,844,791) (2,845,097) Treasury stock (at cost) (22,138) (21,408) Notes receivable for exercise of stock options (220,500) (367,500) ----------- ----------- Total Stockholders' Equity 27,096,449 15,708,417 ----------- ----------- Total Liabilities and Stockholders' Equity $52,865,080 $63,110,768 =========== =========== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
SIX MONTHS ENDED JUNE 30, ----------------------------- 2004 2003 ------------ ------------- Revenues: Rental $1,845,670 $2,013,492 Interest on mortgages - sold properties and other 1,461,429 1,238,706 Interest on mortgages - related parties 284,932 184,736 Other revenues 16,551 16,608 ------------ ------------- Total 3,608,582 3,453,542 ------------ ------------- Costs and Expenses: General and administrative 1,744,368 1,584,983 Depreciation on non-rental property 10,505 12,762 Rental property: Operating expenses 1,120,857 1,074,741 Interest on mortgage debt 299,682 272,551 Real estate taxes 241,422 233,916 Depreciation on real estate 151,845 153,723 Amortization of mortgage costs 10,986 6,138 ------------ ------------- Total 3,579,665 3,338,814 ------------ ------------- Other Income: Investment income 21,602 58,118 Equity in income of partnership (Note 5) 157,712 197,139 ------------ ------------- Income before minority interest and net gain from sales of properties 208,231 369,985 Minority interest (6,232) (8,431) ------------ ------------- Income before net gain from sales of properties 201,999 361,554 Net gain from sales of properties 913,945 919,893 ------------ ------------- Income from continuing operations 1,115,944 1,281,447 ------------ ------------- Discontinued Operations (Note 4): Income (loss) from discontinued operations (764) (442,376) Net gain from sales of discontinued operations 11,236,833 - ------------ ------------- Total income (loss) from discontinued operations 11,236,069 (442,376) ------------ ------------- Net Income $12,352,013 $839,071 ============ ============= Earnings per Common Share (basic and diluted): Income before net gain from sales of properties $0.06 $0.10 Net gain from sales of properties 0.24 0.24 ------------ ------------- Income from continuing operations 0.30 0.34 ------------ ------------- Discontinued Operations (Note 4): Income (loss) from discontinued operations 0.00 (0.12) Net gain from sales of discontinued operations 2.96 - ------------ ------------- Total income (loss) from discontinued operations 2.96 (0.12) ------------ ------------- Net Income per Common Share - basic $3.26 $0.22 ============ ============= - diluted $3.25 $0.22 ============ ============= Cash Distributions per Common Share $0.32 $0.32 ============ ============= Weighted Average Number of Shares Outstanding - basic 3,790,560 3,758,736 ============ ============= - diluted 3,798,256 3,769,356 ============ ============= See notes to consolidated financial statements. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) THREE MONTHS ENDED JUNE 30, ----------------------------- 2004 2003 ------------ ------------- Revenues: Rental $912,359 $1,015,360 Interest on mortgages - sold properties and other 728,853 615,137 Interest on mortgages - related parties 125,857 83,607 Other revenues 7,237 11,170 ------------ ------------- Total 1,774,306 1,725,274 ------------ ------------- Costs and Expenses: General and administrative 907,928 756,343 Depreciation on non-rental property 5,253 6,472 Rental property: Operating expenses 538,170 536,250 Interest on mortgage debt 149,440 136,146 Real estate taxes 120,711 116,959 Depreciation on real estate 76,960 77,801 Amortization of mortgage costs 5,314 2,638 ------------ ------------- Total 1,803,776 1,632,609 ------------ ------------- Other Income: Investment income 9,785 30,553 Equity in income of partnership (Note 5) 91,615 114,669 ------------ ------------- Income before minority interest and net gain from sales of properties 71,930 237,887 Minority interest (3,284) (3,726) ------------ ------------- Income before net gain from sales of properties 68,646 234,161 Net gain from sales of properties - 11,401 ------------ ------------- Income from continuing operations 68,646 245,562 ------------ ------------- Discontinued Operations (Note 4): Income (loss) from discontinued operations 81,305 (224,392) Net gain from sales of discontinued operations 11,236,833 - ------------ ------------- Total income (loss) from discontinued operations 11,318,138 (224,392) ------------ ------------- Net Income $11,386,784 $21,170 ============ ============= Earnings per Common Share (basic and diluted): Income before net gain from sales of properties $0.02 $0.07 Net gain from sales of properties - 0.00 ------------ ------------- Income from continuing operations 0.02 0.07 ------------ ------------- Discontinued Operations (Note 4): Income (loss) from discontinued operations 0.02 (0.06) Net gain from sales of discontinued operations 2.96 - ------------ ------------- Total income (loss) from discontinued operations 2.98 (0.06) ------------ ------------- Net Income per Common Share - basic $3.00 $0.01 ============ ============= - diluted $2.99 $0.01 ============ ============= Cash Distributions per Common Share $0.16 $0.16 ============ ============= Weighted Average Number of Shares Outstanding - basic 3,793,798 3,764,427 ============ ============= - diluted 3,802,456 3,775,774 ============ ============= See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, ----------------------------------- 2004 2003 ------------- ------------ Cash Flows from Operating Activities: Cash received from rental properties $1,815,253 $1,946,603 Interest received 1,613,244 1,383,994 Distributions received from partnership 111,600 161,200 Miscellaneous income 15,303 9,601 Interest paid on rental property mortgage debt (295,159) (276,313) Cash disbursed for rental property operations (1,471,922) (1,340,938) Cash disbursed for general and administrative costs (1,661,731) (1,894,505) ------------- ------------ Net cash provided by (used in) continuing operations 126,588 (10,358) Net cash (used in) provided by discontinued operations (4,297) 18,839 ------------- ------------ Net cash provided by operating activities 122,291 8,481 ------------- ------------ Cash Flows from Investing Activities: Cash flows from continuing operations: Payments received on notes receivable 218,638 2,604,706 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 (189,607) (135,617) Proceeds from sales of co-op apartments 1,015,828 - Purchase of additional interest in partnership - (39,443) Other (730) (8,217) ------------- ------------ 1,044,129 422,679 ------------- ------------ Cash flows from discontinued operations: Payments disbursed for additions and improvements (87,495) (67,827) Proceeds from sales of discontinued operations 19,712,548 - ------------- ------------ 19,625,053 (67,827) ------------- ------------ Net cash provided by investing activities 20,669,182 354,852 ------------- ------------ Cash Flows from Financing Activities: Cash flows from continuing operations: Principal payments on mortgage debt (93,353) (78,719) Mortgage costs paid (8,346) - Distributions to minority partners (20,000) (15,113) Cash distributions on common stock (1,212,970) (1,203,126) Cash received from loan repayment by officer 147,000 - Proceeds from dividend reinvestment and share purchase plan 79,571 142,072 ------------- ------------ (1,108,098) (1,154,886) ------------- ------------ Cash flows from discontinued operations: Principal payments on mortgage debt (97,131) (143,882) Repayment of mortgage debt from sale of property (7,543,612) - ------------- ------------ (7,640,743) (143,882) ------------- ------------ Net cash used in financing activities (8,748,841) (1,298,768) ------------- ------------ Net Increase (Decrease) in Cash and Cash Equivalents 12,042,632 (935,435) Cash and Cash Equivalents, Beginning of Period 1,372,818 6,738,768 ------------- ------------ Cash and Cash Equivalents, End of Period $13,415,450 $5,803,333 ============= ============ See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, -------------------------------------- 2004 2003 -------------- -------------- Reconciliation of Net Income to Net Cash Provided by (Used in) Operating Activities Net Income $12,352,013 $839,071 -------------- -------------- Adjustments to reconcile net income to net cash provided by (used in) continuing operations: Net gain from sales of properties (913,945) (919,893) Loss from discontinued operations 764 442,376 Net gain from sales of discontinued operations (11,236,833) - Equity in income of partnership (157,712) (197,139) Depreciation and amortization 173,336 172,623 Issuance of stock for fees and expenses 11,421 10,461 Amortization of discounts on notes and fees (72,760) (65,018) Minority interest 6,232 8,431 Distributions received from partnership 111,600 161,200 Changes in assets and liabilities: Increase in other receivables (133,010) (136,348) Increase (decrease) in accounts payable and accrued liabilities 102,517 (299,040) Increase in other liabilities 22,374 48,113 Increase in prepaid expenses, deposits in escrow and deferred charges (138,161) (75,847) Other (1,248) 652 -------------- -------------- Total adjustments (12,225,425) (849,429) -------------- -------------- Net cash provided by (used in) continuing operations 126,588 (10,358) -------------- -------------- Discontinued operations: Loss from discontinued operations (764) (442,376) -------------- -------------- Adjustments to reconcile loss to net cash (used in) provided by discontinued operations: Depreciation and amortization 146,145 523,046 Net change in operating assets and liabilities (149,678) (61,831) -------------- -------------- Total adjustments (3,533) 461,215 -------------- -------------- Net cash (used in) provided by discontinued operations (4,297) 18,839 -------------- -------------- Net cash provided by operating activities $122,291 $8,481 ============== ============== SUPPLEMENTAL NONCASH DISCLOSURES: Satisfaction of mortgage debt as a result of foreclosure sale $13,595,028 ============== Net carrying value of real estate written off as a result of foreclosure sale $13,094,590 ============== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2004 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. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. 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 and owns a 75% interest. All significant intercompany balances and transactions have been eliminated. B. 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. C. 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, 2003. D. 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. E. 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 results of operations, including impairment, gains and losses related to the properties that have been sold or properties that are intended to be sold be presented as discontinued operations in the statements of operations for all periods presented and the assets and liabilities of properties intended to be sold are to be separately classified on the balance sheet. Properties designated as held for sale are carried at the lower of cost or fair value less costs to sell and are not depreciated. F. Adoption of Recent Accounting Pronouncements - In January of 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities", which was amended by Interpretation No. 46(R) in December of 2003. 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. As it applied to Presidential, Interpretation No. 46(R) was immediately effective for all variable interest entities on March 31, 2004. The adoption of Interpretation No. 46 had no impact on the Company's consolidated financial statements. 2. REAL ESTATE Real estate is comprised of the following: June 30, December 31, 2004 2003 ----------- ------------ Land $ 675,377 $ 695,475 Buildings 10,902,156 10,806,098 Furniture and equipment 146,134 145,296 ----------- ----------- Total real estate $11,723,667 $11,646,869 =========== =========== 3. MORTGAGE PORTFOLIO The components of the net mortgage portfolio at June 30, 2004 and December 31, 2003 are as follows: Sold Properties Related June 30, 2004 and Other Parties Total - -------------- ----------- ---------- ----------- Notes receivable $28,508,609 $307,487 $28,816,096 Less: Discounts 981,902 54,917 1,036,819 Deferred gains 6,233,390 6,233,390 ----------- -------- ----------- Net mortgage portfolio $21,293,317 $252,570 $21,545,887 =========== ======== =========== December 31, 2003 - ----------------- Notes receivable $28,656,210 $378,524 $29,034,734 Less: Discounts 1,047,628 61,951 1,109,579 Deferred gains 6,233,390 6,233,390 ----------- -------- ----------- Net mortgage portfolio $21,375,192 $316,573 $21,691,765 =========== ======== =========== At June 30, 2004, all of the notes in the Company's mortgage portfolio are current in accordance with their terms, as modified. 4. DISCONTINUED OPERATIONS For the periods ended June 30, 2004 and 2003, income (loss) from discontinued operations includes income from the Continental Gardens property and losses from the Preston Lake Apartments and the Farrington Apartments properties. The Farrington Apartments property which was designated as held for sale during the quarter ended June 30, 2004, is currently under a contract for sale. As a result of the Company's decision to discontinue payments on the first mortgage note secured by the Preston Lake Apartments property and the appointment of a receiver by the mortgagee in late February, 2004, the loss from operations for the 2004 period reflects only two months of operations for the Preston Lake Apartments property. The following table summarizes income or loss for the properties sold or held for sale:
Six Months Ended Three Months Ended June 30, June 30, -------------------------- -------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Revenues: Rental $ 2,139,387 $2,881,475 $ 941,009 $ 1,418,582 ----------- ---------- ----------- ----------- Rental property expenses: Operating expenses 925,022 1,324,394 377,690 641,395 Interest on mortgage debt 812,933 1,194,462 313,668 598,894 Real estate taxes 256,139 281,802 94,848 141,190 Depreciation on real estate 139,343 500,069 70,052 250,925 Amortization of mortgage costs 6,802 22,977 3,450 11,624 ----------- ---------- ---------- ----------- Total 2,140,239 3,323,704 859,708 1,644,028 ----------- ---------- ---------- ---------- Other income: Investment income (loss) 88 (147) 4 1,054 ----------- ---------- ----------- ---------- Income (loss) from discontinued operations (764) (442,376) 81,305 (224,392) Net gain from sales of discontinued operations 11,236,833 11,236,833 ----------- ---------- ------------ ---------- Total income (loss) from discontinued operations $11,236,069 $ (442,376) $11,318,138 $ (224,392) =========== ========== =========== ==========
On June 29, 2004, the Company consummated the sale of its Continental Gardens property in Miami, Florida to MAJO 208, LLC, a Florida limited liability company, for a sales price of $21,500,000 pursuant to a contract for the sale executed in September, 2003. The net cash proceeds of sale, after repayment of the $7,543,612 first mortgage loan and prepayment penalty of $919,522, brokerage fees of $411,610 and other expenses of sale of $499,563, were $12,125,693, substantially all of which is being held in escrow to be used to purchase one or more exchange properties pursuant to a tax-free exchange under Section 1031 of the Internal Revenue Code. Presidential has not yet identified a suitable property to acquire with the proceeds of sale and if it does not find a suitable exchange property, the proceeds will be released from escrow and the sale will result in taxable capital gain of approximately $15,243,000. The gain from sale for financial reporting purposes is $11,007,596. In 2003, the Company also decided to sell Preston Lake Apartments, a 320-unit apartment property in Tucker, Georgia. Based upon offers made by prospective purchasers, the Company estimated that the fair value of the property, less costs to sell, was below the $16,204,950 net carrying value of the property. Therefore, in 2003, based on its decision to sell the property in the near term, rather than to hold it as a long-term investment, the Company recorded an impairment charge in the amount of $3,110,000 to reduce the carrying value of the assets related to discontinued operations to their estimated fair value less costs to sell. In February, 2004, the Company decided not to make the monthly payment due February 1, 2004 on the first mortgage note secured by Preston Lake Apartments. The outstanding principal balance of the mortgage debt on February 1, 2004 was $13,595,028. The mortgage note was nonrecourse and the Company had no personal liability for repayment of the indebtedness. The holder of the first mortgage commenced foreclosure proceedings and Presidential consented to the appointment of a receiver for the property and did not contest the foreclosure sale. On May 4, 2004, the property was sold in a foreclosure sale by the holder of the first mortgage. The Company recorded a gain on the foreclosure sale for financial reporting purposes of $229,237. In the second quarter of 2004, the Company decided to sell the Farrington Apartments property in Clearwater, Florida. In July, 2004, the Company entered into a contract for the sale of the property for a sales price equal to $1,820,000 above the outstanding principal balance on the closing date of the existing mortgage loan secured by the property. The outstanding balance of the mortgage loan at the contract date was $7,640,480. The contract may be terminated by the purchaser prior to the expiration of the due diligence period on August 15, 2004 and closing is further subject to the approval by the lender to the assumption of the mortgage by the purchaser. Based on the terms of the contract, the gain from the sale for financial reporting purposes is estimated to be approximately $177,000. Presidential intends to utilize all or a portion of the estimated net cash proceeds of $1,700,000 from the sale to purchase another property or properties and treat the sale and purchase as a tax-free exchange under Section 1031 of the Internal Revenue Code ("IRC"). 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. However, if a successful tax-free exchange under Section 1031 of the IRC does not occur, the Company may be subject to tax on its undistributed capital gains. The assets and liabilities of the Farrington Apartments property at June 30, 2004, and the combined assets and liabilities of the Farrington Apartments, Continental Gardens and the Preston Lake Apartments properties at December 31, 2003, are segregated in the consolidated balance sheets. The components are as follows:
June 30, December 31, 2004 2003 ----------- ------------ Assets related to discontinued operations: Land $ 1,900,000 $ 6,588,000 Buildings 8,228,487 28,557,536 Furniture and equipment 23,817 267,711 Less: accumulated depreciation (1,106,284) (4,627,994) ----------- ----------- Net real estate 9,046,020 30,785,253 Other assets 143,508 646,677 ----------- ----------- Total $ 9,189,528 $31,431,930 =========== =========== Liabilities related to discontinued operations: Mortgage debt $ 7,647,255 $28,883,027 Other liabilities 47,600 338,404 ----------- ----------- Total $ 7,694,855 $29,221,431 =========== ===========
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 Home Mortgage 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 June 30, 2004. 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 has a negative basis and therefore is classified as a liability on the Company's consolidated balance sheets, under the caption "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 excess of their investment in prior years, and not due to partnership operating losses. Summary financial information for Home Mortgage Partnership is as follows:
June 30, December 31, 2004 2003 ------------ ------------ Condensed Balance Sheets Net real estate $ 4,174,182 $ 4,295,672 Prepaid expenses and deposits in escrow 814,736 742,795 Cash and cash equivalents 726,744 813,306 Receivables and other assets 612,122 567,474 ------------ ------------ Total Assets $ 6,327,784 $ 6,419,247 ============ ============ Nonrecourse mortgage debt $ 16,424,772 $ 16,531,798 Other liabilities 618,481 751,666 ------------ ------------ Total Liabilities 17,043,253 17,283,464 Partners' Deficiency (10,715,469) (10,864,217) ------------ ------------ Total Liabilities and Partners' Deficiency $ 6,327,784 $ 6,419,247 ============ ============ On the Company's Consolidated Balance Sheets: Distributions from partnership in excess of investment and earnings $ 2,365,000 $ 2,411,112 ============ ============
Six Months Ended Three Months Ended June 30, June 30, 2004 2003 2004 2003 ----------- ---------- ---------- ---------- Condensed Statements of Operations Revenues $ 2,252,973 $ 2,364,581 $1,158,511 $1,258,775 Interest on mortgage debt (614,713) (619,040) (306,838) (310,726) Other expenses (1,132,381) (1,114,671) (557,524) (580,560) Investment income 2,869 5,063 1,382 2,413 ----------- ----------- ---------- ---------- Net Income $ 508,748 $ 635,933 $ 295,531 $ 369,902 =========== =========== ========== ========== On the Company's Consolidated Statement of Operations: Equity in income of partnership $ 157,712 $ 197,139 $ 91,615 $ 114,669 =========== =========== ========== ========== 6. MINORITY INTEREST IN CONSOLIDATED PARTNERSHIP Presidential is the general partner of UTB Associates, a partnership in which Presidential has a 75% interest at June 30, 2004. 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, 2003, the Company had taxable income (before distributions to stockholders) of approximately $952,000 ($.25 per share), which included approximately $791,000 ($.21 per share) of capital gains. This taxable income will be reduced by the $154,000 ($.03 per share) of its 2003 distributions that were not utilized in reducing the Company's 2002 taxable income. In addition, the Company may elect to apply any eligible year 2004 distributions to reduce its 2003 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% ($.04 per share) of its 2003 REIT taxable income in 2003, 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 2003 taxable income in 2004 and, therefore, no provision for income taxes was made at December 31, 2003. Furthermore, the Company had a taxable loss (before distributions to stockholders) for the six months ended June 30, 2004 of approximately $2,557,000 ($.67 per share), which is comprised of an ordinary loss of approximately $1,674,000 ($.44 per share) and capital losses of approximately $883,000 ($.23 per share). For the six months ended June 30, 2004, the Company recorded net book income of approximately $12,352,000 and had a taxable loss of approximately $2,557,000. The most significant difference relates to the deferral of the gain from the sale of Continental Gardens because of the Company's present intention to purchase one or more exchange properties pursuant to a tax-free exchange under Section 1031 of the Internal Revenue Code. In addition, certain items that are expenses or costs of sale and are deducted from gain from sales of properties for financial reporting purposes are treated as ordinary deductions for income tax purposes. 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 consists of the changes in the net unrealized gain on securities available for sale and the minimum pension liability adjustments, if any. Thus, comprehensive income, which consists of net income plus or minus other comprehensive income, is as follows: Six Months Ended Three Months Ended June 30, June 30, 2004 2003 2004 2003 ----------- -------- ----------- ------- Net income $12,352,613 $839,071 $11,386,784 $21,170 Other comprehensive income- Net unrealized gain (loss) on securities available for sale 306 982 (1,311) 524 ----------- -------- ----------- ------- Comprehensive income $12,352,919 $840,053 $11,385,473 $21,694 =========== ======== =========== ======= 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. CONTRACTUAL PENSION AND POSTRETIREMENT BENEFITS The following table sets forth the components of net periodic benefit costs for contractual pension benefits: Six Months Ended Three Months Ended June 30, June 30, 2004 2003 2004 2003 -------- -------- -------- ------- Service cost $ 20,739 $ 18,736 $ 10,369 $ 9,369 Interest cost 75,650 77,314 37,825 38,657 Amortization of prior service cost (12,347) (12,347) (6,174) (6,174) Recognized actuarial loss 123,409 96,819 61,705 48,409 -------- -------- -------- ------- Net periodic benefit cost $207,451 $180,522 $103,725 $90,261 ======== ======== ======== ======= The following table sets forth the components of net periodic benefit costs for contractual postretirement benefits: Six Months Ended Three Months Ended June 30, June 30, 2004 2003 2004 2003 -------- -------- ------- ------- Service cost $ 6,545 $ 9,332 $ 1,545 $ 4,666 Interest cost 19,127 20,308 8,877 10,153 Amortization of prior service cost (4,806) (4,806) (2,406) (2,403) Recognized actuarial loss 9,551 13,433 2,801 6,717 -------- -------- -------- ------- Net periodic benefit cost $ 30,417 $ 38,267 $ 10,817 $19,133 ======== ======== ======== ======= During the six months ended June 30, 2004, the Company made contributions of $227,154 and $25,815 for contractual pension benefits and postretirement benefits, respectively. The Company anticipates additional contributions of $231,486 and $40,500 for contractual pension benefits and postretirement benefits, respectively, for the remainder of 2004. 11. DEFINED BENEFIT PLAN The following table sets forth the components of net periodic benefit costs: Six Months Ended Three Months Ended June 30, June 30, 2004 2003 2004 2003 --------- --------- -------- -------- Service cost $ 194,020 $ 246,124 $ 97,010 $123,062 Interest cost 171,420 140,843 85,710 70,422 Expected return on plan assets (154,261) (107,044) (77,130) (53,523) Amortization of prior service cost 6,308 6,308 3,154 3,154 Amortization of accumulated loss 31,482 32,879 15,741 16,440 --------- --------- -------- -------- Net periodic benefit cost $ 248,969 $ 319,110 $124,485 $159,555 ========= ========= ======== ======== During the six months ended June 30, 2004, the Company made contributions of $274,534 to the defined benefit plan. The Company anticipates additional contributions of $271,820 to the plan during the remainder of 2004. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 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, 2003. There have been no significant changes in the Company's critical accounting policies since December 31, 2003. Results of Operations Financial Information for the six months ended June 30, 2004 and 2003: - ------------------------------------------------------------------------ Continuing Operations: Revenues increased by $155,040 primarily as a result of increases in interest income on mortgages-sold properties and other and an increase in interest income on mortgages-related parties, offset by a decrease in rental revenues. Rental revenues decreased by $167,822 primarily due to decreases in rental revenue of $82,331 at the Mapletree Industrial Center property, $55,672 at the Fairlawn Gardens property and $19,839 at the Cambridge Green property as a result of increased vacancies at these properties. The increased vacancy loss at the Mapletree Industrial Center property was the result of a major tenant going out of business and vacating their rental space upon the expiration of their lease. The increased vacancy loss at the Fairlawn Gardens property was a result of flood damage to apartments in 2003. The Company is in the process of repairing the damage and expects to rent these vacated units in the near future. Interest on mortgages-sold properties and other increased by $222,723 primarily due to interest income of $216,123 earned on the $4,500,000 loan made in October, 2003. Interest on mortgages-related parties increased by $100,196 primarily as a result of an increase of $127,250 in payments of interest income received on the Consolidated Loans. This increase was partially offset by a decrease of $18,387 in interest income on the Overlook note receivable which was repaid in March, 2003. Costs and expenses increased by $240,851 primarily due to increases in general and administrative expenses, rental property operating expenses and mortgage interest expense. General and administrative expenses increased by $159,385 primarily as a result of a $138,200 increase in salary expense (of which $117,102 pertains to contractual executive bonuses) and a bad debt expense of $89,500. The bad debt expense is the result of the allowance that was set up for the doubtful collectability of advances made to the rental property management company that manages the Company's properties (discussed further below). These increases were offset by a $70,141 decrease in defined benefit plan expenses. Rental property operating expenses increased by $46,116 primarily as a result of an increase of $35,313 in bad debt expense and increases of $16,237 in repairs and maintenance expense. Mortgage interest expense increased by $27,131 as a result of the new $1,200,000 mortgage on the Building Industries Center property which the Company obtained in December, 2003. Other income decreased by $75,943 primarily as a result of a $39,427 decrease in equity in income of partnership, due to lower earnings of the Home Mortgage Partnership. In addition, investment income decreased by $36,516 primarily as a result of decreased interest earned on lower cash investment balances. Income from continuing operations before net gain from sales of properties decreased by $159,555 from $361,554 in 2003 to $201,999 in 2004. This decrease was primarily due to a $251,545 decrease in income from rental property operations, increases of $159,385 in general and administrative expenses and a $75,943 decrease in other income. These decreases were offset by increased interest income of $322,919. Net gain from sales of properties depends on the timing of sales or the receipt of installments or prepayments on purchase money notes. In 2004, the net gain from sales of properties was $913,945 compared with $919,893 in 2003: Gain from sales recognized for the six months ended June 30, 2004 2003
-------- -------- Sale of property: 330 West 72nd St. apartment unit $560,265 $ Sherwood House apartment unit 334,868 Emily Towers apartment unit 18,812 Deferred gains recognized upon receipt of principal payments on notes: Overlook 880,927 Cooperative apartments notes 38,966 -------- -------- Net gain $913,945 $919,893 ======== ========
Discontinued Operations: The Company has three properties that are classified as discontinued operations; the Farrington Apartments property in Clearwater, Florida, which is under contract of sale, the Continental Gardens property in Miami, Florida, which was sold in June of 2004 and the Preston Lake Apartments property in Tucker, Georgia, which was sold in May of 2004. (See Discontinued Operations below). Loss from discontinued operations before net gain from sale of such operations was $764 in 2004 compared to $442,376 in 2003. The 2004 period only has two months of operations for the Preston Lake Apartments property compared to six months of operations in the 2003 period. The Preston Lake Apartments property went into receivership at the end of February, 2004, and was sold on May 4, 2004 at a foreclosure sale by the holder of the first mortgage. The following table compares the total income or loss from discontinued operations for the six month periods ended June 30, for properties included in discontinued operations: 2004 2003 ----------- --------- Income (loss) from discontinued operations: Continental Gardens, Miami, FL $ 251,178 $ 115,322 Farrington Apartments, Clearwater, FL (130,324) (154,508) Preston Lake Apartments, Tucker, GA (121,618) (403,190) ------------ --------- Loss from discontinued operations (764) (442,376) ----------- --------- Net gain from sales of discontinued operations: Continental Gardens 11,007,596 Preston Lake Apartments 229,237 ----------- --------- Net gain from sales of discontinued operations 11,236,833 ----------- --------- Total income (loss) from discontinued operations $11,236,069 $(442,376) =========== ========= Financial Information for the three months ended June 30, 2004 and 2003: - ------------------------------------------------------------------------ Continuing Operations: Revenues increased by $49,032 primarily as a result of increases in interest income on mortgages-sold properties and other and an increase in interest income on mortgages-related parties, offset by a decrease in rental revenues. Rental revenues decreased by $103,001 primarily due to decreases in rental revenue of $60,606 at the Mapletree Industrial Center property, $29,632 at the Fairlawn Gardens property and $8,143 at the Cambridge Green property as a result of increased vacancies at these properties as previously discussed. Interest on mortgages-sold properties and other increased by $113,716 primarily due to interest income of $108,061 earned on the $4,500,000 loan made in October, 2003. Interest on mortgages-related parties increased by $42,250 primarily as a result of an increase of $45,250 in payments of interest income received on the Consolidated Loans. Costs and expenses increased by $171,167 primarily due to increases in general and administrative expenses and mortgage interest expense. General and administrative expenses increased by $151,585 primarily as a result of a $120,175 increase in salary expense (of which $117,102 pertains to contractual executive bonuses) and a bad debt expense of $29,000. The bad debt expense is part of the allowance that was set up for the doubtful collectability of advances made to the rental property management company that manages the Company's properties (discussed further below). Mortgage interest expense increased by $13,294 as a result of the new $1,200,000 mortgage on the Building Industries Center property which the Company obtained in December, 2003. Other income decreased by $43,822 primarily as a result of a $23,054 decrease in equity in income of partnership, due to lower earnings of the Home Mortgage Partnership. In addition, investment income decreased by $20,768 primarily as a result of decreased interest earned on lower cash investment balances. Income from continuing operations before net gain from sales of properties decreased by $165,515 from $234,161 in 2003 to $68,646 in 2004. This decrease was primarily due to increases of $151,585 in general and administrative expenses, a $123,802 decrease in income from rental property operations and a $43,822 decrease in other income. These decreases were offset by increased interest income of $155,966. Net gain from sales of properties depends on the timing of sales or the receipt of installments or prepayments on purchase money notes. In 2004, the net gain from sales of properties was zero compared with $11,401 in 2003: Gain from sales recognized for the three months ended June 30, 2004 2003 -------- -------- Deferred gains recognized upon receipt of principal payments on notes: Cooperative apartments notes $ $ 11,401 -------- -------- $ $ 11,401 ======== ======== Discontinued Operations: Income from discontinued operations before net gain from sales of such operations was $81,305 in 2004 compared to a loss of $224,392 in 2003. There were no operations for the Preston Lake Apartments property in the 2004 period compared to three months of operations in the 2003 period, because the Preston Lake Apartments property went into receivership at the end of February, 2004. The following table compares the total income or loss from discontinued operations for the three month periods ended June 30, for properties included in discontinued operations: 2004 2003 ----------- --------- Income (loss) from discontinued operations: Continental Gardens, Miami, FL $ 145,595 $ 56,674 Farrington Apartments, Clearwater, FL (65,168) (64,288) Preston Lake Apartments, Tucker, GA 878 (216,778) ----------- --------- Income (loss) from discontinued operations 81,305 (224,392) ----------- --------- Net gain from sales of discontinued operations: Continental Gardens 11,007,596 Preston Lake Apartments 229,237 ----------- --------- Net gain from sales of discontinued operations 11,236,833 ----------- --------- Total income (loss) from discontinued operations $11,318,138 $(224,392) =========== ========= 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 is summarized in the following table: Six Months Ended Three Months Ended June 30, June 30, 2004 2003 2004 2003 ------------ ---------- ------------ --------- Net Income $ 12,352,013 $ 839,071 $ 11,386,784 $ 21,170 Net gain from sales of properties (913,945) (919,893) (11,401) Net gain from sales of discontinued operations (11,236,833) (11,236,833) Depreciation and amortization on: Real estate 151,845 153,723 76,960 77,801 Real estate of discontinued operations 139,343 500,069 70,052 250,925 Real estate of partnership 47,487 47,713 23,777 23,956 ------------ ---------- ------------ -------- Funds From Operations $ 539,910 $ 620,683 $ 320,740 $362,451 ============ ========== ============ ======== Distributions paid to shareholders $ 1,212,970 $1,203,126 $ 606,901 $602,391 ============ ========== ============ ======== FFO payout ratio (1) 224.7% 193.8% 189.2% 166.2% ============ ========== ============ ======== (1) In the first two quarters of 2004 and 2003, 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 Assets related to discontinued operations decreased by $22,242,402 primarily as a result of the sales of the Continental Gardens and Preston Lake Apartments properties. The net carrying value of the properties sold was $21,687,383 and other assets related to the sales were $492,483. Prepaid expenses and deposits in escrow increased by $78,389 primarily as a result of increases of $152,322 in prepaid expenses (primarily insurance and real estate tax), partially offset by decreases of $73,933 in deposits in escrow. Other receivables increased by $139,596 primarily as a result of an increase in accrued interest receivable of $114,986 and net increases of $27,974 in damage settlement claims due from insurance carriers for fire and flood damage which occurred at three properties in 2003. Included in other receivables is a $89,500 receivable which is due from the rental property management company that manages the Company's rental properties. This receivable is for operating advances made by the Company to the management company in December, 2003 and in the first six months of 2004. The collectability of these advances is doubtful and as a result, the Company set up a $89,500 allowance for doubtful accounts for these advances and charged bad debt expense for the $89,500. Cash and cash equivalents increased by $12,042,632 as a result of the net proceeds of approximately $12,126,000 received from the sale of the Continental Gardens property. Other assets decreased by $53,094 primarily as a result of the write-off of $25,805 for deferred expenses of sale relating to properties sold in 2004. In addition, $13,204 of deposits held by utility companies were refunded to the Company. Other assets also decreased by $10,505 due to the depreciation of home office furniture and equipment. Liabilities related to discontinued operations decreased by $21,526,576. As a result of the sale of the Continental Gardens property, the outstanding mortgage debt of $7,543,612 was repaid. In addition, as a result of the foreclosure sale of the Preston Lake Apartments property, the $13,595,028 outstanding mortgage debt was written off. Accrued liabilities increased by $205,973 primarily as a result of $200,100 of accrued expenses of sale in connection with the sale of the Continental Gardens property. Accounts payable decreased by $125,533 primarily as a result of the sale of Preston Lake Apartments. At December 31, 2003, accounts payable included $144,846 attributed to Preston Lake Apartments. In January, 2004, 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 2004 year. The shares were valued at $7.614 per share, which was the market value of the Class B common stock at the grant date, and, accordingly, the Company recorded $22,842 in prepaid directors' fees (to be amortized during 2004) 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 $22,542 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 credit worthiness 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 and a $250,000 commercial loan available from a lending institution. During the first six months of 2004 and the year of 2003, the Company paid cash distributions to shareholders which exceeded cash flows from operating activities. Periodically the Company receives balloon payments on its mortgage portfolio, net proceeds from sales of cooperative apartments 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 six months of 2004 and the year of 2003, 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 2004, no assurances can be given that the present dividend rate will be maintained in the future. At June 30, 2004, Presidential had $13,415,450 in available cash and cash equivalents, an increase of $12,042,632 from the $1,372,818 at December 31, 2003. This increase in cash and cash equivalents was due to cash provided by investing activities of $20,669,182 and cash provided by operating activities of $122,291, offset by cash used in financing activities of $8,748,841. Approximately $12,368,000 of the $13,415,450 cash and cash equivalents is being held in an escrow account pending a possible tax-free exchange under Section 1031 of the Internal Revenue Code (see sale of Continental Gardens below). Operating Activities Cash from operating activities includes interest on the Company's mortgage portfolio, net cash received from (disbursed for) rental property operations and distributions received from the Home Mortgage Partnership. In 2004, cash received from interest on the Company's mortgage portfolio was $1,613,244 and distributions received from the Home Mortgage Partnership were $111,600. Cash disbursed for rental property operations was $28,172. Net cash received from (disbursed for) rental property operations is net of distributions to minority partners but before additions and improvements and mortgage amortization. Investing Activities Presidential holds a portfolio of mortgage notes receivable. During 2004, the Company received principal payments of $218,638 on its mortgage portfolio of which $162,649 represented prepayments and balloon payments. Prepayments and balloon payments are sporadic and cannot be relied upon as a regular source of liquidity. During the first six months of 2004, the Company invested $189,607 in additions and improvements to its properties. The Company owns a small portfolio of cooperative apartments, which are located in New York and Connecticut. These apartments are held for the production of rental income and are not marketed for sale. On occasion, the Company will receive purchase offers for some of these apartments and will make sales if the purchase price is agreeable to management. In 2004, the Company sold three cooperative apartments which were located in the New York metropolitan area. The net cash proceeds from the sale of those apartments were $1,015,828. Financing Activities The Company's indebtedness at June 30, 2004, consisted of $8,966,738 of mortgage debt. The mortgage debt, which is collateralized by individual properties, is nonrecourse to the Company with the exception of the $1,190,498 Building Industries Center mortgage and the $179,486 Mapletree Industrial Center mortgage, which are collateralized by the properties and are recourse to Presidential. In addition, some of the Company's mortgages provide for Company 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 the first six months of 2004, the Company made $93,353 of principal payments on mortgage debt. The mortgages on the Company's properties are at fixed rates of interest. With the exception of three mortgages which will be fully amortized by periodic principal payments, the remaining mortgages have balloon payments due at maturity. In March, 2004, the Company received a $147,000 repayment on a note receivable from an officer for a loan made in 1999 for the exercise of stock options. During the first six months of 2004, Presidential declared and paid cash distributions of $1,212,970 to its shareholders and received proceeds from its dividend reinvestment and share purchase plan of $79,571. Discontinued Operations On June 29, 2004, the Company consummated the sale of its Continental Gardens property in Miami, Florida to MAJO 208, LLC, a Florida limited liability company, for a sales price of $21,500,000 pursuant to a contract for the sale executed in September, 2003. The net cash proceeds of sale, after repayment of the $7,543,612 first mortgage loan and prepayment penalty of $919,522, brokerage fees of $411,610 and other expenses of sale of $499,563, were $12,125,693, substantially all of which is being held in escrow to be used to purchase one or more exchange properties pursuant to a tax-free exchange under Section 1031 of the Internal Revenue Code. Presidential has not yet identified a suitable property to acquire with the proceeds of sale and if it does not find a suitable exchange property, the proceeds will be released from escrow and the sale will result in taxable capital gain of approximately $15,243,000. The gain from sale for financial reporting purposes is $11,007,596. In the third quarter of 2003, the Company decided to sell the Preston Lake Apartments property. Based upon offers made by prospective purchasers, the Company estimated that the fair value of the property, less costs to sell, was below the $16,204,950 carrying value of the property (net of accumulated depreciation of $1,628,334). Therefore, in 2003, the Company recorded an impairment charge in the amount of $3,110,000 to reduce the carrying value of the assets related to discontinued operations to their estimated fair value less costs to sell. The Company decided not to make the monthly payment due February 1, 2004 on the first mortgage note secured by Preston Lake Apartments. The holder of the first mortgage commenced foreclosure proceedings and Presidential consented to the appointment of a receiver for the property and did not contest the foreclosure sale. On May 4, 2004, the property was sold in a foreclosure sale by the holder of the first mortgage. The Company recorded a gain on the foreclosure sale for financial reporting purposes of $229,237. In the second quarter of 2004, the Company decided to sell the Farrington Apartments property in Clearwater, Florida. In July, 2004, the Company entered into a contract for the sale of the property for a sales price equal to $1,820,000 above the outstanding principal balance on the closing date of the existing mortgage loan secured by the property. The outstanding balance of the mortgage loan at the contract date was $7,640,480. The contract may be terminated by the purchaser prior to the expiration of the due diligence period on August 15, 2004 and the closing is further subject to the approval by the lender to the assumption of the mortgage by the purchaser. Based on the terms of the contract, the gain from the sale for financial reporting purposes is estimated to be approximately $177,000. Presidential intends to utilize all or a portion of the estimated net cash proceeds of $1,700,000 from the sale to purchase another property or properties and treat the sale and purchase as a tax-free exchange under Section 1031 of the Internal Revenue Code ("IRC"). 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. However, if a successful tax-free exchange under Section 1031 of the IRC does not occur, the Company may be subject to tax on its undistributed capital gains. At June 30, 2004, assets related to discontinued operations were $9,189,528 and liabilities related to discontinued operations were $7,694,855. Cash used in discontinued operations for the six months ended June 30, 2004 was as follows: cash used in operating activities was $4,297, cash provided by investing activities was $19,625,053 and cash used in financing activities was $7,640,743. 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 June 30, 2004, 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. 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 could 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 six months ended June 30, 2004, the Company received payments of $258,250 from Scorpio. At June 30, 2004, the unpaid and unaccrued interest was $3,368,878. 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. However, since some of the Company's mortgage notes payable are at fixed rates of interest and provide for yield maintenance payments upon prepayment prior to maturity, if market interest rates are lower than the interest rates on the mortgage notes payable, the Company's ability to sell the properties securing the notes may be adversely affected and the net proceeds of any sale may be reduced because of the yield maintenance requirements. The Company does not own any derivative financial instruments or engage in hedging activities. ITEM 3. CONTROLS AND PROCEDURES a) As of the end of the period covered by this quarterly report on Form 10-QSB, 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 has been no change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 31.1 Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 32.1 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. 32.2 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) During the calendar quarter ended June 30, 2004, the Company filed a Form 8-K on May 17, 2004 and a Form 8-K/A on June 10, 2004 which disclosed under Item 2 - Acquisition or Disposition of Assets and Item 7 - Financial Statements and Exhibits the disposition of Preston Lake Apartments. 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: August 11, 2004 By: /s/ Jeffrey F. Joseph --------------------- Jeffrey F. Joseph President and Chief Executive Officer DATE: August 11, 2004 By: /s/ Elizabeth Delgado --------------------- Elizabeth Delgado Treasurer EX-31 2 exhibit31-1.txt EXHIBIT 31.1 CEO CERTIFICATION Exhibit 31.1 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-QSB 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-15(e) and 15d-15(e)) 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the Audit Committee of the Company's Board of Directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. DATE: August 11, 2004 By: /s/ Jeffrey F. Joseph -------------------------- Jeffrey F. Joseph Chief Executive Officer EX-31 3 exhibit31-2.txt EXHIBIT 31.2 CFO CERTIFICATION Exhibit 31.2 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-QSB 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-15(e) and 15d-15(e)) 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the Audit Committee of the Company's Board of Directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. DATE: August 11, 2004 By: /s/ Thomas Viertel -------------------------- Thomas Viertel Chief Financial Officer EX-32 4 exhibit32-1.txt EXHIBIT 32.1 CEO CERTIFICATION Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-QSB of Presidential Realty Corporation (the "Company") for the period ending June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey F. Joseph, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a)or 15(d) of the Securities Exchange Act of 1934: and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Company. Presidential Realty Corporation By:/s/ Jeffrey F. Joseph -------------------------- Jeffrey F. Joseph Chief Executive Officer Date: August 11, 2004 EX-32 5 exhibit32-2.txt EXHIBIT 32.2 CFO CERTIFICATION Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-QSB of Presidential Realty Corporation (the "Company") for the period ending June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas Viertel, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a)or 15(d) of the Securities Exchange Act of 1934: and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Company. Presidential Realty Corporation By:/s/ Thomas Viertel ---------------------- Thomas Viertel Chief Financial Officer Date: August 11, 2004 -----END PRIVACY-ENHANCED MESSAGE-----