10QSB 1 sep0410qsb.txt PRESIDENTIAL REALTY CORPORATION 10Q-SB 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 September 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 November 8, 2004 was 478,840 shares of Class A common and 3,336,796 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 Nine Months Ended September 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 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2004 2003 -------------- -------------- Assets Real estate (Note 2) $11,829,659 $11,646,869 Less: accumulated depreciation 5,871,513 5,650,595 -------------- -------------- Net real estate 5,958,146 5,996,274 -------------- -------------- Mortgage portfolio (Note 3): Sold properties and other - net 21,247,898 21,375,192 Related parties - net 249,726 316,573 -------------- -------------- Net mortgage portfolio (of which $3,130,264 in 2004 and $112,730 in 2003 are due within one year) 21,497,624 21,691,765 -------------- -------------- Assets related to discontinued operations (Note 4) 9,228,298 31,431,930 Investments in and advances to joint ventures (Note 5) 10,031,677 - Prepaid expenses and deposits in escrow 1,027,070 1,198,753 Other receivables (net of valuation allowance of $171,951 in 2004 and $180,613 in 2003) 962,205 770,360 Cash and cash equivalents 2,533,965 1,372,818 Other assets 578,890 648,868 -------------- -------------- Total Assets $51,817,875 $63,110,768 ============== ============== Liabilities and Stockholders' Equity Liabilities: Mortgage debt (of which $202,133 in 2004 and $191,250 in 2003 are due within one year) $8,918,123 $9,060,091 Liabilities related to discontinued operations (Note 4) 7,679,088 29,221,431 Contractual pension and postretirement benefits liabilities 3,372,580 3,396,393 Defined benefit plan liability 792,840 1,393,341 Accrued liabilities 1,254,893 1,129,188 Accounts payable 255,975 344,067 Distributions from partnership in excess of investment and earnings (Note 6) 2,248,009 2,411,112 Other liabilities 350,315 377,382 -------------- -------------- Total Liabilities 24,871,823 47,333,005 -------------- -------------- Minority Interest in Consolidated Partnership (Note 7) 52,742 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 September 30, 2004 December 31, 2003 333,255 330,667 ----------- -------------------- ----------------- Authorized: 10,000,000 10,000,000 Issued: 3,332,549 3,306,674 Treasury: 1,997 1,897 Additional paid-in capital 3,378,740 3,189,840 Retained earnings 25,999,713 15,374,021 Accumulated other comprehensive loss (2,844,154) (2,845,097) Treasury stock (at cost) (22,138) (21,408) Notes receivable for exercise of stock options - (367,500) -------------- -------------- Total Stockholders' Equity 26,893,310 15,708,417 -------------- -------------- Total Liabilities and Stockholders' Equity $51,817,875 $63,110,768 ============== ============== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2004 2003 ----------- ----------- Revenues: Rental $2,770,398 $3,001,252 Interest on mortgages - sold properties and other 2,193,087 1,843,616 Interest on mortgages - related parties 489,635 231,734 Other revenues 23,692 22,029 ----------- ----------- Total 5,476,812 5,098,631 ----------- ----------- Costs and Expenses: General and administrative 2,706,355 2,359,368 Depreciation on non-rental property 15,758 19,976 Rental property: Operating expenses 1,677,218 1,633,762 Interest on mortgage debt 448,682 408,221 Real estate taxes 375,672 360,074 Depreciation on real estate 231,034 232,482 Amortization of mortgage costs 16,360 8,852 ----------- ----------- Total 5,471,079 5,022,735 ----------- ----------- Other Income: Investment income 49,503 82,206 Equity in income of partnership (Note 6) 258,702 268,133 ----------- ----------- Income before minority interest and net gain from sales of properties 313,938 426,235 Minority interest (8,396) (11,420) ----------- ----------- Income before net gain from sales of properties 305,542 414,815 Net gain from sales of properties 913,945 1,028,596 ----------- ----------- Income from continuing operations 1,219,487 1,443,411 ----------- ----------- Discontinued Operations (Note 4): Loss from discontinued operations (29,271) (649,200) Impairment of real estate held for sale - (2,527,334) Net gain from sales of discontinued operations 11,257,217 - ----------- ----------- Total income (loss) from discontinued operations 11,227,946 (3,176,534) ----------- ----------- Net Income (Loss) $12,447,433 ($1,733,123) =========== =========== Earnings per Common Share (basic and diluted): Income before net gain from sales of properties $0.08 $0.11 Net gain from sales of properties 0.24 0.27 ----------- ----------- Income from continuing operations 0.32 0.38 ----------- ----------- Discontinued Operations (Note 4): Loss from discontinued operations (0.01) (0.17) Impairment of real estate held for sale - (0.67) Net gain from sales of discontinued operations 2.97 - ----------- ----------- Total income (loss) from discontinued operations 2.96 (0.84) ----------- ----------- Net Income (Loss) per Common Share - basic $3.28 ($0.46) =========== =========== - diluted $3.27 ($0.46) =========== =========== Cash Distributions Declared per Common Share (Note 13) $0.48 $0.64 =========== =========== Weighted Average Number of Shares Outstanding - basic 3,795,030 3,762,397 =========== =========== - diluted 3,806,170 3,773,648 =========== =========== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, ------------------------- 2004 2003 ----------- ----------- Revenues: Rental $924,728 $987,760 Interest on mortgages - sold properties and other 731,658 604,910 Interest on mortgages - related parties 204,703 46,998 Other revenues 7,141 5,421 ----------- ----------- Total 1,868,230 1,645,089 ----------- ----------- Costs and Expenses: General and administrative 961,987 774,385 Depreciation on non-rental property 5,253 7,214 Rental property: Operating expenses 556,361 559,021 Interest on mortgage debt 149,000 135,670 Real estate taxes 134,250 126,158 Depreciation on real estate 79,189 78,759 Amortization of mortgage costs 5,374 2,714 ----------- ----------- Total 1,891,414 1,683,921 ----------- ----------- Other Income: Investment income 27,901 24,088 Equity in income of partnership (Note 6) 100,990 70,994 ----------- ----------- Income before minority interest and net gain from sales of properties 105,707 56,250 Minority interest (2,164) (2,989) ----------- ----------- Income before net gain from sales of properties 103,543 53,261 Net gain from sales of properties - 108,703 ----------- ----------- Income from continuing operations 103,543 161,964 ----------- ----------- Discontinued Operations (Note 4): Loss from discontinued operations (28,507) (206,824) Impairment of real estate held for sale - (2,527,334) Net gain from sales of discontinued operations 20,384 - ----------- ----------- Total loss from discontinued operations (8,123) (2,734,158) ----------- ----------- Net Income (Loss) $95,420 ($2,572,194) =========== =========== Earnings per Common Share (basic and diluted): Income before net gain from sales of properties $0.03 $0.01 Net gain from sales of properties - 0.03 ----------- ----------- Income from continuing operations 0.03 0.04 ----------- ----------- Discontinued Operations (Note 4): Loss from discontinued operations (0.01) (0.05) Impairment of real estate held for sale - (0.67) Net gain from sales of discontinued operations 0.01 - ----------- ----------- Total loss from discontinued operations 0.00 (0.72) ----------- ----------- Net Income (Loss) per Common Share - basic $0.03 ($0.68) =========== =========== - diluted $0.03 ($0.68) =========== =========== Cash Distributions Declared per Common Share (Note 13) $0.16 $0.32 =========== =========== Weighted Average Number of Shares Outstanding - basic 3,803,614 3,770,277 =========== =========== - diluted 3,815,681 3,781,666 =========== =========== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------- 2004 2003 -------------- ------------- Cash Flows from Operating Activities: Cash received from rental properties $2,714,190 $2,926,301 Interest received 2,501,038 2,021,475 Distributions received from partnership 168,600 288,300 Miscellaneous income 21,820 14,398 Interest paid on rental property mortgage debt (444,403) (411,418) Cash disbursed for rental property operations (2,068,647) (2,049,302) Cash disbursed for general and administrative costs (3,126,719) (3,140,695) -------------- ------------- Net cash used in continuing operations (234,121) (350,941) Net cash provided by discontinued operations 80,403 29,978 -------------- ------------- Net cash used in operating activities (153,718) (320,963) -------------- ------------- Cash Flows from Investing Activities: Cash flows from continuing operations: Payments received on notes receivable 302,666 2,794,436 Payments disbursed for investments in notes receivable (8,600,000) (1,500,000) Payments of taxes payable on gain from sale - (498,750) Payments disbursed for additions and improvements (295,599) (177,000) Proceeds from sale of co-op apartments 1,015,828 128,292 Purchase of property (26,993,267) - Purchase of additional interest in partnership (73,000) (39,443) Other (730) (8,217) -------------- ------------- (34,644,102) 699,318 -------------- ------------- Cash flows from discontinued operations: Payments disbursed for additions and improvements (123,798) (116,935) Proceeds from sales of discontinued operations 19,639,780 - -------------- ------------- 19,515,982 (116,935) -------------- ------------- Net cash (used in) provided by investing activities (15,128,120) 582,383 -------------- ------------- Cash Flows from Financing Activities: Cash flows from continuing operations: Principal payments on mortgage debt (141,968) (118,748) Mortgage costs paid (8,346) (13,100) Mortgage proceeds 22,961,590 - Loan proceeds 2,600,000 - Distributions to minority partners (25,000) (25,112) Cash distributions on common stock (1,821,741) (1,806,299) Cash received from loan repayment by officers 367,500 - Proceeds from dividend reinvestment and share purchase plan 168,646 181,066 -------------- ------------- 24,100,681 (1,782,193) -------------- ------------- Cash flows from discontinued operations: Principal payments on mortgage debt (114,084) (213,213) Repayment of mortgage debt from sale of property (7,543,612) - -------------- ------------- (7,657,696) (213,213) -------------- ------------- Net cash provided by (used in) financing activities 16,442,985 (1,995,406) -------------- ------------- Net Increase (Decrease) in Cash and Cash Equivalents 1,161,147 (1,733,986) Cash and Cash Equivalents, Beginning of Period 1,372,818 6,738,768 -------------- ------------- Cash and Cash Equivalents, End of Period $2,533,965 $5,004,782 ============== ============= See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------- 2004 2003 ---------------- ---------------- Reconciliation of Net Income (Loss) to Net Cash Used in Operating Activities Net Income (Loss) $12,447,433 ($1,733,123) ---------------- ---------------- Adjustments to reconcile net income (loss) to net cash used in continuing operations: Net gain from sales of properties (913,945) (1,028,596) Loss from discontinued operations 29,271 649,200 Impairment of real estate held for sale - 2,527,334 Net gain from sales of discontinued operations (11,257,217) - Equity in income of partnership (258,702) (268,133) Depreciation and amortization 263,152 261,310 Issuance of stock for fees and expenses 17,132 15,691 Amortization of discounts on notes and fees (108,525) (88,644) Minority interest 8,396 11,420 Distributions received from partnership 168,600 288,300 Changes in assets and liabilities: Increase in other receivables (161,930) (155,244) Decrease in accounts payable and accrued liabilities (479,454) (850,497) Increase (decrease) in other liabilities (2,613) 21,656 Increase in prepaid expenses, deposits in escrow and deferred charges 16,153 2,024 Other (1,872) (3,639) ---------------- ---------------- Total adjustments (12,681,554) 1,382,182 ---------------- ---------------- Net cash used in continuing operations (234,121) (350,941) ---------------- ---------------- Discontinued operations: Loss from discontinued operations (29,271) (649,200) ---------------- ---------------- Adjustments to reconcile loss to net cash provided by discontinued operations: Depreciation and amortization 145,899 719,326 Net change in operating assets and liabilities (36,225) (40,148) ---------------- ---------------- Total adjustments 109,674 679,178 ---------------- ---------------- Net cash provided by discontinued operations 80,403 29,978 ---------------- ---------------- Net cash used in operating activities ($153,718) ($320,963) ================ ================ 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 $13,094,950 ================ See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 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. Equity Method - The Company accounts for its investments in joint ventures and partnerships using the equity method of accounting because it exercises significant influence, but not control over these investments. G. 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: September 30, December 31, 2004 2003 ------------ ------------ Land $ 675,377 $ 695,475 Buildings 11,006,494 10,806,098 Furniture and equipment 147,788 145,296 ----------- ------------ Total real estate $11,829,659 $11,646,869 =========== ============ 3. MORTGAGE PORTFOLIO The components of the net mortgage portfolio at September 30, 2004 and December 31, 2003 are as follows: Sold Properties Related September 30, 2004 and Other Parties Total ------------------ ----------- -------- ----------- Notes receivable $28,430,328 $301,740 $28,732,068 Less: Discounts 949,040 52,014 1,001,054 Deferred gains 6,233,390 6,233,390 ----------- --------- ----------- Net mortgage portfolio $21,247,898 $249,726 $21,497,624 =========== ========= =========== 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 September 30, 2004, all of the notes in the Company's mortgage portfolio are current in accordance with their terms, as modified. On October 1, 2004, the Company received prepayment of its $6,000,000 Newcastle Apartments note receivable which was due to mature on July 31, 2006. As a result, in the fourth quarter of 2004, the Company will recognize a gain of $2,991,850 which had been previously deferred. In connection with the prepayment, the Company received a prepayment fee of $60,000. 4. DISCONTINUED OPERATIONS For the periods ended September 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:
Nine Months Ended Three Months Ended September 30, September 30, -------------------------- ---------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Revenues: Rental $ 2,538,963 $ 4,258,880 $399,576 $ 1,377,405 ----------- ----------- -------- ----------- Rental property expenses: Operating expenses 1,152,083 1,969,664 227,061 645,270 Interest on mortgage debt 973,914 1,796,763 160,981 602,301 Real estate taxes 296,617 422,703 40,478 140,901 Depreciation on real estate 139,097 688,773 (246) 188,704 Amortization of mortgage costs 6,802 30,553 7,576 ----------- ----------- -------- ----------- Total 2,568,513 4,908,456 428,274 1,584,752 ----------- ----------- -------- ----------- Other income: Investment income 279 376 191 523 ----------- ----------- -------- ---------- Loss from discontinued operations (29,271) (649,200) (28,507) (206,824) Impairment of real estate held for sale (2,527,334) (2,527,334) Net gain from sales of discontinued operations 11,257,217 20,384 ----------- ----------- -------- ----------- Total income (loss) from discontinued operations $11,227,946 $(3,176,534) $ (8,123) $(2,734,158) =========== =========== ========= ===========
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 $498,639, were $12,126,617, all of which was used to purchase an exchange property pursuant to a tax-free exchange under Section 1031 of the Internal Revenue Code (see Note 5). The gain from sale for financial reporting purposes is $11,008,520. 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 (including $2,527,334 at September 30, 2003) 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 $248,697. 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 anticipated closing date will be $7,618,219. At the end of the due diligence period in August, 2004, the purchase price was reduced by $100,000, the contract deposit was increased to $250,000 and the purchaser's obligation to close became unconditional subject only 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 $36,000. Presidential intends to utilize all or a portion of the estimated net cash proceeds of $1,600,000 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 September 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:
September 30, December 31, 2004 2003 ------------- ------------ Assets related to discontinued operations: Land $ 1,900,000 $ 6,588,000 Buildings 8,264,790 28,557,536 Furniture and equipment 23,817 267,711 Less: accumulated depreciation (1,106,037) (4,627,994) ------------ ------------ Net real estate 9,082,570 30,785,253 Other assets 145,728 646,677 ------------ ------------ Total $ 9,228,298 $31,431,930 ============ ============ Liabilities related to discontinued operations: Mortgage debt $ 7,630,303 $28,883,027 Other liabilities 48,785 338,404 ------------ ----------- Total $ 7,679,088 $29,221,431 ============ ===========
5. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES On September 24, 2004, the Company purchased the Martinsburg Mall, an enclosed regional shopping mall containing gross leasable area of approximately 552,000 square feet, in Martinsburg, West Virginia (the "Martinsburg Property"). The purchase price for the Martinsburg Property was $27,000,000 and was paid by utilizing $12,365,000 of the net cash proceeds generated by the recent sale of the Company's Continental Gardens property in Miami, Florida and the proceeds of a first mortgage loan in the amount of $14,635,000. Subsequent to closing, the Company obtained an additional advance of $8,326,590 under the first mortgage loan and a mezzanine loan from The Lightstone Group ("Lightstone") in the amount of $2,600,000 which is secured by a pledge of the ownership interests in the entity that owns the Martinsburg Property. The loan matures on September 27, 2014, and the interest rate on the loan is 11% per annum. Lightstone will manage the Martinsburg Property and received a 71% ownership interest in the entity owning the Martinsburg Property, leaving the Company with a 29% ownership interest. On September 28, 2004, Presidential made an $8,600,000 mezzanine loan to Lightstone (the "Presidential Mezz Loan") in connection with the acquisition by Lightstone of four shopping malls, namely the Shenango Valley Mall, an enclosed regional mall located in Hermitage, Pennsylvania with 508,000 square feet of gross leasable area; the West Manchester Mall, an enclosed regional mall located in York, Pennsylvania with 615,000 square feet of gross leasable area; the Bradley Square Mall, an enclosed mall located in Cleveland, Tennessee with 417,000 square feet of gross leasable area; and the Mount Berry Square Mall, an enclosed regional mall located in Rome, Georgia with 475,000 square feet of gross leasable area (the "Other Properties"). The Presidential Mezz Loan is secured by the ownership interests in the entities owning the Other Properties and Presidential obtained a 29% ownership interest in the entities owning the Other Properties. The loan matures on September 27, 2014 and the interest rate on the loan is 11% per annum. The $22,961,590 first mortgage loan obtained by Presidential in connection with its acquisition of the Martinsburg property is part of a $105,000,000 nonrecourse first mortgage loan secured by the Martinsburg Property and the Other Properties. The Company accounts for these investments using the equity method. At September 30, 2004, investment in and advances to joint ventures are as follows: Martinsburg Mall $ 1,453,342 Other Properties 8,578,335 ----------- $10,031,677 =========== The Lightstone Group is controlled by David Lichtenstein. In addition to Presidential's investments in these joint ventures with Mr. Lichtenstein, Presidential previously made five loans in the aggregate outstanding principal amount of $12,875,000 to entities that are controlled by Mr. Lichtenstein. Some, but not all, of these loans are guaranteed in whole or in part by Mr. Lichtenstein and all of such loans are in good standing. While the Company believes that all of these loans are adequately secured, a default by Mr. Lichtenstein on some or all of these loans could have a material adverse effect on Presidential's business and operating results. 6. 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. had an aggregate 31% general and limited partner interest in Home Mortgage Partnership at December 31, 2003 and purchased an additional 1% interest in August, 2004 for a purchase price of $73,000. 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:
September 30, December 31, 2004 2003 ------------- ------------ Condensed Balance Sheets Net real estate $ 4,129,705 $ 4,295,672 Prepaid expenses and deposits in escrow 825,216 742,795 Cash and cash equivalents 895,805 813,306 Receivables and other assets 557,397 567,474 ------------ ------------ Total Assets $ 6,408,123 $ 6,419,247 ============ ============ Nonrecourse mortgage debt $ 16,371,401 $ 16,531,798 Other liabilities 616,595 751,666 ------------ ------------ Total Liabilities 16,987,996 17,283,464 Partners' Deficiency (10,579,873) (10,864,217) ------------ ------------ Total Liabilities and Partners' Deficiency $ 6,408,123 $ 6,419,247 ============ ============ On the Company's Consolidated Balance Sheets: Distributions from partnership in excess of investment and earnings $ 2,248,009 $ 2,411,112 ============ ============ Nine Months Ended Three Months Ended September 30, September 30, 2004 2003 2004 2003 ----------- ----------- ---------- ---------- Condensed Statements of Operations Revenues $ 3,439,540 $ 3,467,878 $1,186,567 $1,103,297 Interest on mortgage debt (923,907) (932,238) (309,194) (313,198) Other expenses (1,696,495) (1,677,537) (564,114) (562,866) Investment income 5,206 6,843 2,337 1,780 ----------- ----------- ---------- ---------- Net Income $ 824,344 $ 864,946 $ 315,596 $ 229,013 =========== =========== ========== ========== On the Company's Consolidated Statement of Operations: Equity in income of partnership $ 258,702 $ 268,133 $ 100,990 $ 70,994 =========== =========== ========== ===========
7. MINORITY INTEREST IN CONSOLIDATED PARTNERSHIP Presidential is the general partner of UTB Associates, a partnership in which Presidential has a 75% interest at September 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 consolidated financial statements. The minority interest reflects the minority partners' equity in the partnership. 8. INCOME TAXES Presidential has elected to qualify as a Real Estate Investment Trust under the Internal Revenue Code. A REIT which distributes at least 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. Upon filing the Company's income tax return for the year ended December 31, 2003, Presidential applied all of its available 2003 stockholders' distributions and further elected to apply (under Section 858 of the Internal Revenue Code) approximately $798,000 of its year 2004 stockholders' distributions to reduce its taxable income for 2003 to zero. Furthermore, the Company had a tax loss (before distributions to stockholders) for the nine months ended September 30, 2004 of approximately $3,893,000 ($1.02 per share), which is comprised of an ordinary loss of approximately $3,038,000 ($.80 per share) and capital losses of approximately $855,000 ($.22 per share). For the nine months ended September 30, 2004, the Company recorded net book income of approximately $12,447,000 and had a taxable loss of approximately $3,893,000. The most significant difference relates to the deferral of the gain from the sale of Continental Gardens because of the Company's purchase of an exchange property 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. 9. COMPREHENSIVE INCOME (LOSS) The Company's other comprehensive income or loss 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 or loss plus or minus other comprehensive income, is as follows:
Nine Months Ended Three Months Ended September 30, September 30, 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Net income (loss) $12,447,433 $(1,733,123) $95,420 $(2,572,194) Other comprehensive income- Net unrealized gain on securities available for sale 943 2,015 637 1,033 ----------- ----------- ------- ----------- Comprehensive income (loss) $12,448,376 $(1,731,108) $96,057 $(2,571,161) =========== =========== ======= ===========
10. 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. 11. CONTRACTUAL PENSION AND POSTRETIREMENT BENEFITS The following table sets forth the components of net periodic benefit costs for contractual pension benefits: Nine Months Ended Three Months Ended September 30, September 30, 2004 2003 2004 2003 -------- -------- -------- -------- Service cost $ 31,108 $ 28,104 $ 10,369 $ 9,368 Interest cost 113,475 115,971 37,825 38,657 Amortization of prior service cost (18,520) (18,520) (6,173) (6,173) Recognized actuarial loss 185,113 145,228 61,704 48,409 -------- -------- -------- ------- Net periodic benefit cost $311,176 $270,783 $103,725 $90,261 ======== ======== ======== ======= The following table sets forth the components of net periodic benefit costs for contractual postretirement benefits: Nine Months Ended Three Months Ended September 30, September 30, 2004 2003 2004 2003 -------- -------- ------- ------- Service cost $ 9,817 $ 13,997 $ 3,272 $ 4,665 Interest cost 28,690 30,464 9,563 10,156 Amortization of prior service cost (7,209) (7,209) (2,403) (2,403) Recognized actuarial loss 14,326 20,149 4,775 6,716 -------- -------- -------- ------- Net periodic benefit cost $ 45,624 $ 57,401 $ 15,207 $19,134 ======== ======== ======== ======= During the nine months ended September 30, 2004, the Company made contributions of $343,222 and $37,390 for contractual pension benefits and postretirement benefits, respectively. The Company anticipates additional contributions of $116,068 and $18,610 for contractual pension benefits and postretirement benefits, respectively, for the remainder of 2004. 12. DEFINED BENEFIT PLAN The following table sets forth the components of net periodic benefit costs:
Nine Months Ended Three Months Ended September 30, September 30, 2004 2003 2004 2003 --------- --------- --------- -------- Service cost $ 291,032 $ 369,183 $ 97,012 $123,059 Interest cost 257,129 211,264 85,709 70,421 Expected return on plan assets (231,392) (160,562) (77,131) (53,518) Amortization of prior service cost 9,462 9,462 3,154 3,154 Amortization of accumulated loss 47,223 49,318 15,741 16,439 ---------- ---------- --------- -------- Net periodic benefit cost $ 373,454 $ 478,665 $124,485 $159,555 ========== ========== ========= ========
During the nine months ended September 30, 2004, the Company made contributions of $973,955 to the defined benefit plan. The Company anticipates additional contributions of $1,577,491 to the plan during the remainder of 2004. 13. CASH DISTRIBUTIONS PER COMMON SHARE Distributions paid per common share for each of the three quarters ended September 30, 2004 and September 30, 2003 were $.16 per quarter. The $.16 distribution paid for the fourth quarter ending December 31, 2003, was declared in the third quarter of 2003 to enable the Company to deduct the distribution from its 2002 taxable income in accordance with the provisions of the Internal Revenue Code applicable to Real Estate Investment Trusts. The $.16 distribution for the fourth quarter of 2004 was declared in the fourth quarter of 2004. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 30, 2004 and 2003: --------------------------------------------------------------------------- Continuing Operations: Revenues increased by $378,181 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 $230,854 primarily due to decreases in rental revenue of $150,541 at the Mapletree Industrial Center property and $74,078 at the Fairlawn Gardens property as a result of increased vacancies. The increased vacancy loss at the Mapletree Industrial Center property was the result of a major tenant going out of business and vacating its rental space upon the expiration of its 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 $349,471 primarily due to interest income of $325,372 earned on the $4,500,000 loan made in October, 2003. Interest on mortgages-related parties increased by $257,901 primarily as a result of an increase of $282,500 in payments of interest income received on the Consolidated Loans (see below). 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 $448,344 primarily due to increases in general and administrative expenses, rental property operating expenses and mortgage interest expense. General and administrative expenses increased by $346,987 primarily as a result of a bad debt expense of $254,059 and a $206,948 increase in salary expense (of which $175,654 pertains to contractual executive bonuses). The bad debt expense is primarily due to the $270,908 write-off of receivables due from an unaffiliated property management company. These receivables resulted from unreimbursed shared overhead expenses and advances made from time to time by Presidential to the management company. It is unlikely that Presidential will collect these amounts, as the management company ceased operations on September 30, 2004, and, accordingly, Presidential determined that it was appropriate to write off these receivables. These increases were partially offset by a $105,211 decrease in defined benefit plan expenses. Rental property operating expenses increased by $43,456 primarily as a result of increases of $35,652 in bad debt expense and $16,451 in insurance expense. Mortgage interest expense increased by $40,461 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 $42,134 primarily as a result of a $32,703 decrease in investment income due to decreased interest earned on lower cash investment balances. In addition, equity in income of partnership decreased by $9,431 due to lower earnings of the Home Mortgage Partnership. Income from continuing operations before net gain from sales of properties decreased by $109,273 from $414,815 in 2003 to $305,542 in 2004. This decrease was primarily due to increases of $346,987 in general and administrative expenses, a $336,429 decrease in income from rental property operations, and a $42,134 decrease in other income. These decreases were offset by increased interest income of $607,372. 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 $1,028,596 in 2003: Gain from sales recognized for the nine months ended September 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 6300 Riverdale Ave. apartment units 103,017 Deferred gains recognized upon receipt of principal payments on notes: Overlook 880,927 Cooperative apartments notes 44,652 -------- ----------- Net gain $913,945 $1,028,596 ======== ==========
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 Liquidity and Capital Resources - Discontinued Operations below). Loss from discontinued operations before impairment of real estate held for sale and net gain from sale of such operations was $29,271 in 2004 compared to $649,200 in 2003. The 2004 period only has two months of operations for the Preston Lake Apartments property compared to nine 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. At September 30, 2003, the Company recorded a $2,527,334 impairment loss on the Preston Lake Apartments property. As a result, the carrying value of assets related to discontinued operations was written down by the $2,527,334 and income (loss) from discontinued operations was charged with an impairment loss on real estate held for sale. The following table compares the total income or loss from discontinued operations for the nine month periods ended September 30, for properties included in discontinued operations:
2004 2003 ----------- ---------- Income (loss) from discontinued operations: Continental Gardens, Miami, FL $ 248,362 $ 250,829 Farrington Apartments, Clearwater, FL (156,587) (251,004) Preston Lake Apartments, Tucker, GA (121,046) (649,025) ----------- ------------ Loss from discontinued operations (29,271) (649,200) ----------- ------------ Impairment of real estate held for sale: Preston Lake Apartments, Tucker, GA (2,527,334) ----------- ------------ Net gain from sales of discontinued operations: Continental Gardens 11,008,520 Preston Lake Apartments 248,697 ----------- ------------ Net gain from sales of discontinued operations 11,257,217 ----------- ------------ Total income (loss) from discontinued operations $11,227,946 $(3,176,534) ============ ============
Financial Information for the three months ended September 30, 2004 and 2003: ---------------------------------------------------------------------------- Continuing Operations: Revenues increased by $223,141 primarily as a result of an increase in interest income on mortgages-related parties and increases in interest income on mortgages-sold properties and other, offset by a decrease in rental revenues. Rental revenues decreased by $63,032 primarily due to decreases in rental revenue of $68,210 at the Mapletree Industrial Center property as a result of increased vacancies as previously discussed. Interest on mortgages-sold properties and other increased by $126,748 primarily due to interest income of $109,249 earned on the $4,500,000 loan made in October, 2003. Interest on mortgages-related parties increased by $157,705 primarily as a result of an increase of $155,250 in payments of interest income received on the Consolidated Loans. Costs and expenses increased by $207,493 primarily due to increases in general and administrative expenses and mortgage interest expense. General and administrative expenses increased by $187,602 primarily as a result of a bad debt expense of $164,559 and a $68,747 increase in salary expense (of which $58,551 pertains to contractual executive bonuses). The bad debt expense is primarily due to the $181,408 write-off of receivables due from an unaffiliated rental property management company that managed the Company's properties. These increases were offset by a $35,070 decrease in defined benefit plan expenses. Mortgage interest expense increased by $13,330 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 increased by $33,809 primarily as a result of a $29,996 increase in equity in income of partnership, due to higher earnings of the Home Mortgage Partnership. Income from continuing operations before net gain from sales of properties increased by $50,282 from $53,261 in 2003 to $103,543 in 2004. This increase was primarily due to increases of $284,453 and $33,809 in interest income and other income, respectively. These increases were offset by increases of $187,602 in general and administrative expenses and an $84,884 decrease in income from rental property operations. 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 $108,703 in 2003:
Gain from sales recognized for the three months ended September 30, 2004 2003 -------- -------- Deferred gains recognized upon receipt of principal payments on notes: Cooperative apartments notes $ - $ 5,686 Sale of property: 6300 Riverdale Ave. apartment units - 103,017 -------- -------- Net gain $ - $108,703 ======== ======== Discontinued Operations:
Loss from discontinued operations before impairment of real estate held for sale and net gain from sales of such operations was $28,507 in 2004 compared to $206,824 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. At September 30, 2003, the Company recorded a $2,527,334 impairment loss on the Preston Lake Apartments property. As a result, the carrying value of assets related to discontinued operations was written down by the $2,527,334 and income (loss) from discontinued operations was charged with an impairment loss on real estate held for sale. The following table compares the total loss from discontinued operations for the three month periods ended September 30, for properties included in discontinued operations: 2004 2003 ----------- --------- Income (loss) from discontinued operations: Continental Gardens, Miami, FL $ (2,816) $ 135,507 Farrington Apartments, Clearwater, FL (26,263) (96,496) Preston Lake Apartments, Tucker, GA 572 (245,835) -------- ----------- Loss from discontinued operations (28,507) (206,824) -------- ----------- Impairment of real estate held for sale: Preston Lake Apartments, Tucker, GA - (2,527,334) -------- ----------- Net gain from sales of discontinued operations: Continental Gardens 924 - Preston Lake Apartments 19,460 - -------- ----------- Net gain from sales of discontinued operations 20,384 - -------- ----------- Total loss from discontinued operations $ (8,123) $(2,734,158) ======== =========== Funds from Operations Funds from operations ("FFO") represents net income (loss) 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: Nine Months Ended Three Months Ended September 30, September 30, 2004 2003 2004 2003 ------------ ----------- -------- ----------- Net Income (Loss) $ 12,447,433 $(1,733,123) $ 95,420 $(2,572,194) Net gain from sales of properties (913,945) (1,028,596) (108,703) Net gain from sales of discontinued operations (11,257,217) (20,384) Depreciation and amortization on: Real estate 231,034 232,482 79,189 78,759 Real estate of discontinued operations 139,097 688,773 (246) 188,704 Real estate of partnership 72,354 72,069 24,867 24,356 ------------ ----------- -------- ----------- Funds From (Used In) Operations (1) $ 718,756 $(1,768,395) $178,846 $(2,389,078) ============ =========== ======== =========== Distributions paid to shareholders (2) $ 1,821,741 $ 1,806,299 $608,771 $ 603,173 ============ =========== ======== =========== FFO payout ratio (3) 253.5% - 340.4% - ============ =========== ======== =========== (1) NAREIT's revised guidance, issued in October, 2003, provides that impairment write-downs should not be added back to net income in calculating FFO. Accordingly, the Company has not added back the $2,527,334 write-down taken in the third quarter of 2003 to net income in computing FFO for the nine months and three months ended September 30, 2003. (2) In the third quarter of 2003, the Company declared the fourth quarterly distribution of $.16 per share payable on December 31, 2003; that distribution is not included in the distributions paid. (3) In the first three 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 $22,203,632 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 $21,666,056 and other assets related to the sales were $492,483. In September, 2004, the Company invested $10,031,677 in joint ventures which own five shopping malls (see below). Prepaid expenses and deposits in escrow decreased by $171,683 primarily as a result of decreases of $245,477 in deposits in escrow, partially offset by increases of $73,794 in prepaid expenses. Other receivables increased by $191,845 primarily as a result of an increase in accrued interest receivable of $136,518 and net increases of $52,761 in damage settlement claims due from insurance carriers for fire and flood damage which occurred at three properties in 2003 and 2004. Cash and cash equivalents increased by $1,161,147 primarily as a result of the $12,126,617 cash proceeds received from the sale of the Continental Gardens property, partially offset by the $10,031,677 invested in joint ventures. Other assets decreased by $69,978 primarily as a result of the write-off of $19,613 for deferred expenses of sale relating to properties sold in 2004. In addition, $15,350 of deposits held by utility companies were refunded to the Company. Other assets also decreased by $13,298 due to a decrease in tenant security deposit cash accounts and by $15,758 due to the depreciation of home office furniture and equipment. Liabilities related to discontinued operations decreased by $21,542,343. 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. Defined benefit plan liability decreased by $600,501 primarily as a result of Company contributions of $973,955, partially offset by the net periodic benefit costs of $373,454. Accrued liabilities increased by $125,705 primarily as a result of $175,654 of accrued contractual executive bonuses and $75,100 of accrued expenses of sale in connection with the sale of the Continental Gardens property. These increases were partially offset by decreases in accrued rental property expenses of $92,410 and decreases of $18,385 in accrued franchise tax expenses. Accounts payable decreased by $88,092 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. This decrease was partially offset by increases in accounts payable as a result of payment scheduling and not from insufficient cash flows. 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 nine 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 nine 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 September 30, 2004, Presidential had $2,533,965 in available cash and cash equivalents, an increase of $1,161,147 from the $1,372,818 at December 31, 2003. This increase in cash and cash equivalents was due to cash provided by financing activities of $16,442,985, offset by cash used in operating activities of $153,718 and cash used in investing activities of $15,128,120. 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 the Home Mortgage Partnership. In 2004, cash received from interest on the Company's mortgage portfolio was $2,501,038 and distributions received from the Home Mortgage Partnership were $168,600. Cash received from rental property operations was $176,140. Net cash received from 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 $302,666 on its mortgage portfolio of which $234,882 represented prepayments and balloon payments. Prepayments and balloon payments are sporadic and cannot be relied upon as a regular source of liquidity. On October 1, 2004, the Company received prepayment of its $6,000,000 Newcastle Apartments note receivable which was due to mature on July 31, 2006. As a result, in the fourth quarter of 2004, the Company will recognize a gain of $2,991,850 which had been previously deferred. In connection with the prepayment, the Company received a prepayment fee of $60,000. During the first nine months of 2004, the Company invested $295,599 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. In September, 2004, the Company purchased a shopping mall in Martinsburg, West Virginia for a purchase price of $27,000,000 less purchase credits of $6,733 for a net purchase price of $26,993,267 and advanced an $8,600,000 loan to The Lightstone Group (see Investments in and Advances to Joint Ventures below). In August, 2004, the Company purchased an additional 1% interest in the Home Mortgage Partnership for a purchase price of $73,000. Financing Activities The Company's indebtedness at September 30, 2004, consisted of $8,918,123 of mortgage debt. The mortgage debt, which is collateralized by individual properties, is nonrecourse to the Company with the exception of the $1,184,692 Building Industries Center mortgage and the $173,902 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 nine months of 2004, the Company made $141,968 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 September, 2004, the Company received mortgage proceeds of $22,961,590 from a first mortgage loan in connection with its purchase of a shopping mall in Martinsburg, West Virginia and received a $2,600,000 loan from The Lightstone Group (see Investments in and Advances to Joint Ventures below). During the first nine months of 2004, the Company received repayments of $367,500 on notes receivable from officers for loans made in 1999 for the exercise of stock options. During the first nine months of 2004, Presidential declared and paid cash distributions of $1,821,741 to its shareholders and received proceeds from its dividend reinvestment and share purchase plan of $168,646. 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 $498,639, were $12,126,617, all of which was used to purchase an exchange property pursuant to a tax-free exchange under Section 1031 of the Internal Revenue Code (see above). The gain from sale for financial reporting purposes is $11,008,520. 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 (including $2,527,334 at September 30, 2003) 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 $248,697. 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 anticipated closing date will be $7,618,219. At the end of the due diligence period in August, 2004, the purchase price was reduced by $100,000, the contract deposit was increased to $250,000 and the purchaser's obligation to close became unconditional subject only 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 $36,000. Presidential intends to utilize all or a portion of the estimated net cash proceeds of $1,600,000 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 September 30, 2004, assets related to discontinued operations were $9,228,298 and liabilities related to discontinued operations were $7,679,088. Cash from discontinued operations for the nine months ended September 30, 2004 was as follows: cash provided by operating activities was $80,403, cash provided by investing activities was $19,515,982 and cash used in financing activities was $7,657,696. Investments in and Advances to Joint Ventures On September 24, 2004, the Company purchased the Martinsburg Mall, an enclosed regional shopping mall containing gross leasable area of approximately 552,000 square feet, in Martinsburg, West Virginia (the "Martinsburg Property"). The purchase price for the Martinsburg Property was $27,000,000 and was paid by utilizing $12,365,000 of the net cash proceeds generated by the recent sale of the Company's Continental Gardens property in Miami, Florida and the proceeds of a first mortgage loan in the amount of $14,635,000. Subsequent to closing, the Company obtained an additional advance of $8,326,590 under the first mortgage loan and a mezzanine loan from The Lightstone Group ("Lightstone") in the amount of $2,600,000 which is secured by a pledge of the ownership interests in the entity that owns the Martinsburg Property. The loan matures on September 27, 2014, and the interest rate on the loan is 11% per annum. Lightstone will manage the Martinsburg Property and received a 71% ownership interest in the entity owning the Martinsburg Property, leaving the Company with a 29% ownership interest. On September 28, 2004, Presidential made an $8,600,000 mezzanine loan to Lightstone (the "Presidential Mezz Loan") in connection with the acquisition by Lightstone of four shopping malls, namely the Shenango Valley Mall, an enclosed regional mall located in Hermitage, Pennsylvania with 508,000 square feet of gross leasable area; the West Manchester Mall, an enclosed regional mall located in York, Pennsylvania with 615,000 square feet of gross leasable area; the Bradley Square Mall, an enclosed mall located in Cleveland, Tennessee with 417,000 square feet of gross leasable area; and the Mount Berry Square Mall, an enclosed regional mall located in Rome, Georgia with 475,000 square feet of gross leasable area (the "Other Properties"). The Presidential Mezz Loan is secured by the ownership interests in the entities owning the Other Properties and Presidential obtained a 29% ownership interest in the entities owning the Other Properties. The loan matures on September 27, 2014 and the interest rate on the loan is 11% per annum. The $22,961,590 first mortgage loan obtained by Presidential in connection with its acquisition of the Martinsburg property is part of a $105,000,000 nonrecourse first mortgage loan secured by the Martinsburg Property and the Other Properties. The Company accounts for these investments using the equity method. At September 30, 2004, investment in and advances to joint ventures are as follows: Martinsburg Mall $ 1,453,342 Other Properties 8,578,335 ----------- $10,031,677 =========== The Lightstone Group is controlled by David Lichtenstein. In addition to Presidential's investments in these joint ventures with Mr. Lichtenstein, Presidential previously made five loans in the aggregate outstanding principal amount of $12,875,000 to entities that are controlled by Mr. Lichtenstein. Some, but not all, of these loans are guaranteed in whole or in part by Mr. Lichtenstein and all of such loans are in good standing. While the Company believes that all of these loans are adequately secured, a default by Mr. Lichtenstein on some or all of these loans could have a material adverse effect on Presidential's business and operating results. 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 September 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 who are officers of Presidential (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 nine months ended September 30, 2004, the Company received payments of $451,500 from Scorpio. At September 30, 2004, the unpaid and unaccrued interest was $3,229,207. 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 10.14 Purchase and Sale Agreement Between Preit Associates, L.P., Seller, and Lightstone Real Estate Partners, LLC, Purchaser, dated as of May 14, 2004 (incorporated herein by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q for the period ended June 30, 2004 for Pennsylvania Real Estate Investment Trust, Commission File No. 1-06300). 10.15 Amended and Restated Operating Agreement of PRC Member LLC dated September 27, 2004. 10.16 Loan Agreement dated September 27, 2004 in the amount of $2,600,000 between David Lichtenstein and PRC Member LLC. 10.17 Amended and Restated Operating Agreement of Lightstone Member LLC dated September 27, 2004. 10.18 Loan Agreement dated September 27, 2004 in the amount of $8,600,000 between Presidential Realty Corporation and Lightstone Member LLC. 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. 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: November 11, 2004 By: /s/ Jeffrey F. Joseph --------------------- Jeffrey F. Joseph President and Chief Executive Officer DATE: November 11, 2004 By: /s/ Elizabeth Delgado --------------------- Elizabeth Delgado Treasurer