-----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, KI0aWp3DMMyLY4FQ0l64/oMbU+iCND/uYbwNHhs/dydVaaU4nUxs/lQp2zog+4wS K80OQTotcvZ/EOlp+vA/kw== 0000731245-05-000046.txt : 20051114 0000731245-05-000046.hdr.sgml : 20051111 20051114123943 ACCESSION NUMBER: 0000731245-05-000046 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051114 DATE AS OF CHANGE: 20051114 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: 051198829 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 sept05-10qsb.txt PRESIDENTIAL REALTY CORP 10QSB 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, 2005 ------------------ 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 filing requirements for the past 90 days. Yes No x -------- -------- The number of shares outstanding of each of the issuer's classes of common stock as of the close of business on November 10, 2005 was 478,840 shares of Class A common and 3,365,983 shares of Class B common. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x ---- ---- 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, 2005 Part I Financial Information (Unaudited) Item 1. Financial Statements Consolidated Balance Sheets (Unaudited) Consolidated Statements of Operations (Unaudited) Consolidated Statements of Cash Flows (Unaudited) Consolidated Notes to Financial Statements (Unaudited) 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 5. Other Information Item 6. Exhibits PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2005 2004 -------------- -------------- Assets Real estate (Note 2) $10,344,034 $9,841,035 Less: accumulated depreciation 5,782,154 5,581,306 -------------- -------------- Net real estate 4,561,880 4,259,729 -------------- -------------- Mortgage portfolio (Note 3): Sold properties and other - net 9,944,440 15,216,094 Related parties - net 218,327 244,166 -------------- -------------- Net mortgage portfolio (of which $150,604 in 2005 and $6,091,625 in 2004 are due within one year) 10,162,767 15,460,260 -------------- -------------- Assets related to discontinued operations (Note 4) - 11,036,007 Investments in and advances to joint ventures (Note 5) 24,054,392 17,214,363 Other investments (Note 6) 1,415,000 - Prepaid expenses and deposits in escrow 565,249 1,109,988 Prepaid defined benefit plan costs 2,247,723 2,237,014 Other receivables (net of valuation allowance of $186,000 in 2005 and $205,127 in 2004) 407,757 777,998 Cash and cash equivalents 3,012,610 2,085,767 Other assets 323,986 322,346 -------------- -------------- Total Assets $46,751,364 $54,503,472 ============== ============== Liabilities and Stockholders' Equity Liabilities: Mortgage debt (of which $180,952 in 2005 and $173,119 in 2004 are due within one year) $6,609,022 $6,737,926 Liabilities related to discontinued operations (Note 4) - 9,852,922 Contractual pension and postretirement benefits liabilities 3,383,283 3,349,638 Defined benefit plan liability 348,875 - Accrued liabilities 1,009,471 1,314,158 Accounts payable 260,219 182,435 Distributions from partnership in excess of investment and earnings (Note 7) 2,175,611 2,259,943 Other liabilities 305,836 268,866 -------------- -------------- Total Liabilities 14,092,317 23,965,888 -------------- -------------- Minority Interest in Consolidated Partnership (Note 8) 48,559 51,160 -------------- -------------- 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, 2005 December 31, 2004 336,798 334,273 ----------- ------------------ ------------------ Authorized: 10,000,000 10,000,000 Issued: 3,367,983 3,342,726 Treasury: 2,000 1,997 Additional paid-in capital 3,661,868 3,464,670 Retained earnings 30,019,188 28,095,586 Accumulated other comprehensive loss (Note 10) (1,433,097) (1,433,861) Treasury stock (at cost) (22,163) (22,138) -------------- -------------- Total Stockholders' Equity 32,610,488 30,486,424 -------------- -------------- Total Liabilities and Stockholders' Equity $46,751,364 $54,503,472 ============== ============== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2005 2004 ----------- ----------- Revenues: Rental $2,341,801 $2,278,713 Interest on mortgages - sold properties and other 1,153,471 2,193,087 Interest on mortgages - related parties 303,676 489,635 Other revenues 432,171 23,692 ----------- ----------- Total 4,231,119 4,985,127 ----------- ----------- Costs and Expenses: General and administrative 2,854,339 2,706,355 Depreciation on non-rental property 13,441 15,758 Rental property: Operating expenses 1,603,213 1,363,392 Interest on mortgage debt 325,968 333,236 Real estate taxes 365,785 352,797 Depreciation on real estate 207,329 192,282 Amortization of mortgage costs 9,222 9,793 ----------- ----------- Total 5,379,297 4,973,613 ----------- ----------- Other Income (Loss): Investment income 162,975 49,285 Equity in the loss of joint ventures (Note 5) (681,664) - Equity in income of partnership (Note 7) 46,253 258,702 ----------- ----------- Income (loss) before minority interest and net gain from sales of properties (1,620,614) 319,501 Minority interest (6,150) (8,396) ----------- ----------- Income (loss) before net gain from sales of properties (1,626,764) 311,105 Recognition of deferred gain on sales of properties (Note 3) 3,241,540 - ----------- ----------- Income from continuing operations 1,614,776 311,105 ----------- ----------- Discontinued Operations (Note 4): Loss from discontinued operations (109,246) (34,834) Net gain from sales of discontinued operations 2,255,364 12,171,162 ----------- ----------- Total income from discontinued operations 2,146,118 12,136,328 ----------- ----------- Net Income $3,760,894 $12,447,433 =========== =========== Earnings per Common Share (basic and diluted): Income (loss) before net gain from sales of properties ($0.43) $0.08 Recognition of deferred gain on sales of properties 0.85 - ----------- ----------- Income from continuing operations 0.42 0.08 ----------- ----------- Discontinued Operations: Loss from discontinued operations (0.03) (0.01) Net gain from sales of discontinued operations 0.59 3.21 ----------- ----------- Total income from discontinued operations 0.56 3.20 ----------- ----------- Net Income per Common Share - basic $0.98 $3.28 =========== =========== - diluted $0.98 $3.27 =========== =========== Cash Distributions per Common Share $0.48 $0.48 =========== =========== Weighted Average Number of Shares Outstanding - basic 3,827,933 3,795,030 =========== =========== - diluted 3,839,128 3,806,170 =========== =========== See notes to consolidated financial statements. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) THREE MONTHS ENDED SEPTEMBER 30, ------------------------- 2005 2004 ----------- ----------- Revenues: Rental $824,241 $760,689 Interest on mortgages - sold properties and other 345,792 731,658 Interest on mortgages - related parties 80,873 204,703 Other revenues 38,726 7,141 ----------- ----------- Total 1,289,632 1,704,191 ----------- ----------- Costs and Expenses: General and administrative 953,432 961,987 Depreciation on non-rental property 4,481 5,253 Rental property: Operating expenses 603,086 454,716 Interest on mortgage debt 108,478 110,375 Real estate taxes 131,698 127,379 Depreciation on real estate 72,429 65,950 Amortization of mortgage costs 2,515 3,291 ----------- ----------- Total 1,876,119 1,728,951 ----------- ----------- Other Income (Loss): Investment income 60,004 27,834 Equity in the loss of joint ventures (Note 5) (610,857) - Equity in income (loss) of partnership (Note 7) (35,080) 100,990 ----------- ----------- Income (loss) before minority interest and net gain from sales of properties (1,172,420) 104,064 Minority interest (2,036) (2,164) ----------- ----------- Income (loss) before net gain from sales of properties (1,174,456) 101,900 Recognition of deferred gain on sales of properties (Note 3) 1,941,661 - ----------- ----------- Income from continuing operations 767,205 101,900 ----------- ----------- Discontinued Operations (Note 4): Loss from discontinued operations (8,947) (26,864) Net gain from sales of discontinued operations - 20,384 ----------- ----------- Total loss from discontinued operations (8,947) (6,480) ----------- ----------- Net Income $758,258 $95,420 =========== =========== Earnings per Common Share (basic and diluted): Income (loss) before net gain from sales of properties ($0.31) $0.03 Recognition of deferred gain on sales of properties 0.51 - ----------- ----------- Income from continuing operations 0.20 0.03 ----------- ----------- Discontinued Operations: Loss from discontinued operations - (0.01) Net gain from sales of discontinued operations - 0.01 ----------- ----------- Total loss from discontinued operations - - ----------- ----------- Net Income per Common Share - basic $0.20 $0.03 =========== =========== - diluted $0.20 $0.03 =========== =========== Cash Distributions per Common Share $0.16 $0.16 =========== =========== Weighted Average Number of Shares Outstanding - basic 3,838,614 3,803,614 =========== =========== - diluted 3,850,742 3,815,681 =========== =========== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------- 2005 2004 ---------------- ---------------- Cash Flows from Operating Activities: Cash received from rental properties $2,725,678 $5,210,513 Interest received 1,738,097 2,501,317 Distributions received from partnership 26,922 168,600 Distributions received from joint ventures 1,941,000 - Miscellaneous income 439,517 21,820 Interest paid on rental property mortgage debt (475,742) (1,418,317) Cash disbursed for rental property operations (1,822,699) (3,478,739) Cash disbursed for general and administrative costs (2,436,730) (3,126,719) ---------------- ---------------- Net cash provided by (used in) operating activities 2,136,043 (121,525) ---------------- ---------------- Cash Flows from Investing Activities: Payments received on notes receivable 8,650,280 302,666 Payments disbursed for investments in notes receivable (9,500,000) (8,600,000) Net proceeds received from fire insurance settlement 707,588 - Payments disbursed for additions and improvements (480,021) (451,590) Proceeds from sales of properties held in discontinued operations 4,911,146 20,655,608 Purchase of property - (27,000,000) Payments disbursed for other investments (1,415,000) - Purchase of additional interest in partnership (65,000) (73,000) Other 1,878 6,003 ---------------- ---------------- Net cash provided by (used in) investing activities 2,810,871 (15,160,313) ---------------- ---------------- Cash Flows from Financing Activities: Principal payments on mortgage debt (145,303) (256,052) Principal payments on mortgage debt from insurance proceeds (707,588) - Repayment of mortgage debt from sale of property (1,411,670) (7,543,612) Mortgage proceeds - 22,961,590 Loan proceeds - 2,600,000 Mortgage costs paid - (8,346) Distributions to minority partners (8,751) (25,000) Cash distributions on common stock (1,837,292) (1,821,741) Cash received from loan repayments by officers - 367,500 Proceeds from dividend reinvestment and share purchase plan 90,533 168,646 ---------------- ---------------- Net cash (used in) provided by financing activities (4,020,071) 16,442,985 ---------------- ---------------- Net Increase in Cash and Cash Equivalents 926,843 1,161,147 Cash and Cash Equivalents, Beginning of Period 2,085,767 1,372,818 ---------------- ---------------- Cash and Cash Equivalents, End of Period $3,012,610 $2,533,965 ================ ================ See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------------- 2005 2004 ---------------- ----------------- Reconciliation of Net Income to Net Cash Provided by (Used in) Operating Activities Net Income $3,760,894 $12,447,433 ---------------- ----------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Recognition of deferred gain on sales of properties (3,241,540) - Net gain from sales of discontinued operations (2,255,364) (12,171,162) Equity in income of partnership (46,253) (258,702) Equity in the loss of joint ventures 681,664 - Depreciation and amortization 229,992 409,051 Issuance of stock for fees and expenses 27,828 17,132 Amortization of discounts on notes and fees (118,495) (108,525) Minority interest 6,150 8,396 Distributions received from partnership 26,922 168,600 Distributions received from joint ventures 1,941,000 - Changes in assets and liabilities: Decrease (increase) in other receivables 370,241 (191,845) Increase (decrease) in accounts payable and accrued liabilities 148,606 (636,747) Increase (decrease) in other liabilities 33,734 (15,338) Decrease in prepaid expenses, deposits in escrow and deferred charges 558,672 212,054 Other 11,992 (1,872) ---------------- ----------------- Total adjustments (1,624,851) (12,568,958) ---------------- ----------------- Net cash provided by (used in) operating activities $2,136,043 ($121,525) ================ ================= SUPPLEMENTAL NONCASH DISCLOSURES: Satisfaction of mortgage debt as a result of assumption of the mortgage debt by the purchaser $7,605,966 ================ 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, 2005 (UNAUDITED) Presidential Realty Corporation ("Presidential" or the "Company"), is operated as a self-administrated, self-managed Real Estate Investment Trust ("REIT"). The Company 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-KSB for the year ended December 31, 2004. 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. New Accounting Pronouncements - In December of 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 153, "Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29". The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 had no impact on the Company's consolidated financial statements. In December of 2004, the FASB issued SFAS No. 123, (Revised 2004) - "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R replaces SFAS No. 123, which the Company previously adopted. SFAS No. 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements and be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123R is effective as of the first interim and annual reporting period that begins after December 31,2005. The Company does not believe that the adoption of SFAS No. 123R will have a material effect on the Company's consolidated financial statements. In May of 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and SFAS No. 3". SFAS No. 154 changes the requirements for the accounting and reporting of a change in accounting principle by requiring retrospective application to prior periods' financial statements of the change in accounting principle, unless it is impracticable to do so. SFAS No. 154 also requires that a change in depreciation or amortization for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not believe that the adoption of SFAS No. 154 will have a material effect on the Company's consolidated financial statements. 2. REAL ESTATE Real estate is comprised of the following: September 30, December 31, 2005 2004 ------------- ------------ Land $ 603,969 $ 603,969 Buildings 9,599,139 9,104,222 Furniture and equipment 140,926 132,844 ----------- ----------- Total real estate $10,344,034 $ 9,841,035 =========== =========== 3. MORTGAGE PORTFOLIO The components of the net mortgage portfolio are as follows: Sold Properties Related September 30, 2005 and Other Parties Total - ------------------ ----------- -------- ---------- Notes receivable $10,742,238 $281,495 $11,023,733 Less: Discounts 797,798 63,168 860,966 ----------- -------- ----------- Net mortgage portfolio $ 9,944,440 $218,327 $10,162,767 =========== ======== =========== December 31, 2004 - ----------------- Notes receivable $19,373,812 $295,427 $19,669,239 Less: Discounts 916,178 51,261 967,439 Deferred gains 3,241,540 - 3,241,540 ----------- -------- ----------- Net mortgage portfolio $15,216,094 $244,166 $15,460,260 =========== ======== =========== At September 30, 2005, all of the notes in the Company's mortgage portfolio are current in accordance with their terms, as modified. On March 9, 2005, the Company received prepayment of its $8,550,000 Encore Apartments note receivable which was due to mature on April 30, 2009. As a result of the prepayment of this note, the Company recognized a $3,241,540 gain from the sale of the property, which had previously been deferred. The long-term capital gain for tax purposes, that was being recognized on the installment method, was approximately $5,548,000. At June 30, 2005, the Company expected to retain this capital gain and declare an undistributed capital gain dividend. Accordingly, the Company recorded a provision for Federal income taxes of $1,941,661. For financial reporting purposes, the provision for income taxes of $1,941,661 reduced the $3,241,540 gain on sale, resulting in a net gain on sale of $1,299,879. During the quarter ended September 30, 2005, the Company made the decision not to designate and retain the $5,548,000 long-term capital gain. Therefore, the provision for income taxes of $1,941,661 was reversed resulting in a net gain on sale of $3,241,540 for financial reporting purposes (see Note 9). In connection with the prepayment, the Company received an additional interest payment of $171,000, a prepayment fee of $256,500 and other fees of $25,000. 4. DISCONTINUED OPERATIONS For the periods ended September 30, 2005 and 2004, income (loss) from discontinued operations includes the Farrington Apartments property, which was sold in January, 2005, and the Fairlawn Gardens property, which was sold in April, 2005. In addition, income (loss) from discontinued operations for the periods ended September 30, 2004 included the Continental Gardens property, the Preston Lake Apartments property and three cooperative apartments, which were all sold during the year ended December 31, 2004. The following table summarizes income (loss) for the properties sold or held for sale:
Nine Months Ended Three Months Ended September 30, September 30, -------------------------- -------------------------- 2005 2004 2005 2004 ---- ---- ---- ---- Revenues: Rental $ 285,160 $ 3,030,648 $ - $563,615 ---------- ----------- ------- -------- Rental property expenses: Operating expenses 292,750 1,465,909 8,950 328,706 Interest on mortgage debt 82,159 1,089,360 - 199,606 Real estate taxes 19,956 319,492 - 47,349 Depreciation on real estate - 177,849 - 12,993 Amortization of mortgage costs - 13,369 - 2,083 ---------- ----------- ------- -------- Total 394,865 3,065,979 8,950 590,737 ---------- ----------- ------- -------- Other income: Investment income 459 497 3 258 ---------- ----------- ------- ------- Loss from discontinued operations (109,246) (34,834) (8,947) (26,864) Net gain from sales of discontinued operations 2,255,364 12,171,162 - 20,384 ---------- ------------ ------- -------- Total income (loss) from discontinued operations $2,146,118 $12,136,328 $(8,947) $ (6,480) ========== =========== ======= ========
On January 26, 2005, the Company completed the sale of its Farrington Apartments property in Clearwater, Florida for a sales price of $9,325,966, of which $1,720,000 was paid in cash and the $7,605,966 balance was paid by the assumption by the purchaser of the first mortgage on the property. In connection with the closing, Presidential gave the purchaser a $300,000 credit against the purchase price for hurricane damage sustained by the property prior to closing and retained the insurance proceeds of $260,405. The loss from the sale for financial reporting purposes was $11,580. On April 4, 2005, the Company consummated the sale of its Fairlawn Gardens property in Martinsburg, West Virginia for a sales price of $3,500,000, pursuant to a contract of sale, as amended, executed in February, 2005. The net cash proceeds of sale, after repayment of the $1,411,670 outstanding principal balance of the first mortgage, prepayment fees and other closing expenses, were $1,906,896. The gain from the sale for financial reporting purposes was $2,266,944. Prior to closing, on March 29, 2005, the Company utilized $707,588 of insurance proceeds that the Company had received as a result of fire damage to sixteen apartments at the property to pay down a portion of the outstanding balance of the first mortgage. The gain for Federal income tax purposes resulting from this transaction is $2,269,014 and is being treated by the Company as a gain resulting from an involuntary conversion of property under Section 1033 of the Internal Revenue Code. Accordingly, the gain will be deferred pursuant to the provisions of Section 1033. Subsequent to September 30, 2005, the Company agreed to a settlement of its claim for additional insurance recovery for the fire damage to sixteen apartments at the Fairlawn Gardens property. The net proceeds of the settlement will be approximately $167,000. When the settlement is finalized, the net proceeds received from the settlement will increase the gain on the sale of the Fairlawn Gardens property. On June 29, 2004, the Company consummated the sale of its Continental Gardens property in Miami, Florida for a sales price of $21,500,000. 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 was $11,008,520. In February, 2004, as a result of continuing operating losses at Preston Lake Apartments in Tucker, Georgia, the Company decided not to make the monthly payment due February 1, 2004 on the first mortgage note secured by the property. 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 first quarter of 2004, the Company sold three cooperative apartment units which were located in the New York metropolitan area. The gain from the sales of those apartments for financial reporting purposes was $913,945 and the net cash proceeds of the sales were $1,015,828. The combined assets and liabilities of the Fairlawn Gardens and Farrington Apartments properties at December 31, 2004, are segregated in the consolidated balance sheet. The components are as follows: December 31, 2004 ------------ Assets related to discontinued operations: Land $ 1,971,408 Buildings 10,243,952 Furniture and equipment 39,825 Less: accumulated depreciation (1,475,713) ----------- Net real estate 10,779,472 Other assets 256,535 ----------- Total $11,036,007 =========== Liabilities related to discontinued operations: Mortgage debt $ 9,741,622 Other liabilities 111,300 ----------- Total $ 9,852,922 =========== 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 purchase price for the Martinsburg Mall was $27,000,000 and was paid by utilizing $12,365,000 of the net cash proceeds generated by the 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 Mall. The loan matures on September 27, 2014, and the interest rate on the loan is 11% per annum. Lightstone will manage the Martinsburg Mall and received a 71% ownership interest in the entity owning the Martinsburg Mall, leaving the Company with a 29% ownership interest. On September 28, 2004, Presidential made an $8,600,000 mezzanine loan to Lightstone Member LLC ("Lightstone I") in connection with the acquisition by Lightstone I 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 733,000 square feet of gross leasable area; the Bradley Square Mall, an enclosed mall located in Cleveland, Tennessee with 385,000 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 "Four Malls"). The loan is secured by the ownership interests in the entities owning the Four Malls and Presidential obtained a 29% ownership interest in the entities owning the Four Malls. 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 Mall is part of a $105,000,000 nonrecourse first mortgage loan secured by the Martinsburg Mall and the Four Malls. On December 23, 2004, Presidential made a $7,500,000 mezzanine loan to Lightstone Member II LLC ("Lightstone II") in connection with the acquisition by Lightstone II of two shopping malls, namely the Brazos Outlets Center Mall, an enclosed single story regional mall located in Lake Jackson, Texas with 587,966 square feet of gross leasable area and the Shawnee Mall, an enclosed single story regional mall located in Shawnee, Oklahoma with 445,657 square feet of gross leasable area (the "Shawnee/Brazos Malls"). The loan is secured by the ownership interests in the entities owning the Shawnee/Brazos Malls and Presidential obtained a 29% ownership interest in the entities owning the Shawnee/Brazos Malls. The loan matures on December 23, 2014 and the interest rate on the loan is 11% per annum. The Shawnee/Brazos Malls are subject to a $39,500,000 nonrecourse first mortgage loan. On July 7, 2005, Presidential made a $9,500,000 mezzanine loan to Lightstone Member III LLC ("Lightstone III") in connection with the acquisition by Lightstone III of two shopping malls, namely the Macon Mall, an enclosed two-story regional mall located in Macon, Georgia with 764,208 square feet of gross leasable area (and an additional 682,160 square feet of department store space in the mall area owned by four department stores), and the Burlington Mall, an enclosed single story regional mall located in Burlington, North Carolina with 416,442 square feet of gross leasable area (the "Macon/Burlington Malls"). The loan is secured by the ownership interests in the entities owning the Macon/Burlington Malls and Presidential obtained a 29% ownership interest in the entities owning the Macon/Burlington Malls. The loan matures on July 6, 2015, and the interest rate on the loan is 11% per annum. The Macon/Burlington Malls are subject to a nonrecourse first mortgage loan in the original principal amount of $158,850,000. The Company accounts for these investments using the equity method. Investments in and advances to joint ventures are as follows: September 30, December 31, 2005 2004 ------------- ------------ Martinsburg Mall $ 936,728 $ 1,352,433 Four Malls 6,935,191 8,387,301 Shawnee/Brazos Malls 6,944,115 7,474,629 Macon/Burlington Malls 9,238,358 - ----------- ----------- $24,054,392 $17,214,363 =========== =========== Equity in the (loss) income of joint ventures for the periods ended September 30, 2005 is as follows: Nine Months Three Months Ended Ended September 30, 2005 September 30, 2005 ------------------ ------------------ Martinsburg Mall (1) $(325,956) $(151,336) Four Malls (2) (467,665) (336,522) Shawnee/Brazos Malls (3) 173,736 (61,220) Macon/Burlington Malls (4) (61,779) (61,779) --------- --------- $(681,664) $(610,857) ========= ========= (1) The Company's share of the loss of joint ventures for the Martinsburg Mall is determined after the deduction for the interest expense at the rate of 11% per annum on the outstanding $2,600,000 loan from Lightstone. (2) Interest income earned by the Company at the rate of 11% per annum on the outstanding $8,600,000 loan from the Company to Lightstone I is included in the calculation of the Company's share of the loss of joint ventures for the Four Malls. (3) The Company's share of the income of joint ventures for the Shawnee/Brazos Malls includes interest income at the rate of 11% per annum on the outstanding $7,500,000 loan from Presidential to Lightstone II. (4) Interest income earned by the Company at the rate of 11% per annum on the outstanding $9,500,000 loan from the Company to Lightstone III is included in the calculation of the Company's share of the loss of joint ventures for the Macon/Burlington Malls. The Company prepares the summary of the condensed combined financial information for the Martinsburg Mall, the Four Malls, the Shawnee/Brazos Malls and the Macon/Burlington Malls based on information provided by The Lightstone Group. The condensed combined information is as follows: September 30, December 31, 2005 2004 ------------- ------------ Condensed Combined Balance Sheets Net real estate $301,992,431 $146,103,060 In place lease values and acquired lease rights 24,306,242 17,578,322 Deposits in escrow 16,813,859 8,728,026 Cash and cash equivalents 1,779,992 1,635,000 Deferred financing costs 3,880,965 3,608,435 Other assets 3,874,069 1,742,466 ------------ ------------ Total Assets $352,647,558 $179,395,309 ============ ============ Nonrecourse mortgage debt $303,350,000 $144,500,000 Mezzanine notes payable 28,200,000 18,700,000 Other liabilities 19,352,684 12,514,864 ------------ ------------ Total Liabilities 350,902,684 175,714,864 Members' Equity 1,744,874 3,680,445 ------------ ------------ Total Liabilities and Members' Equity $352,647,558 $179,395,309 ============ ============ Nine Months Ended Three Months Ended September 30, 2005 September 30, 2005 ------------------ ------------------ Condensed Combined Statements of Operations Revenues $31,332,595 $ 14,503,473 Interest on mortgage debt and other debt (11,347,024) (5,799,227) Depreciation and amortization (9,378,342) (4,260,782) Other expenses (16,640,151) (8,196,027) ----------- ------------ Net Loss $(6,032,922) $ (3,752,563) =========== ============ As a result of the Company's use of the equity method of accounting with respect to its investments in and advances to the joint ventures, the Company's consolidated statement of operations for the nine months ended September 30, 2005 reflects 29% of the income (loss) of the joint ventures. The equity in the loss of joint ventures of $681,664 for the nine month period ended September 30, 2005 is after deductions in the aggregate amount of $2,719,719 for the Company's 29% of noncash charges (depreciation of $1,500,228, amortization of deferred financing costs of $343,997 and amortization of in-place lease values of $875,494). Notwithstanding the income (loss) from the joint ventures, the Company is entitled to receive its interest at the rate of 11% per annum on its $25,600,000 of loans to the joint ventures. For the nine months ended September 30, 2005, the Company received distributions from the joint ventures in the amount of $1,941,000, which included payments of interest in the amount of $1,607,650 and return on investment in the amount of $333,350. The Lightstone Group is controlled by David Lichtenstein. At September 30, 2005, in addition to Presidential's investments of $24,054,392 in these joint ventures with entities controlled by Mr. Lichtenstein, Presidential has three loans that are due from entities that are controlled by Mr. Lichtenstein in the aggregate outstanding principal amount of $9,875,000 with a net carrying value of $9,083,443. 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 on some or all of these loans could have a material adverse effect on Presidential's business and operating results. The $33,137,835 net carrying value of investments in and advances to joint ventures with entities controlled by Mr. Lichtenstein and loans outstanding to entities controlled by Mr. Lichtenstein constitute 71% of the Company's total assets at September 30, 2005. 6. OTHER INVESTMENTS On May 24, 2005, the Company invested $1,000,000 with Broadway Real Estate Partners, LLC ("Broadway Partners"), which money will be held in escrow pending investment into Pickwick Preferred Equity Lender LLC ("Pickwick"). While the money is being held in escrow, the Company will receive interest payments at the following rates: 8% per annum from May 24, 2005 through May 31, 2005 and 11.43% per annum thereafter until the funds are invested into Pickwick. The $1,000,000 is scheduled to be invested in Pickwick in late November, 2005. When the investment in Pickwick is made, the Company will own a 12.05% interest in a limited liability company whose sole asset is an $8,300,000 note receivable secured by certain ownership interests in an office building in Greenwich, Connecticut. Presidential is entitled to receive $9,525 of interest per month on its investment and when the $8,300,000 loan is repaid, Presidential will receive $974,335 in full liquidation of its investment. Presidential also has agreed to invest $1,000,000 in Broadway Partners Parallel Fund A, a blind pool of investment capital sponsored by Broadway Partners, through redemption of its membership interest in Pickwick. Presidential's commitment will be called on from time to time by Broadway Partners as it requires funds to make real estate investments. However, Presidential has the right, provided it gives written notice within seven days of such request, to fund its obligations from other capital resources. At September 30, 2005, Presidential had advanced $415,000 of its commitment from its own capital resources and the balance of Presidential's commitment was $585,000. 7. 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 32% general and limited partner interest in Home Mortgage Partnership at December 31, 2004 and purchased an additional 1% interest on March 31, 2005 for a purchase price of $65,000. 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, 2005 2004 ------------- ------------ Condensed Balance Sheets Net real estate $ 3,920,111 $ 4,063,811 Prepaid expenses and deposits in escrow 782,894 826,083 Cash and cash equivalents 1,038,211 993,358 Receivables and other assets 476,824 479,145 ------------ ------------ Total Assets $ 6,218,040 $ 6,362,397 ============ ============ Nonrecourse mortgage debt $ 16,137,197 $ 16,313,668 Other liabilities 634,928 665,894 ------------ ------------ Total Liabilities 16,772,125 16,979,562 Partners' Deficiency (10,554,085) (10,617,165) ------------ ------------ Total Liabilities and Partners' Deficiency $ 6,218,040 $ 6,362,397 ============ ============ On the Company's Consolidated Balance Sheets: Distributions from partnership in excess of investment and earnings $ 2,175,611 $ 2,259,943 ============ ============ Nine Months Ended Three Months Ended September 30, September 30, 2005 2004 2005 2004 ----------- ----------- ---------- --------- Condensed Statements of Operations Revenues $ 2,890,159 $ 3,439,540 $ 818,659 $1,186,567 Interest on mortgage debt (907,811) (923,907) (304,814) (309,194) Depreciation and amortization (267,554) (264,079) (86,980) (87,077) Other expenses (1,587,668) (1,432,416) (540,762) (477,037) Investment income 19,354 5,206 7,593 2,337 ----------- ----------- ---------- ---------- Net Income (Loss) $ 146,480 $ 824,344 $ (106,304) $ 315,596 =========== =========== ========== ========== On the Company's Consolidated Statement of Operations: Equity in income (loss) of partnership $ 46,253 $ 258,702 $ (35,080) $ 100,990 =========== =========== ========== ==========
8. MINORITY INTEREST IN CONSOLIDATED PARTNERSHIP Presidential is the general partner of UTB Associates, a partnership in which Presidential has a 75% interest. 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. 9. 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, 2004, Presidential applied all of its available 2004 stockholders' distributions and further elected to apply (under Section 858 of the Internal Revenue Code) approximately $131,000 of its year 2005 stockholders' distributions to reduce its taxable income for 2004 to zero. The Company had taxable income (before distributions to stockholders) for the nine months ended September 30, 2005 of approximately $4,461,000 ($1.16 per share), which is comprised of capital gains of approximately $6,102,000 ($1.59 per share) and an ordinary loss of approximately $1,641,000 ($.43 per share). The Company intends to apply all of its available 2005 distributions and its eligible 2006 distributions to its 2005 taxable income to reduce its 2005 taxable income to zero. Therefore, no provision for Federal income taxes has been made at September 30, 2005. Presidential has, for tax purposes, reported the gain from the sale of certain of its properties using the installment method. 10. ACCUMULATED OTHER COMPREHENSIVE LOSS The components of accumulated other comprehensive loss are as follows: September 30, December 31, 2005 2004 -------------- ------------ Minimum pension liability $(1,442,537) $(1,442,537) Net unrealized gain on securities available for sale 9,440 8,676 ----------- ----------- Total accumulated other comprehensive loss $(1,433,097) $(1,433,861) =========== =========== 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:
Nine Months Ended Three Months Ended September 30, September 30, 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Net income $ 3,760,894 $12,447,433 $ 758,258 $ 95,420 Other comprehensive income- Net unrealized gain (loss) on securities available for sale 764 943 (333) 637 ----------- ----------- ----------- ----------- Comprehensive income $ 3,761,658 $12,448,376 $ 757,925 $ 96,057 =========== ============ =========== ===========
11. COMMITMENTS AND CONTINGENCIES Presidential has a commitment to invest $585,000 in Broadway Partners Parallel Fund A (see Note 6). Presidential is not a party to any material legal proceedings. The Company may from time to time 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. 12. 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, 2005 2004 2005 2004 -------- -------- -------- -------- Service cost $ 22,568 $ 31,108 $ 7,522 $ 10,369 Interest cost 99,915 113,475 33,305 37,825 Amortization of prior service cost (18,520) (18,520) (6,173) (6,173) Recognized actuarial loss 220,343 185,113 73,448 61,704 -------- -------- -------- -------- Net periodic benefit cost $324,306 $311,176 $108,102 $103,725 ======== ======== ======== ======== 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, 2005 2004 2005 2004 -------- ------- ------- ------- Service cost $ 15,551 $ 9,817 $ 5,184 $ 3,272 Interest cost 36,452 28,690 12,151 9,563 Amortization of prior service cost (7,209) (7,209) (2,403) (2,403) Recognized actuarial loss 68,401 14,326 22,799 4,775 -------- ------- ------- ------- Net periodic benefit cost $113,195 $45,624 $37,731 $15,207 ======== ======= ======= ======= During the nine months ended September 30, 2005, the Company made contributions of $355,402 and $48,453 for contractual pension benefits and postretirement benefits, respectively. The Company anticipates additional contributions of $118,435 and $15,500 for contractual pension benefits and postretirement benefits, respectively, for the remainder of 2005. 13. 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, 2005 2004 2005 2004 -------- -------- ------- -------- Service cost $367,523 $291,032 $122,508 $ 97,012 Interest cost 279,066 257,129 93,022 85,709 Expected return on plan assets (367,695) (231,392) (122,565) (77,131) Amortization of prior service cost 9,462 9,462 3,154 3,154 Amortization of accumulated loss 60,519 47,223 20,173 15,741 -------- -------- -------- -------- Net periodic benefit cost $348,875 $373,454 $116,292 $124,485 ======== ======== ======== ======== During the nine months ended September 30, 2005, the Company did not make a contribution to the defined benefit plan. The Company's funding policy for the plan is based on contributions at the minimum and maximum amounts required by law. The Company is not required to make any contributions in 2005, but may make the maximum tax deductible contribution in 2005 of approximately $166,000. 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, 2005 AND 2004 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: o general economic and business conditions, which will, among other things, affect the demand for apartments, mall space or other commercial space, availability and credit worthiness of prospective tenants, lease rents and the terms and availability of financing; o adverse changes in the real estate markets including, among other things, competition with other companies; o risks of real estate development,acquisition, ownership and operation; o governmental actions and initiatives; and o environment and safety requirements. 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-KSB for the year ended December 31, 2004. There have been no significant changes in the Company's critical accounting policies since December 31, 2004. Results of Operations Financial Information for the nine months ended September 30, 2005 and 2004: - --------------------------------------------------------------------------- Continuing Operations: Revenues decreased by $754,008 primarily as a result of decreases in interest income on mortgages-sold properties and other and interest income on mortgages-related parties. These decreases were partially offset by increases in rental revenues and other revenues. Rental revenues increased by $63,088 as a result of increases at all of the rental properties, with the exception of Cambridge Green, which experienced a decrease in rental revenues of $15,924. Interest on mortgages-sold properties and other decreased by $1,039,616. As a result of $17,550,000 in repayments on notes receivable in the fourth quarter of 2004 and the first quarter of 2005, interest income on those notes decreased by $1,043,580 in the 2005 period. Interest on mortgages-related parties decreased by $185,959 primarily as a result of a decrease of $172,000 in payments of interest income received on the Consolidated Loans (see below). Other revenues increased by $408,479 primarily as a result of a $256,500 prepayment fee received on the repayment of the Encore Apartments note receivable and an additional $25,000 fee in connection with the Encore repayment. In addition, other revenues increased by $118,240 for fees earned by the Company's management company for third party owned properties. Costs and expenses increased by $405,684 primarily due to increases in general and administrative expenses and rental property operating expenses. General and administrative expenses increased by $147,984 primarily as a result of a $173,321 increase in salary expense, of which $134,491 pertains to new employees hired in connection with the property management company formed in October, 2004 and $38,830 pertains to annual salary increases. In addition, professional fees increased by $139,429, postretirement benefit costs increased by $67,571 and insurance expense increased by $34,578. These increases were partially offset by a decrease of $255,361 in bad debt expense. In 2004, the Company wrote off to bad debt expense a $270,908 receivable due from an unaffiliated property management company. Rental property operating expenses increased by $239,821 primarily as a result of increases of $283,359 in repairs and maintenance expenses, $20,962 in bad debt expense and $10,352 in snow removal expenses. These increases were partially offset by an $80,035 decrease in property management fees. Other income decreased by $780,423 primarily as a result of the $681,664 of equity in the loss of joint ventures in the 2005 period. The Company purchased these investments in joint ventures in the third and fourth quarters of 2004 and in the third quarter of 2005. In addition, equity in income of partnership decreased by $212,449 due to lower earnings of the Home Mortgage Partnership. These decreases were partially offset by a $113,690 increase in investment income attributable to higher interest rates and higher cash balances. Income from continuing operations before net gain from sales of properties decreased by $1,937,869 from income of $311,105 in 2004 to a loss of $1,626,764 in 2005. This decrease was primarily a result of decreases in revenues of $754,008, increases in general and administrative expenses of $147,984, increases in rental property operating expenses of $239,821 and the equity in the loss of joint ventures of $681,664 in the 2005 period. Net gain from sales of properties consists of recognition of deferred gains from sales in prior years. The recognition of deferred gains from sales in prior years depends on the receipt of installments or prepayments of purchase money notes. In 2005, the net gain from sales of properties was $3,241,540 compared to zero in 2004: Gain from sales recognized for the nine months ended September 30, 2005 2004 -------- -------- Deferred gains recognized upon receipt of principal payments on notes: Encore Apartments $3,241,540 $ - ---------- -------- Net gain $3,241,540 $ - ========== ======== Discontinued Operations: In 2005, the Company had two properties that were classified as discontinued operations: the Farrington Apartments property in Clearwater, Florida, which was sold in January of 2005, and the Fairlawn Gardens property in Martinsburg, West Virginia, which was sold in April of 2005. (See Liquidity and Capital Resources - - Discontinued Operations below). 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: 2005 2004 ----------- ---------- Income (loss) from discontinued operations: Farrington Apartments, Clearwater, FL $(135,096) $ (156,587) Fairlawn Gardens, Martinsburg, WV 25,850 (1,232) Continental Gardens, Miami, FL - 248,362 Preston Lake Apartments, Tucker, GA - (121,046) Three cooperative apartment units - (4,331) --------- ----------- Loss from discontinued operations (109,246) (34,834) --------- ----------- Net gain (loss) from sales of discontinued operations: Continental Gardens - 11,008,520 Preston Lake Apartments - 248,697 Fairlawn Gardens 2,266,944 - Farrington Apartments (11,580) - Three cooperative apartment units - 913,945 ---------- ----------- Net gain from sales of discontinued operations 2,255,364 12,171,162 ---------- ---------- Total income from discontinued operations $2,146,118 $12,136,328 ========== =========== Financial Information for the three months ended September 30, 2005 and 2004: - ---------------------------------------------------------------------------- Revenues decreased by $414,559 primarily as a result of decreases in interest income on mortgages-sold properties and other and interest income on mortgages-related parties. These decreases were partially offset by increases in rental revenues and other revenues. Rental revenues increased by $63,552 primarily as a result of increases at most of the rental properties especially an increase of $46,271 at the Mapletree Industrial Center property. Interest on mortgages-sold properties and other decreased by $385,866. As a result of $17,550,000 in repayments on notes receivable in the fourth quarter of 2004 and the first quarter of 2005, interest income on those notes decreased by $396,191 in the 2005 period. Interest on mortgages-related parties decreased by $123,830 primarily as a result of a decrease of $120,250 in payments of interest income received on the Consolidated Loans. Other revenues increased by $31,585 primarily as a result of $32,470 of fees earned by the Company's management company for third party owned properties. Costs and expenses increased by $147,168 primarily due to increases in rental property operating expenses. Rental property operating expenses increased by $148,370 primarily as a result of increases of $144,472 in repairs and maintenance expenses and $31,749 in bad debt expense. These increases were partially offset by a $25,282 decrease in property management fees. Other income decreased by $714,757 primarily as a result of the $610,857 of equity in the loss of joint ventures in the 2005 period. In addition, equity in income of partnership decreased by $136,070 due to lower earnings of the Home Mortgage Partnership. These decreases were partially offset by a $32,170 increase in investment income attributable to higher interest rates and higher cash balances. Income from continuing operations before net gain from sales of properties decreased by $1,276,356 from income of $101,900 in 2004 to a loss of $1,174,456 in 2005. This decrease was primarily a result of decreases in revenues of $414,559, increases in rental property operating expenses of $148,370, the decrease in the equity in income of partnership of $136,070 and the equity in the loss of joint ventures of $610,857 in the 2005 period. Net gain from sales of properties consists of recognition of deferred gains from sales in prior years. The recognition of deferred gains from sales in prior years depends on the receipt of installments or prepayments of purchase money notes. In 2005, the net gain from sales of properties was $1,941,661 compared to zero in 2004. The $1,941,661 deferred gain recognized in the 2005 period resulted from the reversal of a provision for Federal income taxes on the long-term capital gain of $5,548,000 relating to the $8,500,000 prepayment received on the Encore Apartments note receivable. During the 2005 period, the Company made the decision not to designate and retain the $5,548,000 long-term capital gain. Therefore, in the third quarter of 2005, the accrual for income taxes of $1,941,661 was reversed. Discontinued Operations: The following table compares the total income or loss from discontinued operations for the three month periods ended September 30, for properties included in discontinued operations: 2005 2004 ----------- ----------- Income (loss) from discontinued operations: Farrington Apartments, Clearwater, FL $(10,653) $(26,263) Fairlawn Gardens, Martinsburg, WV 1,706 1,643 Continental Gardens, Miami, FL - (2,816) Preston Lake Apartments, Tucker, GA - 572 -------- -------- Loss from discontinued operations (8,947) (26,864) -------- -------- 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 $ (8,947) $ (6,480) ======== ======== 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 non-GAAP measure, a supplemental measure of operating performance and uses FFO as a measure for comparing the Company's operating performance between periods and among other REITs. FFO is summarized in the following table: Nine Months Ended Three Months Ended September 30, September 30, 2005 2004 2005 2004 ------------ ------------ ---------- ------------ Net Income $ 3,760,894 $ 12,447,433 $ 758,258 $ 95,420 Net gain from sales of properties (3,241,540) - (1,941,661) - Net gain from sales of discontinued operations (2,255,364) (12,171,162) - (20,384) Depreciation and amortization on: Real estate 207,329 192,282 72,429 65,950 Real estate of discontinued operations - 177,849 - 12,993 Real estate of partnership 74,773 72,354 25,357 24,867 Real estate of joint ventures 1,500,228 - 739,496 - ------------ ----------- ---------- ---------- Funds From (Used In) Operations $ 46,320 $ 718,756 $ (346,121) $ 178,846 ============ ============ =========== ========== Distributions paid to shareholders $ 1,837,292 $ 1,821,741 $ 614,490 $ 608,771 ============ ============ =========== ========== FFO payout ratio (1) 3,966.5% 253.5% - 340.4% ============ ============ =========== ========== (1) In the first three quarters of 2005 and 2004, the Company decided to maintain its cash dividend at the quarterly rate of $.16 per share despite the fact the dividends paid exceeded funds from operations. As a result of balloon payments received on the Company's mortgage portfolio and proceeds from sales of properties, the Company had funds available to it for distribution to shareholders in addition to funds from operations. See Liquidity and Capital Resources below. Balance Sheet Net mortgage portfolio decreased by $5,297,493 as a result of the repayment of the Encore Apartments note receivable. In March, 2005, the Company received repayment of its $8,550,000 note secured by a mortgage on Encore Apartments in New York, New York. As a result, mortgage receivables decreased by $8,550,000 and deferred gains on sale decreased by $3,241,540 (a net effect of $5,308,460 on the mortgage portfolio) and a deferred gain of $3,241,540 was recognized. In connection with the prepayment of this note, the Company also received a prepayment fee of $256,500, other fees of $25,000 and an additional interest payment of $171,000. Assets related to discontinued operations decreased from $11,036,007 at December 31, 2004 to zero at September 30, 2005 as a result of the sale of the Farrington Apartments property in January of 2005 and the sale of the Fairlawn Gardens property in April of 2005. Investments in and advances to joint ventures increased by $6,840,029 primarily as a result of the $9,500,000 investment made in the Macon and Burlington Malls in July of 2005. This increase was partially offset by distributions of $1,941,000 received by the Company (of which $1,607,650 was interest at the rate of 11% on loans advanced to the joint ventures in the aggregate principal amount of $25,600,000 and $333,350 was a return on investment) and $681,664 of equity in the loss from the joint ventures. In 2005, the Company invested $1,415,000 in other investments (see Liquidity and Capital Resources below). Prepaid expenses and deposits in escrow decreased by $544,739 primarily as a result of decreases of $615,004 in deposits in escrow, partially offset by increases of $70,265 in prepaid expenses. Other receivables decreased by $370,241 primarily as a result of a decrease in accrued interest receivable of $234,788, decreases in net tenant accounts receivable of $56,982 and decreases of $78,471 in miscellaneous receivables. Cash and cash equivalents increased by $926,843 primarily as a result of the $9,002,500 cash received from the prepayment, additional interest and fees on the Encore Apartments note receivable repayment. In addition, the Company received net cash proceeds of $1,592,580 from the sale of the Farrington Apartments property and $1,906,896 of net cash proceeds (after first mortgage repayment of $1,411,670) from the sale of the Fairlawn Gardens property. This increase was partially offset by disbursements of $9,500,000 for investment in joint ventures, $1,415,000 for other investments, $480,021 for additions and improvements and a $65,000 purchase of an additional 1% interest in the Home Mortgage Plaza partnership. Liabilities related to discontinued operations decreased from $9,852,922 at December 31, 2004 to zero at September 30, 2005 as a result of the completion of the sales of the Farrington Apartments property and the Fairlawn Gardens property in the first and second quarters of 2005. Accrued liabilities decreased by $304,687 primarily as a result of decreases in accrued rental property expenses of $169,840 and decreases of $134,847 in accrued general and administrative expenses. Accounts payable increased by $77,784. This increase in accounts payable is a result of payment scheduling and not from insufficient cash flows. Other liabilities increased by $36,970 as a result of increases in deferred income and tenant security deposits. In July, 2005, three directors of the Company each received 1,000 shares of the Company's Class B common stock as partial payment for directors' fees for the 2005 year. The shares were valued at $8.35 per share, which was the market value of the Class B common stock at the grant date, and, accordingly, the Company recorded $25,050 in prepaid directors' fees (to be amortized during 2005) 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 $24,750 to additional paid-in capital. In addition, in August, 2005, an executive of the Company was awarded 11,000 shares of the Company's Class B common stock, of which 10,000 were granted (subject to shareholder approval of a proposed restricted stock plan which was obtained in June of 2005) and accrued for in 2004 and 1,000 were granted in 2005. The 10,000 shares were valued at $7.51 per share and the 1,000 shares were valued at $9.04 per share, which were the respective market values of the Class B common stock at the grant date. Accordingly, the Company recorded salary expense of $75,100 in 2004 and $9,040 in 2005. In 2005, the Company recorded additions to the Company's Class B common stock of $1,100 at par value of $.10 per share and $83,040 to additional paid-in capital. 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 $250,000 unsecured line of credit from a lending institution. At September 30, 2005, there was no outstanding balance due under the line of credit. During 2004, the Company paid cash distributions to shareholders which exceeded cash flows from operating activities. Periodically the Company receives balloon payments on its mortgage portfolio and net proceeds from sales of discontinued operations and other properties. 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 2004, 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 capital gains from sales of real properties previously owned by the Company are recognized for income tax purposes on the installment method as principal payments are received. To the extent that any such gain is recognized by Presidential, or to the extent that Presidential incurs a capital gain from the sale of a property, it may, as a REIT, either (i) elect to retain such gain, in which event it will be required to pay Federal and State income tax on such gain, (ii) distribute all or a portion of such gain to shareholders, in which event Presidential will not be required to pay taxes on the gain to the extent that it is distributed to shareholders or (iii) elect to retain such gain and designate it as a retained capital gain dividend, in which event the Company would pay the Federal tax on such gain, the shareholders would be taxed on their share of the undistributed long-term capital gain and the shareholders would receive a tax credit for their share of the Federal tax that the Company paid and increase the tax basis of their stock for the difference between the long-term capital gain and the tax credit. At June 30, 2005, the Company expected to designate and retain the $5,548,000 long-term capital gain recognized upon the prepayment of the Encore Apartments note receivable and had, accordingly, accrued $1,941,661 of income tax. During the quarter ended September 30, 2005, the Company made the decision not to designate and retain the $5,548,000 long-term capital gain. Therefore, in the third quarter of 2005, the accrual for income taxes of $1,941,661 was reversed. 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 2005, no assurances can be given that the present dividend rate will be maintained in the future. At September 30, 2005, Presidential had $3,012,610 in available cash and cash equivalents, an increase of $926,843 from the $2,085,767 at December 31, 2004. This increase in cash and cash equivalents was due to cash provided by operating activities of $2,136,043 and cash provided by investing activities of $2,810,871, offset by cash used in financing activities of $4,020,071. Operating Activities Cash from operating activities includes interest on the Company's mortgage portfolio, net cash received from rental property operations and distributions received from partnership and joint ventures. In 2005, cash received from interest on the Company's mortgage portfolio was $1,738,097 and distributions received from the partnership and joint ventures were $26,922 and $1,941,000, respectively. Cash received from rental property operations was $418,486. 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 2005, the Company received principal payments of $8,650,280 on its mortgage portfolio of which $8,615,302 represented prepayments and balloon payments. In March, 2005, the Company received prepayment of its $8,550,000 Encore Apartments note receivable which was due to mature on April 30, 2009. As a result, the Company recognized a gain of $3,241,540 which had been previously deferred. In connection with the prepayment, the Company received a prepayment fee of $256,500, other fees of $25,000 and additional interest of $171,000. Prepayments and balloon payments are sporadic and cannot be relied upon as a regular source of liquidity. In July, 2005, the Company advanced a $9,500,000 loan to Lightstone Member III LLC ("Lightstone III") in connection with the acquisition by Lightstone III of two shopping malls (see Investments in and Advances to Joint Ventures below). In January, 2005, the Company received $707,588 of net proceeds from a fire insurance settlement pertaining to the Fairlawn Gardens property. During the first nine months of 2005, the Company invested $480,021 in additions and improvements to its properties. In January, 2005, the Company completed the sale of its Farrington Apartments property in Clearwater, Florida, and the net proceeds of the sale were $1,592,580 (see Discontinued Operations below). In April, 2005, the Company completed the sale of its Fairlawn Gardens property in Martinsburg, West Virginia and the net proceeds of the sale were $1,906,896 (see Discontinued Operations below). On May 24, 2005, the Company invested $1,000,000 with Broadway Real Estate Partners, LLC ("Broadway Partners"), which money will be held in escrow pending investment into Pickwick Preferred Equity Lender LLC ("Pickwick"). While the money is being held in escrow, the Company will receive interest payments at the following rates: 8% per annum from May 24, 2005 through May 31, 2005 and 11.43% per annum thereafter until the funds are invested into Pickwick. The $1,000,000 is scheduled to be invested in Pickwick in late November, 2005. When the investment in Pickwick is made, the Company will own a 12.05% interest in a limited liability company whose sole asset is an $8,300,000 note receivable secured by certain ownership interests in an office building in Greenwich, Connecticut. Presidential is entitled to receive $9,525 of interest per month on its investment and when the $8,300,000 loan is repaid, Presidential will receive $974,335 in full liquidation of its investment. Presidential also has agreed to invest $1,000,000 in Broadway Partners Parallel Fund A, a blind pool of investment capital sponsored by Broadway Partners, through redemption of its membership interest in Pickwick. Presidential's commitment will be called on from time to time by Broadway Partners as it requires funds to make real estate investments. However, Presidential has the right, provided it gives written notice within seven days of such request, to fund its obligations from other capital resources. At September 30, 2005, Presidential had advanced $415,000 of its commitment from its own capital resources and the balance of Presidential's commitment was $585,000. In March, 2005, the Company purchased an additional 1% interest in the Home Mortgage Partnership for a purchase price of $65,000. Financing Activities The Company's indebtedness at September 30, 2005, consisted of $6,609,022 of mortgage debt. The mortgage debt, which is collateralized by individual properties, is nonrecourse to the Company with the exception of the $1,160,665 Building Industries Center mortgage and the $151,341 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 2005, the Company made $145,303 of principal payments on mortgage debt. The mortgages on the Company's properties are at fixed rates of interest and will fully amortize by periodic principal payments, with the exception of the Building Industries Center mortgage which has a balloon payment of $1,072,906 due at maturity in January, 2009. In March, 2005, the Company made a prepayment of $707,588 on the Fairlawn Gardens first mortgage debt from the proceeds of the fire insurance settlement and repaid the $1,411,670 outstanding balance in May, 2005 from the proceeds of the sale. During the first nine months of 2005, Presidential declared and paid cash distributions of $1,837,292 to its shareholders and received proceeds from its dividend reinvestment and share purchase plan of $90,553. Discontinued Operations On January 26, 2005, the Company completed the sale of its Farrington Apartments property in Clearwater, Florida for a sales price of $9,325,966, of which $1,720,000 was paid in cash and the $7,605,966 balance was paid by the assumption by the purchaser of the first mortgage on the property. In connection with the closing, Presidential gave the purchaser a $300,000 credit against the purchase price for hurricane damage sustained by the property prior to closing and retained the insurance proceeds of $260,405. The loss from the sale for financial reporting purposes was $11,580. On April 4, 2005, the Company consummated the sale of its Fairlawn Gardens property in Martinsburg, West Virginia for a sales price of $3,500,000. The net cash proceeds of sale, after repayment of the $1,411,670 outstanding principal balance of the first mortgage, prepayment fees and other closing expenses, were $1,906,896. In 2005, the Company received $707,588 of insurance proceeds resulting from fire damage to sixteen apartments at the property in 2004 and applied those proceeds to pay down a portion of the outstanding balance of the first mortgage prior to the sale. The gain on sale for financial reporting purposes was $2,266,944. The gain for Federal income tax purposes resulting from this transaction is $2,269,014 and is being treated by the Company as a gain resulting from an involuntary conversion of property under Section 1033 of the Internal Revenue Code. Accordingly, the gain will be deferred pursuant to the provisions of Section 1033. Subsequent to September 30, 2005, the Company agreed to a settlement of its claim for additional insurance recovery for the fire damage to sixteen apartments at the Fairlawn Gardens property. The net proceeds of the settlement will be approximately $167,000. When the settlement is finalized, the net proceeds received from the settlement will increase the gain on the sale of the Fairlawn Gardens property. Investments in and Advances to Joint Ventures During 2004 and 2005, the Company made investments in and loans to joint ventures and received ownership interests in these joint ventures. The Company purchased the Martinsburg Mall in Martinsburg, West Virginia for $27,000,000 in September, 2004 and subsequent to closing, received a mezzanine loan from The Lightstone Group ("Lightstone") in the amount of $2,600,000, which is secured by a pledge of ownership interests in the entity that owns the Martinsburg Mall. The loan matures on September 27, 2014, and the interest rate on the loan is 11% per annum. Lightstone Member LLC will manage the property and received a 71% ownership interest in the entity owning the property, leaving the Company with a 29% ownership interest. In September, 2004, the Company made an $8,600,000 mezzanine loan to Lightstone Member LLC in connection with the acquisition by Lightstone Member LLC of four shopping malls, namely the Shenango Valley Mall in Hermitage, Pennsylvania; the West Manchester Mall in York, Pennsylvania; the Bradley Square Mall in Cleveland, Tennessee and the Mount Berry Square Mall in Rome, Georgia (the "Four Malls"). The loan is secured by ownership interests in the entities that own the Four Malls and the Company received a 29% ownership interest in these entities. The loan matures on September 27, 2014 and the interest rate on the loan is 11% per annum. The Martinsburg Mall and the Four Malls are subject to a $105,000,000 nonrecourse first mortgage loan. In December, 2004, the Company made a $7,500,000 mezzanine loan to Lightstone Member II LLC in connection with the acquisition by Lightstone Member II LLC of the Brazos Outlets Center Mall in Lake Jackson, Texas and the Shawnee Mall in Shawnee, Oklahoma (the "Shawnee/Brazos Malls"). The loan is secured by ownership interests in the entities that own the properties and the Company received a 29% ownership interest in these entities. The loan matures on December 23, 2014 and the interest rate on the loan is 11% per annum. The Shawnee/Brazos Malls are subject to a $39,500,000 nonrecourse first mortgage loan. On July 7, 2005, Presidential made a $9,500,000 mezzanine loan to Lightstone Member III LLC ("Lightstone III") in connection with the acquisition by Lightstone III of two shopping malls, namely the Macon Mall, an enclosed two-story regional mall located in Macon, Georgia with 764,208 square feet of gross leasable area (and an additional 682,160 square feet of department store space in the mall area owned by four department stores), and the Burlington Mall, an enclosed single story regional mall located in Burlington, North Carolina with 416,442 square feet of gross leasable area (the "Macon/Burlington Malls"). The loan is secured by the ownership interests in the entities owning the Macon/Burlington Malls and Presidential obtained a 29% ownership interest in the entities owning the Macon/Burlington Malls. The loan matures on July 6, 2015, and the interest rate on the loan is 11% per annum. The Macon/Burlington Malls are subject to a nonrecourse first mortgage loan in the original principal amount of $158,850,000. The Company accounts for these investments using the equity method. At September 30, 2005, investments in and advances to joint ventures are as follows: Martinsburg Mall $ 936,728 Four Malls 6,935,191 Shawnee/Brazos Malls 6,944,115 Macon/Burlington Malls 9,238,358 ----------- $24,054,392 =========== Equity in the (loss) income of joint ventures for the nine months ended September 30, 2005 is as follows: Martinsburg Mall $(325,956) Four Malls (467,665) Shawnee/Brazos Malls 173,736 Macon/Burlington Malls (61,779) --------- $(681,664) ========= As a result of the Company's use of the equity method of accounting with respect to its investments in and advances to the joint ventures, the Company's consolidated statement of operations for the nine months ended September 30, 2005 reflects 29% of the income (loss) of the joint ventures. The equity in the loss of joint ventures of $681,664 for the nine month period ended September 30, 2005 is after deductions in the aggregate amount of $2,719,719 for the Company's 29% of noncash charges (depreciation of $1,500,228, amortization of deferred financing costs of $343,997 and amortization of in-place lease values of $875,494). Notwithstanding the income (loss) from the joint ventures, the Company is entitled to receive its interest at the rate of 11% per annum on its $25,600,000 of loans to the joint ventures. For the nine months ended September 30, 2005, the Company received distributions from the joint ventures in the amount of $1,941,000, which included payments of interest in the amount of $1,607,650 and return on investment in the amount of $333,350. The Lightstone Group is controlled by David Lichtenstein. At September 30, 2005, in addition to Presidential's investments of $24,054,392 in these joint ventures with entities controlled by Mr. Lichtenstein, Presidential has three loans that are due from entities that are controlled by Mr. Lichtenstein in the aggregate outstanding principal amount of $9,875,000 with a net carrying value of $9,083,443. 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 on some or all of these loans could have a material adverse effect on Presidential's business and operating results. The $33,137,835 net carrying value of investments in and advances to joint ventures with entities controlled by Mr. Lichtenstein and loans outstanding to entities controlled by Mr. Lichtenstein constitute 71% of the Company's total assets at September 30, 2005. 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, 2005, 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, 2005 and 2004, the Company received payments of $279,500 and $451,500, respectively, from Scorpio. The Consolidated Loans bear interest at a rate equal to the Chase Prime rate and at September 30, 2005, the unpaid and unaccrued interest was $3,079,632. 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. The $105,000,000 nonrecourse first mortgage loan secured by the Martinsburg Mall and the Four Malls, and the $39,500,000 nonrecourse first mortgage loan secured by the Shawnee/Brazos Malls (see Investments in and Advances to Joint Ventures above), carry interest rates which change monthly based on the London Interbank Offered Rate and mature in 2006 subject to the borrower's right to extend the maturity dates for three additional one year terms. As a result, any material increase in interest rates could adversely affect the operating results of the joint ventures and their ability to make the required interest payments on the Company's $8,600,000 and $7,500,000 mezzanine loans to those entities. 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 5. Other Information The Company is delinquent in its federal securities law filing obligations because it has not filed the required financial information as an Exhibit to the Company's Form 8-K with respect to its investment in five shopping mall properties in September, 2004. The financial information relates to operations of the properties for calendar year 2003 and the nine months ended September, 2004 prior to the Company's investment in the properties. The Company has been unable to obtain the financial information from the seller of the properties and, if it is not able to do so, will continue to be delinquent in its federal securities law filing obligations until it is able to file audited financial statements for the properties for the period from the acquisition of its interests in the properties until December 31, 2005. During the continued period of delinquency in its filing obligations, Presidential's dividend reinvestment plan for its Class B Common Stock will continue pursuant to the terms of its Dividend Reinvestment and Share Purchase Plan but shareholders will not be able to make optional cash payments to acquire shares under the Plan. Item 6. 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. 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 10, 2005 By: /s/ Jeffrey F. Joseph --------------------- Jeffrey F. Joseph President and Chief Executive Officer DATE: November 10, 2005 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: November 10, 2005 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: November 10, 2005 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 September 30, 2005, 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: November 10, 2005 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 September 30, 2005, 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: November 10, 2005 -----END PRIVACY-ENHANCED MESSAGE-----