10QSB 1 jun0710qsb.txt PRESIDENTIAL REALTY CORP. 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2007 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT 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 x No -------- -------- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x ---- ---- The number of shares outstanding of each of the issuer's classes of common stock as of the close of business on August 7, 2007 was 478,066 shares of Class A common and 3,470,935 shares of Class B common. Transitional Small Business Disclosure Format (check one): Yes No x ----- ------ PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES ------------------------------------------------- Index to Form 10-QSB For the Quarterly Period Ended June 30, 2007 Part I Financial Information (Unaudited) Item 1. Financial Statements Consolidated Balance Sheets (Unaudited) Consolidated Statements of Operations (Unaudited) Consolidated Statement of Stockholders' Equity (Unaudited) Consolidated Statements of Cash Flows (Unaudited) Notes to Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis or Plan of Operation Quantitative and Qualitative Disclosures about Market Risk Item 3. Controls and Procedures Part II Other Information Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2007 2006 ------------ ------------ Assets Investments in and advances to joint ventures (Note 2) $15,520,573 $18,059,749 ------------ ------------ Real estate (Note 3) 20,796,202 20,333,180 Less: accumulated depreciation 4,586,653 4,363,886 ------------ ------------ Net real estate 16,209,549 15,969,294 ------------ ------------ Mortgage portfolio (Note 4): Notes receivable - net 7,448,170 7,234,239 Notes receivable - related parties - net 131,178 148,216 ------------ ------------ Net mortgage portfolio (of which $1,947,779 in 2007 and $240,533 in 2006 are due within one year) 7,579,348 7,382,455 ------------ ------------ Assets related to discontinued operations (Note 5) - 2,922,493 Other investments (Note 6) 2,000,000 2,000,000 Prepaid expenses and deposits in escrow 1,307,068 1,323,232 Prepaid defined benefit plan costs 522,923 582,394 Other receivables (net of valuation allowance of $178,304 in 2007 and $274,303 in 2006) 406,943 382,393 Cash and cash equivalents 1,288,453 2,263,534 Other assets 929,664 1,212,841 ------------ ------------ Total Assets $45,764,521 $52,098,385 ============ ============ Liabilities and Stockholders' Equity Liabilities: Mortgage debt (of which $429,449 in 2007 and $417,167 in 2006 are due within one year) $19,024,968 $19,176,330 Liabilities related to discontinued operations (Note 5) - 2,911,677 Contractual pension and postretirement benefits liabilities 3,397,405 3,256,861 Accrued liabilities 2,255,891 1,851,953 Accounts payable 348,935 525,029 Other liabilities 718,023 757,947 ------------ ------------ Total Liabilities 25,745,222 28,479,797 ------------ ------------ Minority Interest in Consolidated Partnership (Note 8) 32,539 35,318 ------------ ------------ Stockholders' Equity: Common stock: par value $.10 per share Class A, authorized 700,000 shares, issued 478,940 shares, and 874 shares in 2007 and 100 shares in 2006 held in treasury 47,894 47,894 Class B June 30, 2007 December 31, 2006 349,446 346,232 ----------- ------------------ ----------------- Authorized: 10,000,000 10,000,000 Issued: 3,494,463 3,462,316 Treasury: 23,528 2,000 Additional paid-in capital 4,265,724 4,116,326 Retained earnings 17,995,509 21,453,808 Accumulated other comprehensive loss (Note 10) (2,483,060) (2,358,827) Treasury stock (at cost) (188,753) (22,163) ------------ ------------ Total Stockholders' Equity 19,986,760 23,583,270 ------------ ------------ Total Liabilities and Stockholders' Equity $45,764,521 $52,098,385 ============ ============ See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED JUNE 30, ----------------------------------------- 2007 2006 ----------------- ------------------- Revenues: Rental $1,481,767 $532,135 Interest on mortgages - notes receivable 295,712 311,578 Interest on mortgages - notes receivable - related parties 31,254 65,946 Other revenues 1,249 38,051 ----------------- ------------------- Total 1,809,982 947,710 ----------------- ------------------- Costs and Expenses: General and administrative 1,006,854 918,107 Depreciation on non-rental property 7,111 4,350 Rental property: Operating expenses 721,396 305,702 Interest on mortgage debt 374,715 58,189 Real estate taxes 152,517 82,096 Depreciation on real estate 118,728 32,553 Amortization of in-place lease values and mortgage costs 84,816 2,870 ----------------- ------------------- Total 2,466,137 1,403,867 ----------------- ------------------- Other Income (Loss): Investment income 17,260 51,880 Equity in the loss of joint ventures (Note 2) (661,410) (370,051) Equity in the loss of partnership (Note 7) - (73,064) ----------------- ------------------- Loss before minority interest (1,300,305) (847,392) Minority interest (825) (1,562) ----------------- ------------------- Loss from continuing operations (1,301,130) (848,954) ----------------- ------------------- Discontinued Operations (Note 5): Loss from discontinued operations (2,196) (67,168) Net gain from sales of discontinued operations 88,946 - ----------------- ------------------- Total income (loss) from discontinued operations 86,750 (67,168) ----------------- ------------------- Net Loss ($1,214,380) ($916,122) ================= =================== Earnings per Common Share (basic and diluted): Loss from continuing operations ($0.33) ($0.22) ----------------- ------------------- Discontinued Operations: Loss from discontinued operations - (0.01) Net gain from sales of discontinued operations 0.02 - ----------------- ------------------- Total income (loss) from discontinued operations 0.02 (0.01) ----------------- ------------------- Net Loss per Common Share - basic and diluted ($0.31) ($0.23) ================= =================== Cash Distributions per Common Share $0.16 $0.16 ================= =================== Weighted Average Number of Shares Outstanding - basic and diluted 3,939,103 3,907,980 ================= =================== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
SIX MONTHS ENDED JUNE 30, ----------------------------------------- 2007 2006 ----------------- ------------------- Revenues: Rental $2,864,679 $1,055,204 Interest on mortgages - notes receivable 587,183 633,037 Interest on mortgages - notes receivable - related parties 221,989 107,104 Other revenues 4,648 84,545 ----------------- ------------------- Total 3,678,499 1,879,890 ----------------- ------------------- Costs and Expenses: General and administrative 1,990,008 1,978,913 Depreciation on non-rental property 14,223 8,120 Rental property: Operating expenses 1,531,418 612,221 Interest on mortgage debt 753,761 116,856 Real estate taxes 305,034 164,192 Depreciation on real estate 236,122 64,021 Amortization of in-place lease values and mortgage costs 238,175 5,719 ----------------- ------------------- Total 5,068,741 2,950,042 ----------------- ------------------- Other Income (Loss): Investment income 34,064 99,884 Equity in the loss of joint ventures (Note 2) (1,017,465) (1,014,339) Equity in the loss of partnership (Note 7) - (106,362) ----------------- ------------------- Loss before minority interest (2,373,643) (2,090,969) Minority interest (2,222) (4,126) ----------------- ------------------- Loss from continuing operations (2,375,865) (2,095,095) ----------------- ------------------- Discontinued Operations (Note 5): Loss from discontinued operations (97,077) (99,361) Net gain from sales of discontinued operations 735,705 - ----------------- ------------------- Total income (loss) from discontinued operations 638,628 (99,361) ----------------- ------------------- Net Loss ($1,737,237) ($2,194,456) ================= =================== Earnings per Common Share (basic and diluted): Loss from continuing operations ($0.60) ($0.54) ----------------- ------------------- Discontinued Operations: Loss from discontinued operations (0.02) (0.02) Net gain from sales of discontinued operations 0.18 - ----------------- ------------------- Total income (loss) from discontinued operations 0.16 (0.02) ----------------- ------------------- Net Loss per Common Share - basic and diluted ($0.44) ($0.56) ================= =================== Cash Distributions per Common Share $0.32 $0.32 ================= =================== Weighted Average Number of Shares Outstanding - basic and diluted 3,938,243 3,901,290 ================= =================== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Accumulated Additional Other Total Common Paid-in Retained Comprehensive Treasury Comprehensive Stockholders' Stock Capital Earnings Loss Stock Loss Equity -------- ---------- ----------- ------------- ----------- ------------- ------------- Balance at January 1, 2007 $394,126 $4,116,326 $21,453,808 ($2,358,827) ($22,163) $23,583,270 Cumulative effect of adoption of FIN 48 (Note 9) - - (460,800) - - (460,800) Net proceeds from dividend reinvestment plan 1,914 129,848 - - - 131,762 Cash distributions ($.32 per share) - - (1,260,262) - - (1,260,262) Issuance of stock 1,300 19,550 - - - 20,850 Purchase of treasury stock - - - - (166,590) (166,590) Comprehensive loss: Net loss - - (1,737,237) - - ($1,737,237) (1,737,237) Other comprehensive loss- Net unrealized loss on securities available for sale - - - (3,749) - (3,749) (3,749) Adjustment for contractual postretirement benefits - - - (120,484) - (120,484) (120,484) ------------ Comprehensive loss ($1,861,470) ============ ----------- --------- ----------- ------------ ----------- ------------ Balance at June 30, 2007 $397,340 4,265,724 $17,995,509 ($2,483,060) ($188,753) $19,986,760 =========== ========= =========== ============ =========== ============ See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, -------------------------------------------------- 2007 2006 --------------------- --------------------- Cash Flows from Operating Activities: Cash received from rental properties $2,883,172 $1,653,352 Interest received 735,133 957,474 Distributions received from joint ventures 1,521,711 1,955,995 Miscellaneous income 44,178 88,554 Interest paid on rental property mortgage debt (749,561) (213,761) Cash disbursed for rental property operations (2,323,952) (1,395,183) Cash disbursed for general and administrative costs (1,738,918) (2,127,250) --------------------- --------------------- Net cash provided by operating activities 371,763 919,181 --------------------- --------------------- Cash Flows from Investing Activities: Payments received on notes receivable 114,303 2,727,974 Loan advanced to partnership - (191,291) Loan advanced to joint venture - (335,000) Payments disbursed for additions and improvements (473,976) (163,659) Proceeds from sales of properties 582,004 - Purchase of other investments - (560,000) Deposit on purchase of additional interest in partnership - (975,165) Purchase of additional interest in partnership (53,694) (45,000) --------------------- --------------------- Net cash provided by investing activities 168,637 457,859 --------------------- --------------------- Cash Flows from Financing Activities: Principal payments on mortgage debt (215,391) (90,463) Distributions to minority partners (5,000) (12,500) Cash distributions on common stock (1,260,262) (1,248,893) Purchase of treasury stock (166,590) - Proceeds from dividend reinvestment plan 131,762 99,482 --------------------- --------------------- Net cash used in financing activities (1,515,481) (1,252,374) --------------------- --------------------- Net (Decrease) Increase in Cash and Cash Equivalents (975,081) 124,666 Cash and Cash Equivalents, Beginning of Period 2,263,534 2,878,237 --------------------- --------------------- Cash and Cash Equivalents, End of Period $1,288,453 $3,002,903 ===================== ===================== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, ---------------------------------------------------- 2007 2006 ---------------------- ---------------------- Reconciliation of Net Loss to Net Cash Provided by Operating Activities Net Loss ($1,737,237) ($2,194,456) ---------------------- ---------------------- Adjustments to reconcile net loss to net cash provided by operating activities: Net gain from sales of discontinued operations (735,705) - Equity in the loss of joint ventures 1,017,465 1,014,339 Equity in the loss of partnership - 106,362 Depreciation and amortization 489,080 78,884 Amortization of discount on mortgage payable 55,899 - Net change in revenue related to acquired lease rights/obligations and deferred rent receivable (61,558) - Amortization of discounts on notes and fees (111,196) (95,434) Minority interest 2,222 4,126 Issuance of stock to directors and officers 10,425 177,960 Distributions received from joint ventures 1,521,711 1,955,995 Changes in assets and liabilities: Decrease in other receivables 16,215 184,067 Decrease in accounts payable and accrued liabilities (200,448) (337,401) Increase in other liabilities 14,344 66,458 Decrease (increase) in prepaid expenses, deposits in escrow and deferred charges 90,221 (41,466) Other 325 (253) ---------------------- ---------------------- Total adjustments 2,109,000 3,113,637 ---------------------- ---------------------- Net cash provided by operating activities $371,763 $919,181 ====================== ====================== SUPPLEMENTAL NONCASH DISCLOSURE: Satisfaction of mortgage debt as a result of assumption of the mortgage debt by the purchaser $2,856,452 ====================== Note receivable from sale of property $ 200,000 ====================== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2007 (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 (see Note 8), and 100% of the account balances of PDL, Inc. and Associates Limited Co-Partnership (the "Hato Rey Partnership"). PDL, Inc. (a wholly owned subsidiary of Presidential and the general partner of the Hato Rey Partnership) and Presidential own an aggregate 60% general and limited partnership interest in the Hato Rey Partnership (see Note 7). All significant intercompany balances and transactions have been eliminated. B. Net Loss Per Share - Basic and diluted net loss per share data is computed by dividing net loss by the weighted average number of shares of Class A and Class B common stock outstanding during each period. 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, 2006. 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. Purchase Accounting - In 2006, the Company acquired an additional 25% limited partnership interest in the Hato Rey Partnership, which increased its ownership interest to 59% as of December 31, 2006, and, as a result, consolidated the Hato Rey Partnership on the Company's consolidated balance sheet at December 31, 2006. The Company did not consolidate the Hato Rey Partnership's results of operations on its consolidated statement of operations for the year ended December 31, 2006, because the Company only had a 33% and 34% ownership interest in the partnership, and accordingly, the Company recorded its share of the loss from the partnership for the year ended December 31, 2006, in Equity in the loss of partnership, under the equity method of accounting. As of January 1, 2007, the Company consolidated the Hato Rey Partnership on the Company's consolidated balance sheet and consolidated statement of operations. In January, 2007, the Company purchased an additional 1% partnership interest and its ownership interest was increased to 60%. The Company allocated the fair value of acquired tangible and intangible assets and assumed liabilities based on their estimated fair values in accordance with the provisions of Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements", and the Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", as a partial step acquisition. No gain or goodwill was recognized on the recording of the acquisition of the 25% interest in the Hato Rey Partnership. Building and improvements are depreciated on the straight-line method over thirty-nine years. In-place lease values are amortized to expense over the terms of the related tenant leases. Above and below market lease values are amortized as a reduction of, or an increase to, rental revenue over the remaining term of each lease. Mortgage discount is amortized to mortgage interest expense over the remaining term of the mortgage using the interest method. F. Discontinued Operations - The Company complies with the provisions of 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. G. Equity Method - The Company accounts for its investments in joint ventures using the equity method of accounting. H. Recent Accounting Pronouncements - In July, 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 establishes new evaluation and measurement processes for all income tax positions taken. FIN 48 also requires expanded disclosures of income tax matters. The Company adopted FIN 48 on January 1, 2007. If the Company's tax positions in relation to certain transactions were examined and were not ultimately upheld, the Company would be required to pay an income tax assessment and related interest, or a deficiency dividend and related interest, for prior years. Should such an assessment require the Company to pay a deficiency dividend in order to continue to qualify as a REIT, the Company would pay the deficiency dividend to its shareholders and the related interest assessment to the taxing authorities. Upon adoption of FIN 48 the Company recorded a reduction to the January 1, 2007 balance of retained earnings of $460,800 for accrued interest for prior years related to the tax positions for which the Company may be required to pay a deficiency dividend. In addition, for the six months ended June 30, 2007, the Company recorded interest expense of $180,000 for the interest related to these matters. As of June 30, 2007, the tax years that remain open to examination by the federal, state and local taxing authorities are the 2003 - 2006 tax years. In September, 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". SFAS No. 157 clarifies the definition of fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for fiscal years beginning after November 15, 2007. The Company does not believe that the adoption of this standard on January 1, 2008 will have a material effect on the Company's consolidated financial statements. In September, 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - An Amendment of FASB Statements No. 87, 88, 106 and 132(R)". SFAS No. 158 requires an employer to (i) recognize in its statement of financial position an asset for a plan's overfunded status or a liability for a plan's underfunded status; (ii) measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year (with limited exceptions); and (iii) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income. The adoption of the requirement to recognize the funded status of a benefit plan and the disclosure requirements as of December 31, 2006 resulted in a $1,112,520 increase in accumulated other comprehensive loss on the Company's consolidated balance sheet. The requirement to measure plan assets and benefit obligations to determine the funded status as of the end of the fiscal year and to recognize changes in the funded status in the year in which the changes occur is effective for fiscal years ending after December 15, 2008. The adoption of the measurement date provisions of this standard is not expected to have a material effect on the Company's consolidated financial statements. In February, 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities". SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 159 on the Company's financial position and results of operations. 2. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES The Company has investments in and loans to four joint ventures which own and operate nine shopping malls located in seven states. These investments in and advances to joint ventures were made to entities controlled by David Lichtenstein, who also controls The Lightstone Group ("Lightstone"). The Company accounts for these investments using the equity method. The first investment, the Martinsburg Mall, was purchased by the Company in 2004 and, subsequent to closing, the Company obtained a mezzanine loan from Lightstone in the amount of $2,600,000, which is secured by 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 manages the Martinsburg Mall and David Lichtenstein received a 71% ownership interest in the entity owning the Martinsburg Mall, leaving the Company with a 29% ownership interest. During 2004 and 2005, the Company made three mezzanine loans in the aggregate principal amount of $25,600,000 to joint ventures controlled by David Lichtenstein. These loans are secured by the ownership interests in the entities that own the properties and the Company received a 29% ownership interest in these entities. These loans mature in 2014 and 2015 and the interest rate on the loans is 11% per annum. During 2006, the Company made an additional $335,000 mezzanine loan to Lightstone II, which loan was added to and has the same interest rate and maturity date as the original Lightstone II loan. The following table summarizes information on the shopping mall properties and the mezzanine loans with respect thereto:
Nonrecourse First Mortgage Owning and Mezzanine Loans Entity and Mezzanine Loans June 30, 2007 Property Advanced by Approximate Maturity Interest Owned (1) the Company Sq. Ft. Balance Date Rate ---------- --------------- ----------- -------- -------- -------- (Amounts in thousands) PRC Member LLC Martinsburg Mall 552 $ 29,861 July, 2016 (2) ---------------- Martinsburg, WV Lightstone I Four Malls $ 8,600 ---------- Bradley Square Mall 385 13,802 July, 2016 (2) Cleveland, TN Mount Berry Square Mall 478 22,477 July, 2016 (2) Rome, GA Shenango Valley Mall 508 14,746 July, 2016 (2) Hermitage, PA West Manchester Mall 733 29,600 June, 2008 (2) York, PA Lightstone II Shawnee/Brazos Malls 7,835 39,500 Jan., 2008 (3) -------------------- Brazos Outlets Center Mall 698 Lake Jackson, TX Shawnee Mall 444 Shawnee, OK Lightstone III Macon/Burlington Malls 9,500 157,123 June, 2015 5.78% ---------------------- Burlington Mall 412 Burlington, NC Macon Mall 1,446 Macon, GA ------- ----- -------- $25,935 5,656 $307,109 ======= ===== ========
(1) Each individual owning entity is a single purpose entity that is prohibited by its organizational documents from owning any assets other than the specified shopping mall properties listed above. (2) In June, 2006, the original $105,000,000 nonrecourse first mortgage loan secured by the Martinsburg Mall and the Four Malls was refinanced with the following mortgage loans: a $73,900,000 nonrecourse first mortgage loan with an interest rate of 5.93% per annum, maturing on July 1, 2016; a $7,000,000 mezzanine loan with an interest rate of 12% per annum maturing on July 1, 2016 and a $29,600,000 nonrecourse first mortgage loan with an adjustable interest rate based on the London Interbank Offered Rates ("LIBOR") plus 232 basis points (approximately 8.125% at June 30, 2007), with a minimum interest rate of 7.89%, maturing on June 8, 2008. The $73,900,000 first mortgage loan and the $7,000,000 mezzanine loan are secured by the Martinsburg Mall and three of the Four Malls. The $29,600,000 first mortgage loan is secured by the West Manchester Mall. (3) The interest rate is at the 30 day LIBOR rate plus 280 basis points (approximately 8.12% at June 30, 2007). The loan matures in January, 2008, with two one-year options to extend the loan for an extension fee of .125% of the outstanding principal. Under the equity method of accounting, the Company's investments in the joint ventures, including the $25,935,000 of loans advanced to the joint ventures, have been reduced by distributions received, and losses recorded for the joint ventures. Activity in investments in and advances to joint ventures for the period ended June 30, 2007 is as follows: Equity in the Balance at Loss of Balance at December 31, Distributions Joint June 30, 2006 Received Ventures 2007 ------------ ------------- ----------- ----------- Martinsburg Mall (1) $ 162,821 $ (79,437) $ (83,384) $ - Four Malls 4,534,578 (478,256) (416,677) 3,639,645 Shawnee/Brazos Malls 6,007,924 (435,713) (284,501) 5,287,710 Macon/Burlington Malls 7,354,426 (528,305) (232,903) 6,593,218 ----------- ----------- ----------- ----------- $18,059,749 $(1,521,711) $(1,017,465) $15,520,573 =========== =========== =========== =========== Equity in the (loss) income of joint ventures is as follows: Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 ----------- --------- ----------- ----------- Martinsburg Mall (1) $ (23,703) $(126,980) $ (83,384) $ (285,966) Four Malls (2) (343,967) (244,316) (416,677) (618,733) Shawnee/Brazos Malls (3) (151,380) 46,483 (284,501) (99,057) Macon/Burlington Malls (4)(142,360) (45,238) (232,903) (10,583) ---------- --------- ----------- ----------- $(661,410) $(370,051) $(1,017,465) $(1,014,339) ========== ========= =========== =========== (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. In the second quarter of 2007, the Company's basis of its investment in the Martinsburg Mall was reduced by distributions and losses to zero and, accordingly, the Company only recorded its share of the loss to the extent of its basis. Future distributions to be received will be recorded in income and future earnings of the Martinsburg Mall, should they materialize, will be recorded by the Company after applying the distributions and any losses not previously recognized. (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) Interest income earned by the Company at the rate of 11% per annum on the outstanding $7,835,000 loan from the Company to Lightstone II is included in the calculation of the Company's share of the (loss) income of joint ventures for the Shawnee/Brazos Malls. (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 summary financial information below includes information for all of the joint ventures. The condensed combined information is as follows: June 30, December 31, 2007 2006 ------------- ------------ Condensed Combined Balance Sheets (Amounts in thousands) Net real estate $310,026 $304,358 In-place lease values and acquired lease rights 13,982 16,147 Prepaid expenses and deposits in escrow 17,757 14,844 Cash and cash equivalents 3,375 2,695 Deferred financing costs 1,780 1,766 Other assets 4,833 7,255 -------- ------- Total Assets $351,753 $347,065 ======== ======== Nonrecourse mortgage debt $307,109 $308,092 Mezzanine notes payable 28,535 31,670 Other liabilities 40,777 24,610 -------- -------- Total Liabilities 376,421 364,372 Members' Deficit (24,668) (17,307) -------- -------- Total Liabilities and Members' Deficit $351,753 $347,065 ======== ======== Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 ---------- ----------- ----------- ----------- (Amounts in thousands) Condensed Statements of Operations Revenues $13,143 $14,794 $27,002 $ 29,451 Interest on mortgage debt and other debt (6,276) (7,005) (12,353) (13,001) Other expenses (8,117) (6,346) (15,663) (14,729) ------- ------- ------- -------- Income (loss) before depreciation and amortization (1,250) 1,443 (1,014) 1,721 Depreciation and amortization (3,121) (4,390) (6,259) (8,542) ------- ------- ------- -------- Net Loss $(4,371) $(2,947) $(7,273) $ (6,821) ======= ======= ======= ======== 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 statements of operations reflect 29% of the loss of the joint ventures. The Company's equity in the loss of joint ventures of $1,017,465 for the six months ended June 30, 2007, is after deductions in the aggregate amount of $1,772,861 for the Company's 29% of noncash charges (depreciation of $1,322,745 and amortization of deferred financing costs, in-place lease values and other costs of $450,116). Notwithstanding the loss from the joint ventures, the Company is entitled to receive its interest at the rate of 11% per annum on its $25,935,000 of loans to the joint ventures. For the six months ended June 30, 2007, the Company received distributions from the joint ventures in the amount of $1,521,711, which included interest payments of $1,442,274 on the outstanding loans to the joint ventures and return on investment in the amount of $79,437. The equity in the loss of joint ventures of $1,014,339 for the six months ended June 30, 2006, is after deductions in the aggregate amount of $2,477,356 for the Company's 29% of noncash charges (depreciation of $1,343,708 and amortization of deferred financing costs, in-place lease values and other costs of $1,133,648. For the six months ended June 30, 2006, the Company received distributions from the joint ventures in the amount of $1,955,995, which included interest payments of $1,423,645 on the outstanding loans to the joint ventures and return on investment in the amount of $532,350. The Lightstone Group is controlled by David Lichtenstein. At June 30, 2007, in addition to Presidential's investments of $15,520,573 in the 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 $7,449,994 with a net carrying value of $6,999,330. Two of the loans in the outstanding principal amount of $5,375,000, with a net carrying value of $4,924,336, are secured by interests in five apartment properties and are also personally guaranteed by Mr. Lichtenstein up to a maximum amount of $3,137,500. The Company believes that Mr. Lichtenstein has sufficient net worth and liquidity to satisfy his obligations under these personal guarantees. However, because of the substantial equity in the properties securing the loans, it is unlikely that Presidential will have to call upon these personal guarantees. The third loan in the outstanding principal amount of $2,074,994 is secured by interests in nine apartment properties. All of these loans are in good standing. While the Company believes that all of these loans are adequately secured, a default on any or all of these loans could have a material adverse effect on Presidential's business and operating results. The $22,519,903 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 49% of the Company's total assets at June 30, 2007. 3. REAL ESTATE Real estate is comprised of the following: June 30, December 31, 2007 2006 ----------- ------------ Land $ 2,309,930 $ 2,304,009 Buildings 18,361,551 17,907,264 Furniture and equipment 124,721 121,907 ----------- ----------- Total real estate $20,796,202 $20,333,180 =========== =========== 4. MORTGAGE PORTFOLIO The components of the net mortgage portfolio are as follows: Notes Receivable- Notes Related June 30, 2007 Receivable Parties Total ------------------ ----------- ----------- ---------- Notes receivable $7,903,896 $177,189 $8,081,085 Less: Discounts 455,726 46,011 501,737 ----------- -------- ---------- Net mortgage portfolio $7,448,170 $131,178 $7,579,348 =========== ======== ========== December 31, 2006 ----------------- Notes receivable $7,803,444 $195,001 $7,998,445 Less: Discounts 569,205 46,785 615,990 ---------- -------- ---------- Net mortgage portfolio $7,234,239 $148,216 $7,382,455 ========== ======== ========== At June 30, 2007, all of the notes in the Company's mortgage portfolio are current in accordance with their terms, as modified. In March, 2007, the Company sold its Cambridge Green property in Council Bluffs, Iowa. As part of the sales price, the Company received a $200,000 secured note receivable which matures on March 20, 2008. The note receivable has an interest rate of 7% per annum, payment of which is deferred until maturity. At June 30, 2007, the accrued deferred interest was $3,928 which was recognized in interest income. 5. DISCONTINUED OPERATIONS For the periods ended June 30, 2007 and 2006, income (loss) from discontinued operations is from the Cambridge Green property, which was sold in March, 2007, and one cooperative apartment unit which was sold in June, 2007. The following table summarizes the income (loss) for the Cambridge Green property and for the one cooperative apartment unit:
Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 ---- ---- ---- ---- Revenues: Rental $ 4,473 $239,718 $112,965 $542,076 ------- -------- -------- -------- Rental property expenses: Operating expenses 6,394 217,339 152,114 463,105 Interest on mortgage debt - 48,147 31,684 96,507 Real estate taxes - 42,226 27,685 84,452 Depreciation on real estate 280 512 560 1,024 ------- -------- -------- -------- Total 6,674 308,224 212,043 645,088 ------- -------- -------- -------- Other income: Investment income 5 1,338 2,001 3,651 ------ -------- -------- -------- Loss from discontinued operations (2,196) (67,168) (97,077) (99,361) Net gain from sales of discontinued operations 88,946 - 735,705 - ------- -------- -------- ------- Total income (loss) from discontinued operations $86,750 $(67,168) $638,628 $(99,361) ======= ======== ======== ========
On March 21, 2007, the Company completed the sale of the Cambridge Green property, a 201-unit apartment property in Council Bluffs, Iowa for a sales price of $3,700,000. As part of the sales price, (i) the $2,856,452 outstanding principal balance of the first mortgage debt was assumed by the buyer, (ii) the Company received a $200,000 secured note receivable from the buyer, which matures in one year and has an interest rate of 7% per annum, and (iii) the balance of the sales price was paid in cash. The net proceeds of sale were $664,780, which includes the $200,000 note receivable. The Company recognized a gain from the sale for financial reporting purposes of $646,759. The Company owns a small portfolio of cooperative apartments located in New York and Connecticut. These apartments are held for the production of rental income and generally are not marketed for sale. However, from time to time, the Company will receive purchase offers for some of these apartments or decide to market specific apartments and will make sales if the purchase price is acceptable to management. In June, 2007, the Company sold one cooperative apartment unit located in New Haven, Connecticut for a sales price of $125,000. The net proceeds of sale were $117,224 and the Company recognized a gain from the sale for financial reporting purposes of $88,946. The assets and liabilities of the Cambridge Green property were segregated in the consolidated balance sheet at December 31, 2006. The components were as follows: December 31, 2006 ----------- Assets related to discontinued operations: Land $ 200,000 Buildings 4,214,988 Furniture and equipment 39,851 Less: accumulated depreciation (1,634,161) ---------- Net real estate 2,820,678 Other assets 101,815 ---------- Total $2,922,493 ========== Liabilities related to discontinued operations: Mortgage debt $2,865,433 Other liabilities 46,244 ---------- Total $2,911,677 ========== 6. OTHER INVESTMENTS In 2005, the Company agreed to advance $1,000,000 from time to time to Broadway Partners Parallel Fund A ("Broadway Fund A"), a blind pool of investment capital sponsored by Broadway Real Estate Partners, LLC ("Broadway Partners"). In connection with such agreement, the Company advanced $1,000,000 to Broadway Partners and received interest on these funds at the rate of 11.43% per annum through September 30, 2006 and 5% per annum thereafter until such funds were used to fund the Company's commitment to Broadway Fund A. In 2006, the Company made an additional commitment to fund an additional $1,000,000 to Broadway Partners Feeder Fund A II ("Broadway Fund A II"), another blind pool of investment capital sponsored by Broadway Partners. The Company retained the right to fund its commitments to Broadway Fund A and Broadway Fund A II with the $1,000,000 advanced to Broadway Partners or with other funds available to the Company. As of December 31, 2006, Presidential had advanced $890,000 of its $1,000,000 commitment to Broadway Fund A and the balance of Presidential's commitment to Broadway Fund A at June 30, 2007 was $110,000. Also in 2006, Presidential advanced $590,000 of its $1,000,000 commitment to Broadway Fund A II. The remaining $410,000 balance of Presidential's commitment to Broadway Fund A II was funded in January, 2007. At June 30, 2007, Broadway Partners continued to hold $110,000 of the funds previously advanced to it by Presidential. For the six months ended June 30, 2007 and 2006, the Company earned interest income of $4,128 and $57,150, respectively, on the funds held by Broadway Partners. The Company accounts for these investments under the cost method. Other investments are composed of: June 30, December 31, 2007 2006 --------- ------------ Broadway Partners $ 110,000 $ 520,000 Broadway Fund A 890,000 890,000 Broadway Fund A II 1,000,000 590,000 ---------- ---------- Total $2,000,000 $2,000,000 ========== ========== 7. HATO REY PARTNERSHIP PDL, Inc. (a wholly owned subsidiary of Presidential) is the general partner of the Hato Rey Partnership. Presidential and PDL, Inc. had an aggregate 33% general and limited partner interest in the Hato Rey Partnership at March 31, 2006. During the second quarter of 2006, the Company purchased an additional 1% limited partnership interest. In addition, during 2006 the Company purchased an additional 25% limited partnership interest, which purchase was effective as of December 31, 2006. At December 31, 2006, Presidential and PDL, Inc. owned an aggregate 59% general and limited partner interest. In January, 2007, the Company purchased an additional 1% limited partnership interest for a purchase price of $53,694. At June 30, 2007, Presidential and PDL, Inc. owned an aggregate 60% general and limited partner interest in the Hato Rey Partnership. The Hato Rey Partnership owns and operates an office building, with 210,000 square feet of commercial space, located in Hato Rey, Puerto Rico (the "Hato Rey Center"). Prior to the purchase of the additional 25% limited partnership interest, the Company accounted for its investment in this partnership under the equity method. As a result of the purchase of the additional 25% limited partnership interest at December 31, 2006, the Company owns the majority of the partnership interests in the partnership, is the general partner of the partnership, and exercises effective control over the partnership through its ability to manage the affairs of the partnership in the ordinary course of business. The purchase of the additional limited partnership interests were recorded as partial step acquisitions in accordance with the provisions of ARB No. 51 and SFAS No. 141. At December 31, 2006, the Company consolidated the Hato Rey Partnership on the Company's consolidated balance sheet. The results of operations of the Hato Rey Partnership were not consolidated on the Company's consolidated statement of operations because for the year ended December 31, 2006, the Company only had a 34% ownership interest in the partnership (33% at June 30, 2006), and accordingly, the Company's share of the loss from the partnership for 2006 was recorded in Equity in the loss of partnership, under the equity method of accounting. For the six months ended June 30, 2007, the Company consolidated the results of operations of the Hato Rey Partnership on the Company's consolidated statement of operations. For the three months and six months ended June 30, 2006, the Company recorded Equity in the loss of partnership of $73,064 and $106,362, respectively. Summary statement of operations information for the Hato Rey Partnership for the three months and six months ended June 30, 2006, is as follows: Three Months Ended Six Months Ended June 30, June 30, 2006 2006 ------------------ ---------------- Condensed Statements of Operations Revenues $ 674,610 $ 1,502,246 Interest on mortgage debt (298,005) (593,968) Depreciation and amortization (93,029) (188,719) Other expenses (510,906) (1,054,772) Investment income 5,925 12,904 --------- ----------- Net Loss $(221,405) $ (322,309) ========= =========== On the Company's Consolidated Statements of Operations: Equity in the loss of partnership $ (73,064) $ (106,362) ========= =========== Net income of the Hato Rey Partnership decreased during 2005 and 2006 as a result of three tenants vacating a total of 82,387 square feet of office space at the expiration of their leases. In addition, in 2006, the Hato Rey Partnership undertook a program of repairs and improvements to the building that is estimated to cost approximately $1,255,000, which renovations are expected to be completed in 2007. The Company agreed to lend up to $1,000,000 to the Hato Rey Partnership (and has the right to lend an additional $1,000,000) to pay for the cost of improvements to the building and fund any negative cash flows from the operation of the property. The loan, which is advanced from time to time as funds are needed, bears interest at the rate of 11% per annum, with interest and principal to be paid out of the first positive cash flow from the property or upon a refinancing of the first mortgage on the property. At June 30, 2007, the Company had advanced $1,916,275 of the loan to the Hato Rey Partnership. The $1,916,275 loan and accrued interest in the amount of $124,636 have been eliminated in consolidation. For the six months ended June 30, 2007, the Hato Rey Partnership had a loss of $304,891. The minority partners have no basis in their investment in the Hato Rey Partnership, and as a result, the Company is required to record the minority partners' 40% share of the loss which was $121,956. Therefore, the Company recorded 100% of the loss from the partnership of $304,891 in the Company's consolidated financial statements. Future earnings of the Hato Rey Partnership, should they materialize, will be recorded by the Company up to the amount of the losses previously absorbed that were applicable to the minority partners. 8. MINORITY INTEREST IN CONSOLIDATED PARTNERSHIP Presidential is the general partner of UTB Associates, a partnership, which holds notes receivable and 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. As of June 30, 2007, the notes receivable portfolio had an outstanding principal balance of $142,757. The monthly payments on these notes amortize through 2013, and have various interest rates. In July, 2007, the Company purchased the remaining minority partners 25% interest in these notes for a purchase price of $42,508. The partnership will be liquidated in the third quarter of 2007. 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. The Company adopted FIN 48 on January 1, 2007. If the Company's tax positions in relation to certain transactions were examined and were not ultimately upheld, the Company would be required to pay an income tax assessment and related interest, or a deficiency dividend and related interest, for prior years. Should such an assessment require the Company to pay a deficiency dividend in order to continue to qualify as a REIT, the Company would pay the deficiency dividend to its shareholders and the related interest assessment to the taxing authorities. Upon adoption of FIN 48 the Company recorded a reduction to the January 1, 2007 balance of retained earnings of $460,800 for accrued interest for prior years related to the tax positions for which the Company may be required to pay a deficiency dividend. In addition, for the six months ended June 30, 2007, the Company recorded interest expense of $180,000 for the interest related to these matters. The Company recognizes this interest expense in general and administrative expenses in its consolidated statements of operations. As of June 30, 2007, the Company had accrued $640,800 of interest related to these matters, which is included in accrued liabilities in its consolidated balance sheet. As of June 30, 2007, the tax years that remain open to examination by the federal, state and local taxing authorities are the 2003 - 2006 tax years. For the year ended December 31, 2006, the Company had a tax loss of approximately $1,709,000 ($.43 per share), which is comprised of capital gains of $217,000 ($.06 per share) and an ordinary loss of $1,926,000 ($.49 per share). As previously stated, in order to maintain REIT status, Presidential is required to distribute 90% of its REIT taxable income (exclusive of capital gains). As a result of the ordinary tax loss of $.49 per share for 2006, the Company will not be required to make a distribution in 2007 in order to maintain its qualification as a REIT. In addition, no provision for income taxes was made at December 31, 2006. For the six months ended June 30, 2007, the Company had a tax loss of approximately $258,000 ($0.06 per share), which is comprised of capital gains of approximately $1,169,000 ($0.30 per share) and an ordinary loss of approximately $1,427,000 ($0.36 per share). 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: June 30, December 31, 2007 2006 ----------- ------------ Minimum contractual pension benefit liability $(1,260,101) $(1,260,101) Net unrealized gain on securities available for sale 10,045 13,794 Adjustments for initial adoption of SFAS No. 158: Defined benefit plan (1,039,101) (1,039,101) Contractual postretirement benefits (73,419) (73,419) Adjustment for contractual postretirement benefits (120,484) - ----------- ----------- Total accumulated other comprehensive loss $(2,483,060) $(2,358,827) =========== =========== The Company's other comprehensive income (loss) consists of the changes in the net unrealized gain on securities available for sale and the minimum pension liability adjustments, if any. Thus, comprehensive income (loss), which consists of net income (loss) plus or minus other comprehensive income, is as follows:
Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 ----------- --------- ----------- ----------- Net loss $(1,214,380) $(916,122) $(1,737,237) $(2,194,456) Other comprehensive income (loss)- Net unrealized gain (loss) on securities available for sale (5,420) (1,037) (3,749) 1,586 SFAS No. 158 adjustment for contractual postretirement benefits (120,484) - (120,484) - ----------- --------- ---------- ----------- Comprehensive loss $(1,340,284) $(917,159) $(1,861,470) $(2,192,870) =========== ========= ========== ===========
11. COMMITMENTS AND CONTINGENCIES Presidential has a commitment to invest $110,000 in Broadway 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 involved in an environmental remediation process for contaminated soil found on its Mapletree Industrial Center property in Palmer, Massachusetts. The land area involved is approximately 1.25 acres and the depth of the contamination is at this time undetermined. Since the most serious identified threat on the site is to songbirds, the proposed remediation will consist of removing all exposed metals and a layer of soil (the depth of which is yet to be determined). The Company estimates that the costs of the cleanup will not exceed $1,000,000. The remediation will comply with the requirements of the Massachusetts Department of Environmental Protection ("MADEP"). The MADEP has agreed that the Company may complete the remediation over the next fifteen years, but the Company expects to complete the project over the next ten years. In accordance with the provisions of SFAS No. 5, "Accounting for Contingencies", in the fourth quarter of 2006, the Company accrued a $1,000,000 liability which was discounted by $145,546 and charged $854,454 to expense. The discount rate used was 4.625%, which was the interest rate on 10 year Treasury Bonds. The expected cash payments and undiscounted amount to be recognized in the Company's consolidated financial statements are as follows: Estimated Undiscounted Discount Actual Amount Amount Estimated Cash to be Recognized as Cash Payments Recognized Expense Year Payments June 30, 2007 as Expense June 30, 2007 ---- -------- ------------- ------------ ------------- 2007 $200,000 $17,478 $ 8,841 $773 2008 200,000 16,934 2009 150,000 18,277 2010 100,000 15,612 2011 100,000 18,781 2012-2016 250,000 67,101 Actual costs incurred may vary from these estimates due to the inherent uncertainties involved. The Company believes that any liability in excess of the amounts accrued which may result from the resolution of this matter will not have a material adverse effect on the financial condition, liquidity or the cash flow of the Company. For the six months ended June 30, 2007, the Company incurred environmental expenses of $41,493 for further excavation and testing of the site. These expenses were in addition to the $1,000,000 previously accrued for the costs of the cleanup of the site. 12. CONTRACTUAL PENSION AND POSTRETIREMENT BENEFITS The following table sets forth the components of net periodic benefit costs for contractual pension benefits: Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 -------- -------- -------- -------- Service cost $ 4,356 $ 4,120 $ 8,712 $ 8,240 Interest cost 31,106 31,947 62,213 63,895 Amortization of prior service cost (11,594) (11,594) (23,188) (23,188) Recognized actuarial loss 105,591 96,085 211,182 192,170 -------- -------- -------- -------- Net periodic benefit cost $129,459 $120,558 $258,919 $241,117 ======== ======== ======== ======== The following table sets forth the components of net periodic benefit costs for contractual postretirement benefits: Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 ------- -------- ------- ------- Service cost $(2,234) $ 1,230 $ 973 $ 6,414 Interest cost 12,763 6,504 22,090 18,655 Amortization of prior service cost 6,822 (23,021) (5,890) (25,424) Recognized actuarial loss (2,397) 3,776 10,891 26,577 ------- -------- ------- -------- Net periodic benefit cost $14,954 $(11,511) $28,064 $26,222 ======= ======== ======= ======= During the six months ended June 30, 2007, the Company made contributions of $233,392 and $33,531 for contractual pension benefits and postretirement benefits, respectively. The Company anticipates additional contributions of $231,208 and $32,869 for contractual pension benefits and postretirement benefits, respectively, for the remainder of 2007. 13. DEFINED BENEFIT PLAN The following table sets forth the components of net periodic benefit costs: Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 --------- --------- --------- --------- Service cost $ 58,496 $ 94,992 $ 116,992 $ 189,985 Interest cost 107,813 99,774 215,625 199,548 Expected return on plan assets (142,130) (132,969) (284,260) (265,939) Amortization of prior service cost 3,154 3,154 6,308 6,308 Amortization of accumulated loss 2,403 16,793 4,806 33,585 -------- --------- -------- --------- Net periodic benefit cost $ 29,736 $ 81,744 $ 59,471 $ 163,487 ========= ========= ======== ========= The Company's funding policy for the defined benefit plan is based on contributions at the minimum and maximum amounts required by law. During the six months ended June 30, 2007, the Company did not make a contribution to the defined benefit plan for the 2007 plan year. The Company is not required to make any contributions in 2007. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION OR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 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 that 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, rental rates 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 environmental 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, 2006. There have been no significant changes in the Company's critical accounting policies since December 31, 2006. New Accounting Standard The Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), on January 1, 2007. If the Company's tax positions in relation to certain transactions were examined and were not ultimately upheld, the Company would be required to pay an income tax assessment and related interest, or a deficiency dividend and related interest, for prior years. Should such an assessment require the Company to pay a deficiency dividend in order to continue to qualify as a REIT, the Company would pay the deficiency dividend to its shareholders and the related interest assessment to the taxing authorities. If the Company had to pay a deficiency dividend and interest thereon, the Company may have to borrow funds or sell assets to do so. Upon adoption of FIN 48 the Company recorded a reduction to the January 1, 2007 balance of retained earnings of $460,800 for accrued interest for prior years related to the tax positions for which the Company may be required to pay a deficiency dividend. In addition, for the six months ended June 30, 2007, the Company recorded interest expense of $180,000 for the interest related to these matters. The Company recognizes this interest expense in general and administrative expenses in its consolidated statements of operations. As of June 30, 2007, the Company had accrued $640,800 of interest related to these matters, which is included in accrued liabilities in its consolidated balance sheet. As of June 30, 2007, the tax years that remain open to examination by the federal, state and local taxing authorities are the 2003 - 2006 tax years. Results of Operations Financial Information for the three months ended June 30, 2007 and 2006: --------------------------------------------------------------------------- For the three months ended June 30, 2007, the Company consolidated 100% of the results of operations of the Hato Rey Partnership. The table below is the results of operations for the Company for the three months ended June 30, 2007 and 2006. For the three months ended June 30, 2006, the Hato Rey Partnership was not consolidated on the Company's consolidated statement of operations; the Company recorded its share of the loss from operations from the Hato Rey Partnership under the equity method of accounting and, accordingly, the loss was recorded in the equity in the loss of partnership. The table also segregates for analysis purposes the results of operations of the Hato Rey Partnership for the three months ended June 30, 2007. THREE MONTH PERIODS
Net Loss Before Consolidation of the Hato Rey Hato Rey Eliminations Total Total Partnership Partnership (1) Net Loss Net Loss Three Months Three Months Three Months Three Months Three Months Ended Ended Ended Ended Ended June 30, June 30, June 30, June 30, June 30, 2007 2007 2007 2007 2006 --------------- ------------ ------------- ---------------- ---------------- Revenues: Rental $661,505 $853,673 ($33,411) $1,481,767 $532,135 Interest on mortgages - notes receivable 295,712 - - 295,712 311,578 Interest on mortgages - notes receivable - related parties 31,254 - - 31,254 65,946 Other revenues 65,713 - (64,464) 1,249 38,051 --------------- ---------- -------------- --------------- ---------------- Total 1,054,184 853,673 (97,875) 1,809,982 947,710 --------------- ---------- -------------- --------------- ---------------- Costs and Expenses: General and administrative 1,040,265 - (33,411) 1,006,854 918,107 Depreciation on non-rental property 7,111 - - 7,111 4,350 Rental property: Operating expenses 315,553 518,472 (112,629) 721,396 305,702 Interest on mortgage debt 81,647 293,068 - 374,715 58,189 Real estate taxes 86,060 66,457 - 152,517 82,096 Depreciation on real estate 33,285 85,443 - 118,728 32,553 Amortization of in-place lease values and mortgage costs 71,073 13,743 - 84,816 2,870 --------------- ---------- -------------- --------------- ---------------- Total 1,634,994 977,183 (146,040) 2,466,137 1,403,867 --------------- ---------- -------------- --------------- ---------------- Other Income (Loss): Investment income 59,376 6,088 (48,204) 17,260 51,880 Equity in the loss of joint ventures (661,410) - - (661,410) (370,051) Equity in the loss of partnership - - - - (73,064) --------------- ---------- -------------- --------------- ---------------- Loss before minority interest (1,182,844) (117,422) (39) (1,300,305) (847,392) Minority interest (825) - - (825) (1,562) --------------- ---------- -------------- ---------------- --------------- Loss from continuing operations (1,183,669) (117,422) (39) (1,301,130) (848,954) --------------- ---------- -------------- ---------------- --------------- Discontinued Operations: Loss from discontinued operations (2,235) - 39 (2,196) (67,168) Net gain from sales of discontinued operations 88,946 - - 88,946 - --------------- ---------- -------------- ---------------- --------------- Total income (loss) from discontinued operations 86,711 - 39 86,750 (67,168) --------------- ---------- -------------- ---------------- --------------- Net Loss ($1,096,958) ($117,422) $ - ($1,214,380) ($916,122) =============== ========== ============== ================ ===============
(1) Represents intercompany transactions that are eliminated in consolidation. Continuing Operations: Revenues increased by $862,272 primarily as a result of increases in rental revenues, partially offset by decreases in interest income on mortgages-notes receivable, interest income on mortgages-notes receivable-related parties and other revenues. Rental revenues increased by $949,632 primarily due to the consolidation of the Hato Rey Partnership, which increased rental revenues by $853,673. In addition, rental revenues increased at all of the other rental properties, including a $37,183 increase at the Mapletree Industrial Center property as a result of increased occupancy rates. Interest on mortgages - notes receivable decreased by $15,866. As a result of a repayment of $2,425,006 on a note receivable in the first quarter of 2006, interest income on that note decreased by $25,598 in the 2007 period. Interest on mortgages-notes receivable-related parties decreased by $34,692 primarily as a result of a decrease of $33,500 in payments of interest received on the Consolidated Loans (see Liquidity and Capital Resources - Consolidated Loans below). Other revenues decreased by $36,802 primarily as a result of reduced fees of $31,597 earned by the Company's management company for third party owned properties, including primarily the Hato Rey Partnership. As a result of the consolidation of the Hato Rey Partnership in 2007, such fees were eliminated. Costs and expenses increased by $1,062,270 primarily due to the consolidation of the Hato Rey Partnership, which increased rental property expenses, and increases in general and administrative expenses. General and administrative expenses increased by $88,747 primarily due to interest expense of $83,000 for the accrual of interest related to tax positions for which the Company may be required to pay a deficiency dividend. In addition, fees for professional services increased by $72,592, postretirement benefit costs increased by $26,465 and directors fees and expenses increased by $10,571. These increases were partially offset by decreases in salary expense of $58,272 and defined benefit plan expenses of $52,008. Rental property operating expenses increased by $415,694 primarily as a result of the $424,193 operating expenses (after the elimination of $94,279 in intercompany expenses) from the consolidation of the Hato Rey Partnership. Interest on mortgage debt increased by $316,526 primarily as a result of the $293,068 interest expense from the consolidation of the Hato Rey Partnership mortgage. In addition, the Company recorded amortization of discount on this mortgage of $25,129. Amortization of in-place lease values and mortgage costs increased by $81,946 primarily as a result of $68,117 of amortization of in-place lease values and $13,743 of amortization of mortgage costs as a result of the consolidation of the Hato Rey Partnership. The in-place lease values were recorded in connection with the partial step acquisition of the Hato Rey Partnership in 2006. Other income decreased by $252,915 primarily as a result of the $291,359 increase in the Company's share of the loss from joint ventures (see Liquidity and Capital Resources - Investments in and Advances to Joint Ventures below). Loss from continuing operations increased by $452,176 from a loss of $848,954 in 2006 to a loss of $1,301,130 in 2007. This increase was primarily a result of the increase in the equity in the loss of joint ventures of $291,359 and the consolidation of the Hato Rey Partnership which incurred a loss of $117,422 in the 2007 period. Discontinued Operations: In 2007, the Company had two properties that were classified as discontinued operations; the Cambridge Green property in Council Bluffs, Iowa, which was sold in March, 2007, and a cooperative apartment unit in New Haven, Connecticut, which was sold in June, 2007. (See Liquidity and Capital Resources - Discontinued Operations below). The following table compares the total income (loss) from discontinued operations for the three month periods ended June 30, for properties included in discontinued operations: 2007 2006 --------- --------- Loss from discontinued operations: Cambridge Green, Council Bluffs, IA $ (1,640) $ (66,955) Cooperative apartment unit, New Haven, CT (556) (213) --------- ---------- Loss from discontinued operations (2,196) (67,168) --------- ---------- Net gain from sales of discontinued operations: Cooperative apartment unit 88,946 - --------- ---------- Total income (loss) from discontinued operations $ 86,750 $ (67,168) ========= ========== Results of Operations Financial Information for the six months ended June 30, 2007 and 2006: --------------------------------------------------------------------------- For the six months ended June 30, 2007, the Company consolidated 100% of the results of operations of the Hato Rey Partnership. The table below is the results of operations for the Company for the six months ended June 30, 2007 and 2006. For the six months ended June 30, 2006, the Hato Rey Partnership was not consolidated on the Company's consolidated statement of operations; the Company recorded its share of the loss from operations from the Hato Rey Partnership under the equity method of accounting and, accordingly, the loss was recorded in the equity in the loss of partnership. The table also segregates for analysis purposes the results of operations of the Hato Rey Partnership for the six months ended June 30, 2007. SIX MONTH PERIODS
Net Loss Before Consolidation of the Hato Rey Hato Rey Eliminations Total Total Partnership Partnership (1) Net Loss Net Loss Six Months Six Months Six Months Six Months Six Months Ended Ended Ended Ended Ended June 30, June 30, June 30, June 30, June 30, 2007 2007 2007 2007 2006 ------------------ ------------- -------------- -------------- -------------- Revenues: Rental $1,309,941 $1,621,560 ($66,822) $2,864,679 $1,055,204 Interest on mortgages - notes receivable 587,183 - - 587,183 633,037 Interest on mortgages - notes receivable - related parties 221,989 - - 221,989 107,104 Other revenues 132,484 - (127,836) 4,648 84,545 ------------------ ------------- -------------- -------------- -------------- Total 2,251,597 1,621,560 (194,658) 3,678,499 1,879,890 ------------------ ------------- -------------- -------------- -------------- Costs and Expenses: General and administrative 2,056,830 - (66,822) 1,990,008 1,978,913 Depreciation on non-rental property 14,223 - - 14,223 8,120 Rental property: Operating expenses 716,992 1,019,936 (205,510) 1,531,418 612,221 Interest on mortgage debt 169,523 584,238 - 753,761 116,856 Real estate taxes 172,119 132,915 - 305,034 164,192 Depreciation on real estate 66,256 169,866 - 236,122 64,021 Amortization of in-place lease values and mortgage costs 206,623 31,552 - 238,175 5,719 ------------------ ------------- -------------- -------------- -------------- Total 3,402,566 1,938,507 (272,332) 5,068,741 2,950,042 ------------------ ------------- -------------- -------------- -------------- Other Income (Loss): Investment income 105,371 12,056 (83,363) 34,064 99,884 Equity in the loss of joint ventures (1,017,465) - - (1,017,465) (1,014,339) Equity in the loss of partnership - - - - (106,362) ------------------ ------------- -------------- -------------- -------------- Loss before minority interest (2,063,063) (304,891) (5,689) (2,373,643) (2,090,969) Minority interest (2,222) - - (2,222) (4,126) ------------------ ------------- -------------- -------------- ------------- Loss from continuing operations (2,065,285) (304,891) (5,689) (2,375,865) (2,095,095) ------------------ ------------- -------------- -------------- ------------- Discontinued Operations: Loss from discontinued operations (102,766) - 5,689 (97,077) (99,361) Net gain from sales of discontinued operations 735,705 - - 735,705 - ------------------ ------------- -------------- -------------- ------------- Total income (loss) from discontinued operations 632,939 - 5,689 638,628 (99,361) ------------------ ------------- -------------- -------------- ------------- Net Loss ($1,432,346) ($304,891) $ - ($1,737,237) ($2,194,456) ================== ============= ============== ============== ============= (1) Represents intercompany transactions that are eliminated in consolidation.
Continuing Operations: Revenues increased by $1,798,609 primarily as a result of increases in rental revenues and in interest income on mortgages-notes receivable-related parties, partially offset by decreases in interest income on mortgages-notes receivable and other revenues. Rental revenues increased by $1,809,475 primarily due to the consolidation of the Hato Rey Partnership, which increased rental revenues by $1,621,560. In addition, rental revenues increased at all of the other rental properties, including a $94,965 increase at the Mapletree Industrial Center property as a result of increased occupancy rates. Interest on mortgages - notes receivable decreased by $45,854. As a result of a repayment of $2,425,006 on a note receivable in the first quarter of 2006, interest income on that note decreased by $60,928 in the 2007 period. Interest on mortgages-notes receivable-related parties increased by $114,885 primarily as a result of an increase of $117,250 in payments of interest received on the Consolidated Loans (see Liquidity and Capital Resources - Consolidated Loans below). Other revenues decreased by $79,897 primarily as a result of reduced fees of $62,701 earned by the Company's management company for third party owned properties, including primarily the Hato Rey Partnership. As a result of the consolidation of the Hato Rey Partnership in 2007, such fees were eliminated. Costs and expenses increased by $2,118,699 primarily due to the consolidation of the Hato Rey Partnership, which increased rental property expenses. Rental property operating expenses increased by $919,197 primarily as a result of the $852,767 operating expenses (after the elimination of $167,169 in intercompany expenses) from the consolidation of the Hato Rey Partnership. In addition, insurance expense increased by $33,057 and environmental expenses increased by $25,626 at the Mapletree Industrial Center property (see Liquidity and Capital Resources - Environmental Matters below). Interest on mortgage debt increased by $636,905 primarily as a result of the $584,238 interest expense from the consolidation of the Hato Rey Partnership mortgage. In addition, the Company recorded amortization of discount on this mortgage of $55,899. Amortization of in-place lease values and mortgage costs increased by $232,456 primarily as a result of $200,733 of amortization of in-place lease values and $31,552 of amortization of mortgage costs as a result of the consolidation of the Hato Rey Partnership. The in-place lease values were recorded in connection with the partial step acquisition of the Hato Rey Partnership in 2006. Other income increased by $37,416 primarily as a result of a decrease of $106,362 in the equity in loss of the Hato Rey Partnership, offset by lower investment income of $65,820. Investment income decreased primarily due to lower interest income earned on other investments. Loss from continuing operations increased by $280,770 from a loss of $2,095,095 in 2006 to a loss of $2,375,865 in 2007. This increase was primarily due to the consolidation of the Hato Rey Partnership which incurred a loss of $304,891 for 2007. Discontinued Operations: The following table compares the total income (loss) from discontinued operations for the six month periods ended June 30, for properties included in discontinued operations: 2007 2006 -------- -------- Loss from discontinued operations: Cambridge Green, Council Bluffs, IA $(96,438) $(98,734) Cooperative apartment unit, New Haven, CT (639) (627) -------- -------- Loss from discontinued operations (97,077) (99,361) -------- -------- Net gain from sales of discontinued operations: Cambridge Green 646,759 - Cooperative apartment unit 88,946 - -------- -------- Net gain from sales of discontinued operations 735,705 - -------- -------- Total income (loss) from discontinued operations $638,628 $(99,361) ======== ======== Balance Sheet Investments in and advances to joint ventures decreased by $2,539,176 as a result of $1,521,711 of distributions received and $1,017,465 of equity in the loss from the joint ventures. Net mortgage portfolio increased by $196,893 primarily as a result of a $200,000 secured note receivable received in connection with the sale of the Cambridge Green property in March, 2007. Assets related to discontinued operations decreased by $2,922,493 as a result of the sale of the Cambridge Green property. Prepaid defined benefit plan costs decreased by $59,471 as a result of net periodic benefit costs for 2007. Other receivables increased by $24,550 primarily as a result of increases in tenant account receivables of $53,973, partially offset by a decrease in accrued interest receivable of $12,677 and decreases of $16,746 in miscellaneous receivables. Cash and cash equivalents decreased by $975,081 primarily as a result of cash distributions on common stock to shareholders of $1,260,262 and purchases of treasury stock of $166,590, partially offset by the cash proceeds received on the sale of the Cambridge Green property of $464,780. Other assets decreased by $283,177 primarily as a result of $197,868 of amortization of in-place lease value, $37,442 of amortization of mortgage costs and a decrease of $18,950 in tenant security deposits. Liabilities related to discontinued operations decreased by $2,911,677 as a result of the sale of the Cambridge Green property. Accrued liabilities increased by $403,938 primarily as a result of the $640,800 accrual for interest related to tax positions for which the Company may be required to pay a deficiency dividend, partially offset by a decrease in accrued real estate taxes of $168,924 for the Cambridge Green property that was sold. Other liabilities decreased by $39,924 primarily as a result of $33,857 for the amortization of below market leases. In January, 2007, three independent directors of the Company each received 1,000 fully vested shares of the Company's Class B common stock from its 2005 Restricted Stock Plan ("2005 Plan") as a partial payment of directors' fees for the 2007 year. The shares were valued at $6.95 per share, which was the market value of the Class B common stock at the grant date, and, accordingly, the Company recorded $20,850 in prepaid directors' fees (to be amortized during 2007) based on the market value of the stock. The Company recorded additions to the Company's Class B common stock of $300 at par value of $.10 per share and $20,550 to additional paid-in capital. In addition, in May, 2007, an officer of the Company was awarded 10,000 shares of the Company's Class B common stock from the 2005 Plan. The market price of the shares at the grant date was $7.44 per share and the shares will vest at the rate of 50% per year. Treasury stock increased by $166,590 as a result of the Company's purchase of 11,528 shares of its Class B common stock at an average cost of $7.87 per share, 10,000 shares of its Class B Common Stock from a director of the Company at a cost of $7.00 per share, and 774 shares of its Class A common stock at an average cost of $7.60 per share. 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. If the Company's tax positions in relation to certain transactions were examined and were not ultimately upheld, the Company would be required to pay an income tax assessment and related interest, or a deficiency dividend and related interest, for prior years. Should such an assessment require the Company to pay a deficiency dividend in order to continue to qualify as a REIT, the Company would pay the deficiency dividend to its shareholders and the related interest assessment to the taxing authorities. The Company would be required to pay such deficiency dividend within ninety days of such determination. If the Company had to pay a deficiency dividend and interest thereon, the Company may have to borrow funds or sell assets to do so. 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 June 30, 2007, there was no outstanding balance due under the line of credit. During the first six months of 2007, 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 the first six months of 2007, pay dividends in excess of its cash flow from operating activities if the Board of Directors believes that the Company's liquidity and capital resources are sufficient to pay such dividends. To the extent that payments received on its mortgage portfolio or payments received from sales are taxable as capital gains, the Company has the option to distribute the gain to its shareholders or to retain the gain and pay Federal income tax on it. 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 2007, no assurances can be given that the present dividend rate will be maintained in the future. At June 30, 2007, Presidential had $1,288,453 in available cash and cash equivalents, a decrease of $975,081 from the $2,263,534 at December 31, 2006. This decrease in cash and cash equivalents was due to cash used in financing activities of $1,515,481, offset by cash provided by operating activities of $371,763 and cash provided by investing activities of $168,637. 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 joint ventures. In 2007, cash received from interest on the Company's mortgage portfolio was $735,133 and distributions received from the joint ventures were $1,521,711. Net cash disbursed for rental property operations was $195,341. Net cash disbursed for rental property operations includes distributions to minority partners but does not include additions and improvements and mortgage amortization. Investing Activities Presidential holds a portfolio of mortgage notes receivable. During 2007, the Company received principal payments of $114,303 on its mortgage portfolio of which $103,644 represented prepayments. During the first six months of 2007, the Company invested $473,976 in additions and improvements to its properties. In March, 2007, the Company completed the sale of its Cambridge Green Apartments in Council Bluffs, Iowa and the net proceeds of the sale were $664,780, which included a $200,000 secured note receivable from the buyer that matures in one year and has a 7% per annum interest rate. The net cash proceeds of sale were $464,780 (see Discontinued Operations below). In June, 2007, the Company sold a cooperative apartment unit located in New Haven, Connecticut for a sales price of $125,000 and the net cash proceeds of sale were $117,224 (see Discontinued Operations below). In January, 2007, the Company purchased an additional 1% limited partnership interest in the Hato Rey Partnership for a purchase price of $53,694. Financing Activities The Company's indebtedness at June 30, 2007, consisted of mortgage debt of $19,024,968. The mortgage debt is collateralized by individual properties. The $15,680,467 mortgage on the Hato Rey Center property and the $2,220,186 mortgage on the Crown Court property are nonrecourse to the Company, whereas the $1,115,340 Building Industries Center mortgage and the $111,651 Mapletree Industrial Center mortgage are recourse to Presidential. In addition, some of the Company's mortgages provide for Company liability for damages resulting from specified acts or circumstances, such as for environmental liabilities and fraud. Generally, mortgage debt repayment is serviced with cash flow from the operations of the individual properties. During the first six months of 2007, the Company made $215,391 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, and the Hato Rey Center mortgage. The $15,680,467 Hato Rey Center mortgage matures in May, 2028, and has a fixed rate of interest of 7.38% per annum until May, 2008; thereafter the interest rate will increase by 2% and additional repayments of principal will be required from surplus cash flows from operations of the property. The Company intends to refinance the Hato Rey Center mortgage prior to May, 2008. During the first six months of 2007, Presidential declared and paid cash distributions of $1,260,262 to its shareholders and received proceeds from its dividend reinvestment plan of $131,762. In the first quarter of 2007, the Company purchased 774 shares of its Class A common stock and 11,528 shares of its Class B common stock for a purchase price of $96,590. In addition, in April, 2007, the Company purchased 10,000 shares of its Class B common stock from a director of the Company for a purchase price of $70,000. The Company has from time to time purchased shares of its stock from individual shareholders who have approached the Company. The Company has no specific plan or program to repurchase additional shares but it may do so in the future. Discontinued Operations On March 21, 2007, the Company completed the sale of the Cambridge Green property, a 201-unit apartment property in Council Bluffs, Iowa for a sales price of $3,700,000. As part of the sales price, (i) the $2,856,452 outstanding principal balance of the first mortgage debt was assumed by the buyer, (ii) the Company received a $200,000 secured note receivable from the buyer, which matures in one year and has an interest rate of 7% per annum, and (iii) the balance of the sales price was paid in cash. The net proceeds of sale were $664,780, which includes the $200,000 note receivable. The Company recognized a gain from the sale for financial reporting purposes of $646,759. The Company owns a small portfolio of cooperative apartments located in New York and Connecticut. These apartments are held for the production of rental income and generally are not marketed for sale. However, from time to time, the Company will receive purchase offers for some of these apartments or decide to market specific apartments and will make sales if the purchase price is acceptable to management. In June, 2007, the Company sold one cooperative apartment unit located in New Haven, Connecticut for a sales price of $125,000. The net proceeds of sale were $117,224 and the Company recognized a gain from the sale for financial reporting purposes of $88,946. Investments in and Advances to Joint Ventures Over the past several years the Company has made investments in and advances to four joint ventures that own nine shopping malls. The Company has a 29% ownership interest in these joint ventures and accounts for these investments under the equity method. All of the investments in and advances to joint ventures were made with various entities of the Lightstone Group ("Lightstone"). The Company's investments in three of the joint ventures were mezzanine loans to the various joint venture owning entities. These loans mature in 2014 and 2015 and have an annual interest rate of 11% per annum. At June 30, 2007, these loans have an aggregate outstanding principal balance of $25,935,000. The loans are secured by the ownership interests in the entities that own the malls, subject to the first mortgage liens. The Company receives monthly payments of interest on these loans from the joint ventures and records these payments to Investments in and advances to joint ventures, as distributions received. In addition, the owning entity of the Martinsburg Mall has a $2,600,000 mezzanine loan payable to Lightstone. The loan matures in 2014 and the interest rate on the loan is 11% per annum. This loan is secured by an assignment of the ownership interest in the entity that owns the mall, subject to the first mortgage lien. Each individual owning entity is a single purpose entity that is prohibited by its organizational documents from owning any assets other than the nine shopping mall properties. The Company accounts for these investments using the equity method. At June 30, 2007, investments in and advances to joint ventures are as follows: Martinsburg Mall (1) $ - Four Malls 3,639,645 Shawnee/Brazos Malls 5,287,710 Macon/Burlington Malls 6,593,218 ----------- $15,520,573 =========== Equity in the loss of joint ventures for the six months ended June 30, 2007 is as follows: Martinsburg Mall (1) $ (83,384) Four Malls (416,677) Shawnee/Brazos Malls (284,501) Macon/Burlington Malls (232,903) ----------- $(1,017,465) =========== (1) In the second quarter of 2007, the Company's basis of its investment in the Martinsburg Mall was reduced by distributions and losses to zero and the Company only recorded its share of the loss to the extent of its basis. Future distributions to be received will be recorded in income, and, future earnings of the Martinsburg Mall, should they materialize, will be recorded by the Company after applying the distributions and any losses not previously recognized. 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 statements of operations reflect 29% of the loss of the joint ventures. The Company's equity in the loss of joint ventures of $1,017,465 for the six months ended June 30, 2007 is after deductions in the aggregate amount of $1,772,861 for the Company's 29% of noncash charges (depreciation of $1,322,745 and amortization of deferred financing costs, in-place lease values and other costs of $450,116). Notwithstanding the loss from the joint ventures, the Company is entitled to receive its interest at the rate of 11% per annum on its $25,935,000 of loans to the joint ventures. For the six months ended June 30, 2007, the Company received distributions from the joint ventures in the amount of $1,521,711, of which $1,442,274 were interest payments received on the outstanding loans to the joint ventures and $79,437 was a return on investment. The Lightstone Group is controlled by David Lichtenstein. At June 30, 2007, in addition to Presidential's investments of $15,520,573 in the 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 $7,449,994 with a net carrying value of $6,999,330. Two of the loans in the outstanding principal amount of $5,375,000, with a net carrying value of $4,924,336, are secured by interests in five apartment properties and are also personally guaranteed by Mr. Lichtenstein up to a maximum amount of $3,137,500. The Company believes that Mr. Lichtenstein has sufficient net worth and liquidity to satisfy his obligations under these personal guarantees. However, because of the substantial equity in the properties securing the loans, it is unlikely that Presidential will have to call upon these personal guarantees. The third loan in the outstanding principal amount of $2,074,994 is secured by interests in nine apartment properties. All of these loans are in good standing. While the Company believes that all of these loans are adequately secured, a default on any or all of these loans could have a material adverse effect on Presidential's business and operating results. The $22,519,903 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 approximately 49% of the Company's total assets at June 30, 2007. Hato Rey Partnership At June 30, 2007, the Company has an aggregate 60% general and limited partnership interest in the Hato Rey Partnership. The Hato Rey Partnership owns and operates an office building in Hato Rey, Puerto Rico. During 2005 and 2006, three tenants at the building vacated a total of 82,387 square feet of office space at the expiration of their leases in order to take occupancy of their own newly constructed office buildings. As a result, at December 31, 2006, the vacancy rate at the building was approximately 45% and at June 30, 2007, the vacancy rate was approximately 35%. The Company expects that it will take some time to find tenants for the vacant space and that until a substantial portion of the vacant space is rented, the property will operate at a loss. In addition, in 2006 the Hato Rey Partnership began a program of repairs and improvements to the building that is estimated to cost approximately $1,255,000. Management believes that the improvement program, when completed in 2007, will bring the building up to modern standards for office buildings in the area, that renting will continue to progress and that the property will be returned to its former profitable status. The Company agreed to lend up to $1,000,000 to the Hato Rey Partnership (and has the right to lend an additional $1,000,000) to pay for the cost of improvements to the building and fund any negative cash flows from the operation of the property. The loan, which is advanced from time to time as funds are needed, bears interest at the rate of 11% per annum, with interest and principal to be paid out of the first positive cash flow from the property or upon a refinancing of the first mortgage on the property. At June 30, 2007, the Company had advanced $1,916,275 to the Hato Rey Partnership. The $1,916,275 loan and the accrued interest of $124,636 have been eliminated in consolidation. Environmental Matters Mapletree Industrial Center - Palmer, Massachusetts The Company is involved in an environmental remediation process for contaminated soil found on this property. The land area involved is approximately 1.25 acres and the depth of the contamination is at this time undetermined. Since the most serious identified threat on the site is to songbirds, the proposed remediation will consist of removing all exposed metals and a layer of soil (the depth of which is yet to be determined). The Company estimates that the costs of the cleanup will not exceed $1,000,000. The remediation will comply with the requirements of the Massachusetts Department of Environmental Protection ("MADEP"). The MADEP has agreed that the Company may complete the remediation over the next fifteen years, but the Company expects to complete the project over the next ten years. In accordance with the provisions of SFAS No. 5, "Accounting for Contingencies", in the fourth quarter of 2006, the Company accrued a $1,000,000 liability which was discounted by $145,546 and charged $854,454 to expense. The discount rate used was 4.625%, which was the interest rate on 10 year Treasury Bonds. The expected cash payments and undiscounted amount to be recognized in the Company's consolidated financial statements are as follows: Estimated Discount Undiscounted Amount Actual Amount to be Recognized Estimated Cash Payments Recognized as Expense Year Cash Payments June 30, 2007 as Expense June 30, 2007 ---- ------------- ------------- ------------ ------------- 2007 $200,000 $17,478 $ 8,841 $773 2008 200,000 16,934 2009 150,000 18,277 2010 100,000 15,612 2011 100,000 18,781 2012-2016 250,000 67,101 Actual costs incurred may vary from these estimates due to the inherent uncertainties involved. The Company believes that any liability in excess of the amounts accrued which may result from the resolution of this matter will not have a material adverse effect on the financial condition, liquidity or the cash flow of the Company. For the six months ended June 30, 2007, the Company incurred environmental expenses of $41,493 for further excavation and testing of the site. These expenses were in addition to the $1,000,000 previously accrued for the costs of the cleanup of the site. Consolidated Loans Presidential holds two nonrecourse loans (the "Consolidated Loans"), which were collateralized by substantially all of the remaining assets of Ivy Properties, Ltd. and its affiliates "(Ivy"). At June 30, 2007, 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 may be material from time to time. However, the profitability of theatrical production is by its nature uncertain and management believes that any estimate of payments from Scorpio on the Consolidated Loans for future periods is too speculative to project. During the six months ended June 30, 2007 and 2006, the Company received payments of $215,250 and $98,000, respectively, from Scorpio. The Consolidated Loans bear interest at a rate equal to the JP Morgan Chase Prime rate, which was 8.25% at June 30, 2007. At June 30, 2007, the unpaid and unaccrued interest was $3,273,373 and such interest is not compounded. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments consist primarily of 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 or prepayment 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. Nevertheless, 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 as a result of the yield maintenance requirements. The Company does not own any derivative financial instruments or engage in hedging activities. The $29,600,000 nonrecourse first mortgage loan secured by the West Manchester Mall and the $39,500,000 nonrecourse first mortgage loan secured by the Shawnee/Brazos Malls carry interest rates that change monthly based on the London Interbank Offered Rate and mature in June, 2008 and January, 2008, respectively. The borrower has the right to extend the maturity date of the Shawnee/Brazos Malls first mortgage for two additional one year terms. A 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 $7,835,000 mezzanine loans to those entities. The interest rate on the first mortgage secured by the West Manchester Mall was 7.89% per annum at December 31, 2006 and 8.125% at June 30, 2007. The interest rate on the first mortgages secured by the Shawnee/Brazos Malls was 7.93% per annum at December 31, 2006 and 8.12% per annum at June 30, 2007. The Company believes that these first mortgages will either be extended in accordance with their terms or refinanced prior to the maturity date. 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 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Stockholders on June 15, 2007. The following actions were taken at the Annual Meeting: 1. The following persons were elected as Directors by the holders of the Company's Class A Common Stock: Votes Votes For Withheld --- -------- Robert Feder 371,172 2,319 Jeffrey F. Joseph 370,772 2,719 Robert E. Shapiro 370,772 2,719 Steven Baruch 370,672 2,819 2. The following persons were elected as Directors by the holders of the Company's Class B Common Stock: Votes Votes For Withheld --- -------- Richard Brandt 2,757,900 142,226 Mortimer Caplin 2,756,344 143,782 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: August 8, 2007 By: /s/ Jeffrey F. Joseph --------------------- Jeffrey F. Joseph President and Chief Executive Officer DATE: August 8, 2007 By: /s/ Elizabeth Delgado --------------------- Elizabeth Delgado Treasurer