-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FDQZnPKdA4AP6uZnWpdYJ/tJkhGeS7Fw6iguhyzMn5uOGCIj48KfG25+kdha0VeO CgLyF2jNCaoZM2e8Oxpk4g== 0000731245-09-000018.txt : 20091110 0000731245-09-000018.hdr.sgml : 20091110 20091110134305 ACCESSION NUMBER: 0000731245-09-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20090930 FILED AS OF DATE: 20091110 DATE AS OF CHANGE: 20091110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRESIDENTIAL REALTY CORP/DE/ CENTRAL INDEX KEY: 0000731245 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 131954619 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08594 FILM NUMBER: 091171326 BUSINESS ADDRESS: STREET 1: 180 S BROADWAY CITY: WHITE PLAINS STATE: NY ZIP: 10605 BUSINESS PHONE: 9149481300 MAIL ADDRESS: STREET 1: 180 SOUTH BROADWAY CITY: WHITE PLAINS STATE: NY ZIP: 10605 10-Q 1 sep0910q.txt PRESIDENTIAL REALTY CORP FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2009 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8594 ------ PRESIDENTIAL REALTY CORPORATION -------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-1954619 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 180 South Broadway, White Plains, New York 10605 - ------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code 914-948-1300 ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ----- Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No ----- ----- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer ------- ------- Non-accelerated filer (Do not check if a smaller reporting company) ------ Smaller reporting company x ----- 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 registrant's classes of common stock as of November 9, 2009 was 442,533 shares of Class A common stock and 2,957,147 shares of Class B common stock. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES ------------------------------------------------- Index to Form 10-Q For the Quarterly Period Ended September 30, 2009 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 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk Item 4. Controls and Procedures Part II Other Information Item 6. Exhibits PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2009 2008 ---------------- --------------- Assets Real estate (Note 2) $18,005,331 $17,686,971 Less: accumulated depreciation 2,586,562 2,211,207 ---------------- --------------- Net real estate 15,418,769 15,475,764 Net mortgage portfolio (of which $750,346 in 2009 and $119,274 in 2008 are due within one year) (Note 3) 2,867,935 2,249,203 Investments in and advances to joint ventures (Note 4) 3,709,882 1,511,887 Assets related to discontinued operations (Note 5) 30,819 391,479 Prepaid expenses and deposits in escrow 990,324 1,113,437 Other receivables (net of valuation allowance of $175,421 in 2009 and $106,183 in 2008) 328,430 462,479 Cash and cash equivalents 1,362,241 5,984,550 Securities available for sale (Note 6) 3,633,958 9,648 Other assets 543,315 693,162 ---------------- --------------- Total Assets $28,885,673 $27,891,609 ================ =============== Liabilities and Stockholders' Equity Liabilities: Mortgage debt (of which $1,422,687 in 2009 and $376,619 in 2008 are due within one year) $16,113,609 $16,392,285 Liabilities related to discontinued operations (Note 5) - 2,078,971 Contractual pension and postretirement benefits liabilities 1,814,673 1,808,104 Defined benefit plan liability 1,764,094 2,253,139 Accrued liabilities 2,213,034 2,000,365 Accounts payable 390,061 524,718 Other liabilities 562,538 695,300 ---------------- --------------- Total Liabilities 22,858,009 25,752,882 ---------------- --------------- Stockholders' Equity: Common stock: par value $.10 per share September 30, 2009 December 31, 2008 ------------------ ------------------ Class A 47,894 47,894 ----------- Authorized: 700,000 700,000 Issued: 478,940 478,940 Treasury: 36,407 36,407 Class B 352,755 352,455 ----------- Authorized: 10,000,000 10,000,000 Issued: 3,527,547 3,524,547 Treasury: 570,400 570,400 Additional paid-in capital 4,625,289 4,586,738 Retained earnings 7,913,364 3,870,905 Accumulated other comprehensive loss (Note 9) (3,610,698) (3,589,877) Treasury stock (at cost) (3,129,388) (3,129,388) ---------------- --------------- Total Presidential Realty Corporation stockholders' equity 6,199,216 2,138,727 Noncontrolling interest (Note 7) (171,552) - ---------------- --------------- Total Stockholders' Equity 6,027,664 2,138,727 ---------------- --------------- Total Liabilities and Stockholders' Equity $28,885,673 $27,891,609 ================ =============== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, ------------------------------------- 2009 2008 --------------- ---------------- Revenues: Rental $1,314,425 $1,380,940 Interest on mortgages - notes receivable 103,451 287,022 Interest on mortgages - notes receivable - related parties - 19,250 Other revenues 12 1,350 --------------- ---------------- Total 1,417,888 1,688,562 --------------- ---------------- Costs and Expenses: General and administrative (Note 10) 865,834 (60,746) Depreciation on non-rental property 10,518 11,942 Rental property: Operating expenses 689,632 762,201 Interest on mortgage debt 385,324 385,565 Real estate taxes 157,396 111,195 Depreciation on real estate 131,165 120,286 Amortization of in-place lease values and mortgage costs 13,470 31,194 --------------- ---------------- Total 2,253,339 1,361,637 --------------- ---------------- Other Income (Loss): Investment income 31,558 16,932 Equity in the loss from joint ventures (Note 4) (466,127) (124,683) --------------- ---------------- Income (loss) from continuing operations (1,270,020) 219,174 --------------- ---------------- Discontinued Operations (Note 5): Income (loss) from discontinued operations (3,127) 70,421 Net gain from sales of discontinued operations - 2,893,031 --------------- ---------------- Total income (loss) from discontinued operations (3,127) 2,963,452 --------------- ---------------- Net income (loss) (1,273,147) 3,182,626 Add: Net loss from noncontrolling interest (Note 7) 87,936 - --------------- ---------------- Net Income (Loss) attributable to Presidential Realty Corporation ($1,185,211) $3,182,626 =============== ================ Earnings per Common Share attributable to Presidential Realty Corporation (basic and diluted) (Note 11): Income (loss) from continuing operations ($0.35) $0.06 --------------- ---------------- Discontinued Operations: Income from discontinued operations - 0.02 Net gain from sales of discontinued operations - 0.83 --------------- ---------------- Total income from discontinued operations - 0.85 --------------- ---------------- Net Income (Loss) per Common Share - basic ($0.35) $0.91 =============== ================ - diluted ($0.35) $0.90 =============== ================ Cash Distributions per Common Share $ - $0.16 =============== ================ Weighted Average Number of Shares Outstanding - basic 3,381,982 3,501,921 =============== ================ - diluted 3,381,982 3,533,118 =============== ================ Amounts attributable to Presidential Realty Corporation Common Shareholders: Income (loss) from continuing operations ($1,182,084) $219,174 Total income (loss) from discontinued operations (3,127) 2,963,452 --------------- ---------------- Net Income (Loss) ($1,185,211) $3,182,626 =============== ================ See notes to consolidated financial statements. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------- 2009 2008 --------------- ---------------- Revenues: Rental $4,064,411 $4,035,636 Interest on mortgages - notes receivable 350,833 815,586 Interest on mortgages - notes receivable - related parties - 146,750 Other revenues 23,626 3,786 --------------- ---------------- Total 4,438,870 5,001,758 --------------- ---------------- Costs and Expenses: General and administrative (Note 10) 2,748,724 1,875,181 Depreciation on non-rental property 31,419 29,676 Rental property: Operating expenses 2,067,541 2,128,177 Interest on mortgage debt 1,144,177 1,088,241 Real estate taxes 381,132 330,505 Depreciation on real estate 382,230 343,784 Amortization of in-place lease values and mortgage costs 47,743 130,883 --------------- ---------------- Total 6,802,966 5,926,447 --------------- ---------------- Other Income (Loss): Investment income 64,159 53,207 Equity in the loss from joint ventures (Note 4) (1,052,005) (581,083) Gain on settlement of joint venture loans (Notes 3 and 4) 3,979,289 - --------------- ---------------- Income (loss) from continuing operations 627,347 (1,452,565) --------------- ---------------- Discontinued Operations (Note 5): Income from discontinued operations 35,224 196,099 Net gain from sales of discontinued operations 3,208,336 2,893,031 --------------- ---------------- Total income from discontinued operations 3,243,560 3,089,130 --------------- ---------------- Net income 3,870,907 1,636,565 Add: Net loss from noncontrolling interest (Note 7) 171,552 - --------------- ---------------- Net Income attributable to Presidential Realty Corporation $4,042,459 $1,636,565 =============== ================ Earnings per Common Share attributable to Presidential Realty Corporation (basic and diluted) (Note 11): Income (loss) from continuing operations $0.24 ($0.39) --------------- ---------------- Discontinued Operations: Income from discontinued operations 0.01 0.05 Net gain from sales of discontinued operations 0.95 0.77 --------------- ---------------- Total income from discontinued operations 0.96 0.82 --------------- ---------------- Net Income per Common Share - basic $1.20 $0.43 =============== ================ - diluted $1.19 $0.43 =============== ================ Cash Distributions per Common Share $ - $0.48 =============== ================ Weighted Average Number of Shares Outstanding - basic 3,380,667 3,770,895 =============== ================ - diluted 3,399,592 3,770,895 =============== ================ Amounts attributable to Presidential Realty Corporation Common Shareholders: Income (loss) from continuing operations $798,899 ($1,452,565) Total income from discontinued operations 3,243,560 3,089,130 --------------- ---------------- Net Income $4,042,459 $1,636,565 =============== ================ See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Presidential Realty Corporation Stockholders --------------------------------------------------------- Accumulated Additional Other Total Common Paid-in Retained Comprehensive Treasury Noncontrolling Comprehensive Stockholders' Stock Capital Earnings Loss Stock Interest Income Equity -------- ----------- ---------- ------------- ------------ -------------- ------------- ---------- Balance at January 1, 2009 $400,349 $4,586,738 $3,870,905 ($3,589,877) ($3,129,388) $ - $2,138,727 Issuance and vesting of restricted stock 300 38,551 - - - - 38,851 Comprehensive income: Net income (loss) - - 4,042,459 - - (171,552) $3,870,907 3,870,907 Other comprehensive income (loss) - Net unrealized loss on securities available for sale - - - (2,327) - - (2,327) (2,327) Adjustment for contractual postretirement benefits - - - (18,494) - - (18,494) (18,494) ------------ Comprehensive income 3,850,086 Comprehensive loss attributable to noncontrolling interest 171,552 Comprehensive income attributable to Presidential Realty ----------- Corporation $4,021,638 =========== -------- ----------- ---------- ------------ ------------ ---------- ---------- Balance at September 30, 2009 $400,649 $4,625,289 $7,913,364 ($3,610,698) ($3,129,388) ($171,552) $6,027,664 ======== =========== ========== ============ ============ ========== ========== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------------- 2009 2008 ----------------- ------------------ Cash Flows from Operating Activities: Cash received from rental properties $4,269,683 $4,773,851 Interest received 394,170 680,405 Distributions received from joint ventures - 1,676,855 Miscellaneous income 10,942 2,732 Interest paid on rental property mortgage debt (944,782) (1,032,805) Cash disbursed for rental property operations (2,602,299) (3,138,703) Cash disbursed for general and administrative costs (3,143,968) (2,333,587) ----------------- ------------------ Net cash (used in) provided by operating activities (2,016,254) 628,748 ----------------- ------------------ Cash Flows from Investing Activities: Payments received on notes receivable 107,839 5,638,903 Proceeds from sales of properties 1,545,851 3,457,950 Payments received on settlement of joint venture loans 65,289 - Payments disbursed for additions and improvements (392,995) (576,675) Purchase of securities available for sale (4,431,622) - Proceeds from sales of securities 804,766 - ----------------- ------------------ Net cash (used in) provided by investing activities (2,300,872) 8,520,178 ----------------- ------------------ Cash Flows from Financing Activities: Principal payments on mortgage debt (303,683) (329,538) Payments disbursed for mortgage costs (1,500) - Purchase of treasury stock - (2,639,272) Cash distributions on common stock - (1,790,821) ----------------- ------------------ Net cash used in financing activities (305,183) (4,759,631) ----------------- ------------------ Net (Decrease) Increase in Cash and Cash Equivalents (4,622,309) 4,389,295 Cash and Cash Equivalents, Beginning of Period 5,984,550 2,343,497 ----------------- ------------------ Cash and Cash Equivalents, End of Period $1,362,241 $6,732,792 ================= ================== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------------- 2009 2008 ----------------- ----------------- Reconciliation of Net Income to Net Cash (Used in) Provided by Operating Activities Net Income $3,870,907 $1,636,565 ----------------- ----------------- Adjustments to reconcile net income to net cash (used in) provided by operating activities: Net gain from sales of discontinued operations (3,208,336) (2,893,031) Gain on settlement of joint venture loans (3,979,289) - Equity in the loss from joint ventures 1,052,005 581,083 Depreciation and amortization 461,612 539,981 Amortization of discount on mortgage payable - 48,254 Net change in revenue related to acquired lease rights/obligations and deferred rent receivable (25,300) (45,478) Amortization of discounts on notes and fees (62,570) (349,195) Issuance of stock to directors and officers 37,644 75,240 Distributions received from joint ventures - 1,676,855 Changes in assets and liabilities: Decrease (increase) in other receivables 142,453 (19,453) Decrease in accounts payable and accrued liabilities (393,062) (807,222) Increase (decrease) in other liabilities (75,587) 7,702 Decrease in prepaid expenses, deposits in escrow and deferred charges 170,664 179,320 Other (7,395) (1,873) ----------------- ----------------- Total adjustments (5,887,161) (1,007,817) ----------------- ----------------- Net cash (used in) provided by operating activities ($2,016,254) $628,748 ================= ================= SUPPLEMENTAL NONCASH DISCLOSURES: Fair value of assets received in settlement of notes receivable due from joint ventures: 50% partnership interest in IATG Puerto Rico, LLC $3,250,000 Note receivable 664,000 ----------------- $3,914,000 ================= Satisfaction of mortgage debt as a result of assumption of the mortgage debt by purchaser $2,053,964 ================= See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 (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 or interests in 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 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 Income (Loss) Per Share - Basic net income (loss) per share data is computed by dividing net income (loss) by the weighted average number of shares of Class A and Class B common stock outstanding (excluding nonvested shares) during each period. Diluted net income per share is computed by dividing net income by the weighted average shares outstanding, including the dilutive effect, if any, of nonvested shares. See Note 11. C. Basis of Presentation - The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. The results for such interim periods are not necessarily indicative of the results to be expected for the year. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the results for the respective periods have been reflected. These consolidated financial statements and accompanying notes should be read in conjunction with the Company's Form 10-K for the year ended December 31, 2008. 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. Securities Available for Sale - The Company's investments are in marketable equity and debt securities consisting of notes and bonds of agencies of the federal government and common stock of other REITS. Disposition of such securities may be appropriate for either liquidity management or in response to changing economic conditions, so they are classified as securities available for sale. Securities available for sale are reported at fair value in accordance with the Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"). The valuation of securities available for sale was determined to be Level 1 financial assets within the valuation hierarchy in this topic, and is based on current market quotes received from financial sources that trade such securities. Unrealized gains and losses are reported as other comprehensive income in the consolidated statement of stockholders' equity until realized. The Company evaluates these investments for other-than-temporary declines in value, and, if such declines were other than temporary, the Company would record a loss on the investments. Gains and losses on sales of securities are determined using the specific identification method. F. Discontinued Operations - The Company complies with the requirements of the Presentation and Property, Plant, and Equipment Topics of the ASC, with respect to long-lived assets classified as held for sale. The ASC 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. Accounting for Uncertainty in Income Taxes - The Company complies with the requirements of the recognition of current and deferred income tax accounts, including accrued interest and penalties in accordance with ASC 740-10-25. 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. Alternatively, the Company could elect to pay a deficiency dividend in order to continue to qualify as a REIT and the related interest assessment to the taxing authorities. I. Recently Adopted Accounting Standards - In June, 2009, the FASB issued ASC Topic 105, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162". This standard establishes the FASB ASC as the primary source of authoritative generally accepted accounting principles ("GAAP") recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission ("SEC") are also sources of authoritative GAAP for SEC registrants. This standard and the ASC became effective for interim and annual periods ending after September 15, 2009. The ASC supersedes all existing non-SEC accounting and reporting standards and the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to: (a) update the ASC; (b) provide background information about the guidance; and (c) provide the basis for conclusions on the change(s) in the ASC. The Company's adoption of this standard and the ASC during the quarter ended September 30, 2009 did not have a material effect on the Company's consolidated financial statements. All accounting references have been updated, and therefore Statement of Financial Accounting Standards ("SFAS") references have been replaced with ASC references except for SFAS references that have not been integrated into the codification. In December, 2007, the FASB issued ASC 810-10-65, "Noncontrolling Interests in Consolidated Financial Statements", which requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and noncontrolling interest. This standard became effective on January 1, 2009. The Company's adoption of this standard resulted in additional disclosures in the Company's consolidated financial statements, including the reporting of a net loss attributable to a noncontrolling interest of $171,552 for the nine months ended September 30, 2009. In June, 2008, the FASB issued ASC 260-10-65-2, "Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities". This standard affects entities which accrue non-returnable cash dividends on share-based payment awards during the awards' service period. The FASB concluded unvested share-based payment awards which are entitled to cash dividends, whether paid or unpaid, are participating securities any time the common shareholders receive dividends. Because the awards are considered participating securities, the issuing entity is required to apply the two-class method of computing basic and diluted earnings per share. This standard became effective on January 1, 2009. The Company's adoption of this standard on January 1, 2009 did not have a material effect on the Company's consolidated financial statements. In May, 2009, the FASB issued ASC Topic 855, "Subsequent Events". Although this standard does not significantly change current practice surrounding the disclosure of subsequent events, it provides guidance on management's assessment of subsequent events and the requirement to disclose the date through which subsequent events have been evaluated. This standard became effective on June 30, 2009. The Company has evaluated subsequent events through November 10, 2009, the date the consolidated financial statements were issued, for this Quarterly Report on Form 10-Q for the quarter ended September 30, 2009. I. Recently Issued and Not Yet Effective Accounting Standard - In June, 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)". SFAS No. 167 modified the existing quantitative guidance used in determining the primary beneficiary of a variable interest entity ("VIE") by requiring entities to qualitatively assess whether an enterprise is a primary beneficiary, based on whether the entity has (i) power over the significant activities of the VIE, and (ii) an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. SFAS No. 167 becomes effective for all new and existing VIEs on January 1, 2010. The Company's adoption of SFAS No. 167 is expected to have no impact on the Company's consolidated financial statements. 2. REAL ESTATE Real estate is comprised of the following: September 30, December 31, 2009 2008 ------------ ------------ Land $ 2,057,310 $ 2,059,856 Buildings 15,867,191 15,546,526 Furniture and equipment 80,830 80,589 ----------- ----------- Total real estate $18,005,331 $17,686,971 =========== =========== 3. MORTGAGE PORTFOLIO The components of the net mortgage portfolio are as follows: September 30, December 31, 2009 2008 ------------- ------------ Notes receivable $2,932,532 $2,290,370 Less: Discounts 64,597 41,167 ---------- ---------- Net mortgage portfolio $2,867,935 $2,249,203 ========== ========== At September 30, 2009, all of the notes in the Company's mortgage portfolio are current in accordance with their terms, as modified. On March 31, 2009, the Company received repayment of its $75,000 loan receivable related to the sale of Cambridge Green in 2007. On February 27, 2009, the Company completed a Settlement Agreement with The Lightstone Group ("Lightstone") and David Lichtenstein regarding various claims the Company had asserted against them. Under the terms of the Settlement Agreement, an affiliate of Lightstone, which is the debtor on an existing loan from the Company in the outstanding principal amount of $2,074,994, assumed $10,000,006 of indebtedness under the $9,500,000 mezzanine loan and the $8,600,000 mezzanine loan due from Lightstone. The total indebtedness was consolidated into a nonrecourse loan in the outstanding principal amount of $12,075,000 (the "Consolidated Note"). The Consolidated Note is secured by the ownership interests in entities owning nine apartment properties (1,056 apartment units) located in Virginia (which had previously secured the $2,074,994 indebtedness) and the ownership interests in entities owning nine additional apartment properties (931 apartment units) located in Virginia and North Carolina. The carrying value of the $12,075,000 Consolidated Note on the Company's consolidated balance sheet is $2,074,994. This is the same carrying value of the $2,074,994 note that was on the Company's consolidated balance sheet prior to the consolidation of that note with the additional $10,000,006 indebtedness assumed by the affiliate of Lightstone pursuant to the Settlement Agreement. The $10,000,006 additional portion of the Consolidated Note was received in partial settlement of the $9,500,000 and $8,600,000 mezzanine loans held by the Company, which had a net carrying value of $0 on the Company's consolidated balance sheet at December 31, 2008. Accordingly, in 2009, there was no adjustment on the Company's consolidated balance sheet and no gain or loss was recorded on the Company's consolidated financial statements as a result of the receipt of the Consolidated Note. The Consolidated Note accrues interest at the rate of 13% per annum and is due on February 1, 2012. All net cash flow from the eighteen apartment properties will be utilized to pay the interest accrued on the Consolidated Note and to the extent that there is not sufficient cash flow to pay all accrued interest, the unpaid interest will be deferred until the maturity of the Consolidated Note. The Company does not believe that there will be sufficient cash flow from the security for the Consolidated Note to pay all of the interest that is due on the note, the deferred interest that will be due at maturity and the $12,075,000 principal amount due at maturity. However, the Company believes that the monthly interest due on the $2,074,994 portion of the note will be paid in accordance with the terms of the note and, as a result, the Company will accrue the interest on this portion of the note. For the nine months ended September 30, 2009, the Company received interest payments of $230,785, recognized interest income of $161,849 and recorded deferred interest income of $68,936. The interest due on the $10,000,006 portion of the note will be recorded in income on a cash basis as interest is received and the balance of the interest due on the $10,000,006 will be deferred and due at maturity of the note. For the nine months ended September 30, 2009, the Company received $82,666 of interest payments and the unaccrued deferred interest was $697,334. Under the terms of the Settlement Agreement, the Company also received a $750,000 non-interest bearing, nonrecourse note due on January 31, 2010, which is secured by a 25% ownership interest in IATG Puerto Rico, LLC ("IATG") (see Note 4). In March, 2009, the Company had preliminarily estimated the fair value of the $750,000 note to be $200,000 and the Company recorded the $200,000 note receivable on its consolidated balance sheet and recognized a gain on settlement of joint venture loans of $200,000 in its consolidated financial statements at March 31, 2009. Subsequently, the Company received an independent appraisal of the IATG property (see Note 4) and based upon that appraisal, the Company estimated the fair value of the $750,000 note to be $664,000 ($750,000 note receivable less a discount on the note receivable of $86,000). Accordingly, in June, 2009, the Company recorded an additional $464,000 for the note receivable on its consolidated balance sheet and recognized an additional gain of $464,000 on settlement of joint venture loans in its consolidated financial statements. In addition, for the period ended September 30, 2009, the Company recognized in interest income $53,493 of the amortization of discount recorded on the note receivable. 4. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES At December 31, 2008, the Company had investments in and advances to four joint ventures which owned and operated nine shopping malls located in seven states. These investments in and advances to joint ventures were made to entities controlled by David Lichtenstein and Lightstone as follows: Owning Entity Properties Owned - ------------- ----------------- PRC Member LLC Martinsburg Mall Martinsburg, WV Lightstone I Four Malls ---------- Bradley Square Mall, Cleveland, TN Mount Berry Square Mall, Rome, GA Shenango Valley Mall, Hermitage, PA West Manchester Mall, York, PA Lightstone II Shawnee/Brazos Malls -------------------- Brazos Mall, Lake Jackson, TX Shawnee Mall, Shawnee, OK Lightstone III Macon/Burlington Malls ---------------------- Burlington Mall, Burlington, NC Macon Mall, Macon, GA As a result of the February 27, 2009 Settlement Agreement, the Company assigned its interests in PRC Member LLC, Lightstone I and Lightstone III, which the Company believed had no value, to Lightstone and received, among other assets, a 50% interest in IATG described below. The Company now has investments in and advances to joint ventures in two entities that are controlled by David Lichtenstein and Lightstone. The Company accounts for these investments using the equity method. The first investment is the Company's mezzanine loan in the amount of $7,835,000 to Lightstone II which is secured by ownership interests in the Shawnee Mall and the Brazos Mall properties ("Shawnee/Brazos Malls"). In connection with this loan, the Company received a 29% ownership interest in Lightstone II. The loan was in good standing at December 31, 2008. However, the borrower failed to make the interest payments due on January 1, 2009 and in subsequent months and the Company's loan receivable is in default. The first mortgage loan secured by the properties was due to mature in January of 2009 but was extended for one year until January of 2010. In connection with the extension, the holder of the first mortgage exercised its right (exercisable because the cash flow from the properties did not satisfy a required debt service coverage ratio) to retain all cash flow from the properties (after payment of all operating expenses but before payment of interest on the Company's mezzanine loan) as additional security for the repayment of the first mortgage loan. Lightstone II is attempting to sell the properties (which sale requires the consent of Presidential), but a sale will be difficult to accomplish under current market conditions and with only short term financing on the properties. As part of the Settlement Agreement, the Company received a personal guaranty from Mr. Lichtenstein that the Company will receive all accrued interest on the Company's $7,835,000 mezzanine loan (relating to the Shawnee/Brazos Malls) through the date of repayment and $500,000 of the principal amount of the loan, which personal guaranty is limited to $500,000. As part of the settlement, the Company agreed to modify its right to receive repayment in full of the $7,835,000 loan before Mr. Lichtenstein receives any return on his capital contributions to the borrowing entity to the following extent: the Company will receive the first net proceeds of any sale or refinancing of the Shawnee/Brazos Malls in an amount equal to all accrued and unpaid interest and $2,000,000 of principal; Mr. Lichtenstein will receive the next $1,000,000 of any such net sale or refinancing proceeds; the Company will receive the next $1,000,000 of any such net proceeds and any additional net proceeds shall be paid 50% to the Company and 50% to Mr. Lichtenstein. Mr. Lichtenstein's guaranty is secured by his remaining interest in IATG, the entity that owns The Las Piedras Industrial Complex (see below). The Company has agreed with Lightstone that it will not foreclose on its $7,835,000 mezzanine loan so long as the first mortgage on the Shawnee/Brazos Malls is not accelerated or due at maturity and the holder of the first mortgage is retaining funds from operations of the properties in an amount sufficient to pay the interest due on the mezzanine loan. As part of the Settlement Agreement, the Company received a 50% ownership interest in IATG, the Lightstone affiliate that owns The Las Piedras Industrial Complex, an industrial property located in Las Piedras, Puerto Rico and consisting of approximately 68 acres of land and 380,800 square feet of rentable space contained in several buildings in the complex. The property is substantially vacant and the owners may attempt to sell the property. Lightstone has agreed to advance funds to pay any negative cash flow from the operations of the property until a sale can be accomplished and has agreed that if it does not do so, it will transfer its remaining 49% interest in the property to Presidential. The Company's preliminary estimate of the fair value of its 50% ownership interest in IATG was $1,500,000 and in March, 2009, the Company recorded a $1,500,000 investment in joint ventures on its consolidated balance sheet and recognized a gain on settlement of joint venture loans of $1,500,000 in its consolidated financial statements. The Company based the preliminary estimated fair value of its interest in the IATG property on information available to it at the time. During the quarter ended June 30, 2009, the Company obtained an independent appraisal of the property owned by IATG and based on the appraised value of $6,500,000, the Company adjusted the preliminary estimate of the value of its 50% ownership interest in the IATG property from $1,500,000 to $3,250,000 on its consolidated financial statements. In the quarter ended June 30, 2009, the Company recorded an additional $1,750,000 investment in joint ventures on its consolidated balance sheet and recognized an additional $1,750,000 gain on the settlement of joint venture loans in its consolidated financial statements. While management believes that the $6,500,000 appraised value of the IATG property is a reasonable value, there can be no assurance that if and when the property is sold, it can be sold for its appraised value. In summary, as a result of the Settlement Agreement, in 2009, the Company recorded assets of $3,914,000 on the Company's consolidated balance sheet (a $750,000 note receivable less an $86,000 discount on the note receivable and a $3,250,000 investment in joint ventures) and recorded a $3,914,000 gain on settlement of joint venture loans in its consolidated financial statements. The Company also received a net cash payment of $65,289 ($250,000 less expenses of $184,711), which was also recorded in gain on settlement of joint venture loans in its consolidated financial statements. Activity in investments in and advances to joint ventures for the period ended September 30, 2009 is as follows: Equity in the Loss Balance at from Balance at December 31, Joint September 30, 2008 Investments Ventures 2009 ------------ ------------- --------- ------------- Shawnee/Brazos Malls (1) $1,511,887 $ - $ (622,376) $ 889,511 IATG (2) - 3,250,000 (429,629) 2,820,371 ---------- ---------- ----------- ---------- $1,511,887 $3,250,000 $(1,052,005) $3,709,882 ========== ========== =========== ========== Equity in the income (loss) from joint ventures is as follows: Three Months Ended Nine Months Ended September 30, September 30, 2009 2008 2009 2008 ---------- ---------- ----------- ---------- Shawnee/Brazos Malls (1) $(264,340) $(301,230) $ (622,376) $(839,024) IATG (2) (201,787) - (429,629) - Martinsburg Mall (3) - 13,625 - 134,052 Four Malls (4) - 162,922 - 33,903 Macon/Burlington Malls (5) - - - 89,986 --------- --------- ----------- --------- $(466,127) $(124,683) $(1,052,005) $(581,083) ========= ========= =========== ========= (1) Interest due to 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 from joint ventures for the Shawnee/Brazos Malls. (2) The fair value of the Company's 50% ownership interest in IATG is $3,250,000. The Company also recorded its 50% share of the loss from IATG for the seven month period ended September 30, 2009. (3) In 2007, the Company's basis of its investment in the Martinsburg Mall was reduced by distributions and losses to zero. Any subsequent distributions received from the Martinsburg Mall were recorded in income. (4) 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 was included in the calculation of the Company's share of the income (loss) from joint ventures for the Four Malls. In the second quarter of 2008, the Company's basis of its investment in the Four Malls was reduced by distributions and losses to zero. Any subsequent distributions received from the Four Malls were recorded in income. (5) In 2007, the Company's basis of its investment in the Macon/Burlington Malls was reduced by distributions and losses to zero. Any subsequent distributions received from the Macon/Burlington Malls were recorded in income. The summary financial information for the Shawnee/Brazos Malls is as follows: September 30, December 31, 2009 2008 ------------- ------------ (Amounts in thousands) Condensed Balance Sheets Net real estate $ 60,180 $61,751 In-place lease values and acquired lease rights 679 916 Prepaid expenses and deposits in escrow 3,563 1,706 Cash and cash equivalents 956 440 Deferred financing costs 662 622 Other assets 1,096 1,308 -------- ------- Total Assets $ 67,136 $66,743 ======== ======= Nonrecourse mortgage debt $ 39,061 $39,061 Mezzanine notes payable (1) 38,503 35,899 Other liabilities 8,950 7,415 -------- ------- Total Liabilities 86,514 82,375 Members' Deficit (19,378) (15,632) -------- ------- Total Liabilities and Members' Deficit $ 67,136 $66,743 ======== ======= (1) The mezzanine notes payable includes a $7,835,000 mezzanine note which is payable to the Company and the balance is payable to an affiliate of Lightstone. The payment due to the affiliate of Lightstone is subordinate to the Company's mezzanine note. Three Months Ended Nine Months Ended September 30, September 30, 2009 2008 2009 2008 -------- --------- -------- ------ (Amounts in thousands) Condensed Statements of Operations Revenues $ 2,344 $ 2,654 $ 7,378 $ 7,286 Interest on mortgage debt and other debt (1,591) (1,494) (4,625) (4,458) Other expenses (1,446) (1,836) (4,242) (4,866) -------- ------ ------- ------- Loss before depreciation and amortization (693) (676) (1,489) (2,038) Depreciation and amortization (758) (902) (2,257) (2,461) -------- ------- ------- ------- Net Loss $(1,451) $(1,578) $(3,746) $(4,499) ======== ======== ======= ======= The summary financial information for IATG is as follows: September 30, 2009 ---------------------- (Amounts in thousands) Condensed Balance Sheets Net real estate $5,550 Cash and cash equivalents 16 Accounts receivable 52 Deferred expenses 210 ------ Total Assets $5,828 ====== Note payable (1) $7,521 Other liabilities 2,292 ------ Total Liabilities 9,813 Members' Deficit (3,985) ------ Total Liabilities and Members' Deficit $5,828 ====== (1) The note payable is payable to an affiliate of Lightstone and payment thereof is subordinate to the Company's right to receive its share of any proceeds of a sale or refinancing. Three Months Ended Seven Months Ended September 30, September 30, 2009 2009 ------------------ ----------------- (Amounts in thousands) Condensed Statements of Operations Revenues $ 158 $ 465 Interest on note payable (220) (503) Other expenses (289) (698) ----- ----- Loss before depreciation and amortization (351) (736) Depreciation and amortization (52) (123) ----- ----- Net Loss $(403) $(859) ===== ===== The Lightstone Group is controlled by David Lichtenstein. At September 30, 2009, in addition to Presidential's investments of $3,709,882 in these joint ventures with entities controlled by Mr. Lichtenstein, Presidential has two loans that are due from entities that are controlled by Mr. Lichtenstein in the aggregate outstanding principal amount of $12,825,000 with a net carrying value of $2,792,487. The $6,502,369 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 23% of the Company's total assets at September 30, 2009. 5. DISCONTINUED OPERATIONS For the periods ended September 30, 2009 and 2008, income from discontinued operations includes the Crown Court property in New Haven, Connecticut (which consists of 105 apartment units and 2,000 square feet of commercial space) and two cooperative apartment units in Riverdale, New York. The Crown Court property was designated as held for sale during the three months ended September 30, 2008 and sold on April 1, 2009. One cooperative apartment unit in Riverdale, New York was designated as held for sale during the three months ended March 31, 2009 and sold on October 15, 2009. Another cooperative apartment unit in Riverdale, New York was designated as held for sale during the three months ended June 30, 2009. In addition, income from discontinued operations for the periods ended September 30, 2008, included 42 cooperative apartment units at the Towne House Apartments in New Rochelle, New York and one cooperative apartment unit in New Haven, Connecticut, which were sold during the three months ended September 30, 2008. The following table summarizes income (loss) for the properties sold or held for sale: Three Months Ended Nine Months Ended September 30, September 30, 2009 2008 2009 2008 ---- ---- ---- ---- Revenues: Rental $ 2,209 $ 269,514 $ 137,720 $ 816,664 ------- ---------- ----------- ---------- Rental property expenses: Operating expenses 5,336 108,638 16,840 335,036 Interest on mortgage debt - 36,954 36,091 112,114 Real estate taxes - 49,349 49,349 138,070 Depreciation - 4,253 219 35,638 ------- ---------- ----------- ---------- Total 5,336 199,194 102,499 620,858 ------- ---------- ----------- ---------- Other income: Investment income - 101 3 293 ------- ---------- ----------- --------- Income (loss) from discontinued operations (3,127) 70,421 35,224 196,099 Net gain from sales of discontinued operations - 2,893,031 3,208,336 2,893,031 ------- ------------ ---------- ---------- Total income (loss) from discontinued operations $(3,127) $2,963,452 $3,243,560 $3,089,130 ======= ========== ========== ========== The Crown Court property in New Haven, Connecticut was owned subject to a long-term net lease with an option to purchase the property in April, 2009 for a purchase price of $1,635,000 over the outstanding principal mortgage balance at the date of the exercise of the option. On April 1, 2009, the Company completed the sale of the Crown Court property. The net proceeds of sale were $1,545,851 and the gain from sale for financial reporting purposes was $3,208,336. 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. During the three months ended March 31, 2009, the Company designated a cooperative apartment unit in Riverdale, New York as held for sale and, in July, 2009, entered into a contract for its sale for a sales price of $154,000. The sale was completed on October 15, 2009. The carrying value of the unit at September 30, 2009 was $24,594, net of accumulated depreciation of $3,831. The gain from sale for financial reporting purposes is approximately $121,000 and the net proceeds of sale are approximately $142,000. During the three months ended June 30, 2009, the Company designated another cooperative apartment unit in Riverdale, New York as held for sale. The Company expects to sell the unit within one year for net proceeds in excess of its carrying value. The carrying value of the unit at September 30, 2009 was $6,225, net of accumulated depreciation of $3,262. In September, 2008, the Company sold a package of 42 cooperative apartment units at Towne House located in New Rochelle, New York for a sales price of $3,450,000. The net proceeds of sale were $3,343,960 and the gain from sale for financial reporting purposes was $2,807,272. In July, 2008, the Company sold one cooperative apartment unit located in New Haven, Connecticut for a sales price of $122,000. The net proceeds of sale were $113,990 and the gain from the sale for financial reporting purposes was $85,759. The assets and liabilities of the cooperative apartment units in Riverdale, New York at September 30, 2009 and the assets and liabilities of the Crown Court property at December 31, 2008 are segregated in the consolidated balance sheets. The components are as follows: September 30, December 31, 2009 2008 ---- ---- Assets related to discontinued operations: Land $ 2,546 $ 168,000 Buildings 35,366 3,090,544 Furniture and equipment - 45,382 Less: accumulated depreciation (7,093) (2,912,447) ------- ----------- Total $30,819 $ 391,479 ======= =========== Liabilities related to discontinued operations: Mortgage debt $ - $ 2,078,971 ======= =========== 6. SECURITIES AVAILABLE FOR SALE The tables below summarize the Company's securities available for sale: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- September 30, 2009 - ------------------ U.S. Government Agencies notes and bonds maturing within one year $ 719,591 $ - $ (7,699) $ 711,892 U.S. Government Agencies notes and bonds maturing from one to four years 2,907,046 8,449 (2,932) 2,912,563 Common stock of REITS 2,011 7,492 - 9,503 ---------- ------- -------- ---------- $3,628,648 $15,941 $(10,631) $3,633,958 ========== ======= ======== ========== December 31, 2008 - ----------------- Common stock of REITS $ 2,011 $ 7,637 $ - $ 9,648 ========== ======= ======== ========== Sales activity results for securities available for sale for the three and nine months ended September 30, 2009 are as follows: Gross sales proceeds $ 804,766 ========== Gross realized gains $ 343 Gross realized losses (562) ---------- Net realized loss $ (219) ========== 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. have an aggregate 60% general and limited partner interest in the Hato Rey Partnership. The Company exercises effective control over the partnership through its ability to manage the affairs of the partnership in the ordinary course of business. Accordingly, the Company consolidates the Hato Rey Partnership in the accompanying consolidated financial statements. The Hato Rey Partnership owns and operates the Hato Rey Center, an office building with 209,000 square feet of commercial space, located in Hato Rey, Puerto Rico. The Company agreed to lend up to $2,500,000 to the Hato Rey Partnership 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, bore interest at the rate of 11% per annum until May 11, 2008 and 13% thereafter, 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. In July, 2009, the Company agreed to loan an additional $250,000 to the Hato Rey Partnership which increased the agreed upon $2,500,000 loan to $2,750,000. The additional $250,000 will be advanced to the Partnership as funds are needed and will have the same terms as the $2,500,000 loan. At September 30, 2009, the Company had advanced $2,500,000 of the loan to the Hato Rey Partnership. The $2,500,000 loan and accrued interest in the amount of $739,478 have been eliminated in consolidation. On January 1, 2009, the Company adopted ASC 810-10-65 which requires amounts attributable to noncontrolling interests to be reported separately. For the nine months ended September 30, 2009, the Hato Rey Partnership had a loss of $428,880. The consolidated financial statements reflect the separate disclosure of the noncontrolling interest's share (40%) of the loss of $171,552. Prior to the adoption of ASC 810-10-65, the partners constituting the noncontrolling interest in the Hato Rey Partnership had no basis in their investment and, as a result, the Company was required to record in its consolidated financial statements any losses attributable to the noncontrolling interest and the Company would have recorded any future earnings of the noncontrolling interest up to the amount of the losses previously recorded by the Company attributable to the noncontrolling interest. For the years ended December 31, 2008 and 2007, the Hato Rey Partnership had losses of $481,352 and $521,102, respectively, of which $192,541 and $208,441, respectively, represented the noncontrolling interest share absorbed by the Company. 8. INCOME TAXES Presidential has elected to qualify as a Real Estate Investment Trust under the Internal Revenue Code. A REIT which distributes at least 90% of its real estate investment trust taxable income to its shareholders each year by the end of the following year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. If the Company's tax position in relation to a certain transaction were to be examined and were not ultimately upheld, the Company would be required to pay an income tax assessment and related interest. Alternatively, the Company could elect to pay a deficiency dividend to its shareholders in order to continue to qualify as a REIT and the related interest assessment to the taxing authorities. On January 1, 2007, the Company recorded a reduction to the balance of retained earnings of $460,800 for accrued interest for prior years related to certain tax positions for which the Company may have been required to pay a deficiency dividend. In addition, the Company recorded interest expense of $356,780 for the year ended December 31, 2007 and $147,526 for the six months ended June 30, 2008 for the interest related to these matters. The Company recognized this interest expense in general and administrative expenses in its consolidated statements of operations. As of June 30, 2008, the Company had accrued $965,106 of interest related to these matters, which was included in accrued liabilities in its consolidated balance sheet. During the three months ended September 30, 2008, the statute of limitations with respect to the tax year related to this interest accrual expired and the Company reversed the $965,106 interest accrual. As of September 30, 2009, the tax years that remain open to examination by the federal, state and local taxing authorities are the 2006 - 2008 tax years and the Company was not required to accrue any liability for those years. Upon filing the Company's income tax return for the year ended December 31, 2008, Presidential applied approximately $1,919,000 of its available net operating loss carryforward of approximately $1,969,000 and then applied all of its available 2008 stockholders' distributions to reduce its taxable income for 2008 to zero. For the nine months ended September 30, 2009, the Company had a tax loss of approximately $4,761,000 ($1.40 per share), which is comprised of an ordinary loss of approximately $7,871,000 ($2.32 per share) and capital gains of approximately $3,110,000 ($0.92 per share). 9. ACCUMULATED OTHER COMPREHENSIVE LOSS The components of accumulated other comprehensive loss are as follows: September 30, December 31, 2009 2008 ------------- ----------- Defined benefit plan liability adjustment $(3,572,373) $(3,572,373) Contractual postretirement benefits liability adjustment 155,738 174,232 Minimum contractual pension benefit liability adjustment (199,373) (199,373) Net unrealized gain on securities available for sale 5,310 7,637 ----------- ----------- Total accumulated other comprehensive loss $(3,610,698) $(3,589,877) =========== =========== The Company's other comprehensive income (loss) consists of the changes in the net unrealized gain (loss) on securities available for sale and the adjustments to the pension liabilities and the postretirement benefits liability, if any. Thus, comprehensive income (loss), which consists of net income (loss) plus or minus other comprehensive income, is as follows: Three Months Ended Nine Months Ended September 30, September 30, 2009 2008 2009 2008 ----------- ----------- ----------- ----------- Net income (loss) $(1,273,147) $3,182,626 $3,870,907 $1,636,565 Other comprehensive income (loss)- Net unrealized gain (loss) on securities available for sale 20,669 2,489 (2,327) 479 Adjustment for contractual postretirement benefits (6,165) 29,529 (18,494) 88,587 ----------- ---------- ----------- ---------- Comprehensive income (loss) (1,258,643) 3,214,644 3,850,086 1,725,631 Comprehensive loss attributable to noncontrolling interest 87,936 - 171,552 - ----------- ---------- ----------- ---------- Comprehensive income (loss) attributable to Presidential Realty Corporation $(1,170,707) $3,214,644 $4,021,638 $1,725,631 =========== ========== ========== ========== 10. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses include the following: Three Months Ended Nine Months Ended September 30, September 30, 2009 2008 2009 2008 ---- ---- ---- ---- Interest expense (credit) (1) $ - $ (965,106) $ - $ (817,580) Other general and administrative expenses 865,834 904,360 2,748,724 2,692,761 -------- ---------- ---------- ---------- Net expense (credit) $865,834 $ (60,746) $2,748,724 $1,875,181 ======== ========== ========== ========== (1) As previously discussed in Note 8, during the three months ended September 30, 2008, the tax years related to the interest expense accrual had expired and the Company reversed the $965,106 interest accrual. Such reversal reduced general and administrative expenses by $965,106 and resulted in a credit balance for total general and administrative expenses of $60,746 in the Company's consolidated statement of operations for the three months ended September 30, 2008. 11. EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted income (loss) per share attributable to Presidential Realty Corporation: Three Months Ended Nine Months Ended September 30, September 30, 2009 2008 2009 2008 ---- ---- ---- ---- Income (loss) from continuing operations $(1,270,020) $ 219,174 $ 627,347 $(1,452,565) ----------- ---------- ---------- ----------- Discontinued Operations: Income (loss) from discontinued operations (3,127) 70,421 35,224 196,099 Net gain from sales of discontinued operations - 2,893,031 3,208,336 2,893,031 ---------- --------- --------- ---------- Total income (loss) from discontinued operations (3,127) 2,963,452 3,243,560 3,089,130 ----------- ----------- ---------- ----------- Net income (loss) (1,273,147) 3,182,626 3,870,907 1,636,565 Add: Net loss from noncontrolling interest 87,936 - 171,552 - ----------- ----------- ---------- ----------- Net Income (Loss) attributable to Presidential Realty Corporation $(1,185,211) $3,182,626 $4,042,459 1,636,565 =========== ========== ========== =========== Earnings per Common Share attributable to Presidential Realty Corporation basic: Income (loss) from continuing operations $ (0.35) $ 0.06 $ 0.24 $ (0.39) ----------- ---------- ---------- ----------- Discontinued Operations: Income from discontinued operations - 0.02 0.01 0.05 Net gain from sales of discontinued operations - 0.83 0.95 0.77 ----------- ----------- ---------- ----------- Total income from discontinued operations - 0.85 0.96 0.82 ----------- ----------- ---------- ----------- Net Income (Loss) per Common Share - basic $ (0.35) $ 0.91 $ 1.20 $ 0.43 =========== ========== ========== =========== Three Months Ended Nine Months Ended September 30, September 30, 2009 2008 2009 2008 ---- ---- ---- ---- Earnings per Common Share attributable to Presidential Realty Corporation diluted: Income (loss) from continuing operations $ (0.35) $ 0.06 $ 0.24 $ (0.39) ---------- ---------- ---------- ---------- Discontinued Operations: Income from discontinued operations - 0.02 0.01 0.05 Net gain from sales of discontinued operations - 0.82 0.94 0.77 ---------- ---------- ---------- ---------- Total income from discontinued operations - 0.84 0.95 0.82 ---------- ---------- ---------- ---------- Net Income (Loss) per Common Share - diluted $ (0.35) $ 0.90 $ 1.19 $ 0.43 ========== ========== ========== ========== Weighted average number of shares outstanding: Basic 3,381,982 3,501,921 3,380,667 3,770,895 Effect of dilutive securities - restricted stock - 31,197 18,925 - --------- ---------- ----------- ---------- Diluted 3,381,982 3,533,118 3,399,592 3,770,895 ========== ========== =========== ========== For the three months ended September 30, 2009 and the nine months ended September 30, 2008, the weighted average shares outstanding as used in the calculation for diluted loss per share does not include 17,100 and 30,600, respectively, of restricted shares not yet vested, as their inclusion would be antidilutive. 12. COMMITMENTS AND CONTINGENCIES 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 February, 2009, the Company completed a settlement of various claims it had asserted against Lightstone and Mr. Lichtenstein (see Notes 3 and 4). 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. Since the most serious identified threat on the site is to songbirds, the proposed remediation will consist of removing all exposed materials and a layer of soil. The Company had previously estimated that the costs of the cleanup would not exceed $1,000,000. In accordance with the provisions of the ASC Contingencies Topic, 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. At September 30, 2009, the accrued liability balance was $809,944 and the discount balance was $137,144, for a net accrued liability of $672,800. The remediation must comply with the requirements of the Massachusetts Department of Environmental Protection ("MADEP") and during the three months ended March 31, 2009, the Company obtained the consent of MADEP to a specific plan of remediation. The Company has commenced the remediation work and expects to complete it by the end of 2009. While the final cost of the remediation work has not been finally determined, management believes that it will be substantially less than the balance of the net accrued liability at September 30, 2009. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved. The Company believes that any liability in excess of 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. 13. CONTRACTUAL PENSION AND POSTRETIREMENT BENEFITS The following tables set forth the components of net periodic benefit costs for contractual pension benefits: Three Months Ended Nine Months Ended September 30, September 30, 2009 2008 2009 2008 -------- -------- -------- -------- Service cost $ - $ - $ - $ - Interest cost 19,450 19,399 58,349 58,195 Amortization of prior service cost (7,730) (11,594) (23,191) (34,782) Recognized actuarial loss 14,029 - 42,089 - ------- ------- -------- ------- Net periodic benefit cost $25,749 $ 7,805 $ 77,247 $ 23,413 ======= ======== ======== ======== The following tables set forth the components of net periodic benefit costs for contractual postretirement benefits: Three Months Ended Nine Months Ended September 30, September 30, 2009 2008 2009 2008 -------- -------- -------- -------- Service cost $ 406 $ 518 $ 1,217 $ 1,554 Interest cost 6,701 9,696 20,102 29,088 Amortization of prior service cost 925 926 2,776 2,777 Recognized actuarial loss (gain) (8,194) (631) (24,581) (1,893) -------- ------- -------- ------- Net periodic benefit cost $ (162) $10,509 $ (486) $31,526 ======== ======= ======== ======= During the nine months ended September 30, 2009, the Company made contributions of $73,303 and $15,383 for contractual pension benefits and postretirement benefits, respectively. The Company anticipates additional contributions of $0 and $5,000 for contractual pension benefits and postretirement benefits, respectively, for the remainder of 2009. 14. DEFINED BENEFIT PLAN The following table sets forth the components of net periodic benefit costs for the defined benefit plan: Three Months Ended Nine Months Ended September 30, September 30, 2009 2008 2009 2008 ---- ---- ---- ---- Service cost $ 39,393 $ 59,413 $ 118,178 $ 178,241 Interest cost 69,452 76,200 208,358 228,598 Expected return on plan assets (36,891) (91,988) (110,674) (275,966) Amortization of prior service cost 3,154 3,154 9,462 9,462 Amortization of accumulated loss 63,183 4,521 189,549 13,565 -------- -------- --------- --------- Net periodic benefit cost $138,291 $ 51,300 $ 414,873 $ 153,900 ======== ========= ========= ========= The Company's funding policy for the defined benefit plan is based on contributions that comply with the minimum and maximum amounts required by law. During the nine months ended September 30, 2009, the Company made a $903,918 contribution to the defined benefit plan. 15. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS Estimated fair values of the Company's financial instruments as of September 30, 2009 and December 31, 2008 have been determined using available market information and various valuation estimation methodologies. Considerable judgment is required to interpret the effects on fair value of such items as future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. The estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. Also, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values. The following table summarizes the estimated fair values of financial instruments: September 30, 2009 December 31, 2008 ------------------ ----------------- (Amounts in thousands) Net Estimated Net Estimated Carrying Fair Carrying Fair Value (1) Value Value (1) Value --------- ----- --------- ----- Assets: Cash and cash equivalents $ 1,362 $1,362 $ 5,985 $5,985 Securities available for sale 3,634 3,634 10 10 Notes receivable 2,868 3,004 2,249 2,366 Liabilities: Mortgage debt 16,114 20,436 16,392 19,484 (1) Net carrying value is net of discounts where applicable. The fair value estimates presented above are based on pertinent information available to management as of September 30, 2009 and December 31, 2008. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since September 30, 2009 and, therefore, current estimates of fair value may differ significantly from the amounts presented above. Fair value methods and assumptions are as follows: Cash and Cash Equivalents - The estimated fair value approximates carrying value, due to the short maturity of these investments. Securities Available for Sale - The fair value of securities available for sale was determined to be Level 1 financial assets within the valuation hierarchy established by the ASC Fair Value Measurements and Disclosures Topic, and is based on current market quotes received from financial sources that trade such securities. Notes Receivable - The fair value of notes receivable has been estimated by discounting projected cash flows using current rates for similar notes receivable. Mortgage Debt - The fair value of mortgage debt has been estimated by discounting projected cash flows using current rates for similar debt. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 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 continuing generally adverse economic and business conditions, which, among other things (a) affect the demand for apartments, retail and office space at properties owned by the Company or which are security for loans made by the Company, (b) affect the availability and creditworthiness of prospective tenants and the rental rates obtainable at the properties, and (c) affect consumer demand for the products offered by the tenants at the malls owned by the joint venture in which the Company is a member, which adversely affects the operating results and valuations of such malls; o continuing adverse changes in the real estate markets, including a severe tightening of the availability of credit, which adversely affect the ability of the Company or the joint ventures in which the Company is a member to sell, or refinance the mortgages on, their properties and which may also affect the ability of prospective tenants to rent space at these properties; o risks of real estate development, ownership and operation; o governmental actions and initiatives; and o environmental and safety requirements. Overview Presidential Realty Corporation is taxed for federal income tax purposes as a real estate investment trust. Presidential owns real estate directly and through a partnership and joint ventures and makes loans secured by interests in real estate. During the past two years, the downturn in the economy, higher unemployment and lack of consumer confidence have adversely affected the operating results of the shopping mall properties in which the Company has invested. These conditions, among others, resulted in defaults in 2008 on two of the mezzanine loans made by the Company to joint ventures owning seven shopping mall properties and in defaults on the first mortgage loans secured by six of these properties. In January, 2009, the borrower defaulted in the payment of interest on the Company's third mezzanine loan. (See Liquidity and Capital Resources - Joint Venture Mezzanine Loans and Settlement Agreement below.) In addition, the turmoil in the credit markets has made it very difficult for the Company and its joint venture partners to obtain refinancing of the mortgage loans on some of its properties on satisfactory terms. For example, the Company was unable to refinance the existing $15,007,955 first mortgage on its Hato Rey Center office building in May, 2008 when the terms of the mortgage anticipated repayment. As a result, while the mortgage is not in default, the annual interest rate was increased by 200 basis points (the payment of which is deferred until maturity) and the mortgagee is entitled to receive all net cash flow from the property to reduce the outstanding principal balance. During 2008 and the first nine months of 2009, there was no net cash flow available to reduce the principal balance of the mortgage and no assurances can be given that there will be any net cash flow available in 2009. (See Hato Rey Partnership below.) The restrictive credit markets also adversely affect the ability of the Company and the joint ventures to sell properties owned by them on satisfactory terms because of the inability of prospective purchasers to obtain financing on satisfactory terms. From time to time in the Company's recent history, the Company has considered various strategic alternatives, including a merger, consolidation or sale of all or substantially all of its assets. In the past, no appropriate opportunity has been found but the Board of Directors and management will always consider reasonable proposals. In the current economic environment, the Company may seek to sell one or more of its assets if reasonable prices can be determined and obtained. If a sale or sales can be made, management may consider submitting a plan of liquidation to its shareholders for approval. The plan of liquidation would provide for the sale of all of the Company's assets over time and the distribution of the net proceeds of sale to the shareholders after satisfaction of the Company's liabilities. While management has considered this course of action, among others, as noted above, there has been no determination to adopt such a plan of liquidation at this time or to enter into any strategic alternative. Further, there can be no assurance that the Company will be able to sell any of its assets at prices that management deems fair. 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 difficult, complex and subjective judgments. The Company's critical accounting policies are described in its Form 10-K for the year ended December 31, 2008. There have been no significant changes in the Company's critical accounting policies since December 31, 2008. Results of Operations Financial Information for the three months ended September 30, 2009 and 2008: - ---------------------------------------------------------------------------- Continuing Operations: Revenues decreased by $270,674 primarily as a result of decreases in rental revenues, interest income on mortgages-notes receivable and interest income on mortgages-notes receivable-related parties. Rental revenues decreased by $66,515 primarily due to decreased rental revenues at the Hato Rey Center property of $64,857. Interest on mortgages-notes receivable decreased by $183,571 primarily as a result of repayments of $5,585,000 on notes receivable during 2008. Interest income and amortization of discount on those notes was $210,314 during the 2008 period. This decrease was partially offset by an increase of $7,646 in interest received on the Consolidated Note and the $23,389 amortization of discount on the $750,000 note receivable received in the Settlement Agreement (see Liquidity and Capital Resources - Joint Venture Mezzanine Loans and Settlement Agreement below). Interest on mortgages-notes receivable-related parties decreased by $19,250 as a result of a decrease of $19,250 in payments of interest received on the Consolidated Loans (see Liquidity and Capital Resources - Consolidated Loans below). Costs and expenses increased by $891,702 primarily due to increases in general and administrative expenses and increases in real estate tax expense. These increases were partially offset by decreases in rental property operating expenses and amortization of in-place lease values and mortgage costs. General and administrative expenses increased by $926,580 primarily as a result of increases in pension plan expenses of $94,264 and the impact of the reversal in 2008 of $965,106 of interest expense accrued in accordance with the ASC Income Tax Topic 740-10-25, which deals with uncertainty in income taxes and the recognition of current and deferred income tax accounts including accrued interest and penalties. The Company previously accrued $965,106 of interest related to certain tax positions for which the Company may have been required to pay a deficiency dividend. When the statute of limitations with respect to these tax positions expired in September, 2008, the accrued liability was reversed at that time and general and administrative expenses were reduced by such reversal. The Company has no such further tax positions requiring an interest accrual in 2009. These increases in general and administrative expenses were partially offset by decreases in salary expense of $127,557. Salary expense decreased primarily due to a lower amount of salary to be accrued in 2009 compared to 2008, a difference of $106,658, pursuant to an amendment of an executive employment agreement which would require payments upon the retirement of the executive. In addition, salary expense decreased by $16,032 as a result of reductions in the Company's office staff. Rental property operating expenses decreased by $72,569 as a result of a decrease of $78,345 in electric expenses at the Hato Rey Center property. Real estate tax expense increased by $46,201 primarily as a result of an increase of $43,972 in real estate tax expense at the Hato Rey Center property. Depreciation on real estate increased by $10,879 primarily as a result of a $8,925 increase in depreciation on the Hato Rey Center property. Amortization of in-place lease values and mortgage costs decreased by $17,724 as a result of a $15,666 decrease in the amortization of in-place lease values and a $2,058 decrease in the amortization of mortgage costs. In-place lease values were recorded in connection with the partial step acquisition of the Hato Rey Partnership in prior years and amortize over the remaining terms of the leases. Other income decreased by $326,818 as a result of a $341,444 increase in the loss from joint ventures. The loss from the investments in the nine malls increased by $139,657 from a loss of $124,683 in 2008 to a loss of $264,340 in 2009. The loss from the investment in IATG Puerto Rico, LLC ("IATG") was $201,787 in 2009. (See Liquidity and Capital Resources - Joint Venture Mezzanine Loans and Settlement Agreement and Investments in and Advances to Joint Ventures below.) Income from continuing operations decreased by $1,489,194 from income of $219,174 in 2008 to a loss of $1,270,020 in 2009. The $1,489,194 decrease in income in 2009 was primarily a result of the $183,571 decrease in interest income on mortgages-notes receivable, the $926,580 increase in general and administrative expenses and the $341,444 increase in the loss from the joint ventures. Discontinued Operations: In 2009, the Company had three properties that are classified as discontinued operations: the Crown Court property in New Haven, Connecticut (which consists of 105 apartment units and 2,000 square feet of commercial space) and two cooperative apartment units in Riverdale, New York. The Crown Court property was designated as held for sale during the three months ended September 30, 2008. The Crown Court property was owned subject to a long-term net lease with an option to purchase the property in April, 2009 for a purchase price of $1,635,000 over the outstanding principal mortgage balance at the date of the exercise of the option. On April 1, 2009, the Company completed the sale of the Crown Court property. The net proceeds of sale were $1,545,851 and the gain from sale for financial reporting purposes was $3,208,336. In addition, two cooperative apartment units in Riverdale, New York were designated as held for sale during 2009. In July, 2009, the Company entered into a contract of sale for one of these apartment units for a sales price of $154,000 and on October 15, 2009 the Company completed the sale. The carrying value of the unit at September 30, 2009 was $24,594, net of accumulated depreciation of $3,831. The gain from sale for financial reporting purposes is approximately $121,000 and the net proceeds of sale are approximately $142,000. In 2008, the Company had two properties that were classified as discontinued operations. The Towne House property in New Rochelle, New York and a cooperative apartment unit in New Haven, Connecticut were sold during the quarter ended September 30, 2008. The following table compares the total income (loss) from discontinued operations for the three month periods ended September 30, for properties included in discontinued operations: 2009 2008 ---- ---- Income (loss) from discontinued operations: Cooperative apartment unit, New Haven, CT $ - $ (13) Cooperative apartment units, Riverdale, NY (3,127) (658) Crown Court, New Haven, CT - 39,627 Towne House, New Rochelle, NY - 31,465 ---------- ---------- Income (loss) from discontinued operations (3,127) 70,421 ---------- ---------- Net gain from sales of discontinued operations: Cooperative apartment unit, New Haven, CT - 85,759 Towne House - 2,807,272 ---------- ---------- Net gain from sales of discontinued operations - 2,893,031 ---------- ---------- Total income (loss) from discontinued operations $ (3,127) $2,963,452 ========== ========== Financial Information for the nine months ended September 30, 2009 and 2008: - --------------------------------------------------------------------------- Continuing Operations: Revenues decreased by $562,888 primarily as a result of decreases in interest income on mortgages-notes receivable and interest income on mortgages-notes receivable-related parties, partially offset by an increase in rental revenues. Rental revenues increased by $28,775 due to increased rental revenues at the Hato Rey Center property of $49,403, partially offset by a $28,475 decrease in rental revenues at the Mapletree Industrial Center property. Interest on mortgages-notes receivable decreased by $464,753 primarily as a result of repayments of $5,585,000 on notes receivable during 2008. Interest income and amortization of discounts on those notes was $586,660 during the 2008 period. This decrease was partially offset by an increase of $81,917 in interest received on the Consolidated Note and the $53,493 amortization of discount on the $750,000 note receivable received in the Settlement Agreement. Interest on mortgages-notes receivable-related parties decreased by $146,750 as a result of a decrease of $146,750 in payments of interest received on the Consolidated Loans. Costs and expenses increased by $876,519 primarily due to increases in general and administrative expenses, interest on mortgage debt, real estate tax expense and depreciation expense. These increases were partially offset by decreases in rental property operating expenses and decreases in amortization of in-place lease values and mortgage costs. General and administrative expenses increased by $873,543 primarily as a result of increases in pension plan expenses of $282,795 and professional fees of $84,778 and the impact of the reversal in 2008 of interest expense accrued in accordance with the ASC Income Tax Topic referred to above. The reversal of the 2008 interest accrual in the 2008 nine month period was $817,580. These increases in general and administrative expenses were partially offset by decreases in salary expense of $308,822. Salary expense decreased due to a lower amount of salary to be accrued in 2009 compared to 2008, a difference of $317,028, pursuant to an amendment of an executive employment agreement which would require payments upon the retirement of the executive. Rental property operating expenses decreased by $60,636 primarily as a result of a decrease of $157,865 in utility expenses, partially offset by increases in bad debts of $47,670, repairs and maintenance of $21,888, salaries of $13,930 and insurance of $9,157. Interest on mortgage debt increased by $55,936 primarily as a result of a $104,190 increase in mortgage interest expense on the Hato Rey Center property first mortgage. The terms of the existing first mortgage provided for a 2% per annum increase in the interest rate beginning on May 12, 2008, which increase is due at maturity. This increase was partially offset by a $48,254 decrease in the amortization of discount on mortgage payable. Real estate tax expenses increased by $50,627 primarily as a result of an increase of $43,972 in real estate tax expense at the Hato Rey Center property. Depreciation on real estate increased by $38,446 primarily as a result of a $35,618 increase in depreciation on the Hato Rey Center property. Amortization of in-place lease values and mortgage costs decreased by $83,140 as a result of a $55,476 decrease in the amortization of in-place lease values and a $27,664 decrease in the amortization of mortgage costs. Other income increased by $3,519,319 primarily as a result of a $3,979,289 gain recorded upon the settlement of certain joint venture loans to David Lichtenstein and Lightstone. This increase was partially offset by the $470,922 increase in the loss from joint ventures, which included the loss of $429,629 from the investment in IATG and the $41,293 increase in the loss from the investments in the nine malls. (See Liquidity and Capital Resources - Joint Venture Mezzanine Loans and Settlement Agreement and Investments in and Advances to Joint Ventures below.) Income from continuing operations increased by $2,079,912 from a loss of $1,452,565 in 2008 to income of $627,347 in 2009. The $2,079,912 increase in income in 2009 was a result of the $3,979,289 gain recorded upon the settlement of some joint venture loans with David Lichtenstein and Lightstone. This increase was partially offset by a $464,753 decrease in interest income on mortgages-notes receivable, an increase of $873,543 in general and administrative expenses and a $470,922 increase in the loss from joint ventures. Discontinued Operations: The following table compares the total income (loss) from discontinued operations for the nine month periods ended September 30, for properties included in discontinued operations: 2009 2008 ---- ---- Income (loss) from discontinued operations: Cooperative apartment unit, New Haven, CT $ - $ 866 Cooperative apartment units, Riverdale, NY (9,244) (2,875) Crown Court, New Haven, CT 44,468 109,006 Towne House, New Rochelle, NY - 89,102 ---------- ---------- Income from discontinued operations 35,224 196,099 ---------- ---------- Net gain from sales of discontinued operations: Cooperative apartment unit, New Haven, CT - 85,759 Crown Court 3,208,336 - Towne House - 2,807,272 ---------- ---------- Net gain from sales of discontinued operations 3,208,336 2,893,031 ---------- ---------- Total income from discontinued operations $3,243,560 $3,089,130 ========== ========== Balance Sheet Net mortgage portfolio increased by $618,732 primarily as a result of the $750,000 note receivable from the Settlement Agreement with David Lichtenstein and Lightstone in February of 2009 (see Liquidity and Capital Resources - Joint Venture Mezzanine Loans and Settlement Agreement below). The note was recorded at its fair value of $664,000 ($750,000 note receivable less a discount of $86,000). The carrying value of the note at September 30, 2009 was $717,493 as a result of $53,493 of amortization of discount for the period. This increase was partially offset by the $75,000 principal repayment the Company received on its loan receivable relating to the Cambridge Green sale in 2007. Investments in and advances to joint ventures increased by $2,197,995 as a result of the $3,250,000 investment recorded for the Company's 50% ownership interest in IATG, which the Company received from the Settlement Agreement with Lightstone (see Liquidity and Capital Resources - Joint Venture Mezzanine Loans and Settlement Agreement below), partially offset by the $1,052,005 loss from the joint ventures. Assets related to discontinued operations decreased by $360,660 primarily as a result of the sale of the Crown Court property. Prepaid expenses and deposits in escrow decreased by $123,113 primarily as a result of decreases of $145,267 in deposits in escrow, offset by increases of $22,154 in prepaid expenses. Other receivables decreased by $134,049 primarily as a result of a $71,560 decrease in net tenant accounts receivable and an $87,431 decrease in miscellaneous receivables, partially offset by a $16,538 increase in accrued interest receivable. Cash and cash equivalents decreased by $4,622,309 primarily as a result of the $4,431,622 purchase of securities available for sale. Securities available for sale increased by $3,624,310 as a result of the $4,431,622 purchase of securities available for sale, partially offset by the $804,985 sale of securities and the $2,327 decrease in the fair value of the securities. The Company utilized the $804,766 proceeds from the sale of securities to make a $903,918 cash contribution to the Company's defined benefit plan. See Liquidity and Capital Resources below. Other assets decreased by $149,847 primarily as a result of a decrease in deferred charges of $46,344 and the $43,664 of amortization of in-place lease values. Liabilities related to discontinued operations decreased by $2,078,971 as a result of the sale of the Crown Court property. Defined benefit plan liability decreased by $489,045 primarily as a result of the $903,918 Company contribution made in the third quarter of 2009. This decrease was offset by the $414,873 net periodic benefit cost for the defined benefit plan. Other liabilities decreased by $132,762 primarily as a result of a $102,746 decrease in deferred commission income and a $25,406 decrease in deferred rental income. In January, 2009, three independent directors of the Company each received 1,000 shares of the Company's Class B common stock as a partial payment of directors' fees for the 2009 year. The shares were valued at $1.61 per share, which was the market value of the Class B common stock at the grant date, and, accordingly, the Company recorded $4,830 in prepaid directors' fees (to be amortized during 2009) 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 $4,530 to additional paid-in capital. Liquidity and Capital Resources Presidential obtains funds for working capital and investment from its available cash and cash equivalents, from operating activities, from refinancing of mortgage loans on its real estate equities or from sales of such equities, and from repayments on its mortgage portfolio. The Company also has at its disposal a $250,000 unsecured line of credit from a lending institution. At September 30, 2009, there was no outstanding balance due under the line of credit. 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. In the fourth quarter of 2008, the Company reduced its dividend from $.16 per share to $.08 per share. The decision of the Board of Directors of the Company to reduce the Company's dividend at that time recognized, among other things, the adverse economic conditions currently affecting real estate markets, the then existing defaults on two of the Company's loans to affiliates of David Lichtenstein, the Company's inability to refinance the Hato Rey Center office building mortgage and the desirability of conserving the Company's cash resources under these circumstances. On February 4, 2009, the Company announced that it was not declaring a dividend for the first quarter of 2009 and that it was unlikely that it would declare any dividend in 2009. 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 to pay operating expenses or for additional investment, and its ability to reduce taxes by paying dividends. At September 30, 2009, Presidential had $1,362,241 in available cash and cash equivalents, a decrease of $4,622,309 from the $5,984,550 available at December 31, 2008. This decrease in cash and cash equivalents was due to cash used in operating activities of $2,016,254, cash used in investing activities of $2,300,872, and by cash used in financing activities of $305,183. In May, 2009, the Company invested $4,431,622 of its cash in securities available for sale. Securities available for sale consist primarily of notes and bonds issued by agencies of the United States government maturing at dates ranging from 2009 through 2013 with interest rates ranging from 1.625% to 5.125%. The Company purchased these notes and bonds to utilize its cash to earn higher interest rates while retaining substantial liquidity in its investments. The balance of securities available for sale at September 30, 2009 was $3,633,958. Joint Venture Mezzanine Loans and Settlement Agreement In February, 2008, Lightstone III defaulted on payments of interest due under the Company's $9,500,000 loan related to the Macon/Burlington Malls. Lightstone III also defaulted on payments of interest due on the first mortgage loan covering the properties and the holder of the first mortgage commenced foreclosure proceedings and appointed a receiver to operate the properties. The Company believed that the outstanding principal balance of the first mortgage substantially exceeded the then current value of the Macon/Burlington Malls and that it was unlikely that the Company would be able to recover any interest or any principal on its mezzanine loan from the collateral that it held as security for the loan. In October, 2008, Lightstone I defaulted on the payment of interest due under the Company's $8,600,000 mezzanine loan relating to the Four Malls and also did not make the payments of the preferential return of 11% per annum due on the Company's $1,438,410 investment in the Martinsburg Mall. Lightstone I also defaulted on payments of interest due under the first mortgage covering the Martinsburg Mall and three of the Four Malls (Bradley Square, Mount Berry Square and Shenango Valley) on and after August 1, 2008 and the holder of the first mortgage commenced foreclosure proceedings and appointed a receiver to operate the properties. The Company believed that the outstanding principal balance of the first mortgage substantially exceeded the then current value of the mortgaged properties and that it was unlikely that the Company would be able to recover any amount of its mezzanine loan in the amount of $8,600,000 and investment in the amount of $1,438,410 from the collateral that it held as security for its mezzanine loan and investment. The Company's mezzanine loan in the amount of $7,835,000 to Lightstone II secured by interests in the Shawnee Mall and the Brazos Mall ("Shawnee/Brazos Malls") was in good standing at December 31, 2008. However, the borrower failed to make the interest payments due on January 1, 2009 and on the first day of subsequent months and the loan due to the Company is in default. The first mortgage loan secured by the properties was due to mature in January of 2009 but Lightstone II obtained a one year extension of the maturity date until January of 2010. In connection with the extension, the holder of the first mortgage exercised its right (exercisable because the cash flow from the properties did not satisfy a required debt service coverage ratio) to retain all cash flow from the properties (after payment of all operating expenses but before payment of interest on the Company's mezzanine loan) as additional security for the repayment of the first mortgage loan. Lightstone II is attempting to sell the properties (which sale requires the consent of Presidential), but a sale will be difficult to accomplish under current market conditions and with only short term financing on the properties. Subsequent to the defaults under the $9,500,000 and $8,600,000 mezzanine loans, the Company asserted various claims against Lightstone and Mr. Lichtenstein personally with respect to such loans and on February 27, 2009 completed a settlement of such claims. Under the settlement: (1) $5,000,003 of the indebtedness under the $9,500,000 mezzanine loan and $5,000,003 of the indebtedness under the $8,600,000 mezzanine loan were assumed by an affiliate of Lightstone which is the debtor on an existing loan from the Company in the outstanding principal amount of $2,074,994. The total indebtedness was consolidated into a nonrecourse loan in the outstanding principal amount of $12,075,000 (the "Consolidated Note") and is secured by the ownership interests in entities owning nine apartment properties (1,056 apartment units) located in Virginia (which had previously secured the $2,074,994 indebtedness) and the ownership interests in entities owning nine additional apartment properties (931 apartment units) located in Virginia and North Carolina. The Consolidated Note accrues interest at the rate of 13% per annum and is due on February 1, 2012. All net cash flow from the eighteen apartment properties will be utilized to pay the interest accrued on the Consolidated Note and to the extent that there is not sufficient cash flow to pay all accrued interest, the unpaid interest will be deferred until the maturity of the Consolidated Note. The Company anticipates that a substantial portion of the annual interest will not be paid currently and will be deferred in accordance with the terms of the Consolidated Note. The Company also anticipates that it is likely that on the maturity date of the Consolidated Note, the outstanding principal balance of the Consolidated Note plus any unpaid deferred interest thereon will exceed the value of the Company's security therefore and, accordingly, since the Consolidated Note is a nonrecourse loan, the Company does not expect to obtain payment in full of the Consolidated Note on maturity. (2) The Company obtained a 50% ownership interest in IATG, the Lightstone affiliate that owns The Las Piedras Industrial Complex, an industrial property located in Las Piedras, Puerto Rico and consisting of approximately 68 acres of land and 380,800 square feet of rentable space contained in several buildings in the complex. The property is substantially vacant and the owners may attempt to sell the property. Lightstone has agreed to advance funds to pay any negative cash flow from the operations of the property until a sale can be accomplished and has agreed that if it does not do so, it will transfer its remaining 49% interest in the property to Presidential. (3) The Company received at closing $250,000 in cash and a note from Mr. Lichtenstein in the amount of $750,000 payable without interest on January 31, 2010. Mr. Lichtenstein is not personally liable for payment of the $750,000 note, but the note is secured by a 25% ownership interest in the Las Piedras property. (4) The Company received a personal guaranty from Mr. Lichtenstein that the Company will receive all accrued interest on the Company's $7,835,000 mezzanine loan (relating to the Shawnee/Brazos Malls) through the date of repayment and $500,000 of the principal amount of the loan, which personal guaranty is limited to $500,000. As part of the settlement, the Company agreed to modify its right to receive repayment in full of the $7,835,000 loan before Mr. Lichtenstein receives any return on his capital contributions to the borrowing entity to the following extent: the Company will receive the first net proceeds of any sale or refinancing of the Shawnee/Brazos Malls in an amount equal to all accrued and unpaid interest and $2,000,000 of principal; Mr. Lichtenstein will receive the next $1,000,000 of any such net sale or refinancing proceeds; the Company will receive the next $1,000,000 of any such net proceeds and any additional net proceeds shall be paid 50% to the Company and 50% to Mr. Lichtenstein. Mr. Lichtenstein's guaranty is secured by his remaining interest in IATG. The Company has agreed with Lightstone that it will not foreclose on its $7,835,000 mezzanine loan so long as the first mortgage on the Shawnee/Brazos Malls is not accelerated or due at maturity and the holder of the first mortgage is retaining funds from operations of the properties in an amount sufficient to pay the interest due on the mezzanine loan. It is impossible to predict at this time whether or to what extent the Company will be able to recover any amounts on the $7,835,000 mezzanine loan. While the Shawnee/Brazos Malls currently generate more than sufficient cash flow to service the first mortgage and the Company's mezzanine loan, if the adverse market conditions currently affecting the sale and refinancing of shopping mall properties persist through 2009, it may not be possible to extend or refinance the first mortgage when it becomes due in January of 2010 or to sell the properties for an amount in excess of the first mortgage balance. The carrying value on the Company's financial statements of the $7,835,000 mezzanine loan and the Company's minority interest in the entity owning the Shawnee/Brazos Malls was $889,511 and $1,511,887 at September 30, 2009 and December 31, 2008, respectively. While under existing market conditions it is difficult to place a value on the assets and collateral received from Lightstone and Mr. Lichtenstein in settlement of the Company's claims against them, management believes that the settlement was in the best interests of the Company taking into account the nature of the Company's claims and the cost and unpredictability of litigation and collection of any judgment that might have been obtained. The defaults in payment of the Company's $9,500,000 mezzanine loan to Lightstone III, the $8,600,000 mezzanine loan to Lightstone I, and the $7,835,000 mezzanine loan to Lightstone II have had and will have a material adverse affect on the Company's business, financial condition, results of operations and prospects. The principal effects of the transactions resulting from the Settlement Agreement on the Company's consolidated financial statements in 2009, are as follows: (i) The carrying value of the $12,075,000 Consolidated Note on the Company's consolidated balance sheet is $2,074,994. This is the same carrying value of the $2,074,994 note that was on the Company's consolidated balance sheet prior to the consolidation of this note with the additional $10,000,006 indebtedness received in the Settlement Agreement. The $10,000,006 additional portion of the note was received in partial settlement of the $9,500,000 and $8,600,000 mezzanine loans, which had a net carrying value of $0 on the Company's consolidated balance sheet. Accordingly, there was no significant adjustment on the Company's consolidated balance sheet in 2009 as a result of the receipt of the Consolidated Note. No gain or loss was recorded on the Company's consolidated financial statements in connection with the consolidation of the $2,074,994 and $10,000,006 indebtedness and the substitution of the collateral for the $10,000,006 indebtedness. (ii) The 50% membership interest in IATG obtained by the Company was recorded on the Company's consolidated balance sheet at its fair value of $3,250,000 and a gain on the settlement of the joint venture loans in the amount of $3,250,000 was recognized on the Company's consolidated financial statements. (iii) The $750,000 non-interest bearing, nonrecourse note due on January 31, 2010, which is secured by an additional 25% ownership interest in IATG, was recorded on the Company's consolidated balance sheet at its fair value of $664,000 ($750,000 note receivable less a discount on the note receivable of $86,000) and a gain on the settlement of the joint venture loans in the amount of $664,000 was recognized on the Company's consolidated financial statements. In March, 2009, the Company's preliminary estimate of the fair value of the 50% ownership interest in IATG was $1,500,000 and its preliminary estimate of the fair value of the $750,000 note was $200,000. The Company recorded a $1,500,000 investment in joint ventures and a $200,000 note receivable on its consolidated balance sheet and recognized a gain on settlement of joint venture loans of $1,700,000 in its consolidated financial statements at March 31, 2009. The Company based the preliminary estimated fair value of its interest in the IATG property on information available to it at the time. During the quarter ended June 30,2009, the Company obtained an independent appraisal of the property owned by IATG and based on the appraised value of $6,500,000, the Company has adjusted the preliminary estimate of the value of its 50% ownership interest in the IATG property from $1,500,000 to $3,250,000 and its preliminary estimate of the $750,000 note receivable from $200,000 to $664,000. Accordingly, in June, 2009, the Company recorded an additional $1,750,000 in investments in joint ventures and an additional $464,000 for the note receivable on its consolidated balance sheet and recognized an additional gain of $2,214,000 on the gain on settlement of joint venture loans in its consolidated financial statements. While management believes that the $6,500,000 appraised value of the IATG property is a reasonable value, there can be no assurance that if and when the property is sold, it can be sold for its appraised value. In summary, as a result of the Settlement Agreement, in 2009 the Company recorded assets of $3,914,000 on the Company's consolidated balance sheet (a $750,000 note receivable less an $86,000 discount on the note receivable and a $3,250,000 investment in joint ventures) and recorded a $3,914,000 gain on the settlement of joint venture loans in its consolidated financial statements. The Company also received a net cash payment of $65,289 ($250,000 less $184,711 of expenses for the settlement), which was also recorded in gain on settlement of joint venture loans in its consolidated financial statements. In addition, for the period ended September 30, 2009, the Company recognized in interest income $53,493 of the amortization of discount recorded on the note receivable. The $12,075,000 Consolidated Note accrues interest at the rate of 13% per annum. However, the Company believes that the monthly interest due on the $2,074,994 portion of the note will be paid in accordance with the terms of the note and therefore, the Company only accrues the interest due on this portion of the note. The interest due on the $10,000,006 portion of the note is not accrued and such interest is recorded on a cash basis as interest is received. At September 30, 2009, the Company recognized interest income of $161,849 and recorded deferred interest income of $68,936 on the $2,074,994 portion of the note. In addition, the Company received interest payments of $82,666 on the $10,000,006 portion of the note. At September 30, 2009, the deferred and unaccrued interest on the $10,000,006 portion of the note was $697,334. 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 2009, cash received from interest on the Company's mortgage portfolio was $394,170. Net cash received from rental property operations was $722,602. Net cash received from rental property operations is before additions and improvements and mortgage amortization. In 2009, the Company did not receive any distributions from the joint ventures. Investing Activities Presidential holds a portfolio of mortgage notes receivable. During 2009, the Company received principal payments of $107,839 on its mortgage portfolio. In April, 2009, the Company received $1,545,851 of net proceeds from the sale of its Crown Court property. As a result of the Settlement Agreement with Lightstone, the Company had received a $250,000 payment for the Company's costs related to the Settlement Agreement. The Company paid the $184,711 costs of the Settlement Agreement and the remaining balance of $65,289 was recorded in gain on settlement of joint venture loans. During the first nine months of 2009, the Company invested $392,995 in additions and improvements to its properties. In May, 2009, the Company invested $4,431,622 in securities available for sale. The Company purchased notes and bonds issued by agencies of the United States government in order to utilize its cash to earn higher interest rates while retaining substantial liquidity in its investments. During the quarter ended September 30, 2009, the Company received $804,766 of proceeds from the sales of securities. The Company utilized these cash proceeds and operating cash to make a $903,918 contribution to the Company's underfunded defined benefit plan. Financing Activities The Company's indebtedness at September 30, 2009, consisted of mortgage debt of $16,113,609. The mortgage debt is collateralized by individual properties. The $15,007,955 mortgage on the Hato Rey Center property is nonrecourse to the Company, whereas the $1,053,390 Building Industries Center mortgage and the $52,264 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 2009, the Company made $303,683 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 $1,038,086 due at maturity in March, 2010, and the Hato Rey Center mortgage. The Company expects to repay the $1,038,086 balloon payment due in March, 2010 on the Building Industries Center mortgage, unless it is able to obtain an extension on satisfactory terms. The $15,007,955 Hato Rey Center mortgage matures in May, 2028, and had a fixed rate of interest of 7.38% per annum until May, 2008; thereafter the interest rate increased by 2% and additional repayments of principal will be required from surplus cash flows from operations of the property (see Hato Rey Partnership below). Investments In and Advances to Joint Ventures At December 31, 2008, the Company had investments in and advances to four joint ventures which owned and operated nine shopping malls located in seven states. These investments in and advances to joint ventures were made to entities controlled by David Lichtenstein and Lightstone. As a result of the February 27, 2009, Settlement Agreement, the Company now has investments in and advances to joint ventures in two entities that are controlled by Mr. Lichtenstein and Lightstone. The Company accounts for these investments using the equity method. The first investment is the Company's mezzanine loan in the amount of $7,835,000 to Lightstone II which is secured by ownership interests in the Shawnee/Brazos Malls. In connection with this loan, the Company received a 29% ownership interest in Lightstone II. The loan matures in 2014 and has an interest rate of 11% per annum. Since January 1, 2009, the interest payments due on the $7,835,000 loan have not been made and the loan is in default (see Joint Venture Mezzanine Loans and Settlement Agreement above). The $7,835,000 investment has been reduced by payments of interest (distributions received) and the Company's share of the losses recorded from the joint venture and the balance of the Company's investment in the Shawnee/Brazos Malls at September 30, 2009 is $889,511. The second investment is a 50% ownership interest in IATG, the Lightstone affiliate that owns The Las Piedras Industrial Complex, an industrial property located in Las Piedras, Puerto Rico and consisting of approximately 68 acres of land and 380,800 square feet of rentable space contained in several buildings in the complex. The Company's estimate of the fair value of its 50% ownership interest in IATG is $3,250,000 and the Company recorded a $3,250,000 investment in joint ventures on its consolidated balance sheet and recognized a gain on settlement of joint venture loans of $3,250,000 in its consolidated financial statements (see Joint Venture Mezzanine Loans and Settlement Agreement above). Activity in investments in and advances to joint ventures for the period ended September 30, 2009 is as follows: Equity in the Loss Balance at from Balance at December 31, Joint September 30, 2008 Investments Ventures 2009 ------------ ------------- ----------- ----------- Shawnee/Brazos Malls (1) $1,511,887 $ - $ (622,376) $ 889,511 IATG (2) - 3,250,000 (429,629) 2,820,371 ---------- ---------- ----------- ---------- $1,511,887 $3,250,000 $(1,052,005) $3,709,882 ========== ========== =========== ========== Equity in the income (loss) from joint ventures is as follows: Three Months Ended Nine Months Ended September 30, September 30, 2009 2008 2009 2008 ---- ---- ---- ---- Shawnee/Brazos Malls (1) $(264,340) $(301,230) $ (622,376) $(839,024) IATG (2) (201,787) - (429,629) - Martinsburg Mall (3) - 13,625 - 134,052 Four Malls (4) - 162,922 - 33,903 Macon/Burlington Malls (5) - - - 89,986 --------- --------- ----------- --------- $(466,127) $(124,683) $(1,052,005) $(581,083) ========= ========= =========== ========= (1) Interest due to 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 from joint ventures for the Shawnee/Brazos Malls. (2) The fair value of the Company's 50% ownership interest in IATG is $3,250,000. The Company also recorded its 50% share of the loss from IATG for the seven month period ended September 30, 2009. (3) In 2007, the Company's basis of its investment in the Martinsburg Mall was reduced by distributions and losses to zero. Any subsequent distributions received from the Martinsburg Mall were recorded in income. (4) 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 was included in the calculation of the Company's share of the income (loss) from joint ventures for the Four Malls. In the second quarter of 2008, the Company's basis of its investment in the Four Malls was reduced by distributions and losses to zero. Any subsequent distributions received from the Four Malls were recorded in income. (5) In 2007, the Company's basis of its investment in the Macon/Burlington Malls was reduced by distributions and losses to zero. Any subsequent distributions received from the Macon/Burlington Malls were recorded in income. The Lightstone Group is controlled by David Lichtenstein. At September 30, 2009, in addition to Presidential's investments of $3,709,882 in these joint ventures with entities controlled by Mr. Lichtenstein, Presidential has two loans that are due from entities that are controlled by Mr. Lichtenstein in the aggregate outstanding principal amount of $12,825,000 with a net carrying value of $2,792,487. The $6,502,369 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 23% of the Company's total assets at September 30, 2009. Hato Rey Partnership At September 30, 2009 the Company has an aggregate 60% general and limited partnership interest in the Hato Rey Partnership. The Hato Rey Partnership owns and operates the Hato Rey Center, an office building in Hato Rey, Puerto Rico. In 2005 and 2006, tenants vacated 82,387 square feet of space to occupy their own newly constructed office buildings and Presidential commenced an aggressive program to lease the vacant space. Since March, 2006 the vacancy rate at the property was reduced from 48% to a low of approximately 20% at January 31, 2009. However, as a result of local economic conditions and higher than historical vacancy rates in the Hato Rey area, the vacancy rate has increased to 27% at October 31, 2009. Over the last three years, Presidential has loaned $2,500,000 to the owning partnership to fund negative cash flow from the operations of the property during the periods of high vacancy rates and to pay the costs of a modernization program. Interest accrued on the loan at the rate of 11% until May, 2008 and 13% thereafter, with interest and principal to be paid from the first positive cash flow from the property or upon a refinancing of the first mortgage on or sale of the property. In July, 2009, the Company agreed to loan an additional $250,000 to the Hato Rey Partnership under the same terms as the $2,500,000 agreement. At September 30, 2009, total advances under the loan were $2,500,000. The $2,500,000 loan and the accrued interest in the amount of $739,478 have been eliminated in consolidation. The Company had expected to refinance the existing first mortgage on the building in the second quarter of 2008, when the terms of the existing mortgage were to be automatically modified to increase the interest rate thereon, but the combination of the slower than anticipated rent up and the turmoil in the lending markets made a refinancing unfeasible. The modification of the terms of the existing mortgage provided for an increase in its interest rate by 2% per annum (from 7.38% to 9.38%) and that payment of the additional 2% will be deferred until the maturity date of the mortgage in 2028. In addition, the modification provides that all net cash flow from the property will be utilized to repay the outstanding principal of the mortgage loan, which will be prepayable without penalty. The Company intends to refinance this mortgage when occupancy rates at the property have further improved and lending markets have returned to a more normal state. The management of Presidential believes that the vacancy rate at the property can continue to be reduced over the next few years. However, until the first mortgage is refinanced, the Company will not receive any cash payments on its loan to the partnership since principal and interest on the Company's loan are payable only out of operating cash flow or refinancing or sale proceeds and, under the terms of the modified mortgage, all net cash flow will be utilized to reduce principal on the first mortgage. During 2009, there was no net cash flow available to reduce the principal on the first mortgage. On January 1, 2009, the Company adopted ASC 810-10-65 which requires amounts attributable to noncontrolling interests to be reported separately. For the nine months ended September 30, 2009, the Hato Rey Partnership had a loss of $428,880. The consolidated financial statements reflect the separate disclosure of the noncontrolling interest's share (40%) of the loss of $171,552. Prior to the adoption of ASC 810-10-65, the partners constituting the noncontrolling interest in the Hato Rey Partnership had no basis in their investment and, as a result, the Company was required to record in its consolidated financial statements any losses attributable to the noncontrolling interest and the Company would have recorded any future earnings of the noncontrolling interest up to the amount of the losses previously recorded by the Company attributable to the noncontrolling interest. For the years ended December 31, 2008 and 2007, the Hato Rey Partnership had losses of $481,352 and $521,102, respectively, of which $192,541 and $208,441, respectively, represented the noncontrolling interest share absorbed by the Company. 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. 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 Company had previously estimated that the costs of the cleanup would not exceed $1,000,000. In accordance with the provisions of the ASC Contingencies Topic, 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. At September 30, 2009, the accrued liability balance was $809,944 and the discount balance was $137,144 for a net accrued liability of $672,800. The remediation must comply with the requirements of the Massachusetts Department of Environmental Protection ("MADEP") and during the three months ended March 31, 2009, the Company obtained the consent of MADEP to a specific plan of remediation. The Company has commenced the remediation work and expects to complete it by the end of 2009. While the final cost of the remediation work has not been finally determined, management believes that it will be substantially less than the balance of the net accrued liability at September 30, 2009. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved. The Company believes that any liability in excess of 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. Consolidated Loans Presidential holds two nonrecourse loans (the "Consolidated Loans"), which it received in 1991 from Ivy Properties, Ltd. and its affiliates "(Ivy"). At September 30, 2009, 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 (Steven Baruch who is an executive officer and Director of Presidential and Thomas Viertel who is also an executive officer and Director of Presidential) 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. While these amounts have been material in the past, the Company believes that they will not be material in 2009. 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 nine months ended September 30, 2009 and 2008, the Company received payments of zero and $146,750, respectively, from Scorpio. The Consolidated Loans bear interest at a rate equal to the JP Morgan Chase Prime rate, which was 3.25% at September 30, 2009. At September 30, 2009, the unpaid and unaccrued interest was $3,638,084 and such interest is not compounded. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK While the Company is not required as a smaller reporting company to comply with this Item 3, it is providing the following general discussion of qualitative 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. However, changes in market rates of interest impact the fair values of these fixed rate assets and liabilities. 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, and, accordingly, any fluctuations in values do not impact the Company's earnings, balance sheet or cash flows. The Company does not own any derivative financial instruments or engage in hedging activities. ITEM 4. CONTROLS AND PROCEDURES a) As of the end of the period covered by this quarterly report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in this report. b) There has been no change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 6. EXHIBITS 31.1 Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 32.1 Certification of Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PRESIDENTIAL REALTY CORPORATION (Registrant) DATE: November 10, 2009 By: /s/ Jeffrey F. Joseph ------------------------------------- Jeffrey F. Joseph President and Chief Executive Officer DATE: November 10, 2009 By: /s/ Elizabeth Delgado ------------------------------------- Elizabeth Delgado Treasurer EX-31 2 exhibit31-1.txt EXHIBIT 31.1 CEO CERTIFICATION Exhibit 31.1 CERTIFICATION ------------- I, Jeffrey F. Joseph, Chief Executive Officer of Presidential Realty Corporation (the "registrant"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of the Board of Directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: November 10, 2009 By:/s/ JEFFREY F. JOSEPH --------------------------------- Jeffrey F. Joseph Chief Executive Officer EX-31 3 exhibit31-2.txt EXHIBIT 31.2 CFO CERTIFICATION Exhibit 31.2 CERTIFICATION ------------- I, Thomas Viertel, Chief Financial Officer of Presidential Realty Corporation (the "registrant"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of the Board of Directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: November 10, 2009 By: /s/ THOMAS VIERTEL ------------------------------ Thomas Viertel Chief Financial Officer EX-32 4 exhibit32-1.txt EXHIBIT 32.1 CEO CERTIFICATION Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-Q of Presidential Realty Corporation (the "Company") for the period ending September 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey F. Joseph, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a)or 15(d) of the Securities Exchange Act of 1934: and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Company. Presidential Realty Corporation By:/s/ Jeffrey F. Joseph -------------------------- Jeffrey F. Joseph Chief Executive Officer Date: November 10, 2009 EX-32 5 exhibit32-2.txt EXHIBIT 32.2 CFO CERTIFICATION Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-Q of Presidential Realty Corporation (the "Company") for the period ending September 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas Viertel, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a)or 15(d) of the Securities Exchange Act of 1934: and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Company. Presidential Realty Corporation By:/s/ Thomas Viertel ---------------------- Thomas Viertel Chief Financial Officer Date: November 10, 2009 -----END PRIVACY-ENHANCED MESSAGE-----