-----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, WjNkj9dOdsVcq2kzKUTxsXZrunfsbogTFBU1eHeTcM/OFEH+eFxCYMalgzlgJT+j uWhwgT0fSLMCcOZ0Bpph3g== 0000731245-98-000004.txt : 19980813 0000731245-98-000004.hdr.sgml : 19980813 ACCESSION NUMBER: 0000731245-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: AMEX 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: SEC FILE NUMBER: 001-08594 FILM NUMBER: 98683043 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 QUARTERLY REPORT FOR PRESIDENTIAL REALTY CORP. 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 June 30, 1998 ---------------- 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) (Zip Code) Registrant's telephone number, indicating 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 ------ ------ The number of shares outstanding of each of the issuer's classes of common stock as of the close of business on August 7, 1998 was 478,940 shares of Class A common and 3,116,697 shares of Class B common. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES Index to Form 10-Q For the Six Months Ended June 30, 1998 Part I - Financial Information (Unaudited) Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Part II - Other Information Item 6. Exhibits and Reports on Form 8-K PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
Assets June 30, December 31, 1998 1997 ---------------- ---------------- Mortgage portfolio (Note 2): Sold properties, accrual $43,663,011 $43,871,400 Related parties, accrual 1,728,718 2,350,899 Sold properties, impaired 17,735,787 17,878,458 ---------------- ---------------- Total mortgage portfolio 63,127,516 64,100,757 ---------------- ---------------- Less discounts: Sold properties, accrual 4,552,520 5,055,574 Related parties, accrual 155,173 160,735 Sold properties, impaired 7,636,926 7,675,111 ---------------- ---------------- Total discounts 12,344,619 12,891,420 ---------------- ---------------- Less deferred gains: Sold properties, accrual 12,546,661 12,550,333 Related parties, accrual 940,129 1,543,342 Sold properties, impaired 6,398,157 6,432,055 ---------------- ---------------- Total deferred gains 19,884,947 20,525,730 ---------------- ---------------- Net mortgage portfolio (of which $773,699 in 1998 and $756,751 in 1997 are due within one year) 30,897,950 30,683,607 ---------------- ---------------- Real estate (Note 3) 27,891,032 27,690,535 Less: accumulated depreciation 6,783,508 6,404,797 ---------------- ---------------- Net real estate 21,107,524 21,285,738 ---------------- ---------------- Minority partners' interest (Note 4) 7,391,068 3,779,408 Prepaid expenses and deposits in escrow 2,177,880 1,190,158 Other receivables (net of valuation allowance of $145,258 in 1998 and $129,484 in 1997) 558,584 715,407 Other receivables (related party) 8,065 8,287 Securities available for sale (Note 5) 274,503 226,550 Cash and cash equivalents 4,855,637 979,712 Other assets 1,968,740 1,140,571 ---------------- ---------------- Total Assets $69,239,951 $60,009,438 ================ ================ See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
Liabilities and Stockholders' Equity June 30, December 31, 1998 1997 ---------------- ---------------- Liabilities: Mortgage debt (Note 6): Properties owned $35,029,837 $26,271,093 Wrap mortgage debt on sold properties 4,910,994 5,149,217 ---------------- ---------------- Total (of which $829,491 in 1998 and $1,133,721 in 1997 are due within one year) 39,940,831 31,420,310 Note payable to bank (of which $153,367 in 1998 and $147,190 in 1997 are due within one year) (Note 7) 10,470,469 10,542,552 Executive pension plan liability 1,544,280 1,601,411 Accrued liabilities 2,519,399 2,276,898 Accrued postretirement costs 570,100 574,637 Deferred income 265,383 274,097 Accounts payable 288,945 481,248 Other liabilities 691,840 665,202 ---------------- ---------------- Total Liabilities 56,291,247 47,836,355 ---------------- ---------------- Stockholders' Equity: Common stock; par value $.10 per share Class A, authorized 700,000 shares, issued and outstanding 478,940 shares 47,894 47,894 Class B June 30, 1998 December 31, 1997 312,779 311,377 ----------- -------------------- ---------------------- Authorized: 10,000,000 10,000,000 Issued: 3,127,786 3,113,773 Treasury: 11,224 14,224 Additional paid-in capital 2,117,486 2,043,653 Retained earnings 10,596,679 9,943,241 Net unrealized gain on securities available for sale (Notes 5 and 9) 25,833 19,505 Class B, treasury stock (at cost) (Note 10) (151,967) (192,587) ---------------- ---------------- Total Stockholders' Equity 12,948,704 12,173,083 ---------------- ---------------- Total Liabilities and Stockholders' Equity $69,239,951 $60,009,438 ================ ================ See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
SIX MONTHS ENDED JUNE 30, ---------------------------------- 1998 1997 -------------- --------------- Income: Rental $4,709,588 $4,040,286 Interest on mortgages - sold properties 1,896,418 2,182,126 Interest on wrap mortgages 641,496 652,233 Interest on mortgages - related parties 263,564 115,357 Investment income 66,593 87,220 Other 28,930 34,482 -------------- --------------- Total 7,606,589 7,111,704 -------------- --------------- Costs and Expenses: General and administrative 1,401,101 1,129,095 Interest on note payable and other 568,656 477,080 Interest on wrap mortgage debt 105,367 116,104 Amortization of loan acquisition costs 16,229 14,040 Depreciation on non-rental property 11,777 13,083 Rental property: Operating expenses 2,043,870 2,017,307 Interest on mortgages 1,181,120 1,083,567 Real estate taxes 439,278 349,338 Depreciation on real estate 379,655 353,427 Amortization of mortgage costs 161,359 67,476 Minority interest share of partnership income 214,179 215,656 -------------- --------------- Total 6,522,591 5,836,173 -------------- --------------- Income before net gain from sales of properties and securities 1,083,998 1,275,531 Net gain from sales of properties and securities 681,218 507,873 -------------- --------------- Net Income $1,765,216 $1,783,404 ============== =============== Earnings per Common Share (Note 1-C): Income before net gain from sales of properties and securities $0.30 $0.36 Net gain from sales of properties and securities 0.19 0.14 -------------- --------------- Net Income per Common Share $0.49 $0.50 ============== =============== Cash Distributions per Common Share $0.31 $0.30 ============== =============== Weighted Average Number of Shares Outstanding 3,586,805 3,557,194 ============== =============== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED JUNE 30, ---------------------------------- 1998 1997 -------------- --------------- Income: Rental $2,342,122 $2,017,982 Interest on mortgages - sold properties 952,817 892,497 Interest on wrap mortgages 320,064 306,708 Interest on mortgages - related parties 98,564 57,571 Investment income 37,780 42,538 Other 25,080 10,066 -------------- --------------- Total 3,776,427 3,327,362 -------------- --------------- Costs and Expenses: General and administrative 738,676 539,541 Interest on note payable and other 283,625 248,279 Interest on wrap mortgage debt 52,000 57,393 Amortization of loan acquisition costs 8,114 7,218 Depreciation on non-rental property 6,574 6,344 Rental property: Operating expenses 1,005,908 1,029,964 Interest on mortgages 652,983 544,918 Real estate taxes 219,641 197,740 Depreciation on real estate 191,370 180,396 Amortization of mortgage costs 124,067 33,738 Minority interest share of partnership income 42,176 69,522 -------------- --------------- Total 3,325,134 2,915,053 -------------- --------------- Income before net gain from sales of properties and securities 451,293 412,309 Net gain from sales of properties and securities 617,649 18,497 -------------- --------------- Net Income $1,068,942 $430,806 ============== =============== Earnings per Common Share (Note 1-C): Income before net gain from sales of properties and securities $0.12 $0.12 Net gain from sales of properties and securities 0.18 0.00 -------------- --------------- Net Income per Common Share $0.30 $0.12 ============== =============== Cash Distributions per Common Share $0.16 $0.15 ============== =============== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, --------------------------------------- 1998 1997 -------------- -------------- Cash Flows from Operating Activities: Cash received from rental properties $4,602,224 $4,220,524 Interest received 2,362,793 2,144,925 Miscellaneous income 27,682 47,569 Interest paid on rental property mortgages (1,171,692) (1,059,614) Interest paid on wrap mortgage debt (105,367) (116,104) Interest paid on note payable (466,545) (369,510) Cash disbursed for rental property operations (3,287,776) (2,074,981) Cash disbursed for general and administrative costs (1,406,232) (1,223,336) -------------- -------------- Net cash provided by operating activities 555,087 1,569,473 -------------- -------------- Cash Flows from Investing Activities: Payments received on notes receivable 1,021,673 1,693,330 Payments disbursed for investments in notes receivable (60,000) (3,006,442) Payments disbursed for additions and improvements (244,036) (911,061) Proceeds from sale of property 74,550 Purchase of property (9,386) Proceeds from sales of securities 523,790 Purchases of securities (41,625) (79,202) Purchase of 1% interest in partnership (60,000) -------------- -------------- Net cash provided by (used in) investing activities 741,176 (1,839,585) -------------- -------------- Cash Flows from Financing Activities: Principal payments on mortgage debt: Properties owned (252,431) (288,305) Wrap mortgage debt on sold properties (238,223) (229,834) Mortgage debt payment from proceeds of mortgage refinancing (10,788,825) Mortgage proceeds 19,800,000 Mortgage refinancing repairs and replacement escrows (558,730) Mortgage costs (467,404) (218,046) Note payable proceeds 2,500,000 Principal payments on note payable (72,083) (294,275) Cash distributions on common stock (1,111,778) (1,067,098) Proceeds from dividend reinvestment and share purchase plan 94,975 82,180 Distributions to minority partners (3,825,839) (244,241) -------------- -------------- Net cash provided by financing activities 2,579,662 240,381 -------------- -------------- Net Increase (Decrease) in Cash and Cash Equivalents 3,875,925 (29,731) Cash and Cash Equivalents, Beginning of Period 979,712 1,392,135 -------------- -------------- Cash and Cash Equivalents, End of Period $4,855,637 $1,362,404 ============== ============== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, ----------------------------------------- 1998 1997 --------------- --------------- Reconciliation of Net Income to Net Cash Provided by Operating Activities Net Income $1,765,216 $1,783,404 --------------- --------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 569,020 448,026 Gain from sales of properties and securities (681,218) (507,873) Issuance of treasury stock 10,440 Amortization of discounts on notes and fees (546,801) (870,078) Decrease in accounts receivable 157,045 112,368 Increase (decrease) in accounts payable and accrued liabilities (11,470) 357,175 Increase (decrease) in deferred income (8,714) 5,752 Increase in prepaid expenses, deposits in escrow and deferred charges (644,533) (55,414) Increase in security deposit restricted funds (293,667) Increase in security deposit liabilities 27,886 67,370 Miscellaneous (2,296) 13,087 Minority share of partnership income 214,179 215,656 --------------- --------------- Total adjustments (1,210,129) (213,931) --------------- --------------- Net cash provided by operating activities $555,087 $1,569,473 =============== =============== Supplemental noncash disclosures: Property received in satisfaction of debt $11,569 $45,765 =============== =============== Net carrying value of foreclosed properties reclassified to real estate $588,683 =============== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. General - Presidential Realty Corporation ("Presidential" or the "Company"), a Real Estate Investment Trust ("REIT"), is engaged principally in the holding of notes and mortgages secured by real estate and in the ownership of income producing real estate. B. Principles of Consolidation - The consolidated financial statements include the accounts of Presidential Realty Corporation and its wholly owned subsidiaries. Additionally, the accompanying consolidated financial statements include 100% of the account balances of UTB Associates and PDL, Inc. and Associates Limited Co-Partnership ("Home Mortgage Partnership" formerly known as Metmor Plaza Associates), partnerships in which Presidential or PDL, Inc., a wholly owned subsidiary of Presidential, is the General Partner. All significant intercompany balances and transactions have been eliminated. C. Net Income Per Share - Basic net income per share data is computed by dividing the net income by the weighted average number of shares of Class A and Class B common stock outstanding and common stock equivalents during each period. Basic net income per share and diluted income per share are the same for the six months ended June 30, 1998 and 1997. The dilutive effect of stock options is calculated using the treasury stock method. D. Basis of Presentation - The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. 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 financial statements and accompanying notes should be read in conjunction with the Company's Form 10-K for the year ended December 31, 1997. E. Management Estimates - In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheets and income and expense for the period. Actual results could differ from those estimates. 2. MORTGAGE PORTFOLIO The Company's mortgage portfolio includes notes receivable - sold properties and notes receivable - related parties and includes both accrual and impaired loans. Notes receivable - sold properties consist of: (1) Long-term purchase money notes from sales of properties previously owned by the Company or notes purchased by the Company. These purchase money notes have varying interest rates with balloon payments due at maturity. (2) Notes receivable from sales of cooperative apartment units. These notes generally have market interest rates and the majority of these notes amortize monthly with balloon payments due at maturity. Notes receivable - related parties are all due from Ivy Properties, Ltd. or its affiliates (collectively "Ivy") and consist of: (1) Purchase money notes resulting from sales of property or partnership interests to Ivy. (2) Notes receivable relating to loans made by the Company to Ivy in connection with Ivy's cooperative conversion business. The Woodland notes receivable were modified in March, 1998, as a result of the sale of the property and the assumption of the notes by the purchasers. The interest rate on the notes was increased from 9% to 10% through 2001 and will increase to 10.25% thereafter. At June 30, 1998, all of the notes in the Company's mortgage portfolio are current with the exception of two sold properties notes, the Fairfield Towers Second Mortgage and the Grant House wraparound mortgage note, which are classified as impaired loans. These two loans are in the aggregate amount of $17,735,787 and have a net carrying value of $3,700,704 after deducting discounts of $7,636,926 and deferred gains of $6,398,157. The Grant House wraparound mortgage note wraps around and is subordinate to a first mortgage with an outstanding principal balance of $2,295,940 at June 30, 1998, which is equal to the net carrying value of the Grant House wraparound note. At June 30, 1998, all payments due on the first mortgage have been paid. The Company has determined that no allowances for credit losses are required for these impaired loans because the net carrying value of these loans is less than the estimated fair value of the underlying collateral. The Company recognizes income on the impaired loans only to the extent that such income is actually received. The average recorded investment in impaired loans during the six months ended June 30, 1998 and June 30, 1997 was $17,807,401 and $16,187,019, respectively. There have been no significant changes in the status of the impaired loans since December 31, 1997. There were no condominium sales at the Fairfield Towers property during the six months ended June 30, 1998. The following table reflects the activity in impaired loans: IMPAIRED LOANS - --------------
Impaired Impaired Loan Additions Loan Balance (Payments) Balance Loan Description 12/31/97 1998 6/30/98 - ------------------------------------------------ ----------------- ----------------- ----------------- Notes receivable-sold properties: Properties previously owned- Fairfield Towers Second Mortgage $14,488,337 ($72,083) $14,416,254 Grant House (1) 3,390,121 (70,588) 3,319,533 ----------------- ----------------- ----------------- Total $17,878,458 ($142,671) $17,735,787 ================= ================= ================= Discount Net on Deferred Carrying Loans Gain Value Loan Description 6/30/98 6/30/98 6/30/98 - ------------------------------------------------ ----------------- ----------------- ----------------- Notes receivable-sold properties: Properties previously owned- Fairfield Towers Second Mortgage ($7,636,926) ($5,374,564) $1,404,764 Grant House (1) (1,023,593) 2,295,940 ----------------- ----------------- ----------------- Total ($7,636,926) ($6,398,157) $3,700,704 ================= ================= ================= Six months ended June 30, ---------------------------------------- 1998 1997 ----------------- ----------------- Reported Interest Income and Amortization of Discount (Cash Basis) - --------------------------------------------------------- Fairfield Towers Second Mortgage - interest income $8,237 $58,561 Fairfield Towers Second Mortgage - amortization of discount 38,185 38,582 Grant House - interest income (1) 34,882 Overlook - interest income (2) 47,077 Overlook - additional interest income (2) 11,987 ----------------- ----------------- Total $81,304 $156,207 ================= ================= Recognized Gain from Sale of Property - --------------------------------------------------------- Fairfield Towers Second Mortgage $33,898 $34,251 Overlook (2) 11,759 ----------------- ----------------- Total $33,898 $46,010 ================= ================= Nonreported Interest Income and Amortization of Discount - --------------------------------------------------------- The following additional amounts would have been reported if these loans had been fully performing: Fairfield Towers Second Mortgage - interest income $487,323 $436,780 Fairfield Towers Second Mortgage - additional interest income 43,213 Fairfield Towers Second Mortgage - amortization of discount 634,236 532,380 Grant House - interest income (1) 37,500 ----------------- ----------------- Total $1,159,059 $1,012,373 ================= ================= (1) Grant House was classified as an impaired loan at December 31, 1997 and, as a result, no amounts are listed for the 1997 period. The interest income of $34,882 reported for the 1998 period represents interest received on the wraparound first mortgage debt. The net carrying value of this wraparound mortgage note is equal to the first mortgage debt of $2,295,940 which it wraps around. (2) The Overlook loan was reclassified to accrual status at December 31, 1997.
3. REAL ESTATE Real estate is comprised of the following: June 30, December 31, 1998 1997 ----------- ----------- Land $ 3,774,549 $ 3,774,779 Buildings and leaseholds 23,903,042 23,729,409 Furniture and equipment 213,441 186,347 ----------- ----------- Total real estate $27,891,032 $27,690,535 =========== =========== 4. MINORITY PARTNERS' INTEREST Presidential is the General Partner of UTB Associates and Pdl, Inc., a wholly owned subsidiary of Presidential, is the General Partner of Home Mortgage Partnership. Presidential has a 66-2/3% interest in UTB Associates. Presidential and PDL, Inc. have an aggregate 26% interest in Home Mortgage Partnership. As the General Partner of these partnerships, Presidential and PDL, Inc., respectively, exercise effective control over the business of these partnerships, and, accordingly, Presidential has included 100% of the account balances of these partnerships in the accompanying financial statements. The minority partners' interest reflects the minority partners' equity in the partnerships. The minority partners' interest in the Home Mortgage Partnership is a negative interest and therefore, minority partners' interest is a net receivable on the Company's financial statements. The negative basis for each partner's interest in the Home Mortgage Partnership is due to the refinancing of the mortgage on the property and the distribution of the proceeds to the partners. The mortgage debt, which is included in the Company's financial statements, is substantially in excess of the historical cost of the property and the estimated fair value of the property is significantly greater than the mortgage debt. The minority partners' interest should be recovered if the partnership sold the property and the partnership is liquidated. Minority partners' interest is comprised of the following: June 30, December 31, 1998 1997 ----------- ----------- Home Mortgage Partnership $7,572,387 $3,963,378 UTB Associates (181,319) (183,970) ---------- ---------- Total minority partners' interest $7,391,068 $3,779,408 ========== ========== 5. SECURITIES AVAILABLE FOR SALE The cost and fair value of securities available for sale are as follows: June 30, December 31, 1998 1997 -------- ----------- Cost $248,670 $207,045 Gross unrealized gains 30,448 19,612 Gross unrealized losses (4,615) (107) -------- -------- Fair value $274,503 $226,550 ======== ======== During the six months ended June 30, 1998, there were no sales of securities available for sale. During the six months ended June 30, 1997, the Company sold securities available for sale for gross proceeds of $526,110 and a net loss of $10,634. The net loss of $10,634 included gross realized losses of $37,264, offset by gross realized gains of $26,630. 6. MORTGAGE DEBT In March, 1998, the Company obtained a $2,300,000 mortgage on its Fairlawn Gardens property (formerly Kent Terrace). The mortgage bears interest at the rate of 7.06% per annum, requires monthly payments of principal and interest of $15,395 and matures on April 1, 2008 with a $2,012,668 balloon payment due at maturity. In April, 1998, the Company refinanced the mortgage on the Home Mortgage property (formerly known as Metmor Plaza). The prior mortgage balance of $10,788,825 was paid from the proceeds of the new $17,500,000 mortgage. The new mortgage bears interest at the rate of 7.38% per annum for the first ten years and requires monthly payments of principal and interest of $120,928 until the anticipated repayment date of May 11, 2008, at which time the then outstanding principal balance of $15,445,099 is expected to be repaid. However, the maturity date of the mortgage is May 11, 2028 and if the mortgage is not repaid in 2008, the interest rate will be increased by 2% and additional repayments will be required from the surplus cash flows from the operations of the property (after payment of operating expenses) which will be applied to the outstanding principal amount. 7. NOTE PAYABLE TO BANK In connection with the Company's purchase of the Fairfield Towers First Mortgage in 1996, the Company obtained a bank loan from Fleet Bank, N.A. ("Fleet"). The note, which matures on October 30, 2001, is secured by a collateral assignment of the Fairfield Towers First Mortgage and is nonrecourse to Presidential except for a limited guarantee, the amount of which reduces as the principal balance is reduced. This limited guarantee was $1,408,583 at June 30, 1998. The interest rate is variable and is based at the Company's election on either the bank's prime rate plus 1%, a cost of funds rate plus 3%, or various LIBOR rates plus 3%. The note amortizes monthly based on a 9.25% interest rate for a 25 year term. In addition, upon the sale of condominium units, the Company is required to make principal payments to Fleet in an amount equal to the amount of principal payments received by the Company on the Fairfield Towers First Mortgage. At June 30, 1998 payments on the Fleet note payable were current. The outstanding note balance at June 30, 1998 and December 31, 1997 was $10,470,469 and $10,542,552, respectively. The Company obtained an unsecured $250,000 line of credit from a lending institution in 1997. The interest rate is 1% above the prime rate and the line of credit expires in February, 1999. Presidential pays a 1% annual fee for the line of credit. At June 30, 1998, no advances are outstanding on this line of credit. 8. INCOME TAXES Presidential elected to qualify as a Real Estate Investment Trust effective January 1, 1982 under Sections 856-860 of the Internal Revenue Code. Under those sections, a REIT which distributes at least 95% of its real estate investment trust taxable income to its shareholders each year by the end of the following year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. For the year ended December 31, 1997, the Company had taxable income (before distributions to stockholders) of approximately $2,633,000 ($.74 per share), which included approximately $1,480,000 ($.42 per share) of capital gains. This amount will be reduced by approximately $557,000 ($.16 per share) of the 1997 distributions that were not utilized in reducing the Company's 1996 taxable income and by any eligible 1998 distributions that the Company may elect (under Section 858 of the Internal Revenue Code) to utilize as a reduction of its 1997 taxable income. As previously stated, in order to retain REIT status, Presidential is required to distribute 95% of its REIT taxable income (exclusive of capital gains). As of June 30, 1998, Presidential has distributed the required 95% of its 1997 REIT taxable income. In addition, although no assurances can be given, it is the Company's present intention to distribute all of its 1997 taxable income and, therefore, no provision for income taxes was made at December 31, 1997. Furthermore, the Company had taxable income (before distributions to stockholders) for the six months ended June 30, 1998 of approximately $1,233,000 ($.34 per share), which included approximately $662,000 ($.18 per share) of capital gains. This amount will be reduced by 1998 distributions that were not utilized in reducing the Company's 1997 taxable income and by any eligible 1999 distributions that the Company may elect to utilize as a reduction of its 1998 taxable income. Presidential intends to continue to maintain its REIT status and although no assurances can be given at this time, the Company expects that it will not have to pay Federal income taxes for 1998 because its present intention is to distribute all of its 1998 taxable income during 1998 and 1999. Therefore, no provision for income taxes has been made at June 30, 1998. Presidential has, for tax purposes, reported the gain from the sale of certain of its properties using the installment method. 9. COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" in the first quarter of 1998. The Company's only element of other comprehensive income is the change in the unrealized gain on the Company's securities available for sale. Thus, comprehensive income, which consists of net income plus or minus other comprehensive income, for the six months ended June 30, 1998 and 1997 was $1,771,544 and $1,774,948, respectively. 10. TREASURY STOCK In March, 1998, three directors of the Company were each given 1,000 shares of the Company's Class B common stock as partial payment for directors fees for the 1998 year. Such shares had been held in treasury at an average cost of approximately $13.54 per share. The average market value for the previous month of the Class B common stock, on which the fees were based, was $6.96 per share. As a result of this transaction, the Company recorded $20,880 for prepaid directors fees (to be amortized during 1998) based on the average market value of the stock. Treasury stock was reduced by a cost of $40,620 and additional paid-in capital was charged $19,740 for the excess of the cost over the market value. 11. COMMITMENTS AND CONTINGENCIES The Company has incurred costs for environmental site investigations and the related response action outcome for potentially hazardous drums found at one site on its Mapletree Industrial Center property in Palmer, Massachusetts. As of December 31, 1997, the site investigation work was completed and remedial action was in progress and the Company had a balance of $35,600 in accrued environmental costs. At June 30, 1998, there have been no changes to the 1997 estimated costs. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997 Results of Operations Financial Information for the six months ended June 30, 1998 and 1997: - ------------------------------------------------------------------------------- Revenue increased by $494,885 from $7,111,704 in 1997 to $7,606,589 in 1998 primarily as a result of increases in rental income and interest on mortgages- related parties. These increases were offset by decreases in interest on mortgages-sold properties and investment income. Rental income increased by $669,302 from $4,040,286 in 1997 to $4,709,588 in 1998 primarily as a result of increases of $250,236 at the Home Mortgage property (formerly Metmor Plaza), increases of $263,993 at the Fairlawn Gardens property (formerly Kent Terrace) and increases at all other properties of $155,073. Interest on mortgages-related parties increased by $148,207 from $115,357 in 1997 to $263,564 in 1998 primarily as a result of increases in interest on the Consolidated Loans of $97,476 and increases in interest on the Overlook loan of $57,570. Interest on mortgages-sold properties decreased by $285,708 from $2,182,126 in 1997 to $1,896,418 in 1998 primarily due to the $382,796 amortization of discount on the Cedarbrooke note which was recorded in 1997 as a result of the prepayment of the Cedarbrooke note in 1997. In addition, there was a decrease of $50,324 of interest received on the Fairfield Towers Second Mortgage. These decreases were offset by increases of $86,949 in interest income from the Fairfield Towers First Mortgage and $67,956 from the amortization of discounts on the mortgage portfolio. Investment income decreased by $20,627 from $87,220 in 1997 to $66,593 in 1998 primarily as a result of decreased dividend income on securities available for sale. Costs and expenses increased by $686,418 from $5,836,173 in 1997 to $6,522,591 in 1998 primarily due to increases in general and administrative expenses, interest on note payable and other, interest on mortgages, real estate tax expense, depreciation expense and amortization of mortgage costs. General and administrative expenses increased by $272,006 from $1,129,095 in 1997 to $1,401,101 in 1998 primarily due to increases in franchise tax expense of $159,872, resulting from the partnership distribution received from the proceeds of the mortgage on the Home Mortgage property and the taxes thereon. In addition, there were increases in salary expense of $81,937 (of which $92,862 pertains to increases in executive bonuses offset by decreases of $10,925 in salary expense), professional fees increased by $17,276, stationery and printing expenses increased by $7,969 and there was an increase in directors fees of $6,070. In the 1998 period, three directors of the Company were each given 1,000 shares of the Company's Class B common stock as partial payment for directors fees. Such shares had been held in treasury at an average cost of $13.54 per share. The average market value of the Class B common stock, on which the fees were based, was $6.96 per share. As a result, the Company recorded $20,880 in prepaid directors fees based on the average market value of the stock, treasury stock was reduced by a cost of $40,620 and additional paid-in capital was charged $19,740 for the excess of the cost over the market value. At June 30, 1998, $10,440 of the prepaid directors fees were expensed. Interest on note payable and other increased by $91,576 from $477,080 in 1997 to $568,656 in 1998 primarily due to a $71,755 increase in interest expense on the note payable as a result of the additional $2,500,000 loan advanced in 1997. Mortgage interest expense increased by $97,553 from $1,083,567 in 1997 to $1,181,120 in 1998 as a result of the refinancing of the mortgage on the Home Mortgage property in April of 1998, and the new mortgage obtained on the Fairlawn Gardens property in March of 1998. Mortgage interest on the Home Mortgage property increased by $76,718 and mortgage interest on the Fairlawn Gardens property was $45,975. Real estate tax expense increased by $89,940 from $349,338 in 1997 to $439,278 in 1998 primarily as a result of increases in real estate tax expense at the Crown Court, Cambridge Green and Home Mortgage properties. The 1997 real estate tax expense included refunds of $46,143 for prior years' taxes at the Crown Court property. Depreciation on real estate increased by $26,228 from $353,427 in 1997 to $379,655 in 1998 as a result of improvements and additions made to the properties in 1997. Amortization of mortgage costs increased by $93,883 from $67,476 in 1997 to $161,359 in 1998 as a result of the $107,412 write-off of unamortized mortgage costs associated with the prior mortgage on the Home Mortgage property. The mortgage on the Home Mortgage property was refinanced in April, 1998 and the prior mortgage was repaid from the proceeds of the new mortgage. Net gain from sales of properties and securities are sporadic (as they depend on the timing of sales or the receipt of installments or prepayments on purchase money notes). In 1998, the net gain from sales of properties and securities was $681,218 compared with $507,873 in 1997. In the 1998 period, the Company recognized a gain of $40,435 from the sale of a cooperative apartment unit at Sherwood House. In addition, the Company recognized deferred gains of $603,213 and $33,898, respectively, from principal payments received on the Overlook loan and the Fairfield Towers Second Mortgage. In the 1997 period, the Company recognized $472,497 of deferred gain from the sale of the Cedarbrooke property as a result of a $1,074,200 principal prepayment received on that note. In addition, the Company recognized deferred gains of $11,759 and $34,251, respectively, from principal payments received on the Overlook loan and the Fairfield Towers Second Mortgage. Financial Information for the three months ended June 30, 1998 and 1997: - ------------------------------------------------------------------------------- Revenue increased by $449,065 from $3,327,362 in 1997 to $3,776,427 in 1998 primarily as a result of increases in rental income, interest on mortgages-sold properties, interest on mortgages-related parties and other income. Rental income increased by $324,140 from $2,017,982 in 1997 to $2,342,122 in 1998 primarily as a result of increases of $180,219 at the Home Mortgage property, increases of $110,525 at the Fairlawn Gardens property and increases at all other properties of $33,396. Interest on mortgages-sold properties increased by $60,320 from $892,497 in 1997 to $952,817 in 1998 primarily due to increases of $20,806 in interest income from the Fairfield Towers First Mortgage and $33,688 from the amortization of discounts on the mortgage portfolio. Interest on mortgages-related parties increased by $40,993 from $57,571 in 1997 to $98,564 in 1998 primarily as a result of increases in interest on the Consolidated Loans of $38,695. Other income increased by $15,014 from $10,066 in 1997 to $25,080 in 1998 as a result of a $20,000 fee received in 1998 in connection with the refinancing of the Home Mortgage property mortgage. Costs and expenses increased by $410,081 from $2,915,053 in 1997 to $3,325,134 in 1998 primarily due to increases in general and administrative expenses, interest on note payable and other, interest on mortgages, real estate tax expense and amortization of mortgage costs. These increases were offset by a decrease in minority interest share of partnership income. General and administrative expenses increased by $199,135 from $539,541 in 1997 to $738,676 in 1998 primarily due to an increase of $157,372 in franchise tax expense resulting from the partnership distribution received from the proceeds of the mortgage on the Home Mortgage property and the taxes thereon. In addition, there were increases in salary expense of $45,223 (of which $41,503 pertains to increases in executive bonuses). Interest on note payable and other increased by $35,346 from $248,279 in 1997 to $283,625 in 1998 primarily due to a $25,565 increase in interest expense on the note payable as a result of the additional $2,500,000 loan advanced in 1997. Mortgage interest expense increased by $108,065 from $544,918 in 1997 to $652,983 in 1998 as a result of the refinancing of the mortgage on the Home Mortgage property in April, 1998 and the new mortgage obtained on the Fairlawn Gardens property in March, 1998. Mortgage interest on the Home Mortgage property increased by $81,072 and mortgage interest on the Fairlawn Gardens property was $40,562. Real estate tax expense increased by $21,901 from $197,740 in 1997 to $219,641 in 1998 primarily as a result of increases in real estate tax expense at the Home Mortgage and Cambridge Green properties. Amortization of mortgage costs increased by $90,329 from $33,738 in 1997 to $124,067 in 1998 as a result of the $107,412 write-off of unamortized mortgage costs associated with the prior mortgage on the Home Mortgage property. Minority interest share of partnership income decreased by $27,346 from $69,522 in 1997 to $42,176 in 1998 as a result of a decrease in partnership income on the Home Mortgage property. Net gain from sales of properties and securities are sporadic (as they depend on the timing of sales or the receipt of installments or prepayments on purchase money notes). In 1998, the net gain from sales of properties and securities was $617,649 compared with $18,497 in 1997. In the 1998 period, the Company recognized deferred gains of $596,854 and $17,123, respectively, from principal payments received on the Overlook loan and the Fairfield Towers Second Mortgage. In the 1997 period, the Company recognized deferred gains of $5,946 and $17,558, respectively, from principal payments received on the Overlook loan and the Fairfield Towers Second Mortgage. Balance Sheet The receivable for minority partners' interest increased by $3,611,660 from $3,779,408 at December 31, 1997 to $7,391,068 at June 30, 1998, as a result of the $3,670,400 distribution made to the minority partners of the Home Mortgage Partnership from the proceeds from the refinancing of the mortgage on the Home Mortgage property. Prepaid expenses and deposits in escrow increased by $987,722 from $1,190,158 at December 31, 1997 to $2,177,880 at June 30, 1998 as a result of increases of $150,866 in prepaid franchise taxes, increases of $267,484 in mortgagee real estate tax and insurance escrows and an increase of $579,529 in replacement reserve mortgagee escrow funds. These increases were a result of the mortgages obtained in 1998 on the Home Mortgage and Fairlawn Gardens properties. Cash and cash equivalents increased by $3,875,925 from $979,712 at December 31, 1997 to $4,855,637 at June 30, 1998 as a result of the $2,300,000 mortgage obtained from the financing of the Fairlawn Gardens property. The Company also received a $1,006,276 partnership distribution (net of taxes paid) from the Home Mortgage Partnership as a result of the refinancing of the mortgage on the Home Mortgage property and principal payments of $603,213 were received on the Overlook loan. Other assets increased by $828,169 from $1,140,571 at December 31, 1997 to $1,968,740 at June 30, 1998 primarily as a result of a $467,404 increase in mortgage costs for the mortgages obtained in 1998, which were partially offset by the $177,588 amortization of mortgage and loan acquisition costs. In addition, $274,814 of tenant security deposits at the Home Mortgage property were transferred from cash and cash equivalents to restricted funds, in accordance with the terms of the refinanced mortgage. Deferred charges increased by $225,981 as a result of expenditures made for the proposed acquisition of an apartment complex in Miami, Florida. Home office furniture and equipment increased by $30,481, primarily for costs associated with the purchase of new computer systems in preparation for the year 2000. Mortgage debt on properties owned increased by $8,758,744 from $26,271,093 at December 31, 1997 to $35,029,837 at June 30, 1998. This increase was the result of the refinancing of the Home Mortgage property, which increased the mortgage debt on that property by $6,711,175, and the new $2,300,000 mortgage on the Fairlawn Gardens property. These increases were offset by principal payments of $252,431. Forward-Looking Statements Certain statements made in this report may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements regarding the intent, belief or current expectations of the Company and its management and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: general economic and business conditions, which will, among other things, affect the demand for retail space or retail goods, availability and creditworthiness of prospective tenants, lease rents and the terms and availability of financing; adverse changes in the real estate markets including, among other things, competition with other companies; risks of real estate development and acquisition; governmental actions and initiatives; and environment/safety requirements. Liquidity and Capital Resources Management believes that the Company has sufficient liquidity and capital resources to carry on its existing business and, barring any unforeseen circumstances, to pay the dividends required to maintain REIT status in the foreseeable future. The Company is seeking to expand its portfolio of real estate equities and plans to utilize for this purpose a portion of its available funds and additional funds that the Company may receive from balloon payments due on the Company's notes receivable as they mature, as well as funds that may be available from external sources. However, the Company's plans to expand its portfolio of real estate equities may be adversely affected by limitations on its ability to obtain funds for investment on satisfactory terms from external sources. Except as discussed herein, management is not aware of any other trends, events, commitments or uncertainties that will have a significant effect on liquidity. Presidential obtains funds for working capital and investment from its available cash and cash equivalents, from operating activities, from refinancing of mortgage loans on its real estate equities, and from repayments of its mortgage portfolio. The Company also has at its disposal a $250,000 unsecured line of credit from a lending institution. At June 30, 1998, Presidential had $4,855,637 in available cash and cash equivalents, an increase of $3,875,925 from the $979,712 at December 31, 1997. This increase in cash and cash equivalents was due to cash provided by operating activities of $555,087, investing activities of $741,176 and financing activities of $2,579,662. Operating Activities Presidential's principal source of cash from operating activities is from interest on its mortgage portfolio, which was $1,790,881 in 1998, net of interest payments on wrap mortgage debt and note payable. In 1998, net cash used for rental property operations was $12,683, which is net of distributions from partnership operations to minority partners but before additions and improvements and mortgage amortization. The net cash used for rental property operations includes an expenditure of $274,814 for the funding of security deposits for the Home Mortgage property in accordance with the terms of the refinanced mortgage on that property. Investing Activities Presidential holds a portfolio of mortgage notes receivable which consist primarily of notes arising from sales of real properties previously owned by the Company. Some of these notes wrap around underlying mortgage debt (the "Underlying Debt") which is paid by Presidential only out of funds received on its mortgage portfolio relating to the Underlying Debt. During 1998, the Company received principal payments of $783,450 on its mortgage portfolio (net of any principal payments attributable to the Underlying Debt), of which $707,519 represented prepayments, which are sporadic and cannot be relied upon as a regular source of liquidity. During 1998, the Company invested $244,036 in additions and improvements to its properties. The Company sold one cooperative apartment at Sherwood House in Long Beach, New York and received net proceeds of $74,550. The Company also holds a portfolio of marketable equitable securities which increased by $47,953 from $226,550 at December 31, 1997 to $274,503 at June 30, 1998 as a result of the purchase of securities of $41,625 and an increase in the fair value of securities of $6,328. Financing Activities The Company's indebtedness at June 30, 1998, includes $39,940,831 of mortgage debt (including $4,910,994 of underlying indebtedness on properties not owned by the Company but on which the Company holds wraparound mortgages). The mortgage debt, which is secured by individual properties, is nonrecourse to the Company with the exception of the $278,177 Mapletree Industrial Center mortgage, which is secured by the property and a guarantee of repayment by Presidential. In addition, some of the Company's mortgages provide for personal 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 1998, the Company made $252,431 of principal payments on mortgage debt on properties which it owns. The Company obtained a $2,300,000 mortgage on its Fairlawn Gardens property in March of 1998. The mortgage matures in April, 2008 with a balloon payment of $2,012,668 due at maturity. The mortgage requires monthly payments of principal and interest of $15,395 and has an interest rate of 7.06% per annum. In April of 1998, the Company completed the refinancing of the mortgage on the Home Mortgage property and the prior mortgage balance of $10,788,825 was paid from the proceeds of the new $17,500,000 mortgage. The new mortgage bears interest at the rate of 7.38% per annum for the first ten years, requires monthly payments of principal and interest of $120,928 until the anticipated repayment date of May 11, 2008 at which time the then outstanding principal balance of $15,445,099 is expected to be repaid. However, the maturity date of the mortgage is May 11, 2028 and if the mortgage is not repaid in 2008, the interest rate will be increased by 2% and additional repayments will be required from the surplus cash flows from the operations of the property (after payment of operating expenses) which will be applied to the outstanding principal amount. The mortgages on the Company's properties are self-liquidating at fixed rates of interest with the exception of the mortgages on Home Mortgage, Building Industries Center, Fairlawn Gardens and Continental Gardens, which have balloon payments due at maturity. The Company's indebtedness at June 30, 1998 includes a $10,470,469 bank loan payable to Fleet. The note, which matures on October 30, 2001, is nonrecourse to Presidential except for a limited guarantee, the amount of which reduces as the principal balance is reduced and was limited to $1,408,583 at June 30, 1998. The interest rate is variable and is based at the Company's election on either the bank's prime rate plus 1%, a cost of funds rate plus 3%, or various LIBOR rates plus 3%. The note amortizes monthly based on a 9.25% interest rate for a 25 year term with additional principal payments due upon the sale of condominium units. During 1998, the Company made principal payments of $72,083. During 1998, Presidential declared and paid cash distributions of $1,111,778 to its shareholders and received proceeds from its dividend reinvestment and share purchase plan of $94,975. Fairfield Towers The Company's financial performance and liquidity in 1998 and subsequent years will be affected by the results of the condominium conversion of Fairfield Towers Apartments in Brooklyn, New York by the owner of that property and the rental operations of the unsold condominium units. At June 30, 1998, the outstanding principal balances on the Fairfield Towers First Mortgage and the Fairfield Towers Second Mortgage were $17,176,884 and $14,416,254, respectively. The Fairfield Towers First Mortgage provides for monthly interest payments of 1% above the prime rate and principal repayments prior to maturity upon the sale of individual condominium units. Until the Fairfield Towers First Mortgage is repaid, Presidential will receive basic interest on the Fairfield Towers Second Mortgage only out of net cash flow from operations of the property and release payments upon the sale of each condominium unit in the amount of $3,000 per unit. All unpaid basic interest and additional interest (which is based on percentages of gross sales proceeds) will be deferred until after repayment of the Fairfield Towers First Mortgage. Since the conversion of the property to condominium status in 1994, a total of 155 units had been sold and 997 units are owned by the sponsor, the majority of which are occupied as rental units. Environmental Matters At June 30, 1998, the Company is continuing with its environmental project for the investigation and removal of potentially hazardous drums found at one site on its Mapletree Industrial Center property in Palmer, Massachusetts. Accrued liabilities for environmental matters have been recorded in operating expenses when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. These estimates are exclusive of claims against third parties and have not been discounted. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved. The Company believes that any additional liability in excess of amounts provided 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. The site investigation at the Mapletree Industrial Center site was completed and remedial action is in progress. At December 31, 1997, the accrued expense for the remedial action was $35,600. For the six months ended June 30, 1998, there were no environmental costs charged to operations. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit 27. Financial Data Schedule. (b) No reports on form 8-K have been filed during the quarter ended June 30, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PRESIDENTIAL REALTY CORPORATION (Registrant) DATE: August 11, 1998 By: /s/ Jeffrey F. Joseph --------------------- Jeffrey F. Joseph President DATE: August 11, 1998 By: /s/ Elizabeth Delgado --------------------- Elizabeth Delgado Treasurer EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1998 JUN-30-1998 4,855,637 274,503 31,609,857 145,258 0 8,648,368 27,891,032 6,783,508 69,239,951 4,056,585 49,428,442 0 0 360,673 12,588,031 69,239,951 0 7,606,589 0 3,238,341 0 0 1,855,143 1,765,216 0 1,765,216 0 0 0 1,765,216 0.49 0.49
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