-----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, MGNtL+u5rl//+E1rSI4oV8wr88FcFEVzYjDMyV26FLRdrdByeOA8YDu5wXRvSfHu o/UdwF8WxjwzVQdXWVN3GA== 0000950123-00-002734.txt : 20000328 0000950123-00-002734.hdr.sgml : 20000328 ACCESSION NUMBER: 0000950123-00-002734 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 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-K405 SEC ACT: SEC FILE NUMBER: 001-08594 FILM NUMBER: 579314 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-K405 1 PRESIDENTIAL REALTY CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1999 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, including area code 914-948-1300 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on Title of each class which registered - ------------------- ---------------- Class A Common Stock American Stock Exchange Class B Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None (Title of class) 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 the filing requirements for at least the past 90 days. Yes __x__ No ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] The aggregate market value of voting stock held by nonaffiliates of the registrant was $18,940,000 at March 6, 2000. The number of shares outstanding of each of the registrant's classes of common stock on March 6, 2000 was 478,940 shares of Class A common and 3,214,279 shares of Class B common. Documents Incorporated by Reference: The Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on June 14, 2000, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A, is incorporated by reference into Part III of this Form 10-K. 2 PRESIDENTIAL REALTY CORPORATION INDEX
FACING PAGE 1 INDEX 2 PART I Item 1. Business 3 Item 2. Properties 17 Item 3. Legal Proceedings 20 Item 4. Submission of Matters to a Vote of Security Holders 20 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 20 Item 6. Selected Financial Data 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38 Item 8. Financial Statements and Supplementary Data 38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 38 PART III Item 10. Directors and Executive Officers of the Registrant 38 Item 11. Executive Compensation 38 Item 12. Security Ownership of Certain Beneficial Owners and Management 38 Item 13. Certain Relationships and Related Transactions 39 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 39 Table of Contents to Consolidated Financial Statements 44
2 3 ITEM 1. BUSINESS (a) General Presidential Realty Corporation is a Delaware corporation organized in 1983 to succeed to the business of a company of the same name which was organized in 1961 to succeed to the business of a closely held real estate business founded in 1911. The terms "Presidential" or the "Company" refer to the present Presidential Realty Corporation or its predecessor company of the same name and to any subsidiaries. Since 1982 the Company has elected to be treated as a real estate investment trust ("REIT") for Federal and State income tax purposes. See Qualification as a REIT. The Company operates in a single business segment, investments in real estate related assets. The Company's principal assets fall into the following three general categories: (i) The largest portion of the Company's assets are equity interests in fourteen rental properties and one parcel of land. These properties have an historical cost of $35,647,633, less accumulated depreciation of $8,231,480, resulting in a net carrying value of $27,416,153. See Properties below. (ii) A substantial portion of the Company's assets consists of notes receivable, which are reflected on the Company's Consolidated Balance Sheet at December 31, 1999 as "Mortgage portfolio: sold properties, accrual". The $28,481,797 aggregate principal amount of these notes have been reduced by $1,837,722 of discounts (which reflect either the difference between the stated interest rates on the notes and the market interest rates at the time the notes were accepted or discounts received on the purchase of notes) and $11,320,373 of gains on sales which have been deferred. See Notes 1-E and 1-F of Notes to Consolidated Financial Statements. Accordingly, the net carrying value of the Company's "Mortgage portfolio: sold properties" was $15,323,702 at December 31, 1999. All of the loans included in this category of assets were in good standing at December 31, 1999. 3 4 While notes reflected under "Mortgage portfolio: sold properties, accrual" consist primarily of notes received from sales of real properties previously owned by the Company, this category of assets also includes notes in the aggregate principal amount of $1,091,023 which relate to sold cooperative apartments, the majority of which were either acquired by the Company in connection with the settlement agreement executed in November, 1991 (the "Settlement Agreement") with Ivy Properties, Ltd. and its affiliates (collectively "Ivy") or obtained as a result of sales of cooperative apartments which the Company received pursuant to the Settlement Agreement. See Relationship with Ivy Properties, Ltd. below. (iii) A smaller portion of the Company's assets consists of notes receivable in the aggregate principal amount of $1,574,028 from loans made to Ivy in connection with the conversion of apartment buildings to cooperative ownership or the sales in 1981 and 1984 by the Company to Ivy of two apartment projects. These loans are reflected on the Company's Consolidated Balance Sheet at December 31, 1999 as "Mortgage portfolio: related parties, accrual". The principal amounts of these notes have been reduced by discounts and valuation reserves of $132,073 and deferred gains of $908,343 and, accordingly, these notes have a net carrying value at December 31, 1999 of $533,612. Management believes that it holds sufficient collateral to protect its interests in all of the outstanding loans to Ivy to the extent of the net carrying value of these loans. At December 31, 1999, all of the loans due from related parties were in good standing. See Relationship with Ivy Properties, Ltd., and Notes 2 and 18 of Notes to Consolidated Financial Statements. Under the Internal Revenue Code of 1986, as amended (the "Code"), a REIT which meets certain requirements is not subject to Federal income tax on that portion of its taxable income which is distributed to its shareholders, if at least 95% of its "real estate investment trust taxable income" (exclusive of capital gains) is so distributed. Since January 1, 1982, the Company has elected to be taxed as a REIT and has paid regular quarterly cash distributions. Total dividends paid by the Company in 1999 were $.64 per share. In addition, at December 31, 1999, the Company elected to retain $.17 per share of long-term capital gains that the Company had received during 1999 and subsequently paid a capital gains tax of $.06 per share. As a result, each shareholder (i) includes its pro rata 4 5 share of the designated long-term capital gains in computing its long-term capital gains, (ii) receives a tax credit for its pro rata share of the tax paid by the REIT and (iii) adjusts the basis of its shares for the difference between the amount of capital gains and the tax credit received by the shareholder. While the Company intends to operate in such a manner as to enable it to be taxed as a REIT, and to pay dividends in an amount sufficient to maintain REIT status, no assurance can be given that the Company will, in fact, continue to be taxed as a REIT, that distributions will be maintained at the current rate or that the Company will have cash available to pay sufficient dividends in order to maintain REIT status. See Qualification as a REIT and Market for the Registrant's Common Equity and Related Stockholder Matters. At December 31, 1999, the Company employed twelve persons. (b) Investment Strategies The Company's current overall investment strategy is to make investments in real property which offer attractive current yields with potential for capital appreciation. The Company's investment policy is not contained in or subject to restrictions included in the Company's Certificate of Incorporation or Bylaws, and there are no limits in the Company's Certificate of Incorporation or Bylaws on the percentage of assets which it may invest in any one type of asset or the percentage of securities of any one issuer which it may acquire. The investment policy may, therefore, be changed by the Directors or Officers of the Company without the concurrence of the holders of its outstanding stock. However, to continue qualifying as a REIT, the Company must restrict its activities to those permitted under the Code. See Qualification as a REIT. The Company's current primary investment strategies are as follows: (i) Equity Properties The Company's current investment policy is focused on acquiring additional equity interests in income producing properties, principally moderate income apartment properties in the eastern United States. Although the Company's present intention is to acquire additional moderate income apartment properties, Presidential has in the past invested in other commercial properties, including office buildings, shopping centers and light industrial properties, and may do so in the future. 5 6 Geographically, the Company expects to invest primarily in the eastern United States, although Presidential has in the past invested in other locations and may do so in the future. 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. Pursuant to this policy strategy, subsequent to year end the Company acquired a 224 unit apartment property in Clearwater, Florida and executed a contract to acquire a 320 unit apartment property in Norcross, Georgia, a suburb of Atlanta, which contract is expected to close in April, 2000. (ii) Holding of Long Term Notes The Company holds and expects to continue to hold long term mortgage notes obtained from the sales of real property previously owned by the Company. These notes provide for balloon principal payments at varying times. The Company may in appropriate circumstances agree to extend and modify these notes. See the table set forth below under Loans and Investments. The capital gains from sales of real properties previously owned by the Company are recognized for income tax purposes on the installment method as principal payments are received. To the extent that such payments are received by Presidential, it may, as a REIT, either (i) elect to retain such payments, in which event it will be required to pay Federal and State income tax on the portion of the payments which represent capital gain, (ii) distribute all or a portion of such payments to shareholders, in which event Presidential will not be required to pay taxes on the capital gain to the extent that it is distributed to shareholders or (iii) elect to retain such payments and designate them as a retained capital gain dividend, in which event the Company would pay the Federal tax on such gain, the shareholders would be taxed on their share of the undistributed long-term capital gain and the shareholders would receive a tax credit for their share of the Federal tax that the Company paid and adjust the basis of their stock for the difference between the long-term capital gain and the tax credit. To the extent that Presidential retains such payments, the proceeds, after payment of any taxes, will be available for future investment. Presidential has not adopted a specific policy with respect to the distribution or retention of capital gains, and its decision as to any such gain will be made in 6 7 connection with all of the circumstances existing at the time the gain is recognized. It should be noted that there can be no assurance that the balloon principal payments due in accordance with the purchase money notes will actually be made when due. (iii) Cooperative/Condominium Conversion Loans The Company is not currently making loans in connection with cooperative/condominium conversion projects, but has made such loans in the past. Presidential made a number of cooperative conversion loans during the 1980's, the majority of which were made to Ivy. In satisfaction of certain indebtedness due from Ivy, Presidential received cooperative apartment units from Ivy (see Relationship with Ivy Properties, Ltd.). Presidential has sold the majority of these units and the remaining units are classified as real estate. Although it may from time to time sell individual or groups of occupied apartments, Presidential generally intends to continue to hold these apartments until they become vacant and may, in some circumstances, rerent apartments free from rent regulations after they have become vacant. (iv) Funding of Investments In the past, the Company has obtained funds to make loans and investments from excess cash from operations or capital transactions, loans from financial institutions secured by specific real property or from general corporate borrowings. Such loans have in the past been, and may in the future be, secured by real property and provide for recourse to Presidential. However, funds may not be readily available from these sources and such unavailability may limit the Company's ability to make new investments. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources. (c) Loans and Investments The Company's portfolio of investments consists of the three types of assets described under General above. At December 31, 1999, all of the loans included in "Mortgage portfolio: sold properties" were current. 7 8 On February 22, 1999, Presidential consummated the sale of its Fairfield Towers First and Second Mortgage Notes (excluding a $4,000,000 portion of the Second Mortgage Note, which it retained). These notes had been secured by 997 unsold condominium units at Fairfield Towers in Brooklyn, New York. At the date of the sale, the Fairfield Towers First Mortgage Note had a net carrying value of $13,957,284 after deducting a discount. The Fairfield Towers Second Mortgage Note, which was classified as an impaired loan, had a net carrying value of $1,311,908 after deducting a discount and a deferred gain. The aggregate sales price for the First Mortgage Note and the Second Mortgage Note (excluding the $4,000,000 interest retained by Presidential) was $21,350,000. As a result of this transaction, Presidential repaid the $10,195,442 outstanding principal balance of its bank note payable, which had been secured by Presidential's interest in the First Mortgage Note. Presidential recognized a gain on sale of $7,393,844 net of Federal taxes of $220,500. The $4,000,000 portion of the Second Mortgage Note retained by Presidential was modified to provide for interest at the rate of 9.625% per annum for the first three years and 10.5% per annum for the remaining seven years. The $4,000,000 outstanding principal balance is due at maturity on February 18, 2009. To secure this obligation, Presidential obtained subordinate security interests in three apartment properties located in New Jersey as collateral for the Note. On January 28, 1999, the Company sold its interest in the $3,235,833 Grant House wraparound mortgage note, which had been classified as an impaired loan. The Company's $1,023,593 equity in its second mortgage wraparound note was sold for a purchase price of $500,000 in connection with the sale by the owner of the apartment property. As a result of this transaction, Presidential wrote off the $2,212,240 balance on the first mortgage and the related $2,212,240 mortgage debt, $75,000 of the sales proceeds was applied to accrued and unpaid interest and the Company recognized a gain on sale of $425,000. In 1999, the Company (i) repaid the $2,300,000 first mortgage indebtedness underlying its $11,000,000 wraparound mortgage notes secured by the Crown Tower and Madison Towers apartment properties in New Haven, Connecticut, (ii) received a principal repayment of $1,000,000 on the notes and paid a $1,000,000 deferred brokerage commission (which had been deferred from the sale of the New Haven properties in 1984) and (iii) consolidated the remaining $12,300,000 of indebtedness into a single note and modified the terms thereof. 8 9 The $12,300,000 note provides for an interest rate of 10% per annum with a one-half of one percent annual rate increase and additional interest of $369,000 due at maturity on June 29, 2002. The note is now secured by a second mortgage on the Encore Apartments and commercial space located in New York, New York and by a personal guaranty in the maximum amount of $2,500,000 from one of the owners of the property. As a result of these transactions, the Company received a $30,750 loan modification fee and recognized a deferred gain on sale of $1,000,000. The following tables set forth information as of December 31, 1999 with respect to the mortgage loan portfolio resulting from the sale of properties and the loan portfolio due from Ivy. 9 10 MORTGAGE PORTFOLIO: NOTES RECEIVABLE - SOLD PROPERTIES DECEMBER 31, 1999 - -------------------------------------------------------------------------------
Net Note Deferred Carrying Name of Property Receivable Discount Gain Value - ---------------- ---------- -------- ---- ----- Chelsea Village Apartments (1) $ 4,000,000 $ 1,442,001 $ $ 2,557,999 Atlantic City, NJ Liberty Garden Bergenfield, NJ Town Oaks Apartments South Bound Brook, NJ Encore Apartments (2) 12,300,000 6,991,540 5,308,460 New York, NY Mark Terrace Associates (3) 2,244,000 558,250 1,685,750 Bronx, NY Mark Terrace Associates 69,262 69,262 Bronx, NY Newcastle Apartments (4) 6,000,000 2,991,850 3,008,150 Greece, NY Pinewood I & II 100,000 100,000 Des Moines, IA Windsor at Arbors (5) 1,175,500 261,208 684,991 229,301 Alexandria, VA Woodland Village (6) 958,343 44,989 913,354 Hartford, CT Woodland Village (6) 543,669 74,556 469,113 Hartford, CT ----------- ----------- ---------- ----------- Subtotal 27,390,774 1,822,754 11,226,631 14,341,389 ----------- ----------- ---------- ----------- Interest Interest Maturity Rate Rate Name of Property Date 1999 Range - ---------------- ---- ---- ----- Chelsea Village Apartments 2009 9.625% 9.625-10.50% Atlantic City, NJ Liberty Garden Bergenfield, NJ Town Oaks Apartments South Bound Brook, NJ Encore Apartments 2002 11.50% 10.00-11.50% New York, NY Mark Terrace Associates 2005 5.24% 5.16-11.16% Bronx, NY Mark Terrace Associates 2002 9.00% 9.00% Bronx, NY Newcastle Apartments 2006 8.32% 7.90-8.50% Greece, NY Pinewood I & II 2001 12.00% 12.00% Des Moines, IA Windsor at Arbors 2007 8.25% 8.25-9.25% Alexandria, VA Woodland Village 2005 10.00% 10.00-10.25% Hartford, CT Woodland Village 2005 10.00% 10.00-10.25% Hartford, CT
10 11 MORTGAGE PORTFOLIO: NOTES RECEIVABLE - SOLD PROPERTIES DECEMBER 31, 1999 (CONTINUED) - -------------------------------------------------------------------------------
Net Note Deferred Carrying Name of Property Receivable Discount Gain Value - ---------------- ---------- -------- ---- ----- Sold Co-op Apartments: Emily Towers (7)(8) $ 206,116 $ 729 $ 5,687 $ 199,700 Flushing, NY 330 W.72nd St (7)(9) 58,397 8,962 49,435 New York, NY 330 W.72nd St. Purchasers (7) 129,428 49,089 80,339 New York, NY Towne House (7)(8) 536,592 4,134 38,966 493,492 New Rochelle, NY 6300 Riverdale Ave (7)(8) 18,965 97 18,868 Riverdale, NY Mark Terrace 35,271 35,271 Bronx, NY Sherwood House (7)(10) 22,165 1,046 21,119 Long Beach, NY Rye Colony 84,089 84,089 Rye, NY ----------- ----------- ----------- ----------- Subtotal 1,091,023 14,968 93,742 982,313 ----------- ----------- ----------- ----------- Total Notes Receivable- Sold Properties $28,481,797 $ 1,837,722 $11,320,373 $15,323,702 =========== =========== =========== =========== Interest Interest Maturity Rate Rate Name of Property Date 1999 Range - ---------------- ---- ---- ----- Sold Co-op Apartments: Emily Towers 2002-2008 7.00-9.50% 7.00-9.50% Flushing, NY 330 W.72nd St 2016 8.00% 8.00-8.50% New York, NY 330 W.72nd St. Purchasers 2003 8.75% 8.75% New York, NY Towne House 2002-2010 7.75-9.50% 7.75-9.50% New Rochelle, NY 6300 Riverdale Ave 2003 7.50-8.25% 7.50-8.25% Riverdale, NY Mark Terrace 2003 9.00% 9.00% Bronx, NY Sherwood House 2002-2010 9.00-9.50% 9.00-9.50% Long Beach, NY Rye Colony 2009-2010 8.00-11.00% 8.00-11.00% Rye, NY
11 12 MORTGAGE PORTFOLIO: NOTES RECEIVABLE - SOLD PROPERTIES DECEMBER 31, 1999 (CONCLUDED) - ------------------------------------------------------------------------------- (1) The Fairfield Towers Second Mortgage was modified in February, 1999, when the Company sold the Fairfield Towers First Mortgage and substantially all of the Fairfield Towers Second Mortgage. The modification provides for an interest rate of 9.625% per annum through February 17, 2002 and an interest rate of 10.50% per annum thereafter. The note matures on February 18, 2009. The discount on this note was computed at a rate of 18%. To secure this obligation, Presidential obtained subordinate security interests in three apartment properties located in New Jersey (having an estimated equity value of approximately $7,000,000) as collateral for the note. (2) In June, 1999, the Crown Tower and Madison Towers wraparound mortgage notes were modified. The Company repaid the $2,300,000 first mortgage debt on these properties (wrap mortgage debt on sold properties), received a $1,000,000 principal repayment and consolidated the $12,300,000 outstanding principal balance of the mortgage notes into one consolidated note. The modified note provides for an interest rate of 10% per annum, with a 1/2 percent annual rate increase and additional interest of $369,000 due at maturity, which will increase the effective interest rate on the note to 11.50% per annum through maturity. The modified note matures on June 29, 2002, and is secured by a second mortgage on the Encore Apartments and commercial space located in New York, New York and by a limited guarantee of $2,500,000 from one of the owners of the property. (3) As provided by the terms of the Mark Terrace Associates note, the maturity date of the note was extended in 1999 from November 29, 1999, to November 29, 2005. In addition, annual interest rates on the note increase by 1% per year, from 6.16% per annum at November 30, 1999 to 11.16% per annum at November 30, 2004. (4) Interest on this note was 6% per annum through July 31, 1999 and is 7.90% per annum through July 31, 2001. Thereafter interest will be at a rate equal to 150 basis points in excess of the yield on specified Treasury bills. In connection with the modification of the note in 1994, the borrower paid a $628,863 fee in order to increase the effective interest rate on the note to 8.5% per annum through July 31, 1999. In September, 1997, the Company extended the maturity date of the note to July 31, 2006 and the Company and the debtor agreed to substitute Newcastle Apartments in Greece, New York for Presidential Park Apartments in Columbus, Ohio as security for this note. (5) The discount on this note was computed at a yield of 12%. As a result of a modification of the note in July, 1997, the maturity date of the loan was changed from 2015 to 2007, with interest rates of 8.25% through 1999 and 9.25% thereafter. In addition, the Company and the debtor agreed to substitute Windsor at Arbors in Alexandria, Virginia for Woodgate Apartments in Wichita, Kansas, as security for this note. (6) The discounts on the Woodland Village notes were computed at a yield of 25%. In January, 1997, the maturity dates of these loans were extended to 2005. As a result of the sale of the Woodland property and the assumption of the notes by the purchaser in 1998, the interest rate on the notes was increased from 9% to 10% through 2001 and 10.25% thereafter. The notes are amortizing monthly based on a 20 year term at the above rates, and have balloon payments due at maturity. (7) These notes were either assigned by Ivy as a result of the Settlement Agreement with Ivy or were received from purchasers of apartments which Presidential held as foreclosed property. (8) The amount under discount represents unamortized mortgage points received from purchasers. (9) The discount on this note was computed at 16% of face value. (10) The discount on this note was computed at 15% of face value. 12 13 MORTGAGE PORTFOLIO: NOTES RECEIVABLE - RELATED PARTIES DECEMBER 31, 1999 - --------------------------------------------------------------------------------
Net Final Note Deferred Carrying Maturity Interest Name of Property Receivable Discount Gain Value Date Rate - ---------------- ---------- -------- -------- -------- -------- -------- UTB End Loans (1) $158,183 $100,467 $ $ 57,716 Various Various Consolidated Loans (2) 39,259 39,259 2016 Chase Prime Overlook 908,343 908,343 2003 6.0% Alexandria, VA University Towers (3) 468,243 31,606 436,637 Various 11.80 to 25.33% New Haven, CT ---------- -------- -------- -------- $1,574,028 $132,073 $908,343 $533,612 ========== ======== ======== ========
(1) Ivy's equity in these purchase money notes (which are secured by co-op apartment units at University Towers, New Haven, CT) was transferred to Presidential as part of the Settlement Agreement. Included in the $100,467 discount on these notes is a valuation reserve of $33,944. This valuation reserve was recorded by the Company in 1997 to reflect the decline in the estimated fair value of the underlying collateral. (2) As part of the Settlement Agreement with Ivy, certain of Presidential's outstanding nonrecourse loans (most of which had previously been written down to zero) were consolidated into two notes which currently have an aggregate outstanding principal balance of $4,809,309. The $39,259 represents Presidential's net carrying value of the notes. Presidential does not expect to recover any material amounts on these notes in excess of their net carrying value. (3) These notes represent a 100% interest in notes receivable held by UTB Associates, a partnership in which Presidential has a 66-2/3% interest. These notes are amortized over a period of approximately 28 years from the date of a co-op apartment sale. Included in the $31,606 discount on these notes is a valuation reserve of $9,849. This valuation reserve was recorded by the Company in 1997 to reflect the decline in the estimated fair value of the underlying collateral. 13 14 (d) Qualification as a REIT Since 1982, the Company has operated in a manner intended to permit it to qualify as a REIT under Sections 856 to 860 of the Code. The Company intends to continue to operate in a manner to permit it to qualify as a REIT. However, no assurance can be given that it will be able to continue to operate in such a manner or to remain qualified. In any year that the Company qualifies as a REIT and meets other conditions, including the distribution to stockholders of at least 95% of its "real estate investment trust taxable income" (excluding long-term capital gains but before a deduction for dividends paid), the Company will be entitled to deduct the distributions that it pays to its stockholders in determining its ordinary income and capital gains that are subject to federal income taxation (see Note 8 of Notes to Consolidated Financial Statements). Income not distributed is subject to tax at rates applicable to a domestic corporation. In addition, the Company is subject to an excise tax (at a rate of 4%) if the amounts actually or deemed distributed during the year do not meet certain distribution requirements. In order to receive this favorable tax treatment, the Company must restrict its operations to those activities which are permitted under the Internal Revenue Code and to restrict itself to the holding of assets that a REIT is permitted to hold. It should be noted that no assurance can be given that the Company will, in fact, continue to be taxed as a REIT; that distributions will be maintained at the current rate; that the Company will have sufficient cash to pay dividends in order to maintain REIT status or that it will be able to make cash distributions in the future. In addition, even if the Company continues to qualify as a REIT, the Board of Directors has the discretion to determine whether or not to distribute long-term capital gains and other types of income not required to be distributed in order to maintain REIT tax treatment. (e) Relationship with Ivy Properties, Ltd. From 1979 to 1989, Presidential made loans to Ivy Properties, Ltd. and its affiliates ("Ivy") in connection with Ivy's cooperative conversions of apartment properties in the New York metropolitan area. In 1981, UTB Associates, a partnership controlled by Presidential, sold an apartment property to Ivy in return for purchase money notes. In addition, in 1984, Presidential sold to 14 15 Ivy its 50% partnership interest in the partnership which owned Overlook Gardens, a 308 unit apartment complex in Alexandria, Virginia for a purchase money note. Ivy is owned by Thomas Viertel, Steven Baruch and Jeffrey Joseph (the "Ivy Principals"), who are the sole partners of Pdl Partnership, which owns 198,735 shares of the Company's Class A common stock. As a result of the ownership of the 198,735 shares of Class A common stock described above and 24,601 additional shares of Class A common stock owned in the aggregate individually by the Ivy Principals, Pdl Partnership and the Ivy Principals have beneficial ownership of an aggregate of approximately 47% of the outstanding shares of Class A common stock of the Company, which class of stock is entitled to elect two-thirds of the Board of Directors of the Company. By reason of such beneficial ownership, the Ivy Principals are in a position substantially to control elections of the Board of Directors of the Company. Jeffrey Joseph is the President and a Director of Presidential. Thomas Viertel, an Executive Vice President and the Chief Financial Officer of Presidential, is the son of Joseph Viertel, a Director and a former President of Presidential, and the nephew of Robert E. Shapiro, Chairman of the Board of Directors and a former President of Presidential. Steven Baruch, an Executive Vice President of Presidential, is the cousin of Robert E. Shapiro and Joseph Viertel. In November, 1999, these three officers exercised stock options for the purchase of an aggregate of 60,000 shares of Class B common stock at an exercise price of $6.125 per share and now hold an aggregate of 87,764 shares of Class B common stock. Presidential made loans totaling $367,500 to these officers for the payment of the purchase price of the 60,000 shares. The loans, which are recourse loans, provide for an interest rate of 8% per annum, mature on November 30, 2004 and are secured by a security interest in the shares. For the year ended December 31, 1999, interest income on these notes was $4,108. In 1999, these officers were granted options to purchase an additional 60,000 shares of Class B common stock. See Note 14 of Notes to Consolidated Financial Statements. As a result of the deterioration of the sales market for cooperative apartments in the New York metropolitan area in 1989 and 1990, Ivy defaulted on certain of its outstanding loans from Presidential in 1990 and 1991. In November, 1991, Presidential and Ivy consummated a Settlement Agreement with respect to various outstanding loans to Ivy. The Settlement Agreement was negotiated for Presidential by a committee of three members of the Board of Directors with no 15 16 affiliations with the Ivy Principals (the "Independent Committee") and an officer of Presidential who was not affiliated with the Ivy Principals, and was approved unanimously by the Board of Directors of Presidential. In connection with the Settlement Agreement, Presidential received, among other things, a number of vacant and occupied cooperative apartment units in the New York metropolitan area and certain third party promissory notes held by Ivy. Presidential received these assets in exchange for (i) the satisfaction of all of Ivy's recourse debt to Presidential and certain of its nonrecourse debt to Presidential with respect to which Presidential held first priority security interests and (ii) the release by Presidential of certain subordinate security interests in collateral securing some of the defaulted loans. Most of Ivy's remaining nonrecourse debt to Presidential was consolidated, on modified terms, into two nonrecourse loans (collectively, the "Consolidated Loans") which were collateralized by substantially all of Ivy's remaining business assets with respect to which Presidential either did not previously have any security interest or had a junior security interest (collectively, the "Consolidated Collateral"). The terms of the Settlement Agreement permit Ivy to use the proceeds of each sale of Consolidated Collateral to (1) pay existing indebtedness of Ivy to its bank and trade creditors and certain operating expenses and (2) create and fund specified reserves to provide for payment of future obligations and potential liabilities. At December 31, 1999, the Consolidated Loans had an outstanding principal balance of $4,809,309 and a net carrying value of $39,259. Since, as permitted by the terms of the Consolidated Loans, most of Ivy's assets have been sold and the sales proceeds used to pay other recourse obligations of Ivy, Presidential does not expect to recover any material amount on the Consolidated Loans in excess of their net carrying value. In 1996, Presidential and the Ivy Principals agreed to a modification of the Settlement Agreement to provide that the Ivy Principals will make payments on the Consolidated Loans in an amount equal to 25% of the operating cash flow (after provision for certain reserves) of Scorpio Entertainment, Inc. ("Scorpio"), a company owned by the Ivy Principals which acts as a producer of theatrical productions. This agreement, and Presidential's decision not to exercise an option (which it had received as part of the original Settlement Agreement) to acquire the capital stock of Scorpio, was made pursuant to the unanimous determination of the Independent Committee that such actions were in the best interests of 16 17 Presidential. During 1999, Presidential received $13,309 of principal payments and $64,405 of interest on the Consolidated Loans. The table entitled "Mortgage portfolio: notes receivable - related parties" set forth under Loans and Investments above reflects all loans to Ivy outstanding at December 31, 1999. All of such loans are in good standing. Management believes that it holds sufficient collateral to protect its interests in the loans that remain outstanding to Ivy to the extent of the net carrying value of these loans. Any transactions relating to the implementation of the terms of the Settlement Agreement, or otherwise involving the Ivy Principals, are subject to the approval of the Independent Committee. (f) Competition The real estate business is highly competitive in all respects. In attempting to expand its portfolio of owned properties, the Company will be in competition with other potential purchasers for properties and sources of financing, many of whom will be larger and have greater financial resources than the Company. As a result of such competition, there can be no assurance that the Company will be able to obtain opportunities for new investments at attractive rates of return. ITEM 2. PROPERTIES As of December 31, 1999, the Company had an ownership or leasehold interest in 790 apartment units, 645,900 square feet of commercial, industrial and professional space and one parcel of land, all of which are carried on the balance sheet at $27,416,153 (net of accumulated depreciation of $8,231,480). The Company has mortgage debt on the majority of these properties in the aggregate amount of $39,379,458, all of which is nonrecourse to Presidential with the exception of $259,071 pertaining to the mortgage on the Mapletree Industrial Center property. The chart below indicates the operating results of each of the properties owned by the Company at December 31, 1999 in accordance with generally accepted accounting principles ("GAAP") and, following that, in terms of cash flow from operations. 17 18 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES REAL ESTATE DECEMBER 31, 1999
Property -------- Vacancy Rentable Rate Mortgage Maturity Residential Space (approx.) Percent Balance Date - ----------- --------------- ------- ------- ---- 330 W. 72nd St New York, NY 3 Apt. Units (7) 0.00% $ 6300 Riverdale Ave Riverdale, NY 8 Apt. Units (7) 0.00% Broad Park Lodge White Plains, NY 3 Apt. Units (7) 0.00% Cambridge Green(3) Council Bluffs, IA 201 Apt. Units 13.62% 3,165,539 October, 2029 Continental Gardens Miami, FL 208 Apt. Units 4.80% 7,957,942 August, 2007 Crown Court (4) 105 Apt. Units New Haven, CT & 2,000 sq.ft. (Net Lease) 2,741,615 November, 2021 of comml. space Fairlawn Gardens(3) Martinsburg, WV 112 Apt. Units 17.06% 2,264,850 April, 2008 Sherwood House(5) Long Beach, NY 1 Apt. Unit (7) 20.87% Sunwood Apartments Miami, FL 105 Apt. Units 8.25% 4,806,972 September, 2008 Towne House New Rochelle, NY 42 Apt. Units (7) 2.85% University Towers New Haven, CT 2 Apt. Units (7) 13.24% Commercial Buildings - -------------------- Building Industries Center White Plains, NY 23,500 sq.ft. 1.80% 906,469 May, 2000 Home Mortgage Plaza(6) Hato Rey, PR 211,000 sq.ft. 1.83% 17,266,846 May, 2008 Mapletree Industrial Center Palmer, MA 385,000 sq.ft. 2.73% 259,071 June, 2011 University Towers Professional Space(6) New Haven, CT 24,400 sq.ft. 4.88% Other - Land - ------------ Towers Shoppers Parcade, New Haven, CT 1/4 acre 0.00% 10,154 August, 2001 ----------- $39,379,458 ===========
Property -------- Cash Flow Income (Deficiency) Interest (Loss) from from Residential Rate Operations (1) Operations (2) - ----------- ---- -------------- -------------- 330 W. 72nd St New York, NY $ 3,978 $ 4,867 6300 Riverdale Ave Riverdale, NY (10,608) (8,486) Broad Park Lodge White Plains, NY (3,562) (3,283) Cambridge Green(3) Council Bluffs, IA 6.65% (446,359) (147,108) Continental Gardens Miami, FL 8.16% 196,261 390,359 Crown Court (4) New Haven, CT 7.00% 74,442 63,235 Fairlawn Gardens(3) Martinsburg, WV 7.06% (11,654) 16,828 Sherwood House(5) Long Beach, NY (13,716) (15,099) Sunwood Apartments Miami, FL 6.55% 22,564 146,967 Towne House New Rochelle, NY 30,281 41,256 University Towers New Haven, CT (1,188) 593 Commercial Buildings - -------------------- Building Industries Center White Plains, NY 9.875% 14,836 26,000 Home Mortgage Plaza(6) Hato Rey, PR 7.38% 190,016 245,077 Mapletree Industrial Center Palmer, MA 7.75% 321,676 313,893 University Towers Professional Space(6) New Haven, CT 65,897 77,994 Other - Land - ------------ Towers Shoppers Parcade, New Haven, CT 9.75% 4,132 (1,218) ----------- ----------- $ 436,996 $ 1,151,875 =========== ===========
See notes on following page. 18 19 (1) The results are calculated in accordance with GAAP and therefore reflect the deduction of noncash charges such as depreciation and amortization of mortgage costs. (2) Cash flow or deficiencies from operations as reflected in the above chart are calculated before deduction of depreciation, valuation adjustments, amortization of mortgage costs and property replacements and additions, but after deduction of mortgage amortization. These results should not be considered as an alternative to income or loss from operations on the GAAP basis as an indicator of the properties' performance or to cash flows presented in accordance with GAAP. These results do not reflect the cash available to fund cash requirements. (3) The Cambridge Green and Fairlawn Gardens properties experienced high vacancy rates in the first half of 1999. By the end of 1999, these vacancy rates had been reduced and the properties were operating at a satisfactory occupancy rate. During 1999, the mortgage on the Cambridge Green property was refinanced. The Company wrote off $166,756 of unamortized mortgage costs and charged amortization of mortgage costs for a prepayment penalty fee of $31,200 relating to the prior mortgage. In addition, renovations at the Cambridge Green property increased operating expenses at the property in 1999. (4) The Crown Court property is subject to a long-term net lease containing an option to purchase commencing in 2009. (5) During 1999, one cooperative apartment unit became vacant and was sold in April of 1999. (6) These results are net of minority interest share of partnership income. (7) Individual cooperative apartment units. In the opinion of management, all of the Company's properties are adequately covered by insurance in accordance with normal insurance practices. All real estate owned by the Company is owned in fee simple (except for the University Towers professional space, which is held under a valid and existing long-term lease), with title generally insured for the benefit of the Company by reputable title insurance companies. The mortgages on the Company's properties are self-liquidating at fixed rates of interest with the exception of the mortgages on Home 19 20 Mortgage Plaza, Building Industries Center, Fairlawn Gardens, Continental Gardens and Sunwood Apartments. These mortgages amortize monthly with balloon payments due at maturity. ITEM 3. LEGAL PROCEEDINGS UTB Associates, a partnership in which the Company holds a 66-2/3% interest, is a tenant under a lease (the "Professional Space Lease") of 24,400 square feet of professional office space at University Towers, a cooperative apartment building in New Haven, Connecticut. In June, 1999, University Towers Owners Corp., the cooperative corporation, filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Connecticut, New Haven division. As part of the bankruptcy proceedings, in July, 1999 the cooperative corporation filed an Adversary Proceeding against UTB Associates for termination of the Professional Space Lease and damages primarily based on claims arising under Connecticut law. The Company has been advised by its litigation counsel that there are meritorious defenses to the claims raised by the cooperative corporation and that if these defenses are successful, it is unlikely that the Professional Space Lease will be terminated or that any damages will be assessed against UTB Associates. However, in light of the uncertainties of litigation, no assurances can be given as to the outcome of the litigation. The Company's financial statements reflect approximately $66,000 of income from the Professional Space Lease in 1999. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) The principal market for the Company's Class A and Class B Common Stock is the American Stock Exchange (ticker symbols PDL A and PDL B). The high and low prices for the stock on such principal exchange for each quarterly period during the past two years, and the per share dividends declared per quarter, are as follows: 20 21
Stock Prices -------------------------------------------- Dividends Declared Per Class A Class B Share on ------------------ ------------------ Class A and High Low High Low Class B ---- --- ---- --- ------- Calendar 1999 - ------------- First Quarter $7 3/4 $6 5/8 $8 1/8 $6 5/8 $.16 Second Quarter 7 3/4 6 5/8 7 1/2 6 3/8 .16 Third Quarte 7 6 9/16 7 1/4 6 1/8 .16 Fourth Quarter 6 7/8 5 7/8 6 15/16 5 1/2 .16 Calendar 1998 - ------------- First Quarter $9 1/4 $9 1/8 $7 5/16 $6 11/16 $.15 Second Quarter 9 1/4 7 1/4 7 5/16 6 5/8 .16 Third Quarter 7 1/2 6 1/4 7 1/4 6 3/16 .16 Fourth Quarter 8 1/4 6 1/4 7 3/4 6 1/4 .16
(b) The number of record holders for the Company's Common Stock at December 31, 1999 was 164 for Class A and 711 for Class B. (c) Under the Internal Revenue Code of 1986, as amended, a REIT which meets certain requirements is not subject to Federal income tax on that portion of its taxable income which is distributed to its shareholders, if at least 95% of its "real estate investment trust taxable income" (exclusive of capital gains) is so distributed. Since January 1, 1982, the Company has elected to be taxed as a REIT and has paid regular quarterly cash distributions. No assurance can be given that the Company will, in fact, continue to be taxed as a REIT, or that the Company will have sufficient cash to pay dividends in order to maintain REIT status. See Qualification as a REIT above. 21 22 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Amounts in thousands, except per common share data) Selected Data from Consolidated Statements of Operations: Revenues: Rental $10,672 $ 9,716 $ 8,428 $ 8,451 $ 7,999 Interest on mortgages 3,853 5,490 5,568 4,117 3,766 Investment and other 719 207 240 371 406 ------- ------- ------- ------- ------- Total $15,244 $15,413 $14,236 $12,939 $12,171 ======= ======= ======= ======= ======= Income before net gain from sales of properties, notes and securities $ 1,378 $ 2,017 $ 2,135 $ 1,723 $ 1,874 Net gain from sales of properties, notes and securities (1) 7,703 756 596 845 71 ------- ------- ------- ------- ------- Net Income $ 9,081 $ 2,773 $ 2,731 $ 2,568 $ 1,945 ======= ======= ======= ======= ======= Earnings per common share (basic and diluted): Income before net gain from sales of properties, notes and securities $ 0.38 $ 0.56 $ 0.60 $ 0.49 $ 0.53 Net gain from sales of properties, notes and securities 2.12 0.21 0.17 0.24 0.02 ------- ------- ------- ------- ------- Net Income $ 2.50 $ 0.77 $ 0.77 $ 0.73 $ 0.55 ======= ======= ======= ======= ======= Cash distributions per common share $ 0.64 $ 0.63 $ 0.60 $ 0.60 $ 0.60 ======= ======= ======= ======= ======= Weighted average number of shares outstanding 3,629 3,593 3,564 3,539 3,517 ======= ======= ======= ======= =======
(1) The net gain from sales of properties, notes and securities for 1999 includes a net gain of $7,394,000 from the sale of the Fairfield Towers First and Second Mortgage Notes and a net gain of $1,000,000 from principal payments received on the Crown Tower and Madison Towers Notes. These gains were partially offset by a $1,450,000 loss on the sale of securities. 22 23 ITEM 6. SELECTED FINANCIAL DATA (CONCLUDED)
DECEMBER 31, --------------------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- (Amounts in thousands) Selected Data from Consolidated Balance Sheets: Total mortgage portfolio (1) (2) $30,056 $62,729 $64,101 $63,726 $53,416 ======= ======= ======= ======= ======= Mortgage portfolio - net of discounts and deferred gains (1) (2) $15,857 $31,100 $30,684 $28,389 $18,882 ======= ======= ======= ======= ======= Real estate (3) $35,648 $34,704 $27,691 $25,369 $23,872 Less: accumulated depreciation 8,232 7,232 6,405 5,680 5,074 ------- ------- ------- ------- ------- Net real estate $27,416 $27,472 $21,286 $19,689 $18,798 ======= ======= ======= ======= ======= Foreclosed properties $ 589 $ 601 ======= ======= ======= ======= ======= Securities available for sale $ 2,299 $ 1,275 $ 227 $ 975 $ 2,390 ======= ======= ======= ======= ======= Total assets $64,061 $73,906 $60,009 $57,800 $49,513 ======= ======= ======= ======= ======= Mortgage debt - includes amounts due in one year: Properties owned (3)(4) $39,379 $39,728 $26,271 $26,514 $26,978 Wrap mortgage debt on sold properties (5) 4,668 5,149 5,613 6,061 ------- ------- ------- ------- ------- Total $39,379 $44,396 $31,420 $32,127 $33,039 ======= ======= ======= ======= ======= Note payable - includes amounts due in one year (1) $10,395 $10,543 $ 8,643 ======= ======= ======= ======= ======= Stockholders' equity $19,547 $12,851 $12,173 $11,438 $10,801 ======= ======= ======= ======= =======
(1) In 1996, the Company purchased the $14,651,000 Fairfield Towers First Mortgage at a $3,500,000 discount for a net purchase price of $11,151,000. The Company paid $2,501,000 in cash and obtained an $8,650,000 bank loan for the balance of the purchase price. During 1997, the Company advanced an additional $3,000,000 under the Fairfield Towers First Mortgage and borrowed an additional $2,500,000 under the bank loan. In February, 1999, the Company sold this mortgage and repaid the bank loan. (2) During 1999, the Company sold the Fairfield Towers First and Second Mortgage Notes and the equity portion of the Grant House wraparound mortgage. The Company also received payments on notes as a result of modifications or prepayments. See Note 2 of Notes to Consolidated Financial Statements. (3) In August, 1998, the Company acquired Sunwood Apartments in Miami, Florida, for a purchase price of $6,505,000 and obtained a $4,875,000 first mortgage loan on the property. (4) During 1998, the Company refinanced the mortgage on the Home Mortgage Plaza property, increasing the mortgage debt on that property by $6,711,000. The Company also obtained a $2,300,000 mortgage on the Fairlawn Gardens property . (5) During 1999, the Company repaid the $2,300,000 Crown Tower and Madison Towers wrap mortgage debt and wrote off the wrap mortgage debt on Grant House as a result of the sale of the equity portion of the Grant House wraparound mortgage note. 23 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations 1999 vs 1998 Revenue decreased by $168,483 primarily as a result of decreases in interest on mortgages-sold properties, interest on wrap mortgages and interest on mortgages-related parties. These decreases were offset by increases in rental income, investment income and other income. Interest on mortgages-sold properties decreased by $699,796 primarily due to the sale of the Fairfield Towers First Mortgage in February of 1999, which decreased interest income by $1,404,406. In addition, the amortization of discounts on notes receivable decreased by $354,238. Amortization of discounts on notes receivable decreases as notes mature or are sold. These decreases were partially offset by the $333,667 of interest received on the $4,000,000 unsold portion of the Fairfield Towers Second Mortgage and interest of $707,592 received on the modified New Haven note (see below). Interest on wrap mortgages decreased by $749,301 primarily as a result of the Company's repayment in June, 1999 of the first mortgage debt on the Crown Tower and Madison Towers properties. The Crown Tower and Madison Towers wraparound mortgage notes were modified into one consolidated note (the "New Haven note"). As a result of these transactions, wrap mortgage interest decreased by $680,606 because the modified New Haven note is not a wraparound mortgage note. In addition, the sale of the Grant House wraparound mortgage note in January, 1999 decreased interest by $68,695. Interest on mortgages-related parties decreased by $187,549 primarily as a result of decreases in interest on the Consolidated Loans of $111,719 and decreases in interest on the Overlook loan of $68,906. The decrease in interest on the Overlook loan is a result of principal prepayments received in 1998. Rental income increased by $956,140 primarily as a result of increased rental income of $670,515 at the Sunwood Apartments property, which was purchased in August of 1998. In addition, rental income increased by $285,625 at all other properties. Investment income increased by $479,914 primarily as a result of increased dividend income on securities available for sale. 24 25 Other income increased by $32,109 primarily as a result of a $30,750 fee received on the modification of the New Haven note. Costs and expenses increased by $470,662 primarily due to increases in general and administrative expenses, rental property operating expenses, interest on mortgages, depreciation on real estate, amortization of mortgage costs, and an increase in minority interest share of partnership income. These increases were partially offset by a decrease in interest expense on note payable and a decrease in interest expense on wrap mortgage debt. General and administrative expenses increased by $429,350 primarily as a result of the $378,522 bad debt write-off for receivables due from the Company's unaffiliated rental property management company. These receivables resulted from unreimbursed shared overhead expenses and advances made from time to time by Presidential to the management company. Although these outstanding advances of $378,522 have not been forgiven, it is unlikely that Presidential will collect them in the near future and, accordingly, Presidential determined that it was appropriate to write off these receivables. In addition, there were increases in salary expenses of $107,087 (of which $60,442 pertains to increases in executive bonuses), increases in executive pension plan expenses of $91,437, increases in professional fees of $63,792 and increases of $37,341 in other categories of general and administrative expenses. These increases were partially offset by a decrease in franchise tax expenses of $248,829. The decrease in 1999 is a result of a franchise tax expense incurred in 1998 on the partnership distributions received from the proceeds of the mortgage refinancing on the Home Mortgage Plaza property. Interest on note payable and other decreased by $891,714 primarily as a result of the repayment of the note payable in February, 1999. Interest on wrap mortgage debt decreased by $150,630 as a result of the repayment of the first mortgage debt on the Crown Tower and Madison Towers properties in June of 1999. In addition, in January, 1999, the Company sold the Grant House wraparound mortgage note and the related first mortgage debt on the property was assigned to the purchaser. Rental property operating expenses increased by $412,078 primarily as a result of increased operating expenses at the Cambridge Green and Sunwood Apartments properties of $233,837 and $229,365, respectively. The increased operating expenses at the Cambridge Green property were a result of renovations at the property in 1999. These increases 25 26 were partially offset by a $70,329 decrease in operating expenses at the Home Mortgage Plaza property. Interest on mortgages increased by $304,795 primarily as a result of the addition of the Sunwood Apartments property, which increased mortgage interest expense by $209,342. In April, 1998, the Company refinanced the $10,788,825 mortgage on the Home Mortgage Plaza property for a new $17,500,000 mortgage, which increased mortgage interest expense by $125,474. In addition, the Company obtained a new mortgage on the Fairlawn Gardens property in March, 1998, which increased mortgage interest expense by $33,738. These increases were offset by a decrease of $43,760 on the Cambridge Green mortgage which was refinanced in January, 1999. Depreciation expense on real estate increased by $180,265 primarily as a result of $112,345 of increased depreciation expense on the Sunwood Apartments property and increases in depreciation expense on all other properties as a result of additions and improvements. Amortization of mortgage costs increased by $81,404 primarily as a result of the write-off of unamortized mortgage costs of $166,756 and the $31,200 prepayment penalty fee resulting from the refinancing of the mortgage on the Cambridge Green property in January, 1999. This increase was offset by a decrease of $124,556 in amortization of mortgage costs on the Home Mortgage Plaza property. In 1998, the Company had written off $107,412 of unamortized mortgage costs in connection with the refinancing of the mortgage on the Home Mortgage Plaza property. Minority interest share of partnership income increased by $111,979 as a result of an increase in partnership income on the Home Mortgage Plaza property. Net gain from sales of properties, notes and securities are sporadic (as they depend on the timing of sales or the receipt of installments or prepayments on purchase money notes). In 1999, the net gain from sales of properties, notes and securities was $7,703,081 compared with $755,801 in 1998: 26 27
Gain (loss) from sales recognized at December 31, 1999 1998 ----------- ----------- Sales of mortgage notes: Fairfield Towers First and Second Mortgages (net of taxes of $220,500) sold in 1999 $ 7,393,844 Grant House wraparound mortgage note sold in 1999 425,000 Deferred gains recognized upon receipt of principal payments on notes: New Haven - $1,000,000 principal payment received in 1999 1,000,000 Pinewood - $317,662 principal prepayment received in 1999 218,534 Overlook 21,714 $ 613,285 Fairfield Towers Second Mortgage 19,466 69,217 Hastings Gardens 7,754 Towne House 3,672 Sales of property: Sherwood House 74,672 40,435 Sales of securities (1,450,149) 21,438 ----------- ----------- $ 7,703,081 $ 755,801 =========== ===========
Balance Sheet Net mortgage portfolio decreased by $15,243,115 primarily as a result of the sale of the Fairfield Towers First and Second Mortgage Notes, the sale of the Grant House wraparound mortgage note and the principal prepayment received on the Pinewood note receivable. The sale of the Fairfield Towers First and Second Mortgages resulted in a net decrease of $12,862,048, the sale of the Grant House wraparound mortgage note resulted in a net decrease of $2,212,240 and the principal prepayment of $317,662 received on the Pinewood note receivable resulted in a net decrease of $99,128 after recognizing a deferred gain of $218,534. In addition, although the effect on net mortgage portfolio is zero, the Company received a $1,000,000 principal payment on the New Haven note and recognized a deferred gain on sale of $1,000,000. Prepaid expenses and deposits in escrow decreased by $696,135 primarily due to a $626,512 decrease in mortgagee replacement reserve deposits as a result of reimbursements for replacements at rental properties. In addition, there was a decrease of $70,000 in mortgagee escrow deposits. Other receivables decreased by $129,301 primarily as a result of the write-off of the receivable due from the rental property management company which decreased other receivables by $146,054. 27 28 Securities available for sale increased by $1,024,760 as a result of purchases of $10,343,705 of marketable equity securities, primarily corporate preferred stocks, which were offset by the $9,082,194 sale of marketable equity securities in the fourth quarter of 1999. In addition, there was a $236,751 decline in the fair value of securities available for sale. Cash and cash equivalents increased by $5,250,077 primarily as a result of the sale of the Fairfield Towers First and Second Mortgage Notes and the sale of the equity portion of the Grant House note. The net proceeds received from the sale of these notes were $20,328,728. This increase was offset by the repayment of the $10,195,442 outstanding bank loan and the $2,300,000 repayment of wrap mortgage debt. In addition, the Company purchased $10,343,705 of securities available for sale and received $7,632,045 from the sale of securities, for a net decrease of $2,711,660. Other assets decreased by $347,026 primarily as a result of a $303,901 decrease in mortgage and loan acquisition costs and a $81,007 decrease in deferred charges. Mortgage costs decreased as a result of the refinancing of the mortgage on the Cambridge Green property and the write-off of the unamortized costs of the prior mortgage. In addition, the sale of the Fairfield Towers First and Second Mortgage Notes resulted in the write-off of unamortized loan acquisition costs. Deferred charges decreased as a result of the write-off of 1998 deferred expenses incurred in connection with the sale of the Fairfield Towers First and Second Mortgage Notes. Wrap mortgage debt on sold properties decreased by $4,668,462 primarily due to the repayment of the $2,300,000 Crown Tower and Madison Towers wrap mortgage debt by the Company in June, 1999 and the sale of the Grant House wraparound mortgage note in January, 1999. Note payable to bank decreased by $10,395,361 primarily as a result of the sale of the Fairfield Towers First and Second Mortgages. The note payable, which had been secured by Presidential's interest in the First Mortgage Note, was repaid from the proceeds of the sale of the Fairfield Towers First and Second Mortgages. Accrued liabilities decreased by $993,495 primarily as a result of the payment of a $1,000,000 deferred brokerage commission, which arose from the sale of the New Haven properties in 1984. 28 29 Deferred income decreased by $519,180 primarily as a result of the recognition in 1999 of the $400,000 deposit received in 1998 on the sale of the Fairfield Towers First and Second Mortgages. In addition, $86,607 of prepaid interest on mortgages for sold properties and $35,123 of prepaid rental income were recognized in 1999. Accounts payable increased by $178,388 primarily as a result of increases of $146,052 in rental property accounts payable and increases of $32,336 in general and administrative accounts payable. Additional paid-in capital increased by $400,913 primarily as a result of the exercise of 60,000 shares of stock options for a price of $367,500, of which $361,500 increased additional paid-in capital and $6,000 ($.10 per share) increased Class B common stock. In addition, the net proceeds from the dividend reinvestment and share purchase plan increased additional paid-in capital by $103,863. These increases were offset by a decrease of $64,450 for the issuance of treasury stock. Net unrealized gain (loss) on securities available for sale decreased by $236,751 as a result of the decrease in the fair value of securities available for sale. Treasury stock decreased by $135,139. In March, 1999, three directors of the Company were each given 1,000 shares of the Company's Class B common stock as partial payment for 1999 directors fees. In addition, an officer of the Company was given 7,000 shares of the Company's Class B common stock as additional compensation. Such shares had been held in treasury at an average cost of $13.54 per share. Notes receivable for exercise of stock options increased by $367,500. In November, 1999, three employees exercised their stock options for 60,000 shares of Class B common stock at an exercise price of $6.125 per share. Presidential loaned $367,500 to these employees for the purchase of the shares. These notes, which are recourse, mature on November 30, 2004 and provide for an interest rate of 8% per annum. Presidential has a security interest in the shares, as security for these notes. 29 30 Results of Operations 1998 vs 1997 Revenue increased by $1,177,186 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. Rental income increased by $1,288,604 primarily as a result of increases of $553,846 at the Home Mortgage Plaza property, increases of $202,879 at the Fairlawn Gardens property and the acquisition in 1998 of a new apartment property. On August 31, 1998, the Company purchased Sunwood Apartments, a 105 unit apartment property in Miami, Florida. Rental income from this property was $325,183. In addition, rental income increased at all other properties by $206,696. Interest on mortgages-related parties increased by $203,293 primarily as a result of increases in interest on the Consolidated Loans of $169,921 and increases in interest on the Overlook loan of $38,844. Interest on mortgages-sold properties decreased by $260,264 primarily due to the $382,796 amortization of discount on the Cedarbrooke note in 1997 when it was prepaid. In addition, there was a decrease of $50,168 of interest received on the Fairfield Towers Second Mortgage. These decreases were offset by increases of $57,878 in interest income from the Fairfield Towers First Mortgage and $121,973 from the amortization of discounts on the mortgage portfolio. Costs and expenses increased by $1,294,323 primarily due to increases in general and administrative expenses, interest on mortgages, real estate tax expense, depreciation expense and an increase in minority interest share of partnership income. These increases were partially offset by a decrease in amortization of mortgage costs. General and administrative expenses increased by $340,682 primarily due to increases in franchise tax expenses of $318,305, resulting from the partnership distribution received from the proceeds of the mortgage refinancing on the Home Mortgage Plaza property and the taxes thereon. In addition, there were increases in salary expense 30 31 of $36,885 (of which $21,482 pertains to increases in executive bonuses). Mortgage interest expense increased by $508,750 as a result of the refinancing of the mortgage on the Home Mortgage Plaza property in April of 1998, the new mortgage obtained on the Fairlawn Gardens property in March of 1998 and the mortgage obtained on Sunwood Apartments, which was purchased in August of 1998. Mortgage interest on the Home Mortgage Plaza property increased by $292,908. Mortgage interest on the Fairlawn Gardens and Sunwood Apartments properties was $129,094 and $107,180, respectively. Real estate tax expense increased by $106,700 primarily as a result of increases in real estate tax expense of $93,307 at the Crown Court, Home Mortgage Plaza and Continental Gardens properties. Also, the addition of the Sunwood Apartments property increased real estate tax expense by $31,385. These increases were offset by a $24,468 decrease in real estate tax expense at the Cambridge Green property. The 1997 real estate tax expense included refunds of $46,143 for prior years' taxes at the Crown Court property. Depreciation expense increased by $89,792 primarily as a result of the addition of the Sunwood Apartments property in 1998, which increased depreciation expense by $55,199. Additions and improvements made to other properties in 1997 and 1998 also increased depreciation expense. Amortization of mortgage costs decreased by $91,452 as a result of the write-off in 1997 of $146,097 of unamortized mortgage costs associated with the prior mortgage on the Continental Gardens property, which was refinanced in July, 1997. This decrease was offset by the $107,412 write-off in 1998 of unamortized mortgage costs associated with the prior mortgage on the Home Mortgage Plaza property, which was refinanced in April, 1998. In addition, mortgage costs for the refinanced mortgage on the Home Mortgage Plaza property were less than the mortgage costs on the prior mortgage which resulted in a $67,604 decrease in amortization of mortgage costs. Minority interest share of partnership income increased by $111,137 as a result of an increase in partnership income on the Home Mortgage Plaza property. Net gain from sales of properties, notes 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 31 32 net gain from sales of properties, notes and securities was $755,801 compared with $596,171 in 1997. In 1998, 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 $613,285 and $69,217, respectively, from principal payments received on the Overlook loan and the Fairfield Towers Second Mortgage. In 1997, 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 in 1997, the Company recognized deferred gains of $24,058 and $80,651, respectively, from principal payments received on the Overlook loan and the Fairfield Towers Second Mortgage and a gain from the sale of securities of $18,965. Forward-Looking Statements Certain statements made in this report may constitute "forward- looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements regarding the intent, belief or current expectations of the Company and its management and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: general economic and business conditions, which will, among other things, affect the demand for apartments or commercial space, availability and 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. Year 2000 Compliance The following is a Year 2000 readiness disclosure entitled to protection as provided in the Year 2000 Information and Readiness Disclosure Act. The Company completed its assessments of its information technology systems ("IT") and its non-information technology systems ("NIT") for Year 2000 compliance. All Year 2000 ("Y2K") sensitive systems 32 33 were upgraded and tested. All of the Company's systems are Y2K compliant and are operational. The Company received confirmations from tenants, mortgagors, third party vendors and the Company's property management company verifying that they are Y2K compliant or will be compliant in a timely manner. As a result of the confirmations received, the Company does not anticipate an adverse effect on the operations of the Company's properties, or the ability of its mortgagors and tenants to make payments due to the Company in a timely fashion. As a result of the Company's evaluation of its systems and confirmations received from third party vendors, no formal contingency plan is required. At December 31, 1999, the Company had capitalized $32,393 for replacement of equipment and had expensed $4,789 for the upgrading of its systems. The costs to complete date sensitivity testing and assessments of third party vendors were minimal. The Company does not anticipate any further expenditures relating to the Y2K issue. Subsequent to December 31, 1999, the Company has not encountered any Y2K complications and all of the Company's IT and NIT systems have been operational. To the Company's knowledge, none of the tenants, mortgagors, financial institutions, utility companies and suppliers that the Company does business with have encountered any Y2K complications. However, there can be no absolute assurance that these external agents will not experience any complications in the future. 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, funds received from sales of securities 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. 33 34 Presidential obtains funds for working capital and investment from its available cash and cash equivalents, from securities available for sale, from operating activities, from refinancing of mortgage loans on its real estate equities, and from the sales of or repayments on its mortgage portfolio. The Company also has at its disposal a $250,000 unsecured line of credit from a lending institution. At December 31, 1999, Presidential had $7,014,542 in available cash and cash equivalents, an increase of $5,250,077 from the $1,764,465 at December 31, 1998. This increase in cash and cash equivalents was due to cash provided by operating activities of $3,772,326 and financing activities of $17,933,561, offset by cash used in investing activities of $16,455,810. In March, 2000, the Company acquired Farrington Apartments, a 224 unit apartment property in Clearwater, Florida for a purchase price of $9,630,950. In connection with the acquisition, the Company obtained a nonrecourse first mortgage loan on the property in the amount of $7,900,000, with interest at the rate of 8.25% per annum and a ten year maturity. The Company also executed a contract to acquire Preston Lake, a 320 unit apartment property in Norcross, Georgia for a purchase price of $17,500,000 and obtained a commitment for a first mortgage loan on the property in the amount of $14,000,000, with interest at the rate of 8.15% per annum and a ten year maturity. The Company expects to finalize this purchase in April, 2000. Operating Activities Presidential's principal source of cash from operating activities is from interest on its mortgage portfolio, which was $3,414,860 in 1999, net of interest payments on wrap mortgage debt and note payable. In 1999, net cash received from rental property operations was $2,557,595, which is net of distributions from partnership operations to minority partners but before additions and improvements and mortgage amortization. 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 34 35 Presidential only out of funds received on its mortgage portfolio relating to the Underlying Debt. During 1999, the Company received principal payments of $2,036,619 on its mortgage portfolio (net of any principal payments attributable to the Underlying Debt), of which $1,894,359 represented prepayments, which are sporadic and cannot be relied upon as a regular source of liquidity. On February 22, 1999, Presidential consummated the sale of its Fairfield Towers First and Second Mortgage Notes (excluding a $4,000,000 portion of the Second Mortgage Note, which it retained). The First Mortgage Note, which had an outstanding principal balance at the date of sale of $17,002,695, was acquired by Presidential in October, 1996 at a discount of $3,500,000. The Second Mortgage Note, which had an outstanding principal balance at the date of sale of $14,206,895, was obtained by Presidential when it sold the Fairfield Towers apartment property in 1984. The aggregate sales price for the First Mortgage Note and the Second Mortgage Note (excluding the $4,000,000 interest retained by Presidential) was $21,350,000. In connection with this transaction, the $4,000,000 portion of the Second Mortgage Note retained by Presidential was modified to provide for interest payments at the rate of 9.625% ($385,000) per annum for the first three years and 10.5% ($420,000) per annum for the remaining seven years. The outstanding principal balance of $4,000,000 is due at maturity in 2009. To secure this obligation, Presidential obtained subordinate security interests in three apartment properties located in New Jersey as collateral for the Note. Presidential repaid the $10,195,442 outstanding principal balance of its bank note payable, which had been secured by Presidential's interest in the First Mortgage Note. After payment of the bank loan and expenses related to the transaction, but before payment of any income tax on the capital gain, Presidential received approximately $10,108,000 from the sale. Presidential expects to invest a large portion of these sales proceeds in the acquisition of rental apartment properties. Presidential recognized a gain on sale of $7,614,344 (before accrued taxes of $220,500). In January, 1999, the Company sold its equity interest in the $3,235,833 wraparound mortgage note secured by the Grant House apartment building located in White Plains, New York. Presidential assigned the $2,212,240 nonrecourse first mortgage note to the purchaser and received $500,000 for the sale of its $1,023,593 equity interest in the wraparound mortgage note. As a result of this 35 36 transaction, the Company wrote off the $2,212,240 outstanding balance on the first mortgage and the related $2,212,240 mortgage debt, and recognized a gain on sale of $425,000. In June, 1999, the Company modified its $13,300,000 wraparound mortgage notes secured by the Crown Tower and Madison Towers properties in New Haven, Connecticut. In connection with the modification, the Company repaid the $2,300,000 first mortgage debt on these properties (wrap mortgage debt on sold properties) and consolidated the $13,300,000 outstanding principal balance of the wraparound mortgage notes into one consolidated note (the "New Haven note"). The Company received a $1,000,000 principal payment on the New Haven note and paid a $1,000,000 deferred brokerage commission (which had been deferred from the original sale of the New Haven properties). In connection with the modification Presidential also received a fee of $30,750. The note matures on June 29, 2002, provides for an interest rate of 10% per annum with a 1/2 percent rate increase annually and a $369,000 payment of additional interest due at maturity, which will increase the effective interest rate to 11.5% per annum. The New Haven note is secured by a second mortgage on the Encore Apartments and commercial space located in New York, New York and by a limited guarantee of $2,500,000 from one of the owners of the property. During 1999, the Company invested $967,802 in additions and improvements to its properties. The Company also holds a portfolio of marketable equitable securities which increased by $1,024,760, primarily as a result of the $10,343,705 purchase of corporate preferred stocks, offset by the $9,082,194 sale of preferred stocks and a decrease in the fair value of securities of $236,751. During 1999, while the Company was pursuing the acquisition of new properties with the sales proceeds received from the sale of the Fairfield Towers Mortgage Notes, the Company invested these proceeds in corporate preferred stocks. Management believed that these stocks would yield a greater return on investment than could be earned from other types of investments with similar risks and liquidity. The Company earned $456,831 of interest and dividends on these securities in 1999. In the third quarter of 1999, these securities had declined in market value primarily due to increases in market interest rates. The market value of these securities further declined during the fourth quarter of 1999 and as a result, the Company decided to sell them and incurred a loss of $1,450,149. The Company was able to utilize the $1,450,149 capital loss to offset a portion of its 1999 taxable capital gains. 36 37 Financing Activities The Company's indebtedness at December 31, 1999, consisted of $39,379,458 of mortgage debt. The mortgage debt, which is secured by individual properties, is nonrecourse to the Company with the exception of the $259,071 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 1999, the Company made $423,883 of principal payments on mortgage debt on properties which it owns. In January, 1999, Presidential refinanced the mortgage on its Cambridge Green property. The existing $3,120,190 mortgage was paid from the proceeds of the new $3,195,500 mortgage. The new mortgage bears interest at the rate of 6.65% per annum, requires monthly payments of principal and interest of $20,358, and matures on October 1, 2029. The mortgages on the Company's properties are self-liquidating at fixed rates of interest with the exception of the following mortgages:
Outstanding Maturity Interest Balloon Property Balance Date Rate Payment -------- ------- ---- ---- ------- Building Ind. Ctr. $ 906,469 May, 2000 9.875% $ 901,688 Continental Gardens 7,957,942 Aug., 2007 8.16 7,158,323 Fairlawn Gardens 2,264,850 April,2008 7.06 2,012,668 Home Mtg. Plaza 17,266,846 May, 2008 7.38 15,445,099 Sunwood Apts. 4,806,972 Sept.,2008 6.55 4,146,349
During 1999 Presidential declared and paid cash distributions of $2,325,046 to its shareholders and received proceeds from its dividend reinvestment and share purchase plan of $105,494. Environmental Matters The Company is not aware of any environmental issues at any of its properties, with the exception of the environmental expenses incurred in prior years at its Mapletree Industrial Center property in Palmer, Massachusetts. The presence, with or without the Company's knowledge, of hazardous substances at any of its 37 38 properties could have an adverse effect on the Company's operating results and financial condition. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments consist primarily of mortgage notes receivable and mortgage notes payable. Substantially all of these instruments bear interest at fixed rates, so the Company's cash flows from them are not directly impacted by changes in market rates of interest. The Company does not own any derivative financial instruments or engage in hedging activities. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Table of Contents to Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held June 14, 2000, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held June 14, 2000, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held June 14, 2000, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and which is incorporated herein by reference. 38 39 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held June 14, 2000, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and which is incorporated herein by reference. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) and (d) A Table of Contents to Consolidated Financial Statements and Schedules is included in this report. (b) No report on Form 8-K was filed during the calendar quarter ended December 31, 1999. (c) Exhibits: 3.1 Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.5 to Post-effective Amendment No. 1 to the Company's Registration Statement on Form S-14, Registration No. 2-83073) 3.2 Certificate of Amendment to Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1987, Commission File No. 1-8594). 3.3 Certificate of Amendment to Certificate of Incorporation of the Company, filed July 21, 1988 with the Secretary of State of the State of Delaware (incorporated herein by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, Commission File No. 1-8594). 3.4 Certificate of Amendment to Certificate of Incorporation of the Company, filed on September 12, 1989 with the Secretary of State of the State of Delaware (incorporated herein by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, Commission File No. 1-8594). 3.5 By-laws of the Company (incorporated herein by reference to Exhibit 3.7 to Post-effective Amendment No. 1 to the Company's Registration Statement on Form S-14, Registration No. 2-83073). 39 40 10.1 1993 Stock Option Plan for 250,000 shares of Class B common stock (incorporated herein by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-8594). 10.2 Employment Agreement dated as of November 1, 1982 between the Company and Robert E. Shapiro, as amended by Amendments dated March 1, 1983, November 25, 1985, February 23, 1987 and January 4, 1988, (incorporated herein by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, Commission File No. 1-8594). 10.3 Employment Agreement dated as of November 1, 1982 between the Company and Joseph Viertel, as amended by Amendments dated March 1, 1983, November 22, 1985, February 23, 1987, (incorporated herein by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-8594). 10.4 Settlement Agreement dated November 14, 1991 between the Company and Steven Baruch, Jeffrey F. Joseph and Thomas Viertel, (incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-8594). 10.5 Presidential Realty Corporation Defined Benefit Plan dated December 16, 1994, (incorporated herein by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-8594). 10.6 Employment Agreement dated January 1, 1997 between the Company and Jeffrey F. Joseph, (incorporated herein by reference to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997, Commission File No. 1-8594). 10.7 Employment Agreement dated January 1, 1997 between the Company and Steven Baruch, (incorporated herein by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997, Commission File No. 1-8594). 10.8 Employment Agreement dated January 1, 1997 between the Company and Thomas Viertel, (incorporated herein by reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997, Commission File No. 1-8594). 40 41 10.9 First Amendment dated August 1, 1996 to Settlement Agreement dated November 14, 1991 between the Company and Steven Baruch, Jeffrey F. Joseph and Thomas Viertel (incorporated herein by reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997, Commission File No. 1-8594). 10.10 First and Second Amendments dated December 11, 1995 and December 8, 1999, respectively, to the Presidential Realty Corporation Defined Benefit Plan, (see page 89). 10.11 1999 Stock Option Plan for 150,000 shares of Class B common stock (see page 90). 21. List of Subsidiaries of Registrant dated December 31, 1999 (see page 91). 27. Financial Data Schedule for the year ended December 31, 1999 (see page 92). 41 42 SIGNATURES Pursuant to the requirements of Section 13 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 By: THOMAS VIERTEL -------------- Thomas Viertel Chief Financial Officer March 22, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature and Title Date ------------------- ---- By: ROBERT E. SHAPIRO March 22, 2000 ------------------------------- Robert E. Shapiro Chairman of the Board of Directors and Director By: JEFFREY F. JOSEPH March 22, 2000 ------------------------------- Jeffrey F. Joseph President and Director By: THOMAS VIERTEL March 22, 2000 ------------------------------- Thomas Viertel Executive Vice President (Chief Financial Officer) By: ELIZABETH DELGADO March 22, 2000 ------------------------------- Elizabeth Delgado Treasurer (Principal Accounting Officer) By: RICHARD BRANDT March 22, 2000 ------------------------------- Richard Brandt Director By: MORTIMER M. CAPLIN March 22, 2000 ------------------------------- Mortimer M. Caplin Director
42 43 SIGNATURES (Continued)
Signature and Title Date ------------------- ---- By: ROBERT FEDER March 22, 2000 ------------------------------- Robert Feder Director By: JOSEPH VIERTEL March 22, 2000 ------------------------------- Joseph Viertel Director
43 44 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report 45 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets - December 31, 1999 and 1998 46 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997 48 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 49 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 50 Notes to Consolidated Financial Statements 52 CONSOLIDATED SCHEDULES: II. Valuation and Qualifying Accounts for the Years Ended December 31, 1999, 1998 and 1997 84 III. Real Estate and Accumulated Depreciation at December 31, 1999 85 IV. Mortgage Loans on Real Estate at December 31, 1999 87
NOTE: All schedules, other than those indicated above, are omitted because of the absence of the conditions under which they are required or because the required information is included in the consolidated financial statements or the notes to the consolidated financial statements. 44 45 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Presidential Realty Corporation White Plains, New York We have audited the accompanying consolidated balance sheets of Presidential Realty Corporation and subsidiaries (the "Company") as of December 31, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedules listed in the foregoing Table of Contents. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Presidential Realty Corporation and subsidiaries at December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth herein. Deloitte & Touche LLP Stamford, Connecticut March 14, 2000 45 46 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
Assets December 31, December 31, 1999 1998 ----------- ----------- Mortgage portfolio (Note 2): Sold properties, accrual $28,481,797 $43,440,675 Related parties, accrual 1,574,028 1,698,982 Sold properties, impaired 17,589,027 ----------- ----------- Total mortgage portfolio 30,055,825 62,728,684 ----------- ----------- Less discounts: Sold properties, accrual 1,837,722 4,049,630 Related parties, accrual 132,073 149,685 Sold properties, impaired 7,597,138 ----------- ----------- Total discounts 1,969,795 11,796,453 ----------- ----------- Less deferred gains: Sold properties, accrual 11,320,373 12,538,907 Related parties, accrual 908,343 930,057 Sold properties, impaired 6,362,838 ----------- ----------- Total deferred gains 12,228,716 19,831,802 ----------- ----------- Net mortgage portfolio 15,857,314 31,100,429 ----------- ----------- Real estate (Note 3) 35,647,633 34,703,657 Less: accumulated depreciation 8,231,480 7,231,639 ----------- ----------- Net real estate 27,416,153 27,472,018 ----------- ----------- Minority partners' interest (Note 4) 7,904,533 7,552,743 Prepaid expenses and deposits in escrow 1,434,079 2,130,214 Other receivables (net of valuation allowance of $139,822 in 1999 and $120,102 in 1998) 494,220 623,521 Securities available for sale (Note 5) 2,299,494 1,274,734 Cash and cash equivalents 7,014,542 1,764,465 Other assets 1,641,095 1,988,121 ----------- ----------- Total Assets $64,061,430 $73,906,245 =========== ===========
See notes to consolidated financial statements. 46 47 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Liabilities and Stockholders' Equity
December 31, December 31, 1999 1998 ------------ ------------ Liabilities: Mortgage debt (Note 6): Properties owned $39,379,458 $39,728,031 Wrap mortgage debt on sold properties 4,668,462 ------------ ------------ Total (of which $1,338,491 in 1999 and $905,305 in 1998 are due within one year) 39,379,458 44,396,493 Note payable to bank (Note 7) 10,395,361 Executive pension plan liability (Note 15) 1,479,185 1,496,357 Accrued liabilities 1,637,069 2,630,564 Accrued taxes payable (Note 8) 220,500 Accrued postretirement costs (Note 16) 538,398 562,167 Deferred income 46,533 565,713 Accounts payable 414,195 235,807 Other liabilities 799,490 772,949 ------------ ------------ Total Liabilities 44,514,828 61,055,411 ------------ ------------ Stockholders' Equity: Common stock; par value $.10 per share (Note 11) Class A, authorized 700,000 shares, issued and outstanding 478,940 shares 47,894 47,894
Class B December 31, 1999 December 31, 1998 321,240 313,609 ------- ----------------- ----------------- Authorized: 10,000,000 10,000,000 Issued: 3,212,402 3,136,092 Treasury: 1,258 11,224
Additional paid-in capital 2,573,281 2,172,368 Retained earnings 17,209,589 10,453,253 Accumulated other comprehensive income (loss) (Note 5) (221,074) 15,677 Class B, treasury stock (at cost) (Note 13) (16,828) (151,967) Notes receivable for exercise of stock options (Notes 14 and 18) (367,500) ------------- ------------ Total Stockholders' Equity 19,546,602 12,850,834 ------------- ------------ Total Liabilities and Stockholders' Equity $64,061,430 $73,906,245 ============= ============
See notes to consolidated financial statements. 47 48 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Income: Rental $10,672,236 $ 9,716,096 $ 8,427,492 Interest on mortgages - sold properties 3,074,034 3,773,830 4,034,094 Interest on wrap mortgages 528,173 1,277,474 1,299,147 Interest on mortgages - related parties 250,491 438,040 234,747 Investment income 648,221 168,307 135,406 Other 71,127 39,018 104,693 ----------- ----------- ----------- Total 15,244,282 15,412,765 14,235,579 ----------- ----------- ----------- Costs and Expenses: General and administrative 3,098,272 2,668,922 2,328,240 Interest on note payable and other 236,739 1,128,453 1,055,969 Interest on wrap mortgage debt 54,586 205,216 226,889 Amortization of loan acquisition costs 3,128 32,459 30,062 Depreciation on non-rental property 25,497 24,594 23,689 Rental property: Operating expenses 4,684,312 4,272,234 4,097,633 Interest on mortgages 2,952,811 2,648,016 2,139,266 Real estate taxes 927,344 905,781 799,081 Depreciation on real estate 1,008,051 827,786 737,994 Amortization of mortgage costs 273,752 192,348 283,800 Minority interest share of partnership income 601,489 489,510 378,373 ----------- ----------- ----------- Total 13,865,981 13,395,319 12,100,996 ----------- ----------- ----------- Income before net gain from sales of properties, notes and securities 1,378,301 2,017,446 2,134,583 Net gain from sales of properties, notes and securities (includes a provision for Federal taxes of $220,500 in 1999) (Notes 2, 5 and 8) 7,703,081 755,801 596,171 ----------- ----------- ----------- Net Income $ 9,081,382 $ 2,773,247 $ 2,730,754 =========== =========== =========== Earnings per Common Share (basic and diluted) (Note 1-I): Income before net gain from sales of properties, notes and securities $ 0.38 $ 0.56 $ 0.60 Net gain from sales of properties, notes and securities 2.12 0.21 0.17 ----------- ----------- ----------- Net Income per Common Share $ 2.50 $ 0.77 $ 0.77 =========== =========== =========== Cash Distributions per Common Share (Note 12) $ 0.64 $ 0.63 $ 0.60 =========== =========== =========== Weighted Average Number of Shares Outstanding 3,629,333 3,592,543 3,563,851 =========== =========== ===========
See notes to consolidated financial statements. 48 49 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Additional Other Common Paid-in Retained Comprehensive Stock Capital Earnings Income (Loss) ----- ------- -------- ------------- Balance at January 1, 1997 $ 356,569 $ 1,874,341 $ 9,350,801 $ 49,014 Net proceeds from dividend reinvestment and share purchase plan 2,702 169,312 Cash distributions ($.60 per share) (2,138,314) Purchase of treasury stock Comprehensive income: Net income 2,730,754 Other comprehensive income- Change in net unrealized gain (loss) on securities available for sale (29,509) Comprehensive income ------------ ------------ ------------ ------------ Balance at December 31, 1997 359,271 2,043,653 9,943,241 19,505 Net proceeds from dividend reinvestment and share purchase plan 2,232 148,455 Cash distributions ($.63 per share) (2,263,235) Issuance of treasury stock (Note 13) (19,740) Comprehensive income: Net income 2,773,247 Other comprehensive income- Change in net unrealized gain (loss) on securities available for sale (3,828) Comprehensive income ------------ ------------ ------------ ------------ Balance at December 31, 1998 361,503 2,172,368 10,453,253 15,677 Net proceeds from dividend reinvestment and share purchase plan 1,631 103,863 Exercise of stock options (Notes 14 and 18) 6,000 361,500 Cash distributions ($.64 per share) (2,325,046) Issuance of treasury stock (Note 13) (64,450) Purchase of treasury stock Comprehensive income: Net income 9,081,382 Other comprehensive income- Change in net unrealized gain (loss) on securities available for sale (236,751) Comprehensive income ------------ ------------ ------------ ------------ Balance at December 31, 1999 $ 369,134 $ 2,573,281 $ 17,209,589 ($ 221,074) ============ ============ ============ ============ Notes Receivable Total Treasury for Exercise of Comprehensive Stockholders' Stock Stock Options Income Equity ----- ------------- ------ ------ Balance at January 1, 1997 ($ 192,568) $ 11,438,157 Net proceeds from dividend reinvestment and share purchase plan 172,014 Cash distributions ($.60 per share) (2,138,314) Purchase of treasury stock (19) (19) Comprehensive income: Net income $ 2,730,754 2,730,754 Other comprehensive income- Change in net unrealized gain (loss) on securities available for sale (29,509) (29,509) ------------ Comprehensive income $ 2,701,245 ============ ------------ ------------ ------------ Balance at December 31, 1997 (192,587) 12,173,083 Net proceeds from dividend reinvestment and share purchase plan 150,687 Cash distributions ($.63 per share) (2,263,235) Issuance of treasury stock (Note 13) 40,620 20,880 Comprehensive income: Net income $ 2,773,247 2,773,247 Other comprehensive income- Change in net unrealized gain (loss) on securities available for sale (3,828) (3,828) ------------ Comprehensive income $ 2,769,419 ============ ------------ ------------ ------------ Balance at December 31, 1998 (151,967) 12,850,834 Net proceeds from dividend reinvestment and share purchase plan 105,494 Exercise of stock options (Notes 14 and 18) ($ 367,500) Cash distributions ($.64 per share) (2,325,046) Issuance of treasury stock (Note 13) 135,398 70,948 Purchase of treasury stock (259) (259) Comprehensive income: Net income $ 9,081,382 9,081,382 Other comprehensive income- Change in net unrealized gain (loss) on securities available for sale (236,751) (236,751) ------------ Comprehensive income $ 8,844,631 ============ ------------ ------------ ------------ Balance at December 31, 1999 ($ 16,828) ($ 367,500) $ 19,546,602 ============ ============ ============
See notes to consolidated financial statements 49 50 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1999 1998 1997 ---- ---- ---- Cash Flows from Operating Activities: Cash received from rental properties $ 10,703,186 $ 9,645,206 $ 8,431,167 Interest received 3,671,309 4,447,382 4,180,370 Miscellaneous income 62,597 34,522 116,782 Interest paid on rental property mortgages (2,959,551) (2,608,842) (2,131,785) Interest paid on wrap mortgage debt (54,586) (205,216) (226,889) Interest paid on note payable and other (201,863) (920,230) (863,446) Cash disbursed for rental property operations (4,676,761) (5,931,851) (4,814,072) Cash disbursed for general and administrative costs (2,772,005) (2,705,418) (2,345,167) ------------ ------------ ------------ Net cash provided by operating activities 3,772,326 1,755,553 2,346,960 ------------ ------------ ------------ Cash Flows from Investing Activities: Payments received on notes receivable 2,192,841 1,420,506 2,573,682 Payments disbursed for investments in notes receivable (60,000) (3,011,698) Payments disbursed for deferred sales commission (1,000,000) Proceeds from sale of notes receivable (net of a $400,000 deposit on sale received in 1998) 20,328,728 400,000 Payments disbursed for additions and improvements (967,802) (529,261) (1,596,480) Purchase of property (6,549,637) Proceeds from sales of securities 7,632,045 23,986 817,316 Purchases of securities (10,343,705) (1,054,562) (79,202) Other 91,454 74,550 (60,000) ------------ ------------ ------------ Net cash provided by (used in) investing activities 17,933,561 (6,274,418) (1,356,382) ------------ ------------ ------------ Cash Flows from Financing Activities: Principal payments on mortgage debt: Properties owned (423,883) (429,237) (590,826) Wrap mortgage debt on sold properties (156,222) (480,755) (463,824) Mortgage debt payment from proceeds of mortgage refinancing (3,120,190) (10,788,825) (7,771,546) Mortgage proceeds 3,195,500 24,675,000 8,120,000 Repayment of wrap mortgage debt (2,300,000) Mortgage refinancing repairs and replacement escrows (558,730) Mortgage costs (82,823) (591,251) (248,875) Note payable proceeds 2,500,000 Principal payments on note payable (10,395,361) (147,191) (600,048) Cash distributions on common stock (2,325,046) (2,263,235) (2,138,314) Proceeds from dividend reinvestment and share purchase plan 105,494 150,687 172,014 Distributions to minority partners (953,279) (4,262,845) (381,582) ------------ ------------ ------------ Net cash (used in) provided by financing activities (16,455,810) 5,303,618 (1,403,001) ------------ ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents 5,250,077 784,753 (412,423) Cash and Cash Equivalents, Beginning of Year 1,764,465 979,712 1,392,135 ------------ ------------ ------------ Cash and Cash Equivalents, End of Year $ 7,014,542 $ 1,764,465 $ 979,712 ============ ============ ============
See notes to consolidated financial statements. 50 51 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1999 1998 1997 ---- ---- ---- Reconciliation of Net Income to Net Cash Provided by Operating Activities Net Income $ 9,081,382 $ 2,773,247 $ 2,730,754 ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,310,428 1,077,187 1,075,545 Gain from sales of properties, notes and securities (7,703,081) (755,801) (596,171) Issuance of treasury stock for fees and expenses 21,510 20,880 Amortization of discounts on notes and fees (702,041) (1,094,967) (1,369,026) Minority share of partnership income 601,489 489,510 378,373 Changes in assets and liabilities: Decrease (increase) in accounts receivable 129,301 100,173 (77,737) Increase (decrease) in accounts payable and accrued liabilities 383,041 (9,299) 261,627 Decrease in deferred income (119,180) (108,385) (121,580) Decrease (increase) in prepaid expenses, deposits in escrow and deferred charges 777,142 (491,120) (66,886) Increase in security deposit restricted funds (352,573) Increase in security deposit liabilities 1,124 112,243 76,447 Other (8,789) (5,542) 55,614 ----------- ----------- ----------- Total adjustments (5,309,056) (1,017,694) (383,794) ----------- ----------- ----------- Net cash provided by operating activities $ 3,772,326 $ 1,755,553 $ 2,346,960 =========== =========== =========== Supplemental noncash disclosures: Property received in satisfaction of debt $ 39,858 $ 11,569 $ 45,765 =========== =========== =========== Net carrying value of foreclosed properties reclassified to real estate $ 588,683 ===========
See notes to consolidated financial statements. 51 52 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Presidential operates in a single business segment, investments in real estate related assets. B. Real Estate - Real estate is stated at cost. Generally, depreciation is provided on the straight-line method over the assets' estimated useful lives, which range from twenty to fifty years for buildings and leaseholds and from three to ten years for furniture and equipment. Maintenance and repairs are charged to operations as incurred and renewals and replacements are capitalized. The Company reviews each of its property investments for possible impairment at least annually, and more frequently if circumstances warrant. Impairment of properties is determined to exist when estimated amounts recoverable through future operations on an undiscounted basis are below the properties' carrying value. If a property is determined to be impaired, it is written down to its estimated fair value. The determination of impairment value is based not only upon future cash flows, which rely upon estimates and assumptions including expense growth, occupancy and rental rates, but also upon market capitalization and discount rates as well as other market indicators. Management believes that the estimates and assumptions used are appropriate in evaluating the carrying amounts of the Company's properties. However, changes in market conditions and circumstances may occur in the near term which would cause these estimates and assumptions to change, which, in turn, could cause the amounts ultimately realized upon the sale or other disposition of the properties to differ materially from their estimated fair value. Such changes may also require write-downs in future years. C. Mortgage Portfolio - Net mortgage portfolio represents the outstanding principal amounts of notes receivable reduced by discounts and/or deferred gains. Real estate is the primary form of collateral on all notes receivable. The Company periodically evaluates the collectibility of both interest on and principal of 52 53 its notes receivable to determine whether they are impaired. A mortgage loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms of the loan. When the mortgage loan is considered to be impaired, the Company establishes a valuation allowance equal to the difference between a) the carrying value of the loan, and b) the present value of the expected cash flows from the loan at its effective interest rate, or, for practical purposes, at the estimated fair value of the real estate collateralizing the loan. D. Securities Available for Sale - The Company's investments are in marketable equity securities consisting of common and preferred stocks of listed corporations. 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 with unrealized gains and losses reported as other comprehensive income in the statement of stockholders' equity until realized. Gains and losses on sales of securities are determined using the specific identification method. E. Sale of Real Estate - Presidential complies with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 66, "Accounting for Sales of Real Estate". Accordingly, the gains on certain transactions are deferred and are being recognized on the installment method until such transactions have complied with the criteria for full profit recognition. F. Discounts on Notes Receivable - Presidential assigned discounted values to long-term notes received from the sales of properties to reflect the difference between the stated interest rates on the notes and market interest rates at the time of acceptance. In addition, discounts on notes receivable include discounts received from the purchase of notes. Such discounts are being amortized using the interest method. G. Principals of Consolidation - The consolidated financial statements include the accounts of Presidential Realty Corporation and its wholly owned subsidiaries. Additionally, the consolidated financial statements include 100% of the account balances of UTB Associates and PDL, Inc. and Associates Limited Co-Partnership ("Home Mortgage Partnership"), partnerships in which Presidential or PDL, Inc., a wholly owned subsidiary of Presidential, is the General 53 54 Partner and owns a 66-2/3% interest and an aggregate 26% interest, respectively (see Note 4). All significant intercompany balances and transactions have been eliminated. H. Rental Income Recognition - Rental income is recorded on the accrual method. Recognition of rental income is generally discontinued when the rental is delinquent for ninety days or more, or earlier if management determines that collection is doubtful. I. 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 during each year. Basic net income per share and diluted income per share are the same in 1997, 1998 and 1999. The dilutive effect of stock options is calculated using the treasury stock method. J. Cash and Cash Equivalents - Cash and cash equivalents includes cash on hand, cash in banks and money market funds. K. Benefits - The Company follows SFAS Nos. 87, 106 and 132 in accounting for pension and postretirement benefits (see Notes 15 and 16). L. Management Estimates - The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. In preparing the consolidated financial statements, 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. M. Environmental Liabilities and Expenditures - Accruals for environmental matters are recorded in operating expenses when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accrued liabilities are exclusive of claims against third parties and are not discounted (see Note 9). N. Accounting for Stock Options - The Company complies with the additional disclosures required by SFAS No. 123 "Accounting for Stock-Based Compensation" but has elected to continue to account for employee stock-based compensation as prescribed by Accounting 54 55 Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Additional disclosures are required because of new options granted in 1999 (see Note 14). O. New Pronouncement - The Financial Accounting Standards Board has issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement, as amended, is effective for the Company beginning with the first quarter of 2001. Management does not anticipate that implementation of this statement will have a material effect on the Company's financial statements. 2. MORTGAGE PORTFOLIO The Company's mortgage portfolio includes notes receivable - sold properties and notes receivable - related parties. 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. At December 31, 1999, all of the notes in the Company's mortgage portfolio are current. The following table summaries the components of the mortgage portfolio: 55 56 MORTGAGE PORTFOLIO
Sold Properties ------------------------------------------ Accrual Impaired Accrual Properties Properties Cooperative previously previously apartment owned owned units Total ----------- ---------- ---------- ----------- December 31, 1999 Notes receivable $27,390,774 $1,091,023 $28,481,797 Less: Discounts 1,822,754 14,968 1,837,722 Deferred gains 11,226,631 93,742 11,320,373 ----------- ---------- ---------- ----------- Net $14,341,389 $982,313 $15,323,702 =========== ========== ========== =========== Due within one year $37,119 $45,922 $83,041 Long-term 14,304,270 936,391 15,240,661 ----------- ---------- ---------- ----------- Net $14,341,389 $982,313 $15,323,702 =========== ========== ========== =========== December 31, 1998 Notes receivable $42,204,265 $17,589,027 $1,236,410 $61,029,702 Less: Discounts 4,032,591 7,597,138 17,039 11,646,768 Deferred gains 12,445,165 6,362,838 93,742 18,901,745 ----------- ---------- ---------- ----------- Net $25,726,509 $3,629,051 $1,125,629 $30,481,189 =========== ========== ========== =========== Due within one year $692,613 $146,567 $48,219 $887,399 Long-term 25,033,896 3,482,484 1,077,410 29,593,790 ----------- ---------- ---------- ----------- Net $25,726,509 $3,629,051 $1,125,629 $30,481,189 =========== ========== ========== ===========
Related Parties ----------------------------------------------- Accrual Accrual Cooperative Total Sold conversion mortgage properties loans Total portfolio ---------- --------------- ---------- ----------- December 31, 1999 Notes receivable $1,376,586 $197,442 $1,574,028 $30,055,825 Less: Discounts 31,606 100,467 132,073 1,969,795 Deferred gains 908,343 908,343 12,228,716 ---------- -------- --------- ----------- Net $436,637 $96,975 $533,612 $15,857,314 ======== ======== ======== =========== Due within one year $14,339 $30,423 $44,762 $127,803 Long-term 422,298 66,552 488,850 15,729,511 -------- -------- -------- ----------- Net $436,637 $96,975 $533,612 $15,857,314 ======== ======== ======== =========== December 31, 1998 Notes receivable $1,462,514 $236,468 $1,698,982 $62,728,684 Less: Discounts 34,591 115,094 149,685 11,796,453 Deferred gains 930,057 930,057 19,831,802 -------- -------- -------- ----------- Net $497,866 $121,374 $619,240 $31,100,429 ======== ======== ======== =========== Due within one year $14,027 $29,967 $43,994 $931,393 Long-term 483,839 91,407 575,246 30,169,036 -------- -------- -------- ----------- Net $497,866 $121,374 $619,240 $31,100,429 ======== ======== ======== ===========
56 57 Prepayments In January, 1999, the Company received a $317,662 principal prepayment on its $417,662 mortgage note which is secured by 316 apartment units at Pinewood in Des Moines, Iowa. As a result of the $317,662 prepayment, the Company recognized a deferred gain on sale of $218,534. During 1998, the Company received $590,000 in prepayments from two mortgages which had been assigned by Ivy to the Company as security for the Overlook loan. In connection with this transaction, the Company recognized a deferred gain on sale of $590,000. In March, 1997, the Company received prepayment of its $1,074,200 Cedarbrooke note receivable resulting in the recognition of income from the amortization of discount of $382,796 and recognition of a deferred gain on sale of $472,497. Modifications The Crown Tower and Madison Towers wraparound mortgage notes in the outstanding principal amount of $13,300,000, which were secured by the Crown Tower and Madison Towers properties in New Haven, Connecticut, were modified in June of 1999. In connection with the modification, the Company repaid the $2,300,000 first mortgage debt on these properties (wrap mortgage debt on sold properties) and consolidated the $13,300,000 outstanding principal balance of the wraparound mortgage notes into one consolidated note (the "New Haven note"). The Company received a $1,000,000 principal payment on the New Haven note and paid a $1,000,000 deferred brokerage commission (which had been deferred from the sale of the New Haven properties in 1984). As a result of these transactions, the Company received a $30,750 loan modification fee and recognized a deferred gain on sale of $1,000,000. The New Haven note in the outstanding principal balance of $12,300,000 is due at maturity on June 29, 2002. The note provides for an interest rate of 10% per annum, with a 1/2 percent annual rate increase and additional interest of $369,000 due at maturity, which will increase the effective interest rate to 11.5% per annum through maturity. The New Haven note is secured by a second mortgage on the Encore Apartments and commercial space located in New York, New York and by a limited guarantee of $2,500,000 from one of the owners of the property. 57 58 In January, 1997, the Company modified its Woodland notes receivable, extending the maturity date from 2000 to 2005, with interest rates increasing in 2002 from 9% to 9.25%. In March, 1998, the Company further modified these notes as a result of the sale of the property and the assumption of the notes by the purchaser. The interest rate on the notes was increased from 9% to 10% through 2001 and will increase to 10.25% thereafter. In July, 1997, the Company modified its $1,175,500 Woodgate note receivable, changing the maturity date from 2015 to 2007, with interest rates of 8.25% through 1999 and 9.25% thereafter. In addition, the Company and the debtor agreed to substitute Windsor at Arbors in Alexandria, Virginia for Woodgate Apartments in Wichita, Kansas, as security for this note. In September of 1997, the Company extended and modified its $6,250,000 Presidential Park note receivable. This note, which had previously been modified and extended in August of 1994 and which was due to mature on July 31, 2001, was extended until July 31, 2006. The interest rate was 6% per annum through July 31, 1999. The interest rate is 7.90% per annum from August 1, 1999 through July 31, 2001. From August 1, 2001 through maturity the interest rate will be at a rate equal to one hundred fifty basis points in excess of the yield on specified Treasury bills. In accordance with the terms of this note, the Company and the debtor agreed to substitute Newcastle Apartments in Greece, New York for Presidential Park Apartments in Columbus, Ohio as security for this note. In connection with the modification, the borrower made a $100,000 principal payment on the note reducing the outstanding principal balance to $6,150,000. Valuation Reserves In the fourth quarter of 1997, the Company recorded a valuation reserve of $43,793 on the University Towers purchase money notes to reflect the decline of the estimated fair value of the University Towers cooperative apartments in New Haven, Connecticut that secure the notes. The valuation reserve was recorded to discounts on notes receivable and an expense of $43,793 was recorded to bad debts. Sold Notes During the year ended December 31, 1999, the Company sold the Fairfield Towers First Mortgage Note and substantially all of the Fairfield Towers Second Mortgage Note (the Fairfield Towers Second Mortgage Note had been classified as an impaired loan). The Company 58 59 also sold the Grant House wraparound mortgage note, which had also been classified as an impaired loan. The Fairfield Towers Second Mortgage and the Grant House wraparound mortgage note were classified as impaired loans at December 31, 1998. These two loans were in the aggregate amount of $17,589,027 and had a net carrying value of $3,629,051 after deducting discounts of $7,597,138 and deferred gains of $6,362,838. Fairfield Towers On February 22, 1999, Presidential consummated the sale of its Fairfield Towers First and Second Mortgage Notes (excluding a $4,000,000 portion of the Second Mortgage Note, which it retained). At the date of the sale, the Fairfield Towers First Mortgage Note had an outstanding principal balance of $17,002,695 and a net carrying value of $13,957,284 after deducting a discount of $3,045,411. The Fairfield Towers Second Mortgage Note, which was classified as an impaired loan, had an outstanding principal balance of $14,206,895 and a net carrying value of $1,311,908 after deducting discount and deferred gain of $12,894,987. The aggregate sales price for the First Mortgage Note and the Second Mortgage Note (excluding the $4,000,000 interest retained by Presidential) was $21,350,000. As a result of this transaction, Presidential repaid the $10,195,442 outstanding principal balance of its bank note payable, which had been secured by Presidential's interest in the First Mortgage Note. Presidential recognized a gain on sale of $7,393,844 net of Federal taxes of $220,500. In connection with this transaction, the $4,000,000 portion of the Second Mortgage Note retained by Presidential was modified to provide for interest at the rate of 9.625% per annum for the first three years and 10.5% per annum for the remaining seven years. The $4,000,000 outstanding principal balance is due at maturity on February 18, 2009. To secure this obligation, Presidential obtained subordinate security interests in three apartment properties located in New Jersey as collateral for the Note. Presidential obtained the Fairfield Towers Second Mortgage, which was secured by 997 unsold condominium units at Fairfield Towers in Brooklyn, New York, when it sold the Fairfield Towers property in 1984. This nonrecourse note had been in default since March of 1991. At December 31, 1998, the note had a $14,341,147 outstanding 59 60 principal balance and a net carrying value of $1,404,764, after a discount of $7,597,138 and a deferred gain of $5,339,245. In 1996, the Company acquired the Fairfield Towers First Mortgage (also secured by the unsold condominium units), with an outstanding principal balance of $14,650,867, for a purchase price of $11,150,867. During 1997, the Company had advanced an additional $3,000,018, which was added to the indebtedness secured by the Fairfield Towers First Mortgage. The outstanding principal balance on the Fairfield Towers First Mortgage at December 31, 1998 was $17,176,884. Grant House On January 28, 1999, the Company sold its equity interest in the $3,235,833 Grant House wraparound mortgage note, which had been classified as an impaired loan. The Company's underlying second mortgage in the outstanding principal amount of $1,023,593 was sold to the purchaser for a sales price of $500,000. The nonrecourse first mortgage which Presidential's second mortgage wrapped around was also assigned to the purchaser. As a result of this transaction, Presidential wrote off the $2,212,240 balance on the first mortgage and the related $2,212,240 mortgage debt, $75,000 of the sales proceeds was applied to accrued and unpaid interest and the Company recognized a gain on sale of $425,000. At December 31, 1997, the Company had classified the Grant House wraparound mortgage note as an impaired loan. The note was secured by a wraparound mortgage on the Grant House apartment building (181 apartment units) located in White Plains, New York. The outstanding principal balance of the note at December 31, 1998 was $3,247,880 and the net carrying value was $2,224,287 (which was equal to the outstanding principal amount of the underlying nonrecourse first mortgage debt) after deducting a deferred gain of $1,023,593. 3. REAL ESTATE Real estate is comprised of the following:
December 31, ----------------- 1999 1998 ---- ---- Land $ 5,461,173 $ 5,454,549 Buildings and leaseholds 29,909,205 29,008,677 Furniture and equipment 277,255 240,431 ----------- ----------- Total real estate $35,647,633 $34,703,657 =========== ===========
60 61 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, and 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 consolidates 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 asset 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 net carrying amount of the property, but the estimated fair value of the property is significantly greater than the mortgage debt. Thus, the asset recorded as minority partners' interest should be realized upon sale of the property. Minority partners' interest is comprised of the following:
December 31, ------------------ 1999 1998 ---- ---- Home Mortgage Partnership $8,112,127 $7,735,342 UTB Associates (207,594) (182,599) ---------- ---------- Total minority partners' interest $7,904,533 $7,552,743 ========== ==========
61 62 5. SECURITIES AVAILABLE FOR SALE The cost and fair value of securities available for sale are as follows:
December 31, --------------------- 1999 1998 ---- ---- Cost $2,520,568 $1,259,057 Gross unrealized gains 1,824 23,433 Gross unrealized losses (222,898) (7,756) ---------- ---------- Fair value $2,299,494 $1,274,734 ========== ==========
Sales activity results for securities available for sale are as follows:
Year Ended December 31, ---------------------------- 1999 1998 1997 ---- ---- ---- Gross sales proceeds $ 7,663,713 $23,986 $822,073 =========== ======= ======== Gross realized gains $ $21,438 $ 58,418 Gross realized losses (1,450,149) (39,453) ----------- ------- -------- Net realized gain (loss) $(1,450,149) $21,438 $ 18,965 =========== ======= ========
6. MORTGAGE DEBT All mortgage debt is secured by individual properties and is nonrecourse to the Company with the exception of the $259,071 mortgage on the Mapletree Industrial Center property in Palmer, Massachusetts, which is guaranteed by Presidential. In January, 1999, the Company refinanced the mortgage on its Cambridge Green property. The existing mortgage balance of $3,120,190 was paid from the proceeds of the new $3,195,500 mortgage. The new mortgage bears interest at the rate of 6.65% per annum, requires monthly payments of principal and interest of $20,358, and matures on October 1, 2029. 62 63 As a result of the refinancing of this mortgage, the Company wrote off $166,756 of unamortized mortgage costs and paid a prepayment penalty fee of $31,200 relating to the prior mortgage. As described in Note 2 above, during the year ended December 31, 1999, the Company sold the Grant House wraparound mortgage and repaid the Crown Tower and Madison Towers first mortgage debt (the wrap mortgage debt). As a result of these transactions, wrap mortgage debt was reduced from $4,668,462 at December 31, 1998 to $0 at December 31, 1999. Interest income and interest expense related to wrap mortgages are shown as gross amounts in the consolidated statements of operations. Amortization requirements of all mortgage debt as of December 31, 1999 are summarized as follows:
FHA Insured Other Total Mortgages Mortgages ----- --------- --------- Year ending December 31: 2000 $ 1,338,491 $ 34,831 $ 1,303,660 2001 466,961 37,219 429,742 2002 497,866 39,771 458,095 2003 535,717 42,497 493,220 2004 572,437 45,411 527,026 2005 - 2029 35,967,986 2,965,810 33,002,176 ----------- ---------- ----------- TOTAL $39,379,458 $3,165,539 $36,213,919 =========== ========== ===========
Interest on mortgages is payable at annual rates, summarized as follows:
FHA Insured Other Total Mortgages Mortgages ----- --------- --------- Interest rates: 6.55%-6.65% $ 7,972,511 $3,165,539 $ 4,806,972 7%-7.75% 22,532,381 22,532,381 8.16% 7,957,942 7,957,942 9.75%-9.875% 916,624 916,624 ----------- ---------- ----------- TOTAL $39,379,458 $3,165,539 $36,213,919 =========== ========== ===========
63 64 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. The note, which was due to mature on October 30, 2001, was secured by a collateral assignment of the Fairfield Towers First Mortgage and was nonrecourse to Presidential except for a limited guarantee. Presidential sold the Fairfield Towers First Mortgage in February, 1999 and repaid the outstanding principal balance of the bank note from the proceeds of the sale. The outstanding principal balance at the date of the sale was $10,195,442. The Company has an unsecured $250,000 line of credit from a lending institution. The interest rate is 1% above the prime rate and the line of credit expires in February, 2001. Presidential pays a 1% annual fee for the line of credit. At December 31, 1999, no advances are outstanding on this line of credit. 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 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. Upon filing the Company's income tax return for the year ended December 31, 1998, Presidential applied its available 1998 stockholders' distributions and elected to apply (under Section 858 of the Internal Revenue Code) all but approximately $801,000 of its 1999 stockholders' distributions to reduce its taxable income for 1998 to $4,831. As a result, Presidential paid Federal income taxes of $725 for 1998. For the year ended December 31, 1999, the Company had taxable income (before distributions to stockholders) of approximately $3,711,000 ($1.01 per share), which included approximately $2,836,000 ($.77 per share) of capital gains. This amount will be reduced by the $630,000 ($.17 per share) of undistributed capital gains designated as paid under Section 857(b)(3)(D) (see below) and by the $801,000 ($.22 per share) of its 1999 distributions that were not utilized in reducing the Company's 1998 taxable income. In addition, the Company 64 65 may elect to apply any eligible year 2000 distributions to reduce its 1999 taxable income. As previously stated, in order to retain REIT status, Presidential is required to distribute 95% of its REIT taxable income ($.23 per share exclusive of capital gains). Presidential will apply the available 1999 distributions (approximately $.22 per share) and will be required to pay additional distributions of not less than $.01 per share in 2000 to maintain REIT status, which it intends to do. Under the provisions of the Internal Revenue Code, Section 857(b)(3)(D), Presidential elected to designate and retain net long-term capital gains of $630,000 received in 1999. Presidential subsequently paid a $220,500 income tax on this retained capital gain. Each shareholder (i) includes its pro rata share ($.17 per share) of the Company's retained capital gain in computing its long-term capital gain, (ii) receives a tax credit for its pro rata share ($.06 per share) of the tax paid by Presidential and (iii) adjusts the basis of its shares ($.11 per share) for the difference between the amount of the capital gains and the tax credit received. In addition, although no assurances can be given, the Company currently expects to distribute all of its remaining 1999 taxable income (after the $630,000 retained capital gain) during 1999 and 2000. Presidential has, for tax purposes, reported the gain from the sale of certain of its properties using the installment method. 9. COMMITMENTS AND CONTINGENCIES Presidential is not a party to any material legal proceedings except as noted below. UTB Associates, a partnership in which the Company holds a 66-2/3% interest, is a tenant under a lease (the "Professional Space Lease") of 24,400 square feet of professional office space at University Towers, a cooperative apartment building in New Haven, Connecticut. In June, 1999, University Towers Owners Corp., the cooperative corporation, filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Connecticut, New Haven division. As part of the bankruptcy proceedings, in July, 1999 the cooperative corporation filed an Adversary Proceeding against UTB Associates for termination of the Professional Space Lease and damages primarily based on claims arising under Connecticut law. The Company has been advised by its litigation counsel that there are meritorious defenses to the claim raised by the cooperative corporation and that if these 65 66 defenses are successful, it is unlikely that the Professional Space Lease will be terminated or that any damages will be assessed against UTB Associates. However, in light of the uncertainties of litigation, no assurances can be given as to the outcome of the litigation. The Company's financial statements reflect approximately $66,000 of income from the Professional Space Lease in 1999. In addition, the Company may be a party to routine litigation incidental to the ordinary course of its business. In the opinion of management, all of the Company's properties are adequately covered by insurance in accordance with normal insurance practices. The Company is not aware of any environmental issues at any of its properties, with the exception of the environmental expenses incurred in prior years at its Mapletree Industrial Center property in Palmer, Massachusetts. The presence, with or without the Company's knowledge, of hazardous substances at any of its properties could have an adverse effect on the Company's operating results and financial condition. 10. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of its mortgage portfolio, cash and cash equivalents, and securities available for sale. The Company's mortgage portfolio consists of long-term notes receivable collateralized by real estate located in five states (primarily New York and New Jersey). At December 31, 1999, the aggregate principal amount of these notes was $30,055,825 with a net carrying value of $15,857,314. The real estate securing these notes, consisting primarily of moderate income apartment properties and, to a lesser extent, cooperative apartment units, has at a minimum an estimated fair value equal to the net carrying value of the notes. The mortgage portfolio also includes notes receivable due from a related party, Ivy, with a net carrying value of $533,612 at December 31, 1999. The Company generally maintains its cash in money market funds with high credit quality financial institutions. Periodically, the Company may invest in time deposits with such institutions. Although the Company may maintain balances at these institutions in 66 67 excess of the FDIC insurance limit, the Company does not anticipate and has not experienced any losses. The Company also invests its funds in marketable equity securities available for sale. Such investments are reflected on the Company's consolidated balance sheets at their fair value. 11. COMMON STOCK The Class A and Class B common stock of Presidential have identical rights except that the holders of Class A common stock are entitled to elect two-thirds of the Board of Directors and the holders of the Class B common stock are entitled to elect one-third of the Board of Directors. Other than as described in Note 14, no shares of common stock of Presidential are reserved for officers, employees, warrants or other rights. 12. DISTRIBUTIONS ON COMMON STOCK For income tax purposes, distributions paid on common stock are allocated as follows:
Total Taxable Taxable Year Distribution Ordinary Income Capital Gain - ---- ------------ --------------- ------------ 1999 $0.64 $0.42 $0.22 1998 0.63 0.22 0.41 1997 0.60 0.19 0.41
Designated Undistributed Long-Term Capital Gains: In addition, on December 31, 1999, the Company elected to retain $0.17 per share of long-term capital gains received in 1999. This undistributed long-term capital gain of $0.17 per share is taxable to shareholders as a long-term capital gains distribution. Shareholders will receive a tax credit of $0.06 per share and should also increase the basis of their shares by $0.11 per share. 13. TREASURY STOCK In March, 1999, 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 1999. Such shares had been held in treasury at an 67 68 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 $7.17 per share. As a result of this transaction, the Company recorded $21,510 for directors fees based on the average market value of the stock. Treasury stock was reduced by a cost of $40,618 and additional paid-in capital was charged $19,108 for the excess of the cost over the market value. In addition, on March 24, 1999, an executive of the Company was given 7,000 shares of the Company's Class B common stock at a market price of $7.0625 per share (the closing price of the stock on the date of issuance). The Company recorded a salary expense of $49,438, reduced treasury stock by a cost of $94,780 and charged additional paid-in capital $45,342 for the excess of the cost over the market value. 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 1998. 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 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. 14. STOCK OPTION PLANS In 1993, the Company adopted a Nonqualified Stock Option Plan (the "1993 Stock Option Plan"). The 1993 Stock Option Plan provided that options to purchase up to 250,000 shares of the Company's Class B common stock could be issued prior to December 31, 1998 to the Company's key employees at exercise prices equal to the market value on the date the option was granted. On November 17, 1993, options to purchase 60,000 shares were granted to three employees at an exercise price of $6.125 per share. All of the options were exercised on November 10, 1999. No other options have been granted, exercised or cancelled under this plan from inception to December 31, 1999 and no further options can be granted under this plan. In connection with the exercise of the options discussed above, the Company loaned the three employees, who are officers of Presidential, $367,500 to pay for the stock. The recourse notes, secured by the stock, bear interest at 8% per annum, payable quarterly, and the principal is due at maturity on November 30, 2004. See Note 18. 68 69 In 1999, the Company adopted a Nonqualified Stock Option Plan (the "1999 Stock Option Plan"). The 1999 Stock Option Plan provides that options to purchase up to 150,000 shares of the Company's Class B common stock may be issued prior to December 31, 2003 to the Company's key employees at exercise prices equal to the market value on the date the option is granted. On November 10, 1999, options to purchase 60,000 shares were granted to three employees at an exercise price of $6.375 per share. All of the options are exercisable at December 31, 1999 and expire on November 10, 2005. No other options have been granted, exercised or cancelled under this plan. The Company has agreed that to the extent that any of the existing stock options held by these key employees are either exercised or lapse, the Company will grant new options in the amount of the stock options that have either been exercised or lapse, which new options will have an exercise price equal to the closing price of the Class B common stock on the date that the new option is actually granted, will have a term of six years from the date such new option is granted and will be otherwise subject to the terms of the 1999 Stock Option Plan or any successor plan. The Company has determined that the pro forma effect of the stock options on compensation expense required by SFAS No. 123 is not material. 15. PENSION PLANS Defined Benefit Plan The Company has a noncontributory defined benefit pension plan, which covers substantially all of its employees. The plan provides monthly retirement benefits commencing at age 65. The monthly benefit is equal to the sum of (1) 6.5% (as of January 1, 2000, 6.5% is amended to 7.15%) of average monthly compensation multiplied by the total number of plan years of service (up to a maximum of 10 years), plus (2) .62% of such average monthly compensation in excess of one-twelfth of covered compensation multiplied by the total number of plan years of service (up to a maximum of 10 years). The Company makes annual contributions that meet the minimum funding requirements and the maximum contribution limitations under the Internal Revenue Code. Periodic pension costs are reflected in general and administrative expenses in the Company's consolidated statements of operations. 69 70
Year Ended December 31, 1999 1998 1997 ---- ---- ---- Components of net periodic benefit cost Service cost $330,649 $324,374 $297,908 Interest cost 112,973 79,370 55,484 Expected return on plan assets (131,403) (96,438) (66,209) Amortization and deferrals (11,356) (8,950) -------- -------- -------- Net periodic benefit cost $300,863 $298,356 $287,183 ======== ======== ========
The following sets forth the plan's funded status and amount recognized in the Company's consolidated balance sheets:
December 31, 1999 1998 ---- ---- Change in benefit obligation Benefit obligation at beginning of year $1,613,907 $1,133,852 Service cost 330,649 324,374 Interest cost 112,973 79,370 Amendments 194,286 Actuarial loss 14,403 76,311 ---------- ---------- Benefit obligation at end of year 2,266,218 1,613,907 ---------- ---------- Change in plan assets Fair value of plan assets at beginning of year 1,804,482 1,296,290 Actual return on plan assets 360,412 263,017 Employer contributions 94,040 245,175 ---------- ---------- Fair value of plan assets at end of year 2,258,934 1,804,482 ---------- ---------- Funded status actuarial (7,284) 190,575 Unrecognized prior service cost 194,286 Unrecognized gain (569,931) (366,681) ---------- ---------- Net amount recognized $ (382,929) $ (176,106) ========== ========== Weighted-average assumptions as of December 31 Discount rate 7% 7% Expected return on plan assets 7% 7% Rate of compensation increase 5% 5%
70 71
December 31, 1999 1998 ---- ---- Plan Assets Cash and cash equivalents $ 162,332 $ 65,215 Securities available for sale 2,096,602 1,739,267 ---------- ---------- Total plan assets $2,258,934 $1,804,482 ========== ==========
Executive Pension Plan Presidential has employment contracts with several active and retired key officers and employees. Such contracts are being accounted for as constituting pension agreements. The contracts generally provide for annual benefits in specified amounts for each participant for life, commencing upon retirement, with an annual adjustment for an increase in the consumer price index. Periodic pension costs are reflected in general and administrative expenses in the Company's consolidated statements of operations.
Year Ended December 31, 1999 1998 1997 ---- ---- ---- Components of net periodic benefit cost Service cost $ 52,364 $ 15,127 $ 14,137 Interest cost 173,211 166,262 187,983 Amortization of prior service cost (4,079) (4,079) (4,079) Recognized actuarial loss 168,741 121,490 87,297 -------- -------- -------- Net periodic benefit cost $390,237 $298,800 $285,338 ======== ======== ========
71 72 Presidential has elected not to fund expenses accrued under these contracts. The following set forth the pension liability included in Presidential's consolidated balance sheets:
December 31, 1999 1998 ---- ---- Change in benefit obligation Benefit obligation at beginning of year $ 2,881,845 $ 2,779,019 Service cost 52,364 15,127 Interest cost 173,211 166,262 Amendments 138,611 Actuarial loss 194,294 325,291 Benefits paid (407,409) (403,854) ----------- ----------- Benefit obligation at end of year 3,032,916 2,881,845 ----------- ----------- Change in plan assets Employer contributions 407,409 403,854 Benefits paid (407,409) (403,854) ----------- ----------- Fair value of plan assets at end of year 0 0 ----------- ----------- Funded status (3,032,916) (2,881,845) Unrecognized net actuarial loss 1,438,680 1,413,127 Unrecognized prior service cost 115,051 (27,639) ----------- ----------- Net amount recognized $(1,479,185) $(1,496,357) =========== =========== Weighted-average assumptions as of December 31 Discount rate 7% 7% Expected return on plan assets 7% 7% Rate of compensation increase 5% 5%
16. POSTRETIREMENT BENEFITS Presidential has employment contracts with several active and retired key officers and employees which provide for postretirement benefits other than pensions (such as health care benefits). The Company accrues the estimated cost of retiree benefit payments during the years the employee provides services. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligations was 13% for participants age 65 and over and 15% for participants under age 65, decreasing linearly each successive year until it reaches 6% in 2002, after which it remains constant. 72 73
Year Ended December 31, 1999 1998 1997 ---- ---- ---- Components of net periodic benefit cost Service cost $ 7,180 $ 6,711 $ 6,272 Interest cost 32,785 34,241 35,484 Recognized net actuarial gain (10,386) (9,196) (8,069) ------- ------- ------- Net periodic benefit cost $29,579 $31,756 $33,687 ======= ======= =======
The accumulated postretirement benefit obligation and recorded liability, none of which has been funded, was as follows:
December 31, 1999 1998 ---- ---- Change in benefit obligation Benefit obligation at beginning of year $ 498,846 $ 518,570 Service cost 7,180 6,711 Interest cost 32,785 34,241 Actuarial gain (9,543) (16,450) Benefits paid (53,348) (44,226) --------- --------- Benefit obligation at end of year 475,920 498,846 --------- --------- Change in plan assets Employer contributions 53,348 44,226 Benefits paid (53,348) (44,226) --------- --------- Fair value of plan assets at end of year 0 0 --------- --------- Funded status (475,920) (498,846) Unrecognized actuarial gain (62,478) (63,321) --------- --------- Net amount recognized $(538,398) $(562,167) ========= ========= Weighted-average assumptions as of December 31 Discount rate 7% 7% Expected return on plan assets 7% 7%
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- Point Increase Point Decrease -------------- -------------- Effect on total service and interest cost components $ 1,000 $ (1,000) Effect on postretirement benefit obligation 46,000 (38,000)
73 74 17. DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN Presidential maintains a Dividend Reinvestment and Share Purchase Plan (the "Plan"). Under the Plan, stockholders may reinvest cash dividends and make optional cash payments to purchase Class B common stock without incurring any brokerage commission or service charge. Additionally, the price of Class B common stock purchased with reinvested cash dividends will be discounted by 5% from the average of the high and low market prices of the five days immediately prior to the dividend payment date, as reported on the American Stock Exchange. Class B Common Shares issued under the Plan are summarized below:
Net Proceeds Shares Received ------ -------- Total shares issued at December 31, 1997 327,754 $2,230,058 Shares issued during 1998 22,319 150,687 ------- ---------- Total shares issued at December 31, 1998 350,073 2,380,745 Shares issued during 1999 16,310 105,494 ------- ---------- Total shares issued at December 31, 1999 366,383 $2,486,239 ======= ==========
18. RELATED PARTY TRANSACTIONS Ivy Properties, Ltd. and various affiliated companies (collectively "Ivy") are owned by Thomas Viertel, Steven Baruch and Jeffrey Joseph (the "Ivy Principals"), who are also the sole partners of Pdl Partnership, which owns 198,735 shares of the Company's Class A common stock. As a result of the ownership of the 198,735 shares of Class A common stock described above and 24,601 additional shares of Class A common stock owned in the aggregate individually by the Ivy Principals, Pdl Partnership and the Ivy Principals have beneficial ownership of an aggregate of approximately 47% of the outstanding shares of Class A common stock of the Company, which class of stock is entitled to elect two-thirds of the Board of Directors of the Company. By reason of such beneficial ownership, the Ivy Principals are in a position substantially to control elections of the Board of Directors of the Company. Jeffrey Joseph is the President and a Director of Presidential. Thomas Viertel, an Executive Vice President and the Chief Financial Officer of Presidential, is the son of Joseph Viertel, a Director and a former President of Presidential, and the nephew of Robert E. Shapiro, Chairman of the Board of Directors and a former President 74 75 of Presidential. Steven Baruch, an Executive Vice President of Presidential, is the cousin of Robert E. Shapiro and Joseph Viertel. In connection with the exercise of stock options in November, 1999, the Company loaned $367,500 in the aggregate to Jeffrey Joseph ($147,000), Thomas Viertel ($110,250) and Steven Baruch ($110,250) to pay for the purchase of the stock. The recourse notes, secured by the stock, bear interest at 8% per annum, payable quarterly, and the principal is due at maturity on November 30, 2004. For the year ended December 31, 1999, Presidential recognized interest income of $4,108 on these notes. These three officers own an aggregate of 87,764 shares of Class B common stock and options to purchase 60,000 shares of Class B common stock. See Note 14. From 1979 to 1989, Presidential made loans to Ivy in connection with Ivy's cooperative conversions of apartment properties in the New York metropolitan area. In 1981, UTB Associates, a partnership controlled by Presidential, sold an apartment property to Ivy in return for purchase money notes. In addition, in 1984, Presidential sold to Ivy its 50% partnership interest in the partnership which owned Overlook Gardens, a 308 unit apartment complex in Alexandria, Virginia for a purchase money note. During 1989 and 1990 the sales market for cooperative apartments in the New York metropolitan area deteriorated and as a result in 1990 and 1991 Ivy defaulted on certain of its outstanding loans from Presidential. In early 1990, Ivy began negotiations with Presidential with respect to a workout of the loans then in default. Because of the relationships described above between the Ivy Principals and Presidential, the negotiations with Ivy were conducted on behalf of Presidential by a committee of three members of the Board of Directors with no affiliations with the Ivy Principals (the "Independent Committee") and an officer of Presidential who was not affiliated with the Ivy Principals. On November 14, 1991, Presidential and Ivy consummated a settlement agreement (the "Settlement Agreement") with respect to various outstanding loans to Ivy, which was approved unanimously by the Board of Directors of Presidential. In connection with the Settlement Agreement, Presidential received, among other things, a number of vacant and occupied cooperative apartment units in the New York metropolitan area and certain third party promissory notes held by Ivy. Presidential received these assets in exchange for (i) the satisfaction of all of Ivy's recourse debt to Presidential and certain of its nonrecourse debt to Presidential with respect to which Presidential held first priority security interests and (ii) the release by Presidential of certain 75 76 subordinate security interests in collateral securing some of the defaulted loans. Most of Ivy's remaining nonrecourse debt to Presidential was consolidated, on modified terms, into two nonrecourse loans (collectively, the "Consolidated Loans") which were collateralized by substantially all of Ivy's remaining business assets with respect to which Presidential either did not previously have any security interest or had a junior security interest (collectively, the "Consolidated Collateral"). The terms of the Settlement Agreement permit Ivy to use the proceeds of each sale of Consolidated Collateral to (1) pay existing indebtedness of Ivy to its bank and trade creditors and certain operating expenses and (2) create and fund specified reserves to provide for payment of future obligations and potential liabilities. At December 31, 1999, the Consolidated Loans have an outstanding principal balance of $4,809,309 and a net carrying value of $39,259. Since, as permitted by the terms of the Consolidated Loans, most of Ivy's assets have been sold with the sales proceeds used to pay other recourse obligations of Ivy, Presidential does not expect to recover any material amount on the Consolidated Loans in excess of their net carrying value. In 1996, Presidential and the Ivy Principals agreed to a modification of the Settlement Agreement to provide that the Ivy Principals will make payments on the Consolidated Loans in an amount equal to 25% of the operating cash flow (after provision for certain reserves) of Scorpio Entertainment, Inc. ("Scorpio"), a company owned by the Ivy Principals which acts as a producer of theatrical productions. This agreement, and Presidential's decision not to exercise an option (which it had received as part of the original Settlement Agreement) to acquire the capital stock of Scorpio, was made pursuant to the unanimous determination of the Independent Committee that such actions were in the best interests of Presidential. During 1999, Presidential received $13,309 of principal payments and $64,405 of interest on the Consolidated Loans. All outstanding loans from Ivy at December 31, 1999 are current. Management believes that Presidential holds sufficient collateral to protect its interests in the loans that remain outstanding from Ivy to the extent of the net carrying value of these loans. Presidential received interest of $236,457, $426,990 and $223,402 from Ivy during 1999, 1998 and 1997, respectively, on the loans referred to above. In addition, in 1999, 1998 and 1997, Presidential recognized $14,034, $11,050 and $11,345, respectively, 76 77 of income representing the amortization of discounts on notes receivable. Any transactions relating to the implementation of the terms of the Settlement Agreement, or otherwise involving the Ivy Principals, are subject to the approval of the Independent Committee. All outstanding loans from Ivy are set forth in the table below: 77 78 MORTGAGE PORTFOLIO: NOTES RECEIVABLE - RELATED PARTIES
Loan Balance Original December 31, Loan Basic Date Advanced Description Interest Rate 1999 1998 - ---- -------- ----------- ------------- ---- ---- 1981 $5,285,000 UTB Associates, a partnership in 11.8 to 25.33% $468,243 $532,457 which Presidential owns a 66-2/3% interest, sold an apartment property in New Haven, CT to Ivy for long-term, nonrecourse purchase money notes. 1984 4,305,500 Sale by Presidential to Ivy of 6.0% 908,343 930,057 50% interest in a partnership which owns an apartment complex in Alexandria, VA (Overlook loan). 1991 526,454 UTB End Loans: Purchase money notes Various 158,183 183,900 on co-op apts. These notes were transferred to Presidential as part of the Ivy settlement. 1991 155,084 Consolidated Loans: Replaced previously Chase Prime 39,259(1) 52,568 defaulted loans. --------- --------- Total Loans 1,574,028 1,698,982 Less: Discounts 132,073(2) 149,685 Deferred gain on Overlook loan 908,343 930,057 --------- --------- Net Carrying Value $533,612 $619,240 ========= =========
(1) The Consolidated Loans have a net carrying value of $39,259 and an outstanding principal balance of $4,809,309. (2) Included in the $132,073 discount is a valuation reserve of $43,793. This valuation reserve was recorded by the Company in 1997 to reflect the decline in the estimated fair value on the University Towers co-op apartments held as security for the UTB Associates and the UTB End Loan notes. 78 79 19. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS Estimated fair values of the Company's financial instruments as of December 31, 1999 and 1998 have been determined using available market information and various valuation estimation methodologies. Considerable judgement 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 summaries the estimated fair values of financial instruments: 79 80 FINANCIAL INSTRUMENTS
December 31, 1999 December 31, 1998 Net Estimated Net Estimated Carrying Fair Carrying Fair Value (1) Value Value (1) Value --------- ----- --------- ----- Assets: Cash and cash equivalents $7,014,542 $7,014,542 $1,764,465 $1,764,465 Securities available for sale 2,299,494 2,299,494 1,274,734 1,274,734 Notes receivable-sold properties- accrual 15,323,702 28,461,062 26,852,138 39,975,890 Notes receivable-sold properties- impaired(2) 3,629,051 10,720,562 Notes receivable-related parties- accrual 533,612 1,651,797 619,240 1,688,873 Liabilities: Mortgage debt on properties owned 39,379,458 34,716,388 39,728,031 39,728,031 Wrap mortgage debt 4,668,462 4,668,462 Note payable to bank 10,395,361 10,395,361
(1) Net carrying value is net of discounts and deferred gains where applicable. (2) The fair value of the impaired loans at December 31, 1998, includes all impaired loans. As a result of the sale of these notes in the first quarter of 1999, the fair value of these notes was assessed by discounting the cash flows received or to be received for these notes. 80 81 The fair value estimates presented above are based on pertinent information available to management as of December 31, 1999 and 1998. 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 December 31, 1999 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 is estimated based on quoted market prices or dealer quotes, if available. If a quote is not available, fair value is estimated using quoted market prices for similar 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 on Properties Owned, Wrap Mortgage Debt and Note Payable to Bank - At December 31, 1999, the fair value of mortgage debt on properties owned has been estimated by discounting projected cash flows using current rates for similar debt. At December 31, 1998, the fair value of mortgage debt on properties owned, wrap mortgage debt and note payable to bank was estimated at their net carrying value. 81 82 20. QUARTERLY FINANCIAL INFORMATION - UNAUDITED (Amounts in thousands, except earnings (loss) per common share)
Income Before Earnings Net Gain from (Loss) Year Sales of Per Ended Properties, Notes Net Income Common December 31 Revenues and Securities (Loss) Share - ----------- -------- -------------- ------ ----- 1999 First $3,922 $298 $7,017 (1) $ 1.94 (1) Second 3,782 561 1,641 0.46 Third 3,747 423 428 0.11 Fourth 3,793 96(2) (5)(1) (0.01)(1) 1998 First $3,830 $633 $ 696 $ 0.19 Second 3,777 451 1,069 0.30 Third 3,869 538 582 0.16 Fourth 3,937 395 426 0.12
(1) Net income for the first quarter of 1999 includes a net gain of $6,050,740 (after accrued taxes of $1,566,474) from the sale of the Fairfield Towers First and Second Mortgage Notes. The tax accrual of $1,566,474 was based on management's intention, at that time, that the Company would retain all of the taxable gain from the sale of the Fairfield Towers Notes. On December 31, 1999, the Company elected to retain only $630,000 of the taxable gain from the sale of the Fairfield Towers Notes. This election reduced the accrued taxes on the sale from $1,566,474 to $220,500 and resulted in an increase in the net gain from sales of $1,345,974. This increase was offset by the $1,450,149 loss incurred in the fourth quarter from the sales of securities. (2) Income before net gain from sales of properties, notes and securities for the fourth quarter of 1999 includes a $378,522 write-off to bad debt expense of amounts advanced to the Company's unaffiliated rental property management company. Although it is unlikely that the rental property management company will be able to repay these advances in the near future, Presidential has not released the management company from its liability for these amounts due. 82 83 21. SUBSEQUENT EVENTS In March, 2000, the Company acquired Farrington Apartments, a 224 unit apartment property in Clearwater, Florida for a purchase price of $9,630,950. In connection with the acquisition, the Company obtained a nonrecourse first mortgage loan on the property in the amount of $7,900,000, with interest at the rate of 8.25% per annum and a ten year maturity. The Company also executed a contract to acquire Preston Lake, a 320 unit apartment property in Norcross, Georgia for a purchase price of $17,500,000 and obtained a commitment for a first mortgage loan on the property in the amount of $14,000,000, with interest at the rate of 8.15% per annum and a ten year maturity. The Company expects to finalize this purchase in April, 2000. 83 84 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 SCHEDULE II
BALANCE AT CHARGED BALANCE BEGINNING TO AT END CLASSIFICATION OF YEAR EXPENSES DEDUCTIONS (1) OF YEAR -------------- ------- -------- -------------- ------- 1999 Discount on mortgage portfolio and valuation allowance for other receivables $11,916,555 $60,488 $9,867,426 (2)(3) $ 2,109,617 =========== ======= ========== =========== 1998 Discount on mortgage portfolio and valuation allowance for other receivables $13,020,904 $46,799 $1,151,148 $11,916,555 =========== ======= ========== =========== 1997 Discount on mortgage portfolio and valuation allowance for other receivables $14,419,071 $68,042 $1,466,209 $13,020,904 =========== ======= ========== ===========
(1) Represents amortization of discount on mortgages and notes using the interest method and also includes write-off of discounts on notes due to prepayments on notes. (2) Includes $3,045,411 of discount on the Fairfield Towers First Mortgage which was recognized as a gain on the sale of the Fairfield Towers First Mortgage. (3) Includes a write-off of discount of $6,075,210 relating to the Fairfield Towers Second Mortgage which was sold in 1999. 84 85 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999 SCHEDULE III
INITIAL COST TO COMPANY COSTS ----------------------- CAPITALIZED BUILDING SUBSEQUENT TO AMOUNT OF AND ACQUISITION PROPERTIES ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS (1) ---------- ------------ ---- ------------ ---------------- Office and Commercial except where otherwise indicated: Building Industries Center, White Plains, NY $906,469 $61,328 $496,198 $584,227 *Cambridge Green, Council Bluffs, IA 3,165,539 200,000 2,034,315 1,328,645 *Continental Gardens, Miami, FL 7,957,942 2,448,000 7,389,786 416,071 *Crown Court, New Haven, CT 2,741,615 168,000 3,077,445 58,481 *Fairlawn Gardens Martinsburg, WV 2,264,850 71,408 657,805 1,201,736 Home Mortgage Plaza, Hato Rey, Puerto Rico 17,266,846 636,712 5,070,769 1,871,686 Mapletree Industrial Center, Palmer, MA 259,071 79,100 191,378 *Sunwood Apartments Miami, FL 4,806,972 1,680,000 4,860,251 38,815 Towers Shoppers Parcade, New Haven, CT 10,154 7,000 University Towers, New Haven, CT 233,791 Cooperative Apartment Shares: 330 W.72nd St., New York, NY 20,891 28,013 6300 Riverdale Ave., Riverdale, NY 10,164 66,032 1,986 Broad Park Lodge, White Plains, NY 1,203 8,797 Sherwood House, Long Beach, NY 7,316 51,930 (42,926)(2) Towne House, New Rochelle, NY 61,051 343,286 169,459 University Towers, New Haven, CT 1,375 54,735 1,374 ---------- ---------- ----------- ---------- TOTAL $39,379,458 $5,446,548 $24,146,362 $6,054,723 ========== ========== =========== ==========
GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF YEAR ------------------------------------ BUILDING AND ACCUMULATED PROPERTIES LAND IMPROVEMENTS TOTAL DEPRECIATION ---------- ---- ------------ ----- ------------ Office and Commercial except where otherwise indicated: Building Industries Center, White Plains, NY $61,328 $1,080,425 $1,141,753 $921,449 *Cambridge Green, Council Bluffs, IA 200,000 3,362,960 3,562,960 745,522 *Continental Gardens, Miami, FL 2,448,000 7,805,857 10,253,857 1,118,087 *Crown Court, New Haven, CT 168,000 3,135,926 3,303,926 2,569,233 *Fairlawn Gardens Martinsburg, WV 71,408 1,859,541 1,930,949 129,729 Home Mortgage Plaza, Hato Rey, Puerto Rico 636,712 6,942,455 7,579,167 2,371,294 Mapletree Industrial Center, Palmer, MA 79,100 191,378 270,478 27,707 *Sunwood Apartments Miami, FL 1,680,000 4,899,066 6,579,066 222,743 Towers Shoppers Parcade, New Haven, CT 7,000 7,000 7,000 University Towers, New Haven, CT 233,791 233,791 63,478 Cooperative Apartment Shares: 330 W.72nd St., New York, NY 20,891 28,013 48,904 2,667 6300 Riverdale Ave., Riverdale, NY 10,164 68,018 78,182 6,341 Broad Park Lodge, White Plains, NY 1,203 8,797 10,000 837 Sherwood House, Long Beach, NY 1,788 14,532 16,320 1,365 Towne House, New Rochelle, NY 81,204 492,592 573,796 40,033 University Towers, New Haven, CT 1,375 56,109 57,484 3,995 ---------- ----------- ----------- ---------- TOTAL $5,461,173 $30,186,460 $35,647,633 $8,231,480 ========== =========== =========== ==========
YEARS ON WHICH DE- PRECIATION IN LATEST INCOME STATE- DATE OF DATE MENT IS PROPERTIES CONSTRUCTION ACQUIRED COMPUTED ---------- ------------ -------- -------- Office and Commercial except where otherwise indicated: Building Industries Center, White Plains, NY 1956 1966 25 *Cambridge Green, Council Bluffs, IA 1974 1992 50 *Continental Gardens, Miami, FL 1971 1994 27-1/2 *Crown Court, New Haven, CT 1973 1973 40 *Fairlawn Gardens Martinsburg, WV 1964 1996 50 Home Mortgage Plaza, Hato Rey, Puerto Rico 1966-1967 1966 40 Mapletree Industrial Center, Palmer, MA 1902-1966 1974 20 *Sunwood Apartments Miami, FL 1976 1998 30 Towers Shoppers Parcade, New Haven, CT 1962 1962 33-1/3 University Towers, New Haven, CT Cooperative Apartment Shares: 330 W.72nd St., New York, NY 1997 31 1/2 6300 Riverdale Ave., Riverdale, NY 1997 31 1/2 Broad Park Lodge, White Plains, NY 1995 31 1/2 Sherwood House, Long Beach, NY 1997 31 1/2 Towne House, New Rochelle, NY 1997 31 1/2 University Towers, New Haven, CT 1997 31 1/2
* Apartments (1) Includes furniture and equipment of $277,255. (2) Includes sales of cooperative apartments in 1998 and 1999. 85 86 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999 SCHEDULE III (CONCLUDED) (3) The aggregate cost of real estate for Federal income tax purposes is $34,710,056 at December 31, 1999. (4) The reconciliations of the total cost of real estate at the beginning of each year with the total cost at the end of each year are as follows:
YEAR ENDED DECEMBER 31, 1999 1998 1997 ---- ---- ---- Balance at the beginning of year $34,703,657 $27,690,535 $25,369,405 Additions during the year: Acquisitions through foreclosure 44,284 11,569 101,875 Additions and improvements 917,365 7,036,611 1,643,877 Reclassed from foreclosed properties 588,683 ----------- ----------- ----------- 35,665,306 34,738,715 27,703,840 Deductions during the year: Dispositions 17,673 35,058 13,305 ----------- ----------- ----------- Balance at end of year $35,647,633 $34,703,657 $27,690,535 =========== =========== ===========
(5) The reconciliations of the accumulated depreciation at the beginning of each year with the total shown at the end of each year are as follows:
YEAR ENDED DECEMBER 31, 1999 1998 1997 ---- ---- ---- Balance at the beginning of year $7,231,639 $6,404,797 $5,680,108 Additions during the year: Depreciation charged to income 1,008,051 827,786 737,994 ---------- ---------- ---------- 8,239,690 7,232,583 6,418,102 Deductions during the year: Dispositions and replacements 8,210 944 13,305 ---------- ---------- ---------- Balance at end of year $8,231,480 $7,231,639 $6,404,797 ========== ========== ==========
86 87 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 1999 SCHEDULE IV
PERIODIC INTEREST MATURITY PAYMENT PRIOR FACE AMOUNT DESCRIPTION RATE DATE TERMS MORTGAGES OF MORTGAGE First Mortgages: Apartment buildings: Greece, NY 7.90-8.50% 2006 (2) (3) $6,000,000 Hartford, CT 10.00-10.25% 2005 (4) (4) 1,502,012 Sold Co-op Apartments: Bronx, NY (2 notes) 9.00% 2003 (5) 35,271 Flushing, NY (8 notes) 7.00-9.50% 2002-2008 (5)(6) 206,116 Long Beach, NY (2 notes) 9.00-9.50% 2002-2010 (5)(6) 22,165 New Rochelle, NY (19 notes) 7.75-9.50% 2002-2010 (5)(6) 536,592 New York, NY (3 notes) 8.00-8.75% 2003-2016 (5)(6) 187,825 Riverdale, NY (3 notes) 7.50-8.25% 2003 (6) 18,965 Rye, NY (2 notes) 8.00-11.00% 2009-2010 (6) 84,089 ----------- ----------- Total First Mortgage Loans 8,593,035 ----------- ----------- Junior Mortgages: Apartment buildings: Alexandria, VA 8.25-9.25% 2007 (7) (3) $20,072,419 1,175,500 Bronx, NY 5.16-11.16% 2002-2005 (8) (3) 3,450,000 2,313,262 Atlantic City, NJ ) 9.625-10.50% 2009 (9) (3) 6,745,566 4,000,000 Bergenfield, NJ ) 9,001,182 South Bound Brook, NJ ) 3,296,772 Des Moines, IA 12.00% 2001 (3) 100,000 New York, NY 10.00-11.50% 2002 (10) (3) 50,000,000 12,300,000 ----------- ----------- Total Junior Mortgage Loans 92,565,939 19,888,762 ----------- ----------- Total Mortgage Loans $92,565,939 $28,481,797 =========== ===========
CARRYING PRINCIPAL AMT. OF LOANS AMOUNT OF SUBJECT TO DELINQUENT DESCRIPTION MORTGAGE (1) PRINCIPAL OR INTEREST First Mortgages: Apartment buildings: Greece, NY $3,008,150 Hartford, CT 1,382,467 Sold Co-op Apartments: Bronx, NY (2 notes) 35,271 Flushing, NY (8 notes) 199,700 Long Beach, NY (2 notes) 21,119 New Rochelle, NY (19 notes) 493,492 New York, NY (3 notes) 129,774 Riverdale, NY (3 notes) 18,868 Rye, NY (2 notes) 84,089 ----------- ---------------- Total First Mortgage Loans 5,372,930 ----------- ---------------- Junior Mortgages: Apartment buildings: Alexandria, VA 229,301 Bronx, NY 1,755,012 Atlantic City, NJ ) 2,557,999 Bergenfield, NJ ) South Bound Brook, NJ ) Des Moines, IA 100,000 New York, NY 5,308,460 ----------- ---------------- Total Junior Mortgage Loans 9,950,772 ----------- ---------------- Total Mortgage Loans $15,323,702 =========== ================
87 88 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 1999 SCHEDULE IV (CONCLUDED)
Year Ended Year Ended Year Ended December 31, 1999 December 31, 1998 December 31, 1997 ----------------- ----------------- ----------------- Balance at beginning of year $30,481,189 $30,036,785 $27,558,691 Additions during the year: New mortgage loans $60,000 $3,011,698 Less: Discounts on additions ---------- --------- ---------- Net addition to carrying amount 60,000 3,011,698 Deductions during the year: Reclass of loan foreclosed 39,858 11,569 45,765 Collections of principal 2,062,203 768,587 2,398,668 Collections on notes sold 21,775,000 Write-off balance of notes sold 8,670,424 Less: Amortization of discounts 688,007 1,083,917 1,357,681 Discount recognized as gain on sale 3,045,411 Write-off of discounts on notes sold 6,075,210 Deferred gains recognized 7,581,370 80,643 553,148 ---------- --------- ---------- Net reduction of carrying amount 15,157,487 (384,404) 533,604 ------------ ------------ ------------ Balance at end of year $15,323,702 $30,481,189 $30,036,785 ============ ============ ============
(1) Carrying value is net of discounts and deferred gains. The aggregate net carrying value of this portfolio for tax purposes at December 31, 1999, is $7,067,030. (2) Interest was paid on this note at the rate of 6% per annum through July 31, 1999 and is 7.90% per annum through July 31, 2001. Thereafter interest will be at a rate equal to 150 basis points in excess of the yield on specified Treasury bills. In connection with the modification of the note in 1994, the borrower paid a $628,863 fee in order to increase the effective interest rate on the note to 8.5% per annum through July 31, 1999. In September, 1997 the Company extended the maturity date of the note to July 31, 2006 and the Company and the debtor agreed to substitute Newcastle Apartments in Greece, New York for Presidential Park Apartments in Columbus, Ohio as security for this note. (3) Entire principal due at Final Maturity Date. (4) In January, 1997, the maturity dates of these loans were extended to 2005. As a result of the sale of the property and the assumption of the notes by the purchaser in 1998, the interest rate on the notes was increased from 9% to 10% through 2001 and 10.25% thereafter. The notes are amortizing monthly, based on a 20 year term at the above rates, and have balloon payments of $1,234,813 due at maturity. (5) Principal amortization each year with a balloon payment in the year of maturity. (6) Principal amortization each year through maturity. (7) As a result of a modification of the note in July, 1997, the maturity date of this loan was changed from 2015 to 2007, with interest rates of 8.25% through 1999 and 9.25% thereafter. In addition, the Company and the debtor agreed to substitute Windsor at Arbors in Alexandria, Virginia for Woodgate Apartments in Wichita, Kansas, as security for this note. (8) As provided by the terms of the $2,244,000 note, the maturity date of this note was extended from November 29, 1999 to November 29, 2005. In addition, annual interest rates will increase by 1% per year, from 6.16% per annum at November 30, 1999 to 11.16% per annum at November 30, 2004. The $69,262 smaller portion of the note matures on December 31, 2002 and the interest rate is 9% per annum. (9) The Fairfield Towers Second Mortgage was modified in February, 1999, when the Company sold the Fairfield Towers First Mortgage and substantially all of the Fairfield Towers Second Mortgage. The modification provides for an interest rate of 9.625% per annum through February 17, 2002 and an interest rate of 10.50% per annum thereafter. The note matures on February 18, 2009. To secure this obligation, Presidential obtained subordinate security interests in three apartment properties located in New Jersey. (10) In June, 1999, the New Haven, Connecticut wraparound mortgage notes were modified. The Company repaid the $2,300,000 first mortgage debt on these properties (wrap mortgage debt on sold properties), received a $1,000,000 principal repayment and consolidated the $12,300,000 outstanding principal balance of the mortgage notes into one consolidated note. The modified note provides for an interest rate of 10% per annum, with a 1/2 percent annual rate increase and additional interest of $369,000 due at maturity, which will increase the effective interest rate on the note to 11.50% per annum through maturity. The modified note matures on June 29, 2002, and is secured by a second mortgage on the Encore Apartments and commercial space located in New York, New York and by a limited guarantee of $2,500,000 from one of the owners of the property. 88 EX-10.10 2 FIRST & SECOND AMENDMENTS TO DEFINED BENEFIT PLAN 1 AMENDMENT NUMBER ONE TO PRESIDENTIAL REALTY CORPORATION DEFINED BENEFIT PLAN BY THIS AGREEMENT, Presidential Realty Corporation Defined Benefit Plan (herein referred to as the "Plan") is hereby amended as follows, effective as of January 1, 1995, except as otherwise provided: 1. The definition of "Actuarial Equivalent" is amended, effective with the later of the adoption date or the effective date of this amendment, by the addition of the following paragraphs: Notwithstanding the foregoing, the mortality table and the interest rate for the purposes of determining an Actuarial Equivalent amount (other than nondecreasing life annuities payable for a period not less than the life of a Participant or, in the case of a Pre-Retirement Survivor Annuity, the life of the surviving spouse) shall be the "Applicable Mortality Table" and the "Applicable Interest Rate" described below. However, if prior to the first day of the Plan Year beginning after the later of the adoption date or the effective date of this amendment, the Plan used an interest rate other than the Pension Benefit Guaranty Corporation interest rate (or an interest rate or rates based on the Pension Benefit Guaranty Corporation interest rate) in determining the present value of a Participant's Accrued Benefit, the mortality table and the interest rate for the purposes of determining an Actuarial Equivalent amount (other than nondecreasing life annuities payable for a period not less than the life a Participant or, in the case of a Pre-Retirement Survivor Annuity, the life of the surviving spouse) shall be the mortality table and the interest rate specified above or the "Applicable Mortality Table" and the "Applicable Interest Rate" described below, whichever produces the greater benefit: (a) The "Applicable Mortality Table" means the table prescribed by the Secretary of the Treasury. Such table shall be based on the prevailing commissioner's standard table (described in Code Section 807(d)(5)(A)) used to determine reserves for group annuity contracts issued on the date as of which present value is being determined (without regard to any other subparagraph of Code Section 807(d)(5)). (b) The "Applicable Interest Rate" means the annual rate of interest on 30-year Treasury securities determined as of the first calendar month preceding the first day of the Plan Year 89 2 during which the "annuity starting date" occurs. However, except as provided in Regulations, if a Plan amendment (including this amendment) changes the time for determining the interest rate assumption (including an indirect change as a result of a change in the Plan Year), any distribution for which the "annuity starting date" occurs in the one-year period commencing at the time the Plan amendment is effective (if the amendment is effective on or after the adoption date) must use the interest rate as provided under the terms of the Plan after the effective date of the amendment, determined at either the date for determining the interest rate before the amendment or the date for determining the interest rate after the amendment, whichever results in the larger distribution. If the Plan amendment is adopted retroactively (that is, the amendment is effective prior to the adoption date), the Plan must use the interest rate determination date resulting in the larger distribution for the period beginning with the effective date and ending one year after the adoption date. In the case of a distribution (other than nondecreasing life annuities payable for a period not less than the life of a Participant or, in the case of a Pre-Retirement Survivor Annuity, the life of the surviving spouse) that was made in a Plan Year beginning after December 31, 1994, and before the later of the adoption date or the effective date of this amendment, the calculation shall be made by using the interest rate determined under the regulations of the Pension Benefit Guaranty Corporation for determining the present value of a lump sum distribution on plan termination that were in effect on September 1, 1993, and using the provisions of the Plan as in effect on the day before December 8, 1994; but only if such provisions of the Plan met the requirements of Code Section 417(e)(3) as in effect on the day before December 8, 1994. 2. Section 5.6(a) is amended as follows: (a) Payment to a Former Participant of the Vested portion of his Accrued Benefit, unless he otherwise elects, shall begin not later than the 60th day after the close of the Plan Year in which the latest of the following events occurs: (1) the date on which the Participant attains the earlier of age 65 or the Normal Retirement Age specified herein; (2) the 10th anniversary of the year in which the Participant commenced participation in the Plan; or (3) the date the Participant terminates his service with the Employer. However, the Administrator shall direct at the Participant's request, the earlier payment of the entire Vested portion of the Present Value of Accrued Benefit, but only if it 3 does not exceed $3,500 and has never exceeded $3,500 at the time of any prior distribution. 3. Section 6.3(a) is amended, effective with the first "limitation year" beginning after December 31, 1994, by the deletion of the last sentence and the addition of the following sentences: In order to determine actuarial equivalence for this purpose, the lesser of the equivalent amount computed using the Plan interest rate and mortality table and the amount computed using five percent (5%) interest and the "Applicable Mortality Table" shall be used. However, if the "annual benefit" is paid in a form other than a nondecreasing life annuity payable for a period not less than the life of a Participant or, in the case of a Pre-Retirement Survivor Annuity, the life of the surviving spouse, the actuarial equivalence shall be determined by substituting the "Applicable Interest Rate" for five percent (5%) in the preceding sentence. 4. Section 6.3 is amended, effective with the first "limitation year" beginning after December 31, 1994, by the addition of the following subsection: For purposes of adjusting the "annual benefit" to a straight life annuity, the equivalent "annual benefit" shall be the greater of the equivalent "annual benefit" computed using the Plan interest rate and mortality table and the equivalent "annual benefit" computed using five percent (5%) interest rate assumption and the "Applicable Mortality Table." However, if the "annual benefit" is paid in a form other than a nondecreasing life annuity payable for a period not less than the life of a Participant or, in the case of a Pre-Retirement Survivor Annuity, the life of the surviving spouse, the "Applicable Interest Rate" shall be substituted for five percent (5%) in the preceding sentence. 5. Section 6.6(c)(4) is amended, effective with the first "limitation year" beginning after December 31, 1994, to read as follows: If, as a result of a reasonable error in estimating a Participant's Compensation or other facts and circumstances to which Regulation 1.415-6(b)(6) shall be applicable, voluntary employee contributions for the "limitation year" would cause the "annual additions" credited to a "participant's account" to exceed that lesser of (A) $30,000 adjusted annually as provided in Code Section 415(d) pursuant to the Regulations, or (B) twenty-five percent (25%) of the Participant's "415 Compensation" for Regulation 1.415-6(b)(6)(iv), return such 4 voluntary employee contributions and distribute any gains attributable to such voluntary employee contributions to the Participant to the extent necessary so that "annual additions" for the "limitation year" do not exceed the lesser of (A) or (B). 6. Section 6.7 is amended, effective with the first "limitation year" beginning after December 31, 1994, by the addition of the following paragraph: A Participant's Accrued Benefit shall not be reduced Below his Accrued Benefit as of the last day of the last Plan Year beginning before January 1, 1995 (freeze date), merely because his Accrued Benefit is determined solely in accordance with changes made to Code Section 415(b)(2)(E) by the Retirement Protection Act of 1994, which is part of the Uruguay Round Agreements Act of 1994. Accordingly, a Participant's Accrued Benefit shall be equal to the greater of (1) the Participant's benefit under the terms of the Plan, for the "annuity starting date" and optional form and taking into account the limitations of Code Section 415 as amended, and (2) the Participant's protected Accrued Benefit as of the freeze date. However, the protected Accrued Benefit may be reduced if the Plan interest rate is changed to comply with Code Section 417(e). IN WITNESS WHEREOF, this Amendment has been executed this 11th day of December, 1995. Signed, sealed, and delivered in the presence of: Presidential Realty Corporation By Jeffrey F. Joseph ------------------------------- EMPLOYER ATTEST Roslyn Lacativa --------------------------- Robert Feder ---------------------------------- TRUSTEE Thomas Viertel ---------------------------------- TRUSTEE 5 SECOND AMENDMENT TO THE PRESIDENTIAL REALTY CORPORATION DEFINED BENEFIT PLAN WHEREAS, Presidential Realty Corporation (the "Employer"), has previously adopted the Presidential Realty Corporation Defined Benefit Plan (the "Plan"); and WHEREAS, the Employer desires to amend the Plan; and NOW, THEREFORE, effective January 1, 2000, the Plan is hereby amended to read as follows: 1. Section 1.1 of the Plan shall be amended by adding the following paragraph at the end thereof: "The Accrued Benefit of a Participant who is a Participant in the Plan as of December 31, 1999 shall not be less than the Accrued Benefit as determined under the terms of the Plan as in effect on December 31, 1999." 2. Section 5.1, paragraph (a) of the Plan shall be amended by inserting the following paragraph after the first paragraph thereof: "Notwithstanding the foregoing, effective January 1, 2000, and solely for Participants who are Eligible Employees on and after January 1, 2000, a Participant's Accrued Benefit is based on a retirement benefit formula equal to the sum of (1) 7.15% of such Participant's Average Monthly Compensation multiplied by the Participant's total number of Plan Years of Service (up to a maximum of 10 years), plus (2) .62% of such Average Monthly Compensation in excess of one-twelfth of Covered Compensation multiplied by the Participant's total number of Plan Years of Service (up to a maximum of 10 years), computed to the nearest dollar." 6 IN WITNESS WHEREOF, the Employer has caused this Amendment to be executed by a duly authorized officer on this 8th day of December, 1999. PRESIDENTIAL REALTY CORPORATION By: Jeffrey F. Joseph ----------------------------- Title: President ----------------------------- 7 PRESIDENTIAL REALTY CORPORATION CERTIFICATE OF SECRETARY The undersigned Secretary of Presidential Realty Corporation (the "Employer") hereby certifies that the following resolutions were duly authorized by the Board of Directors of the Employer on this 8th day of December, 1999: RESOLVED, that the Employer hereby authorizes the adoption of the Second Amendment to the Presidential Realty Corporation Defined Benefit Plan, effective January 1, 2000; and be it further RESOLVED, that the appropriate officers of the Employer are hereby authorized and directed to execute any and all documents necessary in order to effectuate the foregoing resolution. Roslyn Lacativa --------------------------------------- Secretary December 8, 1999 --------------------------------------- Date EX-10.11 3 1999 STOCK OPTION PLAN 1 PRESIDENTIAL REALTY CORPORATION 1999 STOCK OPTION PLAN EFFECTIVE JANUARY 1, 1999 1. PURPOSE The purpose of the Presidential Realty Corporation 1999 Stock Option Plan (the "Plan") is to advance the interests of Presidential Realty Corporation (the "Company") by providing stock ownership opportunities to certain key employees (including officers and directors who are employees) who contribute significantly to the performance of the Company. In addition, the Plan is intended to enhance the ability of the Company to attract and retain individuals of superior managerial ability and to motivate such key employees to exert their best efforts towards the future progress and profitability of the Company. 2. ADMINISTRATION AND INTERPRETATION (a) ADMINISTRATION. The administration and operation of the Plan shall be supervised by the Compensation Committee of the Board of Directors of the Company, or such other committee of such Board of Directors which shall succeed to the functions and responsibilities, in whole or in part, of said Compensation Committee (the "Committee"). The Committee shall consist of not less than three members of the Board of Directors of the Company (the "Board of Directors") who are not officers of the Company. No member of the Committee shall be entitled to participate in the Plan. The Committee shall have the authority, consistent with the provisions of the Plan, to determine the provisions of the Options to be granted under the Plan; to determine the form of any such Option; to interpret the Plan and any Option granted under the Plan; to adopt, amend and rescind rules and regulations for the administration of the Plan and the Options granted under the Plan; and to make all determinations in connection therewith which may be necessary or advisable. The day-to-day administration of the Plan shall be carried out by such officers and employees of the Company as shall be designated from time to time by the Committee. 90 2 (b) INTERPRETATION. The interpretation and construction by the Committee of any provisions of the Plan or of any Option granted under the Plan and any determination by the Committee under any provision of the plan or any such Option shall be final and conclusive, unless otherwise determined by the Board of Directors, in which event the determination of the Board of Directors shall be final and conclusive. (c) LIMITATION ON LIABILITY. Neither the Board of Directors nor the Committee, nor any member of either, shall be liable for any act, omission, interpretation, construction or determination made in connection with the Plan in good faith, and the members of the Committee shall be entitled to indemnification and reimbursement by the Company in respect to any claim, loss, damage or expense (including counsel fees) arising therefrom to the full extent permitted by law and under any directors and officers liability insurance coverage which may be in effect from time to time. 3. SHARES SUBJECT TO OPTIONS UNDER THE PLAN (a) LIMITATION ON NUMBER OF SHARES. The shares subject to Options under the Plan ("Option Shares") shall be shares of the Company's authorized but unissued Class B common stock, par value $.10 per share ("Common Stock"). The aggregate number of Option Shares as to which options may be granted under and issued pursuant to the Plan shall not exceed 150,000. If any outstanding Option expires or terminates unexercised or is terminated for any reason prior to December 31, 2003, the shares allocable to the unexercised or terminated portion of such Option may again be made the subject of grants under the Plan. (b) ADJUSTMENTS OF AGGREGATE NUMBER OF SHARES. The aggregate number of shares stated in Section 3(a) shall be subject to appropriate adjustment, from time to time, in accordance with the provisions of Section 4(c) hereof. In the event of a change in the designation thereof to "Capital Stock" or other similar designation, or to a change in the par value thereof, without increase or decrease in the number of issued shares, the shares resulting from any such change shall be deemed to be Common Stock within the meaning of the Plan. 3 4. STOCK OPTIONS (a) ELIGIBILITY. The individuals who shall be eligible to receive Options under the Plan shall be such key employees (including officers and directors who are employees) of the Company as the Board of Directors and the Committee from time to time shall determine as provided below. (b) GRANTS OF OPTIONS (1) IN GENERAL. Options granted under the Plan shall be Non-qualified Stock Options (as defined below). Options granted under the Plan shall be for such number of Option Shares (subject to the limitation contained in Section 3) as the Board of Directors and the Committee shall designate. The Committee, at any time and from time to time before December 31, 2003, may authorize the granting of Options to any individual eligible to receive the same; provided, however, that Options to be granted to a senior executive officer of the Company, as determined by the Board of Directors, and the aggregate number of Options to be granted on a given date to all other eligible employees, shall be approved by the Board of Directors. (2) NON-QUALIFIED STOCK OPTIONS. The term "Non-qualified Stock Option" shall mean an Option which is not intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended. (c) TERMS OF OPTIONS. Options granted pursuant to this Plan shall be evidenced by agreements ("Stock Option Agreements"). Stock Option Agreements shall comply with and be subject to the following terms and conditions and may contain such other provisions, consistent with the terms of this Plan, as the Committee or the Board of Directors shall deem advisable: (1) MEDIUM OF PAYMENT. Upon exercise of an Option, the option price shall be payable to the Company (i) in United States dollars in cash or by certified check, bank draft or money order payable to the order of the Company (or such other forms of payment as the Committee may determine to be acceptable) or (ii) by tendering to the Company for purchase and cancellation shares of Common Stock owned by the optionee having an aggregate Market Value Per Share as of the date of exercise which is not greater than the option price and by paying the 4 remainder of the option price as provided in (i) above. Payment instruments will be received subject to collection. (2) NUMBER OF SHARES. Each Stock Option Agreement shall state the total number of Option Shares which are subject to the Option. (3) OPTION PRICE. The option price for each Option Share shall not be less than the "Closing Price Per Share" on the date of the granting of the Option. (4) CLOSING PRICE. The Closing Price Per Share as of any particular date shall be the closing price on such date for the Common Stock (or if there are no trades on such date, the closing price prior to such date), on the American Stock Exchange if the Common Stock is then listed thereon, or if such stock it not then listed on the American Stock Exchange, on the principal securities market on which it is traded. (5) TERM. The term of each Option shall be determined by the Committee at the date of grant; provided, however, that each Option shall expire not more than six years from the date the Option is granted. (6) DATE OF EXERCISE. Each Stock Option Agreement shall state that the Option granted therein may not be exercised in whole or in part for any period or periods of time specified in such agreement or otherwise as specified by the Committee. Except as may be so specified, any Option may be exercised in whole at any time or in part from time to time during its term. (7) TERMINATION OF EMPLOYMENT. In the event that an optionee's employment by the Company shall terminate, the optionee's Options shall terminate immediately, except as hereinafter provided in this subsection. The Committee, in its sole discretion, may determine that the optionee's Options, to the extent exercisable immediately prior to such termination of employment, may remain exercisable for a designated period of time not to exceed 90 days after such termination of employment. If any termination of employment is due to retirement with the consent of the Company, the optionee shall have the right, subject to the provisions of subsections (5) and (6) above, to exercise his Option at any time within the thirty-six month period after such retirement to the extent that the optionee was 5 entitled to exercise the same immediately prior to retirement. Whether any termination of employment is to be considered a retirement with the consent of the Company and whether an authorized leave of absence or absence on military or government service or for other reasons shall constitute a termination of employment for the purpose of the Plan shall be determined by the Committee. If an optionee shall die while entitled to exercise an Option, the optionee's estate, personal representative, or beneficiary, as the case may be, shall have the right, subject to the provisions of subsections (5) and (6) above, to exercise the Option at any time within thirty-six months from the date of the optionee's death (but in no event more than thirty-six months from the date of the optionee's retirement with the consent of the Company), to the extent that the optionee was entitled to exercise the same immediately prior to the optionee's death. (8) RECAPITALIZATION. The aggregate number of shares stated in Section 3(a), the number of Option Shares to which each outstanding Option relates, and the option price in respect of each such Option shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a subdivision or consolidation of shares or other capital adjustments, or the payment of a stock dividend or other increase or decrease in such shares, effected without receipt of consideration by the Company or a Subsidiary; provided, however, that any fractional shares resulting from any such adjustment shall be eliminated. (9) MERGER OR CONSOLIDATION. After a merger of one or more corporations in the Company, or after a consolidation of the surviving or resulting corporation, an optionee shall, at the same cost, be entitled upon the exercise of an Option, to receive (subject to any required action by stockholders) such securities of the surviving or resulting corporation as the board of directors of such corporation, in its sole discretion and without liability to any person, shall determine to be equivalent, as nearly as practicable, to the nearest whole number and class of shares of stock or other securities to the Option Shares which were then subject to such Option, and such shares of stock or other securities shall, after such merger or consolidation, be deemed to be Option Shares for all purposes of the Plan and of the Options granted under the Plan; provided, however, that anything herein contained to the contrary notwith- standing, upon the dissolution or liquidation of the Company, or 6 a merger or consolidation in which the Company is not the surviving or resulting corporation, every Option outstanding hereunder shall terminate, except to the extent that the surviving or resulting corporation may, in its absolute and uncontrolled discretion, issue substituted options. (10) OPTIONEE'S AGREEMENT. If, at the time of the exercise of any Option, in the opinion of counsel for the Company, it is necessary or desirable, in order to comply with any then applicable laws or regulations relating to the sale of securities, that the optionee exercising the Option shall agree to hold any Option Shares issued to the optionee for investment and without any present intention to resell or distribute the same and that the optionee will dispose of such shares only in compliance with such laws and regulations, the optionee will, upon the request of the Company, execute and deliver to the Company a further agreement to such effect. Each optionee understands that the Common Stock to be issued upon the exercise of any Option will not be registered under the Securities Act of 1933 and must be held indefinitely unless they are specifically registered under the Securities Act of 1933 or an exemption from such registration is available (including an exemption according to the provisions of Rule 144). Optionee further acknowledges that any sales of Shares made in reliance upon Rule 144 can be made only in limited amounts in accordance with the terms and conditions of that Rule and that other exemptions from registration are extremely limited and may not be available at such time as optionee may wish to sell said Shares. Optionee further understands that no Shares may be issued pursuant to the Option until such Shares are listed on the American Stock Exchange. (d) EFFECT OF EXERCISE OF OPTIONS. The right of an optionee to exercise an Option shall terminate to the extent that such Option is exercised. (e) APPLICATION OF FUNDS. The proceeds received by the Company from the sale of Option Shares pursuant to Options will be used for general corporate purposes. 5. WITHHOLDING FOR TAXES Any distribution of shares of Common Stock under the Plan shall not be made until appropriate arrangements have been made for the payment of any amounts which may be required to be withheld or paid with respect thereto under all present or future federal, state and local tax laws and regulations which 7 may be effective as of the date of each such distribution, including, but not limited to, withholding the distribution of a portion of the shares of Common Stock otherwise issuable or the tendering of such shares back to the Company (under such rules and conditions as may be established by the Committee) in order to satisfy all or a portion of the required withholdings or payments. 6. AMENDMENT AND TERMINATION The Board of Directors may from time to time and at any time alter, amend, suspend, discontinue or terminate this Plan and any Options granted hereunder. 7. PREEMPTION BY APPLICABLE LAWS AND REGULATIONS Anything in the Plan or any Stock Option Agreement entered into pursuant to the Plan to the contrary notwithstanding, if, at any time specified herein or therein for the making of any determination or the issue or other distribution of shares of Common Stock, any law, regulation or requirement of any governmental authority having jurisdiction in the premises shall require either the Company or the employee (or the employee's beneficiary thereof) to take any action in connection with any such determination or the shares then to be issued or distributed, the issue or distribution of such shares shall be deferred until such action shall have been taken. 8. MISCELLANEOUS (a) NO EMPLOYMENT CONTRACT. Nothing contained in the Plan shall be construed as conferring upon an employee the right to continue in the employ of the Company. (b) NO RIGHTS AS A STOCKHOLDER. An employee shall have no rights as a stockholder with respect to Option Shares covered by the employee's Option until the date of the issuance of such shares to the employee and only after such shares are fully paid. No adjustment will be made for dividends or other distributions or rights for which the record date is prior to the date of such issuance. (c) NO RIGHT TO CORPORATE ASSETS. Nothing contained in the Plan shall be construed as giving an employee, the employee's beneficiaries or any other person any equity or interest of any kind in any assets of the Company or creating a 8 trust of any kind or a fiduciary relationship of any kind between the Company and any such person. (d) NO RESTRICTION ON CORPORATE ACTION. Nothing contained in the Plan shall be construed to prevent the Company from taking any corporate action which is deemed by the Company to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Option granted under the Plan. No employee, beneficiary or other person shall have any claim against the Company as a result of any such action. (e) NON-ASSIGNABILITY. Neither an employee nor an employee's beneficiary shall have the power or right to sell, exchange, pledge, transfer, assign or otherwise encumber or dispose of such employee's or beneficiary's interest in the Plan or in any Option received under the Plan; nor shall such interest be subject to seizure for the payment of an employee's or beneficiary's debts, judgments, alimony, or separate maintenance or be transferable by operation of law in the event of an employee's or beneficiary's bankruptcy or insolvency. The Company's obligations under the Plan are not assignable or transferable except to a corporation which acquires all or substantially all of the assets of the Company or to any corporation into which the Company may be merged or consolidated. (f) OTHER BENEFIT PLANS. No Option or payment under the Plan shall be taken into account in determining any benefits under any retirement, profit-sharing or other plan maintained by the Company. (g) GOVERNING LAW; CONSTRUCTION. All rights and obligations under the Plan shall be governed by, and the Plan shall be construed in accordance with, the laws of the State of New York. Titles and headings to Sections herein are for purposes of reference only, and shall in no way limit, define or otherwise affect the meaning or interpretation of any provisions of the Plan. EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 LIST OF SUBSIDIARIES OF PRESIDENTIAL REALTY CORPORATION DATED DECEMBER 31, 1999 (1) PDL, Inc. organized under the laws of the State of Delaware, which carries on business under its own name. (2) Presidential Realty of Iowa, Incorporated, organized under the laws of the State of Iowa, which carries on business under its own name. (3) Presidential Continental Gardens Corp., organized under the laws of the State of Florida, which carries on business under its own name. (4) Fairlawn Gardens Corp., organized under the laws of the State of West Virginia, which carries on business under its own name. (5) Presidential Sunwood Corp., organized under the laws of the State of Florida, which carries on business under its own name. 91 EX-27 5 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 DEC-31-1999 7,014,542 2,299,494 16,491,356 139,822 0 11,370,138 35,647,633 8,231,480 64,061,430 3,656,788 38,040,967 0 0 369,134 19,177,468 64,061,430 0 15,244,282 0 7,494,948 0 0 3,244,136 9,301,882 220,500 9,081,382 0 0 0 9,081,382 2.50 2.50
-----END PRIVACY-ENHANCED MESSAGE-----