10-K405 1 y47019e10-k405.txt 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, 2000 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 $18,589,000 at February 15, 2001. The number of shares outstanding of each of the registrant's classes of common stock on March 6, 2001 was 478,840 shares of Class A common and 3,232,098 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, 2001, 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 15 Item 3. Legal Proceedings 19 Item 4. Submission of Matters to a Vote of Security Holders 19 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 20 Item 6. Selected Financial Data 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 34 Item 8. Financial Statements and Supplementary Data 34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 34 PART III Item 10. Directors and Executive Officers of the Registrant 34 Item 11. Executive Compensation 35 Item 12. Security Ownership of Certain Beneficial Owners and Management 35 Item 13. Certain Relationships and Related Transactions 35 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 35 Table of Contents to Consolidated Financial Statements 40 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's principal assets fall into the following three general categories: (i) The largest portion of the Company's assets are equity interests in fifteen rental properties and one parcel of land. These properties have an historical cost of $63,537,365, less accumulated depreciation of $9,818,165, resulting in a net carrying value of $53,719,200. 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, 2000 as "Mortgage portfolio: sold properties". The $28,191,380 aggregate principal amount of these notes have been reduced by $1,621,104 of discounts (which reflect the difference between the stated interest rates on the notes and the market interest rates at the time the notes were accepted) and $11,224,373 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 $15,345,903 at December 31, 2000. All of the loans included in this category of assets were in good standing at December 31, 2000. While notes reflected under "Mortgage portfolio: sold properties" consist primarily of notes received from sales of real properties previously owned by the Company, this 3 4 category of assets also includes notes in the aggregate principal amount of $970,202 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 $1,447,959 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, 2000 as "Mortgage portfolio: related parties". The principal amounts of these notes have been reduced by discounts and valuation reserves of $114,794 and deferred gains of $884,355 and, accordingly, these notes have a net carrying value at December 31, 2000 of $448,810. 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, 2000, all of the loans due from related parties were in good standing. See Relationship with Ivy Properties, Ltd., and Notes 3 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 2000 were $.64 per share. 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 4 5 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, 2000, 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. 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, in 2000 the Company acquired a 224 unit apartment property in Clearwater, Florida and a 320 unit apartment property in Tucker, Georgia, a suburb of Atlanta. 5 6 (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 and may make additional loans secured by interests in real property. See the table set forth below under Loans and Investments. 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. 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 connection with all of the circumstances existing at the time the gain is recognized. However, in 1999 the Company elected to retain $.17 per share of long-term capital gains that the Company had received in 1999 and subsequently paid a capital gains tax of $.06 per share. 6 7 (iii) 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 following tables set forth information as of December 31, 2000 with respect to the mortgage loan portfolio resulting from the sale of properties and the loan portfolio due from Ivy. 7 8 MORTGAGE PORTFOLIO: NOTES RECEIVABLE - SOLD PROPERTIES DECEMBER 31, 2000
Net Interest Note Deferred Carrying Maturity Rate Name of Property Receivable Discount Gain Value Date 2000 ---------------- ---------- -------- -------- -------- -------- -------- Chelsea Village Apartments (1) $4,000,000 $1,353,379 $ $2,646,621 2009 9.625% Atlantic City, NJ Liberty Gardens Bergenfield, NJ Town Oaks Apartments South Bound Brook, NJ Encore Apartments (2) 12,300,000 6,991,540 5,308,460 2002 11.50% New York, NY Mark Terrace Associates (3) 2,148,000 462,250 1,685,750 2005 6.16% Bronx, NY Mark Terrace Associates 33,262 33,262 2002 9.00% Bronx, NY Newcastle Apartments (4) 6,000,000 2,991,850 3,008,150 2006 7.90% Greece, NY Pinewood I & II 100,000 100,000 2008 12.00% Des Moines, IA Windsor at Arbors (5) 1,175,500 255,281 684,991 235,228 2001 9.25% Alexandria, VA Woodland Village (6) 934,355 934,355 2005 10.00% Hartford, CT Woodland Village (6) 530,061 530,061 2005 10.00% Hartford, CT ---------- --------- ---------- ---------- Subtotal 27,221,178 1,608,660 11,130,631 14,481,887 ---------- --------- ---------- ----------
8 9 MORTGAGE PORTFOLIO: NOTES RECEIVABLE - SOLD PROPERTIES DECEMBER 31, 2000 (CONTINUED)
Net Interest Note Deferred Carrying Maturity Rate Name of Property Receivable Discount Gain Value Date 2000 ----------------- ---------- -------- -------- --------- -------- -------- Sold Co-op Apartments: Emily Towers (7)(8) $198,793 $644 $5,687 $192,462 2002-2008 7.00-9.50% Flushing, NY 330 W.72nd St. (7)(9) 56,753 8,434 48,319 2016 8.00-9.25% New York, NY 330 W.72nd St. Purchasers (7) 128,208 49,089 79,119 2003 8.75% New York, NY Towne House (7)(8) 451,917 2,392 38,966 410,559 2002-2010 7.75-9.50% New Rochelle, NY 6300 Riverdale Ave. (7)(8) 14,138 71 14,067 2003 7.50-8.25% Riverdale, NY Mark Terrace 34,085 34,085 2003 9.00% Bronx, NY Sherwood House (7)(10) 21,425 903 20,522 2002-2010 9.00-9.50% Long Beach, NY Rye Colony 64,883 64,883 2010 11.00% Rye, NY ----------- ---------- ----------- ----------- Subtotal 970,202 12,444 93,742 864,016 ----------- ---------- ----------- ----------- Total Notes Receivable- Sold Properties $28,191,380 $1,621,104 $11,224,373 $15,345,903 =========== ========== =========== ===========
9 10 MORTGAGE PORTFOLIO: NOTES RECEIVABLE - SOLD PROPERTIES DECEMBER 31, 2000 (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 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 initial 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) Annual interest rate on this note increases 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 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. (5) The discount on this note was computed at a yield of 12%. The note was modified in 2000, and the maturity date of the loan was changed from 2007 to 2001. The loan was paid on January 3, 2001. (6) The discounts on the Woodland Village notes were computed at a yield of 25%. 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. 10 11 MORTGAGE PORTFOLIO: NOTES RECEIVABLE - RELATED PARTIES DECEMBER 31, 2000
Net Final Note Deferred Carrying Maturity Interest Name of Property Receivable Discount Gain Value Date Rate ----------- -------- --------- -------- -------- --------------- UTB End Loans (1) $130,594 $85,972 $ $44,622 Various Various Consolidated Loans (2) 24,694 24,694 2016 Chase Prime Overlook 884,355 884,355 2003 6.0% Alexandria, VA University Towers (3) 408,316 28,822 379,494 Various 11.80 to 25.33% New Haven, CT ---------- -------- -------- -------- $1,447,959 $114,794 $884,355 $448,810 ========== ======== ======== ========
(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 $85,972 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 $4,794,744. The $24,694 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 $28,822 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. 11 12 (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 12 13 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 these shares 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, 2000, interest income on these notes was $29,481. In 1999, these officers were granted options to purchase an additional 60,000 shares of Class B common stock. 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 13 14 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 permitted 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, 2000, the Consolidated Loans had an outstanding principal balance of $4,794,744 and a net carrying value of $24,694. Since, as permitted by the terms of the Consolidated Loans, substantially all 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 14 15 Presidential. During 2000, Presidential received $14,565 of principal payments and $2,940 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, 2000. 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, 2000, the Company had an ownership or leasehold interest in 1,331 apartment units (of which 544 apartment units were acquired during 2000, see Management's Discussion and Analysis of Financial Condition and Results of Operations below), 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 $53,719,200 (net of accumulated depreciation of $9,818,165). The Company has mortgage debt on the majority of these properties in the aggregate principal amount of $59,846,143, all of which is nonrecourse to Presidential with the exception of $245,278 pertaining to the mortgage on the Mapletree Industrial Center property. Included in the 1,331 apartment units owned or leased by Presidential are 56 cooperative apartment units which the Company received from Ivy (see Relationship with Ivy Properties, Ltd.). Although it may from time to time sell individual or groups of occupied apartments, Presidential intends to continue to hold these 15 16 apartments until they become vacant and may in some circumstances re-rent apartments free from rent regulations after they have become vacant. The chart below indicates the operating results of each of the properties owned by the Company at December 31, 2000 in accordance with accounting principles generally accepted in the United States of America ("GAAP") and, following that, in terms of cash flow from operations. 16 17 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES REAL ESTATE DECEMBER 31, 2000
Property Vacancy -------- Rentable Rate Mortgage Maturity Residential Space (approx.) Percent Balance Date ----------- ---------------------- ------------ ----------- -------------- APARTMENT BUILDINGS Cambridge Green, Council Bluffs, IA 201 Apt. Units 7.22% $3,130,708 October, 2029 Continental Gardens, Miami, FL 208 Apt. Units 4.90% 7,878,505 (3) August, 2007 Crown Court, New Haven, CT ( 4 ) 105 Apt. Units & 2,000 (Net Lease) 2,686,817 November, 2021 sq.ft. of comml.space Fairlawn Gardens, Martinsburg, WV 112 Apt. Units 4.06% 2,241,935 (3) April, 2008 Farrington Apartments, Clearwater, FL 224 Apt. Units 7.25% 7,866,120 (3) May, 2010 Preston Lake Apartments, Tucker, GA 320 Apt. Units 8.85% 13,938,310 (3) May, 2010 Sunwood Apartments, Miami, FL ( 5 ) 105 Apt. Units 13.15% 4,748,406 (3) September, 2008 INDIVIDUAL COOPERATIVE APARTMENTS Sherwood House, Long Beach, NY 1 Apt. Unit 0.00% 6300 Riverdale Ave., Riverdale, NY 8 Apt. Units 0.00% 330 W. 72nd St., New York, NY 3 Apt. Units 0.00% Towne House, New Rochelle, NY 42 Apt. Units 1.72% University Towers, New Haven, CT 2 Apt. Units 0.00% COMMERCIAL BUILDINGS Building Industries Center, White Plains, NY ( 6 ) 23,500 sq.ft. 0.95% Home Mortgage Plaza, Hato Rey, PR ( 7 ) 211,000 sq.ft. 0.99% 17,105,804 (3) May, 2008 Mapletree Industrial Center, Palmer, MA 385,000 sq.ft. 1.36% 245,278 June, 2011 University Towers Prof. Space, New Haven, CT ( 7 ) ( 8 ) 24,400 sq.ft. 4.04% OTHER - LAND Towers Shoppers Parcade, New Haven, CT 1/4 acre 0.00% 4,260 August, 2001 ----------- $59,846,143 ===========
Cash Flow Property Income (Deficiency) -------- Interest (Loss) from from Residential Rate Operations (1) Operations (2) ----------- --------- -------------- --------------- APARTMENT BUILDINGS Cambridge Green, Council Bluffs, IA 6.65% ($77,337) $48,550 Continental Gardens, Miami, FL 8.16% 258,739 455,578 Crown Court, New Haven, CT ( 4 ) 7.00% 89,478 74,576 Fairlawn Gardens, Martinsburg, WV 7.06% 62,956 91,785 Farrington Apartments, Clearwater, FL 8.25% (77,352) 100,810 Preston Lake Apartments, Tucker, GA 8.15% (202,135) 119,826 Sunwood Apartments, Miami, FL ( 5 ) 6.55% 30,677 150,192 INDIVIDUAL COOPERATIVE APARTMENTS Sherwood House, Long Beach, NY (5,509) (4,791) 6300 Riverdale Ave., Riverdale, NY (6,250) (4,022) 330 W. 72nd St., New York, NY 6,599 7,488 Towne House, New Rochelle, NY 59,190 80,427 University Towers, New Haven, CT (767) 1,014 COMMERCIAL BUILDINGS Building Industries Center, White Plains, NY ( 6 ) 35,201 62,998 Home Mortgage Plaza, Hato Rey, PR ( 7 ) 7.38% 224,133 263,325 Mapletree Industrial Center, Palmer, MA 9.50% 340,519 343,949 University Towers Prof. Space, New Haven, CT ( 7 ) ( 8 ) (44,772) (26,667) OTHER - LAND Towers Shoppers Parcade, New Haven, CT 9.75% 5,058 (718) -------- ---------- $698,428 $1,764,320 ======== ==========
See notes on following page. 17 18 (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) These mortgages amortize monthly with balloon payments due at maturity. (4) The Crown Court property is subject to a long-term net lease containing an option to purchase commencing in 2009. (5) The Sunwood Apartments property experienced a high vacancy rate in 2000 as a result of heavy rains which caused flood damage to approximately 35 apartments in October, 2000. Vacancy losses of approximately $52,000 were incurred while these apartments were being renovated. Renovations (which were fully covered by insurance) have been completed on all of the flood damaged apartments subsequent to December 31, 2000. (6) In May, 2000 the Company repaid the $901,689 outstanding mortgage balance on the Building Industries Center property. This amount is not included in Cash Flow (Deficiency) from Operations. (7) These results are net of minority interest share of partnership income. (8) The University Towers Professional Space property had a loss from operations of $44,772 as a result of substantial legal and professional fees incurred in 2000. See Legal Proceedings below. 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 18 19 generally insured for the benefit of the Company by reputable title insurance companies. The mortgages on the Company's properties have fixed rates of interest and the majority of the 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. A court trial was held in this matter over four days during June and August, 2000, but no decision has yet been rendered by the court. 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 a loss of approximately $45,000 from the Professional Space Lease in 2000. This loss can be attributed to approximately $204,000 of legal and professional fees which were incurred in connection with the litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 19 20 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:
Stock Prices Dividends ------------------------------------ Declared Per Class A Class B Share on --------------- ------------------- Class A and High Low High Low Class B Calendar 2000 First Quarter $6.6875 $5.625 $7.25 $5.375 $.16 Second Quarter 7.00 5.75 7.125 5.8125 .16 Third Quarter 7.125 6.06 7.00 5.00 .16 Fourth Quarter 6.38 5.50 6.63 5.13 .16 Calendar 1999 First Quarter $7.75 $6.625 $8.125 $6.625 $.16 Second Quarter 7.75 6.625 7.50 6.375 .16 Third Quarter 7.00 6.5625 7.25 6.125 .16 Fourth Quarter 6.875 5.875 6.9375 5.50 .16
(b) The number of record holders for the Company's Common Stock at December 31, 2000 was 163 for Class A and 668 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. 20 21 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ------------------------------------------------ 2000 1999 1998 (Amounts in thousands, except per common share data) Selected Data from Consolidated Statements of Operations: Revenues: Rental $ 14,585 $ 10,672 $ 9,716 Interest on mortgages 3,225 3,853 5,490 Investment and other 281 719 207 -------- -------- -------- Total $ 18,091 $ 15,244 15,413 ======== ======== ======== Income before net (loss) gain from sales of properties, notes and securities $ 1,218 $ 1,378 $ 2,017 Net (loss) gain from sales of properties, notes and securities (1) (5) 7,703 756 -------- -------- -------- Net Income $ 1,213 $ 9,081 $ 2,773 ======== ======== ======== Earnings per common share (basic and diluted): Income before net (loss) gain from sales of properties, notes and securities $ 0.33 $ 0.38 $ 0.56 Net (loss) gain from sales of properties, notes and securities 2.12 0.21 -------- -------- -------- Net Income $ 0.33 $ 2.50 $ 0.77 ======== ======== ======== Cash distributions per common share $ 0.64 $ 0.64 $ 0.63 ======== ======== ======== Weighted average number of shares outstanding 3,698 3,629 3,593 ======== ======== ========
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1997 1996 (Amounts in thousands, except per common share data) Selected Data from Consolidated Statements of Operations: Revenues: Rental $ 8,428 $ 8,451 Interest on mortgages 5,568 4,117 Investment and other 240 371 -------- -------- Total $ 14,236 $ 12,939 ======== ======== Income before net (loss) gain from sales of properties, notes and securities $ 2,135 $ 1,723 Net (loss) gain from sales of properties, notes and securities (1) 596 845 -------- -------- Net Income $ 2,731 $ 2,568 ======== ======== Earnings per common share (basic and diluted): Income before net (loss) gain from sales of properties, notes and securities $ 0.60 $ 0.49 Net (loss) gain from sales of properties, notes and securities 0.17 0.24 -------- -------- Net Income $ 0.77 $ 0.73 ======== ======== Cash distributions per common share $ 0.60 $ 0.60 ======== ======== Weighted average number of shares outstanding 3,564 3,539 ======== ========
(1) The 1999 net gain from sales of properties, notes and securities 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. 21 22 ITEM 6. SELECTED FINANCIAL DATA (CONCLUDED) --------------------------------------------
DECEMBER 31, ---------------------------------------------------------- 2000 1999 1998 -------------- -------------- --------------- (Amounts in thousands) Selected Data from Consolidated Balance Sheets: Real estate (1) $ 63,537 $ 35,648 $ 34,704 Less: accumulated depreciation 9,818 8,232 7,232 -------- -------- -------- Net real estate $ 53,719 $ 27,416 $ 27,472 ======== ======== ======== Total mortgage portfolio (2) $ 29,639 $ 30,056 $ 62,729 ======== ======== ======== Mortgage portfolio - net of discounts and deferred gains (2) $ 15,795 $ 15,857 $ 31,100 ======== ======== ======== Foreclosed properties ======== ======== ======== Securities available for sale $ 5 $ 2,299 $ 1,275 ======== ======== ======== Total assets $ 83,938 $ 64,061 $ 73,906 ======== ======== ======== Mortgage debt - includes amounts due in one year: Properties owned (1)(3) $ 59,846 $ 39,379 $ 39,728 Wrap mortgage debt on sold properties (4) 4,668 -------- -------- -------- Total $ 59,846 $ 39,379 $ 44,396 ======== ======== ======== Note payable - includes amounts due in one year (2) $ 10,395 ======== ======== ======== Stockholders' equity $ 18,716 $ 19,547 $ 12,851 ======== ======== ========
DECEMBER 31, ------------------------------------ 1997 1996 -------------- -------------- (Amounts in thousands) Selected Data from Consolidated Balance Sheets: Real estate (1) $ 27,691 $ 25,369 Less: accumulated depreciation 6,405 5,680 -------- -------- Net real estate $ 21,286 $ 19,689 ======== ======== Total mortgage portfolio (2) $ 64,101 $ 63,726 ======== ======== Mortgage portfolio - net of discounts and deferred gains (2) $ 30,684 $ 28,389 ======== ======== Foreclosed properties $ 589 ======== ======== Securities available for sale $ 227 $ 975 ======== ======== Total assets $ 60,009 $ 57,800 ======== ======== Mortgage debt - includes amounts due in one year: Properties owned (1)(3) $ 26,271 $ 26,514 Wrap mortgage debt on sold properties (4) 5,149 5,613 -------- -------- Total $ 31,420 $ 32,127 ======== ======== Note payable - includes amounts due in one year (2) $ 10,543 $ 8,643 ======== ======== Stockholders' equity $ 12,173 $ 11,438 ======== ========
(1) In March, 2000, the Company acquired Farrington Apartments and Preston Lake Apartments for an aggregate purchase price of $27,276,000 and obtained first mortgage loans in the aggregate amount of $21,900,000 on the properties. In 1998, the Company acquired Sunwood Apartments for a purchase price of $6,505,000 and obtained a $4,875,000 first mortgage loan on that property. (2) During 1999, the Company sold the Fairfield Towers First Mortgage Note and all but a $4,000,000 portion of the Fairfield Towers Second Mortgage Note, and the equity portion of the Grant House wraparound mortgage. The Company also received payments on notes as a result of modifications or prepayments. In addition, the Company repaid the bank note payable from the proceeds of the sale of the Fairfield Towers Mortgage Notes. (3) 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. (4) 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. 22 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations 2000 vs 1999 Revenue increased by $2,847,035 primarily as a result of increases in rental income, offset by decreases in all other revenue categories. Rental income increased by $3,912,557 primarily as a result of the purchase of Farrington Apartments and Preston Lake Apartments in March, 2000, which increased rental income by $3,430,630. In addition, rental income increased by $221,381 at the Home Mortgage Plaza property and by $260,546 at all other properties. Interest on mortgages-sold properties decreased by $45,291 primarily as a result of the $509,793 decrease in amortization of discounts on notes receivable. Amortization of discounts on notes receivable decreases as notes mature or are sold. These decreases were offset by increases of $464,502 in interest income primarily due to interest received on the New Haven note which was modified in 1999. Interest on wrap mortgages decreased by $528,173 as a result of the modification of the New Haven wraparound mortgage notes in 1999 and the sale of the Grant House wraparound mortgage note in 1999. As a result of these transactions, the Company no longer holds any wraparound mortgage notes. Interest on mortgages-related parties decreased by $53,646 primarily as a result of the $61,465 decrease in interest received on the Consolidated Loans. This decrease was partially offset by increases of $18,499 from the amortization of discounts on the UTB End Loans as a result of prepayments received on those loans in 2000. Investment income decreased by $405,153 primarily as a result of the sale of securities in the fourth quarter of 1999 and during 2000. Other income decreased by $33,259 primarily as a result of a $30,750 fee received in 1999 from the modification of the New Haven notes. Costs and expenses increased by $3,007,352 primarily due to increases in all categories of rental property operations. The increases were due to the acquisitions of Farrington Apartments and Preston Lake Apartments in March, 2000. These increases were partially offset by 23 24 decreases in amortization of mortgage costs, decreases in general and administrative expenses, a decrease in interest expense on note payable and other and a decrease in interest expense on wrap mortgage debt. General and administrative expenses decreased by $357,126 primarily as a result of a bad debt write-off of $378,522 in 1999. In addition, there were decreases in professional fees of $66,501, franchise tax expense of $47,851 and salary expense of $18,614. These decreases were offset by increases in executive pension plan expenses of $75,910 and employee pension plan expenses of $78,684. Interest on note payable and other decreased by $236,739 as a result of the repayment of the note payable in February, 1999. Interest on wrap mortgage debt decreased by $54,586 as a result of the repayment and sale of the wrap mortgage debts in 1999. Rental property operating expenses increased by $1,616,319. Rental property operating expenses for Farrington Apartments and Preston Lake Apartments were $1,505,350. Operating expenses increased by $176,064 at the University Towers Professional Space property as a result of increases of $176,536 in legal and professional fees incurred in connection with the litigation with University Towers Owners Corp. In addition, operating expenses at the Home Mortgage Plaza property increased by $92,700 primarily as a result of an increase of $65,172 in electric expense and a $41,580 increase in bad debts. These increases were offset by decreases of $138,998 at the Cambridge Green property. Interest on mortgages increased by $1,309,652. Mortgage interest expense for Farrington Apartments and Preston Lake Apartments was $1,401,796. These increases were partially offset by a $55,733 decrease at the Building Industries Center property as a result of the repayment of that mortgage in May of 2000. Real estate tax expense increased by $301,724. Real estate tax expense for Farrington Apartments and Preston Lake Apartments was $272,149. Real estate tax expense increased by $28,171 at the Continental Gardens property as a result of refunds for prior years' real estate taxes which were received in 1999 thereby reducing 1999 expenses below that which was expected to recur. Depreciation on real estate increased by $579,494. Depreciation expense for Farrington Apartments and Preston Lake Apartments was $522,517. Depreciation expense increased by $56,977 at all other 24 25 properties as a result of additions and improvements made to the properties. Amortization of mortgage costs decreased by $185,174 primarily as a result of the write-off in 1999 of unamortized mortgage costs of $166,756 and the $31,200 prepayment penalty fee associated with the prior mortgage on the Cambridge Green property which was refinanced in 1999. 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 2000, the net loss from sales of properties, notes and securities was $5,027 compared with a net gain of $7,703,081 in 1999: Gain (loss) from sales recognized at December 31, 2000 1999 Sales of mortgage notes: Fairfield Towers First and Second Mortgages (net of taxes of $220,500) $7,393,844 Grant House wraparound mortgage note 425,000 Deferred gains recognized upon receipt of principal payments on notes: New Haven - $1,000,000 principal payment 1,000,000 Pinewood - $317,662 principal prepayment 218,534 Mark Terrace $ 96,000 Overlook 23,988 21,714 Fairfield Towers Second Mortgage 19,466 Sales of property: Sherwood House apartment units 74,672 Broad Park Lodge apartment units 60,839 Sales of securities (185,854) (1,450,149) -------- ---------- Net gain (loss) $ (5,027) $7,703,081 ======== ==========
Balance Sheet Real estate increased by $27,899,732 as a result of the purchase of Farrington Apartments and Preston Lake Apartments in March, 2000. The capitalized costs for Farrington Apartments, a 224 unit garden apartment property in Clearwater, Florida, was $1,900,000 for land and $7,896,421 for buildings and improvements. The capitalized costs for Preston Lake Apartments, a 320 unit garden apartment property in Tucker, Georgia, was $2,240,000 for land and $15,239,465 for buildings and improvements. In addition, net additions and improvements to properties were $613,846. 25 26 Prepaid expenses and deposits in escrow increased by $256,934 primarily as a result of the purchase of Farrington Apartments and Preston Lake Apartments. Other receivables increased by $238,435 as a result of increases of $8,487 in tenants accounts receivables, increases of $127,169 in miscellaneous receivables and an increase of $102,779 in accrued interest receivable. Securities available for sale decreased by $2,294,497 as a result of the sale of $2,516,973 in marketable equity securities, primarily interest-bearing corporate preferred stocks, offset by a $222,476 increase in the fair value of securities available for sale. Cash and cash equivalents decreased by $4,854,881 primarily as a result of the cash utilized for the purchase of Farrington Apartments and Preston Lake Apartments and the repayment by the Company of the $901,689 outstanding mortgage debt on its Building Industries Center property. Other assets increased by $356,063 primarily due to increases in mortgage costs and tenant security deposits as a result of the purchase of Farrington Apartments and Preston Lake Apartments. Mortgage debt increased by $20,466,685 primarily due to the $7,900,000 mortgage on Farrington Apartments and the $14,000,000 mortgage on Preston Lake Apartments. This increase was partially offset by the $901,689 repayment of the mortgage on the Building Industries Center property. Deferred income increased by $73,492 primarily as a result of increases of $11,000 in deferred interest income, $46,385 in prepaid rents and $17,857 in deferred utility income. Other liabilities increased by $119,766 primarily as a result of increases of $122,262 in tenant security deposits. Net unrealized gain (loss) on securities available for sale decreased by $222,476 primarily as a result of the sales of securities in the first half of 2000 and an increase in the fair value of securities available for sale. 26 27 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. 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. Other income increased by $32,109 primarily as a result of a $30,750 fee received on the modification of the New Haven note. 27 28 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 were partially offset by a $70,329 decrease in operating expenses at the Home Mortgage Plaza property. 28 29 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:
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) $7,393,844 Grant House wraparound mortgage note 425,000 Deferred gains recognized upon receipt of principal payments on notes: New Haven - $1,000,000 principal payment 1,000,000 Pinewood - $317,662 principal prepayment 218,534 Overlook 21,714 $613,285
29 30
Gain (loss) from sales recognized at December 31, 1999 1998 ---- ---- (continued) Fairfield Towers Second Mortgage 19,466 69,217 Hastings Gardens 7,754 Towne House 3,672 Sales of property: Sherwood House apartment units 74,672 40,435 Sales of securities (1,450,149) 21,438 ---------- -------- Net gain $7,703,081 $755,801 ========== ========
Funds From Operations Funds from operations ("FFO") represents net income (computed in accordance with generally accepted accounting principles) ("GAAP"), excluding gains (losses) from sales of properties, notes and securities, plus depreciation and amortization on real estate. FFO is calculated in accordance with the National Association of Real Estate Investment Trusts ("NAREIT") definition. FFO does not represent cash generated from operating activities in accordance with GAAP which is disclosed in the Consolidated Statements of Cash Flows included in the financial statements and is not necessarily indicative of cash available to fund cash requirements. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Management considers FFO a supplemental measure of operating performance and along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash requirements. FFO, as calculated in accordance with the NAREIT definition, is summarized in the following table:
Year ended December 31, ------------------------------------ 2000 1999 1998 ---- ---- ---- Income before net gain (loss) from sales of properties, notes and securities $ 1,217,984 $ 1,378,301 $ 2,017,446 Depreciation and amortization on real estate 1,587,545 1,008,051 827,786 ----------- ----------- ----------- Funds From Operations $ 2,805,529 $ 2,386,352 $ 2,845,232 =========== =========== ===========
30 31
Year ended December 31, -------------------------------------- 2000 1999 1998 ---- ---- ---- Distributions paid to Shareholders $ 2,367,098 $ 2,325,046 $ 2,263,235 =========== =========== =========== FFO payout ratio 84.4% 97.4% 79.5% =========== =========== =========== Cash flows from: Operating activities $ 3,184,030 $ 3,772,326 $ 1,755,553 ============ ============ =========== Investing activities $(25,301,365) $ 17,933,561 $(6,274,418) ============ ============ =========== Financing activities $ 17,262,454 $(16,455,810) $ 5,303,618 ============ ============ ===========
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. 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. As described below under Investing Activities, in March 2000, the Company purchased two new apartment properties and utilized a substantial portion of its available funds. Except as discussed herein, management is not aware of any other trends, events, commitments or uncertainties that will have a significant effect on liquidity. 31 32 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, 2000, Presidential had $2,159,661 in available cash and cash equivalents, a decrease of $4,854,881 from the $7,014,542 at December 31, 1999. This decrease in cash and cash equivalents was due to cash used in investing activities of $25,301,365, offset by cash provided by operating activities of $3,184,030 and financing activities of $17,262,454. In January, 2001, the Company received the $1,175,500 principal payment on a note receivable that had been secured by the Windsor at Arbors property in Alexandria, Virginia. As a result, in 2001, the Company will recognize an unamortized discount of $255,281 and a deferred gain of $684,991. In February, 2001, the Company utilized substantially all of the loan repayment proceeds to make a $1,100,000 loan secured by three apartment properties located in New Jersey, which properties also secure the $4,000,000 Fairfield Towers loan, and by a personal guarantee limited to $750,000 by one of the borrower's principals. The loan requires monthly payments of interest only at the rate of 13% per annum with the entire principal balance due at maturity in February, 2009. Operating Activities Cash from operating activities includes interest on the Company's mortgage portfolio and net cash received from rental property operations, which were $3,079,724 and $2,180,893 in 2000, respectively. Net cash received from rental property operations 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. During 2000, the Company received principal payments of $431,540 on its mortgage portfolio, of which $284,709 represented prepayments, which 32 33 are sporadic and cannot be relied upon as a regular source of liquidity. In March, 2000, the Company purchased Farrington Apartments and Preston Lake Apartments for a purchase price of $9,630,950 and $17,450,000, respectively. To finance these purchases, the Company obtained first mortgage loans of $7,900,000 and $14,000,000, respectively, which are collateralized by the properties. During 2000, the Company invested $637,617 in additions and improvements to its properties. Financing Activities The Company's indebtedness at December 31, 2000, consisted of $59,846,143 of mortgage debt. The mortgage debt, which is collateralized by individual properties, is nonrecourse to the Company with the exception of the $245,278 Mapletree Industrial Center mortgage, which is collateralized 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 2000, the Company made $1,433,315 of principal payments on mortgage debt. Included in the $1,433,315 principal payments on mortgage debt was a balloon payment of $901,689 that the Company paid in May, 2000 on the mortgage on its Building Industries Center property. In connection with the purchase of Farrington Apartments and Preston Lake Apartments in March, 2000, the Company obtained first mortgage loans collateralized by the properties as follows:
Mortgage Interest Monthly Maturity Balloon Property Loan Rate Payment Date Payment Farrington Apts. $ 7,900,000 8.25% $ 59,350 5/1/2010 $ 7,106,299 Preston Lake Apts. 14,000,000 8.15 104,195 5/1/2010 12,564,077
In addition, the Company paid mortgage costs of $350,094 for the mortgages obtained for the new properties. The mortgages on the Company's properties are self-liquidating at fixed rates of interest with the exception of the following mortgages: 33 34
Outstanding Maturity Interest Balloon Property Balance Date Rate Payment Continental Gardens $ 7,878,505 Aug., 2007 8.16% $ 7,158,323 Fairlawn Gardens 2,241,935 April,2008 7.06 2,012,668 Farrington Apts. 7,866,120 May, 2010 8.25 7,106,299 Home Mtg. Plaza 17,105,804 May, 2008 7.38 15,445,099 Preston Lake Apts. 13,938,310 May, 2010 8.15 12,564,077 Sunwood Apts. 4,748,406 Sept.,2008 6.55 4,146,349
During 2000, Presidential declared and paid cash distributions of $2,367,098 to its shareholders and received proceeds from its dividend reinvestment and share purchase plan of $87,395. Environmental Matters The Company is not aware of any environmental issues at any of its properties. The presence, with or without the Company's knowledge, of hazardous substances at any of its properties could have an adverse effect on the Company's operating results and financial condition. 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, 2001, which Proxy Statement will be filed with the Securities and Exchange 34 35 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, 2001, 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, 2001, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and which is incorporated herein by reference. 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, 2001, 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, 2000. (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 35 36 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). 10.1 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). 10.2 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). 10.3 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). 10.4 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). 36 37 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 First and Second Amendments dated December 11, 1995 and December 8, 1999, respectively, to the Presidential Realty Corporation Defined Benefit Plan (incorporated herein by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 1-8594). 10.7 Employment Agreement dated January 1, 2000 between the Company and Jeffrey F. Joseph, (incorporated herein by reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2000, Commission File No. 1-8594). 10.8 Employment Agreement dated January 1, 2000 between the Company and Steven Baruch, (incorporated herein by reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2000, Commission File No. 1-8594). 10.9 Employment Agreement dated January 1, 2000 between the Company and Thomas Viertel, (incorporated herein by reference to Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2000, Commission File No. 1-8594). 10.10 1999 Stock Option Plan for 150,000 shares of Class B common stock (incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 1-8594). 21. List of Subsidiaries of Registrant dated December 31, 2000 (see page 80). 37 38 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, 2001 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, 2001 ------------------------------ Robert E. Shapiro Chairman of the Board of Directors and Director By: JEFFREY F. JOSEPH March 22, 2001 ------------------------------- Jeffrey F. Joseph President and Director By: THOMAS VIERTEL March 22, 2001 ------------------------------- Thomas Viertel Executive Vice President (Chief Financial Officer) By: ELIZABETH DELGADO March 22, 2001 ------------------------------- Elizabeth Delgado Treasurer (Principal Accounting Officer) By: RICHARD BRANDT March 22, 2001 ------------------------------- Richard Brandt Director By: MORTIMER M. CAPLIN March 22, 2001 ------------------------------- Mortimer M. Caplin Director 38 39 SIGNATURES (Continued) Signature and Title Date By: ROBERT FEDER March 22, 2001 ------------------------------- Robert Feder Director By: JOSEPH VIERTEL March 22, 2001 ------------------------------- Joseph Viertel Director 39 40 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS Page Independent Auditors' Report 41 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets - December 31, 2000 and 1999 42 Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998 44 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 45 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 46 Notes to Consolidated Financial Statements 48 CONSOLIDATED SCHEDULES: II. Valuation and Qualifying Accounts for the Years Ended December 31, 2000, 1999 and 1998 75 III. Real Estate and Accumulated Depreciation at December 31, 2000 76 IV. Mortgage Loans on Real Estate at December 31, 2000 78 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. 40 41 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, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. 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 2, 2001 41 42 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
Assets December 31, December 31, 2000 1999 Real estate (Note 2) $63,537,365 $35,647,633 Less: accumulated depreciation 9,818,165 8,231,480 ----------- ----------- Net real estate 53,719,200 27,416,153 ----------- ----------- Mortgage portfolio (Note 3): Sold properties 28,191,380 28,481,797 Related parties 1,447,959 1,574,028 ----------- ----------- Total mortgage portfolio 29,639,339 30,055,825 ----------- ----------- Less discounts: Sold properties 1,621,104 1,837,722 Related parties 114,794 132,073 ----------- ----------- Total discounts 1,735,898 1,969,795 ----------- ----------- Less deferred gains: Sold properties 11,224,373 11,320,373 Related parties 884,355 908,343 ----------- ----------- Total deferred gains 12,108,728 12,228,716 ----------- ----------- Net mortgage portfolio 15,794,713 15,857,314 ----------- ----------- Minority partners' interest (Note 4) 7,838,643 7,904,533 Prepaid expenses and deposits in escrow 1,691,013 1,434,079 Other receivables (net of valuation allowance of $181,838 in 2000 and $139,822 in 1999) 732,655 494,220 Securities available for sale (Note 5) 4,997 2,299,494 Cash and cash equivalents 2,159,661 7,014,542 Other assets 1,997,158 1,641,095 ----------- ----------- Total Assets $83,938,040 $64,061,430 =========== ===========
See notes to consolidated financial statements. 42 43 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Liabilities and Stockholders' Equity
December 31, December 31, 2000 1999 ---------------- ---------------- Liabilities: Mortgage debt (of which $624,439 in 2000 and $1,338,491 in 1999 are due within one year) (Note 6) $59,846,143 $39,379,458 Executive pension plan liability (Note 15) 1,530,148 1,479,185 Accrued liabilities 1,868,547 1,637,069 Accrued taxes payable (Note 8) 220,500 Accrued postretirement costs (Note 16) 518,334 538,398 Deferred income 120,025 46,533 Accounts payable 419,290 414,195 Other liabilities 919,256 799,490 ------------ ------------ Total Liabilities 65,221,743 44,514,828 ------------ ------------ Stockholders' Equity: Common stock; par value $.10 per share (Note 11) Class A, authorized 700,000 shares, issued 478,940 shares and at December 31, 2000, 100 shares held in treasury 47,894 47,894 Class B December 31, 2000 December 31, 1999 323,015 321,240 ----------- -------------------- ------------------ Authorized: 10,000,000 10,000,000 Issued: 3,230,148 3,212,402 Treasury: 1,850 1,258 Additional paid-in capital 2,677,126 2,573,281 Retained earnings 16,055,448 17,209,589 Accumulated other comprehensive income (loss) (Note 5) 1,402 (221,074) Treasury stock (at cost) (21,088) (16,828) Notes receivable for exercise of stock options (Notes 14 and 18) (367,500) (367,500) ------------ ------------ Total Stockholders' Equity 18,716,297 19,546,602 ------------ ------------ Total Liabilities and Stockholders' Equity $83,938,040 $64,061,430 ============ ============
See notes to consolidated financial statements. 43 44 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 2000 1999 1998 ----------- ----------- ---------- Income: Rental $14,584,793 $10,672,236 $9,716,096 Interest on mortgages - sold properties 3,028,743 3,074,034 3,773,830 Interest on wrap mortgages 528,173 1,277,474 Interest on mortgages - related parties 196,845 250,491 438,040 Investment income 243,068 648,221 168,307 Other 37,868 71,127 39,018 ----------- ------------ ------------ Total 18,091,317 15,244,282 15,412,765 ----------- ------------ ------------ Costs and Expenses: General and administrative 2,741,146 3,098,272 2,668,922 Interest on note payable and other 236,739 1,128,453 Interest on wrap mortgage debt 54,586 205,216 Amortization of loan acquisition costs 3,128 32,459 Depreciation on non-rental property 23,578 25,497 24,594 Rental property: Operating expenses 6,300,631 4,684,312 4,272,234 Interest on mortgage debt 4,262,463 2,952,811 2,648,016 Real estate taxes 1,229,068 927,344 905,781 Depreciation on real estate 1,587,545 1,008,051 827,786 Amortization of mortgage costs 88,578 273,752 192,348 Minority interest share of partnership income 640,324 601,489 489,510 ----------- ------------ ------------ Total 16,873,333 13,865,981 13,395,319 ----------- ------------ ------------ Income before net (loss) gain from sales of properties, notes and securities 1,217,984 1,378,301 2,017,446 Net (loss) gain from sales of properties, notes and securities (includes a provision for income taxes of $220,500 in 1999) (Notes 3, 5 and 8) (5,027) 7,703,081 755,801 ----------- ------------ ------------ Net Income $1,212,957 $9,081,382 $2,773,247 =========== ============ ============ Earnings per Common Share (basic and diluted) (Note 1-I): Income before net (loss) gain from sales of properties, notes and securities $0.33 $0.38 $0.56 Net (loss) gain from sales of properties, notes and securities 0.00 2.12 0.21 ----------- ------------ ------------ Net Income per Common Share $0.33 $2.50 $0.77 =========== ============ ============ Cash Distributions per Common Share (Note 12) $0.64 $0.64 $0.63 =========== ============ ============ Weighted Average Number of Shares Outstanding 3,698,471 3,629,333 3,592,543 =========== ============ ============
See notes to consolidated financial statements. 44 45 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, 1998 $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- Net unrealized gain (loss) on securities available for sale, net of reclassification adjustment (see disclosure below) (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 ($.64 per share) (2,325,046) Issuance of treasury stock (Note 13) (64,450) Purchase of treasury stock Comprehensive income: Net income 9,081,382 Other comprehensive income- Net unrealized gain (loss) on securities available for sale, net of reclassification adjustment (see disclosure below) (236,751) Comprehensive income --------- ----------- ----------- ---------- Balance at December 31, 1999 369,134 2,573,281 17,209,589 (221,074) Net proceeds from dividend reinvestment and share purchase plan 1,475 85,920 Cash distributions ($.64 per share) (2,367,098) Issuance of stock (Note 13) 300 17,925 Purchase of treasury stock Comprehensive income: Net income 1,212,957 Other comprehensive income- Net unrealized gain (loss) on securities available for sale, net of reclassification adjustment (see disclosure below) 222,476 Comprehensive income --------- ----------- ----------- ---------- Balance at December 31, 2000 $370,909 $2,677,126 $16,055,448 $1,402 ========= =========== =========== ==========
Notes Receivable Total Treasury for Exercise of Comprehensive Stockholders' Stock Stock Options Income Equity -------------- ---------------- --------------- --------------- Balance at January 1, 1998 ($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- Net unrealized gain (loss) on securities available for sale, net of reclassification adjustment (see disclosure below) (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- Net unrealized gain (loss) on securities available for sale, net of reclassification adjustment (see disclosure below) (236,751) (236,751) ----------- Comprehensive income $8,844,631 =========== --------- ---------- ----------- Balance at December 31, 1999 (16,828) (367,500) 19,546,602 Net proceeds from dividend reinvestment and share purchase plan 87,395 Cash distributions ($.64 per share) (2,367,098) Issuance of stock (Note 13) 18,225 Purchase of treasury stock (4,260) (4,260) Comprehensive income: Net income $1,212,957 1,212,957 Other comprehensive income- Net unrealized gain (loss) on securities available for sale, net of reclassification adjustment (see disclosure below) 222,476 222,476 ---------- Comprehensive income $1,435,433 ========== ---------- ----------- ----------- Balance at December 31, 2000 ($21,088) ($367,500) $18,716,297 ========== =========== ===========
Disclosure of reclassification amount: Year Ended December 31, ---------------------------------------------------------------- 2000 1999 1998 --------- -------- ------- Unrealized holding gain (loss) arising during year $ 36,622 ($1,686,900) $17,610 Add/subtract: reclassification adjustment for loss/gain included in net income 185,854 1,450,149 (21,438) --------- ------------ -------- Net unrealized gain (loss) on securities available for sale $222,476 ($236,751) ($3,828) ========= ============ ========
See notes to consolidated financial statements. 45 46 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------------------------- 2000 1999 1998 ------------- ------------- ------------- Cash Flows from Operating Activities: Cash received from rental properties $14,630,103 $10,703,186 $9,645,206 Interest received 3,079,724 3,671,309 4,447,382 Miscellaneous income 35,374 62,597 34,522 Interest paid on rental property mortgage debt (4,118,491) (2,959,551) (2,608,842) Interest paid on wrap mortgage debt (54,586) (205,216) Interest paid on note payable and other (201,863) (920,230) Cash disbursed for rental property operations (7,756,285) (4,676,761) (5,931,851) Cash disbursed for general and administrative costs (2,686,395) (2,772,005) (2,705,418) ------------ ------------- ------------ Net cash provided by operating activities 3,184,030 3,772,326 1,755,553 ------------ ------------- ------------ Cash Flows from Investing Activities: Payments received on notes receivable 431,540 2,192,841 1,420,506 Payments disbursed for investments in notes receivable (60,000) Proceeds from sale of notes receivable 20,328,728 400,000 Payments disbursed for deferred sales commission (1,000,000) Payments of taxes payable on gain from sale of notes (220,500) Payments disbursed for additions and improvements (637,617) (967,802) (529,261) Purchase of property (27,275,886) (6,549,637) Purchases of securities (10,343,705) (1,054,562) Proceeds from sales of securities 2,331,119 7,632,045 23,986 Other 69,979 91,454 74,550 ------------ ------------- ------------ Net cash (used in) provided by investing activities (25,301,365) 17,933,561 (6,274,418) ------------ ------------- ------------ Cash Flows from Financing Activities: Principal payments on mortgage debt: Properties owned (1,433,315) (423,883) (429,237) Wrap mortgage debt on sold properties (156,222) (480,755) Mortgage debt payment from proceeds of mortgage refinancing (3,120,190) (10,788,825) Mortgage proceeds 21,900,000 3,195,500 24,675,000 Repayment of wrap mortgage debt (2,300,000) Mortgage refinancing repairs and replacement escrows (558,730) Mortgage costs paid (350,094) (82,823) (591,251) Principal payments on note payable (10,395,361) (147,191) Cash distributions on common stock (2,367,098) (2,325,046) (2,263,235) Proceeds from dividend reinvestment and share purchase plan 87,395 105,494 150,687 Distributions to minority partners (574,434) (953,279) (4,262,845) ------------ ------------- ------------ Net cash provided by (used in) financing activities 17,262,454 (16,455,810) 5,303,618 ------------ ------------- ------------ Net (Decrease) Increase in Cash and Cash Equivalents (4,854,881) 5,250,077 784,753 Cash and Cash Equivalents, Beginning of Year 7,014,542 1,764,465 979,712 ------------ ------------- ------------ Cash and Cash Equivalents, End of Year $2,159,661 $7,014,542 $1,764,465 ============ ============= ============
See notes to consolidated financial statements. 46 47 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------------ 2000 1999 1998 ------------- -------------- --------------- Reconciliation of Net Income to Net Cash Provided by Operating Activities Net Income $1,212,957 $9,081,382 $2,773,247 ---------- ---------- ---------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,699,701 1,310,428 1,077,187 Losses (gains) from sales of properties, notes and securities 5,027 (7,703,081) (755,801) Issuance of stock for fees and expenses 18,225 21,510 20,880 Amortization of discounts on notes and fees (392,512) (702,041) (1,094,967) Minority share of partnership income 640,324 601,489 489,510 Changes in assets and liabilities: Decrease (increase) in accounts receivable (94,873) 129,301 100,173 Increase (decrease) in accounts payable and accrued liabilities 267,472 383,041 (9,299) Increase (decrease) in deferred income 73,492 (119,180) (108,385) Decrease (increase) in prepaid expenses, deposits in escrow and deferred charges (246,383) 777,142 (491,120) Increase in security deposit restricted funds (352,573) Increase in security deposit liabilities 7,356 1,124 112,243 Other (6,756) (8,789) (5,542) ---------- ---------- ---------- Total adjustments 1,971,073 (5,309,056) (1,017,694) ---------- ---------- ---------- Net cash provided by operating activities $3,184,030 $3,772,326 $1,755,553 ========== ========== ========== Supplemental noncash disclosures: Property received in satisfaction of debt $39,858 $11,569 ========== ==========
See notes to consolidated financial statements. 47 48 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 48 49 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. Principles of Consolidation - The consolidated financial statements include the accounts of Presidential Realty Corporation and its wholly owned subsidiaries. Additionally, the consolidated financial statements include 100% of the account balances of UTB Associates 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 49 50 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 1998, 1999 and 2000. 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 accounting principles generally accepted in the United States of America. 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. 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 Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Additional disclosures are required because of options granted and vested in 1999 (see Note 14). N. Derivative Instruments - The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", on January 1, 2001. Company management has determined that the Company 50 51 has no derivative financial instruments; therefore, implementation of this standard had no impact on the Company. 2. REAL ESTATE Real estate is comprised of the following:
December 31, ------------------------- 2000 1999 ---- ---- Land $ 9,599,970 $ 5,461,173 Buildings and leaseholds 53,595,647 29,909,205 Furniture and equipment 341,748 277,255 ----------- ----------- Total real estate $63,537,365 $35,647,633 =========== ===========
In March, 2000, the Company purchased two apartment properties, Farrington Apartments, a 224 unit garden apartment property in Clearwater, Florida and Preston Lake Apartments, a 320 unit garden apartment property in Tucker, Georgia. The purchase price for the Farrington Apartments property was $9,630,950 and the purchase price for the Preston Lake Apartments property was $17,450,000. Additional acquisition costs for these properties were $165,471 and $29,465, respectively. In connection with the purchase of these two apartment properties, the Company obtained first mortgage loans of $7,900,000 and $14,000,000, respectively. The following pro forma consolidated results of operations are presented as if the acquisitions of Farrington Apartments and Preston Lake Apartments had occurred on January 1, 1999. 51 52 PRO FORMA INFORMATION
Year Ended December 31, 2000 Year Ended December 31, 1999 ---------------------------- ---------------------------- As Reported Pro Forma As Reported Pro Forma ----------- ----------- ------------ ----------- Income: Rental $14,584,793 $15,576,398 $10,672,236 $14,951,566 Other 3,506,524 3,506,524 4,572,046 4,572,046 ----------- ----------- ----------- ----------- Total 18,091,317 19,082,922 15,244,282 19,523,612 ----------- ----------- ----------- ----------- Costs and Expenses: Rental property: Operating expenses 6,300,631 6,646,054 4,684,312 6,056,633 Interest on mortgage debt 4,262,463 4,680,158 2,952,811 4,765,024 Real estate taxes 1,229,068 1,303,747 927,344 1,258,446 Depreciation and amortization 1,676,123 1,837,734 1,281,803 1,968,328 Other 3,405,048 3,405,048 4,019,711 4,019,711 ----------- ----------- ----------- ----------- Total 16,873,333 17,872,741 13,865,981 18,068,142 ----------- ----------- ----------- ----------- Income before net (loss) gain from sales of properties, notes and securities 1,217,984 1,210,181 1,378,301 1,455,470 Net (loss) gain from sales of properties, notes and securities (5,027) (5,027) 7,703,081 7,703,081 ----------- ----------- ----------- ----------- Net Income $1,212,957 $1,205,154 $9,081,382 $9,158,551 =========== =========== =========== =========== Net Income per Common Share (basic and diluted) $0.33 $0.33 $2.50 $2.52 =========== =========== =========== ===========
52 53 The pro forma consolidated results of operations include the actual operating results of the acquired properties from January 1, 1999 to the date of acquisition, plus adjustments to give effect to revised property management fees, interest expense on acquisition debt, depreciation expense on the acquired properties and amortization of mortgage costs. The pro forma information is not necessarily indicative of the results of operations that would have occurred had the acquisitions been made at the beginning of 1999 or the results of operations for future periods. Three of the properties owned by the Company represented 29%, 14% and 13% of total rental income in 2000. During 1999, two properties represented 37% and 17% of total rental income and in 1998, three properties represented 39%, 18% and 10% of total rental income. 3. 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, 2000, all of the notes in the Company's mortgage portfolio are current. The following table summarizes the components of the mortgage portfolio: 53 54 MORTGAGE PORTFOLIO
Sold Properties Related Parties ------------------------------------------ --------------------------------------- ------------ Properties Cooperative Properties Cooperative Total previously apartment previously conversion mortgage owned units Total owned loans Total portfolio -------------- ------------- ----------- ------------ ----------- ---------- ----------- December 31, 2000 Notes receivable $27,221,178 $970,202 $28,191,380 $1,292,671 $155,288 $1,447,959 $29,639,339 Less: Discounts 1,608,660 12,444 1,621,104 28,822 85,972 114,794 1,735,898 Deferred gains 11,130,631 93,742 11,224,373 884,355 884,355 12,108,728 ----------- ---------- ----------- ---------- -------- ---------- ----------- Net $14,481,887 $864,016 $15,345,903 $379,494 $69,316 $448,810 $15,794,713 =========== ========== =========== ========== ======== ========== =========== Due within one year $273,139 $42,510 $315,649 $16,665 $30,678 $47,343 $362,992 Long-term 14,208,748 821,506 15,030,254 362,829 38,638 401,467 15,431,721 ----------- ---------- ----------- ---------- -------- ---------- ----------- Net $14,481,887 $864,016 $15,345,903 $379,494 $69,316 $448,810 $15,794,713 =========== ========== =========== ========== ======== ========== =========== December 31, 1999 Notes receivable $27,390,774 $1,091,023 $28,481,797 $1,376,586 $197,442 $1,574,028 $30,055,825 Less: Discounts 1,822,754 14,968 1,837,722 31,606 100,467 132,073 1,969,795 Deferred gains 11,226,631 93,742 11,320,373 908,343 908,343 12,228,716 ----------- ---------- ----------- ---------- -------- ---------- ----------- Net $14,341,389 $982,313 $15,323,702 $436,637 $96,975 $533,612 $15,857,314 =========== ========== =========== ========== ======== ========== =========== Due within one year $37,119 $45,922 $83,041 $14,339 $30,423 $44,762 $127,803 Long-term 14,304,270 936,391 15,240,661 422,298 66,552 488,850 15,729,511 ----------- ---------- ----------- ---------- -------- ---------- ----------- Net $14,341,389 $982,313 $15,323,702 $436,637 $96,975 $533,612 $15,857,314 =========== ========== =========== ========== ======== ========== ===========
54 55 Prepayments During 2000, the Company received $96,000 in principal payments on its Mark Terrace note resulting in the recognition of a deferred gain of $96,000. The payments were made in connection with the resumption of sales by the sponsor of the cooperative apartment units at the Mark Terrace property and the release of these units from the Company's security interest. In 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 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 of $590,000. Modifications In September, 2000, the Woodgate note with an outstanding principal amount of $1,175,500 was modified, changing the maturity date of the note from September, 2007 to January, 2001. In connection with this modification, the Company received a $5,000 fee. Subsequently, in January, 2001, the $1,175,500 Woodgate note was paid in full. Accordingly, the net carrying value of this note of $235,228 was included as "Due within one year" in the table above. As a result of the payment received on the Woodgate note, in 2001, the Company will recognize an unamortized discount of $255,281 and a deferred gain of $684,991. In February, 2001, the Company utilized the loan proceeds to fund a $1,100,000 loan secured by three apartment properties in New Jersey, which properties also secure the $4,000,000 Fairfield Towers loan, and a personal guarantee of $750,000 by one of the borrower's principals. The $1,100,000 principal balance is due in February, 2009 and the annual interest rate is 13%. In June of 1999, the Crown Tower and Madison Towers wraparound mortgage notes in the outstanding principal amount of $13,300,000 were modified. 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"). Concurrently, the 55 56 Company received a $1,000,000 principal payment on the New Haven note and paid, with the proceeds, a $1,000,000 deferred brokerage commission. As a result of these transactions, the Company received a $30,750 loan modification fee and recognized a deferred gain of $1,000,000. The New Haven note with an outstanding principal balance of $12,300,000 at December 31, 2000, is due 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. 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. Sold Notes 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 a net carrying value of $13,957,284. The Fairfield Towers Second Mortgage Note, which was classified as an impaired loan, had a net carrying value of $1,311,908. The aggregate sales price for the Fairfield Towers First and Second Mortgage Notes (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 Fairfield Towers 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 on February 18, 2009. To secure this obligation, Presidential obtained subordinate security interests in three apartment properties located in New Jersey. 56 57 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 $500,000, of which $75,000 of the sales proceeds was applied to unpaid interest and the Company recognized a gain on sale of $425,000. 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. 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. 57 58 Minority partners' interest is comprised of the following:
December 31, -------------------------- 2000 1999 ---- ---- Home Mortgage Partnership $8,040,310 $8,112,127 UTB Associates (201,667) (207,594) ---------- ---------- Total minority partners' interest $7,838,643 $7,904,533 ========== ============
5. SECURITIES AVAILABLE FOR SALE The cost and fair value of securities available for sale are as follows:
December 31, ----------------------- 2000 1999 ---- ---- Cost $3,595 $2,520,568 Gross unrealized gains 1,448 1,824 Gross unrealized losses (46) (222,898) ------ ----------- Fair value $4,997 $2,299,494 ======= ===========
Sales activity results for securities available for sale are as follows:
Year Ended December 31, --------------------------------------- 2000 1999 1998 ---- ---- ---- Gross sales proceeds $2,331,119 $ 7,632,045 $23,986 ========== =========== ======= Gross realized gains $ 2,306 $ $21,438 Gross realized losses (188,160) (1,450,149) ---------- ---------- -------- Net realized gain (loss) $ (185,854) $(1,450,149) $21,438 ========== =========== ========
58 59 6. MORTGAGE DEBT All mortgage debt is secured by individual properties and is nonrecourse to the Company with the exception of the $245,278 mortgage on the Mapletree Industrial Center property in Palmer, Massachusetts, which is guaranteed by Presidential. In connection with the purchase of Farrington Apartments and Preston Lake Apartments in March, 2000, the Company obtained first mortgage loans collateralized by the properties as follows:
Mortgage Interest Monthly Maturity Balloon Property Loan Rate Payment Date Payment Farrington Apartments $ 7,900,000 8.25% $ 59,350 5/1/2010 $ 7,106,299 Preston Lake Apartments 14,000,000 8.15 104,195 5/1/2010 12,564,077
In May, 2000, the mortgage on the Company's Building Industries Center property became due and the Company made a $901,689 balloon payment to repay the mortgage. As described in Note 3, 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, 2000 are summarized as follows:
Year ending December 31: 2001 $ 624,439 2002 669,200 2003 722,129 2004 770,111 2005 840,240 2006 - 2029 56,220,024 ----------- TOTAL $59,846,143 ===========
59 60 Interest on mortgages is payable at annual rates, summarized as follows:
Interest rates: 6.55%-6.65% $ 7,879,114 7%-7.75% 22,034,556 8.15%-8.25% 29,682,935 9.50% - 9.75% 249,538 ----------- TOTAL $59,846,143 ===========
7. LINE OF CREDIT 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, 2002. Presidential pays a 1% annual fee for the line of credit. At December 31, 2000, 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, 1999, Presidential applied its available 1999 stockholders' distributions and elected to apply (under Section 858 of the Internal Revenue Code) all but approximately $87,000 of its 2000 stockholders' distributions to reduce its taxable income for 1999 to zero. For the year ended December 31, 1999, the Company retained undistributed capital gains designated as paid (under Section 857(b)(3)(D) in the amount of $630,000 ($.17 per share) and paid income taxes of $220,500 in January, 2000 on that retained gain. For the year ended December 31, 2000, the Company had taxable income (before distributions to stockholders) of approximately $818,000 ($.22 per share), which is net of capital losses of approximately $32,000 ($.01 per share). This amount will be reduced by the $87,000 ($.02 per share) of its 2000 distributions that were not utilized in reducing the Company's 1999 taxable income. In addition, 60 61 the Company may elect to apply any eligible year 2001 distributions to reduce its 2000 taxable income. As previously stated, in order to retain REIT status, Presidential is required to distribute 95% of its REIT taxable income ($.22 per share exclusive of capital gains and losses). Presidential will apply the available 2000 distributions (approximately $.02 per share) and will be required to pay additional distributions of not less than $.20 per share in 2001 to maintain REIT status, which it intends to do. In addition, although no assurances can be given, it is the Company's present intention to distribute all of its 2000 taxable income during 2000 and 2001 so that it will not have to pay Federal income taxes for 2000. Therefore, no provision for income taxes has been made at December 31, 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. UTB Associates sublets the professional space to unrelated parties. In June, 1999, University Towers Owners Corp., the cooperative corporation, filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. 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 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 a loss of approximately $45,000 from the Professional Space Lease in 2000 and income of approximately $66,000 in 1999. 61 62 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. 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). 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 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 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. 62 63 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 2000 $0.64 $0.04 $0.60 1999 0.64 0.42 0.22 1998 0.63 0.22 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 was taxable to shareholders as a long-term capital gains distribution. Shareholders received a tax credit of $0.06 per share and increased the basis of their shares by $0.11 per share. 13. STOCK COMPENSATION In March, 2000, 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 2000. As a result of this transaction, the Company recorded $18,225 in directors fees based on the average market value of the Class B common stock of $6.075 per share for the previous month. The Company recorded additions to the Company's Class B common stock of $300 at par value of $.10 per share and $17,925 to additional paid-in capital. 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 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 63 64 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, 2000 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. See Note 18. 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, 2000 and expire on November 10, 2005. No other options have been granted, exercised or cancelled under 64 65 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. In 1999, the Company determined that the pro forma effect of the stock options granted in 1999 on compensation expense was 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) 7.15% (as of January 1, 2000, 7.15% was changed from 6.5%) 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.
Year Ended December 31, ------------------------ 2000 1999 1998 ---- ---- ---- Components of net periodic benefit cost Service cost $397,950 $330,649 $324,374 Interest cost 158,635 112,973 79,370 Expected return on plan assets (167,175) (131,403) (96,438) Amortization of prior service cost 12,616 Amortization of accumulated gain (22,479) (11,356) (8,950) -------- -------- -------- Net periodic benefit cost $379,547 $300,863 $298,356 ======== ======== ========
65 66 The following sets forth the plan's funded status and amount recognized in the Company's consolidated balance sheets:
December 31, ----------------- 2000 1999 ---- ---- Change in benefit obligation Benefit obligation at beginning of year $2,266,218 $1,613,907 Service cost 397,950 330,649 Interest cost 158,635 112,973 Amendments 194,286 Actuarial (gain) loss (16,783) 14,403 ---------- ---------- Benefit obligation at end of year 2,806,020 2,266,218 ---------- ---------- Change in plan assets Fair value of plan assets at beginning of year 2,258,934 1,804,482 Actual return on plan assets (48,170) 360,412 Employer contributions 269,398 94,040 ---------- ---------- Fair value of plan assets at end of year 2,480,162 2,258,934 ---------- ---------- Funded status actuarial (325,858) (7,284) Unrecognized prior service cost 181,670 194,286 Unrecognized gain (348,890) (569,931) ---------- --------- Net amount recognized (in accrued liabilities) $ (493,078) $(382,929) ========== =========
Weighted-average assumptions as of December 31 2000 1999 ---- ---- Discount rate 7% 7% Expected return on plan assets 7% 7% Rate of compensation increase 5% 5%
Additional disclosure items for the underfunded plan at December 31, 2000: Accumulated benefit obligation $2,753,866 Projected benefit obligation 2,806,020 Fair value of plan assets 2,480,162
66 67
December 31, ------------------------ 2000 1999 ----- ---- Plan Assets Cash and cash equivalents $ 163,514 $ 162,332 Securities available for sale 2,316,648 2,096,602 ---------- ---------- Total plan assets $2,480,162 $2,258,934 ========== ===========
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.
Year Ended December 31, --------------------------- 2000 1999 1998 ---- ---- ---- Components of net periodic benefit cost Service cost $ 60,861 $ 52,364 $ 15,127 Interest cost 183,241 173,211 166,262 Amortization of prior service cost 21,683 (4,079) (4,079) Recognized actuarial loss 200,362 168,741 121,490 -------- -------- -------- Net periodic benefit cost $466,147 $390,237 $298,800 ======== ======= ========
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, ---------------------- 2000 1999 ---- ---- Change in benefit obligation Benefit obligation at beginning of year $3,032,916 $2,881,845 Service cost 60,861 52,364 Interest cost 183,241 173,211 Amendments 138,611 Actuarial loss 194,017 194,294 Benefits paid (415,184) (407,409) ---------- ---------- Benefit obligation at end of year 3,055,851 3,032,916 ---------- ----------
67 68
Change in plan assets Employer contributions 415,184 407,409 Benefits paid (415,184) (407,409) ---------- ---------- Fair value of plan assets at end of year 0 0 ---------- ---------- Funded status (3,055,851) (3,032,916) Unrecognized net actuarial loss 1,432,335 1,438,680 Unrecognized prior service cost 93,368 115,051 ----------- ----------- Net amount recognized $(1,530,148) $(1,479,185) =========== ===========
Weighted-average assumptions as of December 31 2000 1999 ---- ---- 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 8% for 1999, decreasing gradually each successive year until it reaches 5% in 2002, after which it remains constant.
Year Ended December 31, ----------------------------- 2000 1999 1998 ---- ---- ---- Components of net periodic benefit cost Service cost $13,544 $ 7,180 $ 6,711 Interest cost 34,289 32,785 34,241 Amortization of prior service cost (9,612) (10,386) (9,196) ------- ------- ------- Net periodic benefit cost $38,221 $29,579 $31,756 ======= ======= =======
68 69 The accumulated postretirement benefit obligation and recorded liability, none of which has been funded, was as follows:
December 31, ----------------------- 2000 1999 ---- ---- Change in benefit obligation Benefit obligation at beginning of year $ 475,920 $ 498,846 Service cost 13,544 7,180 Interest cost 34,289 32,785 Actuarial loss (gain) 27,036 (9,543) Benefits paid (58,285) (53,348) --------- --------- Benefit obligation at end of year 492,504 475,920 --------- --------- Change in plan assets Employer contributions 58,285 53,348 Benefits paid (58,285) (53,348) --------- --------- Fair value of plan assets at end of year 0 0 --------- --------- Funded status (492,504) (475,920) Unrecognized prior service cost (52,866) (62,478) Unrecognized net loss 27,036 --------- --------- Net amount recognized $(518,334) $(538,398) ========= =========
Weighted-average assumptions as of December 31 2000 1999 ---- ---- 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 $ 5,142 $ (4,405) Effect on postretirement benefit obligation 45,340 (39,397)
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. 69 70 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 January 1, 1998 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 Shares issued during 2000 14,746 87,395 ------- ---------- Total shares issued at December 31, 2000 381,129 $2,573,634 ======= ==========
18. RELATED PARTY TRANSACTIONS In connection with the exercise of stock options in November, 1999, the Company loaned $367,500 in the aggregate to three of its officers 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 years ended December 31, 2000 and 1999, Presidential recognized interest income on these notes of $29,481 and $4,108, respectively. As shown in Note 3, the Company holds nonrecourse purchase money notes receivable from Ivy, relating to properties sold to Ivy in prior years, as well as nonrecourse notes receivable relating to loans made to Ivy in connection with Ivy's former cooperative conversion business. In the aggregate, the loans receivable from Ivy had a balance of $1,447,959 as of December 31, 2000, and a carrying amount, net of discounts and deferred gains, of $448,810. Presidential received interest of $164,512, $236,457 and $426,990 from Ivy during 2000, 1999 and 1998, respectively, on these loans. In addition, in 2000, 1999 and 1998, Presidential recognized $32,333, $14,034 and $11,050, respectively, of income representing the amortization of discounts on notes receivable. One of the notes, with a carrying amount of $24,694 at December 31, 2000 and an outstanding principal amount of $4,794,744, requires payments in an amount equal to 25% of the operating cash flow (after 70 71 provision for certain reserves) of Scorpio Entertainment, Inc. ("Scorpio"), a company owned by the owners of Ivy. Scorpio acts as a producer of theatrical productions. The Company received $14,565 of principal payments and $2,940 of interest on this loan during 2000 and $13,309 of principal payments and $64,405 of interest during 1999. All outstanding loans from Ivy at December 31, 2000 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. The loans from Ivy were subject to various settlement agreements and modifications in previous years. Ivy is owned by three officers of the Company, who also hold 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. Because of the relationship between the owners of Ivy and the Company, all transactions with Ivy are negotiated on behalf of the Company, and subject to approval, by a committee of three members of the Board of Directors with no affiliations with the owners of Ivy. 19. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS Estimated fair values of the Company's financial instruments as of December 31, 2000 and 1999 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 summarizes the estimated fair values of financial instruments: 71 72 FINANCIAL INSTRUMENTS
December 31, 2000 December 31, 1999 -------------------------- ------------------------------------- Net Estimated Net Estimated Carrying Fair Carrying Fair Value (1) Value Value (1) Value Assets: Cash and cash equivalents $2,159,661 $2,159,661 $7,014,542 $7,014,542 Securities available for sale 4,997 4,997 2,299,494 2,299,494 Notes receivable-sold properties 15,345,903 27,101,235 15,323,702 28,461,062 Notes receivable-related parties 448,810 1,629,782 533,612 1,651,797 Liabilities: Mortgage debt 59,846,143 54,081,441 39,379,458 34,716,388
(1) Net carrying value is net of discounts and deferred gains where applicable. 72 73 The fair value estimates presented above are based on pertinent information available to management as of December 31, 2000 and 1999. 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, 2000 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 - The fair value of mortgage debt has been estimated by discounting projected cash flows using current rates for similar debt. 73 74 20. QUARTERLY FINANCIAL INFORMATION - UNAUDITED (Amounts in thousands, except earnings (loss) per common share)
Income Before Earnings Net Gain (Loss) (Loss) Year from Sales of Per Ended Properties, Notes Net Income Common December 31 Revenues and Securities (Loss) Share 2000 First $3,817 $459 $ 472 $0.13 Second 4,695 260 134 0.03 Third 4,755 220 242 0.07 Fourth 4,824 279 365 0.10 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)
(1) Net income for the first quarter of 1999 included 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 this taxable gain. 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 of 1999 from the sales of securities. (2) Income before net gain (loss) from sales of properties, notes and securities for the fourth quarter of 1999 included 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. 74 75 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 SCHEDULE II -------------------------------------------------------------------------------
BALANCE AT CHARGED BALANCE BEGINNING TO AT END CLASSIFICATION OF YEAR EXPENSES DEDUCTIONS (1) OF YEAR 2000 ------ Discount on mortgage portfolio and valuation allowance for other receivables $2,109,617 $156,913 $348,794 $1,917,736 ========== ======== =========== ========== 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 =========== ======= ========== ===========
(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. 75 76 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2000 SCHEDULE III
INITIAL COST TO GROSS AMOUNT AT WHICH CARRIED COMPANY COSTS AT CLOSE OF YEAR ------------------------ CAPITALIZED ------------------------------ BUILDING SUBSEQUENT TO BUILDING AMOUNT OF AND ACQUISITION AND PROPERTIES ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS (1) LAND IMPROVEMENTS APARTMENT BUILDINGS Cambridge Green, Council Bluffs, IA $3,130,708 $200,000 $2,034,315 $1,389,488 $200,000 $3,423,803 Continental Gardens, Miami, FL 7,878,505 2,448,000 7,389,786 485,389 2,448,000 7,875,175 Crown Court, New Haven, CT 2,686,817 168,000 3,077,445 58,481 168,000 3,135,926 Fairlawn Gardens Martinsburg, WV 2,241,935 71,408 657,805 1,211,994 71,408 1,869,799 Farrington Apartments Clearwater, FL 7,866,120 1,900,000 7,896,421 68,263 1,900,000 7,964,684 Preston Lake Apartments Tucker, GA 13,938,310 2,240,000 15,239,465 145,198 2,240,000 15,384,663 Sunwood Apartments Miami, FL 4,748,406 1,680,000 4,860,251 49,550 1,680,000 4,909,801 INDIVIDUAL COOPERATIVE APARTMENTS Sherwood House, Long Beach, NY 7,316 51,930 (42,926)(2) 1,788 14,532 6300 Riverdale Ave., Riverdale, NY 10,164 66,032 4,010 10,164 70,042 330 W.72nd St., New York, NY 20,891 28,013 20,891 28,013 Towne House, New Rochelle, NY 61,051 343,286 181,430 81,204 504,563 University Towers, New Haven, CT 1,375 54,735 1,374 1,375 56,109 COMMERCIAL BUILDINGS Building Industries Center, White Plains, NY 61,328 496,198 598,412 61,328 1,094,610 Home Mortgage Plaza, Hato Rey, Puerto Rico 17,105,804 636,712 5,070,769 1,974,704 636,712 7,045,473 Mapletree Industrial Center, Palmer, MA 245,278 79,100 227,027 79,100 227,027 University Towers, New Haven, CT 322,612 322,612 OTHER Towers Shoppers Parcade, New Haven, CT 4,260 7,000 3,563 10,563 ----------- ---------- ----------- ---------- ---------- ----------- TOTAL $59,846,143 $9,585,345 $47,273,451 $6,678,569 $9,599,970 $53,937,395 =========== ========== =========== ========== ========== ===========
YEARS ON WHICH DE- GROSS AMOUNT AT WHICH CARRIED PRECIATION COSTS AT CLOSE OF YEAR IN LATEST ----------------------------- INCOME STATE- ACCUMULATED DATE OF DATE MENT IS PROPERTIES TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED APARTMENT BUILDINGS Cambridge Green, Council Bluffs, IA $3,623,803 $890,911 1974 1992 50 Continental Gardens, Miami, FL 10,323,175 1,377,147 1971 1994 27-1/2 Crown Court, New Haven, CT 3,303,926 2,609,128 1973 1973 40 Fairlawn Gardens Martinsburg, WV 1,941,207 175,172 1964 1996 50 Farrington Apartments Clearwater, FL 9,864,684 185,869 1973-1974 2000 35 Preston Lake Apartments Tucker, GA 17,624,663 336,648 1986-1987 2000 35 Sunwood Apartments Miami, FL 6,589,801 393,304 1976 1998 30 INDIVIDUAL COOPERATIVE APARTMENTS Sherwood House, Long Beach, NY 16,320 2,083 1997 31 1/2 6300 Riverdale Ave., Riverdale, NY 80,206 8,569 1997 31 1/2 330 W.72nd St., New York, NY 48,904 3,556 1997 31 1/2 Towne House, New Rochelle, NY 585,767 56,860 1997 31 1/2 University Towers, New Haven, CT 57,484 5,776 1997 31 1/2 COMMERCIAL BUILDINGS Building Industries Center, White Plains, NY 1,155,938 947,697 1956 1966 25 Home Mortgage Plaza, Hato Rey, Puerto Rico 7,682,185 2,684,173 1966-1967 1966 40 Mapletree Industrial Center, Palmer, MA 306,127 43,516 1902-1966 1974 20 University Towers, New Haven, CT 322,612 90,637 OTHER Towers Shoppers Parcade, New Haven, CT 10,563 7,119 1962 1962 15 ----------- ---------- TOTAL $63,537,365 $9,818,165 =========== ==========
(1) Includes furniture and equipment of $341,748. (2) Includes sales of cooperative apartments in 1998 and 1999. 76 77 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES ----------------------------------------------------------------------------- REAL ESTATE AND ACCUMULATED DEPRECIATION SCHEDULE III DECEMBER 31, 2000 (CONCLUDED) ----------------------------------------------------------------------------- (3) The aggregate cost of real estate for Federal income tax purposes is $62,599,788 at December 31, 2000. (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, ----------------------------------------- 2000 1999 1998 ----------------------------------------- Balance at the beginning of year $35,647,633 $34,703,657 $27,690,535 Additions during the year: Acquisitions through foreclosure 44,284 11,569 Additions and improvements 27,899,732 917,365 7,036,611 ----------------------------------------- 63,547,365 35,665,306 34,738,715 Deductions during the year: Dispositions 10,000 17,673 35,058 -------------------------------------- Balance at end of year $63,537,365 $35,647,633 $34,703,657 =======================================
(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, ------------------------------------ 2000 1999 1998 ------------------------------------ Balance at the beginning of year $8,231,480 $7,231,639 $6,404,797 Additions during the year: Depreciation charged to income 1,587,545 1,008,051 827,786 ------------------------------------ 9,819,025 8,239,690 7,232,583 Deductions during the year: Dispositions and replacements 860 8,210 944 ------------------------------------ Balance at end of year $9,818,165 $8,231,480 $7,231,639 ====================================
77 78 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 2000 SCHEDULE IV
PERIODIC INTEREST MATURITY PAYMENT PRIOR FACE AMOUNT DESCRIPTION RATE DATE TERMS MORTGAGES OF MORTGAGE First Mortgages: Apartment buildings: Greece, NY 7.90% 2006 (2) (3) $6,000,000 Hartford, CT 10.00-10.25% 2005 (4) (4) 1,464,416 Sold Co-op Apartments: Bronx, NY (2 notes) 9.00% 2003 (5) 34,085 Flushing, NY (8 notes) 7.00-9.50% 2002-2008 (5) (6) 198,793 Long Beach, NY (2 notes) 9.00-9.50% 2002-2010 (5) (6) 21,425 New Rochelle, NY (16 notes) 7.75-9.50% 2002-2010 (5) (6) 451,917 New York, NY (3 notes) 8.00-9.25% 2003-2016 (5) (6) 184,961 Riverdale, NY (3 notes) 7.50-8.25% 2003 (6) 14,138 Rye, NY (1 note) 11.00% 2010 (6) 64,883 ------------- ----------- Total First Mortgage Loans 8,434,618 ------------- ----------- Junior Mortgages: Apartment buildings: Alexandria, VA 9.25% 2001 (7) (3) $19,863,610 1,175,500 Bronx, NY 6.16-11.16% 2002-2005 (8) (3) 3,450,000 2,181,262 Atlantic City, NJ ) 9.625-10.50% 2009 (9) (3) 6,669,532 4,000,000 Bergenfield, NJ ) 8,898,289 South Bound Brook, NJ ) 3,250,758 Des Moines, IA 12.00% 2008 (3) 100,000 New York, NY 11.50% 2002 (10) (3) 50,000,000 12,300,000 ----------- ----------- Total Junior Mortgage Loans 92,132,189 19,756,762 ----------- ---------- Total Mortgage Loans $92,132,189 $28,191,380 ============ ===========
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 1,464,416 Sold Co-op Apartments: Bronx, NY (2 notes) 34,085 Flushing, NY (8 notes) 192,462 Long Beach, NY (2 notes) 20,522 New Rochelle, NY (16 notes) 410,559 New York, NY (3 notes) 127,438 Riverdale, NY (3 notes) 14,067 Rye, NY (1 note) 64,883 --------- --------- Total First Mortgage Loans 5,336,582 --------- --------- Junior Mortgages: Apartment buildings: Alexandria, VA 235,228 Bronx, NY 1,719,012 Atlantic City, NJ ) 2,646,621 Bergenfield, NJ ) South Bound Brook, NJ ) Des Moines, IA 100,000 New York, NY 5,308,460 --------- --------- Total Junior Mortgage Loans 10,009,321 ---------- --------- Total Mortgage Loans $15,345,903 =========== =========
78 79 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES -------------------------------------------------------------------------------- MORTGAGE LOANS ON REAL ESTATE SCHEDULE IV DECEMBER 31, 2000 (CONCLUDED) --------------------------------------------------------------------------------
Year Ended Year Ended Year Ended ---------------------- ---------------------- -------------------------- December 31, 2000 December 31, 1999 December 31, 1998 ---------------------- ---------------------- -------------------------- Balance at beginning of year $15,323,702 $30,481,189 $30,036,785 Additions during the year: New mortgage loans $ 60,000 Less: Discounts on additions ------- ---------- --------- Net addition to carrying amount 60,000 Deductions during the year: Reclass of loan foreclosed 39,858 11,569 Collections of principal 290,417 2,062,203 768,587 Collections on notes sold 21,775,000 Write-off balance of notes sold 8,670,424 Less: Amortization of discounts 216,618 688,007 1,083,917 Discount recognized as gain on sale 3,045,411 Write-off of discounts on notes sold 6,075,210 Deferred gains recognized 96,000 7,581,370 80,643 ------- ---------- --------- Net reduction of carrying amount (22,201) 15,157,487 (384,404) ------------ ----------- ---------- Balance at end of year $15,345,903 $15,323,702 $30,481,189 =========== =========== ===========
(1) Carrying value is net of discounts and deferred gains. The aggregate net carrying value of this portfolio for tax purposes at December 31, 2000, is $6,903,635. (2) Interest is at the rate of 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. (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) In September, 2000, this note was modified and the maturity date of this loan was changed from 2007 to 2001. In January, 2001, the Company received the $1,175,500 principal repayment on this note. (8) The $2,148,000 matures on November 29, 2005 and the interest rate on this note increases by 1% per year, from 6.16% per annum at November 30, 1999 to 11.16% per annum at November 30, 2004. The $33,262 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. 79