-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S/vpZR+bCGuT73hTEJzcTBklBcO61HV0s/PjgLtzVAcKiC9FqW6dn+5tQjzJVaQg uZSi7BCCQP6rPUw0s+zbTQ== 0000950123-98-003120.txt : 19980331 0000950123-98-003120.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950123-98-003120 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRESIDENTIAL REALTY CORP/DE/ CENTRAL INDEX KEY: 0000731245 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 131954619 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08594 FILM NUMBER: 98579312 BUSINESS ADDRESS: STREET 1: 180 S BROADWAY CITY: WHITE PLAINS STATE: NY ZIP: 10605 BUSINESS PHONE: 9149481300 MAIL ADDRESS: STREET 1: 180 SOUTH BROADWAY CITY: WHITE PLAINS STATE: NY ZIP: 10605 10-K405 1 PRESIDENTIAL REALTY CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 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 $22,830,000 at March 6, 1998. The number of shares outstanding of each of the registrant's classes of common stock on March 6, 1998 was 478,940 shares of Class A common and 3,102,117 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 11, 1998, 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.................................................... 20 Item 3. Legal Proceedings............................................. 23 Item 4. Submission of Matters to a Vote of Security Holders............................................ 23 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................. 23 Item 6. Selected Financial Data....................................... 25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 27 Item 8. Financial Statements and Supplementary Data................... 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................... 37 PART III Item 10. Directors and Executive Officers of the Registrant.................................................. 37 Item 11. Executive Compensation........................................ 37 Item 12. Security Ownership of Certain Beneficial Owners and Management....................................... 37 Item 13. Certain Relationships and Related Transactions................ 37 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................... 37 Table of Contents to Consolidated Financial Statements...................... 42 2 3 ITEM 1. BUSINESS (a) General Presidential Realty Corporation is a Delaware corporation organized in 1983 to succeed to the business of a company of the same name which was organized in 1961 to succeed to the business of a closely held real estate business founded in 1911. The terms "Presidential" or the "Company" refer to the present Presidential Realty Corporation or its predecessor company of the same name and to any subsidiaries. Since 1982 the Company has elected to be treated as a real estate investment trust ("REIT") for Federal and State income tax purposes. See Qualification as a REIT. The Company operates in a single business segment, investments in real estate related assets. The Company's principal assets fall into the following three general categories: (i) The largest portion of the Company's assets consists of notes receivable, which are reflected on the Company's Consolidated Balance Sheet at December 31, 1997 as "Mortgage portfolio: sold properties (accrual and impaired)". The $61,749,858 aggregate principal amount of these notes have been reduced by $12,730,685 of discounts (which reflect either the difference between the stated interest rates on the notes and the market interest rates at the time the notes were accepted or discounts received on the purchase of notes) and $18,982,388 of gains on sales which have been deferred. See Note 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 $30,036,785 at December 31, 1997 which includes $5,149,217 of wrapped mortgage debt. Included in this category is a note having an outstanding principal balance of $17,176,884 at December 31, 1997 secured by a first mortgage on 997 condominium units at Fairfield Towers in Brooklyn, New York (the "Fairfield Towers First Mortgage"). At December 31, 1997 the net carrying value of this note was $13,886,962 after deducting a discount of $3,289,922. The Fairfield Towers First Mortgage was acquired by the Company in 1996 for a purchase price of $11,150,867 which reflected a $3,500,000 discount. During 1997, the Company advanced an additional $3,000,018 under the mortgage which was used by the owners of the property to pay a portion of unpaid real estate taxes (and interest thereon) on the unsold Fairfield Towers condominium 3 4 units. See Loans and Investments below and Note 2 of Notes to Consolidated Financial Statements. The Company also holds a subordinate note secured by the Fairfield Towers condominium units (the "Fairfield Towers Second Mortgage") which the Company received in 1984 when it sold the Fairfield Towers property to the present owner. All of the loans included in this category of assets were in good standing at December 31, 1997 with the exception of the Fairfield Towers Second Mortgage and the Grant House wraparound mortgage note. These loans have been classified as impaired loans in accordance with Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan". The Fairfield Towers Second Mortgage, which has an outstanding principal balance of $14,488,337 at December 31, 1997, has been in nonaccrual status since the fourth quarter of 1991. The net carrying value of this note is $1,404,764, after discount and deferred gain in the amount of $13,083,573. The Grant House wraparound mortgage note has an outstanding principal balance of $3,390,121 at December 31, 1997, and a net carrying value of $2,366,528 (which is equal to the first mortgage debt) after deducting a deferred gain of $1,023,593. Payments on the $1,023,593 equity portion of the wraparound note are only payable out of surplus cash from the operations of the property and are deferred if there is no surplus cash. Although there has not been a monetary default under the mortgage, the Company classified the Grant House wraparound mortgage note as an impaired loan at December 31, 1997, since the property requires substantial capital improvements and the Company believes it is probable that the note will not be repaid in accordance with its terms when it becomes due in November, 1998. As a result, the Company has not recorded accrued interest on the equity portion of the wraparound note in the amount of $75,000 for 1997. Interest for 1996, which was recorded in the amount of $75,000, has not been paid and is deferred in accordance with the terms of the mortgage. Income with respect to loans classified as impaired loans is recognized only to the extent that payments are actually received. See Loans and Investments. While notes reflected under "Mortgage portfolio: sold properties (accrual and impaired)" consist primarily of notes received from sales of real properties previously owned by the Company, this category of assets also includes the $17,176,884 Fairfield Towers First Mortgage purchased in 1996 and notes in the aggregate principal amount of $1,352,216 which relate to sold 4 5 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. (ii) A smaller portion of the Company's assets consists of notes receivable in the aggregate principal amount of $2,350,899 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, 1997 as "Mortgage portfolio: related parties, accrual". The principal amounts of these notes have been reduced by discounts and valuation reserves of $160,735 and deferred gains of $1,543,342 and, accordingly, these notes have a net carrying value at December 31, 1997 of $646,822. 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, 1997, all of the loans due from related parties were in good standing. The Overlook loan, a nonrecourse loan made to Ivy in 1984 in connection with the sale of real property previously owned by the Company, had been in default since 1990 and was classified as a nonaccrual loan in 1990 and as an impaired loan at December 31, 1996. Since 1995, the loan has been performing in accordance with the terms of a 1995 modification agreement, and management believes that the loan is adequately secured and should continue to be paid in accordance with its terms. As a result, at December 31, 1997, the loan was reclassified from an impaired loan to an accrual loan. At December 31, 1997, this loan had a carrying value of $1,543,342 and a net carrying value of zero after a deferred gain of $1,543,342. See Relationship with Ivy Properties, Ltd., and Notes 2 and 18 of Notes to Consolidated Financial Statements. (iii) The Company owns equity interests in thirteen rental properties and one parcel of land. These properties have an historical cost of $27,690,535, less accumulated depreciation of $6,404,797, resulting in a net carrying value of $21,285,738. See Properties below. 5 6 At December 31, 1996, Presidential also had $588,683 in foreclosed properties which consisted of 53 unsold cooperative apartment units acquired by Presidential in satisfaction of loans due to Presidential. The Company intends to hold these apartments as rental property and has reclassified them from foreclosed properties to real estate effective January 1, 1997. See Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 4 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 1997 were $.60 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, or that distributions will be maintained at the current rate or that the Company will have cash available to pay sufficient dividends in order to maintain REIT status. See Qualification as a REIT and Market for the Registrant's Common Equity and Related Stockholder Matters. At December 31, 1997, the Company employed eleven 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: 6 7 (i) Holding of Long Term Notes The Company holds and expects to continue to hold long term mortgage notes obtained from the sales of real property previously owned by the Company. These notes provide for balloon principal payments at varying times. The Company may in appropriate circumstances agree to extend and modify these notes. See the table set forth below under Loans and Investments. The capital gains from sales of real properties previously owned by the Company are recognized for income tax purposes on the installment method as principal payments are received. To the extent that such payments are received by Presidential, it may, as a REIT, either (i) elect to retain such payments, in which event it will be required to pay Federal and State income tax on the portion of the payments which represent capital gain, or (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. 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. 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. (ii) 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. 7 8 Notwithstanding the fact that the Company's current investment policy is and has been focused on acquiring additional equity interests in income producing properties, in 1996 the Company acquired the Fairfield Towers First Mortgage for a purchase price of $11,150,867, which reflected a discount of $3,500,000 from the $14,650,867 outstanding principal balance (see Loans and Investments). The Company decided to make such acquisition because management believed that the Company could obtain a substantial current return on the funds utilized for the acquisition of the Fairfield Towers First Mortgage and also protect its position as the holder of the Fairfield Towers Second Mortgage. (iii) Cooperative/Condominium Conversion Loans The Company is not currently making loans in connection with cooperative/condominium conversion projects, but has made such loans in the past. Presidential made cooperative conversion loans during the 1980's and the majority of these loans were made to Ivy. In 1991, the Company entered into a Settlement Agreement with Ivy with respect to the outstanding loans from Ivy, some of which were in default. As part of the settlement arrangement, Presidential received 191 cooperative apartment units from Ivy in satisfaction of certain indebtedness due from Ivy, (see Relationship with Ivy Properties, Ltd.). Since 1991, Presidential has sold 141 of these cooperative apartments. The remaining cooperative apartments were reclassified from foreclosed properties to real estate as of January 1, 1997. Although it may from time to time sell individual or groups of occupied apartments, Presidential generally intends to continue to hold these apartments until they become vacant and may, in some circumstances, rerent apartments free from rent regulations after they have become vacant. (iv) Funding of Investments In the past, the Company has obtained funds to make loans and investments from excess cash from operations or capital transactions, loans from financial institutions secured by specific real property or from general corporate borrowings. Such loans have in the past been, and may in the future be, secured by real property and provide for recourse to Presidential. However, funds may not be readily available from these sources and such unavailability may limit the Company's ability to make new investments. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources. 8 9 (c) Loans and Investments The Company's portfolio of investments consists of the three types of assets described under General above. At December 31, 1997, all of the loans included in "Mortgage portfolio: sold properties" were current except for the Fairfield Towers Second Mortgage and the Grant House wraparound mortgage note. These loans in the outstanding principal amount of $17,878,458 are classified as impaired loans and have a net carrying value of $3,771,292 at December 31, 1997, after a discount of $7,675,111 and deferred gains of $6,432,055. The Company has determined that at this time no allowance for credit losses is required for these loans because the net carrying value of these loans is less than the fair value of the underlying collateral. In the fourth quarter of 1996, the Company acquired the Fairfield Towers First Mortgage, having an outstanding principal balance of $14,650,867, for a purchase price of $11,150,867. In connection with the acquisition of the Fairfield Towers First Mortgage, which was to become due in December of 1996, the maturity date was extended to October 30, 2006. The Fairfield Towers First Mortgage, which is nonrecourse except for certain limited personal guarantees made by certain of the principals of the borrower, provides for principal repayments prior to maturity upon the sale of individual condominium units in an amount equal to substantially all of the net proceeds of sale, which principal repayments have averaged approximately $25,000 per unit over the sale of the first 155 units. All accrued interest on this mortgage has been paid to date. However, there are approximately $1,800,000 of unpaid real estate taxes (including interest accrued thereon) outstanding on the unsold condominium units. Real estate taxes are now being paid by the owner in an amount equal to the currently accruing taxes and the unpaid balance is being reduced by payment of the tax arrears on each individual unit as it is sold and from additional funds to the extent they are available from the cash flow from operations. During 1997, the Company advanced $3,000,018 to the owner to repay a portion of the unpaid real estate taxes and interest (thus reducing the then outstanding balance to approximately $1,800,000). The $3,000,018 advance was added to the $14,650,867 indebtedness secured by the Fairfield Towers First Mortgage and the interest rate thereon will be the same as the interest rate on the Fairfield Towers First Mortgage. See Note 2 of Notes to Consolidated Financial Statements. Presidential paid $2,500,867 of its $11,150,867 purchase price for the Fairfield Towers First Mortgage in cash and executed an $8,650,000 note for the balance (the "Fairfield Purchase Money Note"). During 1997, Presidential received additional advances of $2,500,000 on this note to reimburse Presidential in part for its $3,000,018 advance on the Fairfield Towers First Mortgage. 9 10 The Fairfield Purchase Money Note is secured by a collateral assignment of the Fairfield Towers First Mortgage and, except for a guarantee of $1,418,281, is nonrecourse to Presidential. All payments of principal received by Presidential under the Fairfield Towers First Mortgage are utilized to make principal repayments on the Fairfield Purchase Money Note. In addition, Presidential is making principal payments on the Fairfield Purchase Money Note in amounts sufficient to amortize it based on a 9.25% interest rate for a 25 year term, with the entire outstanding principal balance due on October 30, 2001. Presidential is also the holder of the Fairfield Towers Second Mortgage on the condominium units, which it received in 1984 when it sold the Fairfield Towers property to the present owner. The Fairfield Towers Second Mortgage, which is nonrecourse, has an outstanding principal balance of $14,488,337 and a net carrying value of $1,404,764. The cash flow from the rental operations of the condominium units is not sufficient to pay more than a nominal amount of the interest that is due on the Fairfield Towers Second Mortgage and, accordingly, pursuant to a modification agreement executed in December, 1992, all unpaid interest is deferred. Presidential only received $66,733 of interest payments on the Fairfield Towers Second Mortgage in 1997. Interest payments on the Fairfield Towers Second Mortgage will remain reduced in future years to the extent that cash flow from the rental operations of the property is utilized to repay accrued real estate taxes. Until the Fairfield Towers First Mortgage is repaid in full, Presidential, as holder of the Fairfield Towers Second Mortgage, only receives release payments of $3,000 per unit upon the sale of each condominium apartment unit. However, after the Fairfield Towers First Mortgage is repaid, Presidential will receive substantially all of the net proceeds of sales of condominium units in repayment of the principal amount of its Second Mortgage and all deferred interest thereon, including additional interest which is based on percentages of gross sales prices. By acquiring the Fairfield Towers First Mortgage at a $3,500,000 discount, Presidential believes that, in addition to obtaining a significant return on the funds utilized to make the acquisition, it has protected its position as holder of the Fairfield Towers Second Mortgage since that position could have been adversely affected upon the maturity of the First Mortgage in December, 1996. Pursuant to the terms of the Fairfield Towers Second Mortgage, Presidential has implemented substantial restrictions relating to the operation and condominium conversion of the property and control of the funds generated from operations and sales. The first sales of apartment units pursuant to the conversion of the property to condominium ownership closed in June, 1994. A total of 155 condominium units have been sold from 1994 through 1997 and 997 units remain to be sold, the majority of which are occupied as rental units. Although sales during the initial 10 11 years of the conversion have been slower than originally anticipated and the Company's return on the Fairfield Towers Second Mortgage during these initial years has been and will continue to be limited, if the conversion is ultimately successful and the Fairfield Towers First Mortgage is repaid, the Company expects to eventually recover a substantial amount of the outstanding principal amount of the Fairfield Towers Second Mortgage and the deferred basic and additional interest thereon. However, the ultimate success of the conversion will depend upon a number of factors, including the owner's ability to attract tenant purchasers as well as purchasers for vacant apartments, and the ability of purchasers to obtain satisfactory financing. From the initial closing of sales under the conversion through December 31, 1997, the Company has received $511,663 in payments from sales of apartment units, which has reduced the original outstanding principal balance of the Fairfield Towers Second Mortgage from $15,000,000 to $14,488,337 at December 31, 1997. The Fairfield Towers Second Mortgage is classified as an impaired loan and the Company recognizes interest income on this loan only to the extent that such interest is actually received. During 1997, the Company received $66,733 of interest and $1,680 of fees on this note. See Note 2 of Notes to Consolidated Financial Statements. At December 31, 1997, the Company classified the Grant House wraparound mortgage note as an impaired loan. Presidential's note wraps around and is subordinate to a nonrecourse first mortgage with an outstanding principal balance of $2,366,528 at December 31, 1997. The outstanding balance of Presidential's wraparound note at December 31, 1997 was $3,390,121 and the net carrying value was $2,366,528 (which is equal to the first mortgage debt) after deducting a deferred gain of $1,023,593. Although there has not been a monetary default under the terms of the mortgage, Presidential classified this loan as an impaired loan because the property is in need of substantial capital improvements and it is Presidential's belief that it is probable that the owner will not be able to repay the Grant House wraparound note in accordance with its terms when it becomes due in November, 1998. Payments on Presidential's equity portion of the wraparound mortgage note are payable only out of surplus cash from the operations of the property and if not paid are deferred until such cash is available or until maturity of the note. The annual interest payment of $75,000 on Presidential's equity portion of the loan has not been paid for 1996 or 1997 and the Company has not accrued the $75,000 interest payable for 1997. Payments on the balance of the wraparound mortgage note are current and, accordingly, Presidential has made its payments on the underlying first mortgage. The Company will recognize income on this loan only to the extent that such income is actually received. 11 12 At December 31, 1997, all of the loans included in "Mortgage portfolio: related parties" were in good standing. The Overlook loan which was previously classified as an impaired loan has been reclassified to accrual status at December 31, 1997. The note was modified in 1995, extending the maturity date to December 31, 2003, with an interest rate of 6% per annum. Since 1995, the loan has been performing in accordance with the terms of the modification and management believes that it will continue to do so in the future. At December 31, 1997, the carrying value of the Overlook loan is $1,543,342 and is reflected on the Company's Consolidated Balance Sheet at a net carrying value of zero after a deferred gain of $1,543,342. The Overlook loan, which is a nonrecourse loan, continues to be secured by three second mortgages with face amounts totalling $1,593,342. Pursuant to the Settlement Agreement with Ivy (see Relationship with Ivy Properties, Ltd.), Ivy agreed to give Presidential a deed in lieu of foreclosure to the various assets held by Presidential as collateral for the Overlook loan, but since the Company in its capacity as a secured creditor exercises significant control over, and receives the economic benefits from, such collateral, the Company has no current plans to request such deed or to foreclose on its collateral. See Note 2 of Notes to Consolidated Financial Statements. The following tables set forth information as of December 31, 1997 with respect to the mortgage loan portfolio resulting from the sale of properties and the loan portfolio due from Ivy. 12 13
MORTGAGE PORTFOLIO: NOTES RECEIVABLE - SOLD PROPERTIES DECEMBER 31, 1997 Effective Net Interest Interest Notes Deferred Carrying Maturity Rate Rate Name of Property Receivable Discount Gain Value Dates 1997 Range ---------------- ---------- ----------- ----------- ---------- -------- --------- ------------- Crown Tower (1)(2)(3) $ 6,677,709 $ 247,184 $ 3,633,200 $2,797,325 1999 9.75% 9.75% New Haven, CT Fairfield Towers-1st mtg (4) 17,176,884 3,289,922 13,886,962 2006 9.50% Prime plus 1% Brooklyn, NY Fairfield Towers-2nd mtg (2)(5)(6) 14,488,337 7,675,111 5,408,462 1,404,764 1999 0.46% 6.75% Brooklyn, NY Grant House (1)(7) 3,390,121 1,023,593 2,366,528 1998 0.00% 7.33% White Plains, NY Madison Towers (1)(2)(3) 7,104,980 296,619 4,358,340 2,450,021 1999 9.75% 9.75% New Haven, CT Mark Terrace (2)(5) 2,244,000 539,461 558,250 1,146,289 1999 5.16% 5.16% Bronx, NY Newcastle Apartments (8) 6,150,000 2,991,850 3,158,150 2006 8.50% 7.50-8.50% Greece, NY Pinewood I & II 417,662 218,534 199,128 2001 12.00% 12.00% Des Moines, IA Windsor at Arbors (9) 1,175,500 291,880 684,991 198,629 2007 8.14% 8.00-9.25% Alexandria, VA Woodland Village (10) 1,003,342 187,183 816,159 2005 9.00% 9.00-9.25% Hartford, CT Woodland Village (10) 569,107 184,467 384,640 2005 9.00% 9.00-9.25% Hartford, CT ----------- ----------- ----------- ---------- Subtotal 60,397,642 12,711,827 18,877,220 28,808,595 ----------- ----------- ----------- ----------
"Wrapped Mortgage" Notes Senior Debt (1) Receivable -------------------- Net of Interest Balance "Wrapped Name of Property Rate 12/31/97 Mortgage" ---------------- -------- ---------- ----------- Crown Tower 5.25% $1,677,709 $ 5,000,000 New Haven, CT Fairfield Towers-1st mtg 17,176,884 Brooklyn, NY Fairfield Towers-2nd mtg 14,488,337 Brooklyn, NY Grant House 3.00% 2,366,528 1,023,593 White Plains, NY Madison Towers 5.25% 1,104,980 6,000,000 New Haven, CT Mark Terrace 2,244,000 Bronx, NY Newcastle Apartments 6,150,000 Greece, NY Pinewood I & II 417,662 Des Moines, IA Windsor at Arbors 1,175,500 Alexandria, VA Woodland Village 1,003,342 Hartford, CT Woodland Village 569,107 Hartford, CT ---------- ----------- Subtotal 5,149,217 55,248,425 ---------- -----------
13 14 MORTGAGE PORTFOLIO: NOTES RECEIVABLE - SOLD PROPERTIES DECEMBER 31, 1997 (CONTINUED)
Effective Net Interest Interest Notes Deferred Carrying Maturity Rate Rate Name of Property Receivable Discount Gain Value Dates 1997 Range ---------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- Sold Co-op Apartments: Emily Towers (11)(12) $ 219,638 $ 1,010 $ 5,687 $ 212,941 2002-2008 7.00-9.50% 7.00-9.50% Flushing, NY 330 W. 72nd St. (11)(13) 61,454 10,016 51,438 2016 8.75% 8.25-8.75% New York, NY 330 W. 72nd St. Purchasers (11) 132,479 49,089 83,390 2003 8.75% 8.75% New York, NY Towne House (11)(12) 697,136 6,351 42,638 648,147 1998-2014 7.50-9.50% 7.50-9.50% New Rochelle, NY 6300 Riverdale Ave. (11)(12) 27,450 149 27,301 2003 7.50-8.25% 7.50-8.25% Riverdale, NY Mark Terrace 37,735 37,735 2003 9.00% 9.00% Bronx, NY Sherwood House (11)(14) 23,444 1,332 22,112 2002-2010 9.00-9.50% 9.00-9.50% Long Beach, NY Rye Colony 127,812 127,812 2009-2010 8.00-10.00% 8.00-10.00% Rye, NY Hastings Gardens (11) 25,068 7,754 17,314 2005-2011 9.00% 9.00% Hastings, NY ----------- ----------- ----------- ----------- Subtotal 1,352,216 18,858 105,168 1,228,190 ----------- ----------- ----------- ----------- Total Notes Receivable- Sold Properties $61,749,858 $12,730,685 $18,982,388 $30,036,785 =========== =========== =========== ===========
"Wrapped Mortgage" Notes Senior Debt (1) Receivable ------------------ Net of Interest Balance "Wrapped Name of Property Rate 12/31/97 Mortgage" ---------------- -------- ---------- ----------- Sold Co-op Apartments: Emily Towers $ $ 219,638 Flushing, NY 330 W. 72nd St. 61,454 New York, NY 330 W. 72nd St. Purchasers 132,479 New York, NY Towne House 697,136 New Rochelle, NY 6300 Riverdale Ave. 27,450 Riverdale, NY Mark Terrace 37,735 Bronx, NY Sherwood House 23,444 Long Beach, NY Rye Colony 127,812 Rye, NY Hastings Gardens 25,068 Hastings, NY ---------- ----------- Subtotal 1,352,216 ---------- ----------- Total Notes Receivable- Sold Properties $5,149,217 $56,600,641 ========== ===========
14 15 MORTGAGE PORTFOLIO: NOTES RECEIVABLE - SOLD PROPERTIES DECEMBER 31, 1997 (CONCLUDED) (1) This note is a wraparound mortgage note, whereby the Company holds a junior mortgage which secures a liability which includes the amount of the outstanding senior or underlying mortgage. The purchaser services the entire debt secured by the wraparound mortgage and Presidential services the senior debt from the proceeds of the wrap mortgage. (2) The discount on this note was computed at a yield of 14%. (3) The maturity dates of these notes may be extended at the option of the buyer from April 30, 1999 to April 30, 2009. (4) This note was purchased by the Company in the fourth quarter of 1996 at a discount of $3,500,000. During 1997, the Company advanced an additional $3,000,018 under the mortgage to the owners of the property for payment of real estate taxes and interest accrued thereon. The interest rate, currently 9.50%, is a variable rate equal to 1% above the prime rate. (5) The maturity dates of the Fairfield Towers Second Mortgage and the Mark Terrace note may be extended at the option of the buyers from November 29, 1999 to November 29, 2005. (6) This note is classified as an impaired loan and interest income is recorded on a cash basis. (7) The Grant House wraparound mortgage note was classified as an impaired loan at December 31, 1997. The net carrying value of the loan is equal to the first mortgage debt of $2,366,528 which it wraps around. Interest income is recorded on a cash basis. (8) Interest is paid on this note at the rate of 6% per annum through July 31, 1999 and a rate of not less than 7.5% per annum through July 31, 2001 and thereafter at a rate equal to 150 basis points in excess of the yield on specified Treasury bills. In connection with the modification of the note in 1994, the borrower paid a $628,863 fee in order to increase the effective interest rate on the note to 8.5% per annum through July 31, 1999. In September, 1997, the Company extended the maturity date of the note to July 31, 2006 and the Company and the debtor agreed to substitute Newcastle Apartments in Greece, New York for Presidential Park Apartments in Columbus, Ohio as security for this note. However, the 33,400 square feet of commercial space adjacent to Presidential Park Apartments, which was part of the original collateral, remains as additional collateral for this note. (9) The discount on this note was computed at a yield of 12%. As a result of a modification of the note in July, 1997, the maturity date of the loan was changed from 2015 to 2007, with interest rates of 8.25% through 1999 and 9.25% thereafter. In addition, the Company and the debtor agreed to substitute Windsor at Arbors in Alexandria, Virginia for Woodgate Apartments in Wichita, Kansas, as security for this note. (10) The discounts on the Woodland Village notes were computed at a yield of 25%. In January, 1997, the maturity dates of these loans were extended to 2005. The interest rate is 9% per annum through December 31, 2002 and 9.25% per annum thereafter. The notes are amortizing monthly based on a 20 year term at the above rates, and have balloon payments due at maturity. (11) 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. (12) The amount under discount represents unamortized mortgage points received from purchasers. (13) The discount on this note was computed at 16% of face value. (14) The discount on this note was computed at 15% of face value. 15 16 MORTGAGE PORTFOLIO: NOTES RECEIVABLE - RELATED PARTIES DECEMBER 31, 1997
Net Final Notes Deferred Carrying Maturity Interest Name of Property Receivable Discount Gain Value Dates Rate ---------------- ---------- -------- ---------- -------- -------- --------------- UTB End Loans (1) $ 198,222 $125,579 $ $ 72,643 Various Various Consolidated Loans (2) 64,719 64,719 2016 Chase Prime Overlook (3) 1,543,342 1,543,342 2003 6.0% Alexandria, VA University Towers (4) 544,616 35,156 509,460 Various 11.80 to 25.33% New Haven, CT ---------- -------- ---------- -------- $2,350,899 $160,735 $1,543,342 $646,822 ========== ======== ========== ========
(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 $125,579 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 $4,834,769. The $64,719 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) This loan had been classified as an impaired loan at December 31, 1996. The loan has been performing in accordance with a 1995 modification agreement and, as a result, at December 31, 1997 the loan was reclassified from impaired to accrual status. (4) 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 $35,156 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. 16 17 (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 9 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 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 17 18 Partnership, which since 1991 has owned 198,735 shares of the Company's Class A common stock. From 1985 through 1991, these 198,735 shares of Class A common stock were owned by BJV Partnership, another partnership wholly owned by the Ivy Principals. As a result of the ownership of the 198,735 shares of Class A common stock described above and 24,601 additional shares of Class A common stock owned in the aggregate individually by the Ivy Principals, Pdl Partnership and the Ivy Principals have, and BJV Partnership and the Ivy Principals had, 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. Thomas Viertel 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 is the cousin of Robert E. Shapiro and Joseph Viertel. 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 early 1990, Ivy began negotiations with Presidential with respect to a workout of the loans then in default. Because of the relationships described above between the Ivy Principals and Presidential, the negotiations with Ivy were conducted on behalf of Presidential by a committee of three members of the Board of Directors with no affiliations with the Ivy Principals (the "Independent Committee") and an officer of Presidential who was not affiliated with the Ivy Principals. On November 14, 1991, Presidential and Ivy consummated a Settlement Agreement with respect to various outstanding loans to Ivy, which was approved unanimously by the Board of Directors of Presidential. In connection with the Settlement Agreement, Presidential received, among other things, a number of vacant and occupied cooperative apartment units in the New York metropolitan area and certain third party promissory notes held by Ivy. Presidential received these assets in exchange for (i) the satisfaction of all of Ivy's recourse debt to Presidential and certain of its nonrecourse debt to Presidential with respect to which Presidential held first priority security interests and (ii) the release by Presidential of certain subordinate security interests in collateral securing some of the defaulted loans. 18 19 Most of Ivy's remaining nonrecourse debt to Presidential was consolidated, on modified terms, into two nonrecourse loans (collectively, the "Consolidated Loans") which were collateralized by substantially all of Ivy's remaining business assets with respect to which Presidential either did not previously have any security interest or had a junior security interest (collectively, the "Consolidated Collateral"). The terms of the Settlement Agreement permit Ivy to use the proceeds of each sale of Consolidated Collateral to (1) pay existing indebtedness of Ivy to its bank and trade creditors and certain operating expenses and (2) create and fund specified reserves to provide for payment of future obligations and potential liabilities. At December 31, 1997, the Consolidated Loans had an outstanding principal balance of $4,834,769 and a net carrying value of $64,719. Since, as permitted by the terms of the Consolidated Loans, most of Ivy's assets have been sold with the sales proceeds used to pay other recourse obligations of Ivy, Presidential does not expect to recover any material amount on the Consolidated Loans in excess of their net carrying value. In 1996, Presidential and the Ivy Principals agreed to a modification of the Settlement Agreement to provide that the Ivy Principals will make payments on the Consolidated Loans in an amount equal to 25% of the operating cash flow (after provision for certain reserves) of Scorpio Entertainment, Inc. ("Scorpio"), a company owned by the Ivy Principals which acts as a producer of theatrical productions. This agreement, and Presidential's decision not to exercise an option (which it had received as part of the original Settlement Agreement) to acquire the capital stock of Scorpio, was made pursuant to the unanimous determination of the Independent Committee that such actions were in the best interests of Presidential. During 1997, Presidential received $52,068 of principal payments and $57,370 of interest and other income 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, 1997. All of such loans are in good standing. See Loans and Investments. 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. Jeffrey Joseph is the President and a Director of Presidential, Thomas Viertel is an Executive Vice President and the Chief Financial Officer of Presidential and Steven Baruch is an Executive Vice President of Presidential. 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. 19 20 (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, 1997, the Company had an ownership or leasehold interest in 685 apartment units, 641,300 square feet of commercial, industrial and professional space and one parcel of land, all of which are carried on the balance sheet at $21,285,738 (net of accumulated depreciation of $6,404,797). The Company has mortgage debt on the majority of these properties in the aggregate amount of $26,271,093, all of which is nonrecourse to Presidential with the exception of $283,923 pertaining to the mortgage on the Mapletree Industrial Center property. Effective January 1, 1997, the Company reclassified $588,683 from foreclosed properties to real estate. The 53 unsold cooperative apartment units reclassified to real estate will be held by the Company as rental property. In addition, during 1997, Presidential acquired three cooperative apartment units in connection with the foreclosure of its security interest in such apartments. The chart below indicates the operating results of each of the properties owned by the Company at December 31, 1997 in accordance with generally accepted accounting principles ("GAAP") and, following that, in terms of cash flow from operations. 20 21 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES REAL ESTATE DECEMBER 31, 1997
Cash Flow Vacancy Income (Deficiency) Rentable Rate Mortgage Interest (Loss) from from Property Space (approx.) Percent Balance Rate Operations (1) Operations (2) -------- --------------- ------- ------- ---- -------------- -------------- Residential - ----------- 330 W. 72nd St. (3) New York, NY 3 Apt. Units 0.00% $ $ 2,376 $ 3,265 6300 Riverdale Ave. (3) Riverdale, NY 8 Apt. Units 0.16% (16,246) (14,149) Broad Park Lodge White Plains, NY 3 Apt. Units 0.00% (5,288) (5,009) Cambridge Green (4) Council Bluffs, IA 201 Apt. Units 15.86% 3,142,031 8.50% (143,533) (73,694) Continental Gardens (5) Miami, FL 208 Apt. Units 7.75% 8,098,688 8.16% (49,974) 275,005 Crown Court (6) 105 Apt. Units New Haven, CT & 2,000 sq.ft. (Net Lease) 2,840,376 7.00% 76,336 71,787 of comml. space Kent Terrace (7) Martinsburg, WV 112 Apt. Units 45.49% (119,457) (114,389) Sherwood House (3) Long Beach, NY 3 Apt. Units 76.48% (18,586) (16,886) Towne House (3)(8) New Rochelle, NY 40 Apt. Units 2.23% (9,520) 16,069 University Towers (8) New Haven, CT 2 Apt. Units 38.38% (1,881) (1,404) Commercial Buildings - -------------------- Building Industries Center White Plains, NY 23,500 sq.ft. 3.73% 938,120 10.00% (25,203) (40,526) Mapletree Industrial Center Palmer, MA 385,000 sq.ft. 6.42% 283,923 8.50% 294,177 283,230 Metmor Plaza (9) Hato Rey, PR 206,400 sq.ft. 15.95% 10,947,597 Various 105,561 99,176 University Towers Professional Space (9) New Haven, CT 24,400 sq.ft. 6.58% 87,966 90,982 Other - Land - ------------ Towers Shoppers Parcade, New Haven, CT 1/4 acre (Net Lease) 20,358 9.75% 2,425 (1,980) ----------- --------- --------- $26,271,093 $ 179,153 $ 571,477 =========== ========= =========
See notes on following page. 21 22 (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 apartments were reclassified from foreclosed properties to real estate effective January 1, 1997. (4) The Cambridge Green property experienced high vacancy rates in 1997, due to economic conditions in the area. By the end of 1997, conditions in the area began to improve and the property was 90% rented. In addition, the 1997 loss from operations reflects a real estate tax expense increase of $37,233, of which $12,411 pertains to the prior year. (5) During 1997, the mortgage on the Continental Gardens property was refinanced, and, as a result, mortgage costs of $146,097 relating to the refinanced mortgage were fully amortized. (6) The Crown Court property is subject to a long-term net lease containing an option to purchase commencing in 1999 and a right to extend the net lease for an additional ten years. (7) During 1996 and 1997, extensive physical upgrading was done at the Kent Terrace property. While the upgrading was in progress, the vacancy rate ranged from 87% to 50%. In the last quarter of 1997, the upgrading and rerental program were completed and the vacancy rate was 2.4% at December 31, 1997. The high vacancy rate and the extensive upgrading at the property resulted in net operating losses in 1997 and in 1996. (8) During 1997, 2 apartments at University Towers and 1 apartment at Towne House were acquired by the Company in connection with the foreclosure of its security interest in such apartments. (9) These results are net of minority interest share of partnership income. 22 23 In the opinion of management, all of the Company's properties are adequately covered by insurance in accordance with normal insurance practices. All real estate owned by the Company is owned in fee simple (except for the University Towers professional space, which is held under a valid and existing long-term lease), with title generally insured for the benefit of the Company by respectable title insurance companies. The majority of the mortgages on the Company's properties are self-liquidating at fixed rates of interest with the exception of the mortgages on Metmor Plaza, Building Industries Center and Continental Gardens. The Metmor Plaza mortgage amortizes monthly with a balloon payment due at maturity in February, 1999. The Building Industries Center mortgage amortizes monthly with a balloon payment due at maturity in May, 2000. The Continental Gardens mortgage, which was refinanced in 1997, amortizes monthly with a balloon payment due at maturity in August, 2007. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) The principal market for the Company's Class A and Class B Common Stock is the American Stock Exchange (ticker symbols PDL A and PDL B). The high and low prices for the stock on such principal exchange for each quarterly period during the past two years, and the per share dividends declared per quarter, are as follows:
Stock Prices Dividends --------------------------------------- Declared Per Class A Class B Share on ----------------- --------------- Class A and High Low High Low Class B ---- --- ---- --- ------------ Calendar 1997 First Quarter $7 3/4 $6 5/8 $7 1/2 $6 $.15 Second Quarter 9 3/4 7 5/8 7 1/8 6 1/4 .15 Third Quarter 10 1/4 8 7/8 7 1/4 6 1/2 .15 Fourth Quarter 9 1/4 8 7/8 6 7/8 6 1/8 .15
23 24 Calendar 1996 First Quarter $6 7/8 $6 1/4 $6 3/8 $5 7/8 $.15 Second Quarter 6 3/8 6 6 3/8 5 15/16 .15 Third Quarter 6 1/4 6 6 3/8 5 3/8 .15 Fourth Quarter 6 1/2 6 1/16 6 3/8 5 3/4 .15
(b) The number of record holders for the Company's Common Stock at December 31, 1997 was 177 for Class A and 798 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. 24 25 ITEM 6 - SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1997 1996 1995 1994 1993 -------- ------- ------- ------- ------- (Amounts in thousands, except per common share data) Selected Data from Consolidated Statements of Operations: Revenues: Rental $ 8,428 $ 8,451 $ 7,999 $ 6,388 $ 6,388 Interest on mortgages 5,568 4,117 3,766 3,722 3,802 Investment and other 240 371 406 343 157 -------- ------- ------- ------- ------- Total $ 14,236 $12,939 $12,171 $10,453 $10,347 ======== ======= ======= ======= ======= Income before net gain from sales of properties and securities and cumulative effect of change in accounting principles $ 2,135 $ 1,723 $ 1,874 $ 1,824 $ 1,366 Net gain from sales of properties and securities (1) 596 845 71 2,669 236 Cumulative effect of change in accounting for securities 38 Cumulative effect of change in accounting for postretirement benefits (699) -------- ------- ------- ------- ------- Net Income $ 2,731 $ 2,568 $ 1,945 $ 4,531 $ 903 ======== ======= ======= ======= ======= Earnings per common share: Income before net gain from sales of properties and securities and cumulative effect of change in accounting principles $ 0.60 $ 0.49 $ 0.53 $ 0.52 $ 0.39 Net gain from sales of properties and securities 0.17 0.24 0.02 0.76 0.07 Cumulative effect of change in accounting for securities 0.01 Cumulative effect of change in accounting for postretirement benefits (0.20) -------- ------- ------- ------- ------- Net Income $ 0.77 $ 0.73 $ 0.55 $ 1.29 $ 0.26 ======== ======= ======= ======= ======= Cash distributions per common share $ 0.60 $ 0.60 $ 0.60 $ 0.60 $ 0.41 ======== ======= ======= ======= ======= Weighted average number of shares outstanding 3,564 3,539 3,517 3,500 3,475 ======== ======= ======= ======= =======
(1) The net gain from sales of properties and securities for 1994 includes a net gain from fire insurance settlement of $1,817,000. 25 26 ITEM 6 - SELECTED FINANCIAL DATA - (CONCLUDED)
DECEMBER 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 -------- ------- ------- ------- ------- (Amounts in thousands) Selected Data from Consolidated Balance Sheets: Total mortgage portfolio (1) $ 64,101 $63,726 $53,416 $54,735 $55,169 ======== ======= ======= ======= ======= Mortgage portfolio - net of discounts and deferred gains (1) $ 30,684 $28,389 $18,882 $18,781 $17,463 ======== ======= ======= ======= ======= Real estate (2) $ 27,691 $25,369 $23,872 $23,479 $14,547 Less: accumulated depreciation 6,405 5,680 5,074 4,475 4,468 -------- ------- ------- ------- ------- Net real estate $ 21,286 $19,689 $18,798 $19,004 $10,079 ======== ======= ======= ======= ======= Foreclosed properties $ 589 $ 601 $ 727 $ 2,228 ======== ======= ======= ======= ======= Loans in process of foreclosure $ 1,569 ======== ======= ======= ======= ======= Securities $ 227 $ 975 $ 2,390 $ 1,767 $ 2,090 ======== ======= ======= ======= ======= Total assets $ 60,009 $57,800 $49,513 $50,999 $40,707 ======== ======= ======= ======= ======= Mortgage debt - includes amounts due in one year: Properties owned (2) $ 26,271 $26,514 $26,978 $27,490 $18,586 Properties in process of foreclosure 1,317 Wrap mortgage debt on sold properties 5,149 5,613 6,061 6,492 6,909 -------- ------- ------- ------- ------- Total $ 31,420 $32,127 $33,039 $33,982 $26,812 ======== ======= ======= ======= ======= Notes payable - includes amounts due in one year (1) $ 10,543 $ 8,643 $ 837 ======== ======= ======= ======= ======= Stockholders' equity $ 12,173 $11,438 $10,801 $10,574 $ 8,300 ======== ======= ======= ======= =======
(1) In 1996, the Company purchased the $14,651,000 Fairfield Towers First Mortgage at a $3,500,000 discount for a net purchase price of $11,151,000. The Company paid $2,501,000 in cash and obtained an $8,650,000 bank loan for the balance of the purchase price. During 1997, the Company advanced an additional $3,000,000 under the Fairfield Towers First Mortgage and borrowed an additional $2,500,000 under the bank loan. (2) In December, 1994, the Company acquired Continental Gardens in Miami, Florida, for a purchase price of $9,765,000 and obtained a $7,800,000 first mortgage loan on the property. See Notes to Consolidated Financial Statements. 26 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations 1997 vs 1996 Revenue for 1997 increased by $1,297,040 from $12,938,539 in 1996 to $14,235,579 in 1997 primarily as a result of increases in interest on mortgages-sold properties, partially offset by decreases in rental income, interest on wrap mortgages and investment income. Rental income decreased by $23,329 from $8,450,821 in 1996 to $8,427,492 in 1997 primarily as a result of decreases of $585,801 at the Metmor Plaza property, of which $122,642 is the result of lease cancellation fees received in 1996, $292,406 is the result of increased vacancy loss in 1997 and $169,819 pertains to decreases in office rental income and rent escalations in 1997. In addition, rental income decreased by $50,634 at the Cambridge Green property. These decreases were partially offset by increases of $209,718 at the Kent Terrace, Building Industries Center and University Towers properties and increased rental income of $402,246 as a result of the reclassification of the operations of foreclosed properties into rental property operations in 1997. Interest on mortgages-sold properties increased by $1,561,098 from $2,472,996 in 1996 to $4,034,094 in 1997 primarily due to an increase in interest income of $1,334,023 from the Fairfield Towers First Mortgage, which the Company purchased in the fourth quarter of 1996. In addition, the 1997 period had an increase of $569,707 from amortization of discounts on notes, of which $382,796 pertains to the Cedarbrooke note which was prepaid in March, 1997 and $152,714 pertains to the Fairfield Towers First Mortgage. These increases were partially offset by decreases in interest income of $162,750 as a result of the prepayments in 1997 and 1996 on the Cedarbrooke, Town House and Hoboken notes and a $160,268 decrease in interest income on the Fairfield Towers Second Mortgage. Interest on wrap mortgages decreased by $95,891 from $1,395,038 in 1996 to $1,299,147 in 1997 primarily as a result of a $75,000 decrease in interest income on the Grant House purchase money mortgage. Investment income decreased by $176,892 from $312,298 in 1996 to $135,406 in 1997 primarily as a result of decreased dividend income on securities available for sale. Costs and expenses increased by $885,473 from $11,215,523 in 1996 to $12,100,996 in 1997 primarily due to increased interest on 27 28 note payable, rental property operating expenses, depreciation expense and amortization of mortgage costs. These increases were partially offset by a decrease in minority interest share of partnership income. Interest on note payable and other increased by $784,096 from $271,873 in 1996 to $1,055,969 in 1997 primarily as a result of a $753,885 increase in interest expense on the note payable to Fleet Bank, N.A. ("Fleet") which was obtained in the fourth quarter of 1996. Rental property operating expenses increased by $316,851 from $3,780,782 in 1996 to $4,097,633 in 1997 primarily as a result of the reclassification of foreclosed properties operations to rental property operations which resulted in an increase in rental property operating expenses of $397,474. In addition, there were increases in operating expenses of $62,644 at the Kent Terrace property and $40,180 at the Continental Gardens property. These increases were partially offset by decreases in operating expenses of $182,115 at the Mapletree Industrial Center property primarily as a result of environmental expenses of $120,500 accrued in 1996 and the $46,697 reversal of that accrual in 1997. Depreciation expense increased by $86,342 from $651,652 in 1996 to $737,994 in 1997 primarily as a result of the additions and improvements made at the Kent Terrace, Metmor Plaza and Continental Gardens properties. Amortization of mortgage costs increased by $152,908 from $130,892 in 1996 to $283,800 in 1997 as a result of the write off of $146,097 of unamortized mortgage costs associated with the prior Continental Gardens mortgage. The mortgage on the Continental Gardens property was refinanced in July, 1997 and the existing mortgage was repaid from the proceeds of the new mortgage. Minority interest share of partnership income decreased by $467,500 from $845,873 in 1996 to $378,373 in 1997 as a result of a decrease in partnership income on the Metmor Plaza property. Net gain from sales of properties and securities are sporadic (as they depend on the timing of sales or the receipt of installments or prepayments on purchase money notes). In 1997, the net gain from sales of properties and securities was $596,171 compared with $845,051 in 1996. In 1997, the Company recognized $472,497 of deferred gain from the sale of the Cedarbrooke property as a result of a $1,074,200 principal prepayment received on that note. In addition, the Company recognized deferred gains of $80,651 and $24,058, respectively, from principal payments received on the Fairfield Towers Second Mortgage and the Overlook loan and a gain from the sale of securities of $18,965. The 1996 gain is primarily a result of a $1,000,000 principal prepayment 28 29 received on the Town House loan, which resulted in the recognition of $773,258 of deferred gain. In addition, the Company recognized deferred gains in 1996 of $71,996 and $56,573, respectively, from principal payments received on the Overlook loan and the Fairfield Towers Second Mortgage. These amounts were offset by a loss of $56,776 from the sale of securities. Balance Sheet Net mortgage portfolio increased by $2,294,690 from $28,388,917 at December 31, 1996, to $30,683,607 at December 31, 1997. This increase was primarily the result of advances to the owners of the Fairfield Towers property in the aggregate amount of $3,000,018, which was added to the indebtedness secured by the Fairfield Towers First Mortgage. This increase was offset by payments of $474,001 received on the Fairfield Towers First Mortgage and a net decrease of $218,907 resulting from the prepayment in March, 1997 of the $1,074,200 principal balance of the Cedarbrooke note receivable, which also resulted in the amortization of discount of $382,796 and the recognition of deferred gain of $472,497. Real estate increased by $2,321,130 from $25,369,405 at December 31, 1996 to $27,690,535 at December 31, 1997. This increase was primarily the result of the January 1, 1997 reclassification of foreclosed properties having a net carrying value of $588,683 to real estate and additions and improvements of $559,809 to the Kent Terrace property, $502,993 to the Metmor Plaza property and $225,473 to the Cambridge Green property. In addition, in 1997, the Company acquired three cooperative apartments with a carrying value of $101,875 in connection with the foreclosure of its security interest in such apartments. The Company also recorded $113,825 of additional basis in its share of the Metmor Plaza property as a result of the additional 1% partnership interest purchased in 1997. Additions and improvements recorded to other properties were $228,472. Securities available for sale decreased by $748,658 from $975,208 at December 31, 1996 to $226,550 at December 31, 1997. This decrease was the result of the sale of $798,351 of securities, offset by the purchase of $79,202 of securities and the $29,509 decrease in the fair value of securities held at December 31, 1997. Note payable to bank increased by $1,899,952 from $8,642,600 at December 31, 1996 to $10,542,552 at December 31, 1997. This increase was primarily the result of an additional $2,500,000 advanced by Fleet offset by principal payments made of $600,048. Accounts payable increased by $210,122 from $271,126 at December 31, 1996 to $481,248 at December 31, 1997. This increase was primarily the result of an increase of $218,502 in rental 29 30 property accounts payable and is due to the timing of the receipt of invoices as well as the scheduling of payments. Deferred income decreased by $121,580 from $395,677 at December 31, 1996 to $274,097 at December 31, 1997. This decrease was primarily the result of the recognition of deferred interest income of $129,886 received in connection with the 1994 modification of the Presidential Park note. Results of Operations 1996 vs 1995 Revenue for 1996 increased by $767,114 from $12,171,425 in 1995 to $12,938,539 in 1996 primarily as a result of increases in rental income and interest on mortgages-sold properties, partially offset by a decrease in investment and other income. Rental income increased by $451,996 from $7,998,825 in 1995 to $8,450,821 in 1996. The Kent Terrace property, of which the Company became the owner in February, 1996, as a result of the foreclosure of its mortgage on that property, resulted in increased rental income of $239,098. In addition, the Metmor Plaza property received income of $127,094 as a result of lease cancellation penalties. Rental income at the Cambridge Green and Continental Gardens properties also increased by an aggregate amount of $181,578. These increases were offset by decreases in rental income of $59,650 at the Mapletree Industrial Center, Building Industries Center and the Metmor Plaza properties. Interest on mortgages-sold properties increased by $354,721 from $2,118,275 in 1995 to $2,472,996 in 1996 primarily as a result of the purchase of the Fairfield Towers First Mortgage in the fourth quarter of 1996, which resulted in additional interest income of $237,159. There also was an increase of $155,643 of interest received on the Fairfield Towers Second Mortgage. In addition, there was an increase of $156,108 in the amortization of discounts on notes, of which $76,473 pertains to the Town House note, which was prepaid in June, 1996, and $39,937 pertains to the Fairfield mortgages. These increases were partially offset by decreases from 1995 to 1996 of $138,901 of interest on the Kent Terrace note and $44,220 of interest on the Town House note. Costs and expenses increased by $917,314 from $10,298,209 in 1995 to $11,215,523 in 1996 primarily due to increased general and administrative expenses, interest on notes payable, rental property operating expenses and an increase in minority interest share of partnership income. General and administrative expenses increased by $319,935 from $1,940,992 in 1995 to $2,260,927 in 1996. This increase was primarily due to increases in professional fees of $89,948, of 30 31 which approximately $51,446 was incurred in connection with proposed acquisitions of properties which were not completed; franchise tax expense of $66,345; salary expense of $71,636, of which $46,514 pertains to executive bonuses; general office expense of $36,535 and a reduction in reimbursed overhead from foreclosed properties of $34,736 resulting from sales of foreclosed properties in 1995 and 1996. Rental property operating expenses increased by $375,070 from $3,405,712 in 1995 to $3,780,782 in 1996. The addition of the Kent Terrace property resulted in an increase of $362,394. In addition, the Metmor Plaza property had increased expenses of $79,572 for utilities and repairs and maintenance; environmental expenses at the Mapletree Industrial Center property increased $45,593, and the Company wrote off the $22,036 carrying value of vacant land in Hartford, Connecticut. These increases were offset by decreases of $46,252 in bad debts and $96,805 in insurance expense at the Mapletree Industrial Center property. Rental property depreciation expense increased by $44,653 from $606,999 in 1995 to $651,652 in 1996 primarily as a result of the addition of the Kent Terrace property in 1996 and increases in rental property depreciation expense at the Cambridge Green and Continental Gardens properties as a result of improvements and additions to those properties. Minority interest share of partnership income increased by $93,061 from $752,812 in 1995 to $845,873 in 1996, as a result of an increase in partnership income on the Metmor Plaza property. Net gain from sales of properties and securities are sporadic (as they depend on the timing of sales or the receipt of installments or prepayments on purchase money notes). In 1996, the net gain from sales of properties and securities was $845,051 compared with a net gain of $71,367 in 1995. The 1996 gain is primarily a result of a $1,000,000 principal prepayment received on the Town House loan, which resulted in the recognition of $773,258 of deferred gain. In addition, the Company recognized deferred gains of $71,996 and $56,573, respectively, from principal payments received on the Overlook loan and the Fairfield Towers Second Mortgage. These amounts were offset by a loss of $56,776 from the sale of securities. The 1995 gain is primarily a result of principal payments received on the Fairfield Towers Second Mortgage which resulted in the recognition of $46,582 of deferred gain. 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- 31 32 looking statements include statements regarding the intent, belief or current expectations of the Company and its management and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: general economic and business conditions, which will, among other things, affect the demand for retail space or retail goods, availability and creditworthiness of prospective tenants, lease rents and the terms and availability of financing; adverse changes in the real estate markets including, among other things, competition with other companies; risks of real estate development and acquisition; governmental actions and initiatives; and environment/safety requirements. Liquidity and Capital Resources Management believes that the Company has sufficient liquidity and capital resources to carry on its existing business and, barring any unforeseen circumstances, to pay the dividends required to maintain REIT status in the foreseeable future. The Company is seeking to expand its portfolio of real estate equities and plans to utilize for this purpose a portion of its available funds and additional funds that the Company may receive from balloon payments due on the Company's notes receivable as they mature, as well as funds that may be available from external sources. However, the Company's plans to expand its portfolio of real estate equities may be adversely affected by limitations on its ability to obtain funds for investment on satisfactory terms from external sources. Presidential obtains funds for working capital and investment from its available cash and cash equivalents, from operating activities, from refinancing of mortgage loans on its real estate equities, and from repayments of its mortgage portfolio. The Company also has at its disposal a $250,000 line of credit from a bank, which it obtained in January, 1997. At December 31, 1997, Presidential had $979,712 in available cash and cash equivalents, a decrease of $412,423 from the $1,392,135 at December 31, 1996. This decrease in cash and cash equivalents was due to cash provided by operating activities of $2,346,960 being exceeded by cash used in investing activities of $1,356,382 and financing activities of $1,403,001. Operating Activities Presidential's principal source of cash from operating activities is from interest on its mortgage portfolio, which was $3,090,035 in 1997 net of interest payments on wrap mortgage debt and note 32 33 payable. In 1997 net cash received from rental property operations was $1,103,728, which is net of distributions to minority partners but before additions and improvements and mortgage amortization. Investing Activities Presidential holds a portfolio of mortgage notes receivable, which consist primarily of notes arising from sales of real properties previously owned by the Company. Some of these notes wrap around underlying mortgage debt (the "Underlying Debt") which is paid by Presidential only out of funds received on its mortgage portfolio relating to the Underlying Debt. During 1997, the Company received principal payments of $2,109,858 on its mortgage portfolio (net of any principal payments attributable to the Underlying Debt), of which approximately $1,841,984 represented prepayments, which are sporadic and cannot be relied upon as a regular source of liquidity. During 1997, the Company advanced an additional $3,000,018 under the Fairfield Towers First Mortgage, which was used by the owners of the property to pay a portion of unpaid real estate taxes (and accrued interest thereon) on the unsold condominium units which secure the mortgage indebtedness. During 1997, the Company invested $1,596,480 in additions and improvements to its properties, which includes $559,809 of additions and improvements at the Kent Terrace property, $502,993 at the Metmor Plaza property and $225,473 at the Cambridge Green property. At December 31, 1997, the upgrading and rerental program at the Kent Terrace property was completed and the renovations to the vacant office suites at the Metmor Plaza property were completed. The Company has not contemplated any major capital expenditures for 1998 except for those capital expenditures in the normal course of business. The Company also holds a portfolio of marketable equity securities which decreased by $748,658 during 1997, to $226,550, due primarily to security sales. Financing Activities The Company's indebtedness at December 31, 1997, includes $31,420,310 of mortgage debt (including $5,149,217 of underlying indebtedness on properties not owned by the Company but on which the Company holds wraparound mortgages). The mortgage debt, which is secured by individual properties, is nonrecourse to the Company with the exception of the $283,923 Mapletree Industrial Center mortgage, which is secured by the property and a guarantee of repayment by Presidential. Generally, mortgage debt repayment is serviced with cash flow from the operations of the individual properties. During 1997, the Company made $590,826 of principal 33 34 payments on mortgage debt on properties which it owns. In July, 1997, the Company refinanced the mortgage on its Continental Gardens property in Miami, Florida and the prior mortgage of $7,771,546 was paid from the proceeds of the new $8,120,000 mortgage. The mortgage matures in August, 2007 with a balloon payment of $7,158,323 due at maturity. The mortgage requires monthly payments of principal and interest in the amount of $60,490 and has an interest rate of 8.16% per annum. The mortgages on the Company's properties are self-liquidating at fixed rates of interest with the exception of the mortgages on Metmor Plaza, Building Industries Center and Continental Gardens. The Metmor Plaza mortgage in the outstanding amount of $10,947,597 amortizes monthly with a $10,415,779 balloon payment due at maturity in February, 1999 and has a variable interest rate which is capped at 8%. The Building Industries Center mortgage in the outstanding amount of $938,120 amortizes monthly with a $908,515 balloon payment due at maturity in May, 2000 and has an interest rate of 10%. The Continental Gardens mortgage, in the outstanding amount of $8,098,688, has an interest rate of 8.16% per annum and has a balloon payment of $7,158,323 due at maturity in August, 2007. The Company's indebtedness at December 31, 1997 includes a $10,542,552 bank loan payable to Fleet. The note, which matures on October 30, 2001, is nonrecourse to Presidential except for a limited guarantee, the amount of which reduces as the principal balance is reduced and was limited to $1,418,281 at December 31, 1997. The interest rate is variable and is based at the Company's election on either the bank's prime rate plus 1%, a cost of funds rate plus 3%, or various LIBOR rates plus 3%. The note amortizes monthly based on a 9.25% interest rate for a 25 year term with additional principal payments due upon the sale of condominium units. During 1997, the Company made principal payments of $600,048 and received additional advances of $2,500,000 from Fleet which were added to the bank loan. These advances were obtained in order to allow Presidential to advance $3,000,018 on the Fairfield Towers First Mortgage. During 1997 Presidential declared and paid cash distributions of $2,138,314 to its shareholders and received proceeds from dividend reinvestments of $172,014. Other than as described herein, management is not aware of any other trends, events, commitments or uncertainties that will or are likely to materially impact the Company's liquidity. Fairfield Towers The Company's financial performance and liquidity in 1998 and subsequent years will be affected by the results of the condominium conversion of Fairfield Towers Apartments in 34 35 Brooklyn, New York by the owner of that property and the rental operations of the unsold condominium units. At December 31, 1997, the outstanding principal balances on the Fairfield Towers First Mortgage and the Fairfield Towers Second Mortgage were $17,176,884 and $14,488,337, respectively. The Fairfield Towers First Mortgage provides for monthly interest payments of 1% above the prime rate and principal repayments prior to maturity upon the sale of individual condominium units. Until the Fairfield Towers First Mortgage is repaid, Presidential will receive basic interest on the Fairfield Towers Second Mortgage only out of net cash flow from operations of the property and release payments upon the sale of each condominium unit in the amount of $3,000 per unit. All unpaid basic interest and additional interest (which is based on percentages of gross sales proceeds) will be deferred until after repayment of the Fairfield Towers First Mortgage. In June of 1994, the owners of the Fairfield Towers property closed the first sales of the condominium units pursuant to the conversion of the property to condominium status. At December 31, 1997, a total of 155 units had been sold and 997 units are owned by the sponsor, the majority of which are occupied as rental units. The success of the condominium conversion could be adversely affected by the existence of unpaid real estate taxes on the unsold condominium units. In 1997, the Company advanced an additional $3,000,018 to the owners of the property to be used to pay a portion of the unpaid real estate taxes and interest, thus reducing the unpaid taxes (and interest thereon) to approximately $1,800,000. The $3,000,018 advance was added to the indebtedness secured by the Fairfield Towers First Mortgage, and Fleet advanced $2,500,000 to Presidential to reimburse it in part for the $3,000,018 advance. Environmental Matters The Company is continuing with its environmental project for the investigation and removal of potentially hazardous drums found at one site on its Mapletree Industrial Center property in Palmer, Massachusetts. Accrued liabilities for environmental matters are recorded in operating expenses when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. These estimates are exclusive of claims against third parties and have not been discounted. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved. The Company believes that any additional liability in excess of amounts provided which may result from the resolution of this matter will not have a material adverse effect on the financial condition, liquidity or the cash flow of the Company. In 1996, the site investigation at the Mapletree Industrial Center site was completed and as a result the Company 35 36 accrued an additional $120,500 in order to complete further site investigations and cleanup at this site. As of December 31, 1997, the site investigation work was completed and remedial action is in progress. As a result of the site investigations in 1997, the estimated costs of $120,500 were reduced to $73,803 and the Company has written off the excess accrued costs of $46,697 in the fourth quarter of 1997. For 1997, 1996 and 1995, the amounts (credited) charged to operations for environmental expenses were $(40,097), $129,129 and $83,536, respectively. Grant House Presidential holds a wraparound mortgage note secured by the Grant House apartment building located in White Plains, New York. The building has 181 apartment units and 8,000 square feet of professional space. At December 31, 1997, the outstanding principal balance on the note was $3,390,121 and the net carrying value was $2,366,528 after deducting a deferred gain of $1,023,593. The note wraps around and is subordinate to a nonrecourse first mortgage with an outstanding principal balance of $2,366,528 at December 31, 1997. Payments on Presidential's equity portion of the note are payable only out of surplus cash from the operations of the property and if not paid, are deferred until surplus cash is available or until maturity. Although there has been no monetary default under the terms of the mortgage at December 31, 1997, Presidential classified this loan as an impaired loan because the property is in need of extensive capital improvements and it is Presidential's belief that it is probable that the owner will not be able to repay the Grant House wraparound note in accordance with its terms when it becomes due in November, 1998. Presidential's equity portion of the note accrues interest at the rate of $75,000 per year. The Company did not accrue any interest on this portion of the note for 1997. The 1996 interest was accrued in 1996 but has not been paid. All payments pertaining to the underlying wraparound mortgage note have been received and, accordingly, Presidential has made its payments on the first mortgage. Year 2000 Compliance The Company utilizes desktop and network software for its computer information systems. The year 2000 issue has been evaluated and procedures will be taken over the next two years to ensure that all systems are year 2000 compliant. The estimated costs to complete this project are not expected to have a material effect on the Company's consolidated financial statements. 36 37 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 11, 1998, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held June 11, 1998, 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 11, 1998, 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 11, 1998, 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, 1997. 37 38 (c) Exhibits: 3.1 Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.5 to Post-effective Amendment No. 1 to the Company's Registration Statement on Form S-14, Registration No. 2-83073). 3.2 Certificate of Amendment to Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1987, Commission File No. 1-8594). 3.3 Certificate of Amendment to Certificate of Incorporation of the Company, filed July 21, 1988 with the Secretary of State of the State of Delaware (incorporated herein by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, Commission File No. 1-8594). 3.4 Certificate of Amendment to Certificate of Incorporation of the Company, filed on September 12, 1989 with the Secretary of State of the State of Delaware (incorporated herein by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, Commission File No. 1-8594). 3.5 By-laws of the Company (incorporated herein by reference to Exhibit 3.7 to Post-effective Amendment No. 1 to the Company's Registration Statement on Form S-14, Registration No. 2-83073). 10.1 1993 Stock Option Plan for 250,000 shares of Class B common stock (incorporated herein by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-8594). 10.2 Employment Agreement dated as of November 1, 1982 between the Company and Robert E. Shapiro, as amended by Amendments dated March 1, 1983, November 25, 1985, February 23, 1987 and January 4, 1988, (incorporated herein by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, Commission File No. 1-8594). 10.3 Employment Agreement dated as of November 1, 1982 between the Company and Joseph Viertel as amended by Amendments dated March 1, 1983, November 22, 1985 and February 23, 1987, (incorporated herein by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-8594). 10.4 Employment Agreement dated November 14, 1993 between the Company and Jeffrey F. Joseph, (incorporated herein by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-8594). 38 39 10.5 Employment Agreement dated November 14, 1993 between the Company and Steven Baruch, (incorporated herein by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-8594). 10.6 Employment Agreement dated November 14, 1993 between the Company and Thomas Viertel, (incorporated herein by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-8594). 10.7 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). 10.8 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). 10.9 Employment Agreement dated January 1, 1997 between the Company and Jeffrey F. Joseph, (incorporated herein by reference to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997, Commission File No. 1-8594). 10.10 Employment Agreement dated January 1, 1997 between the Company and Steven Baruch, (incorporated herein by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997, Commission File No. 1-8594). 10.11 Employment Agreement dated January 1, 1997 between the Company and Thomas Viertel, (incorporated herein by reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997, Commission File No. 1-8594). 10.12 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). 21. List of Subsidiaries of Registrant dated December 31, 1994, (incorporated herein by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-8594). 27. Financial Data Schedule for the year ended December 31, 1997 (see page 85). 39 40 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 25, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report 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 25, 1998 ------------------------------- Robert E. Shapiro Chairman of the Board of Directors and Director By: JEFFREY F. JOSEPH March 25, 1998 ------------------------------- Jeffrey F. Joseph President and Director By: THOMAS VIERTEL March 25, 1998 ------------------------------- Thomas Viertel Executive Vice President (Chief Financial Officer) By: ELIZABETH DELGADO March 25, 1998 ------------------------------- Elizabeth Delgado Treasurer (Principal Accounting Officer) By: RICHARD BRANDT March 25, 1998 ------------------------------- Richard Brandt Director By: MORTIMER M. CAPLIN March 25, 1998 ------------------------------- Mortimer M. Caplin Director By: ROBERT FEDER March 25, 1998 ------------------------------- Robert Feder Director 40 41 SIGNATURES (Continued) Signature and Title Date ------------------- ---- By: JOSEPH VIERTEL March 25, 1998 ------------------------------- Joseph Viertel Director 41 42 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS Page Independent Auditors' Report 43 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets - December 31, 1997 and 1996 44 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 46 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 47 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 48 Notes to Consolidated Financial Statements 50 CONSOLIDATED SCHEDULES: II. Valuation and Qualifying Accounts for the Years Ended December 31, 1997, 1996 and 1995 80 III. Real Estate and Accumulated Depreciation at December 31, 1997 81 IV. Mortgage Loans on Real Estate at December 31, 1997 83 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. 42 43 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, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedules listed in the foregoing Table of Contents. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Presidential Realty Corporation and subsidiaries at December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules listed in the foregoing Table of Contents, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects, the information set forth therein. Deloitte & Touche LLP Stamford, Connecticut March 11, 1998 44 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
Assets December 31, December 31, 1997 1996 ------------ ------------- Mortgage portfolio (Note 2): Sold properties, accrual $43,871,400 $46,522,752 Related parties, accrual 2,350,899 976,141 Sold properties, impaired 17,878,458 14,659,841 Related parties, impaired 1,567,400 ----------- ----------- Total mortgage portfolio 64,100,757 63,726,134 ----------- ----------- Less discounts: Sold properties, accrual 5,055,574 6,322,402 Related parties, accrual 160,735 145,915 Sold properties, impaired 7,675,111 7,765,964 ----------- ----------- Total discounts 12,891,420 14,234,281 ----------- ----------- Less deferred gains: Sold properties, accrual 12,550,333 14,046,423 Related parties, accrual 1,543,342 Sold properties, impaired 6,432,055 5,489,113 Related parties, impaired 1,567,400 ----------- ----------- Total deferred gains 20,525,730 21,102,936 ----------- ----------- Net mortgage portfolio (of which $756,751 in 1997 and $587,839 in 1996 are due within one year) 30,683,607 28,388,917 ----------- ----------- Real estate (Note 3) 27,690,535 25,369,405 Less: accumulated depreciation 6,404,797 5,680,108 ----------- ----------- Net real estate 21,285,738 19,689,297 ----------- ----------- Foreclosed properties (Note 4) 588,683 Minority partners' interest (Note 5) 3,779,408 3,830,024 Prepaid expenses and deposits in escrow 1,190,158 1,123,697 Other receivables (net of valuation allowance of $129,484 in 1997 and $184,790 in 1996) 715,407 635,848 Other receivables (related party) 8,287 10,109 Securities available for sale (Note 6) 226,550 975,208 Cash and cash equivalents 979,712 1,392,135 Other assets 1,140,571 1,166,115 ----------- ----------- Total Assets $60,009,438 $57,800,033 =========== ===========
See notes to consolidated financial statements. 44 45 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Liabilities and Stockholders' Equity
December 31, December 31, 1997 1996 ------------ ------------ Liabilities: Mortgage debt (Note 7): Properties owned $26,271,093 $26,513,465 Wrap mortgage debt on sold properties 5,149,217 5,613,041 ----------- ----------- Total (of which $1,133,721 in 1997 and $1,053,553 in 1996 are due within one year) 31,420,310 32,126,506 Note payable to bank (of which $147,190 in 1997 and $93,377 in 1996 are due within one year) (Note 8) 10,542,552 8,642,600 Executive pension plan liability (Note 15) 1,601,411 1,716,112 Accrued liabilities 2,276,898 2,092,876 Accrued postretirement costs (Note 16) 574,637 592,453 Deferred income 274,097 395,677 Accounts payable 481,248 271,126 Other liabilities 665,202 524,526 ----------- ----------- Total Liabilities 47,836,355 46,361,876 ----------- ----------- Stockholders' Equity: Common stock; par value $.10 per share (Note 12) Class A authorized 700,000 shares, issued and outstanding 478,940 shares 47,894 47,894 Class B December 31, 1997 December 31, 1996 311,377 308,675 ----------- --------------- -------------------- Authorized: 10,000,000 10,000,000 Issued: 3,113,773 3,086,750 Treasury: 14,224 14,221 Additional paid-in capital 2,043,653 1,874,341 Retained earnings 9,943,241 9,350,801 Net unrealized gain on securities available for sale (Note 6) 19,505 49,014 Class B, treasury stock (at cost) (192,587) (192,568) ------------ ----------- Total Stockholders' Equity 12,173,083 11,438,157 ------------ ----------- Total Liabilities and Stockholders' Equity $60,009,438 $57,800,033 ============ ===========
See notes to financial statements. 45 46 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Rental $ 8,427,492 $ 8,450,821 $ 7,998,825 Interest on mortgages - sold properties 4,034,094 2,472,996 2,118,275 Interest on wrap mortgages 1,299,147 1,395,038 1,415,177 Interest on mortgages - related parties 234,747 248,851 232,472 Investment income 135,406 312,298 338,721 Other 104,693 58,535 67,955 ----------- ----------- ----------- Total 14,235,579 12,938,539 12,171,425 ----------- ----------- ----------- Costs and Expenses: General and administrative 2,328,240 2,260,927 1,940,992 Interest on note payable and other 1,055,969 271,873 115,756 Interest on wrap mortgage debt 226,889 247,780 267,919 Amortization of loan acquisition costs 30,062 22,301 Depreciation on non-rental property 23,689 24,986 23,077 Rental property: Operating expenses 4,097,633 3,780,782 3,405,712 Interest on mortgages 2,139,266 2,201,104 2,273,587 Real estate taxes 799,081 777,353 776,196 Depreciation on real estate 737,994 651,652 606,999 Amortization of mortgage costs 283,800 130,892 135,159 Minority interest share of partnership income 378,373 845,873 752,812 ----------- ----------- ----------- Total 12,100,996 11,215,523 10,298,209 ----------- ----------- ----------- Income before net gain from sales of properties and securities 2,134,583 1,723,016 1,873,216 Net gain from sales of properties and securities 596,171 845,051 71,367 ----------- ----------- ----------- Net Income $ 2,730,754 $ 2,568,067 $ 1,944,583 =========== =========== =========== Earnings per Common Share (Note 1-I): Income before net gain from sales of properties and securities $ 0.60 $ 0.49 $ 0.53 Net gain from sales of properties and securities 0.17 0.24 0.02 ----------- ----------- ----------- Net Income per Common Share $ 0.77 $ 0.73 $ 0.55 =========== =========== =========== Cash Distributions per Common Share (Note 13) $ 0.60 $ 0.60 $ 0.60 =========== =========== =========== Weighted Average Number of Shares Outstanding 3,563,851 3,538,667 3,517,306 =========== =========== ===========
See notes to financial statements. 46 47 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Net Unrealized Additional Gain (Loss) on Total Common Paid-in Retained Securities Treasury Stockholders' Stock Capital Earnings Available for Sale Stock Equity ---------- ---------- ----------- ------------------ --------- ------------- Balance at January 1, 1995 $ 352,398 $1,628,492 $ 9,071,188 $( 285,057) $(192,568) $ 10,574,453 Net proceeds from dividend reinvestment and share purchase plan 1,902 116,441 118,343 Net income 1,944,583 1,944,583 Cash distributions $(.60 per share) (2,109,992) (2,109,992) Change in net unrealized gain (loss) on securities available for sale 273,852 273,852 ---------- ---------- ----------- ----------- --------- ------------ Balance at December 31, 1995 354,300 1,744,933 8,905,779 (11,205) (192,568) 10,801,239 Net proceeds from dividend reinvestment and share purchase plan 2,269 129,408 131,677 Net income 2,568,067 2,568,067 Cash distributions $(.60 per share) (2,123,045) (2,123,045) Change in net unrealized gain (loss) on securities available for sale 60,219 60,219 ---------- ---------- ----------- ----------- --------- ------------ Balance at December 31, 1996 356,569 1,874,341 9,350,801 49,014 (192,568) 11,438,157 Net proceeds from dividend reinvestment and share purchase plan 2,702 169,312 172,014 Net income 2,730,754 2,730,754 Cash distributions $(.60 per share) (2,138,314) (2,138,314) Change in net unrealized gain (loss) on securities available for sale (29,509) (29,509) Purchase of treasury stock (19) (19) ---------- ---------- ----------- ----------- --------- ------------ Balance at December 31, 1997 $ 359,271 $2,043,653 $ 9,943,241 $ 19,505 $(192,587) $ 12,173,083 ========== ========== =========== =========== ========= ============
See notes to consolidated financial statements. 47 48 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------------------- 1997 1996 1995 Cash Flows from Operating Activities: ----------- ------------ ----------- Cash received from rental properties $ 8,431,167 $ 8,389,399 $ 7,964,015 Interest received 4,180,370 3,426,291 3,247,312 Miscellaneous income (disbursements) 116,782 218,998 (61,353) Interest paid on rental property mortgages (2,131,785) (2,221,872) (2,267,543) Interest paid on wrap mortgage debt (226,889) (247,780) (267,919) Interest paid on note payable (863,446) (69,558) Cash disbursed for rental and foreclosed property operations (4,814,072) (4,308,676) (4,087,044) Cash disbursed for general and administrative costs (2,345,167) (2,368,704) (2,541,953) ----------- ------------ ----------- Net cash provided by operating activities 2,346,960 2,818,098 1,985,515 ----------- ------------ ----------- Cash Flows from Investing Activities: Payments received on notes receivable 2,573,682 3,055,900 953,054 Payments disbursed for investments in notes receivable (3,011,698) (11,176,563) (23,944) Net payments received from operations and sales of foreclosed properties 73,902 174,662 Payments disbursed for additions and improvements (1,596,480) (956,584) (465,519) Proceeds from sales of securities 817,316 2,650,059 146,908 Purchases of securities (79,202) (1,231,478) (487,060) Purchase of 1% interest in partnership (60,000) ----------- ------------ ----------- Net cash provided by (used in) investing activities (1,356,382) (7,584,764) 298,101 ----------- ------------ ----------- Cash Flows from Financing Activities: Principal payments on mortgage debt: Properties owned (590,826) (526,351) (511,827) Wrap mortgage debt on sold properties (463,824) (447,496) (431,748) Mortgage debt payment from proceeds of mortgage refinancing (7,771,546) (238,181) Mortgage proceeds 8,120,000 300,000 Mortgage costs (248,875) (182,059) (1,500) Note payable proceeds 2,500,000 8,650,000 Principal payments on note payable (600,048) (7,400) Cash distributions on common stock (2,138,314) (2,123,045) (2,109,992) Proceeds from dividend reinvestment and share purchase plan 172,014 131,677 118,343 Distributions to minority partners (381,582) (704,849) (442,598) ----------- ------------ ----------- Net cash provided by (used in) financing activities (1,403,001) 4,852,296 (3,379,322) ----------- ------------ ----------- Net Increase (Decrease) in Cash and Cash Equivalents (412,423) 85,630 (1,095,706) Cash and Cash Equivalents, Beginning of Year 1,392,135 1,306,505 2,402,211 ----------- ------------ ----------- Cash and Cash Equivalents, End of Year $ 979,712 $ 1,392,135 $ 1,306,505 =========== ============ ===========
See notes to consolidated financial statements. 48 49 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Reconciliation of Net Income to Net Cash Provided by Operating Activities Net Income $ 2,730,754 $ 2,568,067 $ 1,944,583 ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,075,545 829,831 765,235 Gain from sales of properties and securities (596,171) (845,051) (71,367) Net gain from sales of foreclosed properties (33,682) (88,151) Amortization of discounts on notes and fees (1,369,026) (802,857) (662,247) Decrease (increase) in accounts receivable (77,737) 55,569 (156,977) Increase (decrease) in accounts payable and accrued liabilities 261,627 90,753 (545,426) Decrease in deferred income (121,580) (164,487) (175,388) Decrease (increase) in prepaid expenses, deposits in escrow and deferred charges (66,886) 244,121 264,769 Increase (decrease) in security deposit liabilities 76,447 10,419 (24,344) Miscellaneous 55,614 19,542 (17,984) Minority share of partnership income 378,373 845,873 752,812 ----------- ----------- ----------- Total adjustments (383,794) 250,031 40,932 ----------- ----------- ----------- Net cash provided by operating activities $ 2,346,960 $ 2,818,098 $ 1,985,515 =========== =========== =========== Supplemental noncash disclosures: Net carrying value of foreclosed properties reclassified to real estate (Note 4) $ 588,683 =========== Property received in satisfaction of debt $ 45,765 $ 329,212 =========== =========== Notes received from sales of foreclosed properties $ 91,450 ===========
See notes to consolidated financial statements. 49 50 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. 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 and principal of 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 50 51 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 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 excluded from earnings and reported in a separate component 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 accompanying consolidated financial statements include 100% of the account balances of UTB Associates and PDL, Inc. and Associates Limited Co-Partnership ("Metmor Plaza Associates"), partnerships in which Presidential or PDL, Inc., a wholly owned subsidiary of Presidential, is the General Partner and owns a 66- 2/3% interest and an aggregate 26% interest, respectively (see Note 5). All significant intercompany balances and transactions have been eliminated. H. Rental Income Recognition - Rental income is recorded on the accrual method. Contingent rents are recognized as income when determinable. 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. 51 52 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 and common stock equivalents during each year. Basic net income per share and fully diluted income per share are the same for the three years ended December 31, 1997. Common stock equivalents consist of stock options and are calculated using the treasury method. The Company adopted SFAS No. 128 in the current year and prior years were calculated under the new method which had no effect on basic or fully diluted income per share (see Note 14). 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 and 106 in accounting for pension (see Note 15) and postretirement benefits (see Note 16), respectively. L. Management Estimates - The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheets and income and expense for the period. Actual results could differ from those estimates. M. Environmental Liabilities and Expenditures - Accruals for environmental matters are recorded in operating expenses when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accrued liabilities are exclusive of claims against third parties and are not discounted (see Note 10). N. Accounting for Stock Options - The Company complies with the additional disclosures required by SFAS No. 123 "Accounting for Stock-Based Compensation" but has elected to continue to account for employee stock-based compensation as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Additional disclosures are not required because no new options were granted in 1995, 1996 and 1997. O. Other - Certain amounts in the 1996 and 1995 consolidated financial statements have been reclassified to conform to the current year's presentation. P. Recently Issued Accounting Pronouncements - The Financial Accounting Standards Board has issued several new accounting pronouncements. SFAS No. 130, "Reporting Comprehensive Income" establishes standards for reporting and display of comprehensive income and its components, and will be effective for the Company's 1998 financial statements. This statement will not have a significant impact on the Company's reporting requirements. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" establishes standards for the 52 53 way that public business enterprises report information about operating segments. Because the Company operates in a single business segment, investments in real estate related assets, this pronouncement will not have an impact on the Company's reporting requirements. SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits", revises current disclosure requirements for employers' pensions and other post-retirement benefits. The Company will apply the standards of this statement in its 1998 consolidated financial statements. 2. MORTGAGE PORTFOLIO The Company's mortgage portfolio includes notes receivable - sold properties and notes receivable - related parties and includes both accrual and impaired loans. Notes receivable - sold properties consist of: (1) Long-term purchase money notes from sales of properties previously owned by the Company. These purchase money notes have varying interest rates with balloon payments due at maturity. (2) Notes receivable from sales of cooperative apartment units. Substantially all of these notes were either received from Ivy Properties, Ltd. or its affiliates (collectively "Ivy") in connection with a settlement agreement between the Company and Ivy executed in November, 1991 (the "Settlement Agreement") or from sales of cooperative apartments received from Ivy pursuant to the Settlement Agreement (see Notes 4 and 18). 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 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, 1997, all of the notes in the Company's mortgage portfolio are current with the exception of those notes which are classified as impaired loans. The following table summarizes the components of the mortgage portfolio: 53 54 MORTGAGE PORTFOLIO - ------------------
Sold Properties Related Parties ------------------------------------------------------- ---------------------------------------- Accrual Impaired Accrual Accrual Properties Properties Cooperative Accrual Impaired Cooperative previously previously apartment Sold Sold conversion owned owned units Total properties properties loans ----------- ----------- ---------- ----------- ---------- ---------- ---------- December 31, 1997 - ----------------- Notes receivable $42,519,184 $17,878,458 $1,352,216 $61,749,858 $2,087,958 $ 262,941 Less: Discounts 5,036,716 7,675,111 18,858 12,730,685 35,156 125,579 Deferred gains 12,445,165 6,432,055 105,168 18,982,388 1,543,342 ----------- ----------- ---------- ----------- ---------- ---------- ---------- Net $25,037,303 $ 3,771,292 $1,228,190 $30,036,785 $ 509,460 $ 137,362 =========== =========== ========== =========== ========== ========== ========== Due within one year $ 379,385 $ 289,430 $ 47,171 $ 715,986 $ 12,158 $ 28,607 Long-term 24,657,918 3,481,862 1,181,019 29,320,799 497,302 108,755 ----------- ----------- ---------- ----------- ---------- ---------- ---------- Net $25,037,303 $ 3,771,292 $1,228,190 $30,036,785 $ 509,460 $ 137,362 =========== =========== ========== =========== ========== ========== ========== December 31, 1996 - ----------------- Notes receivable $45,058,676 $14,659,841 $1,464,076 $61,182,593 $ 617,419 $1,567,400 $ 358,722 Less: Discounts 6,299,192 7,765,964 23,210 14,088,366 28,689 117,226 Deferred gains 13,941,255 5,489,113 105,168 19,535,536 1,567,400 ----------- ----------- ---------- ----------- ---------- ---------- ---------- Net $24,818,229 $ 1,404,764 $1,335,698 $27,558,691 $ 588,730 $ 241,496 =========== =========== ========== =========== ========== ========== ========== Due within one year $ 501,189 $ 45,276 $ 546,465 $ 11,270 $ 30,104 Long-term 24,317,040 $ 1,404,764 1,290,422 27,012,226 577,460 211,392 ----------- ----------- ---------- ----------- ---------- ---------- ---------- Net $24,818,229 $ 1,404,764 $1,335,698 $27,558,691 $ 588,730 $ 241,496 =========== =========== ========== =========== ========== ========== ==========
Related Parties --------------- ----------- Total mortgage Total portfolio ----------- ----------- December 31, 1997 - ----------------- Notes receivable $ 2,350,899 $64,100,757 Less: Discounts 160,735 12,891,420 Deferred gains 1,543,342 20,525,730 ----------- ----------- Net $ 646,822 $30,683,607 =========== =========== Due within one year $ 40,765 $ 756,751 Long-term 606,057 29,926,856 ----------- ----------- Net $ 646,822 $30,683,607 =========== =========== December 31, 1996 - ----------------- Notes receivable $ 2,543,541 $63,726,134 Less: Discounts 145,915 14,234,281 Deferred gains 1,567,400 21,102,936 ----------- ----------- Net $ 830,226 $28,388,917 =========== =========== Due within one year $ 41,374 $ 587,839 Long-term 788,852 27,801,078 ----------- ----------- Net $ 830,226 $28,388,917 =========== ===========
54 55 Loans and Prepayments During 1997, the Company advanced an additional $3,000,018 on the Fairfield Towers First Mortgage to the owners of the unsold condominium units which are security for the loan in order to pay a portion of the unpaid real estate taxes (and interest accrued thereon) on these condominium units. The Fairfield Towers First Mortgage was acquired by the Company in the fourth quarter of 1996. The Company also holds a subordinated note secured by the above condominium units, (the "Fairfield Towers Second Mortgage"). In March, 1997, the Company received prepayment of its $1,074,200 Cedarbrooke note receivable resulting in the recognition of income from the amortization of discount of $382,796 and recognition of a deferred gain on sale of $472,497. In June of 1996, the Company received principal prepayments on two of its long-term purchase money notes, the Hoboken, New Jersey property note in the amount of $1,188,787 and the Town House, Memphis, Tennessee property note in the amount of $1,000,000. As a result, the Company recognized income on the Town House note from the amortization of discount of $76,473 and gain on sale of $773,258. Modifications In January, 1997, the Company modified its Woodland notes receivable, extending the maturity date from 2000 to 2005, with interest rates increasing in 2002 from 9% to 9.25%. In July, 1997, the Company modified its $1,175,500 Woodgate note receivable, changing the maturity date from 2015 to 2007, with interest rates of 8.25% through 1999 and 9.25% thereafter. In addition, the Company and the debtor agreed to substitute Windsor at Arbors in Alexandria, Virginia for Woodgate Apartments in Wichita, Kansas, as security for this note. In September of 1997, the Company extended and modified its $6,250,000 Presidential Park note receivable. This note, which had previously been modified and extended in August of 1994 and which was due to mature on July 31, 2001, was extended until July 31, 2006. The interest rate will remain at 6% per annum through July 31, 1999. Thereafter, the interest rate will be at a rate equal to two hundred basis points in excess of the yield on specified Treasury bills, but not less than 7-1/2% per annum from August 1, 1999 through July 31, 2001. From August 1, 2001 through maturity the interest rate will be at a rate equal to one hundred fifty basis points in excess of the yield on specified Treasury bills. In accordance with the terms of this note, the Company and the debtor agreed to substitute Newcastle Apartments in Greece, New York for Presidential Park Apartments in Columbus, 55 56 Ohio as security for this note. However, the 33,400 square feet of commercial space adjacent to Presidential Park Apartments, which was a part of the original collateral, remains as additional collateral for this note. In connection with the modification, the borrower made a $100,000 principal payment on the note reducing the outstanding principal balance to $6,150,000. Valuation Reserves In the fourth quarter of 1997, the Company recorded a valuation reserve of $43,793 on the University Towers purchase money notes to reflect the decline in the estimated fair value of the University Towers cooperative apartments in New Haven, Connecticut that secure the notes. The valuation reserve was recorded to discounts on notes receivable and an expense of $43,793 was recorded to bad debts. Impaired Loans The Fairfield Towers Second Mortgage and the Grant House wraparound mortgage note are classified as impaired loans at December 31, 1997. These two loans are in the aggregate amount of $17,878,458 and have a net carrying value of $3,771,292 after deducting discounts of $7,675,111 and deferred gains of $6,432,055. The Company has determined that no allowances for credit losses are required for these loans because the net carrying value of these loans is less than the estimated fair value of the underlying collateral. The Company recognizes income on the impaired loans only to the extent that such income is actually received. The average recorded investment in impaired loans during the years ended December 31, 1997, 1996 and 1995 were $16,277,793, $16,510,530 and $17,986,237, respectively. Grant House At December 31, 1997, the Company reclassified the Grant House wraparound mortgage note as an impaired loan. The note is secured by the Grant House apartment building (181 apartment units) located in White Plains, New York. The outstanding principal balance of the note at December 31, 1997 was $3,390,121 and the net carrying value was $2,366,528 (which is equal to the outstanding principal amount of the first mortgage debt) after deducting a deferred gain of $1,023,593. Presidential's note wraps around and is subordinate to a nonrecourse first mortgage. Although there has not been a monetary default under the terms of the mortgage, Presidential classified this loan as an impaired loan because the property is in need of extensive physical repairs and capital improvements and it is Presidential's belief that it is probable that the owner will not be able to repay the 56 57 Grant House wraparound note in accordance with its terms when it becomes due in November, 1998. Payments on Presidential's equity portion of the wraparound mortgage note are payable only out of surplus cash from the operations of the property and if not paid are deferred until such cash is available or until maturity of the note. Because the property requires extensive repairs and capital improvements, the annual interest payment of $75,000 on Presidential's equity portion of the loan has not been paid for 1996 or 1997 and the Company has not accrued the $75,000 interest payable for 1997. Payments on the balance of the wraparound mortgage note are current and, accordingly, Presidential has made its payments on the underlying first mortgage. The Company will recognize income on this loan only to the extent that such income is actually received. Fairfield Towers Presidential is the holder of the Fairfield Towers Second Mortgage on the unsold condominium units. It obtained this mortgage in 1984 when it sold the Fairfield Towers property to the present owner. This nonrecourse note has been in default since March of 1991 and is classified as an impaired loan. At December 31, 1997, the note has a $14,488,337 outstanding principal balance and a net carrying value of $1,404,764, after a discount of $7,675,111 and a deferred gain of $5,408,462. Presidential's basic interest on this loan of 6.75% per annum is payable only out of cash flow from the rental operations of the unsold units and to the extent not so paid is deferred. Presidential only received $66,733 of interest payments on the Fairfield Towers Second Mortgage in 1997 and it is expected that interest payments will continue to be limited in subsequent years until the operating results of the property improve. Until the Fairfield Towers First Mortgage, which is not classified as impaired, is repaid in full, Presidential, as holder of the Fairfield Towers Second Mortgage, will continue to receive release payments of only $3,000 per unit upon the sale of each condominium apartment unit. However, after the Fairfield Towers First Mortgage is repaid, Presidential will receive substantially all of the net proceeds of sales of condominium units in repayment of the principal amount of the Fairfield Towers Second Mortgage and all unpaid interest thereon, including additional interest which is based on percentages of gross sales prices. Pursuant to the terms of the Fairfield Towers Second Mortgage, Presidential has implemented substantial restrictions relating to the operation and condominium conversion of the property and control of the funds generated from operations and sales. In June, 1994, the owners of the property closed the first sales of apartment units pursuant to the conversion of the property to condominium ownership. At December 31, 1997, a total of 155 57 58 condominium units have been sold and 997 units remain as security for the First and Second mortgages. Except for a limited number of apartments kept vacant for sale, these unsold apartments are rented. Since sales commenced, the Company has received $511,663 in payments on the Fairfield Towers Second Mortgage which has reduced the original outstanding principal balance from $15,000,000 to $14,488,337 at December 31, 1997. Since the Fairfield Towers Second Mortgage is classified as an impaired loan, the Company recognizes interest income on this loan only to the extent that such interest is actually received. In the fourth quarter of 1996, the Company acquired the Fairfield Towers First Mortgage, having an outstanding principal balance of $14,650,867, for a purchase price of $11,150,867. In connection with the acquisition of the Fairfield Towers First Mortgage, which was to become due in December of 1996, the maturity date was extended to October 30, 2006. The Fairfield Towers First Mortgage, which is nonrecourse except for certain limited personal guarantees made by certain of the principals of the borrower, provides for principal repayments prior to maturity upon the sale of individual condominium units in an amount equal to substantially all of the net proceeds of sale, which principal repayments have averaged approximately $25,000 per unit over the sale of the first 155 units. All accrued interest on this mortgage has been paid to date. However, there are approximately $1,800,000 of unpaid real estate taxes (including interest accrued thereon) outstanding on the unsold condominium units. Real estate taxes are now being paid by the owner in an amount equal to the currently accruing taxes and the unpaid balance will be reduced by payment of the tax arrears on each individual unit as it is sold and from additional funds, to the extent available, from the cash flow from operations. During 1997, the Company advanced $3,000,018 to the owner of the property to repay a portion of the unpaid real estate taxes and interest, thus reducing the then outstanding balance to approximately $1,800,000. The $3,000,018 was added to the indebtedness secured by the Fairfield Towers First Mortgage and the interest rate thereon is the same as the interest rate on the mortgage. The outstanding principal balance on the Fairfield Towers First Mortgage at December 31, 1997 was $17,176,884. Presidential paid $2,500,867 of its $11,150,867 purchase price for the Fairfield Towers First Mortgage in cash and executed an $8,650,000 note to Fleet Bank, N.A. ("Fleet") for the balance. The Company borrowed an additional $2,500,000 from Fleet in 1997 to reimburse Presidential in part for its $3,000,018 additional loan on the Fairfield Towers First Mortgage (see Note 8). By acquiring the Fairfield Towers First Mortgage at a $3,500,000 discount, Presidential believes that, in addition to obtaining a substantial return on the funds utilized to make the acquisition, it has protected its position as holder of the Fairfield Towers 58 59 Second Mortgage since that position could have been adversely affected upon the maturity of the Fairfield Towers First Mortgage in December, 1996. Overlook Loan The Overlook loan which was previously classified as an impaired loan was reclassified to accrual status at December 31, 1997. The note was modified in 1995, extending the maturity date to December 31, 2003, with an interest rate of 6% per annum. Since 1995, the loan has been performing in accordance with the terms of the modification and management believes the loan is adequately secured and should continue to be paid in accordance with its terms. The Overlook loan, which is a nonrecourse loan, continues to be secured by three second mortgages with face values totaling $1,593,342 at December 31, 1997. The net carrying value of the Overlook loan remains at zero at December 31, 1997. Any principal payments received on the loan will continue to be fully recognized as gain from sale. In its capacity as a secured creditor, the Company exercises significant control over, and receives the economic benefits from, the collateral securing the Overlook loan and, accordingly, the Company has no current plans to foreclose on its collateral for such loan. The following table reflects the activity in impaired loans: 59 60 IMPAIRED LOANS - --------------
Impaired Additions Impaired Discount Net Loan (Payments or Loan on Deferred Carrying Balance Adjustments) Balance Loans Gain Value Loan Description 12/31/96 1997 12/31/97 12/31/97 12/31/97 12/31/97 ---------------- ----------- ----------- ------------ ----------- ----------- ---------- Notes receivable-sold properties: Properties previously owned- Fairfield Towers Second Mortgage $14,659,841 ($ 171,504) $ 14,488,337 ($7,675,111) ($5,408,462) $1,404,764 Grant House (1) 3,390,121 3,390,121 (1,023,593) 2,366,528 Notes receivable-related parties: Sold properties- Overlook (2) 1,567,400 (1,567,400) ----------- ----------- ------------ ----------- ----------- ---------- Total $16,227,241 $ 1,651,217 $ 17,878,458 ($7,675,111) ($6,432,055) $3,771,292 =========== =========== ============ =========== =========== ==========
Year ended December 31, -------------------------------------------- 1997 1996 1995 ----------- ---------- ---------- Reported Interest Income and Amortization of Discount (Cash Basis) - ------------------------------------- Fairfield Towers Second Mortgage - interest income $ 66,733 $ 227,001 $ 71,358 Fairfield Towers Second Mortgage - amortization of discount 90,853 63,730 52,474 Grant House - interest income (1) 72,904 Kent Terrace - interest income (3) 138,901 Overlook - interest income (2) 97,176 105,570 Overlook - additional interest income (2) 33,727 ----------- ---------- ---------- Total $ 230,490 $ 421,634 $ 368,303 =========== ========== ========== Recognized Gain from Sale of Property - ------------------------------------- Fairfield Towers Second Mortgage $ 80,651 $ 56,573 $ 46,582 Overlook (2) 71,996 ----------- ---------- ---------- Total $ 80,651 $ 128,569 $ 46,582 =========== ========== ========== Nonreported Interest Income and Amortization of Discount - -------------------------------------------------------- The following additional amounts would have been reported if these loans had been fully performing: Fairfield Towers Second Mortgage - interest income $ 930,918 $ 774,945 $ 935,030 Fairfield Towers Second Mortgage - additional interest income 83,670 191,537 164,306 Fairfield Towers Second Mortgage - amortization of discount 1,051,071 905,894 770,847 Grant House - interest income (1) 75,000 Kent Terrace - interest income (3) 68,124 Overlook - interest income (2) 38,469 ----------- ---------- ---------- Total $ 2,140,659 $1,872,376 $1,976,776 =========== ========== ==========
(1) Grant House was not impaired until 1997 and, as a result, no amounts are listed for 1996 and 1995. The net carrying value of this wraparound mortgage note is equal to the first mortgage debt of $2,366,528 which it wraps around. (2) The Overlook loan has been performing in accordance with the terms of the loan agreement, as modified, since 1995. As a result, the loan is no longer considered impaired and has been reclassified to accrual status at December 31, 1997. Income earned on the Overlook loan is not listed above for 1997. (3) In February, 1996, the Company completed the foreclosure of its $1,300,000 Kent Terrace mortgage and became the owner of the property. As a result, the net carrying value of the loan of $329,212, after a deferred gain of $970,788, and deferred interest of $338,190 were reclassified to real estate. 60 61 3. REAL ESTATE Real estate is comprised of the following:
December 31, ---------------------------- 1997 1996 ----------- ----------- Land $ 3,774,779 $ 3,664,548 Buildings and leaseholds 23,729,409 21,580,207 Furniture and equipment 186,347 124,650 ----------- ----------- Total real estate $27,690,535 $25,369,405 =========== ===========
4. FORECLOSED PROPERTIES Presidential owns 53 cooperative apartment units which it received from Ivy in satisfaction of certain loans due to Presidential. These cooperative apartment units are at four locations: Towne House, New Rochelle, N.Y. (39 units); 6300 Riverdale Avenue, Bronx, N.Y. (8 units); Sherwood House, Long Beach, N.Y. (3 units) and 330 W. 72nd St., New York, N.Y. (3 units). At December 31, 1996, these cooperative apartment units were reported as foreclosed properties. The Company intends to hold these cooperative apartment units as rental property and, accordingly, reclassified them from foreclosed properties to real estate effective January 1, 1997. The net carrying value of the foreclosed properties reclassified to real estate on January 1, 1997 was $588,683. 5. 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 Metmor Plaza Associates. Presidential has a 66-2/3% interest in UTB Associates. Presidential and PDL, Inc. had an aggregate 25% interest in Metmor Plaza Associates in 1996 and 1995, which interest was increased to 26% when Presidential acquired an additional 1% interest for $60,000 in January, 1997. As the General Partner of these partnerships, Presidential and PDL, Inc., respectively, exercise effective control over the business of these partnerships, and, accordingly, Presidential has included 100% of the account balances of these partnerships in the accompanying financial statements. The minority partners' interest reflects the minority partners' equity in the partnerships. 61 62 Included in the Company's mortgage debt is a mortgage note payable by the Metmor Plaza Associates partnership which is substantially in excess of the historical cost of the property. This was due to a refinancing of the original mortgage note on the building and subsequent distribution of these proceeds to the partners. This event resulted in a negative partnership interest for each partner and a negative minority partners' interest on the Company's books. The estimated fair value of the building is significantly greater than the mortgage debt and the minority partners' interest is expected to be recovered when the building is sold and the partnership is liquidated. Minority partners' interest is comprised of the following:
December 31, ----------------------------- 1997 1996 ----------- ----------- Metmor Plaza Associates $ 3,963,378 $ 4,036,858 UTB Associates (183,970) (206,834) ----------- ----------- Total minority partners' interest $ 3,779,408 $ 3,830,024 =========== ===========
6. SECURITIES AVAILABLE FOR SALE The cost and fair value of securities available for sale are as follows:
December 31, ------------------------- 1997 1996 --------- --------- Cost $ 207,045 $ 926,194 Gross unrealized gains 19,612 71,033 Gross unrealized losses (107) (22,019) --------- --------- Fair value $ 226,550 $ 975,208 ========= =========
Sales activity results for securities available for sale are as follows:
Year Ended December 31, ------------------------------------------- 1997 1996 1995 --------- ----------- --------- Gross sales proceeds $ 822,073 $ 2,667,350 $ 147,200 ========= =========== ========= Gross realized gains $ 58,418 $ 12,975 $ 10,494 Gross realized losses (39,453) (69,751) (1,002) --------- ----------- --------- Net realized gain (loss) $ 18,965 $ (56,776) $ 9,492 ========= =========== =========
62 63 7. MORTGAGE DEBT All mortgage debt is secured by individual properties and is nonrecourse to the Company with the exception of the $283,923 mortgage on the Mapletree Industrial Center property in Palmer, Massachusetts, which is guaranteed by Presidential. In July, 1997, the Company completed the refinancing of the mortgage on its Continental Gardens property. The existing mortgage of $7,771,546 was repaid from the proceeds of a new $8,120,000 mortgage. The new mortgage bears interest at the rate of 8.16% per annum, requires monthly payments of principal and interest of $60,490 and matures in August, 2007 with a $7,158,323 balloon payment due at maturity. Mortgage debt-wrap mortgage debt on sold properties in the amount of $5,149,217 at December 31, 1997 and $5,613,041 at December 31, 1996, relates to mortgage debt on properties sold by Presidential. Payments of principal and interest on these mortgages will be paid from the proceeds (principal and interest) on the wraparound notes receivable from the buyers of these properties. 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, 1997, are summarized as follows:
FHA Insured Other Total Mortgages Mortgages ----------- ----------- ----------- Year ending December 31: 1998 $ 1,133,721 $ 500,845 $ 632,876 1999 11,134,070 520,177 10,613,893 2000 1,607,529 540,315 1,067,214 2001 725,619 561,296 164,323 2002 756,110 583,161 172,949 2003 - 2029 16,063,261 5,585,454 10,477,807 ----------- ---------- ----------- TOTAL $31,420,310 $8,291,248 $23,129,062 =========== ========== ===========
63 64 Interest on mortgages is payable at annual rates, summarized as follows:
FHA Insured Other Total Mortgages Mortgages ----------- ----------- ----------- Interest rates: 3% $ 2,366,528 $2,366,528 $ 5.25% 2,782,689 2,782,689 7% 2,840,376 2,840,376 8% (1) 10,947,597 10,947,597 8.16%-8.50% 11,524,642 3,142,031 8,382,611 9%-10% 958,478 958,478 ----------- ---------- ----------- TOTAL $31,420,310 $8,291,248 $23,129,062 =========== ========== ===========
(1) The interest rate on this mortgage is a variable rate and the chart reflects the current rate at December 31, 1997. 8. NOTE PAYABLE TO BANK The Company obtained an $8,650,000 bank loan in the fourth quarter of 1996 from Fleet in connection with the purchase of the Fairfield Towers First Mortgage. The note, which matures on October 30, 2001, is secured by a collateral assignment of the Fairfield Towers First Mortgage and is nonrecourse to Presidential except for a limited guarantee, the amount of which reduces as the principal balance is reduced. This limited guarantee was $1,418,281 at December 31, 1997. The interest rate is variable and is based at the Company's election on either the bank's prime rate plus 1%, a cost of funds rate plus 3%, or various LIBOR rates plus 3%. The note amortizes monthly based on a 9.25% interest rate for a 25 year term. In addition, upon the sale of condominium units, the Company is required to make principal payments to Fleet in an amount equal to the amount of principal payments received by the Company on the Fairfield Towers First Mortgage. In March and May, 1997, the Company received additional advances of $600,018 and $1,899,982, respectively, on this loan from Fleet. These advances were obtained to reimburse the Company in part for its $600,018 and $2,400,000 advances on the Fairfield Towers First Mortgage (see Note 2). At December 31, 1997, payments on the Fleet note payable were current. The outstanding note balance at December 31, 1997 and December 31, 1996 was $10,542,552 and $8,642,600, respectively. In January, 1997, the Company obtained 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 was renewed in 64 65 January, 1998. Presidential paid a 1% annual fee for the line of credit. At December 31, 1997, no advances are outstanding on this line of credit. 9. INCOME TAXES Presidential elected to qualify as a Real Estate Investment Trust effective January 1, 1982 under Sections 856-860 of the Internal Revenue Code. Under those sections, a REIT which distributes at least 95% of its real estate investment trust taxable income to its shareholders each year by the end of the following year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. Upon filing the Company's income tax return for the year ended December 31, 1996, Presidential applied its available 1996 stockholders' distributions and elected to apply (under Section 858 of the Internal Revenue Code) all but approximately $557,000 of its 1997 stockholders' distributions to reduce its taxable income for 1996 to zero. For the year ended December 31, 1997, the Company had taxable income (before distributions to stockholders) of approximately $2,633,000 ($.74 per share), which included approximately $1,480,000 ($.42 per share) of capital gains. This amount will be reduced by $557,000 ($.16 per share) of its 1997 distributions that were not utilized in reducing the Company's 1996 taxable income and by any eligible 1998 distributions that the Company may elect to utilize as a reduction of its 1997 taxable income. As previously stated, in order to retain REIT status, Presidential is required to distribute 95% of its REIT taxable income ($.31 per share exclusive of capital gains). Presidential will apply the available 1997 distributions (approximately $.16 per share) and will be required to pay additional distributions of not less than $.15 per share in 1998 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 1997 taxable income during 1997 and 1998 so that it will not have to pay Federal income taxes for 1997. Therefore, no provision for income taxes has been made at December 31, 1997. Presidential has, for tax purposes, reported the gain from the sale of certain of its properties using the installment method. 10. COMMITMENTS AND CONTINGENCIES The Company has incurred costs for environmental site investigations and the related response action outcome for potentially 65 66 hazardous drums found at sites on its Mapletree Industrial Center property in Palmer, Massachusetts. As of December 31, 1996, the response action outcome and cleanup at two disposal sites had been completed. The site investigation at a third disposal site also was completed and, as a result, in the third quarter of 1996, the Company accrued an additional $120,500 to complete further site investigations and cleanup at this site. As of December 31, 1997, the site investigation work was completed and remedial action is in progress. As a result of the site investigations in 1997, the estimated costs of $120,500 have been reduced to $73,803 and the Company reversed the excess accrued costs of $46,697 in the fourth quarter of 1997. For 1997, 1996 and 1995, the amounts (credited) charged to operations for environmental costs were ($40,097), $129,129, and $83,536, respectively. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved. 11. 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 Connecticut). At December 31, 1997, the aggregate principal amount of these notes was $64,100,757 with a net carrying value of $30,683,607. 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. Included in the Company's mortgage portfolio are the Fairfield Towers First Mortgage and the Fairfield Towers Second Mortgage in the aggregate principal amount of $31,665,221 with a net carrying value of $15,291,726. The Fairfield Towers First Mortgage has an outstanding principal amount of $17,176,884 at December 31, 1997. All payments due under the terms of this first mortgage are current. The Fairfield Towers Second Mortgage in the outstanding principal amount of $14,488,337 has been in default since 1991. The mortgages are secured by 997 condominium units at Fairfield Towers in Brooklyn, New York and, in addition, the Fairfield Towers First Mortgage is also secured by certain limited personal guarantees made by certain of the principals of the borrower. There are approximately $1,800,000 of unpaid real estate taxes (including interest accrued thereon) owed by the owners of the property (see Note 2). 66 67 The mortgage portfolio also includes notes receivable due from a related party, Ivy, with a net carrying value of $646,822 at December 31, 1997. 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 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. 12. 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 Class B common stock are entitled to elect one-third of the Board of Directors. Other than as described in Note 14, no shares of common stock of Presidential are reserved for officers, employees, warrants or other rights. 13. 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 1997 $0.60 $0.19 $0.41 1996 0.60 0.50 0.10 1995 0.60 0.31 0.29
14. STOCK OPTION PLANS In 1993, the Company adopted a Nonqualified Stock Option Plan (the "1993 Stock Option Plan"). The 1993 Stock Option Plan provides that options to purchase up to 250,000 shares of the Company's Class B common stock may 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 is 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 are exercisable at December 31, 1997 and expire on November 17, 1999. No other options have been granted, 67 68 exercised or cancelled under this plan from inception to December 31, 1997. The Company has agreed to the extent that any of the existing stock options held by these key employees are either exercised or lapsed, the Company will grant new options in the amount of the stock options that have either been exercised or lapsed, 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 1993 Stock Option Plan. 15. PENSION PLANS Defined Benefit Plan The Company has a noncontributory defined benefit pension plan, which covers substantially all of its employees. The plan provides monthly retirement benefits commencing at age 65. The monthly benefit is equal to the sum of (1) 6.5% of average monthly compensation multiplied by the total number of plan years of service (up to a maximum of 10 years), plus (2) .62% of such average monthly compensation in excess of one-twelfth of covered compensation multiplied by the total number of plan years of service (up to a maximum of 10 years). The Company makes annual contributions that meet the minimum funding requirements and the maximum contribution limitations under the Internal Revenue Code. Periodic pension costs are reflected in general and administrative expenses in the Company's consolidated statements of operations. 68 69 Net periodic pension cost included the following components:
Year Ended December 31, ----------------------------------------- 1997 1996 1995 --------- --------- --------- Service cost-benefits earned during the year $ 297,908 $ 279,493 $ 254,681 Interest cost on projected benefit obligation 55,484 37,379 18,012 Return on plan assets (66,209) (65,817) (32,068) Net amortization and deferrals 21,885 14,453 --------- --------- --------- Net periodic pension cost $ 287,183 $ 272,940 $ 255,078 ========= ========= =========
The following sets forth the plan's funded status and amount recognized in the Company's consolidated balance sheets:
December 31, --------------------------- 1997 1996 ----------- --------- Actuarial present value of accumulated benefit obligation: Vested $ 928,736 $ 363,241 Non-Vested 198,540 396,295 ----------- --------- Total accumulated benefit obligation 1,127,276 759,536 Additional amount due to future pay increases 6,576 33,098 ----------- --------- Total projected benefit obligation 1,133,852 792,634 Less: fair value of plan assets 1,296,290 794,735 ----------- --------- Plan assets greater than projected benefit obligation (162,438) (2,101) Unrecognized net gain 286,965 102,898 ----------- --------- Pension liability recognized in accrued expenses in the consolidated balance sheet $ 124,527 $ 100,797 =========== =========
Plan assets consisted of the following:
December 31, --------------------- 1997 1996 ---------- -------- Cash and cash equivalents $ 179,091 $ 51,570 Securities available for sale 1,117,199 743,165 ---------- -------- Total plan assets $1,296,290 $794,735 ========== ========
69 70 The assumptions used in determining net periodic pension cost and funded status information for 1997, 1996 and 1995 were 7% for the discount rate, 7% for the expected long-term rate of return on assets, and 5% for the average increase in compensation. Additionally, the Company had sponsored a 401(k) defined contribution plan for all eligible employees, which plan was terminated on July 31, 1996. The plan permitted both pretax and after-tax employee contributions and the Company had never made any contributions to this plan. 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. The principal assumption used in the accounting was a discount rate of 7% in 1997, 1996 and 1995. Periodic pension costs are reflected in general and administrative expenses in the Company's consolidated statements of operations. Net periodic pension cost included the following components:
Year Ended December 31, -------------------------------- 1997 1996 1995 -------- -------- -------- Service cost-benefits earned during the year $ 14,137 $ 13,856 $ 10,911 Interest cost on projected benefit obligation 187,983 189,213 187,093 Net amortization 83,218 65,956 34,157 -------- -------- -------- Net periodic pension cost $285,338 $269,025 $232,161 ======== ======== ========
Presidential has elected not to fund expenses accrued under these contracts. The following sets forth the pension liability included in Presidential's consolidated balance sheets:
December 31, ----------------------------- 1997 1996 ----------- ----------- Projected benefit obligation $ 2,779,019 $ 2,885,486 Unrecognized net loss (1,209,326) (1,205,171) Unrecognized prior service cost 31,718 35,797 ----------- ----------- Pension liability recognized in the consolidated balance sheets $ 1,601,411 $ 1,716,112 =========== ===========
70 71 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 obligation was 13% for participants age 65 and over and 15% for participants under age 65, decreasing linearly each successive year until it reaches 6% in 2002, after which it remains constant. An annual one-percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation and net postretirement health care cost by approximately 5%. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7%. The accumulated postretirement benefit obligation and recorded liability, none of which has been funded, was as follows:
December 31, ---------------------- 1997 1996 -------- -------- Accumulated postretirement benefit obligation: Retirees $247,996 $288,172 Fully eligible plan participants 148,176 138,482 Other active plan participants 122,398 108,530 -------- -------- Total accumulated postretirement benefit obligation 518,570 535,184 Unrecognized net gain 56,067 57,269 -------- -------- Accumulated postretirement benefit liability $574,637 $592,453 ======== ========
Postretirement benefit cost included the following components:
Year ended December 31, -------------------------------------- 1997 1996 1995 -------- -------- -------- Service cost - benefits earned $ 6,272 $ 5,861 $ 5,478 Interest cost on accumulated postretirement benefit obligation 35,484 36,520 37,359 Net amortization (8,069) (8,459) (9,504) -------- -------- -------- Postretirement benefit cost $ 33,687 $ 33,922 $ 33,333 ======== ======== ========
71 72 17. DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN Presidential maintains a Dividend Reinvestment and Share Purchase Plan (the "Plan"). Under the Plan, stockholders may reinvest cash dividends and make optional cash payments to purchase Class B common stock without incurring any brokerage commission or service charge. Additionally, the price of Class B common stock purchased with reinvested cash dividends will be discounted by 5% from the average of the high and low market prices of the five days immediately prior to the dividend payment date, as reported on the American Stock Exchange. Class B Common Shares issued under the Plan are summarized below:
Net Proceeds Shares Received ------- ---------- Total shares issued at December 31, 1995 278,037 $1,926,367 Shares issued during the year ended December 31, 1996 22,694 131,677 ------- ---------- Total shares issued at December 31, 1996 300,731 2,058,044 Shares issued during the year ended December 31, 1997 27,023 172,014 ------- ---------- Total shares issued at December 31, 1997 327,754 $2,230,058 ======= ==========
18. RELATED PARTY TRANSACTIONS Ivy Properties, Ltd. and various affiliated companies (collectively "Ivy") are owned by Thomas Viertel, Steven Baruch and Jeffrey Joseph (the "Ivy Principals"), who are also the sole partners of Pdl Partnership, which owns 198,735 shares of the Company's Class A common stock. As a result of the ownership of the 198,735 shares of Class A common stock described above and 24,601 additional shares of Class A common stock owned in the aggregate individually by the Ivy Principals, Pdl Partnership and the Ivy Principals have beneficial ownership of an aggregate of approximately 47% of the outstanding shares of Class A common stock of the Company, which class of stock is entitled to elect two-thirds of the Board of Directors of the Company. By reason of such beneficial ownership, the Ivy Principals are in a position substantially to control elections of the Board of Directors of the Company. Thomas Viertel 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 is the cousin of Robert E. Shapiro and Joseph Viertel. From 1979 to 1989, Presidential made loans to Ivy in connection with Ivy's cooperative conversions of apartment properties in the New York metropolitan area. In 1981, UTB Associates, a partnership controlled by Presidential, sold an apartment 72 73 property to Ivy in return for purchase money notes. In addition, in 1984, Presidential sold to Ivy its 50% partnership interest in the partnership which owned Overlook Gardens, a 308 unit apartment complex in Alexandria, Virginia for a purchase money note. Prior to January 1, 1990, Ivy had never defaulted on any of its loans from Presidential. During 1989 and 1990 the sales market for cooperative apartments in the New York metropolitan area deteriorated and as a result in 1990 and 1991 Ivy defaulted on certain of its outstanding loans from Presidential. In early 1990, Ivy began negotiations with Presidential with respect to a workout of the loans then in default. Because of the relationships described above between the Ivy Principals and Presidential, the negotiations with Ivy were conducted on behalf of Presidential by a committee of three members of the Board of Directors with no affiliations with the Ivy Principals (the "Independent Committee") and an officer of Presidential who was not affiliated with the Ivy Principals. On November 14, 1991, Presidential and Ivy consummated a Settlement Agreement with respect to various outstanding loans to Ivy, which was approved unanimously by the Board of Directors of Presidential. In connection with the Settlement Agreement, Presidential received, among other things, a number of vacant and occupied cooperative apartment units in the New York metropolitan area and certain third party promissory notes held by Ivy. Presidential received these assets in exchange for (i) the satisfaction of all of Ivy's recourse debt to Presidential and certain of its nonrecourse debt to Presidential with respect to which Presidential held first priority security interests and (ii) the release by Presidential of certain subordinate security interests in collateral securing some of the defaulted loans. Most of Ivy's remaining nonrecourse debt to Presidential was consolidated, on modified terms, into two nonrecourse loans (collectively, the "Consolidated Loans") which were collateralized by substantially all of Ivy's remaining business assets with respect to which Presidential either did not previously have any security interest or had a junior security interest (collectively, the "Consolidated Collateral"). The terms of the Settlement Agreement permit Ivy to use the proceeds of each sale of Consolidated Collateral to (1) pay existing indebtedness of Ivy to its bank and trade creditors and certain operating expenses and (2) create and fund specified reserves to provide for payment of future obligations and potential liabilities. At December 31, 1997, the Consolidated Loans have an outstanding principal balance of $4,834,769 and a net carrying value of $64,719. Since, as permitted by the terms of the Consolidated Loans, most of Ivy's assets have been sold with the sales proceeds used to pay other recourse obligations of Ivy, Presidential does not expect to recover any material amount on the Consolidated Loans in excess of their net carrying value. 73 74 In 1996, Presidential and the Ivy Principals agreed to a modification of the Settlement Agreement to provide that the Ivy Principals will make payments on the Consolidated Loans in an amount equal to 25% of the operating cash flow (after provision for certain reserves) of Scorpio Entertainment, Inc. ("Scorpio"), a company owned by the Ivy Principals which acts as a producer of theatrical productions. This agreement, and Presidential's decision not to exercise an option (which it had received as part of the original Settlement Agreement) to acquire the capital stock of Scorpio, was made pursuant to the unanimous determination of the Independent Committee that such actions were in the best interests of Presidential. During 1997, Presidential received $52,068 of principal payments and $57,370 of interest and other income on the Consolidated Loans. All outstanding loans from Ivy at December 31, 1997 are current. Management believes that it holds sufficient collateral to protect its interests in the loans that remain outstanding from Ivy to the extent of the net carrying value of these loans. Presidential received interest of $223,402, $242,225 and $223,520 from Ivy during 1997, 1996 and 1995, respectively, on the loans referred to above. In addition, in 1997, 1996 and 1995, Presidential recognized $11,345, $6,626 and $8,952, respectively, of income representing the amortization of discounts on notes receivable. Jeffrey Joseph is the President and a Director of Presidential, Thomas Viertel is an Executive Vice President and the Chief Financial Officer of Presidential and Steven Baruch is an Executive Vice President of Presidential. Any transactions relating to the implementation of the terms of the Settlement Agreement, or otherwise involving the Ivy Principals, are subject to the approval of the Independent Committee. All outstanding loans from Ivy are set forth in the table below: 74 75 MORTGAGE PORTFOLIO: NOTES RECEIVABLE - RELATED PARTIES
Loan Balance Original December 31, Loan Basic ----------------------------- Date Advanced Description Interest Rate 1997 1996 - ----- ----------- ---------------------------------------------- --------------- ------------- ----------- 1981 $5,285,000 UTB Associates, a partnership in 11.8 to 25.33% $ 544,616 $ 617,419 which Presidential owns a 66-2/3% interest, sold an apartment property in New Haven, CT to Ivy for long-term, nonrecourse purchase money notes. 1984 4,305,500 Sale by Presidential to Ivy of 6.0% 1,543,342(1) 1,567,400 50% interest in a partnership which owns an apartment complex in Alexandria, VA (Overlook loan) 1991 526,454 UTB End Loans: Purchase money notes Various 198,222 241,935 on co-op apts. These notes were transferred to Presidential as part of the Ivy settlement. 1991 155,084 Consolidated Loans: Replaced previously Chase Prime 64,719(2) 116,787 defaulted loans. ---------- ---------- Total Loans 2,350,899 2,543,541 Less: Discounts 160,735(3) 145,915 Deferred gain on Overlook loan 1,543,342 1,567,400 ---------- ---------- Net Carrying Value $ 646,822 $ 830,226 ========== ==========
(1) This loan was classified as an impaired loan at December 31, 1996. The loan has been performing in accordance with a 1995 modification agreement and, as a result, at December 31, 1997, was reclassified from impaired to accrual status. (2) The Consolidated Loans have a net carrying value of $64,719 and an outstanding principal balance of $4,834,769. (3) Included in the $160,735 discount is a valuation reserve of $43,793. This valuation reserve was recorded by the Company in 1997 to reflect the decline in the estimated fair value on the University Towers co-op apartments held as security for the UTB Associates and the UTB End Loan notes. 75 76 19. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS Estimated fair values of the Company's financial instruments as of December 31, 1997 and 1996 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: 76 77 FINANCIAL INSTRUMENTS - ---------------------
December 31, 1997 December 31, 1996 ---------------------------- ---------------------------- Net Estimated Net Estimated Carrying Fair Carrying Fair Value (1) Value Value (1) Value ----------- ----------- ----------- ----------- Assets: Cash and cash equivalents $ 979,712 $ 979,712 $ 1,392,135 $ 1,392,135 Securities available for sale 226,550 226,550 975,208 975,208 Notes receivable-sold properties- accrual 26,265,493 41,228,900 26,153,927 43,521,767 Notes receivable-sold properties- impaired (wrap mortgage portion) (2) 2,366,528 2,229,346 Notes receivable-related parties- accrual 646,822 2,414,444 830,226 962,219 Notes receivable-related parties- impaired 1,597,761 Liabilities: Mortgage debt on properties owned 26,271,093 24,255,964 26,513,465 24,736,627 Wrap mortgage debt 5,149,217 4,599,052 5,613,041 4,854,619 Note payable to bank 10,542,552 10,351,397 8,642,600 8,395,742
(1) Net carrying value is net of discounts and deferred gains where applicable. (2) Notes receivable-sold properties-impaired only reflects the fair value of the wrapped portion of the first mortgage receivable and not the equity portion of the impaired loans. The fair value of the equity portion of the impaired loans having a net carrying value of $1,404,764 at December 31, 1997 and 1996 is not included in the above table because it is not practical to reasonably assess the timing of cash flows or the credit adjustment that would be applied in the market place for such notes receivable. 77 78 The fair value estimates presented above are based on pertinent information available to management as of December 31, 1997 and 1996. 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, 1997 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 is based on current rates for similar assets. Securities Available for Sale - The fair value of securities available for sale is estimated based on quoted market prices or dealer quotes, if available. If a quote is not available, fair value is estimated using quoted market prices for similar securities. Notes Receivable - The fair value of notes receivable has been estimated by discounting projected cash flows using current rates for similar notes receivable. Mortgage Debt on Properties Owned, Wrap Mortgage Debt and Note Payable to Bank - The fair value of mortgage debt on properties owned, wrap mortgage debt and note payable to bank has been estimated by discounting projected cash flows using current rates for similar debt. 78 79 20. QUARTERLY FINANCIAL INFORMATION - UNAUDITED (Amounts in thousands, except earnings per common share)
Income Before Net Gain from Earnings Year Sales of Per Ended Properties Common December 31 Revenues and Securities Net Income Share - ----------- -------- -------------- ---------- -------- 1997 First $3,784 $863 $1,352 $0.38 Second 3,328 413 431 0.12 Third 3,462 236 292 0.08 Fourth 3,662 623 656 0.19 1996 First $3,270 $410 $ 435 $0.12 Second 3,249 584 1,415 0.40 Third 3,085 270 304 0.09 Fourth 3,335 459 414 0.12
79 80 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 SCHEDULE II - --------------------------------------------------------------------------------
ADDITIONS --------------------------- CHARGED BALANCE AT CHARGED TO BALANCE BEGINNING TO OTHER AT END CLASSIFICATION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS(1) OF YEAR - ------------------------------- ----------- -------- ---------- ------------- ------------ 1997 ------ Discount on mortgage portfolio and valuation allowance for other receivables $14,419,071 $ 68,042 $1,466,209 $13,020,904 =========== ======== ========== ========== =========== 1996 ------ Discount on mortgage portfolio and valuation allowance for other receivables $11,691,101 $110,936 $3,500,000(2) $ 882,966 $14,419,071 =========== ======== ========== ========== =========== 1995 ------ Discount on mortgage portfolio and valuation allowance for other receivables $12,348,837 $108,351 $ 766,087 $11,691,101 =========== ======== ========== ========== ===========
(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) Represents the discount received on the purchase of the Fairfield Towers First Mortgage. 80 81 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 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 - ------------------------------ ------------ -------- ------------ ---------------- ---------- -------------- Office and Commercial except where otherwise indicated: Building Industries Center, White Plains, NY $ 938,120 $ 61,328 $ 496,198 $ 545,519 $ 61,328 $ 1,041,717 *Cambridge Green, Council Bluffs, IA 3,142,031 200,000 2,034,315 1,044,218 200,000 3,078,533 *Continental Gardens, Miami, FL 8,098,688 2,448,000 7,389,786 274,964 2,448,000 7,664,750 *Crown Court, New Haven, CT 2,840,376 168,000 3,077,445 58,481 168,000 3,135,926 *Kent Terrace, Martinsburg, WV 71,408 657,805 1,160,653 71,408 1,818,458 Mapletree Industrial Center, Palmer, MA 283,923 79,100 82,484 79,100 82,484 Metmor Plaza, Hato Rey, Puerto Rico 10,947,597 636,712 5,070,769 1,363,822 636,712 6,434,591 Towers Shoppers Parcade, New Haven, CT 20,358 7,000 7,000 University Towers, New Haven, CT 52,146 52,146 Cooperative Apartment Shares: 330 W.72nd St., New York, NY 20,891 28,013 20,891 28,013 6300 Riverdale Ave., Riverdale, NY 10,164 66,032 10,164 66,032 Broad Park Lodge, White Plains, NY 1,203 8,797 1,203 8,797 Sherwood House, Long Beach, NY 7,316 51,930 1,663 7,316 53,593 Towne House, New Rochelle, NY 61,051 343,286 53,926 69,282 388,981 University Towers, New Haven, CT 1,375 54,735 1,375 54,735 ----------- ---------- ----------- ---------- ---------- ----------- TOTAL $26,271,093 $3,766,548 $19,286,111 $4,637,876 $3,774,779 $23,915,756 =========== ========== =========== ========== ========== ===========
GROSS YEARS ON AMOUNT WHICH DE- AT WHICH PRECIATION CARRIED IN LATEST AT CLOSE INCOME OF YEAR STATE- ---------- ACCUMULATED DATE OF DATE MENT IS PROPERTIES TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED - ------------------------------ ---------- ------------ ------------ ---------- ----------- Office and Commercial except where otherwise indicated: Building Industries Center, White Plains, NY $ 1,103,045 $ 868,727 1956 1966 25 *Cambridge Green, Council Bluffs, IA 3,278,533 493,524 1974 1992 50 *Continental Gardens, Miami, FL 10,112,750 639,042 1971 1994 27-1/2 *Crown Court, New Haven, CT 3,303,926 2,489,440 1973 1973 40 *Kent Terrace, Martinsburg, WV 1,889,866 45,819 1964 1996 50 Mapletree Industrial Center, Palmer, MA 161,584 8,005 1902-1966 1974 20 Metmor Plaza, Hato Rey, Puerto Rico 7,071,303 1,795,388 1966-1967 1966 40 Towers Shoppers Parcade, New Haven, CT 7,000 7,000 1962 1962 33-1/3 University Towers, New Haven, CT 52,146 40,660 Cooperative Apartment Shares: 330 W.72nd St., New York, NY 48,904 889 1997 31 1/2 6300 Riverdale Ave., Riverdale, NY 76,196 2,097 1997 31 1/2 Broad Park Lodge, White Plains, NY 10,000 279 1995 31 1/2 Sherwood House, Long Beach, NY 60,909 1,700 1997 31 1/2 Towne House, New Rochelle, NY 458,263 11,750 1997 31 1/2 University Towers, New Haven, CT 56,110 477 1997 31 1/2 ----------- ---------- TOTAL $27,690,535 $6,404,797 =========== ==========
* Apartments (1) Includes furniture and equipment of $186,347. 81 82 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------- REAL ESTATE AND ACCUMULATED DEPRECIATION SCHEDULE III DECEMBER 31, 1997 (CONCLUDED) - ------------------------------------------------------------------------------- (2) The aggregate cost of real estate for Federal income tax purposes is $26,752,959 at December 31, 1997. (3) 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, ---------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Balance at the beginning of year $25,369,405 $23,871,618 $23,479,627 Additions during the year: Acquisitions through foreclosure 101,875 729,213 Additions and improvements 1,643,877 790,610 391,991 Reclassed from foreclosed properties 588,683 ----------- ----------- ----------- 27,703,840 25,391,441 23,871,618 Deductions during the year: Dispositions 13,305 22,036(5) ----------- ----------- ----------- Balance at end of year $27,690,535 $25,369,405 $23,871,618 =========== =========== ===========
(4) 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, ----------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Balance at the beginning of year $5,680,108 $5,073,887 $4,475,288 Additions during the year: Depreciation charged to income 737,994 651,652 606,999 ---------- ---------- ---------- 6,418,102 5,725,539 5,082,287 Deductions during the year: Dispositions and replacements 13,305 45,431 8,400 ---------- ---------- ---------- Balance at end of year $6,404,797 $5,680,108 $5,073,887 ========== ========== ==========
(5) Write-off of undeveloped land. 82 83 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------- MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 1997 SCHEDULE IV - -------------------------------------------------------------------------------
PERIODIC INTEREST MATURITY PAYMENT PRIOR FACE AMOUNT DESCRIPTION RATE DATE TERMS MORTGAGES OF MORTGAGE - ----------------------------- -------------- ------------- ----------------------------------------- First Mortgages: Apartment buildings: Brooklyn, NY Prime plus 1% 2006(2) (3) $17,176,884 Greece, NY 7.50-8.50% 2006(4) (5) 6,150,000 Hartford, CT 9.00-9.25% 2005(6) (6) 1,572,449 Sold Co-op Apartments: Bronx, NY (2 notes) 9.00% 2003 (7) 37,735 Flushing, NY (8 notes) 7.00-9.50% 2002-2008 (7)(8) 219,638 Hastings, NY (2 notes) 6.00-9.00% 2005-2011 (7)(8) 25,068 Long Beach, NY (2 notes) 9.00-9.50% 2002-2010 (7)(8) 23,444 New Rochelle, NY (25 notes) 7.50-9.50% 1998-2014 (7)(8) 697,136 New York, NY (3 notes) 8.25-8.75% 2003-2016 (7)(8) 193,933 Riverdale, NY (3 notes) 7.50-8.25% 2003 (8) 27,450 Rye, NY (2 notes) 8.00-10.00% 2009-2010 (8) 127,812 --------------------------- Total First Mortgage Loans 26,251,549 --------------------------- Junior Mortgages: Apartment buildings: Alexandria, VA 8.00-9.25% 2007 (9) (3) $20,429,313 1,175,500 Bronx, NY 5.16% 1999(10) (3) 2,747,938 2,244,000 Brooklyn, NY 6.75% 1999(10) (3) 17,176,884 14,488,337 Des Moines, IA 12.00% 2001 (3) 5,900,460 417,662 New Haven, CT 9.75% 1999(10) (11) 2,782,689 13,782,689 White Plains, NY 7.33% 1998 (12) 2,366,528 3,390,121 ----------- ----------- Total Junior Mortgage Loans 51,403,812 35,498,309 ----------- ----------- Total Mortgage Loans $51,403,812 $61,749,858 =========== ===========
CARRYING PRINCIPAL AMT. OF LOANS AMOUNT OF SUBJECT TO DELINQUENT DESCRIPTION MORTGAGE (1) PRINCIPAL OR INTEREST - ----------------------------- ------------- ------------------------- First Mortgages: Apartment buildings: Brooklyn, NY $13,886,962 Greece, NY 3,158,150 Hartford, CT 1,200,799 Sold Co-op Apartments: Bronx, NY (2 notes) 37,735 Flushing, NY (8 notes) 212,941 Hastings, NY (2 notes) 17,314 Long Beach, NY (2 notes) 22,112 New Rochelle, NY (25 notes) 648,147 New York, NY (3 notes) 134,828 Riverdale, NY (3 notes) 27,301 Rye, NY (2 notes) 127,812 ----------- --------- Total First Mortgage Loans 19,474,101 ----------- --------- Junior Mortgages: Apartment buildings: Alexandria, VA 198,629 Bronx, NY 1,146,289 Brooklyn, NY 1,404,764 Des Moines, IA 199,128 New Haven, CT 5,247,346 White Plains, NY 2,366,528 ----------- --------- Total Junior Mortgage Loans 10,562,684 ----------- --------- Total Mortgage Loans $30,036,785 =========== =========
83 84 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES - --------------------------------------------------------------- MORTGAGE LOANS ON REAL ESTATE SCHEDULE IV DECEMBER 31, 1997 (CONCLUDED) - --------------------------------------------------------------------------------
YEAR ENDED ----------------------------- -------------------------------- ------------------------ December 31, 1997 December 31, 1996 December 31, 1995 ----------------------------- -------------------------------- ------------------------ Balance at beginning of year $27,558,691 $17,953,611 $17,770,779 Additions during the year: New mortgage loans $3,011,698 $14,676,563 $237,049 Less: Discounts on additions 3,500,000 Deferred gains on additions 7,754 ------------- ------------ --------- Net addition to carrying amount 3,011,698 11,176,563 229,295 Deductions during the year: Reclass of loan foreclosed 45,765 329,212 Collections of principal 2,398,668 2,879,524 774,756 Less: Amortization of discounts 1,357,681 796,230 653,295 Deferred gains recognized 553,148 841,023 74,998 ------------- ------------ --------- Net reduction of carrying amount 533,604 1,571,483 46,463 ----------- ----------- ----------- Balance at end of year $30,036,785 $27,558,691 $17,953,611 =========== =========== ===========
(1) Carrying value is net of discounts and deferred gains. The aggregate net carrying value of this portfolio for tax purposes at December 31, 1997, is $25,193,000. (2) The interest rate on this note, currently 9.50%, is a variable rate equal to 1% above the prime rate. (3) Entire principal due at Final Maturity Date. (4) Interest is paid on this note at the rate of 6% per annum through July 31, 1999 and a rate of not less than 7.5% per annum through July 31, 2001 and thereafter at a rate equal to 150 basis points in excess of the yield on specified Treasury bills. In connection with the modification of the note in 1994, the borrower paid a $628,863 fee in order to increase the effective interest rate on the note to 8.5% per annum through July 31, 1999. In September, 1997 the Company extended the maturity date of the note to July 31, 2006 and the Company and the debtor agreed to substitute Newcastle Apartments in Greece, New York for Presidential Park Apartments in Columbus, Ohio as security for this note. However, the 33,400 square feet of commercial space adjacent to Presidential Park Apartments, which was part of the original collateral, remains as additional collateral for this note. (5) $150,000 due in 1999 and a balloon of $6,000,000 due in 2006. (6) In January, 1997, the maturity dates of these loans were extended to 2005. The interest rate is 9% per annum through December 31, 2002 and 9.25% per annum thereafter. The notes are amortizing monthly, based on a 20 year term at the above rates, and have balloon payments of $1,136,621 due at maturity. (7) Principal amortization each year with a balloon payment in the year of maturity. (8) Principal amortization each year through maturity. (9) As a result of a modification of the note in July, 1997, the maturity date of this loan was changed from 2015 to 2007, with interest rates of 8.25% through 1999 and 9.25% thereafter. In addition, the Company and the debtor agreed to substitute Windsor at Arbors in Alexandria, Virginia for Woodgate Apartments in Wichita, Kansas, as security for this note. (10) The maturity dates of these notes may be extended at the option of the buyer for periods ranging up to ten years. (11) Varying amounts to 1999 and balloon of $13,328,421 due in 1999. (12) Varying amounts to 1998 and balloon of $3,259,897 due in 1998. 84 EX-27 2 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1997 DEC-31-1997 979,712 226,550 31,536,785 129,484 0 3,876,865 27,690,535 6,404,797 60,009,438 4,313,154 40,681,951 0 0 359,271 11,813,812 60,009,438 0 14,235,579 0 6,296,881 0 0 3,422,124 2,730,754 0 2,730,754 0 0 0 2,730,754 0.77 0.77
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